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pubdate: August 15, 2018 effdate: N/A -

OATS to CAT Events Field Level Mapping

- Topic: CAT NMS Plan, Technical Specifications, OATS to CAT Events Field Level Mapping - Compliance User: OATS - Keywords: - CAT Event Types, - Oats Retirement, - CAT Mapping, - -

NW_CAT_Mapping

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§242.613 Consolidated audit trail.

(iv) Specify the time by which data that has been corrected will be made available to regulators.

(7) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information consolidated and stored pursuant to paragraph (c)(7) of this section:

(i) Information, including the size and quote condition, on the national best bid and national best offer for each NMS security;

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(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, §242.601; and

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(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, §242.601; and

(iii) Last sale reports reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, §242.608.

(8) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years.

(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

diff --git a/spider/files/data000001.html b/spider/files/data000001.html index bb00fd1..cc1ba51 100644 --- a/spider/files/data000001.html +++ b/spider/files/data000001.html @@ -1,4467 +1,1289 @@ - + jurisdiction: US - regulatory_authority: Securities and Exchange Commission + regulatory_authority: US/SEC content_type: compilation - document_title: 34-67457 Consolidated Audit Trail - source: SEC Final Rule Release - source_type: SEC Final Rule + document_title: CAT Industry Member Reporting Scenarios + document_type: Scenarios + source: US/SEC/Scenarios/Member Reporting Scenarios + source_type: Member Reporting Scenarios language: English -
pubdate: October 1, 2012 effdate: October 1, 2012 -

34-67457 Consolidated Audit Trail

- Topic: SEC Final Rule, Release No. 34-67457 - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b + citation: N/A +
pubdate: February 28, 2019 effdate: N/A +

CAT Industry Member Reporting Scenarios

+ Topic: CAT Industry Member Reporting Scenarios + Compliance User: Industry Member Keywords: - NMS Plan, - SRO, + Technical Specification, -

AGENCY: Securities and Exchange Commission

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ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission ("Commission") is adopting Rule 613 under the Securities Exchange Act of 1934 ("Exchange Act" or "Act") to require national securities exchanges and national securities associations ("self-regulatory organizations" or "SROs") to submit a national market system ("NMS") plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

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EFFECTIVE DATE: October 1, 2012

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FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202) 551-5665; Jennifer Colihan, Special Counsel, at (202) 551-5642; Carl Tugberk, Special Counsel, at (202) 551-6049; or Leigh Duffy, Special Counsel, at (202) 551-5928, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

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pubdate: N/A effdate: N/A -

SUPPLEMENTARY INFORMATION:

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +

(For IM Technical Specification v1.1)

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2/28/19 DRAFT Version 1.1

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pubdate: N/A effdate: N/A +

Executive Summary

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary + Compliance User: Industry Member Keywords: - Summary, + Technical Specifications, + CAT NMS plan, -
pubdate: N/A effdate: N/A -

I. Executive Summary

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Executive Summary - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +

This document is a companion document to the CAT Reporting Technical Specifications for Industry Members (“Technical Specifications”) and is provided to assist Industry Members in implementing the reporting requirements laid out in the Technical Specifications. This document illustrates the specific reporting requirements for a variety of order handling execution scenarios for both equities and options Eligible Securities (as defined in the CAT NMS Plan). The scenarios illustrate the reporting requirements for Phases 2a and 2b. Additional scenarios will be added for Phases 2c and 2d when the Technical Specifications are published for those phases.

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The reporting scenarios are presented in a separated document from the Technical Specifications to provide the greatest flexibility in the ability to modify or add scenarios as new questions are presented and trading practices evolves. It is expected that changes and additions will be necessary for reporting scenarios with greater frequency than changes to the Technical Specifications that would be required when record format, field value changes, etc., occur. By maintaining a separate reporting scenarios document, reporting scenarios may be clarified or added without the need for a new version of the Technical Specifications.

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This document contains interpretive guidance for Industry Member CAT Reporters with respect to how the Technical Specifications must be implemented. As such, any changes to this document are subject to the same review and approval process by the Operating Committee, pursuant to the CAT NMS Plan, as the Technical Specifications.

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This document represents a phased approach to industry reporting. Please note that a proposed amendment to the CAT NMS Plan will be filed with the Securities and Exchange Commission ("Commission") to reflect the phased approach for the Industry member CAT reporting described in the Technical Specifications. The proposed amendment will be subject to the approval of the Commission.

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Revision / Change Process

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pubdate: N/A effdate: N/A +

1. Introduction

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Introduction + Compliance User: Industry Member Keywords: - Trading, - broker-dealers, - SRO, - audit trail, - NMS Plan, + Event Reports, -

In today's high-speed electronic markets, trading is widely dispersed across a variety of market centers, including exchanges, alternative trading systems ("ATSs"), such as dark pools and electronic communication networks ("ECNs"), and over-the-counter broker-dealers acting as market makers or block positioners. In their capacity as SROs, the Financial Industry Regulatory Authority ("FINRA") and some of the exchanges currently maintain their own separate audit trail systems for certain segments of this trading activity, which vary in scope, required data elements and format. In performing their market oversight responsibilities, SRO and Commission staffs today must rely heavily on data from these various SRO audit trails.

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As discussed more fully in part II.A below, there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, rerouted, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.

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Though SRO and Commission staff also have access to sources of market activity data other than SRO audit trails, these systems each suffer their own drawbacks. For example, data obtained from the electronic blue sheet ("EBS")1 system and equity cleared reports2 comprise only trade executions, and not orders or quotes. In addition, like data from existing audit trails, data from these sources lacks key elements important to regulators, such as the time of execution, and, in the case of equity cleared reports, the identity of the customer. Furthermore, recent experience with implementing incremental improvements to the EBS system has illustrated some of the overall limitations of the current technologies and mechanisms used by the industry to collect, record, and make available market activity data for regulatory purposes.3

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The Commission therefore believes that the regulatory data infrastructure on which the SROs and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system. In performing their oversight responsibilities, regulators today must attempt to cobble together disparate data from a variety of existing information systems lacking in completeness, accuracy, accessibility, and/or timeliness – a model that neither supports the efficient aggregation of data from multiple trading venues nor yields the type of complete and accurate market activity data needed for robust market oversight.

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To address this problem and improve the ability of the SROs and the Commission to oversee the securities markets, on May 26, 2010, the Commission proposed Rule 613,4 with the goal of creating a comprehensive consolidated audit trail5 that allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets. As proposed – and summarized in part II.B below – Rule 613 required SROs to jointly submit an NMS plan6 that would govern the creation, implementation, and maintenance of a consolidated audit trail, including a central repository to receive and store consolidated audit trail data. In the proposed Rule, the Commission specified many requirements that the NMS plan, and by extension the consolidated audit trail, must meet, ranging from details of the data elements to be collected, to the timing of data transmissions, to specific standards for data formatting.

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Among its various requirements, the proposed Rule mandated that the NMS plan developed by the SROs must in turn require each SRO and its members to capture and report specified trade, quote, and order activity in all NMS securities7 to the central repository in real time, across all markets, from order inception through routing, cancellation, modification, and execution. The proposed Rule also mandated that the NMS plan require the creation of unique order identifiers to facilitate the ability of regulators to view cross-market activity, as well as unique customer identifiers to enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order or the person exercising investment discretion for the account originating the order, if different from the beneficial owner.

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The Commission received 64 comment letters from 56 commenters in response to the proposed consolidated audit trail representing a wide range of viewpoints, as summarized in part II.C below.8 The commenters included national securities exchanges, a national securities association, technology providers, academics, broker-dealers, organizations representing industry participants, individual investors, and members of Congress.9 Of the comment letters received, 13 expressed support for the proposal;10 36 expressed support, but suggested modifications to certain provisions of the proposal;11 five solely suggested modifications to the proposal;12 two opposed the proposal;13 and seven neither supported nor opposed the substance of the proposal.14 Concerns raised in these comment letters included: (1) the appropriateness of real-time reporting of required data to the central repository;15 (2) the scope of the required data elements, including the use of unique order identifiers and unique customer identifiers;16 and (3) the burden and costs associated with the proposal.17 In addition, a number of commenters offered alternative approaches and made suggestions regarding the creation, implementation, and maintenance of the consolidated audit trail.18

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In consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to the proposed requirements for the NMS plan submitted to the Commission for its consideration. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means SROs may use to meet certain requirements. Some of the more significant changes are as follows:

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• Replacing Real-Time Reporting with a Requirement to Report Data by 8: 00 AM of the Next Trading Day. The adopted Rule no longer requires that the NMS plan provide for the reporting of order event data19 to the central repository in real time; rather, it provides that the NMS plan must require the reporting of order event data to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the SRO or the member.20 The NMS plan may accommodate voluntary submissions of order event data prior to 8: 00 a.m. on the following trading day, but it may not mandate a reporting deadline prior to 8: 00 a.m.

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• Providing More Flexibility to Determine the Format of Data Reported to the Central Repository. The proposed Rule mandated that the NMS plan require the SROs and their members to collect and provide to the central repository the required order and event information in a uniform electronic format. The adopted Rule instead allows the SROs to determine the details of how market participants would transmit data to the central repository (which might include multiple electronic formats, rather than a uniform electronic format), subject to a more general requirement that data must be transmitted in a manner that ultimately allows the central repository to make this data available to regulators in a uniform electronic format.21

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• Eliminating the Requirement to Report Orders with a Unique Order Identifier. The proposed Rule mandated that each order reported to the central repository be tagged with a unique identifier that is the same throughout the order's entire lifecycle. In the adopted Rule, this requirement is replaced with a more general requirement that once all order events are transmitted to the central repository, the repository must be able to efficiently and accurately link together all lifecycle events for the same order, and make available to regulators this linked order data.22

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• Extending the Compliance Period for Small Broker-Dealers. Under the adopted Rule, the NMS plan may provide that small broker-dealers be allowed up to three years, rather than two years as proposed, from the effectiveness of the NMS plan to provide the required data to the consolidated audit trail. 23

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In addition to the above modifications, the Commission has also added a number of new requirements to the adopted Rule in response to general concerns expressed by commenters regarding the process for the development and implementation of the NMS plan. Some of the more significant of these additions are as follows:

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• Considering and Explaining Choices and Available Alternatives. The adopted Rule requires that the NMS plan describe and discuss any reasonable alternative approaches to the creation of the consolidated audit trail that were considered by the SROs and why the approach set forth by the NMS plan was selected.24

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• Planning for Future System Efficiencies. The adopted Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof) that are rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also discuss the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).25

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• Considering Input. The adopted Rule requires the NMS plan to address the process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, provide a summary of the views of such members and other parties, and describe how the plan sponsors took such views into account in preparing the NMS plan.26 In addition, the adopted Rule also requires the NMS plan to provide for the establishment of an Advisory Committee whose function will be to advise the plan sponsors on the implementation, operation, and administration of the central repository.27

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• Periodic Reviews of the Consolidated Audit Trail. To help assure the Commission that as financial markets evolve and new technologies emerge, the consolidated audit trail remains a useful regulatory tool, the adopted Rule mandates that the NMS plan must require the central repository's Chief Compliance Officer to regularly review the operations of the consolidated audit trail, and, in light of market and technological developments, make appropriate recommendations for enhancements to the consolidated audit trail.28

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The Commission has also added certain requirements to the adopted Rule in response to specific concerns expressed by commenters with respect to the use of consolidated audit trail data. Some of the more significant of these additions are as follows:

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• Enhancing Security and Privacy Requirements. Commenters have expressed concerns regarding the risk of failing to maintain appropriate controls over the privacy and security of consolidated audit trail data. Accordingly, the adopted Rule requires the NMS plan to include additional policies and procedures that are designed to ensure the rigorous protection of confidential information collected by the central repository.29

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• Addressing and Limiting Errors. Commenters have also expressed concerns about the potential for errors in the consolidated audit trail; the adopted Rule requires the SROs to provide in their NMS plan detailed information regarding anticipated error rates as well as the plan's proposed error correction process.30

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The Commission generally believes that the collective effect of the modifications and additions described above will be to significantly expand the set of solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and to provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the alternatives that would have been available under the requirements of the proposed Rule. The Commission further believes that these changes address or mitigate the principal concerns raised by commenters – including concerns regarding the extent and cost of the systems changes required by the SROs and their members – while continuing to enable the SROs and the Commission to achieve significant benefits from the consolidated audit trail.31 Each of the modifications and additions noted above is described and explained in detail in part III below.

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Given these changes and the wide array of commenters' views on how to best create, implement, and maintain a consolidated audit trail, the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration.32 Indeed, some commenters recognized that a consolidated audit trail could be created, implemented, and maintained in a number of ways, and thus recommended that the Commission replace the specific systems requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal request-for-proposal ("RFP") process.33

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In light of the expanded solution set that should be available under the changes described above and commenter views on the NMS plan development process, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on competition, efficiency, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., the requirement to solicit input from members of the SROs and other appropriate parties); and (4) information about the implementation plan and milestones for the creation of the consolidated audit trail.

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These requirements are intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of how well the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. To help elicit the most appropriate information and analysis from the SROs in response to these requirements, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." These use cases and accompanying questions should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule, as well as aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail.34

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Because the Commission believes the adopted Rule permits a wider array of solutions to be considered by the SROs than the proposed Rule did and because the Commission and the public will be able to avail themselves of much more information and analysis in connection with the NMS plan submission, the Commission is also making significant modifications to the process by which it will consider the costs and benefits of the creation, implementation, and maintenance of a consolidated audit trail, as well as the potential impacts on efficiency, competition, and capital formation. In particular, the methodology that the Commission used in the Proposing Release to estimate the costs of creating, implementing, and maintaining a consolidated audit trail may be no longer suitable. As discussed in the Proposing Release, the approximately $4 billion cost estimate for the creation and implementation of a consolidated audit trail was primarily based on averages for the development from scratch of new, very large-scale market systems.35 However, the Commission's rationale for this approach was predicated on some of the specific technical requirements of the proposed Rule, especially those related to the real-time collection and standard formatting of all data. As such, the approach assumed that the consolidated audit trail would not be able to build on existing trade, order, and audit trail systems. As noted above, these assumptions may no longer be valid since several of the specific technical requirements underlying the Proposing Release's approach have been substantially modified. The Commission believes these changes would now permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards.36

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In light of these changes, the Commission believes that the economic consequences of the consolidated audit trail now will become apparent only over the course of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. In particular, the Commission believes that the costs and benefits of creating a consolidated audit trail, and the consideration of specific costs as related to specific benefits, is more appropriately analyzed once the SROs narrow the expanded array of choices they have under the adopted Rule and develop a detailed NMS plan. The Commission therefore is focusing its economic analysis in this Release on the actions the SROs are required to take upon approval of the adopted Rule – specifically the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research, that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.37 A robust economic analysis of the next step – the actual creation and implementation of a consolidated audit trail itself – requires information on the plan's detailed features (and their associated cost estimates) that will not be known until the SROs submit their NMS plan to the Commission for its consideration. Accordingly, the Commission is deferring this analysis until such time as it may approve any NMS plan – that is, after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

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To that end, the adopted Rule requires that the SROs: (1) provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the NMS plan submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the NMS plan submitted; and (3) provide their own analysis of the submitted NMS plan's potential impact on competition, efficiency and capital formation. The Commission believes that these estimates and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can develop estimates of the costs for the creation, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs.

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The Commission notes that this approach is suited for the multi-step nature of the particular process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. Further, because the Commission is deferring its final analysis of the consolidated audit trail until after a detailed NMS plan has been submitted to the Commission for its consideration and the public has had an opportunity to comment, the adopted Rule has been modified to include a mandate that in determining whether to approve the NMS plan and whether the NMS plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation of creating, implementing, and maintaining the NMS plan.38 The Commission also will consider the costs and benefits of the creation, implementation, and maintenance of the consolidated audit trail pursuant to the details proposed in the NMS plan submitted to the Commission for its consideration.

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As a result of the new requirements for SROs to provide additional information about costs and a number of other aspects of the NMS plan they submit, the Commission is extending the timeframe for the submission of the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the adopting release for Rule 613 ("Adopting Release") in the Federal Register. The Commission also is altering the timeframe within which SROs must submit proposed rule changes to require their members to comply with the requirements of the Rule and the NMS plan approved by the Commission39 and the deadline for submitting the document required by Rule 613(i) regarding the possible expansion of the scope of the NMS plan.40

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This document is organized by product, and then within each product, by general handling scenario, such as order receipt and routing, order execution, etc.

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For each scenario, a description of the scenario along with a diagram is provided and then is followed by specific Event Reports illustrating the correct values to be populated for each field.

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pubdate: N/A effdate: N/A -

II. Introduction

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Objectives, - Limitations, - Reporting, - -
pubdate: N/A effdate: N/A -

A. Need for, and Objectives of, a Consolidated Audit Trail

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +

2. Equity Scenarios and Examples

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples + Compliance User: Industry Member + Keywords: +

This section will illustrate sample equity reporting scenarios. Each scenario will include a brief scenario description including the reportable order events, a flow chart, and step-by-step reporting responsibilities.

+
pubdate: N/A effdate: N/A +

2.1. Order Origination and Route Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios + Compliance User: Industry Member Keywords: - audit trail, - Rule 613, - NMS Plan, + Order, -

The Commission believes that the Rule adopted today is an appropriate step in the creation of a consolidated audit trail which, when implemented, should substantially enhance the ability of the SROs and the Commission to oversee today's securities markets and fulfill their responsibilities under the federal securities laws. Rule 613 requires the submission of an NMS plan to create, implement, and maintain the first comprehensive audit trail for the U.S. securities markets, which will allow for the prompt and accurate recording of material information about all orders in NMS securities, including the identity of customers, as these orders are generated and then routed throughout the U.S. markets until execution, cancellation, or modification. This information will be consolidated and made readily available to regulators in a uniform electronic format.

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This section reviews the current status and limitations of existing, discrete audit trails and discusses how a consolidated audit trail could address those limitations and improve the ability of the SROs and the Commission to perform their regulatory functions. To perform this review, the Commission is, in part, drawing upon its own experiences in using existing audit trails to carry out its regulatory duties.41 The Commission also is relying on information provided to the Commission from other regulators who use existing audit trail systems, broker-dealers and organizations representing industry participants, and those with expertise in data management and technology solutions that may be applicable to the adopted requirements.

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pubdate: N/A effdate: N/A -
1. Use and Limitations of Current Sources of Trading Data
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Use and Limitations - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.1. New Principal Order Routed to Exchange and Executed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, New Principal Order Routed to Exchange and Executed + Compliance User: Industry Member Keywords: - SRO, - TRade, - EBS System, - Equity Cleared Reports, - SRO Audit Trails, + Industry Member Broker 1, + Route Scenarios, -

It has become increasingly challenging for SROs and the Commission to oversee the U.S. securities markets across the multitude of trading venues, given the huge volume of orders and trades that are generated, routed, transformed, and then re-routed across dozens of venues every day. Among the challenges is the fact that there is no single, comprehensive audit trail available to regulators.42 At present, the SROs and the Commission must use a variety of data sources, including EBS,43 equity cleared reports,44 and SRO audit trail data to help fulfill their regulatory obligations. As a result, among other issues, regulatory authorities face many challenges in obtaining, reconciling, and making effective use of even the limited order and execution data that is available, thereby hindering the conduct of market surveillance, investigation and enforcement activities, and market reconstructions and analyses.45

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The ultimate effectiveness of core SRO and Commission regulatory efforts depends on the following four qualities of trade and order (collectively "market") data:

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• Accuracy. Is the data about a particular order or trade correct?

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• Completeness. Does the data represent all market activity of interest, or just a subset? Is the data sufficiently detailed to provide the required information?

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• Accessibility. How is the data stored? How practical is it to assemble, aggregate, reconcile, and process the data? Can all appropriate regulators acquire the data they need?

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• Timeliness. When is the data available to regulators? How long will it take to process before it can be used for regulatory analyses?

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SROs generally use market data in the form of audit trails to identify potential misconduct in the markets they oversee, including attempts to manipulate market quotations, inflate trading or order volume artificially, or profit from non-public information. When these surveillance efforts identify suspicious trading activity, SROs have a responsibility to open investigations in which they assemble and review additional market data to assess the nature and scope of the potential misconduct. When an SRO detects persistent problems in the market it oversees, it may write new rules for its members to address the problems. To inform these rulemaking efforts, SROs frequently gather and analyze significant amounts of market data. The effectiveness of such efforts is largely determined by the qualities of the data available.46

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The qualities of such market data are also primary determinants of the Commission's ability to fulfill its statutory mission. The Commission uses market data in most of its investigations of potential securities law violations. In many of these investigations, market data analysis frames the issues for investigation and is a primary means of identifying relationships between individuals and entities whose activities may threaten the integrity of the securities markets or create substantial and unnecessary investor losses. The Commission also uses audit trails and other sources of market data to: (1) inform its priorities for examinations of broker-dealers, investment advisers and SROs; (2) supplement the data and information it collects during those examinations; and (3) determine the nature and scope of any potential misconduct the examinations identify. The Commission also relies heavily on market data to identify patterns of trading and order activity that pose risks to the securities markets and to inform regulatory initiatives, as well as to perform market reconstructions. In addition, the Commission relies on market data to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. As is the case for the SROs, the effectiveness of such efforts by the Commission is largely determined by the qualities of the data available.47

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As described in the following sections, each of the present sources of market data available to regulators suffers from deficiencies limiting its effective use.

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a. The EBS System

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The EBS system is currently the only available source of data that allows regulators to obtain the identity of customers of broker-dealers who have executed trades. The SROs and the Commission have depended on this system for decades to request trading records from broker-dealers. The EBS system, supplemented by the requirements of Rule 17a-25 under the Exchange Act,48 is generally used by SRO and Commission staff to assist in the investigation of possible securities law violations, typically involving insider trading and market manipulations.49 In its electronic format, the EBS system provides certain detailed execution information, upon request by SRO or Commission staff, for specific securities during specified timeframes. However, EBS data, which is currently sourced from the so-called back-office records of clearing brokers, are limited to executed trades and do not contain information on orders or quotes (and thus no information on routes, modifications, and cancellations). Also, in frequent cases where brokers utilize average-price accounts to execute and aggregate multiple trades for one or more customers, the details of each individual trade execution are typically lost when reported through the EBS system because it is only the average aggregate price and volume of a series of executed trades that are transmitted to the clearing systems for processing.50

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Furthermore, the EBS data currently includes only the dates, but not the times, of each trade execution (regardless of whether or not the trade represents an average-price series of executions).51 Since there could be many broker-dealers trading a given security on a given day of interest, to reconstruct trading on the market for one security on one day could involve many, perhaps hundreds, of EBS requests. Consequently, EBS data, alone, are not generally useful for price or short sale manipulations analysis, order flow analysis, depth-of-book analysis, or any large-scale market reconstructions in which the timing of events is required to build a useful picture of the market.52

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In addition, though the EBS system provides the names associated with each account in which a trade has been placed, these names are based on the separate records of each broker-dealer providing data to the EBS system, and the same party may be identified by a different name across multiple broker-dealers. Experience of staff at the Commission has shown53 that it is difficult to perform cross-broker customer analysis of trading since the same customer may be known by different names depending on the account and broker-dealer through which it traded.

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The EBS system also typically requires SRO and Commission staff needing EBS data to request the information from each broker-dealer, and complete responses from each broker-dealer may take days or weeks depending upon the scope of the request. As a result of these various limitations, the EBS system is generally only used by regulators in narrowly-focused enforcement investigations that generally involve trading in particular securities on particular dates or with specific broker-dealers.

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b. Equity Cleared Reports

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In addition to the EBS system and Rule 17a-25, the SROs and the Commission also rely upon the NSCC54 equity cleared report for initial regulatory inquiries.55 This report is generated on a daily basis by the SROs, is provided to the NSCC, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.56 This information is also provided to the Commission upon request. Since the information made available on the report is limited to the date, the clearing firm, and the number of transactions cleared by each clearing firm, its use for regulatory purposes is quite limited -- equity cleared reports basically serve as a starting point for certain types of investigations, providing a tool the Commission can use to narrow down the clearing firms to contact concerning transactions in a certain security.

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c. SRO Audit Trails

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In addition to EBS data and equity cleared reports, the SROs and the Commission rely on data collected through individual SRO audit trails. Most SROs maintain their own specific audit trails applicable to their members. For example, the National Association of Securities Dealers ("NASD")57 established its Order Audit Trail System ("OATS")58 in 1996, which required NASD (n/k/a FINRA) members to report certain trade and order data on Nasdaq-listed equity securities. OATS was later expanded to include OTC equity securities. Similarly, the NYSE implemented its Order Tracking System ("OTS")59 in 1999 under which its members were required to report certain trade and order data on NYSE-listed securities. Beginning in 2000, several of the current options exchanges implemented the Consolidated Options Audit Trail System ("COATS").60 In addition, many of the exchanges have created their own audit trails to assist in surveillance activities.

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Recently, FINRA expanded its OATS requirements from covering only Nasdaq-listed and OTC equity securities to covering all NMS stocks.61 To avoid duplicative reporting requirements, the NYSE, NYSE Amex LLC (n/k/a "NYSE MKT LLC") ("NYSE Amex"), and NYSE ARCA, Inc. ("NYSE Arca") subsequently replaced their OTS audit trail requirements for members who are also members of either FINRA or Nasdaq (and therefore subject to OATS requirements) with rules that allow these members to satisfy their reporting obligations by meeting the new OATS requirements.62

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Although these developments with respect to the scope of FINRA's OATS rules reduce the number of audit trails with disparate requirements, they still do not result in a comprehensive audit trail that provides regulators with accurate, complete, accessible, and timely data on the overall markets for which regulators have oversight responsibilities. In particular, data collected by FINRA pursuant to FINRA's Rule 7400 series ("OATS data") does not provide a complete picture of the market because though OATS collects data from FINRA members with respect to orders and trades involving NMS stocks, OATS does not include trade or order activity that occurs on exchanges, or at broker-dealers that are not FINRA or Nasdaq members. Nor does OATS include exchange quotes, principal orders submitted by FINRA members registered as market makers, or options data.63 In performing its own regulatory oversight of the markets, FINRA has chosen to create an internal process in which it augments the data it collects via OATS with trade execution data from other exchanges with which it has a regulatory services agreement. This process provides FINRA with a wider view of the markets than that provided by OATS alone, but linking data in this fashion does not yield fully accurate results.64 For these reasons, the Commission believes that the augmented OATS data currently falls short of providing an efficient source of data for analyzing cross-market activities, or tracking an order through its entire cycle from generation through routing to execution, modification or cancellation.

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OATS data also suffers from a lack of timeliness, partly as a result of the problems with the accuracy of the data as collected, and partly because of its lack of completeness. When FINRA receives an end-of-day OATS file from a member, it takes an hour for FINRA to acknowledge receipt of the report and approximately another 24 hours to determine if there is a syntax error65 in the report.66 During this time, FINRA performs over 152 validation checks on each order event reported to OATS. Thus, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.67 Each of these checks can result in OATS data submissions being rejected and generating an error message.68 As a result of these validation checks, almost 425,000 reports per day, on average, are rejected and must be corrected.69 In addition to the 24 hours needed to identify errors within a report, it takes another two business days to determine whether a file that is syntactically correct nevertheless contains errors in content related to internally-inconsistent information about processing, linking, and routing orders. Once a member is advised of such errors, the member has up to five business days to re-submit a corrected file. However, error corrections are limited to only those that are required to remedy internal inconsistencies within a given member's submission. Cross-firm inconsistencies in which, for example, one member reports routing an order to a second member, but the second member does not report receiving or processing such an order, are identified as unmatched or unlinkable data records, but neither firm corrects these types of reporting errors. The net result yields an historical data record of market activity that contains a small but permanent number of incorrect or irreconcilable trade and order events.70

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Given the time it takes to process each OATS file, and the nature of the process in which errors are detected, reported back to members, and then corrected, inter-firm surveillance by FINRA typically does not begin until 5 business days after receipt of OATS data. In addition, the final product of the FINRA process is available to FINRA, but is not stored in a market-wide database or a central repository that is readily accessible to other regulators. This is because SROs do not typically have access to the internal systems of another SRO, though they may share some sources of underlying data.71

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Because the Commission does not have direct access to OATS data and other SRO audit trails and because each SRO only has direct access to its own audit trails, requests must be made to the Intermarket Surveillance Group ("ISG")72 or SROs to conduct an analysis on order data. It can take days or weeks, depending on the scope of the information requested, to receive responses to requests. Once the responses to its requests for information are received, the Commission, or any SRO undertaking the same task, must commit a significant amount of time and resources to process and cross-link the data from the various formats used by different SROs before it can be analyzed and used for regulatory purposes. Whether or not this process is successful depends on the accuracy, completeness, and format of the data received, as well as how readily data from different SROs can be reliably linked. For example, staff at the Commission working on the analysis of the May 6, 2010 "Flash-Crash" found it was not possible to use the data from existing audit trails to accurately or comprehensively reconstruct exchange and ATS equity limit order books for NMS securities as required to fully analyze the events of that day.73

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A further difficulty in using existing audit trails to conduct cross-market surveillance is the lack of consistency in both format and content among the various audit trails. Not all SROs collect data using the OATS format. In addition, each options exchange maintains its own COATS audit trail in a different format and includes different supplemental data items in its audit trail. These differences make it difficult and labor intensive for regulators to view options trading activity across multiple markets, and the lack of any combined equity and options audit trail is a significant impediment to regulators performing cross-product investigations and analyses.

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An additional shortcoming of existing SRO audit trails is the lack of customer identifiers. In general, existing SRO audit trails only identify the broker-dealer handling the order and not the account holder or the person exercising investment discretion for the account holder, if different. This limitation makes the process of identifying the customers involved in unusual trading patterns or market events very difficult. Even determining whether or not an unusual trading pattern exists is challenging if the data does not identify trades by a single customer at multiple broker-dealers. Requests therefore must be made to one or more broker-dealers to obtain information about the customer or customers behind an order. Multiple requests may be necessary before the information is obtained. EBS data may have to be requested as a supplement. A further challenge arises in any type of customer-based cross-market analysis because there is no standard convention for how customers are identified at different broker-dealers – the same party directing trades across multiple venues, or through different broker-dealers, can be known by many different names.

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Not having customer information at the early stage of surveillance can also impair the accuracy, and thus efficacy, of certain surveillances. The patterns that emerge when trade and order activity is aggregated across all customers of a broker-dealer often exhibit characteristics that can be quite different from the (initially) unobservable patterns of trade and order activity of each individual customer at that broker-dealer. This could result in what are known as "false positive signals," in which market activities that initially are flagged as being potentially manipulative by a surveillance system are later found not to be potentially manipulative once more detailed customer data from the broker-dealer is requested and analyzed. In contrast, potentially manipulative activities may be missed by a surveillance system that cannot identify the customers behind each order or trade if those activities are otherwise obscured by non-manipulative activities of other customers of the same broker-dealer such that the aggregate patterns of trading do not appear potentially manipulative.

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Given the various limitations described above, the Commission does not believe that existing audit trails, with their current features, provide regulators with an efficient or adequate method of monitoring and surveilling the market for NMS securities. The Commission notes, for example, that FINRA summarizes the current cross-market systems as follows: "The current systems in place to achieve effective cross-market surveillance, such as the ISG, are incomplete. For example, the ISG audit trail data has numerous shortcomings, including: (1) it does not capture quote/orders away from a market's inside market (i.e., those quotes/orders below the best bid or above the best offer); (2) it currently identifies participants of a trade only to the clearing broker, not down to the executing broker level; (3) data submitted by participants is not validated; (4) certain data fields are not mandatory; and (5) there are no service level agreements to ensure that participants submit timely and accurate information."74

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This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal order, routes it to an exchange, and then the order is executed on the exchange.

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For this scenario, Industry Member Broker 1 is required to report the following events:

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• The creation of a New Order (Principal)

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• The route to an exchange as an Order Route event

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Note that the execution will be reported by the exchange, Broker 1 does not need to report the fill received.

+ + +
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pubdate: N/A effdate: N/A -
2. Regulatory Improvements with a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Regulatory Improvements with CAT - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.2. Customer Order Routed to Exchange as Agent
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Customer Order Routed to Exchange as Agent + Compliance User: Industry Member Keywords: - NMS Plan, - Quality of Audit Trail, - Surveillance, - Investigation, - Customer-ID, - Risk-Based Examination, - Market Manipulation, - Tips, - Complaints, - Cross-Market, - Broad-Based Market Events, - Market Analysis, - Reporting Requirements, + Average Price Bases, -

The NMS plan required by the Rule, if approved by the Commission, will improve the quality of audit trail data by, among other things: (1) identifying with a unique "Customer-ID" the account holder(s) with respect to an account at a registered broker-dealer and, if different, any person authorized to give the broker-dealer trading instructions for such account; (2) identifying the time of each key event in the life of an order according to synchronized business clocks; (3) requiring the reporting of comprehensive order lifecycle data; and (4) including all NMS securities in one audit trail. As discussed below, the Commission believes that these improvements should have the potential to result in the following: (1) improved market surveillance and investigations; (2) improved analysis and reconstruction of broad-based market events; and (3) improved market analysis. In addition, a consolidated audit trail has the potential to result in a reduction in disparate reporting requirements and data requests.

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a. Improved Market Surveillance and Investigations

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A consolidated audit trail will expand the data available for regulators to perform surveillance and investigations for illegal activities such as insider trading, wash sales, or manipulative practices. In particular, a consolidated audit trail will help surveillance and investigations by facilitating risk-based examinations, allowing more accurate and faster surveillance for manipulation, improving the process for evaluating tips, complaints, and referrals ("TCRs"), and promoting innovation in cross-market and principal order surveillance.

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i. Risk-Based Examinations

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A consolidated audit trail will facilitate risk-based examinations. Risk-based examinations require access to accurate and timely data so that the scope of the examination can be properly set to cover the areas of identified risks. Regulators currently may request audit trail data directly from the broker-dealer, work with the broker-dealer to understand the format and definitions in the data, validate that information with a third party, and analyze the data to determine whether the initial assumptions concerning risk were valid. This effort requires significant resources from both the regulator and the broker-dealer, all of which may be wasted if the resulting analysis shows that the assumptions of risk justifying the examination of a particular subject were not founded. Thus, this resource-intensive process does not necessarily reveal the subjects most worthy of examination, and does not permit an effective pre-examination review of a subject's trading practices.

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In contrast, a consolidated audit trail would permit regulators, for example, to identify risks and appropriate subjects for examinations relating to certain types of trading by creating and comparing metrics based on the complete (and possibly cross-market) activities of a broker-dealer or customer. Signals based on such metrics could, for example, identify outlier patterns in the ratio of order activity to execution, which may be an indication of potentially manipulative practices. Currently, this method is impractical because, as described above, it requires the consolidation of many audit trails that store data in non-uniform formats, participant information in SRO audit trails often does not consistently identify the executing broker-dealer, and there is no uniform method of identifying customers.

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In sum, consolidated audit trail data that meets the minimum requirements for the NMS plan specified in the Rule would allow regulators to create a process that focuses much more of their resources on those firms for which specific activities over specific time periods warrant follow up. The subsequent examinations would thus be more precise, resulting in more efficient use of regulatory resources, potentially reducing the need for multiple document requests, and ultimately reducing the sometimes significant compliance burden on a broker-dealer or other subject.

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ii. Market Manipulation

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In addition to helping regulators focus their resources and better identify areas in which potentially manipulative trading activity may be occurring, a consolidated audit trail will greatly aid the analysis of the potential manipulation itself. The current methodology to analyze order and trade data requires a tremendous amount of time and resources to construct an accurate picture of when trades are actually executed. Typically, this includes: (1) broker-dealers and other registrants responding to multiple requests from the Commission and SROs; (2) SROs devoting regulatory resources to obtaining, analyzing, and reporting data requested by the Commission; and (3) Commission staff reconciling inconsistent order data provided by different SROs with respect to different markets.

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In addition, while SRO audit trail data identifies the dates and times of trades by a particular broker-dealer, SRO audit trail data does not reveal the identities of the customers initiating the trades executed by the broker-dealers. Accordingly, to identify customers placing trades through a broker-dealer, regulatory staff must obtain EBS data and integrate such data with SRO audit trail data. This is a cumbersome process because there is no automated process to link the two data sources. To determine the exact execution time for trades by a particular customer, regulatory staff must obtain a third set of data from the broker-dealer's trading and order handling system. These processes can take many months. In some cases, the laborious process of assembling the data delays other critical investigative or analytical steps. In other cases, investigators or analysts forego the process of determining when trades occurred, limiting their analysis to more accessible information. As a result, SRO and Commission staffs may fail to ascertain the full scope of misconduct under investigation or the causes of unusual market events at issue.

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Even more critically, the absence of reliable information about who initiated which orders makes detection of schemes that involve repeat instances of activity through accounts at multiple broker-dealers difficult. Schemes of this sort may be among the most harmful and difficult to police, but without a customer identifier that consistently and uniquely identifies responsibility for orders across all broker-dealers, no amount of technical sophistication and securities market insight can produce a data query or analysis to detect them.75

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With the data provided by the consolidated audit trail, regulatory staff would be able to conduct such analyses in a much shorter period of time. In addition, the process of analysis with a consolidated audit trail would be inherently more reliable than the manual reconstruction process currently available, reducing the risk of inaccuracies. Furthermore, the ability to process and meaningfully analyze audit trail data more quickly would allow regulatory staff to employ proactive methods of identifying potentially manipulative activities. The Commission therefore believes a consolidated audit trail would make the overall process of identifying and analyzing potentially manipulative trading practices much more focused, accurate, and efficient.76

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The timely availability of data to regulators also impacts the efficacy of detecting (and possibly mitigating the effects of) some types of market manipulation. For example, some pernicious trading schemes are designed to generate large "quick-hit" profits in which participants attempt to transfer the proceeds from the activity to accounts outside of the reach of domestic law enforcement as soon as the offending transactions have settled in the brokerage account (typically three days after execution). If the SROs detect such schemes and promptly report them to the Commission, the Commission potentially could seek asset freezes that limit the transfer of funds until charges against the account holder are resolved. The Commission believes that a consolidated audit trail in which uniform data about market activities are efficiently collected and processed soon after such activities occur, and in which data are available to regulators in a timely manner, would more frequently and effectively allow regulators to use this approach.

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iii. Tips and Complaints

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A consolidated audit trail also would significantly improve the processes used by the SROs and the Commission for evaluating tips and complaints about trading activity.77 It is not uncommon for market participants or those with experience in market data to sometimes note atypical trading or quoting patterns in publicly-available market data. A consolidated audit trail would allow regulatory staff to quickly determine whether a particular instance of an atypical activity (regardless of how it was originally identified), such as an abnormally high level of quote traffic, is worthy of further investigation.

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Today, such an analysis of TCRs is difficult and cumbersome. Even a preliminary review requires analysis by each exchange or ATS to identify the activity in question and to determine its scope. Regulators then must consolidate the analyses from each such market center to determine the identities of those responsible for the atypical activity in question. To the extent that the activity originates from several market participants, regulators must conduct additional analysis on each of those participants, and possibly other participants, to discover information that could identify the customer(s) originating the orders that created the atypical activity. Without a unique customer identifier included in the order and trade data, this may not be possible. The consolidated audit trail would significantly improve the multi-stage process, enabling regulatory staff to make efficient queries on orders and more quickly determine whether the TCR can be "closed" or if further analysis and investigation are warranted.

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iv. Cross-Market and Principal Order Surveillance

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Investigations of cross-market activity may be more efficient with a consolidated audit trail as such an audit trail may provide regulators with data not currently consolidated across markets and/or data not currently available to regulators such as broker-dealer principal orders, including market maker quotes. For example, in an attempt to manipulate the market, a broker-dealer could use numerous principal sell orders across multiple venues to give the misleading appearance of broad sell-side pressure, and then send a buy principal order at a favorable price to take advantage of the market momentum created by the misleading sell orders. This type of activity would be difficult to readily identify with current audit trails, but it could be the target of a routine surveillance of a consolidated audit trail. The Commission notes, for example, the statement of FINRA and NYSE Euronext that, "[p]articularly since the implementation of Regulation NMS in 2007, there has been a significant increase in market linkages, the result of which is that trading activity on one market can have a profound effect on other markets. This, in turn, has led to the realization that market manipulation, by its very nature, is facilitated cross-market where, for example, trading on one market is used to affect a security's price while trading on another market is used to take advantage of that price change."78

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In addition, the consolidation of order data with direct access for all relevant regulators may create opportunities for regulators to develop entirely new methods of surveillance, and to keep existing forms of surveillance up to date as new market practices and new market technologies continue to rapidly evolve. In fact, as described more fully below, SROs are required by the Rule to incorporate the expanded audit trail data into their surveillance systems.79

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b. Improved Analysis and Reconstruction of Broad-Based Market Events

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A consolidated audit trail will significantly improve the ability of regulators to reconstruct broad-based market events so that they and the public may be informed by an accurate and timely accounting of what happened, and possibly why. The sooner a reconstruction can be completed, the sooner regulators can begin reviewing an event to determine what, if any, regulatory responses might be required to address the event in an effective manner.

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For example, on the afternoon of May 6, 2010, the U.S. equity and equity futures markets experienced a sudden breakdown of orderly trading, when broad-based indices, such as the Dow Jones Industrial Average Index and the S&P 500 Index, fell about 5% in just five minutes, only to rebound soon after (the "Flash Crash"). Many individual equities suffered even worse declines, with prices in over 300 stocks and exchange-traded funds falling more than 60%. In many of these cases, trades were executed at a penny or less in stocks that were trading at prices of $30 or more only moments earlier before prices recovered to their pre-Flash Crash levels.80

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The Commission immediately formed an interdisciplinary team from across the Commission to analyze the events of May 6, 2010, identify possible causes, inform the public of what happened, and aid in formation of regulatory responses. The CFTC took similar steps. Within a few weeks, staff at the Commission and the CFTC released a joint preliminary report that described the event and, in general terms, the market conditions prior to and during the rapid decline.81 However, at that time the staffs were unable to definitively identify the specific conditions or circumstances that could have caused, contributed to, or exacerbated the event. Though the SROs and the Commission quickly implemented a single-stock circuit breaker pilot program as an initial response, a more complete regulatory response required a full and robust analysis of additional data.

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From the start of the investigation, many market participants had suggested that the sudden withdrawal of liquidity in the equity markets may have resulted in the rapid decline of prices as orders to immediately sell (many from retail investors) found no interest on the buy side (from market professionals).82 To fully understand how such conditions could occur, Commission economists needed to analyze the order books for thousands of equities. Commission staff requested order book data from several exchanges that sell such data or could readily put such data together, but this data did not represent the whole market. Commission staff attempted to use order data from OATS and several SRO audit trails to reconstruct order books for thousands of equities traded on exchanges that do not maintain or could not provide order book data. Although it was possible to link the data from different sources to show trading activity for a particular stock over a specific period of time, the accuracy, completeness, and content of the combined data sets were not sufficient to allow for an accurate reconstruction of the order books. This hindered staff in determining what happened to liquidity before, during, and after the Flash Crash. Two major problems were the inability to identify and eliminate duplicate orders from the data and the inability to accurately sequence events across the multiple data sources.

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As described in the final joint report issued by the staffs of the CFTC and the Commission on September 30, 2010, Commission staff were only able to create a comprehensive view of the order books by acquiring, processing, and aggregating four distinct data sets that each contained a subset of order book information from each of the four exchanges that could provide such information: Nasdaq ModelView, NYSE Openbook Ultra, NYSE ARCABook, and BATS Exchange.83 Given the enormous volume of data that needed to be processed (more than 5.3 billion records), even small changes to the integration and aggregation process took significant computer time to test and implement.

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By early July 2010, staff at the CFTC had completed a very detailed analysis of the full order book of the S&P 500 E-Mini futures contract and were able to show how liquidity in that contract had been eroding for most of the day. The CFTC's detailed second-by-second analysis of trading during the Flash Crash itself revealed how buy-side depth in the S&P 500 E-Mini futures virtually evaporated as broad market indices rapidly fell 5%.84 However, until a similar analysis could be completed in the equity markets, neither regulators nor the public would know whether an evaporation of liquidity was also present in the equity markets, and whether the timing of such an event preceded or followed the liquidity event in the futures market. Ultimately, it took Commission staff nearly five months to complete an accurate representation of the order books of the equity markets for May 6, 2010. Even then, the reconstruction was not fully complete and only contained an estimated 90% of trade and order activity for that day.85 However, it was sufficiently comprehensive to allow staff to perform a robust analysis of the equity markets revealing how "the decline in full-depth buy-side liquidity for the E-Mini precede[d] that of the SPY and [the stocks composing] the S&P 500," and how "drops in [stock] prices [became] increasingly more severe with ever-larger drops in liquidity."86

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Had there been a consolidated audit trail in place on May 6, 2010, regulators would likely have been able to much more quickly and efficiently perform these types of detailed analyses. This in turn could have dramatically shortened the time during which regulators, as well as the public, remained uncertain about what actually happened during the Flash Crash.

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c. Improved Market Analysis

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In addition to the surveillance and reconstruction benefits described above, a consolidated audit trail would also significantly improve the ability of regulators to monitor overall market structure, so that both the Commission and the SROs can be better informed in their rulemakings. In January 2010 the Commission published a concept release on equity market structure that discusses how the markets have rapidly evolved from trading by floor-based specialists to trading by high-speed computers. The concept release poses a number of questions about the role and impact of high-frequency trading strategies and the movement of trading volume from the public national securities exchanges to dark pools.87

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Over the past two years there has been considerable discussion about these topics by regulators, market participants, the media, and the general public. Nevertheless, numerous open questions remain because of a lack of consolidated market data, making certain types of market-wide analysis impractical. For example, existing research on high frequency trading cannot precisely identify high frequency traders. As a result, studies of high frequency trading have been limited in their ability to thoroughly examine such strategies and their impact on the market, leaving many open questions. Having more precise data on who is trading (and from which general patterns of order submission could be inferred) would help regulators better understand the impact of high frequency trading on markets. Similar analyses also could be performed for other aspects of general market structure, such as those discussed in the concept release related to dark pools and internalization. In addition, having access to a consolidated audit trail will provide the Commission and SROs with better data to conduct retrospective analyses of rules and pilots. Informed analysis of these topics requires consolidating audit trails so that quotes and trades across multiple exchanges can be linked (either by customer type or by specific customer) with order flow and trades from the many dozens of over-the-counter venues.

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d. Potential Reduction in Disparate Reporting Requirements and Data Requests

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The Commission believes that a consolidated audit trail will reduce the burdens on SROs and broker-dealers associated with producing regulatory data. In particular, the consolidated audit trail may reduce burdens from ad hoc data requests.

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The Commission believes that the creation of a consolidated audit trail may reduce the number and types of ad hoc requests made by regulators to market participants for data concerning their trading activities. In particular, regulators could use direct access to data in the consolidated audit trail for investigations or analyzing trends or broad market activities instead of requesting data from market participants. In addition, regulators could use this direct access to analyze the activities of a single trader across multiple markets, which today requires requests for data from multiple market participants. Regulators would therefore likely make fewer ad hoc requests. The Commission, however, does not believe that all ad hoc requests for data from market participants will be replaced by obtaining data from the consolidated audit trail. A detailed investigation of a particular firm may require types of data from that firm that are not stored in the consolidated audit trail, or that relate to periods prior to the implementation of the consolidated audit trail. In addition, in cases in which there are discrepancies, or even suspected discrepancies, between a firm's actual trading activities and what is stored in the consolidated audit trail's central repository, regulators are likely to request data directly from market participants for verification and investigative purposes.

+

This scenario illustrates the reporting requirements to CAT for an Industry Member that routes a customer order to an exchange on an agency basis.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Route event for routing the customer order to the exchange

+

In this scenario, since the execution is passed back directly to the customer, no Order Fulfillment event is required to be reported.

+ + +
-
pubdate: N/A effdate: N/A -
3. Large Trader Reporting System Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Large Trader Reporting System Rule - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.3. Customer Order Fulfilled on Average Price Basis
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Customer Order Fulfilled on Average Price Basis + Compliance User: Industry Member Keywords: - Rule 3h-1, - NMS Plan, + Two Industry Members, -

The Commission believes that a consolidated audit trail will be able to build upon various aspects of the large trader reporting system that was recently adopted by the Commission.88 Rule 13h-1, which establishes the large trader reporting system, requires large traders to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. Upon receipt of Form 13H, the Commission issues a unique identification number to the large trader, which the large trader then will be required to provide to those broker-dealers through which the large trader trades. Registered broker-dealers will be required to maintain specified transaction records for each large trader and to report that information to the Commission upon request. The Large Trader Rule requirements are designed to enable the Commission to promptly and efficiently identify significant market participants and collect data on their trading activity so that Commission staff can reconstruct market events, conduct investigations and bring enforcement actions as appropriate.

-

Several commenters noted that portions of the requirements of Rule 13h-1 overlapped with certain provisions of proposed Rule 613 and requested that the Commission harmonize the rules.89 One commenter stated that the Commission should consider implementing only those portions of Rule 13h-1 that would not be affected by, or be redundant to, the implementation of the consolidated audit trail proposal.90 Another commenter suggested that the Commission mandate compliance only with those aspects of Rule 13h-1 that would operate as part of the consolidated audit trail – the large trader identifier in particular – so they could be leveraged in the creation of the consolidated audit trail.91 Yet another commenter believed that, upon implementation of the consolidated audit trail, it would not be necessary for large traders to identify themselves to their broker-dealers pursuant to Rule 13h-1, because the consolidated audit trail already would require broker-dealers to include a customer identifier for every order.92 The commenter explained that, if customer information is collected as part of the consolidated audit trail, the Commission and SROs could run queries to identify customers with significant trading volume.93

-

The Commission believes that both Rules are necessary to enhance regulatory oversight of the markets and its members. Key aspects of Rule 13h-1 define the types of entities that are large traders, and who must register with the Commission and file and keep current certain background information on Form 13H. These aspects of Rule 13h-1 are not addressed by Rule 613 and would not be superseded by it. Rather, the information collected by the registration of large traders would further complement the data collected for a consolidated audit trail. To this end, Rule 613 requires that large trader identifiers also be reported to the central repository as part of any large trader's customer account information94

-

The Commission does note, however, that other aspects of Rule 13h-1 may be superseded by Rule 613. Specifically, the trade reporting requirements of Rule 13h-1 are built upon the existing EBS system. To the extent that, as described in Section II.A.2.iv.d., data reported to the central repository under Rule 613 obviates the need for the EBS system, the Commission expects that the separate reporting requirements of Rule 13h-1 related to the EBS system would be eliminated.95

+

This scenario illustrates the reporting requirements to CAT for an Industry Member that works a customer order through an average price account by routing one or more representative orders to the exchange. The Industry Member then fills the customer order on an average price basis.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• New Order event for the representative order created from the average price account

+

• Order Route event for each representative order, or portion of the representative order, routed to the exchange

+

• Order Fulfillment event to report the average price given to the customer

+ + + +
-
-
pubdate: N/A effdate: N/A -

B. Summary of Proposed Rule 613

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of Proposed Rule 613 - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - NMS Plan, - FINRA, - Rule 613, - Data Collection, - SRO, - -

Proposed Rule 613 would have required that the SROs propose an NMS plan that included provisions regarding: (1) the operation and administration of the NMS plan; (2) the creation, operation and oversight of a central repository; (3) the data required to be provided by SROs and their members96 to the central repository; (4) clock synchronization; (5) compliance by national securities exchanges, FINRA, and their members with Rule 613 and the NMS plan; and (6) a plan for the possible expansion of the NMS plan to products other than NMS securities. Specifically, proposed Rule 613 would have required the SROs to jointly file an NMS plan with the Commission to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.97 The NMS plan would have been required to provide for an accurate, time-sequenced record of an order's life, from receipt or origination, through cancellation or execution. In particular, the proposed Rule would have required the NMS plan to require that the SROs and their respective members collect and provide to the central repository data for each "reportable event," defined to include the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order, with respect to any NMS security. This data would have been required to be collected and provided to the central repository in a uniform electronic format on a real-time basis.

-

Under the proposed Rule, the data collected upon the receipt or origination of an order would have included: a unique order identifier; a unique customer identifier;98 a unique identifier for the broker-dealer receiving or originating the order; the date and time of receipt or origination of the order; and the "material terms of the order."99 For orders that are modified or cancelled, the data collected in real time would have included: the date and time the modification or cancellation was received or originated; the price and remaining size of the order; changes in the material terms of the order (if the order is modified); and the identity of the person giving the modification or cancellation.

-

For orders that are routed, data collected in real time would have included: the unique order identifier, the date and time the order was routed; the unique identifier of the broker-dealer or national securities exchange routing the order; the unique identifier of the broker-dealer or national securities exchange receiving the order; if routed internally at a broker-dealer, the identity and nature of the department and desk to which the order was routed; and the material terms of the order.

-

For orders received that were routed, data collected in real time would have included all the information for orders that are routed, except the identity and nature of the department and desk to which the order was routed, if routed internally at a broker-dealer; however, the date and time the order was routed would be replaced by the date and time the order was received.

-

For the execution of an order, data collected in real time would have included: the unique order identifier; the date and time of execution; the execution size and price; the unique identifier of the SRO or broker-dealer executing the order; the capacity of the broker-dealer executing the order (i.e., principal, agency, riskless principal); and whether the execution was reported pursuant to an effective transaction reporting plan or the OPRA Plan.100

-

Because certain information may not be readily available at the time of the reportable event, the proposed Rule would have required the NMS plan to require each SRO and its members to collect and provide to the central repository certain information, in a uniform electronic format, promptly after receipt of such information, but in no instance later than midnight of the day that the reportable event occurred or when the SRO or its member receives such information. Under the proposed Rule, this data would have included: the account number for any subaccounts to which the execution is allocated (in whole or part); the unique identifier of the clearing broker or prime broker, if applicable; the unique order identifier of any contra-side order; special settlement terms, if applicable; short sale borrow information and identifier; the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid; and, if the execution is cancelled, a cancelled trade indicator.

-

The proposed Rule would have required that the SROs jointly file an NMS plan with the Commission within 90 days after approval of the Rule. In addition, the SROs would have been required to select a plan processor within two months of the effectiveness of the NMS plan, as well as provide the Commission a document outlining how the SROs would propose to expand the audit trail to include non-NMS securities and additional transactions. The proposed Rule also would have required the SROs to file proposed rule changes to require their members to comply with the requirements of the proposed Rule and the NMS plan within 120 days of the effectiveness of the NMS plan. The SROs would have been required to begin reporting data to the central repository within one year after the effectiveness of the NMS plan, and their members would have been required to begin reporting data to the central repository within two years after the effectiveness of the NMS plan.

-

As proposed, the NMS plan would have been required to include specific plan provisions, detailing: the plan governance structure, the processes of admission and withdrawal of plan sponsors, the percentage of votes required to effectuate amendments to the plan, the allocation of central repository costs among the plan sponsors, and the appointment of a Chief Compliance Officer ("CCO") of the central repository. The proposed Rule would have required all plan sponsors to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the information contained in the consolidated audit trail. This information would be available to the Commission and the SROs for regulatory and oversight purposes only. The proposed Rule also would have required the NMS plan to require information be collected in a convenient and usable standard electronic data format, directly available and searchable electronically without any manual intervention for a period of not less than five years. This information would have been required to be available immediately, or, if immediate availability was not reasonably and practically achieved, any search query would have to begin operating on the data not later than one hour after the search query was made. Additionally, the proposed Rule would have required the NMS plan to include policies and procedures, including standards, to be utilized by the plan processor to ensure the security and confidentiality of all information submitted to the central repository, and all SROs and their employees, as well as all employees of the central repository, would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data. The proposed Rule also would have required SROs and their members to synchronize their business clocks that are used for the purposes of recording the date and time of any event that must be reported under the proposed Rule consistent with industry standards. Further, the proposed Rule would have required the central repository to collect and retain, on a current and continuing basis, and in a format compatible with the other information collected pursuant to the proposed Rule, the national best bid and national best offer ("NBBO") information for each NMS security. Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act,101 and last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act also would have been required to be collected and retained.

-
-
pubdate: N/A effdate: N/A -

C. Summary of General Comments on the Proposed Rule

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Comments, - -

The Commission requested comments on all aspects of the proposed Rule, including the potential costs and benefits.102 In particular, the Commission encouraged commenters to identify, discuss, analyze, and supply relevant data regarding any such costs or benefits.103 In response, commenters provided views and opinions regarding the regulatory usefulness of a consolidated audit trail; the overall costs of the proposed Rule, focusing on those requirements that commenters believed would be the most costly or burdensome to implement;104 the process for creating and implementing a consolidated audit trail; and alternatives to the proposed Rule's approach to creating, implementing, and maintaining a consolidated audit trail. These comments are discussed below.

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pubdate: N/A effdate: N/A -
1. Industry Support for a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.4. Order Routed between Two Industry Members and Subsequently Executed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Routed between Two Industry Members and Subsequently Executed + Compliance User: Industry Member Keywords: - Opinions, - FINRA, - NYSE, - NASDAQ, - Commenters, - SIFMA, + Multiple Industry Members, -

Commenters provided a wide range of opinions, and shared their concerns, regarding specific aspects of the proposed Rule.105 However, many of the commenters and their representatives who are involved with regulating and operating securities markets – as well as many of the commenters who otherwise populate data for, or make use of, existing audit trail systems (such as broker-dealers) – expressed support for the creation of a single consolidated audit trail.

-

FINRA and NYSE Euronext, filed a joint letter, "vigorously support[ing] the establishment of a consolidated audit trail," and stating, among other things, that "the evolution of the U.S. equity markets and the technological advancements that have recently taken place have created an environment where a consolidated audit trail is now essential to ensuring the proper surveillance of the securities markets and maintaining the confidence of investors in those markets."106

-

The NASDAQ OMX Group, Inc. similarly states that "[m]arket developments and fragmentation of market centers with varying market structures and levels of transparency have created inefficiencies and potential gaps in cross-market regulation," and that "[c]omplete transparency is the only way to ensure fair and orderly markets."107

-

Other commenters also stated their general support for the creation of a consolidated audit trail. According to Direct Edge Holdings, LLC ("Direct Edge"), "[t]he proposed consolidated audit trail ('CAT') system would significantly enhance the capabilities of regulators to police trading across asset classes; replace existing audit trails and consolidate trading and execution data for the asset classes under the Commission's jurisdiction . . . enable regulators to create a more complete timeline of an order's lifecycle; and facilitate large-scale market reconstructions . . . ."108

-

Although CBOE expressed some concerns in its comment letter about the "breadth, expense, and timetable of the Proposal"109 (concerns that were shared by other commenters),110 it "recognizes there are potential benefits to be obtained from CAT, and agrees that a central repository with uniform data submitted by all markets could enhance SRO and SEC oversight of the markets."111 CBOE further stated that, "[i]n particular, a CAT that contains a customer identifier on an order by order basis would enhance significantly the audit trails of the markets."112

-

BATS Exchange, Inc. ("BATS") expressed general support for the Commission's proposal, stating, "[o]ver the last several years, liquidity has dispersed across multiple interconnected venues, such that no one market center can claim a majority share of equity securities transactions. However, regulatory tools have not evolved to keep pace with these changes, and the limited existing processes and data available to analyze inter-market trading are inadequate. As a consequence, regulators rely on inefficient processes to reconstruct intermarket trading activity, including ad hoc requests to members for trading data when a potential problem is identified."113

-

Liquidnet, Inc. ("Liquidnet"), an ATS, generally stated that, "[i]n the long run, a properly-designed system that provides for centralized reporting of data should be more cost-efficient than the current patchwork system for collecting audit trail data."114 Liquidnet outlined seven specific benefits of a consolidated audit trail, ranging from "[reducing] the time that regulatory personnel must expend to request and collect data from market participants on a case-by-case basis," to "[reducing] the cost of reconstructing, analyzing, and reporting on significant market events such as those that occurred on May 6, 2010." 115

-

The Securities Industry and Financial Markets Association ("SIFMA"), an industry group that represents, among other entities, hundreds of securities firms that could be impacted by the creation of a consolidated audit trail, "believes that a centralized and comprehensive audit trail would enable the SEC and securities self-regulatory organizations ('SROs') to perform their monitoring, enforcement, and regulatory activities more effectively."116 SIFMA further states that, "[i]n the current era of electronic trading, regulators need efficient access to order and execution data from both broker-dealers and exchanges. Indeed, a consolidated audit trail is a much-needed improvement over today's fragmented audit trail platforms."117 As did a number of other commenters,118 SIFMA also expressed concerns about, and suggested alternatives to, some specific aspects of the proposed Rule, which will be further discussed below.

-

Finally, the Commission notes that members of the Financial Information Forum, whose participants include "trading and back office service bureaus, broker-dealers, market data vendors and exchanges," agree that "an enhanced audit trail system could increase the effectiveness of cross-market surveillance through better data availability and integration."119

-

When the perspectives of these commenters are combined with the Commission's own experiences (as described above in Section II.A.1.c.), a common theme emerges: there is substantial room for improvement in the collection of and access to trading data beyond what is available today from existing audit trails and other sources. The Commission agrees with many of the commenters that one of the main benefits of a consolidated audit trail will be to improve the efficiency and adequacy of a regulatory process of collecting and accessing audit trail data that directly affects and impacts a significant number, and wide variety, of market participants.

+

This scenario illustrates the reporting requirement when an order is routed from one Industry Member to another.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Route event for routing the customer order to Broker 2

+

For this scenario, Industry Member Broker 2 is required to report the following events:

+

• Order Accepted event for the received client order from Broker 1

+

• Order Route event for routing the client order to the exchange

+ + + +
-
pubdate: N/A effdate: N/A -
2. Commenters' Views on the Overall Costs of the Proposed Rule and the Resulting Framework of the Adopted Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.5. Order Split and Routed to Multiple Industry Members, Exchange, and Filled
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Split and Routed to Multiple Industry Members, Exchange, and Filled + Compliance User: Industry Member Keywords: - Cost, - Comments, + Routing Broker, -

With respect to general costs for the proposal, commenters expressed differing views. As discussed below, some commenters thought that the Commission overestimated the burdens of creating, implementing, and maintaining a consolidated audit trail, while others argued that the Commission had underestimated such burdens.

-

Nasdaq was among those commenters that stated that the Commission had overestimated the burdens. Specifically, Nasdaq stated that "innovative technology exists to meet many of the Commission's goals at significantly lower costs than estimated in the Proposing Release," and that SROs should be able to weigh the costs and benefits of various designs.120 Other commenters also expressed similar opinions stating that a consolidated audit trail accomplishing the Commission's goals could be implemented for less than the preliminary estimates.121 Two firms with experience in processing and analyzing market data, FTEN and Thomson Reuters, each noted that current technology could convert data from disparate systems into a uniform format, resulting in a less costly implementation of the consolidated audit trail.122 FTEN stated that "currently available commercial systems are capable of immediately accomplishing CAT goals of real-time cross-market transparency, accountability and control with no implementation risk and for far less than the estimated multi-billion dollar price tag."123 It further suggested that "[t]he SEC should leverage already deployed and commercially available solutions that are in production use today by major market participants . . . ." and an "iterative approach [that] would leverage existing systems to capture order and execution data in real-time from liquidity destinations (exchanges, ECNs, ATSs and dark pools) and 'map' the data back to original trade submissions by market participants without requiring integration with, or changes to, market participants systems or to liquidity destination systems and without modifying existing order flow."124 Similarly, another commenter recommended a technology solution that could handle the required data in milliseconds and that "significantly reduces disk space required, which can potentially save millions of dollars when dealing with multiple terabytes of data."125 One commenter suggested an entirely different approach through the use of an "adaptive graph indexing-based architecture" as the basis for the consolidated audit trail platform, instead of using a central repository, and explained that this technology would keep trading data within each SRO.126

-

On the other hand, numerous commenters expressed general concerns about the costs of implementing a consolidated audit trail relative to the benefits to be gained. For example, one commenter stated that "there can be no doubt whether market regulators need a consolidated audit trail;" however, the commenter questioned whether a system as costly as the consolidated audit trail was necessary to detect violations such as frontrunning, spoofing, and layering, which are violations the Commission has rarely pursued in the recent past.127

-

As discussed above, many commenters expressed general support for the creation of a consolidated audit trail, but believed that, as proposed, the implementation would be too costly and that the Rule should be modified.128 Concern about the proposed real-time requirements for reporting data to the central repository was a common theme expressed by these commenters,129 including those who maintained that a requirement to provide data on a real-time basis would be too burdensome due to the extensive systems changes that would be needed to comply with such a requirement.130 Some of these commenters argued that a real-time reporting requirement would require many industry participants to build entirely new systems or undertake significant technological upgrades.131 SIFMA, in particular, estimated that the cost per broker-dealer to implement real-time reporting could be millions of dollars and that the cost of capturing options quotes in real time alone could exceed the Commission's $2.1 billion estimate for the annualized cost of the audit trail.132 SIFMA further argued that broker-dealers would incur costs associated not only with establishing and maintaining the infrastructure to support real-time reporting, but also due to regulatory risk if they are not able to achieve 100 percent compliance with the proposed Rule.133 While SIFMA opposed a real-time reporting requirement, and encouraged the Commission to adopt a next day or later reporting requirement,134 SIFMA also stated that "if the SEC determines to require reporting of certain data elements in real-time or near real-time, we believe such data should be limited to reporting of 'key business events.'"135 SIFMA further stated that, "if the definition of real-time allowed for reporting within minutes (e.g. 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications . . . ."136 SIFMA described how a reporting system using "drop copies"137 could be "achievable in the relative near term," although it noted that its proposed process would not, among other things, include a unique Customer ID or a unique order identifier.138

-

Commenters also expressed general concerns regarding the costs of other aspects of the Proposed Rule. For example, Global Electronic Trading Company ("GETCO"), a market maker in equities and equity options, urged the Commission to consider whether quotation information already disseminated by SROs could be reported instead of requiring the SROs and their members to report all quotation information to reduce costs for the industry.139 Another commenter, Wells Fargo Advisors, argued that the inclusion of a unique customer identifier would add "tremendous incremental cost to the [consolidated audit trail]."140

-

Many commenters provided suggestions and views on how the costs of creating and implementing a consolidated audit trail might be lowered. For example, financial technology firm, Correlix, Inc. ("Correlix"), stated that relying on existing infrastructure, where possible, could bring down the cost and amount of time it would take to implement the consolidated audit trail.141 Correlix further stated that existing technology already is able to provide "a complete end-to-end history of message and order data from the market participant to the execution venue's matching engine and back to the originator," and that allows clients to run customized queries and reports on the data.142

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A variety of commenters, including SROs and broker-dealers, also believed it would be more cost efficient to use the existing OATS infrastructure specifically as a basis for a consolidated audit trail, rather than to purchase or create an entirely new system.143 Commenters further argued that existing audit trails could be expanded economically and quickly.144

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In contrast, other commenters expressed the view that costs could be reduced not by using existing audit trail infrastructures, but rather by using new, innovative technology to create the consolidated audit trail.145 Noetic Partners, a financial technology firm, explained that technologies are currently available to build a system that would capture "full-depth" data with "compression and near-line storage" in a system that would enable fast retrieval and analysis of data, and opined that, based on existing technology, a consolidated audit trail could be implemented for substantially less than the Commission's preliminary estimates.146 This commenter stated that, based on available technology, a fully functional consolidated audit trail could be implemented in months, rather than years, at an initial cost of less than $100 million.147

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An aggregate analysis of the many specific opinions described above suggests that commenters' views regarding the costs of creating, implementing, and maintaining a consolidated audit trail fall into one of two general categories. One set of commenters expressed the view that many, if not all, of the requirements of the proposed Rule could be met in a cost-effective fashion if current audit trail systems were replaced with new technologies and systems. However, another set of commenters expressed the view that a number of the requirements of the proposed Rule would be very costly to implement, and, instead, suggested that the most cost-effective method of creating a consolidated audit trail would be to relax some of the proposed requirements and build upon the infrastructure of existing audit trail systems.

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Therefore, as discussed above and in detail below,148 in response to these comments, and specific comments discussed throughout this Release,149 the Commission is adopting Rule 613 with substantive changes to some of the specific collection, reporting, and data requirements of the Rule.150 The Commission believes that these changes significantly expand the solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the Rule compared with the requirements of the proposed Rule. For example, the Rule no longer requires real-time reporting151 or only one unique order identifier;152 thus, the Rule would accommodate an NMS plan based on the types of solutions proposed by SIFMA and FINRA. However, to guide the SROs in their development of the NMS plan, the Rule includes several specific considerations153 that the Commission intends to use to evaluate the submitted NMS plan and consider its costs and benefits.

-

The changes from the Proposing Release provide the SROs with the flexibility to submit an NMS plan that provides creative solutions that harness innovative technology or that build on existing audit trail systems.

+

This section illustrates the reporting requirement when a customer order is split and each slice is subsequently routed to different parties - external Industry Member and subsequently an exchange and to an ATS.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Route event for the routing of an order slice to Broker 2

+

• Order Route event for the routing of an order slice to ATS 3

+

For this scenario, Industry Member Broker 2 is required to report the following events:

+

• Order Accepted event for the received client order from Broker 1

+

• Order Route event for routing of the order to Exchange 1

+

For this scenario, Industry Member ATS 3 is required to report the following events:

+

• Order Accepted event for the received client order from Broker 1

+

• Trade event when the order is matched

+ + + + +
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pubdate: N/A effdate: N/A -
3. Comments on the Process for Creating a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on the Process for Creating a CAT - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.6. Order Routed from an Exchange through a Routing Broker to another Exchange
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Routed from an Exchange through a Routing Broker to another Exchange + Compliance User: Industry Member Keywords: - NMS Plan, - FIF, - STA, - Comments, - SROs, + Broker, + Industry Member Broker 1, + original manual timestamp, -

The Commission received comments regarding the process through which a consolidated audit trail should be created. As proposed, the Rule required that the SROs submit an NMS plan setting forth the details for the creation, implementation, and maintenance of a consolidated audit trail within 90 days of approval of the Rule. A few commenters suggested that more time be allotted for the planning and design of the NMS plan.154 FIF and the Security Traders Association ("STA") recommended extensive, "up-front business analysis,"155 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."156 These commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.157

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In this regard, several commenters suggested that the Commission undergo a RFP or request for information ("RFI") process to create and implement a consolidated audit trail.158 Specifically, FIF urged the Commission to perform a RFP process "to determine the best technical solution for developing a consolidated audit trail."159 FIF suggested that the Commission "should outline a set of goals and guiding principles they are striving to achieve as part of the adopted CAT filing and leave the determination of data elements and other technical requirements to [an] industry working group."160 Similarly, Direct Edge suggested that Commission staff should form and engage in a working group to develop an RFP for publication by the Commission.161 DirectEdge explained that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.162 Further, commenters, including Broadridge Financial Solutions, Inc., a technology provider,163 also requested more specific information about the audit trail system to better assess the Commission's initial cost estimates and to determine the best approach to the consolidated audit trail.164

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To gather the necessary information, commenters argued that the timeframe for submitting an NMS plan should be extended. FIF and STA opined that the time needed to perform the analysis to produce a "detailed blueprint for CAT"165 would be closer to six months,166 rather than the proposed 90 days.167 As a basis for their suggestions, FIF provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.168 FIF noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.169

-

In response to these comments, the Rule requires the SROs to provide more information and analysis to the Commission as part of their NMS plan submission than would have been required under the proposed Rule. As discussed in more detail below, these requirements have been incorporated into the Rule as "considerations" that the SROs must address, and they generally mandate that the NMS plan submitted to the Commission for its consideration discuss certain important features and details of the NMS plan, such as how data will be transmitted to the central repository, as well as an analysis of NMS plan costs and impact on efficiency, competition, and capital formation, the process followed by the SROs in developing the NMS plan, and information about the implementation plan and milestones for the creation of the consolidated audit trail.170 These requirements are intended to ensure that the NMS plan is the result of a thorough and well-developed plan for creating, implementing, and maintaining the consolidated audit trail, and the Proposing Release highlighted the importance of these types of considerations. In Section III.C. below, the Commission also provides details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases" to help the SROs prepare a sufficiently detailed NMS plan that addresses the requirements of the adopted Rule.171

-

Because of the additional information and analysis required to be included in the NMS plan, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan. Rule 613(a)(1) provides that "[e]ach national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section." The Commission will publish the NMS plan submitted in accordance with Rule 608 of Regulation NMS under the Exchange Act172 for public comment and will approve the NMS plan if the Commission determines it is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act. 173 The Commission also will consider whether the NMS plan submitted for its consideration would achieve the objectives of the Rule.

+

This section will show the scenario when one exchange routes an order via a routing broker who is an Industry Member to another exchange.

+ +

For this scenario, the exchange that routes the order (Exchange 1) must report:

+

• The route of the order to its routing broker

+

• After the execution, a Fill of the routed order

+

The routing broker (Industry Member Broker 1) must report the following events:

+

• The receipt of the order from the exchange as an Order Accepted event

+

• Order Route event for the route of the order to another exchange

+

The exchange that accepts the routed order (Exchange 2) must report the following events:

+

• The receipt of the order routed from Broker 1; and

+

• Any subsequent order handling events, if applicable

+ + +
+
pubdate: N/A effdate: N/A +
2.1.7. Manual Order Route Followed by Electronic Route, Merged Event
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order Route Followed by Electronic Route, Merged Event + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements when an Industry Member manually routes an order to another Industry Member and follows up with an electronic route message.

+ +

For this scenario, the sending Industry Member Broker 1 is required to report:

+

• New Order event for the customer order

+

• Order Route event for the electronically routed order (inclusive of routedOrderID) to Broker 2 with both the electronic and original manual timestamp

+

For this scenario, the receiving Industry Member Broker 2 is required to report:

+

• Order Accepted event for the electronically received client order (inclusive of routedOrderID) from Broker 1 with both the electronic and original manual timestamp

+ +
-
pubdate: N/A effdate: N/A -
4. Comments on Alternatives to the Proposed Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on Alternatives to the Proposed Consolidated Audit - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.8. Manual Order Route, Electronic Duplicate Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order Route, Electronic Duplicate Order + Compliance User: Industry Member Keywords: - Recommendation, - Alternatives, - FINRA, - OATS, + CAT Reporting, + Industry Member Broker, -

Several commenters, many of whom generally supported the concept of a consolidated audit trail, recommended alternatives for how a consolidated audit trail should be created, implemented, and maintained. In particular, the Commission received comments suggesting various ways that the OATS system could be modified to serve as the central repository for the consolidated audit trail. FINRA submitted a blueprint for a modified version of OATS that listed certain changes to address the Commission's proposed requirements for the creation, implementation, and maintenance of the consolidated audit trail.174 The proposed modifications included, for example, the addition of data elements capturing whether an order was solicited, customer account type, a large trader identifier,175 and a unique identifier for branch office and registered representative to the data reported to OATS;176 using OATS to capture order and quote data from all national securities exchanges and eventually OPRA; the inclusion of options, fixed income securities, security-based swaps, principal orders and orders originating in firm-controlled accounts for purposes of working a customer order in OATS; the use of CRD numbers to identify broker-dealers; an exchange data processing gateway for OATS to validate submissions from exchanges; full access to regulators of queryable consolidated audit trail data through the FINRA web portal;177 and OATS' acceptance of limited drop-copy report information from broker-dealers on a 15-minute reporting basis.178 However, FINRA's blueprint provided that the large trader identifier should be used initially to identify market participants, as the complexities of tracking retail accounts, the infrequent amount of trading by retail investors, and the large number of such investors make requiring a unique customer identifier difficult.179

-

Another commenter from the academic field believed that a modified version of OATS (including fields incorporating ultimate customer account information, a reduction in the time stamp standard to milliseconds or even microseconds, and standardized clock synchronization requirements), coupled with a requirement that exchanges must report to OATS, would allow OATS to fulfill the needs of the consolidated audit trail in a less costly manner than originally proposed.180 This commenter stated that the Commission's needs could be met by "a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."181

-

Several commenters, including SROs and broker-dealers, generally believed that it would be more cost and time efficient to use a form of OATS as a basis for the consolidated audit trail than to purchase or create a new system.182 For example, FINRA/NYSE Euronext stated that modifying existing systems would reduce both the time and cost to develop a consolidated audit trail, explaining that "the programming changes needed to comply with an entirely new system are substantially greater than expanding existing protocols,"183 while BATS suggested that significant cost savings may be realized by building a consolidated audit trail that "leverages elements of OATS."184 FINRA/NYSE Euronext also argued that existing audit trails could be expanded "economically and quickly,"185 noting that use of such systems, such as FINRA's OATS, could make the central repository unnecessary.186 Similarly, FINRA believed that using OATS as a foundation of the consolidated audit trail would make the consolidated audit trail easier to implement,187 as opposed to building a new system, which could take years to establish and would likely result in "negative unintended consequences" during development.188 FIF suggested leveraging FINRA's Trade Reporting and Compliance Engine as a basis for the coverage of debt securities.189

-

Two SROs, BOX and CBOE, recommended the joint use of both OATS and COATS.190 BOX suggested an expansion of OATS and COATS to include customer information,191 and CBOE stated that it believed that certain aspects of OATS and COATS could be combined, with the addition of customer and routing broker information, and new formats.192 The Commission also received an alternative proposal from a commenter that was not based on OATS, but on a combination of automatically-generated drop-copies and the Financial Information eXchange ("FIX") protocol.193 SIFMA urged reporting on a T+1 basis as it believed real-time reporting would require significant changes to existing order management and trading systems.194 If T+1 reporting were not adopted, however, SIFMA's proposal suggested that certain data be provided to the central repository in near real time, such as data pertaining to "key business events" such as order receipt and origination, order transmittal, execution, modification, and cancellation. SIFMA's proposal listed the specific data elements to be reported for each event, but, to achieve quick implementation, did not include unique customer or order identifiers, or an identifier for algorithmic orders.195

-

The Commission has considered the comments on alternative proposals, including those based on OATS, and has made significant modifications to the proposed Rule in light of such comments. Each of these modifications is discussed in detail in Section III. below. But the Commission notes more generally that, as adopted, Rule 613 does not prescribe a specific audit trail collection system or a particular method of data collection to be used for the central repository. In addition, the Commission believes that certain modifications to Rule 613, such as allowing data to be reported by 8: 00 a.m. Eastern Time the following trading day, rather than in real time as proposed, provide the SROs with a wider range of options for how they choose to meet the requirements of the adopted Rule compared with the requirements of the proposed Rule. This wider range of options could more easily accommodate an OATS-based approach or other approaches for the creation of a consolidated audit trail, as suggested by commenters, consistent with the requirements of Rule 613.

-

The Commission notes, however, that OATS, in its current form, has certain limitations and does not include certain attributes that the Commission deems crucial to an effective and complete consolidated audit trail.196 Some of the limitations of OATS that would need to be addressed to meet the requirements of Rule 613 include:

-

• At present, only FINRA members are required to report trade and order activity through OATS. The resulting exclusion of some exchange-based and other types of non-member activity could lead to significant gaps in the data as an order is generated, routed, rerouted, and finally executed, canceled, or modified;

-

• OATS does not currently require the collection of market-making quotes submitted by registered market makers (in those stocks for which they are registered), resulting in further, significant gaps in the data;

-

• OATS is a part of a process by which FINRA collects data from its members for its own regulatory use. OATS is not a central repository and therefore does not presently provide other regulators with ready access to a central database containing processed, reconciled, and linked orders, routes, and executions ready for query, analysis, or download; and

-

• OATS does not presently collect options data, and does not afford regulators an opportunity to perform cross-product surveillance and monitoring;

-

• OATS does not collect information on the identities of the customers of broker-dealers from whom an order is received. As discussed above in Section I., the Commission believes that the integrated inclusion of such data elements into a single consolidated audit trail provides many important regulatory benefits.

+

This scenario illustrates the Phase 2a reporting requirements when an Industry Member manually routes an order but is unable to merge the manual and electronic copies of the order into a single message for CAT Reporting. The Industry Member may report a manual order route event without a routedOrderID, followed by an electronic event which must include electronicDupFlag = true.

+

For this scenario, Industry Member Broker 1 is required to report:

+

• New Order event for the receipt of the customer order

+

• Order Route event for the manual route to Broker 2

+

• Order Route event for the electronic route message sent to Broker 2 (marked with electronicDupFlag = true)

+

For this scenario, Industry Member Broker 2 is required to report:

+

• Order Accepted event once agreeing to the route from Broker 1

+

• Order Accepted event for the receipt of the electronic order route from Broker 1 (marked with electronicDupFlag = true)

+ + + + +
-
-
-
pubdate: N/A effdate: N/A -

III. Discussion

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Rule 613, - -

A discussion of each of the key provisions of Rule 613, as adopted, is set forth below.

-
pubdate: N/A effdate: N/A -

A. NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Description, - Implementation, - -
pubdate: N/A effdate: N/A -
1. Description of the Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan, Description - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.1.9. Manual Order, One Side Reports Merged Event
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order, One Side Reports Merged Event + Compliance User: Industry Member Keywords: - Implementation, - NMS Plan, - Comments, + Manual Order, -

a. Implementation of the Consolidated Audit Trail through an NMS Plan

-

As proposed, the consolidated audit trail would have been created, implemented, and maintained through an NMS plan approved by the Commission. As proposed, Rule 613(a)(1) would have required each national securities exchange and national securities association to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.197 The Commission would then have been required to publish the NMS plan for public comment pursuant to Rule 608 of Regulation NMS under the Exchange Act,198 and, following the period of public comment, would consider whether or not to approve the NMS plan. In the Proposing Release, the Commission stated its expectation that the exchanges and FINRA would "cooperate with each other and take joint action as necessary to develop, file, and ultimately implement a single NMS plan to fulfill this requirement."199

-

The Commission requested comment on this approach. Specifically, the Commission requested comment on whether requiring the exchanges and FINRA to jointly file an NMS plan that would contain the requirements for a consolidated audit trail was the most effective and efficient way to achieve the objectives of Rule 613, or whether the Commission should require the exchanges and FINRA to standardize or otherwise enhance their existing rules. The Commission further requested comment on which approach would be most efficient in improving the ability to monitor cross-market trading, or to undertake market analysis or reconstructions, and why.

-

Two commenters discussed how the consolidated audit trail should be created and implemented through an NMS plan.200 One noted that the Rule should provide the SROs with sufficient flexibility to develop an NMS plan that meets the overarching goals of the Commission.201 The second suggested that the Rule should "include only the elements needed for a [consolidated audit trail], and then leave it up to the SROs, [securities information processors] and involved vendors to develop the specifications for the data elements to be specified in the NMS plan, which would ultimately be subject to public comment and SEC approval."202

-

Other commenters objected in principle to the use of an NMS plan to create and implement the consolidated audit trail.203 One commenter stated that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient," given the need "to respond and adapt quickly to new ways of trading and handling orders," and believed it would be difficult to jointly make necessary technology changes under an NMS plan because, based on the commenter's experience of collecting data for an existing audit trail, "technology changes and changes to technical specifications must be made regularly and promptly with respect to firm-specific reporting requirements, interpretations, and codes to keep up with complex and evolving trading and routing strategies."204 Another commenter argued that an NMS plan is "unnecessary … given all of the governance issues with NMS plans" because "[t]he Commission can get most of what it needs with a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."205

-

For the reasons discussed below, the Commission continues to believe that an NMS plan filed pursuant to Rule 608 of Regulation NMS206 is the most effective mechanism to implement the consolidated audit trail, and is adopting Rule 613 with a number of modifications and clarifications to address the concerns of commenters.207

-

The Commission believes that the creation, implementation, and maintenance of the consolidated audit trail through an NMS plan will ensure that the SROs' expertise as the "front line" regulators of securities markets is drawn upon to develop the details of the consolidated audit trail, and to make appropriate adjustments as warranted to respond to changes in the securities markets and technology going forward. As such, under the Commission's approach, Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail. Additionally, Rules 613(a)(1) and (a)(4), which require that each SRO jointly file and be a sponsor of the NMS plan, is being adopted as proposed. The Commission continues to believe that requiring all SROs to jointly file the NMS plan to establish the consolidated audit trail, as opposed to the flexibility provided by current Rule 608 of Regulation NMS under the Exchange Act,208 which permits any two or more SROs to submit an NMS plan, is appropriate because such a requirement is expected to result in an NMS plan that is the product of negotiation and compromise among all of the SROs; in this regard, the NMS plan submitted to the Commission also may be more readily implemented as the NMS plan should take into consideration the capabilities of every SRO.

-

In response to the commenter that advocated granting additional flexibility to the SROs in developing the requirements of the NMS plan,209 the Commission has made significant modifications to the Rule in several respects to increase the options available to SROs in developing the requirements of the NMS plan.210 Furthermore, in instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the NMS plan in a way that best achieves the objectives of the Rule. For example, Rule 613 requires the NMS plan submitted to the Commission for its consideration to require material terms of an order, such as order type, to be collected by the central repository.211 However, the Rule does not enumerate specific order types or prescribe the format or nature of how this information would be represented. This would be left to the SROs developing the NMS plan and allows flexibility for the future, when new order types may be introduced and added, if appropriate.

-

Similarly, in response to the commenter stating that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient" given the need to respond and adapt quickly to new ways of trading and handling orders,212 the Commission notes that, while the NMS plan submitted to the Commission for its consideration must contain the minimum necessary elements for the consolidated audit trail, and any amendments to an effective NMS plan initiated by plan sponsors will require approval by Commission order, the SROs should have flexibility to accommodate a variety of technological and other market developments without amending the NMS plan (e.g., through the issuance and updating of technical specifications that are reasonably and fairly implied by the NMS plan). Underscoring this need to ensure the consolidated audit trail is regularly updated to remain compatible with best market practices, the Commission, as discussed in Section III.C.2.a.i., also has added general requirements to Rule 613 with regards to SROs monitoring and planning for the technological evolution of the consolidated audit trail. Further, as noted in Section III.B.3 below, the NMS plan must include a governance structure for the central repository that is designed to ensure efficient decision-making.

-

The Commission has also considered the comment that recommended that the Commission should leave it to the SROs, securities information processors ("SIPs") and vendors to develop the specifications for the data elements in the NMS plan.213 The Commission agrees in principle with the commenter, and believes that market participants other than SROs also could have valuable insights regarding the design of the specifications for the data elements, the central repository, and other aspects of the Rule. To address this concern, the adopted Rule requires the SROs to explain in the NMS plan the process by which they solicited views of their members regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members, and how the plan sponsors took such views into account in preparing the NMS plan.214 In addition, the Rule requires the NMS plan submitted to the Commission for its consideration to provide for the creation of an Advisory Committee to afford SRO members, and other interested parties as permitted by the NMS plan,215 the opportunity to have input on the creation, implementation, and maintenance of the consolidated audit trail.216 The Commission also notes that nothing in the Rule precludes the SROs, as plan sponsors, from consulting with others, including the SIPs and vendors, as they craft the NMS plan. Finally, pursuant to Rule 608(b)(1), the NMS plan will be published for public comment.217 Thus, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted to the Commission, which the Commission will review and consider.

-

In response to the commenter that believed that the objectives of the consolidated audit trail could be achieved "with a 'few tweaks' to the existing trade reports and by extending OATS,"218 the Commission notes, as described above, that existing trade reports and the current OATS process combined do not meet many of the requirements the Commission believes are essential for a consolidated audit trail. The Commission therefore believes that an NMS plan, as noted above, provides an effective mechanism for the SROs to create, implement, and maintain a consolidated audit trail meeting such requirements. However, it also notes that the adopted Rule does not preclude the infrastructure, nomenclature, format, or any other aspects of an existing order audit trail system, such as OATS, from being used for the consolidated audit trail, provided the NMS plan proposing to establish such an audit trail otherwise meets the requirements of Rule 613. The Commission stresses that existing order audit trails lack critical information such as the identity of the customer, data on principal orders or quotes, and a way to link orders across markets – information that the Commission believes is essential to the consolidated audit trail.219

+

This scenario illustrates the Phase 2a reporting requirements when an Industry Member manually routes an order to anther Industry Member. The sending Industry Member chooses to report a single merged order event with both a manual and systematized timestamp, but the receiving Industry Member reports the receipt of the order twice - once for the manual receipt of the order followed by an electronic duplicate event which includes the electronicDupFlag = true. Note that in Phase 2a, events with either manualFlag = true or electronicDupFlag = true will not be subject to the standard inter-firm linkage process.

+

For this scenario, the sending Industry Member Broker 1 is required to report:

+

• New Order event for the customer order

+

• Order Route event for the electronically routed order (inclusive of routedOrderID) to Broker 2 with both the electronic and original manual timestamp

+

For this scenario, the receiving Industry Member Broker 2 is required to report:

+

• Order Accepted event for agreeing to the route from Broker 1 (with manualFlag = true)

+

• Order Accepted event for the receipt of the electronic order route from Broker 1 (marked with electronicDupFlag = true)

+ + + +
-
pubdate: N/A effdate: N/A -

B. Elements of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - SRO, - NMS Plan, - Implementation, - Submission, - Minimum Requirements, - -

As discussed above, the adopted Rule requires the SROs to submit an NMS plan to create, implement, and maintain a consolidated audit trail.220 As adopted, the Rule permits the SROs to consider a wider array of solutions, in creating, implementing, and maintaining a consolidated audit trail. The Rule, however, also sets forth certain minimum requirements of the consolidated audit trail that must be included in the NMS plan submitted by the SROs to the Commission for its consideration. The Commission believes that it is important to set forth certain minimum requirements to ensure that the consolidated audit trail will be designed in a way that provides regulators with the accurate, complete, accessible, and timely market activity data they need for robust market oversight. The minimum audit trail requirements that must be included in the NMS plan submitted by the SROs are discussed below.

-
pubdate: N/A effdate: N/A -
1. Recording and Reporting
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Recording and Reporting - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +

2.2. Trade Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios + Compliance User: Industry Member + Keywords: +
pubdate: N/A effdate: N/A +
2.2.1. Agency Order Cross
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Agency Order Cross + Compliance User: Industry Member + Keywords: + New Order event, + +

This scenario illustrates the reporting requirements to CAT when an Industry Member (Broker 1) matches a Customer Buy order with a Sell order routed from another Industry Member (Broker 2).

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

1) The receipt of the order from the customer (New Order event)

+

2) The receipt of the order routed from Broker 1 (Order Accepted event)

+

3) The execution (Trade event)

+

Industry Member Broker 2 would report the following events:

+

1) The receipt of customer order (New Order event)

+

2) The route of the order to Broker 1 (Order Route event)

+

The customer Order A at Broker 1 was fully executed, while the routed order from Broker 2 was partially executed.

+

For ATS agency order cross, please refer to Section 2.2.1 step 10 for more details.

+ + + + +
+
pubdate: N/A effdate: N/A +
2.2.2. Internalized Trade against Proprietary Account
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Internalized Trade against Proprietary Account + Compliance User: Industry Member + Keywords: + Trade Event, + Industry Member Broker 1, + +

This scenario illustrates the reporting requirements to CAT for an Industry Member that executes a customer order against its own proprietary account.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• The receipt of the customer order as a New Order event (New Order event)

+

• The execution as a Trade event

+ + +
+
pubdate: N/A effdate: N/A +
2.2.3. ATS Cross with Multiple Orders on One Side
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, ATS Cross with Multiple Orders on One Side + Compliance User: Industry Member Keywords: - Products, - Covered Transactions, - Orders, - Quotations, - Persons Required to Report, - Central Repository, - Reportable Ebents, - Data Elements, - Material Terms, - Order Type, - Special Handling Instructions, - National Securities Exchange, - National Securities Association, - Broker-Dealer Identifiers, - Customer Identifier, + Order, + ATS A, -

a. Products and Transactions Covered

-

As proposed, Rule 613 would have applied to secondary market transactions in all NMS securities, which includes NMS stocks and listed options.221 In the Proposing Release, the Commission also addressed the possibility of expanding the scope of the consolidated audit trail over time. Specifically, proposed Rule 613(i) would have required the NMS plan to include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how such exchanges and associations would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. The document also would have been required to identify which market participants would be required to provide the additional data and to include an implementation timeline and a cost estimate for including such data in the consolidated audit trail.222 The Commission requested comment on whether expanding the consolidated audit trail to include the products and transactions specified above was an appropriate approach to the eventual expansion of the consolidated audit trail, and, if so, an appropriate and realistic timetable for doing so.

-

Several commenters expressed opinions on the scope of the products and transactions proposed to be covered by the Rule and how their inclusion in the consolidated audit trail should be phased in under the Rule.223 One commenter urged the Commission to consider including additional asset classes in the scope of the products covered by the Rule, and specifically questioned the value of the consolidated audit trail without the inclusion of information on futures and other derivatives.224

-

The Commission also received comment on the proposed Rule's approach for considering a possible future expansion of the products and transactions covered by the consolidated audit trail. One commenter believed that its technology would allow development of a platform that would support multiple asset classes and expansion of the consolidated audit trail for use by other regulators.225 Other commenters expressed general support for expanding the scope of products covered.226 One specifically suggested expanding the scope of the Rule, for example, to include the "creation of instruments that underlie the securities that make up [mortgage-backed securities] and [asset-backed securities]."227 Another suggested expanding the consolidated audit trail to all securities submitted to an exchange or clearing agency.228 Yet another commenter, however, argued against allowing the exchanges, through the NMS plan, to have primary responsibility for specifying the data requirements of non-exchange-traded asset classes, stating that exchanges lacked experience with these instruments.229

-

The Commission has considered the comments discussed above and is adopting the Rule as proposed with respect to the scope of the securities that must be covered at this time, but, as described below, acknowledges the importance of a mechanism for considering other types of products in the future. Specifically, the adopted Rule requires that consolidated audit trail data be collected for all NMS securities.230 However, the Commission also is adopting the requirement that the NMS plan require the SROs to jointly submit a document outlining a possible plan for expansion of the consolidated audit trail, as proposed, but with three modifications from the proposed Rule.

-

Rule 613(i) requires that the SROs jointly provide the Commission a document outlining how the SROs could incorporate the following additional products into the consolidated audit trail: equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities ("expansion document"). The adopted Rule also requires the expansion document to include details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline and a cost estimate. The first modification from the proposed Rule is a technical change clarifying that Rule 613(i) is requiring the SROs to provide the Commission with a document that outlines how an expansion of the consolidated audit trail could be accomplished in the future and is not, at this time, requiring that the SROs commit to expanding the consolidated audit trail beyond secondary market transactions in NMS securities.231 However, the Commission notes that Rule 613(i) retains the requirement that SROs include an implementation timeline and a cost estimate; in this regard, the Commission expects that the SROs will address fully in the expansion document how any such expansion of the consolidated audit trail could be implemented in practice, and that such document would include sufficient detail for the Commission to ascertain how the SROs could proceed with such expansion. The Commission would expect to make the expansion document publicly available on its website and to solicit a wide range of comment on it to further inform and facilitate the expansion of the consolidated audit trail if appropriate, taking into account the relevant considerations contemplated by Rule 613(a)(1). In addition, the expansion document could inform the detailed plans that are to be prepared at least every two years by the CCO of the NMS plan.232

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In addition, after considering the comments received relating to the potential expansion of the consolidated audit trail and how such an expansion might occur,233 the Commission is making the second modification to the proposed Rule to extend the deadline for submitting the expansion document from two months to six months from the date of effectiveness of the NMS plan approved by the Commission. The Commission believes that the additional four months will provide the time necessary after the approval of the NMS plan by the Commission for the SROs to consider how they might expand the consolidated audit trail to capture orders and trading in these additional securities and thus will aid the Commission in receiving an outline or plan from the exchanges and associations that has had the benefit of additional time for analysis and planning. Finally, given the extension of the deadline for submitting the expansion document and the importance of information regarding primary market information in NMS stocks relative to other types of transactions as discussed in Section III.B.1.a. below, the Commission is removing the requirement that the expansion document discuss all primary market transactions in NMS stocks and is, instead, as discussed later, requiring that a discussion of the feasibility, benefits, and costs of incorporating into the consolidated audit trail information about allocations in primary market transactions in NMS securities be addressed with the NMS plan submission.234 However, the expansion document must still include a discussion of primary market transactions in equity securities that are not NMS securities.

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The Commission agrees in principle with the commenters that advocated a phased approach to implementation.235 The Commission, however, has determined not to modify the proposed scope of the Rule, which applies to orders in NMS securities. The Commission also adopts substantially its proposed implementation timeframes that apply if and when the NMS plan is approved,236 except that the NMS plan may provide up to one additional year before small broker-dealers will be required to provide information to the central repository.237

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The Commission continues to believe that the Rule's requirement to include secondary market transactions in all NMS securities (i.e., both listed equities and options) is a reasonable first step in the implementation of the consolidated audit trail. In addition, the Commission believes that applying the Rule solely to NMS securities should allow for a less burdensome implementation of the consolidated audit trail as compared to applying the Rule to a broader set of securities,238 in large part because market participants already have experience with audit trails for transactions in these securities. And, as discussed in detail above,239 there are many significant benefits of a consolidated audit trail that includes NMS securities (even if it is only limited to NMS securities).

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With regards to a phased approach to implementation, the Commission notes that the data recording and reporting requirements would apply initially, as proposed, to the SROs but not to their members. This will allow members additional time to, among other things, implement the systems and other changes necessary to provide the required information to the central repository, including capturing customer and order information that they may not have previously been required to collect. Should the SROs determine that additional implementation phases might be appropriate (e.g., applying the Rule first to equities and then to listed options), the Commission notes that the Rule does not preclude the SROs from proposing such phases, so long as the outer time parameters specified in the Rule, which the Commission is adopting as proposed, are met.240

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The Commission agrees with commenters that the inclusion of additional products (even at a later date) could further enhance the ability of the SROs and the Commission to conduct effective market oversight for financial products currently trading in the marketplace.241 The Commission also believes that it could be beneficial for the consolidated audit trail to be expanded over a reasonable period of time to include information on primary market transactions in equity and debt securities, as this data could be used to quickly assess potential violations of various rules under the Exchange Act such as, for example, Regulation M and Rule 10b-5.242 For example, the primary market transaction data would allow regulators to more quickly identify whether any participant in an offering sold short prior to the offering in violation of Regulation M. The primary market transaction data would allow for identification of the cost basis for purchases by intermediaries and make it easier to assess whether subsequent mark-ups to investors in primary offerings are fair and reasonable and, if not, whether there has been a violation of the antifraud provisions of the federal securities laws, including Rule 10b-5.

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The Commission considered the comment letter that agreed that "policing the market requires a comprehensive approach" but asserted the exchanges should not be primarily responsible for specifying requirements relating to asset-backed securities and other debt instruments, including swap instruments that are not exchange-traded.243 In response, the Commission notes the Rule requires the SROs to submit a document outlining a plan for the possible expansion of the NMS plan to non-NMS securities – namely debt securities and equity securities that are not NMS securities.244 The Commission also notes that FINRA, the SRO responsible for oversight of trading in the over-the-counter market, would participate in the preparation of such expansion document, and expects that FINRA would provide substantial input as to how the consolidated audit trail might be expanded to include non-NMS securities. Because the consolidated audit trail will be jointly owned and operated by the SROs pursuant to the NMS plan, however, the Commission believes that the involvement of all of the SROs in any potential expansion process is appropriate.

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The Commission also notes that any expansion of the consolidated audit trail to include transactions in non-NMS securities would be effected through public notice and comment, and take into account the relevant considerations contemplated by Rule 613(a)(1). Furthermore, adopted Rule 613(b)(7), discussed in more detail later in this Release,245 requires the NMS plan to include an Advisory Committee, which includes members of the plan sponsors and other interested parties as set by the NMS plan,246 that would be available to provide consultation on matters concerning the central repository, including the securities subject to the Rule. Therefore, the Commission believes that the participation of FINRA, the public, and the Advisory Committee should assist the SROs in devising a document outlining the expansion of the consolidated audit trail to other securities.

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The Commission continues to believe that the expansion document required by Rule 613(i) will provide valuable information to the Commission and help inform the Commission about the likely efficacy of expanding the scope of the consolidated audit trail to include information on equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. In addition, the expansion document will aid the Commission in assessing the feasibility and impact of the plan sponsors' proposed approach.

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The Commission acknowledges that plan sponsors will incur costs to prepare the expansion document. For example, plan sponsors will be required to address, among other things, details for each order and reportable event for which data may be submitted; which market participants may be required to provide the data; an implementation timeline; and a cost estimate. Thus, the plan sponsors must, among other things, undertake an analysis of technological and computer system acquisitions and upgrades that would be required to incorporate such an expansion. The Commission, however, believes that it would be beneficial to receive a document outlining how the plan sponsors could incorporate into the consolidated audit trail securities in addition to NMS securities, such as over-the-counter equity and debt securities, as soon as practicable. This is because such an expansion document will aid the Commission in assessing both the feasibility of expanding the audit trail to these additional securities, possibly including, as commenters urged, instruments that underlie mortgage-backed securities and asset-backed securities, and the resulting potential benefits to the securities markets as a whole if the consolidated audit trail is expanded in the manner described in the document submitted by the plan sponsors pursuant to Rule 613(i).

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b. Orders and Quotations

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As proposed, Rule 613 would have required that information be provided to the central repository for every order in an NMS security originated or received by a member of an exchange or FINRA. Proposed Rule 613(j)(4) would have defined "order" to mean: (1) any order received by a member of a national securities exchange or national securities association from any person; (2) any order originated by a member of a national securities exchange or national securities association; or (3) any bid or offer.247 In sum, the Commission proposed that the Rule cover all orders (whether for a customer or for a member's own account), as well as quotations in NMS stocks and listed options.248

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The Commission requested comment about the scope of its proposed definition of "order," including whether principal orders249 should be included in the scope of the consolidated audit trail and whether there are any differences between orders and quotations that should be taken into account with respect to the information that would be required to be provided to the central repository. The Commission also requested comment on whether non-firm quotations should be included in the consolidated audit trail and marked to show that they are not firm.250

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Commenters generally supported the inclusion of principal orders in the definition of "order,"251 but some expressed concern about including market maker quotations in the consolidated audit trail.252 In particular, these commenters thought that the volume of quotes proposed to be collected was so large that it would require market participants to increase the capacity of their systems that would transmit data to the central repository, and thus recommended that market maker quotations be exempted from the Rule's reporting requirements.253 One of these commenters specifically suggested that the Rule use the same approach as is currently used for the COATS – which contains order, quote (but only the top of market quote) and transaction data for all market participants.254

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The Commission also received two comments regarding the inclusion of non-firm orders and quotes in the consolidated audit trail. One commenter, consistent with the proposed Rule, stated that only firm orders and quotes should be included.255 Another commenter, however, believed that the proposed Rule did not go far enough, and stated that the Rule should require that information relating to indications of interest or similar communications be reported to, among other things, assist the SROs and the Commission in detecting "spoofing,"256 where a market participant enters and quickly cancels limit orders or quotations with the intent of having those non-bona fide orders or quotations change the NBBO or create a misperception of the available market liquidity to induce others to change their trading decisions.

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In addition to the comments regarding inclusion of principal and non-firm orders and quotes in the consolidated audit trail, some commenters suggested ways to narrow the definition of "order." One commenter would exempt "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit," from the mandatory reporting requirements.257 Another commenter – an options exchange - recommended that the Commission only require consolidated NBBO data to be reported with respect to options quotations, noting that there are millions of quotes per day on its exchange and that certain options, including out-of-the-money options, are subject to a high volume of quotation updates but generate limited trading activity.258

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The Commission considered the comments regarding the scope of the quotes and orders that should be included in the Rule's definition of "order," and acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.259 The Commission also acknowledges that requiring the recording and reporting of all quotes and orders may entail more costs, such as additional development time and storage capacity, than if the Commission did not require the recording and reporting of market maker quotes or out-of-the-money options. Nevertheless, because the Commission continues to believe that many of the benefits of a consolidated audit trail can only be achieved if all orders and quotations are included, the Commission is adopting the definition of "order" in Rule 613(j)(4) (renumbered as Rule 613(j)(8)), as proposed, to include orders received by a member of an exchange or FINRA from any person, any order originated by a member of an exchange or FINRA, and any bid or offer, including principal orders.260

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The Commission believes it is important for the consolidated audit trail to capture information for all principal orders and market maker quotations because principal orders and market maker quotations represent a significant amount of order and transaction activity in the U.S. markets. Effective surveillance of their trading is critical to detecting a variety of types of potential misconduct such as manipulation and trading ahead. By providing regulators comprehensive information about principal orders and market maker quotations throughout the U.S. markets – information that is not available to regulators today using existing audit trails – the consolidated audit trail would allow regulators to efficiently surveil for manipulative and other illegal activity by market making and other proprietary trading firms. In addition, any comprehensive market reconstruction or other market analysis would need to take into account principal orders and market maker quotations – which, as noted above, constitute a large percentage of the orders and trades in today's markets – to provide a complete and accurate picture of market activity.

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Furthermore, the Commission believes that including principal orders and market maker quotations in the consolidated audit trail would permit SROs to more efficiently monitor the market for violations of SRO rules. Such monitoring requires determination of the exact sequence of the receipt and execution of customer orders in relation to the origination and execution of principal orders or market maker quotations. For example, SROs would be able to use the consolidated audit trail data to more efficiently detect instances when a broker-dealer receives a customer order and then sends a principal order or quote update to an exchange ahead of the customer order, potentially violating the trading ahead prohibitions in SRO rules.261

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In addition, information on principal orders or market maker quotations could be useful in investigating illegal "spoofing." The availability to regulators of comprehensive information about principal orders and market maker quotations would allow them to more efficiently and effectively identify the source of the orders or quotations and, thus, better determine whether the quoted price was manipulated or simply a response to market forces.

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A further example where information on principal orders and market maker quotations would enhance regulatory efforts is in reviewing "layering" or other manipulative activity. Layering is a form of market manipulation where orders are placed close to the best buy or sell price with no intention to trade in an effort to falsely overstate the liquidity in a security. Layering attempts to manipulate the shape of the limit order book to move the price of a security or influence the trading decisions of others. Layering is often effected with principal orders, so inclusion of principal orders in the consolidated audit trail would aid regulators in the detection of this manipulative practice.262

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The Commission considered the comment that recommended excluding certain quotations, such as those generated for out-of-the-money options, from the definition of "orders" required to be reported to the central repository.263 The Commission, however, believes that such quotations must be included in the consolidated audit trail. Although there may be a high volume of quotations in out-of-the-money options with limited resulting trading activity, the Commission believes that having a record of those quotations is necessary to allow regulators to surveil high-speed quoting strategies for manipulative or other illegal behavior and to assess the impact of market making and other high-frequency quoting behaviors on the quality of the markets. Including these quotations is necessary for example, because the Commission may investigate allegations of a broker-dealer engaging in the practice of flooding the market with out-of-the-money option quotations for the purpose of manipulating the price of the option or related security, or to overload exchange execution systems. Based on the foregoing, to ascertain whether any illegal activity might be occurring through the misuse of quoting, the consolidated audit trail must require all bids and offers to be collected and reported to the central repository.

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The Commission also considered the comment that asserted that "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit" should be exempt from the reporting requirements of the Rule.264 In response to this comment, the Commission notes that Rule 613 does not require the reporting of such transfers because they are not "orders," as defined under Rule 613(j)(8). However, Rule 613 does require the NMS plan to require the reporting of the internal routing of orders at broker-dealers.265

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The Commission also considered the comment that recommended including indications of interest in the definition of "order."266 The Commission, however, is not including indications of interest in the definition of "order" for purposes of the consolidated audit trail because the Commission believes that the utility of the information such data would provide to regulators would not justify the costs of reporting the information. Indications of interest are different than orders because they are not firm offers to trade, but are essentially invitations to negotiate. As such, the Commission believes that indications of interest are less likely to be used as a vehicle for illegal activity, such as manipulation or layering, because they would be less likely to induce a response from other market participants.

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c. Persons Required to Report Information to the Central Repository

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Under proposed Rule 613(c)(5), each national securities exchange and its members would have been required to collect and provide to the central repository certain data for each NMS security registered or listed on a national securities exchange, or admitted to unlisted trading privileges on such exchange; and, under proposed Rule 613(c)(6), each national securities association and its members would have been required to collect and provide to the central repository certain data for each NMS security for which transaction reports would be required to be submitted to a national securities association. Proposed Rule 613(c)(7) would have required each national securities exchange, national securities association, and any member of such exchange or association to collect and provide to the central repository certain details, delineated in such Rule, for each order and each reportable event. The Commission requested comment on whether requiring SROs and their members to report the required order information to the central repository was appropriate.

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Several commenters broadly objected to the requirement that all broker-dealers report consolidated audit trail information to the central repository and/or proposed alternatives to such a requirement.267 One commenter suggested that introducing brokers should be permitted to rely on their clearing firms for reporting to the central repository, arguing that requiring separate reporting by introducing brokers and clearing firms "will only dilute the economic benefits realized by Introducing Brokers through such clearing arrangements and may result in increased costs to customers."268 This commenter also stated that it does not believe there is appreciable benefit to the Commission, FINRA or the markets in general in mandating reporting by introducing brokers.269

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Similarly, another commenter urged the Commission to exclude broker-dealers from the consolidated audit trail reporting requirements if they route their orders exclusively to another reporting firm that is solely responsible for further routing decisions, on the basis that this would essentially result in duplicative reporting.270 In addition, this commenter recommended the Commission exempt small broker-dealers from the reporting requirements if compliance would be unduly burdensome.271 Another commenter, a small broker-dealer that manually handles orders, specifically suggested that the Commission adopt a provision similar to FINRA Rule 7470, which provides FINRA staff the authority to grant exemptions to broker-dealers that solely handle orders manually from OATS recording and data transmission requirements.272

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Three commenters argued that broker-dealers should not be required to report quotation information to the central repository that is available from other market participants.273 Specifically, one commenter argued that broker-dealers should not be required to report information to the central repository that has already been reported to an SRO (e.g., market maker quotes) because the SRO would also be reporting the information to the central repository.274 Another commenter stated that it "believes that, rather than requiring quote reporting by broker-dealers, only the exchanges and FINRA (through its Alternative Display Facility and proposed Quotation Consolidation Facility) should be required to report quotations," and added that "[t]he exchanges and FINRA are in a position to provide quotation information at a lower cost and with more accuracy."275 Similarly, a third commenter urged the Commission to consider "whether surveillance systems could rely on quotation information disseminated by the SROs," instead of requiring all quotation data to be sent separately to the repository.276

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The Commission considered the comments objecting to the requirement that broker-dealers report all consolidated audit trail information to the central repository. However, for the reasons discussed below, the Commission is adopting the requirements as proposed with regard to the obligation of members to report required data to the central repository.277 Specifically, the Commission is adopting Rules 613(c)(5) and (6) as proposed. Rule 613(c)(5) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by [Rule 613(c)(7)] for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange," and Rule 613(c)(6) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association."

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In essence, the Commission believes these provisions are appropriate because they require each party – whether a broker-dealer, exchange or ATS – that takes an action with respect to an order, and thus has the best information with respect to that action, to record and report278 that information to the central repository.279 For example, the broker-dealer originating an order – whether received from a customer or generated as a principal order – is in the best position to record the terms of that order, including the time of origination, as well as the unique customer and order identifiers. If the originating broker-dealer is required to record the time each order in a rapid series of principal orders is generated, for example, regulators will be able to more accurately reconstruct the sequence of those orders for purposes of conducting market surveillances for manipulative or other illegal activity, or for performing market reconstructions. In addition, requiring the originating broker-dealer to record the time an order was received from a customer could then help regulators more accurately determine whether the broker-dealer quickly traded ahead of the customer order. On the other hand, if the recording and reporting requirements initially applied only to the executing or routing broker-dealer, or the exchange in the case of market maker quoting, regulators would not know the precise time the order or quote was originated, and would not be able to implement or perform as efficiently effective surveillances, such as those discussed above. In addition, the lack of precise order origination time could interfere with the ability of regulators to perform accurate market reconstructions or analyses, particularly with respect to high frequency trading strategies. Thus, the Commission believes that every broker-dealer (and exchange) that touches an order must record the required data with respect to actions it takes on the order, contemporaneously with the reportable event, to ensure that all relevant information, including the time the event occurred, is accurately captured and reported to the consolidated audit trail.280

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While a broker-dealer will be required to record any actions it takes with respect to an order because such recordation would capture information, particularly the time stamp, which is needed by regulators for the reasons discussed above, the Commission notes that nothing in the Rule precludes the NMS plan submitted to the Commission for its consideration from allowing an introducing broker or other broker-dealer to use a third party, such as a clearing broker-dealer, to report the data recorded by the introducing broker or other broker-dealer to the central repository.

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The Commission acknowledges that SROs and their members will incur costs to record and report the audit trail data required by Rules 613(c)(5), 613(c)(6) and 613(c)(7).281 The Commission also acknowledges that, in some instances, the information required to be recorded and reported by some market participants, for example, market makers, may indeed be available from other market participants (in the case of market makers, the exchanges) and that there might be additional costs for all market participants to record and report information. However, for the reasons noted above, the Commission believes that requiring every market participant that touches an order to record and report the required audit trail data to the central repository, and thus requiring these market participants to incur these costs is appropriate. The Commission believes that such costs will depend on the exact details of how information is to be recorded and reported to the central repository, including whether third-parties, such as clearing-brokers or exchanges, facilitate the transmission of such data. But because these costs depend on details that are not being prescribed by the Commission, Rule 613 requires that the SROs must, in their proposal of the specific mechanisms by which data will be reported to the central repository, include cost estimates of their solution, as well as a discussion of the costs and benefits of the various alternatives considered but not chosen.282 More so, as discussed above in Section I, once the Commission receives the submitted NMS plan, it will be able to use such plan-specific details and costs estimates, as well as public comment on the NMS plan, in determining whether to approve the NMS plan.

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The Commission also considered the comment that small broker-dealers should be granted an exemption from the Rule,283 and, as discussed in Section III.D., is adopting Rule 613(a)(3)(vi), which provides that the NMS plan shall require each SRO to require small broker-dealers to provide audit trail data to the central repository within three years after effectiveness of the NMS plan, as opposed to within two years as proposed.284 The Commission believes that completely exempting small broker-dealers from reporting requirements would be contradictory to the goal of Rule 613, which is to create a comprehensive audit trail. In effect, an exemption to small broker-dealers from the requirements of the Rule would eliminate the collection of audit trail information from a segment of the broker-dealer community and would thus result in an audit trail that does not capture all orders by all participants in the securities markets for NMS securities. The Commission notes that illegal activity, such as insider trading and market manipulation, can be conducted through accounts at small broker-dealers just as readily as it can be conducted through accounts at large broker-dealers. In addition, granting an exemption to certain broker-dealers might create incentives for prospective wrongdoers to utilize such firms to evade effective regulatory oversight through the consolidated audit trail. The Commission recognizes, however, that small broker-dealers, particularly those that operate manual systems, might be particularly impacted because of their more modest financial resources and may need additional time to upgrade to an electronic method of reporting audit trail data to the central repository, and thus believes that allowing the NMS plan to permit such broker-dealers up to an extra year to begin reporting data to the central repository if the plan sponsors believe such an accommodation is reasonable, is appropriate. The Commission believes up to an additional year could allow small broker-dealers extra time to explore the most cost-effective and most efficient method to comply with the Rule. The Commission acknowledges that permitting small broker-dealers up to three years to begin reporting the required audit trail data to the central repository will delay the ability of regulatory authorities to obtain full information about all orders from all participants, which in turn will result in delaying the full regulatory benefit of the consolidated audit trail. However, the Commission believes that such an accommodation to small broker-dealers is reasonable, given the fact that small broker-dealers may face greater financial constraints in complying with Rule 613 as compared to larger broker-dealers. 285 The Commission also notes that many small broker-dealers are introducing broker-dealers and may be able to use their clearing broker-dealers to report the data to the central repository, thereby potentially reducing some of their costs.

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d. Reportable Events and Consolidated Audit Trail Data Elements

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As proposed, Rule 613 would have required SROs and their respective members to provide certain information regarding each order and each "reportable event" to the central repository. A reportable event would have been defined in proposed Rule 613(j)(5) to include, but not be limited to, the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order.

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For the reportable event of receipt and origination of an order, proposed Rule 613(c)(7)(i) would have required the reporting of the following data elements: (1) information of sufficient detail to identify the customer; (2) a unique customer identifier for each customer; (3) customer account information; (4) a unique identifier that would attach to an order at the time of receipt or origination by the member; (5) a unique identifier for the broker-dealer receiving or originating an order; (6) the unique identifier of the branch office and registered representative receiving or originating the order; (7) the date and time (to the millisecond) of order receipt or origination; and (8) the material terms of the order.

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For the reportable event of routing of an order, proposed Rule 613(c)(7)(ii) would have required the reporting of the following information by the member or SRO that is doing the routing, each time an order is routed: (1) the unique order identifier; (2) the date on which an order was routed; (3) the exact time (in milliseconds) the order was routed; (4) the unique identifier of the broker-dealer or national securities exchange that routes the order; (5) the unique identifier of the broker-dealer or national securities exchange that receives the order; (6) the identity and nature of the department or desk to which an order is routed if a broker-dealer routes the order internally; and (7) the material terms of the order.

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Rule 613(c)(7)(iii), as proposed, also would have required the collection and reporting by the SRO or member receiving a routed order of the following information: (1) the unique order identifier; (2) the date on which the order is received; (3) the time at which the order is received (in milliseconds); (4) the unique identifier of the broker-dealer or national securities exchange receiving the order; (5) the unique identifier of the broker-dealer or national securities exchange routing the order; and (6) the material terms of the order.

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For the reportable events of modification or cancellation of an order, proposed Rule 613(c)(7)(iv) would have required the following data be collected and reported: (1) the date and time (in milliseconds) that an order modification or cancellation was originated or received; (2) the price and remaining size of the order, if modified; (3) the identity of the person responsible for the modification or cancellation instruction; and (4) other modifications to the material terms of the order.

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For full or partial executions of an order, proposed Rule 613(c)(7)(v) would have required the following information to be collected and reported to the central repository: (1) the unique order identifier; (2) the execution date; (3) the time of execution (in milliseconds); (4) the capacity of the entity executing the order (whether principal, agency, or riskless principal); (5) the execution price; (6) the size of the execution; (7) the unique identifier of the national securities exchange or broker-dealer executing the order; and (8) whether the execution was reported pursuant to an effective transaction reporting plan or pursuant to the OPRA Plan.

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The Commission received comments on the information proposed to be recorded and reported to the central repository for each reportable event (i.e., the consolidated audit trail data elements) but did not receive comments on the proposed definition of reportable event in proposed Rule 613(j)(5) (i.e., the events that trigger consolidated audit trail reporting requirements). However, the Commission is making clarifying changes to proposed Rule 613(j)(5) (renumbered as Rule 613(j)(9)) to define a "reportable event" as including the original receipt of a customer's order by a broker-dealer; the origination of an order by a broker-dealer (i.e., a principal order); and the receipt of a routed order. Thus, Rule 613(j)(9), as adopted, provides that "[t]he term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order." The Commission believes these changes from the proposal are appropriate because they conform Rule 613(j)(9) to the provisions of Rule 613(c)(7). Specifically, Rule 613(c)(7) is structured around each "reportable event;" therefore, audit trail data is listed according to the data that must be reported upon "original receipt or origination" of an order (Rule 613(c)(7)(i)); "routing" of an order (Rule 613(c)(7)(ii)); "receipt of an order that has been routed" (Rule 613(c)(7)(iii)); "modification or cancellation" of an order (Rule 613(c)(7)(iv)); and "execution" of an order (Rule 613(c)(7)(v) and (vi)).

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As noted above, the Commission received comments on the information proposed to be recorded and reported to the central repository with each reportable event (i.e., the consolidated audit trail data elements) and, in response, is adopting the Rule with certain modifications from the proposed Rule with respect to certain of the consolidated audit trail data elements. In so adopting the Rule, the Commission acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.286 However, the Commission believes that the costs to SRO members for reporting this information, and the costs to the central repository for collecting and storing this information, will significantly depend on the exact details of how this information will be gathered and transmitted by the various types of market participants covered by Rule 613. The Commission is therefore requiring the SROs to include as part of the NMS plan submitted to the Commission for its consideration pursuant to the Rule, details of how each of the different data elements would be recorded, reported, collected, and stored, as well as cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed. The Commission also notes that the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of the Rule.

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Once the SROs have submitted an NMS plan with these details, the Commission will be able to use this information to determine whether to approve the NMS plan. The Commission at this time is only directing the SROs to develop and submit a detailed NMS plan that includes each of the data elements. The Commission is not making a final determination of the nature and scope of the data elements to be included in the consolidated audit trail – as discussed above, these determinations will be made after the SROs submit the NMS plan, and the Commission and public have had an opportunity to consider the proposed data elements.

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Rather, at this time the Commission is only making a more limited determination. The benefits the Commission and the public will receive from being able to consider the detailed costs and benefits of the specific set of data elements submitted to the Commission for its consideration pursuant to the Rule justify the costs of preparing the NMS plan with such data elements included.

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A discussion of these consolidated audit trail data elements follows.

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i. Material Terms of the Order

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As proposed, Rule 613 would have required broker-dealers to report the material terms of the order upon origination or receipt of an order and upon routing, modification, and cancellation of an order.287 Proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) defined material terms of the order to include, but not be limited to, the following information: (1) the NMS security symbol; (2) the type of security; (3) price (if applicable); (4) size (displayed and non-displayed); (5) side (buy/sell); (6) order type; (7) if a sell order, whether the order is long, short, or short exempt;288 (8) if a short sale, the locate identifier; (9) open/close indicator; (10) time in force (if applicable); (11) whether the order is solicited or unsolicited; (12) whether the account has a prior position in the security; (13) if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and (14) any special handling instructions.

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The Commission requested comment on whether there are any items of information that are required to be recorded and reported by existing audit trail rules, or to be provided to the SROs or the Commission upon request, that were not proposed but should have been included in the Rule. One commenter suggested that two data elements be added to aid regulators in detecting the original source of orders that violate laws or are involved in market manipulations.289 Specifically, this commenter recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order.290 Another commenter questioned the need for information regarding whether an account has a prior position in a security.291 The commenter expressed skepticism about the value of knowing, in real time, whether the customer has a prior position in the security, since the length of time the position has been held would not be captured. This commenter also questioned how the Commission's requirement that the prior position in a security be reported would work in the situation where a client has multiple accounts but it is the first time the client has opened a position in one of the accounts.292 Another commenter provided specific information on the exact data elements that it could incorporate into the consolidated audit trail if it were chosen as the central processor under Rule 613.293

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The Commission considered the views of the commenter that questioned the value of knowing whether a customer has a prior position in a security. The Commission also considered the commenter's concern about potential reporting complications for clients with multiple accounts, as well as general comments urging the Commission to reduce the burdens of the Rule, and is adopting proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) with modifications to delete certain data elements.

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After considering the commenters' views, and re-evaluating the necessity of requiring certain specific data elements, the Commission has determined not to require the locate identifier (if a short sale); whether the order is solicited or unsolicited; and whether the account has a prior position in the security. The Commission believes the consolidated audit trail can still achieve significant benefits without requiring the routine recording and reporting of these specific data elements to the central repository.294 While this information may be useful for certain investigations and market analyses, the Commission believes that this additional data could be readily obtained from a follow-up request to a broker-dealer if the other data required by proposed Rule 613(j)(3), particularly relating to the customer behind the order, is included in the consolidated audit trail. Thus, the Commission believes that it is unnecessary to require this additional data to be reported as a standard part of the consolidated audit trail. In effect, the Commission believes that the benefits of having these specific audit trail data elements are minimal. As such, the Commission does not believe the benefits to the Commission and the public to consider the detailed costs and benefits of such data elements justify the costs to SROs for including them in their NMS plan submission.

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In response to the commenter who recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order,295 the Commission notes that Rule 613 defines "customer" as: "(i) the account holder(s) of the account at a registered broker-dealer originating the order; and (ii) any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)."296 The Rule does not require the identification of the individual registered representative who placed the order.297 Further, the Commission does not believe that "the system he or she used to originate the order" is of significant enough regulatory value to require that information to be recorded and reported under Rule 613 at this time.

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(A) Order Type

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As proposed, the Rule would have required that members report the order type as an element of the material terms of an order. In the Proposing Release, the Commission explained that the proposed Rule does not specify the exact order types (e.g., market, limit, stop, pegged, stop limit) that could be reported under the Rule in recognition that order types may differ across markets and an order type with the same title may have a different meaning at different exchanges.298 The Commission also noted that markets are frequently creating new order types and eliminating existing order types. Thus, the Commission preliminarily believed that it would not be practical to include a list of order types in the proposed Rule as part of the required information to be reported to the central repository.

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The Commission received one comment in response to its request for comment on its proposed approach to handling order types. This commenter believed that the Commission did not think that order types were needed for the consolidated audit trail, and argued that this information is "essential for any attempts to use the order data to reconstruct the state of the limit order book at any point in time."299 The Commission agrees that information about an order's type is important and notes that the Rule, as proposed, did require order types to be reported.300 Thus, the Commission is adopting the Rule, as proposed, to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for SROs and members to report the order type as an element of the material terms of an order. The Rule, however, does not provide an exhaustive list of order types, as the Commission continues to believe that it is not feasible to do so in its Rule, for the reasons stated in the Proposing Release.301 Rather, the Commission believes the plan sponsors should be responsible for determining how to describe and categorize specific order types in the NMS plan or in the NMS plan's technical specifications, as there is more flexibility to amend such documents and the SROs would have the most familiarity with the variations among the order types on their markets. The Commission notes that specific order types may differ across markets, and even an order type with the same title may have a different meaning at different exchanges. Further, SROs regularly develop new order types to respond to changes in market structures and trading strategies, and any list of order types will likely need to be updated over time.

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(B) Special Handling Instructions

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The proposed Rule also would have required that that any special handling instructions be reported as part of the material terms of an order.302 The Commission specifically requested comment in the Proposing Release on whether the Rule should require, as part of the disclosure of special handling instructions, the disclosure of an individual algorithm that may be used by a member or customer to originate or execute an order, and, if so, how such an algorithm should be identified. The Commission received one comment noting the importance of requiring the special handling instructions to be included in the consolidated audit trail.303 This commenter believed that special handling instructions were important for reconstructing the limit order book.304 Regarding algorithms, commenters generally were not in favor of unique identifiers for algorithms.305 One commenter urged against requiring customer information at the level of "individual strategy, trading desk, or particular algorithm . . . ."306 Another commenter stated that the proposed rule should not require that unique customer identifiers be affixed to computer algorithms.307 This commenter pointed out that algorithms change daily, which would result in uncertainty about whether new identifiers are needed. Further, the commenter argued that firms would need to develop safeguards to ensure proprietary algorithms and trading strategies are not appropriated by competitors. This commenter suggested that, instead of requiring a unique customer identifier, the Commission could require that a "flag" be appended to orders generated by an algorithm.

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The Commission agrees with the commenter that supported the proposed requirement that special handling instructions be reported308 and is adopting this requirement as proposed.309 The Commission believes that such information will be useful to regulators in attempting to recreate an SRO's limit order book for market reconstructions. When performing market reconstructions, it is important for regulators not only to have information regarding what orders were on the book, but the conditions or special instructions attached to those orders. Such information can be of key importance in determining the amount of accessible liquidity at any price point and whether or not certain orders were entitled to be executed at various price levels.

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Additionally, the Commission considered the comments received regarding whether an individual algorithm should be reported and identified as part of an order's special handling instructions, and has determined not to adopt that requirement in recognition that algorithms change frequently and therefore it may be difficult to determine when and if new algorithm identifiers are necessary. The Commission also considered one commenter's concern regarding the proprietary nature of algorithms and the risk of competitors appropriating algorithms if they were required to be identified in the consolidated audit trail. However, the Commission notes that, because the disclosure of whether an order is a result of an algorithm that makes trading decisions based on a programmed investment strategy might be useful for the Commission and the SROs to sort or filter trade data to re-construct market events or to better evaluate potentially manipulative behavior or intent, the SROs may want to consider whether it would be feasible to include a "flag" or other indicator that would reveal whether an order was the result of an algorithmic trading calculation. Such a flag would not identify the actual algorithm used, but could instead indicate whether the order was the result of an algorithmic trade. Appending such a "flag" or indicator may aid regulatory authorities in their efforts to make preliminary assessments about market activity and better allow the SROs and the Commission to monitor the usage of algorithms over time. The Commission acknowledges that by not requiring that algorithms be recorded and reported to the central repository, the consolidated audit trail may not contain an audit trail data element that might prove useful to regulatory authorities. The Commission, however, believes that, should regulatory authorities need such information, regulators can submit a request for this information and obtain the information about whether the order was the result of an algorithm readily from the broker-dealer that handled the order.

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ii. Unique National Securities Exchange, National Securities Association and Broker-Dealer Identifiers

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The Commission proposed to require each member originating or receiving an order from a customer, and each national securities exchange, national securities association, and member that subsequently handles the order to report its own unique identifier to the central repository. Proposed Rule 613(c)(7)(i)(E) (renumbered as 613(c)(7)(i)(C)) would have provided that any member of an SRO, that originally receives from a customer or originates a principal order, shall collect and electronically report "the unique identifier of the broker-dealer receiving or originating the order." Similarly, proposed Rule 613(c)(7)(ii)(D) provided that the SRO or any member of such SRO that routes an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(ii)(E) provided that the SRO or any member of such SRO routing an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(D) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(E) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(iv)(E) required, for a modification or a cancellation of an order, the identity of the person giving such instruction. Proposed Rule 613(c)(7)(v)(F) provided that the SRO or any member of such SRO that executes an order in whole or part report "the unique identifier of the broker-dealer or national securities exchange executing the order." Further, the Commission proposed to require a member receiving an order from a customer to report, if applicable, "the unique identifier of the branch office and the registered representative receiving or originating the order."310

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Commenters generally supported the proposed use of unique identifiers for exchanges and broker-dealers.311 One commenter explained that cross-market surveillance efforts are unduly complicated if a single market participant has a different identifier for each market, and stated that the current market participant identifier ("MPID") system needed to be updated.312 This commenter, however, questioned whether it was necessary for branch office and registered representative information to be included in the consolidated audit trail, stating that the information would increase the amount of data reported to the consolidated audit trail, but would be useful only in certain circumstances.313 In another letter, the same commenter proposed to use Central Registration Depository ("CRD") numbers to uniquely identify broker-dealers.314 Under this system, the commenter suggested that SROs would be required to link the CRD numbers to unique MPIDs to create a cross-referenced database, so that data could be searched and retrieved at the firm level (by CRD number) or by the unique market center identifiers used by firms for each transaction on a specific market center.315 For activity not occurring on a national securities exchange, the commenter proposed continued reporting with MPIDs currently used for OATS reporting.316 Another commenter supported the use of MPIDs as unique identifiers for broker-dealers, suggesting that the MPIDs of the firms originating each order should be added to the trade report, but stated that only FINRA and the Commission should be allowed to access this information.317

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After considering commenters' views requesting additional flexibility with respect to the unique identifiers requirement for national securities exchanges, national securities associations, and members, the Commission has determined to adopt the Rule to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for such unique identifiers, substantially as proposed. The Commission, however, has made two technical changes to the Rule text from the proposal to: (1) add a defined term, "CAT-Reporter-ID," in adopted Rule 613(j)(2) to refer to these unique identifiers, and (2) expressly permit that a "code" be used that uniquely and consistently identifies the national securities exchange, national securities association, or member. Specifically, adopted Rule 613(j)(2) provides that "[t]he term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository."

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In response to the commenters that stated that firms' current MPIDs or CRD numbers may work as a viable unique broker-dealer identifier, the Commission believes it is appropriate to leave the decision of whether to specify an existing identifier, such as a firm's MPID or CRD number, or some other identifier such as one created under the unique legal entity identifier (LEI) standard under development by the International Standards Organization ("ISO") (ISO 17442),318 as the unique broker-dealer identifier, to the plan sponsors to assess and propose in the NMS plan. Therefore, while the adopted Rule continues to require the NMS plan to require these unique identifiers, the Rule does not specify which identifier to use, nor does the Rule specify the process for assigning unique broker-dealer identifiers.319 In this regard, the Commission expects the plan sponsors to establish a process, to be described in the NMS plan, by which every national securities exchange, and every member of a national securities exchange or national securities association, can obtain a CAT-Reporter-ID.

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The Commission also is adopting, substantially as proposed, rules requiring the NMS plan submitted to the Commission for its consideration to require each SRO and its members to report the unique identifier of the broker-dealer or SRO for each reportable event in the life of an order to the central repository, except to make two technical changes: to include the new defined term, "CAT-Reporter-ID" and to require the CAT-Reporter-ID or Customer-ID, if applicable, of the person giving a cancellation or modification instruction.320 Specifically, Rule 613(c)(7)(i)(C), as adopted, provides that any member of an SRO that originally receives from a customer or originates a principal order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer receiving or originating the order." Rule 613(c)(7)(ii)(D) provides that any national securities exchange or any member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(ii)(E) provides that any national securities exchange or member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed." Rule 613(c)(7)(iii)(D) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order." Rule 613(c)(7)(iii)(E) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(iv)(F) provides that the SRO or any member of an SRO that receives an instruction to modify or cancel an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction." Rule 613(c)(7)(v)(F) provides that the national securities exchange or any member of an SRO that executes an order in whole or part shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange executing the order." Rule 613(c)(7)(vi)(B) provides that, if an order is executed in whole or part, a member of an SRO shall record and report "[t]he CAT-Reporter-ID of the clearing broker or prime broker, if applicable."

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The Commission notes that CAT-Reporter-IDs will be reported to the central repository for each reportable event that the member or SRO is reporting to the central repository. The requirement to report CAT-Reporter-IDs in this manner will help ensure that regulators can determine which market participant took action with respect to an order at each reportable event. The Commission does not believe that the CAT-Reporter-ID of each member or market that touches an order needs to be tagged to and travel with an order for the life of the order, as long as the CAT-Reporter-ID of the member or exchange taking the action is reported to the central repository, and an order identifier(s) is reported at every reportable event of the order. The Commission believes the details of how these data are reported to the central repository, and the specific methodologies used by the central repository to assemble time-sequenced records of the full life-cycle of an order, is best left to the expertise of the SROs as they develop the NMS plan to be submitted to the Commission for its consideration. Instead, as adopted, Rule 613 requires that data in the central repository be made available to regulators in a linked fashion so that each order can be tracked from origination through modification, cancellation, or execution, and that the parties routing or receiving routes, or otherwise performing such actions, are identified for every reportable event.

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After considering the comment opposing the requirement to report to the central repository the unique identifier of the branch office and registered representative receiving or originating an order,321 the Commission has reconsidered the requirement in proposed Rule 613(c)(7)(i)(F) and is not adopting this requirement.322 While this audit trail data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that this information need not be required by Rule 613 because it is not critical information to help identify the customer responsible for trading a security, nor to capturing the entire life of an order as it moves from origination to execution or cancellation. In addition, the Commission believes that a requirement that a unique identifier of the branch office and registered representative receiving or originating the order be reported may not provide enough information in an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that this information be required in the audit trail created by Rule 613. Further, should regulators determine that the identity of the branch office and registered representative receiving or originating the order is needed to follow-up on a specific issue, they may request the information directly from the broker-dealer as broker-dealers are required to make and keep records identifying the registered representative that receives an order pursuant to Exchange Act Rules 17a-3(a)(6)(i)323 and 7a-4(b)(1).324 As such, the Commission does not believe the benefits of including this information in the consolidated audit trail justify the costs to SROs for requiring them to devise a methodology to identify the branch offices and registered representatives receiving or originating an order, and a mechanism for reporting this type of data to the central repository.

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iii. Unique Customer Identifier

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(A) Proposed Rule

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As proposed, Rule 613 would have required every SRO and broker-dealer to report a unique customer identifier to the central repository for any order originated by or received from such customer.325 Specifically, proposed Rule 613(c)(7)(i)(B) (renumbered as Rule 613(c)(7)(i)(A)) would have required that a national securities exchange, national securities association or any member of such exchange or association that originally receives or originates an order to collect and electronically report "a unique customer identifier for each customer." In the Proposing Release, the Commission noted that the unique customer identifier should remain constant for each customer, and have the same format, across all broker-dealers.326

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The Commission requested comment on possible ways to develop and implement unique customer identifiers. For example, the Commission solicited input about who should be responsible for generating the identifier; whether a unique customer identifier, together with the other information with respect to the customer that would be required to be provided under the proposed Rule, would be sufficient to identify individual customers; and whether there were any concerns about how the customer information would be protected. The Commission specifically requested comment on what steps should be taken to ensure that appropriate safeguards are implemented with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository.

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(B) Comments on Proposed Rule 613(c)(7)(i)(B)

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The Commission received comments that supported the general notion that identifying customers in an audit trail would be beneficial for regulatory purposes.327 One commenter stated that a customer identifier on an order-by-order basis would "enhance significantly the audit trails of the markets."328 Similarly, another commenter agreed that identifying the customer would be useful to regulators for purposes of market surveillance and enforcement.329 Another commenter noted that it "fully supports more granularity in an order audit trail, such as obtaining high-level customer identity information (e.g., large trader identification), so that patterns of trading across multiple market centers can be quickly and readily identified, and [the commenter] agrees that the timeframe needed to identify customers should be greatly reduced; however, [the commenter] question[s] the utility of receiving the identity of both the beneficial owner and the person exercising the investment discretion, if different, for each and every order reported to the consolidated audit trail."330

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However, other commenters disagreed with the need for a unique customer identifier and the proposed Rule's requirements for reporting a unique customer identifier with every order. These commenters generally focused on the complexity and cost of the systems changes required to implement the unique customer identifier requirement for every customer;331 the complexity in the process for assigning unique customer identifiers;332 the alternative ways that a customer could be identified without requiring a unique customer identifier as proposed;333 and the concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.334

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One commenter discussed the complexity and cost of the systems changes required to implement the unique customer identifier requirement, as set forth in the Rule.335 This commenter, who did not believe the Commission should require a unique customer identifier for every customer, noted the "complexity of the technology development work involved" in adding this identifier to the audit trail.336 The commenter added that the work required to update internal architecture to report customer identifiers would be "substantial" because broker-dealer systems and processes may access and maintain customer (and proprietary) identification information in different ways and at different levels of specificity, and that sales and trading systems would need to be modified to report the unique customer identifiers with every order. This commenter also noted the "significant costs" generally associated with requiring a unique customer identifier.337

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A few commenters also submitted their views on the complexity of the process for assigning unique customer identifiers.338 One commenter noted that the process for assigning unique customer identifiers that the Commission discussed in the Proposing Release (i.e., generating unique customer identifiers based on the input by a broker-dealer of a customer's social security number or tax identification number) would not create an administrative burden on individuals and non-broker-dealer entities.339 Another commenter, however, noted difficulties associated with implementing a centralized process for assigning, storing and utilizing standardized customer identifiers340 and another commenter characterized the "implementation of a centralized customer identification system" as a "monumental task."341 Another commenter believed that to satisfy the Rule's requirements, the industry would need to implement a completely new market-wide system to satisfy the unique customer identifier requirement, noting that this might not be feasible on the proposed timeline.342 Another commenter characterized the collection of a unique customer identifier as a "significant project unto itself."343 One commenter observed that given the large number of retail investors (some with multiple accounts), the complexities associated with tracking retail investors' accounts, and the relatively small and infrequent amount of trading by typical retail investors, the Rule should not require unique customer identifiers for every customer.344 Another commenter urged the Commission to specify whether the process required that a unique customer identifier be submitted at the time an order is originated or received and the procedure to be followed if an identifier is not available.345

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A few commenters suggested alternative ways to identify a customer, rather than through a unique customer identifier.346 One commenter suggested that customers could be identified by amending the current trade report.347 Another commenter believed that "sophisticated analysis could identify trading activity that might be coordinated, without using an account identifier, and that regulators could then perform further analysis to determine who traded by using [EBS] and other methods already available to the staff."348 Another commenter noted that a possible method for identifying customers could be by linking customer information in EBS to trading information in OATS.349 Another commenter noted that "[i]t makes economical sense to use the current OATS and COATS audit trails and to expand those audit trails to include additional customer information, thereby providing a more complete audit trail for regulatory oversight for post trade analysis rather than building another audit trail system."350

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Commenters also discussed the need for both a large trader identification number under Rule 13h-1 under the Exchange Act, the Commission's Rule implementing the large trader reporting system,351 and a unique customer identifier under Rule 613.352 One commenter stated that the Commission could alleviate some of the burdens of the proposed Rule, and increase the effectiveness of an identification system, if it required only large trader identification numbers to be reported instead of requiring a unique customer identifier for every customer.353 This commenter believed that the Commission and the SROs are unlikely to be interested in routine transactions by small investors and would much more likely need accurate information about the orders of large traders because they are most likely to engage in transactions large enough to impact prices.354 Another commenter noted that an alternative would be to only identify entities that have sponsored or direct access to market centers via a relationship with a sponsoring market participant and to identify customers whose trading activity would be required to be disclosed pursuant to Rule 13h-1.355

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Certain commenters discussed concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.356 One commenter, noting the Commission's discussion in the Proposing Release that the unique customer identifiers could be based on a customer's social security number or taxpayer identification number, believed that the Commission's approach raises "serious privacy concerns."357 Another commenter noted that "there is a legitimate privacy concern with having the unique customer identifier available to the marketplace, and creating a means to protect that privacy would add tremendous incremental cost to the [consolidated audit trail]."358 One commenter questioned how long and at what level customer information would be encrypted,359 and another noted that "[t]he proposal needs to clarify who will have access to customer data and how confidentiality will be ensured."360

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(C) Adopted Rule

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(1) Need for a Unique Customer Identifier

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The Commission recognizes that the implementation of the unique customer identifier requirement may be complex and costly, and the reporting of a unique customer identifier will require SROs and their members to modify their systems to comply with the Rule's requirements. The Commission, however, believes that unique customer identifiers are vital to the effectiveness of the consolidated audit trail. The inclusion of unique customer identifiers should greatly facilitate the identification of the orders and actions attributable to particular customers and thus substantially enhance the efficiency and effectiveness of the regulatory oversight provided by the SROs and the Commission. Without the inclusion of unique customer identifiers, many of the benefits of a consolidated audit trail as described above in Section II.2. would not be achievable.

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For example, unique customer identifiers will make regulatory inquiries and investigations more efficient by eliminating delays resulting from the current need to send information requests to individual market participants in search of this key information, as well as reducing the burden on regulators and market participants of such requests.361 The identity of the customer is often necessary to tie together potential manipulative activities that occur across markets and through multiple accounts at various broker-dealers. Existing audit trails, however, do not identify the customer originating the order and thus do not allow SRO and Commission regulatory staff to quickly and reliably track a person's trading activity wherever it occurs in the U.S. securities markets. A unique customer identifier connected to each order will allow the SROs and the Commission to more quickly identify the customer that originated each order and therefore potentially more quickly and efficiently stop manipulative behavior through the submission of orders. In certain cases this might limit the losses of parties injured by malfeasance who currently may suffer losses during the weeks or months that it can currently take for regulators to obtain customer information through written requests for information.

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Further, unique customer identifiers will aid regulators in reconstructing broad-based market events. Specifically, having unique customer identifiers will aid regulators in determining how certain market participants behaved in response to market conditions and may even reveal the identity of the market participant(s) who caused or exacerbated a broad-based market event. More so, unique customer identifiers would enable regulators to disaggregate the market activity of different participants in ways that could help address many important questions related to equity and equity options market structure, ranging from more detailed analyses of the potential impacts of high frequency trading, to studies of market liquidity, to trend analyses of the trading costs and general efficiency by which investors use our public markets to acquire or dispose of their securities holdings.

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The Commission has considered commenters' concerns about the complexity of the process for creating and assigning unique customer identifiers and understands and acknowledges that the process of creating and assigning unique customer identifiers may not be simple and may result in additional costs to SROs and their members.362 The Commission also considered the commenters' views that there may be alternative ways to identify the customer responsible for orders, and that, in the view of some commenters, every individual customer need not be identified for purposes of an audit trail. As noted above, the Commission believes that the identification of each customer responsible for every order is critical to the effectiveness of a consolidated audit trail and does not agree that the commenters' alternative means of identifying a customer would be as effective as the method proposed by Rule 613. For example, the Commission considered the comment that customers could be identified by amending the trade report, but this approach would fail to identify customers associated with orders that are not executed.363 Additionally, account numbers are assigned by broker-dealers for their own customers only, and account numbers vary between broker-dealers. Thus, the identity of a customer from a specific account number would not be apparent to regulators without the time-consuming requests for information Rule 613 specifically is seeking to avoid. The use of unique customer identifiers would permit regulators to readily trace market activity by the same customer back to that unique customer identifier even if such market activity were affected across multiple accounts and broker-dealers.

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The Commission also considered the recommendations of some commenters that the consolidated audit trail should use the large trader identifier instead of a unique customer identifier.364 The Commission, however, does not believe that the commenters' approach will address the regulatory need to obtain information on and to identify the holders of accounts for all order activity in the market for NMS securities because the use of the large trader identifier alone would identify only those traders that self-report as "large traders" pursuant to Rule 13h-1 and are assigned a large trader unique identifier. Thus, under the commenters' suggested approach, only a very small portion of customers – the very largest traders in the market – would be assigned a unique identifier for purposes of the consolidated audit trail. Smaller traders, however, also can be perpetrators of illegal activity, or otherwise impact the market. Accordingly, the Commission believes that information on all customers is necessary to achieve the goal of Rule 613.

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Despite the wide and disparate array of views from commenters on the costs, complexities, and most efficient methodologies to generate and collect unique customer identifiers, the Commission believes that the potential benefits of including this information in the consolidated audit trail justify the costs to the SROs in requiring that they develop and include a detailed framework for unique customer identification as part of the NMS plan to be submitted for consideration by the Commission and the public. Therefore, the Commission is adopting the Rule substantially as proposed to provide that the NMS plan must require every member to report a unique customer identifier to the central repository upon origination or receipt of an order as required by Rule 613(c)(7)(i)(A). The Commission, however, is changing the term "unique customer identifier," as used in the proposed Rule, to the term "Customer-ID." Adopted Rule 613(j)(5) defines the term "Customer-ID" to mean, "with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository."365

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Given the complexity and the various existing options for identifying a customer, the Commission believes that the plan sponsors, by engaging in a detailed process that combines their own expertise with that of other market participants, are in the best position to devise a methodology for, and estimate the costs of, including customer identifiers in the consolidated audit trail. Once the NMS plan was submitted, the Commission and the public would then be able to consider the details and costs of such a framework.

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The Commission notes that the Rule does not specify the process for assigning the unique customer identifiers, or the format for such identifiers; rather, the Rule contemplates that the plan sponsors have the flexibility to determine the precise way to assign or "code" these identifiers. In this regard, the Commission expects the plan sponsors to establish a process by which every broker-dealer can, in a cost-effective manner, obtain a unique customer identifier, or Customer-ID, for each of their customer(s).366 The Commission also expects the plan sponsors to establish a process by which unique customer identifiers are reported to the central repository, and how this information is linked to the name and address of customers as stored in the central repository. The Commission further notes that Rule 613 does not specify that unique customer identifiers must be attached to every reportable event as orders are routed from one market or broker-dealer to another, or that these identifiers are reported at the same time and fashion as other customer-identifying information. Rather, the Commission is relying on the SROs, and other market participants,367 to develop a proposal that maximizes efficiency and security, and that data in the central repository be made available to regulators in a linked fashion so that each order, and all subsequent reportable events, can be readily traced back to one or more customers through their unique identifiers.

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In response to the commenter that questioned what should happen if a unique customer identifier was not available,368 the Commission notes that the Rule does not set out a process for addressing a situation where a unique customer identifier is not available to a broker-dealer and/or customer. Instead, the Commission believes that the plan sponsors are in the best position to address this situation as they develop the overall process for assigning unique customer identifiers. In response to the comment that requested the Commission specify whether a unique customer identifier is required to be reported at the time an order is originated or received,369 the Commission notes that Rule 613(c)(7)(i)(A) requires that the NMS plan require that this information be recorded contemporaneously with the reportable event, but permits the reporting of the identifier by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded.370 In addition, in response to the commenter that believed that the consolidated audit trail should identify market participants with direct or sponsored access to markets,371 the Commission notes that under the Rule, to assure the Commission and the SROs of an accurate and complete audit trail for every action that every market participant takes with respect to an order, the sponsored party will be assigned a Customer-ID and the sponsoring broker-dealer will be assigned a CAT-Reporter ID under Rule 613.

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The Commission also considered the privacy and security concerns that commenters raised with respect to the use of Customer-IDs.372 In response to these comments, the Commission is revising proposed Rule 613, as discussed in more detail in Section III.B.2.e. below, to include additional mechanisms to safeguard the privacy and confidentiality of the audit trail data, including the Customer-ID, in large part to address the privacy concerns raised by commenters.373 In response to the commenter that questioned when and at what level customer information would be encrypted,374 the Commission notes that, while Rule 613 does not explicitly require that this information be encrypted, the Rule contains several safeguards to ensure the privacy and confidentiality of the audit trail data. Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, reported to the central repository, will be ensured.375 Based on these provisions, the Commission believes that plan sponsors would need to make sure customer information is protected, and the plan sponsors could require such data to be encrypted.

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Additionally, the Commission believes that privacy concerns also could be mitigated if the plan sponsors determine, as permitted by Rule 613, that the unique customer identifiers not travel with the order, and instead be reported to the central repository only upon the receipt or origination of an order. Therefore, if the plan sponsors make this decision, the SROs and their members will not be able to use the unique customer identifier to track the identity of a customer(s) or a customer's order flow.376 While the unique customer identifier will be linked to information that is sufficient to identify a customer (e.g., the name and address of the customer) and customer account information377 at the central repository, this information will be accessible only by regulators for regulatory purposes.378 The Commission also notes that the plan sponsors could determine not to require that a customer's social security number or tax identification number be used as a customer's unique identifier to the extent they believe that there are privacy and confidentiality concerns.

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(2) Definition of "Customer"

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As proposed, Rule 613(j)(1) (renumbered as Rule 613(j)(3)) defined "customer" as "[t]he beneficial owner(s) of the account originating the order; and [t]he person exercising investment discretion for the account originating the order, if different from the beneficial owner(s)." The Commission received two comments regarding the inclusion of beneficial owners in the definition of customer. One commenter questioned the use of a unique customer identifier for both a beneficial owner of an account and the person exercising investment discretion, if different, and noted that if a trade comes into question, the person exercising investment discretion, not the beneficial owner, likely will be the "first person of interest in any type of review or investigation of such trading activity."379 Another commenter requested further clarity regarding the definition of "customer" for purposes of Rule 613, and suggested that the Commission should define "beneficial owner" to be sure this term is applied correctly.380 This commenter specifically stated that "[t]he SEC should also provide a definition for the terms 'beneficial owner' and 'customer' to eliminate any doubts as to whom these labels apply. For example, is the 'customer' the entity directing the trade or the beneficial owner of the account?" and added that, "for registered investment advisers, the unique customer identifier should be associated with the investment adviser rather than the underlying beneficial owner. Frequently, investment advisers aggregate orders for multiple beneficial owners in 'bulk' orders that are routed together and allocated on an average-priced basis to ensure best execution."381 In response to commenters' concerns about the use of the term "beneficial owner," the Commission is revising Rule 613(j)(1), as proposed (renumbered as Rule 613(j)(3)), to state that "[t]he term 'customer' shall mean: (i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." The Commission believes that the revised Rule will provide it with the customer information required to achieve the objectives of the consolidated audit trail.382

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In adopting this revised definition, the Commission is clarifying its intent that, with respect to the "account holder" reference under Rule 613(j)(3), the NMS plan submitted to the Commission for its consideration must require broker-dealers to capture information on only the individuals or entities that currently are required to be recorded in the books and records of the broker-dealer pursuant to Rule 17a-3(a)(9) under the Exchange Act.383 Because this provision does not require broker-dealers to obtain information about their account holders beyond what they are required to obtain today, the Commission believes the modification to the proposed Rule is appropriate because it will reduce the proposed Rule's burden on broker-dealers in recording and reporting information about a "customer," as that term will be defined under Rule 613(j)(3). The Commission notes that, under the Rule, as adopted, for joint accounts – where two individuals are required to provide information under Rule 17a-3 of the Exchange Act for one account – information for both persons listed on the joint account would be recorded and reported under Rule 613.384

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The Commission also believes that it is important to capture the person that has authority to give trading instructions to a broker-dealer for an account, if different from the account holder, because such person likely will be of interest in a review or investigation of activity in such account. Thus, the Commission is modifying the proposed Rule to clarify its intent that under Rule 613 the NMS plan also must capture, in the definition of customer, "[a]ny person from whom the broker-dealer is authorized to accept trading instructions, if different from the account holder(s)."385 Knowing the identity of the person who is authorized to give the broker-dealer trading instructions for an account, whether the account holder or an adviser or other third party, is a vital component in the investigative process. Further, when investigating violations of the federal securities laws, it is important to promptly identify all potentially relevant parties who may have made trading or investment decisions, which could include both the person authorized to give the broker-dealer trading instructions for such account and the account holder.386

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Pursuant to the revised definition of "customer" under adopted Rule 613, for example, if an order is entered to buy or sell securities for the account of an investment company or other pooled investment vehicle (a "fund"), the Rule will capture, in the definition of customer, the fund itself or, if the account at the broker-dealer is held only in the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions, the Rule will capture the investment adviser.387 If the account at the broker-dealer is held in the name of the fund itself, the Rule will capture both the name of the fund (pursuant to Rule 613(j)(3)(i)), as well as the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions (pursuant to Rule 613(j)(3)(ii)). In addition, if an adviser enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would capture both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)). If an adviser instead enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule would capture the adviser (pursuant to Rule 613(j)(3)(i)) but would only capture any client accounts to which the adviser allocates executed trades (pursuant to Rule 613(c)(7)(vi)) if those client accounts were held separately at the same broker-dealer as well.

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Furthermore, in cases where multiple individuals in the same trading firm transact through a single account maintained at a broker-dealer in the name of that trading firm, the Rule will require the NMS plan to require recording and reporting of the Customer-ID of the trading firm associated with that account, and not the Customer-IDs of the individual traders who had placed the orders.388 The Commission understands that in some cases broker-dealers may have knowledge of the individual traders transacting within the same firm-wide account, and may even provide reports to the firm holding the account that summarizes trade activity according to individual trader. Because such information is not captured by the Rule, but may be useful in informing regulators about the potential manipulative activities, the SROs may wish to consider how such information might be incorporated into the consolidated audit trail in the future.

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The Commission is also modifying a related provision of the Rule, Rule 613(c)(7)(i)(A), to reflect that more than one Customer-ID must be provided upon original receipt or origination of an order if the account holder and the person authorized to give the broker-dealer trading instructions for such account are different or if more than one person is an account holder for the account (such as, for example, joint account holders). Specifically, Rule 613(c)(7)(i)(A) provides that "Customer-ID(s)" (i.e., multiple Customer-IDs) must be provided for each customer, if that is applicable. In addition, the Commission notes that every "customer," as defined by Rule 613(j)(3) will be assigned a Customer-ID; thus, two Customer-IDs maybe associated with one order under the Rule.

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iv. Unique Order Identifier

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As proposed, the Rule would have required the NMS plan to require each member of an exchange or FINRA to attach, to each order received or originated by the member, a unique order identifier that would be reported to the central repository and that would remain with that order throughout its life, including routing, modification, execution, or cancellation. Specifically, proposed Rule 613(c)(7)(i)(D) (renumbered as Rule 613(c)(7)(i)(B)) would have provided that the national market system plan shall require each national securities exchange, national securities association, and any member of such exchange or association to collect and electronically provide to a central repository details for each order and each reportable event, including, but not limited to, "a unique identifier that will attach to the order at the time the order is received or originated by the member and remain with the order through the process of routing, modification, cancellation, and execution (in whole or in part)." In the Proposing Release, the Commission stated that the use of such an identifier would allow the SROs and the Commission to efficiently link all events in the life of an order and help create a complete audit trail across all markets and broker-dealers that handle the order.389 Proposed Rules 613(c)(7)(ii)(A), 613(c)(7)(iii)(A), and 613(c)(7)(v)(A) would have required the reporting of a unique order identifier to the central repository for the reportable events of routing and execution. The Commission did not propose to mandate the format of such an identifier or how the identifier would be generated.

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The Commission requested comment on whether a unique order identifier that would remain with the order for its life would be necessary or useful for an effective consolidated audit trail. The Commission also specifically requested comment on, among other things, the feasibility and merits of its proposed approach for attaching a unique order identifier to an order, as well as on how multiple "child" orders that may result if the original "parent" order is subsequently broken up, or an aggregation of multiple original orders into a single order, should be addressed.

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Several commenters expressed opinions on the proposed unique order identifier requirement, with some noting that the Commission's proposal imposed "significant" burdens or challenges on market participants, and others offering alternatives to the Commission's approach to identifying orders.390 For example, some commenters suggested that the Rule permit the approach used for OATS reporting, in which the broker-dealer initiating or receiving an order would generate its own order identifier, but pass on a separate routing identifier to the entity to which it routes the order, which would generate its own order identifier, but retain and report that routing identifier as well, so that information about the order can be linked together as it is passed from venue to venue.391 One of these commenters also believed that the OATS approach would avoid certain complexities that could occur with a unique order identifier, such as when the original order is broken up into multiple "child" orders.392 In a subsequent comment letter, the commenter stated that it could require two new order event types that would allow customer orders handled on a riskless principal or agency basis to be linked to the related representative orders.393 Another of the commenters suggested that "the adopted CAT filing should require that an order be tracked through its lifecycle and [the Commission should] leave the technical details to [a] requirements analysis."394

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Another commenter was concerned that, if the originating firm's or customer's name was used as part of the unique order identifier, this could create "potential privacy information risks as every new destination (both internally across information barriers within a firm and externally across broker-dealers) would see where an order originated."395 Similarly, a third commenter supported the OATS approach of linking a series of separate order identifiers in part because it believed that, if a unique identifier were to pass from firm-to-firm, there was a risk that information about the origin of an order might be inferred.396 Yet another commenter recommended that the Commission standardize how the order identifier should be structured to ensure consistent reporting between firms, instead of leaving this decision to the plan sponsors.397

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The Commission has considered the comments received regarding the requirement that the NMS plan mandate a unique order identifier, and is adopting Rule 613 with significant modifications398 that provide more flexibility for the SROs, as the plan sponsors, to determine whether the NMS plan will require a single unique order identifier or a "series of order identifiers." Specifically, the Rule, as adopted, requires that every order have a "CAT-Order-ID," defined as "a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of the order."399

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The Commission has modified the Rule from the proposal so that the SROs can draw upon their own expertise, as well as those of other market participants, in developing the most accurate and efficient methodology for tracking an order through its life. Thus, the SROs may submit an NMS plan in which they require a single unique order ID to travel with each originating order; the SROs may submit an NMS plan in which, as suggested by a number of commenters, a series of order IDs, each generated by different market participants, is reported to the central repository in a manner that allows for the accurate linking of reportable events; or the SROs may submit an NMS plan based on any other methodology that meets the requirements of the Rule.

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The Commission expects that the details of the methodology proposed by the SROs in the NMS plan will, in part, be based on how the generation and reporting of order identifiers would interact with other technical details involving order tracking in the consolidated audit trail, such as the potential for multiple orders to be aggregated, routed, and disaggregated. However, though the Commission is not prescribing a particular methodology, the Rule does require that SROs take into account a number of considerations, such as accuracy and cost, in designing their methodology.400

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The Commission notes that, with this modification, a wider array of possible solutions is now available to the SROs as they develop the NMS plan to be submitted to the Commission for its consideration, including those that may better accommodate the infrastructure of existing audit trails and thereby potentially, and possibly significantly, reduce implementation burdens. As indicated above, several commenters suggested that the Rule accommodate the linked order identifier approach, currently used by OATS.401 However, the Commission also notes that, though the adopted Rule could accommodate such an approach, there historically have been limitations on the accuracy and reliability of linking orders in OATS.402 It will therefore be very important for the NMS plan to demonstrate how the approach it has selected will ensure that information about all reporting events pertaining to an order will be efficiently and accurately linked together in a manner that allows regulators efficient access to a complete order audit trail.403 As discussed below, the reliability, accuracy, and confidentiality of the data reported to and maintained by the central repository, as well as the method by which the data in the central repository can be accessed by regulators, are considerations for the Commission in evaluating the NMS plan.404

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The Commission emphasizes that, under the adopted Rule, regardless of the specific method chosen by the SROs, all orders reported to the central repository must be made available to regulators in a uniform electronic format and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information for all reportable events for that order.405 The Commission believes the consolidated audit trail will still achieve significant benefits with this modification.

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The Commission recognizes the complexities of order routing in today's markets, including, as noted by a commenter,406 the frequent splitting of larger orders into numerous "child" orders or the bundling of smaller orders into one larger order. The Commission believes, however, that since, in today's complex markets, orders are currently and routinely aggregated and disaggregated, practical solutions to record such orders can be developed by the plan sponsors to ensure they are accurately and efficiently tracked through a variety of aggregation and disaggregation events.

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With regard to the concern expressed by a commenter that the use of an order identifier(s), as required by Rule 613, could provide the ability to deduce the origin of an order, thereby revealing confidential trading strategies or raising privacy concerns,407 the Commission notes that this commenter assumed that a unique order identifier "would very likely require members to include the originating firm's or customer's name as part of the identifier."408 The Commission believes, however, that the SROs will be able to devise a way to assign order identifiers – through random number sequences or otherwise – that would protect the identity of broker-dealers and their customers from disclosure to persons other than authorized regulatory personnel. The Commission also notes that, as discussed in Section III.B.2.e. infra, the adopted Rule requires the NMS plan submitted to the Commission for its consideration to incorporate a variety of policies and procedures to ensure the security and confidentiality of all information reported to the central repository.

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Furthermore, because the Rule requires the SROs to discuss the details of each aspect of the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider how well the methodology the SROs developed to link reportable events for the same order meets the considerations of accuracy and reliability, as well as those of security and confidentiality. The Commission will then be able to use this information in determining whether to approve the NMS plan submitted.

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v. Time Stamp

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The proposed Rule would have required SROs and their members to report the date and time, to the millisecond, that an order was originated or received, routed out, and received upon being routed, modified, cancelled, and executed.409 Specifically, proposed Rules 613(c)(7)(i)(H) (renumbered as 613(c)(7)(i)(E)), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B) (renumbered as 613(c)(7)(iv)(C)), and 613(c)(7)(v)(C) provided that the "time of order receipt or origination (in milliseconds)" would be recorded for every order originated or received, routed, modified, cancelled or executed, by a broker-dealer or SRO.

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Several commenters expressed opinions on the time stamp requirement. One commenter believed a millisecond standard was not precise enough, explaining that many exchanges currently execute orders in less than a millisecond.410 This commenter explained that, to detect the manipulative or fraudulent behavior of high frequency traders, it is necessary that time stamps be accurate to a level more detailed than the speed at which trades are executed; otherwise, it would not be possible to determine the time sequence in which trades occurred. The commenter suggested that reports from execution venues (e.g., exchanges, ATSs, dark pools, and large internalizers) should be required to be accurate to 0.01 milliseconds.411 This commenter also suggested that a more liberal time stamp standard of one second might be more appropriate for low-volume broker-dealers.412 Another commenter, however, expressed concern about the proposed millisecond time stamp requirement, explaining that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second."413 Another commenter believed that, because computers have a certain rate of error when keeping time ("time drift"), it is difficult to sequence orders based on millisecond time stamps.414 As a result, according to this commenter, there is "no real value in requiring data to this level of specificity [based on milliseconds], especially if the goal of time stamping is to sequence the lifecycle of a single order as it moves from origination to execution."415

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The Commission has considered the comments regarding the precision of the proposed time stamp requirement for the consolidated audit trail and is adopting the millisecond time stamp requirement with modifications from the proposal.416 As adopted, the Rule provides that the NMS plan submitted shall require the time stamps as set forth in Rule 613(d)(3).417 Rule 613(d)(3) provides that the NMS plan must require each SRO and its members to "[u]tilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in any national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond." Rule 613(d)(3) also provides that, "[t]o the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, such plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced." Rule 613(d)(3) further provides that "[t]he national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments."

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The Commission notes that SIPs currently support millisecond time stamps418 and other entities in the securities industry currently conduct business in millisecond increments or finer.419 The Commission believes that, given the speed with which the industry currently handles orders and executes trades, it is important that the consolidated audit trail utilize a time stamp that will enable regulators to better determine the order in which reportable events occur. The entry time of orders can be critical to enforcement cases. For example, the timing between order origination and order entry is important in investigating possible market abuse violations, such as trading ahead of a customer order. In general, determining whether a series of orders rapidly entered by a particular market participant is manipulative or otherwise violates SRO rules or federal securities laws, otherwise being able to reconstruct market activity, or performing other detailed analyses, requires the audit trail to sequence each order accurately. The Commission believes that, for many types of common market activities that operate at the level of milliseconds or less, time stamps in increments greater than a millisecond would not allow this sequencing with any reasonable degree of reliability.

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In response to the comment that a millisecond standard is not sufficiently precise, as many exchanges currently execute orders in less than a millisecond,420 adopted Rule 613(d)(3) provides that the NMS plan must require that, to the extent that the order handling and execution systems of any SRO or broker-dealer utilize time stamps in increments finer than the minimum required by the NMS plan time stamps, such SRO or member must use time stamps in such finer increments when reporting data to the central repository, so that reportable events reported to the central repository by any SRO or member can be accurately sequenced. The Commission believes this approach will improve the accuracy of records with respect to the sequencing of events that occur very rapidly, especially with respect to those market participants that have elected to use time stamps in increments finer than a millisecond.

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The Commission recognizes, as a commenter noted,421 that computers have a certain rate of deviation when keeping time. The requirement that clocks be synchronized within a level of granularity to be specified in the NMS plan422 is designed to ensure that time drift does not exceed a defined level of deviation. However, the Commission believes that time stamps reported with a millisecond or finer granularity would still provide significant benefits even, contrary to one commenter's assertion,423 if the time drift between systems is larger than a millisecond. This is because such time stamps would still allow an accurate sequencing of reportable events as may commonly occur within in a single system, tied to a single clock, at levels of a millisecond or finer (e.g., high-frequency trading algorithms). Any drift of such a system's clock relative to the clocks of other systems may of course hinder the time-sequencing of cross-system events, but it would not preclude the ability of regulators from performing a detailed, accurate time-sequenced analysis of all the orders, cancellations, modifications, and executions performed by the specific system of interest.424 In this regard, the Rule is analogous to the current requirements for OATS reporting: FINRA requires clocks to be synchronized to the second, and requires time stamps to be reported to FINRA in seconds, unless those time stamps are captured by the FINRA member in milliseconds, in which case they must reported to FINRA in milliseconds (notwithstanding the clock sync remaining at a second).425

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The Commission acknowledges that changes (with their associated costs) might be required to internal broker-dealer systems to comply with a millisecond time stamp requirement. However, given the benefits outlined above, and the apparent widespread use of millisecond time stamps in the industry today,426 the Commission believes the cost of requiring the SROs to develop a plan that provides for millisecond time stamps, and to discuss the costs and benefits of the specific solution chosen, is justified.

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The Commission also acknowledges that broker-dealers who presently report time stamps to OATS in millisecond increments, but whose systems direct and capture their order activity in finer time increments, could incur costs associated with these time stamps being reported to the central repository with the same granularity at which they are recorded by the broker-dealers.427 The Commission recognizes that there may be alternatives to reporting events in finer than millisecond increments that enable the central repository to use a different method for accurately time-sequencing sub-millisecond events originating from within a system or systems on a single clock. Therefore, in developing the NMS plan to be submitted to the Commission for its consideration, if the SROs identify one or more such alternatives, the Commission believes that they should address such alternatives in the NMS plan,428 how such alternatives (i.e., an alternative to reporting in finer than millisecond increments) would ensure that reportable events may be accurately time-sequenced at the sub-millisecond level, and the costs associated with such alternatives both on their own terms and relative to a requirement to report events in the same sub-millisecond time stamp as used by a broker-dealer for directing and capturing orders.429

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The Commission also notes that, because millisecond time stamps may become inadequate to investigate trading as technology evolves and trading speeds increase, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require the plan sponsors to annually evaluate whether industry standards have evolved such that a finer increment time stamp is appropriate. As this approach is tied to the then-current industry standard used to assess whether to shorten the future time stamp increment, the Commission also believes that this approach helps assure that the time stamps in the consolidated audit trail will be in line with technological developments. Should the industry standard move to a finer time standard, the plan sponsors could modify the minimum standard required by the NMS plan by submitting an amendment to the NMS plan under Rule 608 of Regulation NMS. Such an amendment would need to be considered and would be subject to approval by the Commission, as well as subject to public notice and comment.430

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vi. Additional Routing Data Elements

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Proposed Rules 613(c)(7)(ii) and (iii) would have required that certain additional information be collected and reported specifically to allow regulators to track the life of an order through the routing process. The Commission requested comment as to whether information regarding the routing of orders would be necessary or useful for an effective consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to routing.

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One commenter noted that the proposed Rule would capture the routing of an order internally within a broker-dealer, but not the routing of an order internally within an exchange from one execution system to another.431 This commenter also noted that, as proposed, the Rule would not require an SRO or member to report information indicating that an order was "flashed" or otherwise displayed in a "step-up" mechanism.432 The commenter believed that this information would be important for the consolidated audit trail to capture.433

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The Commission believes that it is important to capture the routing of an order internally within a broker-dealer to, for example, evaluate best execution practices.434 Capturing the time at which a broker-dealer received a customer's order and the time that such order was executed can help determine if the broker-dealer delayed acting on its customer's order. The time at which an order was routed can affect the evaluation of whether the broker-dealer fulfilled its best execution obligations, and, thus, the Commission believes that this internal broker-dealer routing information should be captured by Rule 613. The Commission, however, does not believe that data regarding order processing (i.e., management of an order) within exchange systems is as useful as data regarding internal routing within a broker-dealer435 because, for example, unlike broker-dealers, exchanges do not have best execution obligations. Further, any issues with an SRO's internal processing would occur at a single venue – the SRO – and, thus, there could be direct follow-up with the SRO. Additionally, the Commission notes that the consolidated audit trail will not collect information indicating whether orders were flashed or displayed in a "step-up" mechanism as it concerns an exchange's internal processing and dissemination to its members of an order in the instance when the exchange cannot execute the order because the exchange does not have any available trading interest at the NBBO (depending on the side of the order).436 Orders that are flashed or displayed through a "step-up" mechanism are not executable because they are displayed only to members of an exchange as an indication of a broker-dealer's interest. The Commission believes it is appropriate not to require the reporting of these flashed or "stepped-up" orders to the central repository because, as noted above, the Commission believes that the tracing of processes within an exchange is not as material to regulators as the routing of orders between markets. Further, as stated, SROs do not have the same legal obligations with regard to handling customer orders as broker-dealers; therefore, the Commission does not believe it is necessary, at this time, to require the consolidated audit trail to track an SRO's internal processing of orders.

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The Commission has considered the comments related to the data that is required to be recorded and reported when an order is routed and is adopting Rules 613(c)(7)(ii) and (iii) substantially as proposed.437 The Commission notes that the Rule requires that the NMS plan require the broker-dealer routing an order and the broker-dealer receiving a routed order – both actions that are defined as "reportable events" under Rule 613 – record and report the CAT-Reporter-ID of the broker-dealer routing the order and the CAT-Reporter-ID of the broker-dealer receiving the routed order. The Commission believes the requirement to report this information on both the routing and receiving end of a route is not duplicative but, rather, is useful. Specifically, information regarding when a broker-dealer received a routed order could prove useful in an investigation of allegations of best execution violations to see if, for example, there were delays in executing an order that could have been executed earlier. In addition, if a market participant is required to report when it receives an order, regulators could solely rely on information gathered directly from that market participant when examining or investigating the market participant. For example, if a regulator needs to investigate a delay between the time a market participant received an order and the time the market participant acted on the order, under Rule 613, as adopted, the regulator could use information recorded and reported by the market participant itself, rather than rely on information about the receipt and action taken on the order that would be provided by a third party. Information from a third party may be less accurate in general and may not accurately reflect events to the extent there are latencies in order transmission. In addition, the Commission relies on data such as that which would be recorded under Rule 613(c)(7)(ii) and (iii) to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. For these reasons, the Commission believes that it is important to have both the routing broker-dealer and the receiving broker-dealer report their CAT-Reporter-IDs to the central repository, and that such information could aid regulatory authorities when analyzing the trades of market participants.438

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To reflect terms that have been modified elsewhere in the Rule as adopted, the terms "unique order identifier" and "unique identifier" in Rule 613(c)(7)(ii) and (iii) have been replaced with the terms "CAT-Order-ID" and "CAT-Reporter-ID." In addition, Rule 613(c)(7)(ii) and (iii) now reflect the new time stamp requirement contained in Rule 613(d)(3). Specifically, Rules 613(c)(7)(ii)(C) and 613(c)(7)(iii)(C) provide that the time at which an order is routed or received must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed. The Commission believes these conforming changes are appropriate to reflect the revised terms in the adopted Rule.

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vii. Additional Modification, Cancellation, or Execution Data Elements

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In addition to the data elements discussed above, proposed Rules 613(c)(7)(iv) and (v) would have required that certain information be collected and provided specifically to allow regulators to track the life of an order through modification, cancellation, or execution. The Commission requested comment as to whether information required under the Rule as proposed would be sufficient to create a complete and accurate consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to modifications, cancellations, or executions.

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In response, one commenter noted that broker-dealer order management systems may differ in their treatment of order modifications and cancellations, as some, for example, may capture or report only modified data elements, and not necessarily all of the elements of a modified order.439 The commenter recommended that the consolidated audit trail accommodate such differences, and further suggested requiring only the submission of the order identifier for a cancelled order, not the order's other data elements.440 Another commenter believed that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."441

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After consideration of the comments regarding the specific audit trail data required for orders that are modified, cancelled, or executed, the Commission is adopting Rules 613(c)(7)(iv) and (v) substantially as proposed, with a modification to require that the NMS plan include a requirement that the CAT-Order-ID for such orders also be recorded and reported to the central repository. This modification is designed to ensure that an order identifier be reported for orders that have been modified or cancelled. The Commission believes that the order identifier is a critical piece of information that will efficiently link an order across markets. Adopted Rules 613(c)(7)(iv) and (v) will also require that the NMS plan submitted to the Commission for its consideration require the recording and reporting of the CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction to reflect the new terminology of the adopted Rule. In addition, Rules 613(c)(7)(iv) and (v) reflect the new time stamp requirement contained in Rule 613(d)(3), as adopted. Specifically, Rules 613(c)(7)(iv)(C) and 613(c)(7)(v)(C) provide that the time at which an order is modified, cancelled, or executed must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed.

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The Commission believes it is necessary to require the NMS plan to require the information under Rule 613(c)(7)(iv) and (v) for each order and reportable event because it will assist the Commission and SROs in identifying all changes made to an order (including an execution) and those market participants responsible for the changes (or execution). The Commission believes this information, in combination with the proposed information pertaining to order receipt or origination, will provide regulators with a comprehensive view of all material stages and participants in the life of an order. Among other things, this order information should help regulators investigate suspicious trading activity in a more efficient manner than is currently possible. Regulators will have access to information identifying the customer behind the order and will also see how a customer's order is handled across markets. This data also will improve regulators' understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. In addition, the Commission believes that most of the data proposed to be recorded and reported by the Rule for order modification, cancellation, and execution is data that most broker-dealers already generate in the course of handling an order pursuant to the existing audit trail requirements of several SROs.442

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The Commission notes that regulatory staff at an SRO or the Commission could use execution information required under Rule 613(c)(7)(v), which will be consolidated with the other audit trail information required under Rule 613 to, for example, detect patterns of reported and unreported transactions effected by a broker-dealer in a particular security by comparing the data reported to the central repository regarding an execution with information reported pursuant to a transaction reporting plan or the OPRA Plan. Depending on the results of that analysis, regulators may undertake further inquiry into the nature of trading by that broker-dealer to determine whether the public received accurate and timely information regarding executions, and whether the broker-dealer complied with the trade reporting obligations contained in SRO rules. Patterns of reported and unreported transactions by a particular broker-dealer could also be indicia of market abuse, including the failure to obtain the best execution for customer orders, or possible market manipulation. Thus, the ability to compare the consolidated order execution data, including customer information, with the trades reported to the consolidated tape would be an important component of an effective market surveillance program that is not possible today because regulators currently do not have access to comprehensive cross-market audit trail data, and the process of identifying customers is very labor intensive, time-consuming, and error prone.

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In response to the commenter that recommended that the consolidated audit trail accommodate differences in the treatment of modifications by broker-dealer order management systems (i.e., those that report only the modified data elements, not the entire order), and suggested that only an order identifier be reported for a cancellation, not the cancelled order's other data elements,443 the Commission notes that Rule 613 does not require all of the data elements of a modified order to be reported to the central repository. The Rule only requires the NMS plan to require the reporting of the CAT-Order-ID; the date and time the modification is received or originated; the CAT-Reporter ID of the broker-dealer or the Customer-ID of the person giving the modification instruction; if modified, the price and remaining size of the order; and any other changes to the material terms of the order. The adopted Rule also requires the NMS plan to require the date and time a cancellation is received or originated and the CAT-Reporter-ID of the broker-dealer, or Customer-ID of the person, giving the cancellation instruction to be reported to the central repository. The Commission believes this will ensure that regulators can determine the market participant or person responsible for the cancellation of an order,444 and the date and time of the cancellation.

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In response to the commenter that suggested that the Rule should require that the execution data be linked with the public trade report using a common identifier,445 the Commission notes that Rule 613(c)(7)(v)(G) requires the NMS plan submitted to the Commission for its consideration to require that, for an order that has been executed, the SRO or member that executes the order must report to the central repository whether the execution was reported pursuant to an effective transaction reporting plan or OPRA, as applicable. The Commission has considered the commenter's further suggestion that a common identifier link the audit trail execution reports for the buy and sell orders to the public trade report and is not mandating such a requirement under Rule 613; the Commission believes that Rule 613 and its requirements provide a sufficient initial framework for collecting audit trail data that will enhance the ability of regulators to surveil the market for NMS securities.446 Accordingly, the Commission is adopting Rule 613(c)(7)(v)(G), as proposed, which requires that the plan sponsors include in the NMS plan submitted to the Commission for its consideration a requirement that the broker-dealer report to the central repository whether a trade was reported pursuant to an effective transaction reporting plan or OPRA.

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e. Rule 613(c)(3): Information to Be Recorded Contemporaneously with the Reportable Event and Reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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i. Proposed Rule 613(c)(3)

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As proposed, Rule 613(c)(3) would have required the NMS plan to require each SRO and member to collect and provide to the central repository, on a "real time" basis, key data for each order and each reportable event, including the origination or receipt of an order, as well as the routing, cancellation, modification, or execution of the order.447 Specifically, the proposed Rule would have provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraphs (c)(7)(i) through (v) of this section on a real time basis."448 In the Proposing Release, the Commission noted that "real time" meant "immediately and with no built in delay from when the reportable event occurs."449

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ii. Comments on Proposed Rule 613(c)(3)

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The Commission received a variety of comments about the achievability of the real-time requirement; the accuracy of audit trail data that would be collected and provided in real time; the necessity, merits and usefulness of real-time audit trail data; the costs of real-time reporting; and the proposed Rule's requirement that all audit trail data be collected and reported in real time. These comments are discussed below.

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Several commenters believed that reporting data on a real-time basis was achievable.450 Of these comments, one commenter stated that its current systems could be used to support real-time reporting, and that real-time reporting may be easier to achieve than intraday or end-of-day batch processing.451 Similarly, another commenter, endorsing the use of FIX Protocol, stated that FIX Protocol is already widely used throughout the financial industry, and that "[a]ll FIX messages are generated in real time for trading."452

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A significant number of commenters, however, expressed concern about the proposed requirement that the audit trail data be collected and provided to the central repository in real time.453 Some of these commenters focused on the effect a real-time reporting requirement would have on their systems, and the systems changes that might be needed to achieve real-time reporting. Specifically, commenters argued that a real-time collection and provision requirement would require many industry participants to build entirely new systems or to undertake significant technological upgrades to comply with a real-time reporting requirement.454 Other commenters stated that real-time reporting would strain their order handling systems and result in latencies and delays in the processing of customer orders.455 Additionally, one commenter questioned the ability of a real-time consolidated audit trail system to handle periods of immense volume, like the volume on May 6, 2010.456

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Other commenters who expressed concern about the real-time reporting requirement questioned the accuracy of data that would be reported in real time.457 One commenter, for example, noted that there would not be an opportunity for data validation if consolidated audit trail data were required to be reported in real time.458 Another commenter stated that the real-time processing required by real-time reporting would create data integrity issues and, thus, lead to poorer data quality as compared to an approach with a more liberal timeframe, such as next day, or "T+1," reporting.459 FINRA similarly commented that the data integrity issues that arise when audit trail data is provided on a T+1 basis would be exacerbated by a real-time system.460 FINRA stated that it performs over 40 billion data validations of order events submitted through OATS every day, and requires its members to repair rejected OATS data.461

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A number of commenters discussed whether a real-time reporting requirement is necessary. One commenter stressed that the real-time availability of data would facilitate the identification of cross-market events and their origins.462 This commenter explained that a platform developed using FTEN and SMARTS technology would include real-time risk management and surveillance capabilities.463 However, most commenters did not believe that real-time data typically would be useful to the Commission and SROs.464 One commenter explained that using audit trail data before having an opportunity to validate it "may result in a severely distorted picture of trading and interfere with effective oversight."465 Another commenter stated that "real-time order information is inherently incomplete and could even be inaccurate and therefore misleading to the users of the data."466 Some commenters were of the view that the Commission had significantly overvalued the regulatory benefit of real-time data.467 One of these commenters noted that, "[b]ased on its experience in conducting surveillance, [it] does not believe that it is essential that all of the information proposed to be captured in the CAT be received real time or near-real-time."468 A commenter suggested that, to the extent any information had to be submitted in real time, it should be limited to data related to certain key events, such as order receipt and origination, order transmittal, execution, modification, and cancellation.469 Other commenters generally questioned the value of real-time audit trail data, arguing that regulators would still need to rely on traditional investigative techniques, such as taking testimony, to establish securities law violations.470 Another commenter believed that "[m]any potential uses for the data, including enforcement inquiries probing market behavior, may require either multiple days' worth of data, or data from other markets that is not available on a real-time basis," limiting the ability to use such real-time data provided by the consolidated audit trail.471

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Some commenters questioned whether the substantial costs that would be associated with providing the data on a real-time basis would outweigh the benefits.472 One commenter believed that "the SEC has significantly overestimated the incremental utility of real-time data over data received on a T+1 basis" and that "the costs associated with the breadth of real-time reporting proposed by the Commission would be significant and far outweigh the minimal regulatory benefit gained by such a reporting system."473

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Some commenters who questioned the value of the real-time reporting requirement also suggested that the Commission consider a different timeframe for the reporting of audit trail information. Several commenters, for example, suggested a later timeframe for reporting audit trail data to the central repository. One commenter, an exchange, stated that "[o]ur strong preference would be for submission of information to the central repository through a batch process after the close of the trading day involved."474 Another commenter suggested a compromise whereby broker-dealers would be subject to next day (or later) reporting requirements, while the SROs could leverage their existing real-time monitoring tools and provide real-time trading information for use in the consolidated audit trail.475 Several commenters recommended that the Commission permit end-of-day reporting.476 One commenter noted that end-of-day reporting would alleviate some of the practical challenges firms would face with a requirement to identify beneficial owners on a real-time basis.477 Another commenter suggested that a reporting deadline of 10-15 minutes would be substantially more workable than a "real-time" reporting requirement.478 Finally, one commenter suggested that broker-dealers and SROs should retain audit trail information, and submit it only upon regulatory request, so that the central repository would only collect data needed for investigations or surveillance purposes.479

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One commenter, who did not specifically advocate either real time or reporting on an end-of-day basis, supported a requirement that all trades be reported in a standardized format that will be accessible to the SEC at the end of each trading day.480

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Some commenters suggested alternative means of collecting audit trail information, assuming such audit trail data would not be on a real-time basis and would not be through the reporting regime set forth by Rule 613. For example, one commenter suggested the Commission consider "a consolidation" of [OATS] and [COATS], audit trails that are produced on a T+1 basis; and a review of the prospect of extracting specific real-time data from surveillance reports currently used by SROs to perform post trade analysis, such as the Large Option Position Report . . . and large trader reports, to obtain real-time risk information that may impact a particular NMS issue or the market in general."481 This commenter believed that a requirement of real-time reporting should be considered only after other available sources of data have been carefully reviewed, and only to the extent that such a requirement is both necessary and economically feasible.482 Another commenter, however, urged the Commission not to "lower its expectations for the CAT and accept a more limited audit trail based exclusively on existing systems."483 One commenter suggested that the Commission consider a "hybrid" approach that would enhance elements of the quotation and transaction information reported in real time, while collecting and reporting more specific order information on a T+1 basis or later.484

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Two commenters commented on the meaning of "real time."485 One commenter noted that "[our members] request clarification on the definition of real-time data submission as it relates to each data element required by CAT. The granularity/definition of real-time for each element will have a major impact on SROs, their members and CAT system development from both a data quality and database design perspective . . . ."486 The other commenter noted that the "[t]he term 'real time' is used throughout the document, but never defined. (There are several distinct meanings in the computer industry.)"487

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The Commission also received comments specifically relating to the cost of reporting the audit trail information in real time under the Rule as proposed. One commenter believed it would cost $1.25 million in initial costs to comply with the Rule as proposed.488 The commenter divided its $1.25 million estimate into development costs of $750,000 and hardware costs of $500,000 (including hardware, circuits, etc.).489 In addition, this commenter believed the development timeframe would be 9-12 months "once final architecture is drafted," and would require approximately 6,000 hours of development work.490 Notably, this commenter said that "[t]he assumptions that drove this analysis were that any real time reporting of order events would leverage the capabilities contained within the [OATS] reporting today and that the revised real time system would retire the legacy systems of Bluesheets, OATS, OTS and TRACE."491 With respect to ongoing costs to provide information, this commenter also stated that it believed the Commission had underestimated the ongoing costs of the proposal.492 However, another commenter, who opined that the goals of the consolidated audit trail could be achieved for significantly lower costs than the Commission originally estimated, stated that, if the Rule permitted market participants to modify existing systems for collecting and reporting audit trail information, the consolidated audit trail objectives could "be achieved and perhaps even surpassed."493

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iii. Adopted Rule 613(c)(3)

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As described in detail below, the Commission is adopting Rule 613 with two significant modifications to the proposed requirement that the NMS plan submitted to the Commission for its consideration require the collection and provision of key audit trail data to the central repository on a "real time" basis. First, the Rule, as adopted, no longer requires the real-time reporting of consolidated audit trail data but, instead, provides that order event audit trail data must be reported "by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."494 Second, the adopted Rule clarifies that this data is to be recorded "contemporaneously with the reportable event," instead of in "real time."495

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(A) Reporting of Audit Trail Data by 8: 00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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The Commission has considered the commenters' concerns regarding a "real-time" reporting requirement for audit trail data, including its achievability and cost effectiveness; the accuracy of audit trail data recorded and reported in real time; and the necessity, merits, and usefulness of real-time audit trail data.496

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On the one hand, the Commission recognizes that there may be very considerable costs imposed on the industry if audit trail data was required to be reported to the central repository in real time – indeed, the Commission, in the Proposing Release, estimated the costs of creating a real-time consolidated audit trail by assuming that such a requirement would necessitate the wholesale creation of new industry-wide systems. On the other hand, the Commission also received a variety of comments suggesting that real-time reporting could be achieved in a cost-effective manner.497 And yet other commenters suggested a hybrid approach. For example, SIFMA commented that, although it believed real-time reporting as originally proposed by the Commission would be too costly, intra-day reporting of a subset of audit data delayed 10-15 minutes would be possible. SIFMA further described how such reporting might be accomplished through the use of "drop-copy" data.498

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With respect to concerns about the accuracy of consolidated audit trail data if real-time reporting were required, the Commission recognizes that the real-time reporting of data could result in accuracy issues to the extent SROs and broker-dealers would need to re-enter the required audit trail data into a separately prepared regulatory report containing the required audit trail data for submission to the central repository, as is the case today with OATS reports.499 The Commission notes, however, that the use of certain existing technologies, such as "drop copies" described by SIFMA, could provide reliable and accurate audit trail data to the central repository because such "drop copies" would reflect the information captured by an SRO or member's order management and execution systems to enter, route, modify, and execute or cancel orders.

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The Commission believes that, whether or not real-time reporting of data is required, the creation, implementation, and maintenance of a consolidated audit trail will likely be a complex and significant undertaking for the industry. It therefore recognizes the practical advantages of a more incremental, or more gradual, approach to such an undertaking. After considering the many comments received on the use of real-time data by regulators, the Commission has recognized that, although there might be some additional benefits to receiving data and monitoring the markets intra-day (such as for certain enforcement investigations and the facilitation of real-time cross-market surveillance), the majority of the regulatory benefits gained from the creation of an industry-wide consolidated audit trail, as described in the Proposing Release, do not require real-time reporting. Indeed, the extent of the potential uses of a consolidated audit trail discussed in Section II.A.2., supra, which do not rely on a real-time reporting requirement, illustrate the value of a consolidated audit trail even if data is not reported in real-time. Instead, the Rule, as adopted, provides that the NMS plan must require that order event data be reported "by 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."500

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The Commission notes that, while the Rule provides that the NMS plan must impose a reporting deadline of 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member, the Rule also provides that the NMS plan may accommodate SROs and members that voluntarily satisfy their reporting obligations earlier.501

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The Commission acknowledges that, by replacing the requirement that the SROs develop a plan for real-time reporting with a requirement for reporting by 8: 00 a.m. the next trading day, the Commission has precluded the possibility that, as some commenters suggested, a mandatory real-time reporting NMS plan might be developed by the SROs for consideration by the Commission and the public.502 However, given the overall scope and complexity of creating a consolidated audit trail, the Commission has determined that it would be more beneficial to have the SROs and their members focus on those key aspects of a consolidated audit trail that the Commission believes would be the most useful for improving regulatory oversight and monitoring (including, but not limited to, the use of unique customer identifiers, the ability to accurately link an order across its lifecycle, the inclusion of market making quotes, and the addition of options data), rather than focus on how to develop an NMS plan for real-time reporting that may not yield benefits that are equally as useful.503 The Commission also believes that, as a consequence of this modification, the Rule, as adopted with the 8: 00 a.m. reporting deadline, will more readily accommodate a consolidated audit trail that could build upon existing audit trail infrastructures. Meeting the requirement of the Rule may no longer necessitate the creation of completely new infrastructures. In particular, the Commission notes that the OATS technical specifications require OATS data to be reported by 8: 00 a.m. the following calendar day.504 Thus, the Rule, as adopted, would permit the SROs to submit an NMS plan to the Commission for its consideration with reporting timeframes comparable to OATS' requirement, with which all FINRA members are presently capable of complying.505 As a result, broker-dealers might need to make fewer systems changes to comply with the Rule than they would have had to make if real-time reporting were required, though, as discussed in Section II.C.4., supra, OATS in its present form would still need to be modified to meet certain of the other requirements of this Rule.506 Nevertheless, as suggested by many commenters, fewer systems changes to comply with the Rule should lead to lower costs incurred by broker-dealers.507

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An additional consequence of the Commission's decision not to require real-time reporting is that, since meeting the requirements of the Rule may no longer necessitate the wholesale creation of new systems, the Commission's proposed cost estimates, which were based on this assumption, may no longer be applicable. As discussed in Section II.C.2., supra, the Commission believes that given the many different ways in which the SROs may develop an NMS plan that meets an 8: 00 a.m. reporting requirement, the costs of such reporting will be highly dependent on the details of the specific plan proposed. The Rule, as adopted, therefore directs the SROs to provide these details, along with associated costs, in the NMS plan submitted to the Commission for the Commission and the public to consider. The Commission will be able to consider this information when determining whether to approve the NMS plan submitted.

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(B) Recording of Audit Trail Data Contemporaneously with the Reportable Event

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As noted above, the Rule as proposed would have required SROs and their members to "collect" audit trail data "on a real time basis." In response to commenters who commented on the meaning of "real time," the Commission is adopting this provision with modifications from the proposed Rule. Specifically, Rule 613(c)(3), as adopted, requires that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event."

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The Commission believes that the term "contemporaneously" better reflects its intent, as noted in the Proposing Release, that information should be collected immediately and with no built-in delay from when the reportable event occurs. While, in response to commenters, the Commission is no longer requiring the real-time reporting of information, the Commission believes it is important for SROs and broker-dealers to "record" the events contemporaneously. The Commission expects that compliance with this requirement will not be difficult for SROs and broker-dealers with automated systems, which will contain much, if not all, of the data to be reported to the central repository as a result of processing and saving a record of any actions taken by the SRO or broker-dealer. On the other hand, broker-dealers that do not use automated systems will have to ensure that reportable events are manually recorded as they are occurring. In addition, the adopted Rule uses the term "record" in Rule 613(c)(3), instead of the proposed term "collect," because the Commission believes that term more accurately reflects its intent that a contemporaneous record be made when an order event occurs.

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f. More Flexible Format for Reporting Consolidated Audit Trail Data to the Central Repository

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In the Proposing Release, the Commission expressed its preliminary view that data would need to be collected and provided by SROs and their members to the central repository in a uniform electronic format to assure regulators that they will have ready access to comparable cross-market data.508 Specifically, Rule 613(c)(2), as proposed, provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format."

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However, the Commission received comments suggesting that audit trail data does not necessarily need to be provided by SROs and their members to the central repository in a uniform electronic format, and that such data instead could be converted automatically into a uniform format by the central repository or a third party using existing technology, which could result in lower cost for the securities industry than originally estimated.509 Specifically, two commenters indicated that technology exists today to convert or "normalize" data that may be produced from disparate systems into a uniform format and that, as a result, implementation of the consolidated audit trail could be simpler and less costly than originally contemplated by the Commission.510 One of these commenters stated that a number of risk management services and surveillance systems currently receive automatically-generated copies, or "drop copies," of order and execution messages, in real time, from a variety of broker-dealers and exchanges, and convert that information into a common standard format.511 Two other commenters suggested that firms that currently use FIX should be allowed to continue utilizing FIX,512 stating that FIX's prevalence in the financial industry would make it cheaper and easier to use FIX as the protocol of the consolidated audit trail.513 Another commenter stated it could collect information directly from exchanges and other sources of information to minimize reporting obligations, and could leverage its own technology to get information directly from exchanges.514

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In response to these comments, the Commission has modified this aspect of the proposed Rule. Specifically, adopted Rule 613(c)(2) allows the NMS plan to provide that SROs and their members can report data either "in a uniform electronic format" or "in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage."515 In light of the comments that data from multiple sources could be converted into a uniform format,516 this modification provides SROs with the flexibility, in devising the NMS plan, to better accommodate a range of proposals, including those based on leveraging technology in a cost-effective manner by permitting data to be converted to a uniform electronic format at the broker-dealer level or at the central repository. The Commission does not believe this change will reduce the accuracy or accessibility of the audit trail data provided to regulators (since the Rule still requires data to ultimately be provided to regulators in a uniform electronic format).

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Further, by providing the SROs the ability to use a number of approaches to normalization, broker-dealers and SROs may not need to make substantial changes to their order management and execution systems to comply with Rule 613; instead, the central repository or the broker-dealers could convert such data into a uniform electronic format, and the Rule now provides the plan sponsors with the flexibility to use this approach in the NMS plan submitted to the Commission for its consideration. The Commission believes that, to the extent it avoids requiring broker-dealers and SROs to make substantial changes to their order management and execution systems to comply with Rule 613 regarding a uniform electronic format, this type of approach could be a more efficient and cost-effective method for collecting the specified audit trail data required by the Rule.517 The Commission expects that the NMS plan submitted for its consideration will specify how any normalization approach that might be included in the plan will lead to accurate and reliable data.518

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g. Timeframe for Reporting Other Data Elements to the Central Repository

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i. Proposed Rule 613(c)(4)

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While most order and execution information would have been required to be reported to the central repository on a real-time basis under the proposed Rule, the Commission also recognized that not all information required to be reported to the consolidated audit trail would be available to the SROs and their members in real time.519 In general, the audit trail data required under this timeframe reflected information not typically available until later in the order handling and execution process. This information that would have been provided on an extended timeframe included: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique order identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) the cancelled trade indicator (if applicable) (collectively, "supplemental audit trail data").520 Proposed Rule 613(c)(4) would have permitted the supplemental audit trail data to be reported to the central repository promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information.

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The Commission solicited comments on proposed Rule 613(c)(4) and its requirement that certain audit trail information not available in real time be reported promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information. One commenter believed that the timeframe for reporting the specific consolidated audit trail data listed above should be lengthened to T+1 or later.521 This commenter was concerned that requiring broker-dealers to report certain data elements by midnight could disrupt the trading of certain products.

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ii. Adopted Rule 613(c)(4)

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After considering the commenter's views on proposed Rule 613(c)(4), the Commission is adopting the Rule with three modifications from the proposed Rule. First, to parallel the 8: 00 a.m. deadline by which order event data must be reported to the central repository under adopted Rule 613(c)(3), adopted Rule 613(c)(4) requires that the NMS plan provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the member receives the audit trail data, and provides that the plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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Second, the adopted Rule no longer requires the reporting of (1) special settlement terms, (2) the amount of commission, if any, paid by the customer, and the unique identifier of the broker-dealer to whom the commission is paid, and (3) the short sale borrow information and identifier. Third, adopted Rule 613(c)(4) requires that the NMS plan provide for the reporting of certain customer identification and customer account information by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such data, instead of in "real time," as proposed.522 These modifications are discussed in more detail below.

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(A) Reporting Timeframe

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In response to the comments regarding the timing for reporting of consolidated audit trail data elements,523 the Commission is adopting Rule 613(c)(4) with modifications to the timeframe for reporting supplemental audit trail data. Specifically, the Rule no longer requires that supplemental audit trail data be reported "promptly" after the broker-dealer receives the information but no later than midnight of the day that the reportable event occurred; rather, adopted Rule 613(c)(4) requires the NMS plan to provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the broker-dealer receives such information. Although the NMS plan may permit broker-dealers to report such information prior to that time, it may not require such earlier reporting. The Commission believes it is appropriate that there be an extended timeframe for reporting this data because this information (e.g., allocation to subaccounts) might not be available until later in the order handling and execution process and, on balance, the Commission does not believe it is necessary that it be reported to the central repository "promptly". Instead, the modification to Rule 613(c)(4), as proposed, now requires that the NMS plan provide that the supplemental audit trail data be reported by 8: 00 a.m. Eastern Time following the day the member receives the information, which parallels the adopted Rule 613(c)(3) timeframe for reporting event data. The Commission believes this more flexible standard should reduce implementation burdens and simplify the requirements of adopted Rule 613, without materially reducing the utility of the consolidated audit trail.

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The Commission notes that it has made a clarifying change to Rule 613(c)(4), as proposed, to specify that the obligation to report the supplemental audit trail data to the central repository only falls on a broker-dealer, and not on a national securities exchange or national securities association.524 The Commission believes that this change is appropriate because only broker-dealers receive the types of audit trail data described in Rule 613(c)(vi) through (viii).525

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(B) Elimination of Certain Data Elements

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As previously noted, proposed Rule 613(c)(4) would have required that the following information be reported to the central repository: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) cancelled trade indicator (if applicable).526

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After considering general comments suggesting that the Commission reduce the proposed reporting obligations under Rule 613, the Commission is not requiring the following data elements to be reported to the central repository: (1) special settlement terms; (2) the amount of commission, if any, paid by the customer; (3) the unique identifier of the broker-dealer to whom the commission is paid; and (4) the short sale borrow information and identifier.527 While this data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that these data elements should not be required by Rule 613 because the Commission does not typically find that these particular audit trail data elements provide enough information relevant to an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that they be required as a standard part of the audit trail created by Rule 613. If the Commission or the SROs find that such information would be useful to their regulatory responsibilities, they may request the information directly from the broker-dealer with the obligation to record this information, although requests related to short sale borrow information may pose unique challenges. In effect, the Commission believes that the benefit of having these specific audit trail data elements in the consolidated audit trail at this time is unlikely to justify the recording and reporting burden on broker-dealers of providing these elements, particularly in light of the other information required to be reported under Rule 613 and the regulators' ability to obtain this information through a follow-up request. The Commission notes that, if the SROs believe that having such data elements as part of the consolidated audit trail could be useful to their regulatory responsibilities, the SROs could determine to require SROs and their members to record and report such data as part of the NMS plan.

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With respect to the account number for any subaccounts to which the execution is allocated (in whole or in part) – an audit trail data element that will be required by Rule 613(c)(4), as adopted – the Commission notes that obtaining allocation information is important because part of the goal of Rule 613 is to obtain audit trail information for the life of an order, which would include how an order was ultimately allocated (i.e., to which specific customer and account). The Commission notes, however, that the Rule requires the NMS plan to require a broker-dealer to report only the account number of any subaccounts to which an execution is allocated that is contained in its own books and records for accounts and subaccounts it holds; there is no obligation for the broker-dealer to obtain any additional information about accounts or subaccounts from other broker-dealers or non-broker-dealers who submitted the original order. The Commission further notes that broker-dealers will remain subject to existing regulatory requirements, including recordkeeping and suitability requirements (e.g., "know your customer" rules). Including the account number of any subaccounts to which an execution is allocated in the consolidated audit trail will allow regulators to understand how an allocation of the securities was made among customers of a broker-dealer to, for example, determine if the broker-dealer was favoring a particular customer, to better understand the economic interests of the customer, or as it relates to possible enforcement actions. Similarly, having information regarding the identity of the clearing broker or prime broker for the transaction, the identity of any contra-side order(s), and a cancelled trade indicator by 8: 00 a.m. Eastern Time on the trading day following the day that the member receives such information will aid the Commission and the SROs in knowing all of the parties that touched an order (including the clearing broker, prime broker, and contra-side party to the order), and whether the order was cancelled. The Commission believes that all of this information will facilitate regulatory improvements as discussed above in Section II.A.2.

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(C) Movement of Certain Data Elements from Event Data to Supplemental Audit Trail Data

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As proposed, Rule 613 would have required that, in addition to the Customer-ID, customer account information and other specified information sufficient to identify a customer be reported in real time.528 The Commission requested comment about the feasibility of this requirement. Several commenters expressed concern over the proposed requirement that customer information be reported in real time upon origination or receipt of an order.529 One commenter believed that leakage of customer information could "negatively impact investor willingness to trade in the U.S. markets,"530 and, instead, urged regulators to rely on EBS to provide customer information.531 Another commenter did not think it was feasible to provide customer information in real time.532 Another commenter suggested that the Commission "pare down its list of data points to focus on what would appear on a trade ticket and certain client demographic information."533 This commenter explained that its suggested approach "makes sense because for most brokers pulling trade ticket information from frontend systems will be straightforward, and client demographics should be easily pulled and populated onto a system for easy retrieval."534 Another commenter was of the view that only customer information regarding the person exercising investment discretion for the account originating the order, such as an investment adviser, should be required to be reported.535 This commenter explained that if a trade is not executed an investment advisor would not typically provide information about the owners of the underlying accounts to the broker-dealer and thus this commenter suggested that it would be more practical to disclose underlying account information in relation to executed trades.536 Another commenter suggested that there be a "requirements analysis" that considers the availability of order and trade data, and noted that allocation data is not available at the time of order entry.537

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In recognition of commenters' concerns that this information may not be available in real time538 and to reduce the reporting burdens on broker-dealers, the Commission is moving data elements, including the customer's name, address, and account information, and large trader identifier (if applicable) (collectively defined as "customer attributes") from the order event data category to the supplemental audit trail data category.539 As a result, the Commission is adopting the Rule to provide that the NMS plan require that customer attributes540 including the customer's name, address,541 and customer account information be reported under Rule 613542 no later than 8: 00 a.m. Eastern Time on the trading day following the day that the member receives the information.543 The Commission expects that the Customer-ID will be able to be linked to the customer attributes in the consolidated audit trail.

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The Commission believes that, to realize many of the objectives of a consolidated audit trail, the specific attributes of a customer must be recorded and, when needed, made available to regulators. Without these customer attributes, the data recorded is effectively anonymized, which would prevent regulators from using the enhanced consolidated audit trail data to take any enforcement action against specific individuals. The Commission believes customer attributes544 are necessary because regulatory authorities need to accurately and efficiently identify the customer to effectively surveil and analyze the markets, and enforce the securities laws. For example, as noted in the Proposing Release,545 a trader may trade through multiple accounts at multiple broker-dealers. Being able to identify the account holder aids in the identification and investigation of suspicious trading activity. Accordingly, the unique customer identifier that is required to be reported to the central repository for original receipt, origination, modification, or cancellation of an order,546 and that links together all reportable events by the same customer, must ultimately link back to information regulators could use to identify the party. With this information, regulators could more quickly initiate investigations, and more promptly take appropriate enforcement action. While this information could be requested from broker-dealers by the Commission and the SROs on a case-by-case basis, the Commission believes that achieving these benefits requires having such information maintained in a uniform format that is readily accessible to the Commission and the SROs.

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Furthermore, in response to the commenters concerns with respect to the confidentiality of this sensitive information,547 and as discussed in more detail below, the adopted Rule includes requirements for enhanced safeguards with respect to the privacy and confidentiality of consolidated audit trail data, including customer information.548

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In response to the commenter who suggested only information appearing on the trade ticket and certain client demographic information549 be collected, the Commission notes that it may be feasible for the NMS plan to allow customer identifying and account information to be reported by a broker-dealer to the central repository only when the customer opens or closes an account (or at the time the consolidated audit trail is first implemented for pre-existing accounts) -- this information may not need to be re-reported with every order.550 Under this approach, the specified customer attributes may be stored in the central repository and automatically linked to an order whenever an order with the applicable Customer-ID is reported. As the Commission noted in the Proposing Release,551 broker-dealers today, as part of their books and records requirements, must take reasonable and appropriate steps to ensure the accuracy of the customer information with respect to orders received.552 Following adoption of the Rule, and the creation and implementation of the consolidated audit trail, broker-dealers will continue to be subject to this requirement as they report customer information to the central repository. The Commission believes that allowing the specified customer attributes to be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that a broker-dealer first receives this information appropriately balances the regulatory need with the practical burdens of supplying it in real time as originally proposed.

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In response to the commenter who stated that an investment adviser would not typically provide information about the owners of the underlying accounts to the broker-dealer if the trade is not executed,553 the Commission notes that, in the case of an adviser that enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule, as adopted, would only require the NMS plan to require the capture of information about the owners of the underlying client accounts for which the order was placed if there is an executed trade, and if the executed trade is allocated (pursuant to Rule 613(c)(7)(vi)) to the accounts of the adviser's clients at the same broker-dealer.554 However, the Commission notes that, in the case of an adviser that enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would require the NMS plan to require the capture of both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)), even if the order did not result in execution.

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Finally, in the Proposing Release,555 the Commission specifically requested comment on whether there are laws or other regulations in other jurisdictions that would limit or prohibit members from obtaining the proposed customer information for non-U.S. customers. The Commission also requested comment on how members currently obtain such information. If broker-dealers did encounter special difficulties in obtaining customer information from other jurisdictions, the Commission requested comment on how the proposed consolidated audit trail requirements should be modified to address such difficulties.

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The Commission received one comment on this issue.556 The commenter expressed concern that, if broker-dealers were forced to refuse orders from non-U.S. customers because the laws of another jurisdiction prohibited disclosure of certain customer information, U.S. broker-dealers would be penalized and trading activity may shift offshore.557 The commenter recommended that the Commission adopt a limited exemption that would allow broker-dealers to accept orders from non-U.S. broker-dealers without providing customer information, in recognition of the fact that these broker-dealers are subject to regulation in their home countries.558

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In the Rule, as adopted, "customer" is defined as "(i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." Under this definition, the non-U.S. broker-dealer referred to above is the "customer" of the U.S. broker-dealer for purposes of the rule. The U.S. broker-dealer would be required to record customer information for transactions in NMS securities only with respect to its foreign broker-dealer customer. There is no requirement to record information about the customers of such foreign broker-dealer. Because the Rule as adopted does not require a non-U.S. broker-dealer placing orders in NMS securities through a U.S. broker-dealer to provide information about its customers to the consolidated audit trail, the Commission believes that the requested limited exemption is unnecessary.

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Although the Commission is aware that the privacy laws of some, but not all, foreign jurisdictions may hinder a foreign broker-dealer's ability to disclose personal identifying and account information of their customers absent customer authorization, the Rule as adopted does not require the foreign broker-dealer to disclose this information about its customers.559 Accordingly, a non-U.S. customer desiring to trade in the U.S. markets would be permitted to do so through a foreign broker-dealer without having to disclose its personal data to the consolidated audit trail. Because the Rule as adopted does not require a foreign broker-dealer to disclose personal identifying and account information of its customers to the consolidated audit trail, the Commission does not believe that trading in NMS securities will shift offshore as a result of the customer identification requirements.

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h. Clock Synchronization

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As proposed, Rules 613(d)(1) and (2) required that the NMS plan filed with the Commission include a requirement that each SRO and its members synchronize their business clocks that they use for the purposes of recording the date and time of any event that must be reported to the time maintained by the National Institute of Standards and Technology ("NIST"), consistent with industry standards.560 The SROs and their members also would have been required to annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes to industry standards.561 This clock synchronization would have been required to occur within four months after effectiveness of the NMS plan.562

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A few commenters expressed concerns with the Commission's proposed approach to clock synchronization, and a few commenters provided comments specifically relating to the Commission's estimated costs relating to clock synchronization.563 One commenter preferred a synchronization standard measured in seconds and believed that synchronizing at the millisecond level would require specialized software configurations and expensive hardware.564 This commenter also was of the view that there could be material problems with systems latency if processors were required to re-synchronize clocks every few seconds to address "time drift" issues – further deviations from the time maintained by the NIST that may occur after a clock is synchronized.565 Another commenter suggested that a clock synchronization standard shorter than the three second standard currently required by FINRA for OATS compliance might be impossible to achieve across market participants.566 A third commenter was concerned that implementing clock synchronization could require firms to make modifications to a variety of related applications.567 One commenter noted that synchronizing clocks to milliseconds would require costly specialized software and hardware.568

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On the other hand, one commenter – a provider of data capture and time stamping technology – noted that "[t]he advent of relatively low cost GPS receivers that derive absolute timing information accurate to better than 0.1 micro-seconds has significantly eased the problem of clock synchronization across multiple global locations," that "[s]uch technology costs a few thousands of dollars per installation," and that "[i]t is already in use by exchanges and high frequency traders."569 Another commenter expressed support generally for the Commission's proposed approach to clock synchronization.570

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After considering the comments received on this issue, the Commission is adopting Rule 613(d)(1) as proposed. As this provision requires that the NMS plan require clock synchronization consistent with industry standards, the Commission expects the NMS plan that is submitted to specify the time increment within which clock synchronization must be maintained, and the reasons the plan sponsors believe this represents the industry standard. The Commission notes that FINRA currently requires its members to synchronize their business clocks used for OATS reporting to within one second of the time maintained by NIST.571 The Commission believes that the current industry standard for conducting securities business is more rigorous than one second. For example, as one commenter noted, technology used today by exchanges and high frequency trading firms synchronizes clocks to increments well within the millisecond level.572 The Commission recognizes, as another commenter noted, that some firms may need to upgrade their technology to meet the industry standard,573 and that there will be attendant costs for such upgrading.574

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The Commission continues to believe that it is appropriate to require members of the securities industry to synchronize their clocks to the time maintained by NIST. Effective clock synchronization is essential to maintaining an accurately time-sequenced consolidated audit trail, particularly one where time stamps will be in millisecond increments or less. Because the consolidated audit trail will capture trading activity occurring across markets, if the business clocks used by SROs and their members for the purposes of recording the date and time for reportable events are not properly and consistently synchronized, the consolidated audit trail data will not be accurately time-sequenced. It is critical for the consolidated audit trail to allow regulators the capability to accurately determine the order in which all reportable events occur.575

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The Rule as proposed required that both the SROs and their members annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes in the industry standard.576 The Commission believes that the obligation to evaluate the clock synchronization standard annually should be borne by the SROs as the plan sponsors, not SRO members. The Commission believes that it is appropriate for the SROs, as regulators of the securities markets and users of the consolidated audit trail data, to have the obligation to evaluate whether a change in the clock synchronization standard is warranted.577 Therefore, the adopted Rule provides that the NMS plan shall require SROs to evaluate annually the clock synchronization standard set forth in the NMS plan.578

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The Commission recognizes, as a commenter noted,579 that time drift is an issue that must be addressed by the plan sponsors, to prevent a deterioration of the accuracy of the data in the consolidated audit trail. Therefore, the Commission expects the NMS plan to address the maximum amount of time drift that would be allowed before clocks must be re-synchronized, and why this is consistent with the industry standard.

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As with many other aspects of the Rule, the costs of this requirement are highly dependent on the details of the solution proposed by the SROs because the Commission is leaving it up the SROs to determine the maximum allowable time drift. As such, the SROs must discuss in their submitted plan the clock-synchronization standard they proposed, what alternatives were considered, and the rationale behind their choice. Once the NMS plan is received, the Commission, as well as the public, will be able to consider the extent to which the proposed synchronization standard supports the ability of regulators to fully achieve the benefits afforded by the creation of a cross-market consolidated audit trail.

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This scenario illustrates the reporting requirement when an ATS performs a cross that has multiple orders on one side. For this case, the ATS must report:

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• The receipt of the three orders involved in the execution (three Order Accepted events)

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• Two Trade Events

+ + + + + + +
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pubdate: N/A effdate: N/A -
2. Central Repository
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Central Repository - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.2.4. Negotiated Trade
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Negotiated Trade + Compliance User: Industry Member Keywords: - NMS Plan, - Receipt, - Consolidation, - Retention of Data, - Audit Trail Data, - NBBO Information, - Transaction Reports, - Last Sale Reports, - Retention, - Timeliness, - Accuracy, - Integrity, - Completeness, - Consolidated Data, - Access, - Confidentiality, + Industry Member, + New Order, + New Order and Trade, -

a. Central Repository as a Facility of the SROs

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As proposed, Rule 613(e) required that the NMS plan provide for the creation and maintenance of a central repository,580 which would have been a "facility" of each exchange and FINRA.581 The central repository would have been jointly owned and operated by the exchanges and FINRA, and the NMS plan would have been required to provide, without limitation, the Commission and SROs with access to, and use of, the data reported to and consolidated by the central repository for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.582 Each of the exchanges and FINRA would have been a sponsor of the plan583 and, as such, would have been jointly responsible for selecting a plan processor to operate the central repository.584

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The Commission requested comment on the need for a central repository to receive and retain the consolidated audit trail information, whether there would be alternatives to creating a central repository for the receipt of order audit trail information, and whether it would be practical or appropriate to require the SROs to jointly own and operate the central repository.

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A few commenters discussed the proposed ownership structure of the central repository.585 One commenter argued that the central repository should be owned and operated by the Commission, or a non-SRO formed specifically to operate the central repository, and expressed concern that the central repository could be used by SROs as a source of revenue through the imposition of penalties.586 Another commenter recommended that the Commission own the repository and not outsource it to a third party, explaining that, in systemically important events, it may be necessary to have immediate and direct access to the data, without an intermediary.587 Yet another commenter noted that the decision to use OATS or another system as the basis for the consolidated audit trail system should be separate from the choice of the party that will be responsible for building and operating the central repository.588

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The Commission received a couple of comments specifically regarding the costs of the creation and maintenance of the central repository. FINRA, in one of its comment letters, submitted a "blueprint" for a version of a consolidated audit trail based on enhancements to OATS – though without certain key elements proposed to be required by the adopted Rule – and estimated initial costs for developing the repository to be between $100 million and $125 million, with ongoing annual costs to be between $30 million and $40 million.589 Another commenter suggested the use of cloud computing for the central repository which it believed would cost less than $10 million per year.590

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The Commission has considered the comments and is adopting as proposed the requirement in Rule 613(e)(1) that the NMS plan provide for the creation of a central repository. The Commission believes that having a central repository is important to ensuring access to consolidated data for the Commission and SROs, and for ensuring consistency, quality, and security in the audit trail data.

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As adopted, Rule 613(e)(1) does not dictate a particular audit trail collection system to be used as the central repository for the consolidated audit trail, but, instead, delineates the required core features of such a system.

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The Commission considered the commenter's recommendation that it should own the central repository591 but determined that such ownership is not necessary as long as the central repository has the core features articulated in the Rule, the Commission and SROs have full access to the audit trail data for regulatory purposes, and the central repository is a facility of each SRO subject to Commission oversight.592 The Commission notes that, because the central repository will be jointly owned by, and a facility of, each SRO, it will be subject to Commission oversight. The Commission will have unfettered access to the data in the central repository without being its owner.

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The Commission also considered the comment that the central repository should be owned by a non-SRO specifically formed to operate the central repository.593 The Commission, however, believes that it will have more regulatory authority over the central repository as a facility of each SRO than it would have if the central repository were owned or operated by a non-SRO. First, the Commission has the statutory obligation to oversee the SROs, including facilities thereof, and to ensure that SROs enforce compliance by their members with the respective SRO's rules, and the federal securities laws, rules, and regulations.594 Second, a facility of an SRO is subject to the rule filing requirements of Section 19(b) of the Exchange Act.595

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In response to the commenter who expressed concern that the plan sponsors would use the central repository to generate revenue through penalties,596 the Commission notes that any penalty provisions must be provided in the NMS plan submitted to the Commission for its consideration, or in a future amendment to the NMS plan, if the NMS plan is approved. The Commission will review the NMS plan submitted for its consideration, which also will be subject to public notice and comment, to assure itself that the NMS plan is designed to be applied fairly and otherwise in a manner consistent with the Exchange Act. The Commission expects that the NMS plan's penalty provisions would provide sufficient detail regarding the circumstances in which any penalties would apply, and any restrictions on how payments of such penalties may be used, to permit the Commission to determine that such penalty provisions are fair and consistent with the Exchange Act. As the central repository will be a facility of the plan sponsors, the rules governing it must be consistent with the Exchange Act.597 In addition, future amendments to the penalty provisions would either be reviewed as an amendment to the NMS plan, under Rule 608 of Regulation NMS, or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.598 Additionally, the Commission has the authority to review any action taken or failure to act by any person under an effective NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS.599 Lastly, any penalty provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure they are implemented fairly in a manner consistent with the Exchange Act.600

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In response to the comments regarding the costs of the creation and maintenance of a central repository, the Commission notes that the costs would be highly dependent on the decisions the SROs make with respect to each of the areas in which the Commission has provided flexibility to the SROs in crafting the NMS plan to be submitted to the Commission for its consideration. For example, cost estimates could vary depending on whether the NMS plan requires unique order identifiers or permits "a series of order identifiers." Such cost estimates also could vary because the Rule does not specify details regarding, among other things, the security and confidentiality procedures of the central repository, the system for assigning customer identifiers, the format(s) of data reported to the central repository, the methods by which regulators will access data in the central repository, whether an annual independent evaluation will be required, how reportable events related to the same order will be linked, or how errors will be processed. Such information will be known only after the filing of the NMS plan and, thus, the Commission believes it is appropriate to defer consideration of such costs until the NMS plan is submitted for its consideration. Once it is submitted, the Commission will be able to use this information in determining whether to approve the NMS plan.

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The Commission notes that other provisions of the Rule that are applicable to the central repository, discussed below, have been modified from the proposal, including provisions relating to the format in which the data may be reported,601 and to the security and confidentiality of the consolidated audit trail data.602

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b. Receipt, Consolidation, and Retention of Data

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1. Audit Trail Data

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In addition to providing for the creation and maintenance of the central repository, Rule 613(e), as proposed, also would have required the central repository to receive, consolidate, and retain all data reported by the SROs and their members pursuant to the Rule and the NMS plan.603

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The Commission is adopting, substantially as proposed, the provisions in Rule 613(e) regarding the responsibility of the central repository to receive, consolidate, and retain the audit trail data, but with a few modifications to reflect changes the Commission made to other sections of Rule 613.604

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The first change to Rule 613(e)(1) is a conforming change to the modification in adopted Rule 613(c)(2) that permits the NMS plan to provide that audit trail data be reported to the central repository either in a uniform electronic format, or in a manner that would allow the central repository or a third party to convert the data to a uniform electronic format for consolidation and storage.605 Given the need for cross-market comparability and ready access,606 the adopted Rule requires that, to the extent the NMS plan does not require that data be reported to the central repository in a uniform electronic format, the central repository must convert the data to a uniform electronic format for consolidation and storage.607 The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to have the central repository normalize audit trail data reported, the Rule requires the central repository to consolidate and store the data in a uniform electronic format.

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The second change to Rule 613(e)(1) reflects the Commission's view that, while it is appropriate to provide the plan sponsors with the flexibility to determine how an order will be identified, audit trail data must be stored in the central repository in a manner that will allow order information to be retrieved in a timely and accurate fashion. Accordingly, adopted Rule 613(e)(1) requires that the audit trail data consolidated in the central repository be stored "in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval . . . for all reportable order events for that order." The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to use a series of order identifiers or a unique order identifier, the Rule requires the central repository to be able to link together all reporting events pertaining to an order.

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In looking ahead to considering the overall cost of creating, implementing, and maintaining a consolidated audit trail in connection with the NMS plan, the Commission recognizes that, in addition to the costs to SRO members who would be required to record and report data to the central repository, there also will be costs associated with creating and maintaining a central repository. These costs may include: (1) the purchase and maintenance of servers and systems to receive, consolidate, and retain audit trail data, and to allow access to and searches on the data; (2) the development of policies and procedures relating to the timeliness, accuracy, completeness, security, and confidentiality of the data collected; (3) the development and maintenance of a comprehensive information security program for the central repository; and (4) dedicated staff, including a CCO.

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2. NBBO Information, Transaction Reports, and Last Sale Reports

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In addition to receiving, consolidating, and retaining audit trail data reported pursuant to Rule 613(c), Rule 613(e)(5), as proposed, would have required the central repository to collect and retain, on a current and continuing basis and in a format compatible with the information collected pursuant to Rule 613(c)(7),608 the NBBO information for each NMS security,609 as well as transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act.610 In addition, last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act would have been required to be collected and retained.611

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One commenter expressed its belief that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."612 The Commission believes that the proposed requirement for the central repository to collect and retain NBBO information, as well as transaction reports and last sale reports,613 would facilitate the ability of SRO and Commission staff to search across order, NBBO, and transaction databases. Moreover, inclusion of NBBO information would permit regulators to compare order execution information to the NBBO information readily as all of the information will be available in a compatible format in the same database. This information also would be available to the Commission to assist in its oversight efforts.

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Additionally, requiring the central repository to collect and retain the NBBO and transaction information in a format compatible with the order execution information would aid in monitoring for regulatory compliance (e.g., Rule 201 of Regulation SHO). Also, this information would be useful in conducting market analyses (e.g., how order entry affects NBBO prices and depth). The Commission believes that the requirement that the central repository collect transaction reports reported pursuant to the CTA, UTP, and OPRA plans614 would allow regulators to more efficiently evaluate certain trading activity. For example, a pattern of unreported trades may cause the staff of an SRO to make further inquiry into the nature of the trading to determine whether the public is receiving accurate and timely information regarding executions and that market participants are continuing to comply with the trade reporting obligations under SRO rules. Similarly, a pattern of unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. The Commission believes that having the quotation and transaction information currently collected with respect to NMS securities in the same data repository – and in a compatible format – as part of the consolidated audit trail would enhance regulatory efficiency when analyzing the data.

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After considering the comment on this provision,615 the Commission is adopting proposed Rule 613(e)(5)(ii) and (e)(5)(iii) (renumbered as Rule 613(e)(7)(ii) and (e)(7)(iii)), as proposed, and the requirement of proposed Rule 613(e)(5)(i) (renumbered as Rule 613(e)(7)(i)) for the NMS plan to require the central repository to collect and retain NBBO information for each NMS security substantially as proposed, but is clarifying that the NBBO information must include size and quote condition.616 NBBO size information is integral to determining whether best execution and order handling requirements were satisfied for a particular order because these requirements depend on the relationship between the size of the order and the displayed size at the NBBO. NBBO quote condition information is integral to determining whether or not quotes are immediately accessible. For example, quote condition information that identifies whether the quote reflecting the NBBO was automated, and therefore subject to trade-through protection, or manual617 may be an important consideration in determining whether the duty of best execution was satisfied. The NBBO price, size, and quote condition is used by regulators to evaluate members for compliance with regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS.618 The Commission acknowledges that there will be costs to the central repository to purchase and to retain NBBO information, transaction reports, and last sale reports. However, the Commission believes that the benefits associated with having such information included in the central repository justify the costs to the SROs of requiring that they include this in the NMS plan submitted to the Commission for its review.

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3. Retention of Information

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As proposed, Rule 613(e)(6) would have provided that the NMS plan require the central repository to retain the information collected pursuant to Rule 613(c)(7) and (e)(5) in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would have been required to be available immediately, or, if immediate availability could not reasonably and practically be achieved, a search query would have been required to begin operating on the data not later than one hour after the search query is made.619

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One commenter suggested that the Commission modify the time standard for the availability of older data to a next day (or later) standard, as the need for regulators to have immediate access to the data diminishes over time. The commenter stated that a requirement that the data be made available the next day, or after another longer period of time, would be less burdensome on the consolidated audit trail system and less costly, while still meeting the needs of regulators.620 Another commenter believed that there could be difficulties in querying and analysis because the proposal did not specify how the data would be stored in the central repository.621

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In response to the commenters' concerns, the Commission is modifying the proposed Rule. Specifically, Rule 613(e)(8) (renumbered from proposed Rule 613(e)(6)) provides that "[t]he national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to [Rules 613(c)(7) and (e)(7)] in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years." The adopted Rule does not require, as was proposed, that the consolidated audit trail data be available immediately, or if immediate availability cannot reasonably and practically be achieved, any search query must begin operating on the data not later than one hour after the search query is made.622

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The Commission believes that it is unnecessary for the Rule to require a timeframe within which consolidated audit trail data must be available or a timeframe for when a search must begin after the query is made because, as discussed below,623 the Rule, as adopted, includes a provision that requires the NMS plan to specifically address the "time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."624 The Commission will consider the response to this provision contained in the NMS plan submitted by the plan sponsors to the Commission, regarding the time and method by which the data in the central repository can be accessed and used by regulators as part of their regulatory and oversight responsibilities – which would encompass queries – as it evaluates the NMS plan. The Commission believes this provision provides flexibility to the SROs to devise an access requirement that meets the needs of regulators in a cost-effective and timely manner, 625 rather than establishing a strict deadline for all data to be accessible from the central repository.

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c. Timeliness, Accuracy, Integrity, and Completeness of the Consolidated Data

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As proposed, Rule 613(e)(4)(ii) would have required the NMS plan to include policies and procedures, including standards, for the plan processor to ensure the timeliness, accuracy, and completeness of the data provided to the central repository. In addition, proposed Rule 613(e)(4)(iii) would have required that the NMS plan include policies and procedures, including standards for the plan processor to reject data provided to the central repository that does not meet these validation parameters, and for SROs and members to re-transmit corrected data. Finally, proposed Rule 613(e)(4)(iv) would have required that the NMS plan include policies and procedures, including standards, to ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository.

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The Commission requested comment on these proposed requirements.626 The Commission asked if this approach was practical to ensure the integrity of the data, and whether there were alternative methods that would achieve the same purpose that would be preferable. The Commission also requested comment on how much latency would result from a validation procedure.

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The Commission received comments focusing concern on the potential for errors in the consolidated audit trail and the negative effects of errors in the consolidated audit trail.627 One commenter stated that the "key principles [that] best ensure that the regulatory goals of the consolidated audit trail are met in a cost efficient manner" include a system that "avoids data quality issues through data validation safeguards and a structure that reads data as close to the point of origin as possible to avoid data translation errors when data is processed through intermediary applications."628 Another commenter stated that "the CAT facility would also need a mechanism to identify and correct data that was inaccurate."629 Another commenter noted that, "if any other protocol [other than FIX] is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data."630

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As a point of reference, summary data about OATS provided by FINRA to Commission staff indicates that approximately 0.25% of the intra-firm data reported daily by members contains errors. 631 Additionally, according to FINRA, when errors relating to the linkage of order reports are detected, members have no obligation to correct the errors.632 As a result, approximately 1-2% of each day's recorded events remain unmatched (i.e., multi-firm events, such as order routing, that cannot be reconciled).633 This deficiency in the OATS process diminishes the completeness and overall usefulness of the audit trail OATS creates.

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In a comment letter, FINRA discussed the challenge of obtaining accurate audit trail information if the data was required in real time, and it noted the actions it undertakes to ensure the accuracy and completeness of its audit trail data and minimize errors.634 FINRA stated that, "to ensure the integrity of OATS data submitted, FINRA performs over 152 separate OATS data validations on each order event, each of which can result in OATS data submissions being rejected and generating an error message.635 As a result, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.636 Members are then required by rule to repair and resubmit such data that did not meet OATS specifications.637 Although members' OATS compliance rates are very high on average, almost 425,000 reports per day, on average, are rejected and must be corrected.638 Accordingly, to use audit trail data before such validations have been performed may result in a severely distorted picture of trading and interfere with effective oversight."639

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With respect to mechanisms to ensure compliance by SROs with the requirements of the plan, one commenter stated that "Commission rules should focus on the reasonable design of systems, processes and procedures to fulfill their objectives and patterns and practice of noncompliance rather than looking to any failure as a rule violation. This is particularly important in the context of data errors or similar matters."640

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Finally, another commenter believed that "major market participants" should retain "detailed information of all network packets and trade data at both the ingress and egress of their infrastructure."641 This commenter believed that this information would not need to be forwarded to "any audit authority" but explained that such information could be used by regulators in the event a "denial of service" attack were to occur at a network level to slow market activities or hinder the flow of market information. This commenter further explained that having this information would "greatly improve confidence in the integrity of data and act as a further deterrence for fraudulent activity."642

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After consideration of the comments received, the Commission is adopting Rule 613(e)(4)(ii) substantially as proposed. Thus, the NMS plan must have policies and procedures, including standards, to ensure the timeliness, accuracy, and completeness of the data received. The Commission believes that audit trail data that is timely, accurate, and complete is critical to the usefulness and effectiveness of Rule 613. However, the Commission is adding the term "integrity" to the list of items that the policies and procedures adopted by the plan sponsors, as set forth in Rule 613(e)(4)(ii), must address.643 The addition of "integrity" is designed to help emphasize that data should not be subject to benign or malicious alteration, so that such data would be consistent and reliable at each point of transmission throughout its lifecycle (i.e., transmission from the SRO or member to the central repository, data extraction, transformation and loading at the central repository, data maintenance and management at the central repository, and data access by regulators). The Commission believes that the integrity of the audit trail data is critical to the usefulness and effectiveness of the consolidated audit trail.

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The Commission also is adopting Rule 613(e)(4)(iv), renumbered as Rule 613(e)(4)(iii), as proposed, which provides that the NMS plan submitted shall include policies and procedures, including standards, to be used by the plan processor to ensure the accuracy of the consolidation by the plan processor of the data reported to the central repository. The Commission believes that policies and procedures, including standards, to be used to ensure accuracy of the consolidated data are important and necessary because the benefits of ensuring that data is accurately reported to the central repository would be lost if the consolidation process is not as equally robust. The regulatory benefits of a consolidated audit trail are therefore based, in part, on the timeliness, accuracy, completeness, and integrity of the data ultimately available to regulators from the central repository.

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As described above in Sections III.B.1.f. and III.B.1.d.iv., the adopted Rule provides the SROs with more flexibility than the proposed Rule in developing (a) the format(s) of data to be reported to the central repository, and (b) the methods by which order identifiers will be used to link reportable events. Accordingly, the Commission expects the policies and procedures included in the NMS plan submitted to the Commission for its consideration to apply to both the transmission of audit trail data from SROs and their members to the central repository, and the consolidation and retention of that data, and other information collected pursuant to the Rule, by the central repository, including, but not limited to, any normalization or conversion of the data to a uniform electronic format, and procedures for how reportable events are accurately linked. The Commission believes that it is critical to the usefulness of the consolidated audit trail that the SROs and their members report data in a manner that is accurate and complete, and that the central repository takes any and all appropriate measures to consolidate and retain that data in the same manner. To the extent the data is not accurate or complete, the ability of SRO and Commission staff to utilize the data to accomplish the goal of the consolidated audit trail will be compromised.644

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In light of the comments the Commission received that noted the concern about the potential for errors in the consolidated audit trail, as well as the impact such errors may have on the consolidated audit trail,645 the Commission is revising Rule 613(e)(4)(iii) as proposed (renumbered as Rule 613(e)(6)(i)). Specifically, Rule 613(e)(6)(i) requires the NMS plan submitted to the Commission for its consideration to "[s]pecify a maximum error rate to be tolerated by the central repository for any data reported pursuant to Rule 613(c)(3) and (c)(4); describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce the maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof."646 Rule 613(e)(6)(ii) states that the NMS plan shall "[r]equire the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan." Rule 613(e)(6)(iii) and (iv) provide that the NMS plan shall "[s]pecify a process for identifying and correcting errors in the data reported to the central repository pursuant to [Rule 613(c)(3) and (c)(4)], including the process for notifying the national securities exchanges, national securities associations, and members who reported erroneous data to the central repository about such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and . . . [s]pecify the time by which data that has been corrected will be made available to regulators."647

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As noted above, the Commission believes the availability of accurate consolidated data is a critical component of a useful and effective audit trail. Ideally, there would be no errors in the recording or reporting of any audit trail data element, and every data element of every reportable event would be accurately recorded by the SROs and their members, and then accurately reported to the central repository under Rule 613, resulting in a consolidated audit trail that reflects all actions relating to every order in the market for securities. However, because the Commission understands that, to some extent, errors in reporting audit trail data to the central repository will occur, the Commission believes it is appropriate to adopt a provision in Rule 613 that requires the NMS plan to set forth the maximum error rate to be tolerated by the central repository in the reporting of audit trail data, as well as to specify a process for identifying and correcting such errors.648

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The Commission notes that the Rule leaves to the plan sponsors the ability to determine the acceptable maximum error rate, although the Rule does require that the NMS plan must explain the basis for selecting such rate. The Rule also requires the NMS plan submitted to the Commission for its consideration to set forth how the plan sponsors will seek to reduce such maximum error rate over time, thereby increasing the accuracy of audit trail data. Further, the Rule requires the NMS plan to have in place a means to ensure compliance with the maximum error rate so that SROs and their members are incentivized to comply with the maximum error rate, and to set forth a plan for promptly remedying the causes for any noncompliance.

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Since the Rule leaves many of the specific details regarding error rates and error-correction processes for the plan sponsors to determine, and because the accuracy and completeness of data ultimately received by regulators is of such significance to the effective use of a consolidated audit trail, the Commission, as well as the public, would likely consider such details very important in their overall evaluation of the submitted plan. Furthermore, given that the approval of any plan by the Commission would, in part, be based on expectations of maximum error rates, the Commission believes it is equally important for objective measures to be reported that track how well the plan is meeting such expectations. Thus, to ensure the accuracy of the audit trail data generally meets these expectations, Rule 613(e)(6)(ii) also requires that the error rate identified in the NMS plan be measured each business day and that remedial action be taken if, on any given day, the error rate exceeds the maximum error rate set forth in the NMS plan.649

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The Commission also believes it is appropriate to require the SROs to formulate a process for identifying and dealing with errors, and to require that the SROs or the members reporting erroneous data be notified that an error in reporting has occurred.650 In addition, the Commission believes it is appropriate to require the SROs to develop a process to help ensure that errors are promptly corrected by the reporting SRO or member. The Commission understands that requirements similar to these are currently implemented by FINRA as part of their OATS process, though cross-firm errors, such as those leading to irreconcilable or unmatched routes, are not generally corrected under the OATS process.651 The Commission further believes that disciplining SROs and members that repeatedly report erroneous audit trail data, as required by Rule 613(e)(6)(iii), is appropriate given the need to maintain an accurate consolidated audit trail for regulatory purposes. Finally, given that the NMS plan submitted to the Commission for its consideration is required to specify a process for correcting errors, the Commission also believes it is appropriate to require, pursuant to Rule 613(e)(6)(iv), that the NMS plan submitted to the Commission for its consideration specify the time by which data that has been corrected will be made available to regulators. In reviewing the NMS plan submitted for its consideration, the Commission will therefore be able to consider the time that uncorrected but consolidated data (which was reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information was recorded) would be available for use by regulators, the expected error rate of this data, and the time at which a corrected version of this data would be made available to regulators. These three parameters will help inform regulators as to the potential effectiveness of starting different types of surveillance and monitoring activities at different times.652

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The Commission acknowledges there would be costs to the central repository associated with developing policies and procedures related to the timeliness, accuracy, integrity, and completeness of data, including, but not limited to, processes for identifying and correcting errors in the audit trail data received, and measuring the error rate on a daily basis. However, the size of these costs depends significantly on the specific details of the NMS plan submitted to the Commission for its consideration. Once the SROs submit the NMS plan to the Commission for its consideration specifying the details, parameters, and estimated costs of such processes, as well as the maximum error rate expected under such processes, the Commission and the public will be able to consider this information when determining whether to approve the NMS plan.

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d. Access to the Central Repository and Consolidated Audit Trail Data for Regulatory and Oversight Purposes

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As proposed, each national securities exchange and national securities association, as well as the Commission, would have had access to the central repository for the purposes of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.653 This access would have included all systems of the central repository, and the data reported to and consolidated by the central repository.654 In addition, the Commission proposed to require that the NMS plan include a provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data.655 This method of access would have been required to be designed to include search and reporting functions to optimize the use of the consolidated data. The Commission requested comment on whether it should allow the consolidated audit trail data to be made available to third parties, such as for academic research.

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One commenter supported limiting access to the consolidated audit trail data to the Commission and SROs for regulatory purposes, but suggested it would also be appropriate to share the data with the CFTC.656 Other commenters supported the idea of providing "anonymized" data for academic use, as long as appropriate controls were established to assure regulators and market participants that confidential trading information could not be revealed.657 Specifically, one commenter endorsed the use of the data "with appropriate safeguards" by academic researchers, explaining that it will "promote understanding of the markets," and "lead to better policy decisions and thus more fair and orderly markets."658 Similarly, another commenter also supported the use of the data by certain third parties and stated that "[a]ccess to real-world data can help research immensely."659

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The Commission also received a comment that argued for extending access to the consolidated audit trail data to certain individuals who have a fiduciary responsibility to shareholders of a company. This commenter explained that such access would allow them to audit all trading activity in the equity or other derivative securities of that company.660

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The Commission recognizes there may be certain benefits to the types of expanded access to data in the central repository that has been suggested by various commenters, but, for the reasons discussed below, it is adopting the provisions in Rule 613 regarding access by regulatory authorities at the SROs and the Commission to the systems operated by the central repository, and to the data received, consolidated, and retained by the central repository, substantively as proposed in Rule 613(e)(3), but with one clarification regarding the requirement for access by regulators.661 Specifically, Rule 613(e)(3), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports." As proposed, Rule 613(e)(3) would have provided that the central repository must have a "reporting function." The Commission believes that this language is ambiguous and may have implied that the central repository was required to do more than respond to search queries. Accordingly, the Commission is replacing the requirement in proposed Rule 613(e)(3) that the central repository provide "search and reporting functions" with the requirement that there be "the ability to run searches and generate reports." The change in language from that contained in the Rule, as proposed, is not intended to change the substance of the requirement.

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In response to the commenter who suggested sharing data with the CFTC, the Commission notes that it has shared information with the CFTC in the past and that it intends to continue sharing information when the situation so warrants. The Commission notes that, among other arrangements, it currently has information-sharing agreements with other regulators. The Commission also agrees with commenters that there may be benefits to allowing academics or other third parties to have access to data collected by the central repository. Academic and other third-party analyses are helpful to the Commission in performing its own evaluation of the economic costs and benefits of regulatory policy. The Commission also notes that one commenter believes that the ability of companies to detect manipulative trading activity in their securities could be enhanced if certain individuals, who have a fiduciary responsibility to shareholders, were given access to limited consolidated audit trail data. However, because the creation and implementation of the consolidated audit trail is in the formative stage, and in light of commenters' concerns about the privacy and security of the information, the Commission believes it is premature to require that the NMS plan require the provision of data to third parties.

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Though the Commission is not specifying a particular process, or any details, regarding the mechanism(s) by which regulators will access data in the central repository, the Rule requires the SROs to provide such details and cost estimates in its NMS plan submitted to the Commission for its consideration.662 Further, as discussed below in Section III.C.2.c., the Commission is providing the SROs with detailed regulator use cases for how regulators would likely make use of the data in the central repository. These regulator use cases are designed to help the SROs respond with sufficient details in the NMS plan submitted to the Commission for its consideration so that, along with associated cost estimates also required to be provided by the SROs, the Commission and the public will be able to fully consider the NMS plan submitted.

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e. Confidentiality of Consolidated Data

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Rule 613(e)(4)(i), as proposed, would have required that the NMS plan include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository. The plan sponsors and employees of the plan sponsors and central repository would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.663 As proposed, Rule 613 also would have required the NMS plan to include mechanisms to ensure compliance by the plan sponsors and their members with the requirements of the plan.664

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In the Proposing Release, the Commission solicited comments regarding what steps should be taken to ensure appropriate safeguards with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository. The Commission requested comment on the issue of appropriate safeguards to be put in place by the SROs and the central repository to help ensure confidentiality. The Commission also asked whether the proposed Rule should: (1) require that SROs put in place specific information barriers or other protections to help ensure that data is used only for regulatory purposes; (2) provide for an audit trail of the SROs' personnel access to, and use of, information in the central repository to help monitor for compliance with appropriate usage of the data; and (3) include a requirement that the NMS plan include policies and procedures to be used by the plan processor to ensure the security and confidentiality of information reported to, and maintained by, the central repository be expanded to include the content of any searches or queries performed by the SROs or the Commission on the data.665

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Several commenters expressed concern about how to best ensure the confidentiality of the data collected.666 One commenter generally argued that safeguards for the audit trail data had not been sufficiently addressed in the Proposing Release.667 Another commenter recommended that the operator of the central repository and the SROs be required to implement security policies, processes, and practices consistent with industry best practices for the protection of sensitive information and that such policies, processes, and practices be audited on an annual basis by a third-party expert.668 Similarly, one commenter suggested that vendors also should implement best practices with regard to security, reliability, and integrity of data.669 Another commenter stated that SROs should be subject to the same privacy and data protection standards as those to which broker-dealers are subject, and that SRO members should not be held responsible, and be indemnified by the SROs, for any breaches of customer or firm information.670

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One commenter offered several specific recommendations for enhancing the security of audit trail information.671 This commenter suggested that the Commission should expressly state who would have access to the data, when they could access it, and how they could use it, and further recommended that all data sent to the central repository be encrypted, and that certain fields be "masked" or be subject to delayed end-of-day reporting.672 In addition, this commenter suggested that the Commission and each SRO should adopt a robust information security program, and that the Commission should explain how it intends to treat requests for audit trail data.673

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Another commenter suggested that the Rule more explicitly enunciate permissible and impermissible uses of the consolidated audit trail and suggested including a requirement regarding the SROs' personnel access to and use of audit trail data, as well as a commitment by the Commission to review each SRO with respect to the adequacy of information barriers.674 Similarly, a commenter suggested that access to audit trail data be limited to employees of regulators whose function is to monitor and surveil that market.675 This commenter supported the restriction that consolidated audit trail data only be used for regulatory purposes.676

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One commenter asked how and at what level customer data would be encrypted.677 This commenter listed specific aspects of data encryption that would need to be addressed, and noted that potential burdens could be associated with encryption.678 Finally, one commenter recommended that the Commission express its intention to withhold audit trail data from the public pursuant to Freedom of Information Act ("FOIA")679 exemptions.680

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The Commission considered the concerns expressed by commenters about the sensitivity of much of the information that will be consolidated by the central repository, and believes that maintaining the confidentiality of customer and other information reported to the central repository is essential. Without adequate protections, market participants would risk the exposure of highly-confidential information about their trading strategies and positions.

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The Commission notes that that it currently has controls and systems for its own use and handing of audit trail information. Nevertheless, given the sensitivity of certain information that will be produced by the consolidated audit trail – as well as the fact that such information should be more readily available and provided in a more usable format than existing audit trail information – the Commission intends to review the controls and systems that it currently has in place for the use and handling of audit trail information. The Commission further intends to evaluate whether any additional controls and systems may be required to adequately protect the sensitive information provided to it under the consolidated audit trail.681

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In addition, adopted Rule 613(e)(4)(i) requires that the NMS plan include policies and procedures that are designed to ensure implementation of the privacy protections that are necessary to assure regulators and market participants that the NMS plan provides for rigorous protection of confidential information reported to the central repository. Specifically, adopted Rule 613(e)(4)(i)(A) requires that "[a]ll plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in [Rule 613(e)(4)(i)(A)] shall be construed to prevent a plan sponsor from using the data that it submits to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation." Further, in response to a comment,682 adopted Rule 613(e)(4)(i)(B) adds the requirement to the Rule, as proposed, that the plan sponsors adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository, and (2) permit only persons designated by plan sponsors to have access to the data in the central repository.683 In addition, the Commission is modifying the Rule, as proposed, to require that the plan processor must: (1) develop and maintain a comprehensive information security program, with dedicated staff, that is subject to regular reviews by the central repository's CCO, (2) require the central repository to have a mechanism to confirm the identity of all persons permitted to access the data, and (3) maintain a record of all instances where such persons access the data.684

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The Commission believes these provisions should create a framework for the SROs to establish a thorough and exacting process for helping ensure the continued effectiveness of the confidentiality safeguards. Further, the Commission believes these additional provisions are appropriate because they clarify the types of confidentiality safeguards that the NMS plan submitted to the Commission for its consideration must have to preserve the confidentiality of the information that is received, consolidated, and retained by the central repository. The provision requiring information barriers is designed to, for example, protect and prevent audit trail data, which are to be used only for regulatory purposes, from being communicated to any personnel at an SRO that are engaged in non-regulatory or business activities. Additionally, the Rule's requirement that policies and procedures submitted as part of the NMS plan provide that: (i) only persons designated by the plan sponsors have access to the central repository data, (ii) the plan processor have a mechanism to confirm the identity of all persons permitted access to the data, and (iii) the plan processor maintain a record of all instances where such persons access the data. These provisions are designed to assure regulators and market participants that only designated persons are allowed access to the consolidated audit trail data, and that the central repository will have a method to track such access. With respect to the commenter that suggested the Commission more explicitly enunciate permissible and impermissible uses of the consolidated audit trail,685 the Commission notes that any security and confidentiality provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure that they are implemented fairly in a manner consistent with the Exchange Act.686

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The Commission believes that an outline or overview description of the policies and procedures that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan submitted to the Commission to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.

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The Commission considered the comment that asked when and at what level customer information would be encrypted.687 The Commission notes that, while Rule 613 does not require that this information be encrypted, the Rule contains several safeguards, discussed in this section, to ensure the privacy and confidentiality of the audit trail data. Based on these provisions,688 the Commission believes that plan sponsors would need to make sure customer information is protected, which could be accomplished by data encryption, if they so choose. Additionally, the Commission notes that the unique customer identifier is only reported once to the central repository – by the broker-dealer that is either originating the order or is the original recipient of the order. Because the unique customer identifier does not travel with the order as it is routed to other market participants, only the originating broker-dealer should be able to determine the identity of the customer of the order. The Commission considered the comment that recommended that the Commission express its intention to withhold audit trail data from the public pursuant to FOIA.689 The adopted Rule places no affirmative obligations on the Commission to provide information to any third parties. Further, the Commission believes there are bases under FOIA to withhold customer information, including 5 U.S.C. 552(b)(4) (trade secrets, commercial or financial information), 5 U.S.C. 552(b)(6) (personal information affecting an individual's privacy), and 5 U.S.C. 552(b)(8) (records related to examinations of financial institutions). The Commission intends to assert all appropriate exemptions in response to a FOIA request for information related to the consolidated audit trail's customer information.

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The Rule, as adopted, also states that the NMS plan must require the SROs to adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository, described above, with respect to information security.690 The Commission believes this provision is appropriate because it provides an incentive to SROs to comply with the central repository's information security program. The Commission encourages SROs to include in their comprehensive information security program developed and maintained by the plan processor provisions for notifying any customer or other market participant whose information may have been compromised by a security breach, so that appropriate remedial steps may be taken.

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Additionally, given the importance of the security of data consolidated in the central repository, and in response to the commenter who recommended an annual third-party audit of the security of the central repository,691 the Commission has added Rule 613(e)(5) to require the NMS plan submitted to the Commission for its consideration to address whether there will be an annual, independent evaluation of the security of the central repository and (1) if so, provide a description of the scope of such planned evaluation, and (2) if not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead. As with most information technology systems, the central repository's system will include measures to assure regulators and market participants of the security of the system. An independent evaluation of the security of the central repository could aid the central repository in identifying and correcting potential areas of weakness or risk. While the Commission is leaving it to the plan sponsors to determine whether the NMS plan will require an annual audit, given the confidential nature of information that will be stored at the central repository, the Commission believes that the NMS plan submitted to the Commission for its consideration must, at a minimum, address whether such an audit is appropriate.

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The Commission also notes that, as discussed below,692 it is adding a specific provision that requires the NMS plan submitted to the Commission for its consideration to discuss the security and confidentiality of the information reported to the central repository.693 With this information, the Commission, as well as the public, will be able review in detail how the NMS plan proposes to ensure the security and confidentiality of such information in deciding whether to approve the NMS plan.

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The Commission believes that, collectively, these provisions are appropriate because of the confidential and commercially valuable information that the central repository will contain. The Commission believes that the purpose and efficacy of the consolidated audit trail would be compromised if the Commission, the SROs and their members could not rely on the confidentiality and security of the information stored in the central repository. The Commission acknowledges there would be costs associated with a comprehensive information security program, including, but not limited to, compensating a CCO and a dedicated staff, and establishing policies and procedures, as well as for an annual, independent evaluation of the central repository's security (if such an evaluation is required by the NMS plan submitted to the Commission for its consideration) or alternative measures (if such an evaluation is not). Once the SROs have submitted the NMS plan to the Commission that, as required, contains details about the security and confidentiality of the audit trail data, the Commission and the public will be able to consider this information when evaluating the NMS plan.

+

This scenario illustrates the reporting requirement when an Industry Member executes a customer order as the result of negotiating a trade with another Industry Member (e.g. through a system such as OTCLink). For this case, Industry Member Broker 1 (initiator) is required to report the following:

+

• The receipt of the customer order in a New Order event

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• The execution of the order (Trade event)

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Industry Member Broker 2 (respondent) must report the following to CAT:

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• A New Order event

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• The execution of the order (Trade event)

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All of the New Order and Trade events occurring within the negotiation process must have the negotiatedTradeFlag and negotiatedTradeSide present and marked properly.

+ + + +
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pubdate: N/A effdate: N/A -
3. Other Required Provisions of the NMS Plan
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Other Required Provisions of the NMS Plan - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.2.5. Trade as the Result of a Quote
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Trade as the Result of a Quote + Compliance User: Industry Member Keywords: - Exchanges, - Associations, - Penalities, - Members, - Operation, - Administration, - NMS Plan, + Market Maker, + Industry Member Market Maker, + Industry Member OTCM, -

a. Compliance with the NMS plan

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1. Exchanges and Associations

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As proposed, Rule 613(h) would have provided that each plan sponsor shall comply with the provisions of an NMS plan submitted pursuant to the proposed Rule and approved by the Commission.694 In addition, the proposed Rule would have provided that any failure by a plan sponsor to comply with the provisions of the NMS plan could be considered a violation of the proposed Rule.695 The proposed Rule also would have required that the NMS plan include a mechanism to ensure compliance by the sponsors with the requirements of the plan.696

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One commenter expressed concern that there would be competitive implications if the NMS plan were to include provisions that would permit SROs to assess penalties against one another for non-compliance.697 This commenter recommended, instead, that the NMS plan include a "fee recoupment" provision so the plan administrator could recoup costs incurred as a result of an error by a particular SRO.698 The commenter maintained that a "fee recoupment" provision, coupled with the risk of Commission disciplinary action for a "pattern or practice" of non-compliance, would be a sufficient penalty.699

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After considering the comment received on the issue of compliance with the NMS plan by exchanges and associations,700 the Commission is adopting Rule 613(h) substantially as proposed, with a modification to Rule 613(h)(3) to specify that a mechanism to ensure compliance by the sponsors of the NMS plan with the requirements of the plan "may include penalties where appropriate" and a technical modification to proposed Rule 613(h)(1) and (2).701 The Commission believes that specifying that the mechanism to ensure compliance by the sponsors of the NMS plan may include a penalty provision where appropriate provides the plan sponsors with an appropriate tool – including potential disciplinary action – to help ensure compliance by SROs with the terms and provisions of the NMS plan.702 The Commission notes that a penalty provision could provide an incentive for each SRO to comply with all the provisions of the NMS plan because each SRO will seek to avoid incurring any penalty under the Rule. The incentive to avoid a penalty could also reduce the risk of non-compliance with the Rule. The Commission notes, however, that the adopted Rule does not mandate that the NMS plan's enforcement mechanism include penalties, as there might be other mechanisms to enforce or encourage compliance with the Rule, and the Commission believes that the SROs, in the first instance, should design such mechanisms in their role as plan sponsors. However, the Commission expects that if the SROs design compliance mechanisms that do not incorporate penalties, they would explain in the NMS plan how such mechanisms are expected to help ensure compliance by SROs with the terms and provisions of the NMS plan.703

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With respect to the comment concerning the potential competitive implications of allowing the plan sponsors to impose penalties against each other for non-compliance, the Commission notes that it will carefully review the NMS plan submitted for its consideration, including any proposed mechanisms to help ensure compliance with the NMS plan and the adopted Rule, to help ensure that penalty provisions, if any, are designed to be applied fairly and in a manner consistent with the Exchange Act.704 As the central repository will be a facility705 of the SROs, the rules governing it must be consistent with the Exchange Act. In addition, any future amendment to the penalty provisions applicable to the SROs would either be reviewed as an amendment to the NMS plan (effected through public notice and comment and taking into account the relevant considerations contemplated by Rule 613(a)(1)) or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.

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The Commission notes that the Commission's examination authority under Section 17 of the Exchange Act706 extends to the central repository because it is a facility of the SROs and, thus, the Commission will have the opportunity to inspect the central repository and its books and records for compliance with any penalty provisions set out in the NMS plan. Additionally, the Commission has the authority to review any actions taken under the NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS,707 for burdens on competition, among other matters.708

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In response to the comment suggesting a "fee recoupment" provision in the NMS plan, the Commission notes that Rule 613(b)(4), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan." In this regard, to the extent a "fee recoupment" is a method for recouping costs incurred by the central repository as a result of an error in reporting to the consolidated audit trail, as stated by a commenter,709 the Commission notes that, pursuant to Rule 613(b)(4), the plan sponsors may, if they deem it appropriate, include a fee recoupment provision in the NMS plan submitted to the Commission for its consideration.710

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2. Members

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Proposed Rule 613(g) would have included provisions to subject members of each SRO to the requirements of Rule 613. Specifically, as proposed, the Rule would have required each SRO to file with the Commission, pursuant to Section 19(b)(2) of the Exchange Act711 and Rule 19b-4 thereunder,712 a proposed rule change to require its members to comply with the requirements of the proposed Rule and the NMS plan.713 Further, the proposed Rule directly would have required each member to (1) collect and submit to the central repository the information required by the Rule, and (2) comply with the clock synchronization requirements of the proposed Rule.714 The proposed Rule also would have required that the NMS plan include a provision that each SRO, by subscribing to and submitting the plan to the Commission, agrees to enforce compliance by its members with the provisions of the plan.715 Finally, the proposed Rule would have required the NMS plan to include a mechanism to ensure compliance with the requirements of the plan by the members of each SRO that is a sponsor of the NMS plan submitted pursuant to this Rule and approved by the Commission.716

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One commenter expressed the view that "enforcement of [the consolidated audit trail] . . . should be accomplished through a policies and procedures rule framework – similar to that of Regulation NMS. To enforce the rule from a strict liability perspective would simply be the wrong approach and would result in thousands of technical (non-material) violations, which is clearly not the intent of the rule."717

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After considering the comment regarding Rule 613's provisions on compliance with the Rule by members of the SROs, the Commission is adopting Rule 613(g) substantially as proposed, with technical modifications to proposed Rule 613(g). These technical modifications simplify the language of Rule 613(g). Adopted Rule 613(g) does not include the phrase that applied the requirements therein to each member of an SRO "that is a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the deleted language.

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In addition, the Commission modified Rule 613(g)(2) as proposed to provide that, "[e]ach member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members." This change requires members to comply with all applicable provisions of the NMS plan as approved by the Commission instead of with the specific provisions contained in the Rule relating to recording and reporting data and clock synchronization since the requirements contained in the NMS plan may differ or be more specific than the requirements stated in the Rule.

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To be in compliance with the NMS plan, members must record and report all data elements required by the NMS plan within the time specified in the plan. To this end, the plan sponsors must develop a way to ensure that each member that takes action with respect to an order (e.g., originates, receives, routes, modifies, cancels or executes an order) records and reports all required elements associated with a reportable event, as the plan sponsors must also develop a mechanism to address any lapses in compliance with the NMS plan with a goal of ensuring the central repository is receiving a complete record of the life of an order.

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The Commission does not agree with the commenter that believed that enforcement of the consolidated audit trail will necessarily "result in thousands of technical (non-material) violations, which is clearly not the intent of the rule." 718 The Commission notes that the adopted Rule does not address the means of achieving compliance with the requirements of the consolidated audit trail. Rather, adopted Rule 613(g) simply provides that the SROs must submit proposed rule changes to require their members to comply with the requirements of an NMS plan approved by the Commission.

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The Commission acknowledges there would be costs to the SROs for filing with the Commission proposed rule changes to require their members to comply with Rule 613 and the NMS plan approved pursuant thereto. The Commission, however, believes that the Rule should include these rule filing requirements for the reasons discussed above.

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b. Operation and Administration of the NMS Plan

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Proposed Rule 613(b) sets forth requirements concerning the operation and administration of the NMS plan. As proposed, Rule 613(b)(1) would have required that the NMS plan include a governance structure to ensure fair representation of the plan sponsors and provisions governing the administration of the central repository, including the selection of a plan processor. Rule 613(b)(2), as proposed, also would have required the plan sponsors to include in the NMS plan a provision addressing the requirements for the admission of new sponsors to the plan and the withdrawal of sponsors from the plan. In addition, proposed Rule 613(b)(3) would have required the NMS plan to include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, and proposed Rule 613(b)(4) would have required that the plan sponsors develop a process for allocating among themselves the costs associated with creating and maintaining the central repository, including a provision addressing the manner in which such costs would be allocated to sponsors who join the plan after it has been approved.

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Finally, proposed Rule 613(b)(5) would have required the NMS plan to require the appointment of a CCO to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations to the plan sponsors for enhancement to the nature of the information collected and the manner in which it is processed. In the Proposing Release, the Commission stated that it expected the CCO would establish the procedures necessary to ensure that the operations of the central repository keep pace with technical developments and to make any necessary upgrades or changes to the central repository to maintain its efficacy.719

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The Commission received comments addressing the proposed requirements for operation and administration of the NMS plan.720 One commenter suggested that the NMS plan should contain a voting mechanism that requires less than unanimity, and with an effective tie breaking mechanism.721 This commenter also recommended that the governance structure "limit the ability of individual SROs to make modifications on a unilateral basis that could escalate costs by forcing the operator and firms to absorb costs that do not advance the interests of investors."722

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Two commenters expressed views on the selection and role of the plan processor.723 One suggested that the SROs should select the processor through a "request for proposal."724 Another commenter generally believed that the allocation of plan processor costs warranted more consideration.725 This commenter expressed concern with regard to the SROs owning the plan processor, noting in particular that unanimous consent would be required for all board actions.726 This commenter stated that the plan processor alone should handle rulemaking and compliance, subject to oversight by an "industry group."727 Another commenter stated that, "[r]egarding the governance of the national market system plan [contemplated] by the proposal, we wish to reiterate that the SEC should provide the broker-dealer industry with an official 'seat at the table' alongside the SROs, so that [the broker-dealers] can review and comment on system requirements as they are being developed and vote on plan amendments going forward."728

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After considering these comments, for the reasons discussed below, the Commission is adopting Rule 613(b) as proposed, but with the addition of two new requirements. Specifically, in addition to the provisions included in the proposed rule,729 Rule 613(b), as adopted, provides that the national market system plan submitted shall include: "a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail . . ., [and] an Advisory Committee . . . includ[ing] representatives of the member firms of the plan sponsors."730

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The requirement that the NMS plan require the appointment of a CCO to regularly review the operation of the central repository and make any appropriate recommendations for enhancements731 is one method to facilitate the consolidated audit trail's ability to evolve over time in terms of technology, functionality, and accuracy. Adopted Rule 613(b)(6) supplements this requirement by now requiring that the NMS plan "include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum: (i) [a]n evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with [Rule 613(e)(6)]), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with [Rule 613 (e)(4)]), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics; (ii) [a] detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the NMS plan to include new instruments, and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer; (iii) [a]n estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and (iv) [a]n estimated implementation timeline for any such potential improvements, if applicable."732 The Commission believes these provisions will help plan sponsors understand and evaluate any deficiencies in the operation of the consolidated audit trail and to propose potential enhancements to the NMS plan, as appropriate, taking cost effectiveness into consideration. These provisions also will allow the Commission to assess any such potential improvements, accounting for the considerations contemplated by Rule 613(a)(1), the specific requirements of the approved NMS plan, and any changes or additions to these requirements that the Advisory Committee, the SROs, or the Commission may wish to consider in the future. The Commission believes that such enhancements, if any, to the consolidated audit trail could improve the ability of the SROs and the Commission to conduct effective market oversight by keeping up with continually-changing technologies and markets, by, for example, allowing the SROs and the Commission to conduct their market oversight more quickly, accurately, and/or comprehensively, as well as possibly at lower costs. Similarly, the Commission believes that adding granularity and details regarding the scope and nature of Customer-IDs, adding new instruments, or including new trading or order activities could allow regulators to have a more complete picture of the markets and market participants, which could also lead to more effective market oversight. The Commission believes that performing this assessment no later than every two years is reasonable given the rapid speed at which the markets and related technologies are evolving. The Commission also believes that the written assessment, required by Rule 613(b)(6), will help inform the Commission about the likely feasibility, costs, and impact of, and the plan sponsors' approach to, the consolidated audit trail evolving over time. The Commission would expect to make the document publicly available on its website.

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In response to the comment requesting that the broker-dealer industry receive a "seat at the table" regarding governance of the NMS plan,733 the adopted Rule requires that the NMS plan submitted to the Commission for its consideration include a provision requiring the creation of an Advisory Committee, composed at least in part by representatives of the members of the plan sponsors, "to advise the plan sponsors on the implementation, operation and administration of the central repository."734 Further, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require that "[m]embers of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors."735 Pursuant to the Rule, the NMS plan also shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsor.736 The Rule further provides that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.737 The Commission believes that, given the scope of the Rule, both in terms of the market participants that may be affected by the Rule and the breadth of the audit trail information that will be collected, it is important that the plan sponsors solicit input from their members because this could help inform the plan sponsors of any expected or unexpected operational or technical issues that may arise in the implementation of the Rule and/or the operation of the central repository, and help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the burdens on SRO members. The Commission believes that the Advisory Committee could provide members of the SROs with a forum for informing the plan sponsors of any potential implementation or operational issues faced by them in connection with the consolidated audit trail. Plan sponsors also will be able to draw on the knowledge and experience of these members to help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the costs to SRO members. The Commission also believes that an Advisory Committee could help foster industry consensus on how to approach and resolve possible issues that may be disputed, and approaches that may conflict, regarding operation of the consolidated audit trail. In this regard, the Commission encourages the plan sponsors to, in the NMS plan, provide for an Advisory Committee whose composition includes SRO members from a cross-section of the industry, including representatives of small-, medium- and large-sized broker-dealers.

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The Commission believes the requirement for the NMS plan to create the Advisory Committee, as well as the requirement in Rule 613(a)(1)(xi), discussed below, that requires the NMS plan to require a discussion of the process by which the plan sponsors solicited the views of their members on the creation, implementation, and maintenance of the consolidated audit trail, a summary of those views, and how the plan sponsors took those views into account when preparing the NMS plan, are responsive to commenters' views that more input by industry representatives, such as members of the SROs who are subject to the requirements of Rule 613, would be advantageous to the creation, implementation, and maintenance of the consolidated audit trail.738

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In addition, because the members of the Advisory Committee will have the right to attend all meetings of the plan sponsors (with the exception of executive sessions), to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors, the governance process of the central repository will be more transparent to all market participants that will be affected by Rule 613. Further, the Commission believes the inclusion of SRO members on the Advisory Committee will increase the efficacy of the central repository. These market participants will have first-hand experience with the operation of the central repository, as they are required to report data to the facility, allowing them to provide informed input on any problems currently facing the central repository of which they are aware, and on any future actions that the central repository might or should take to address such problems. Finally, the Commission believes that an Advisory Committee structure that also permits the plan sponsors to meet in executive session without members of the Advisory Committee appropriately balances the need to provide a mechanism for industry input into the operation of the central repository, against the regulatory imperative that the operations and decisions regarding the consolidated audit trail be made by SROs who have a statutory obligation to regulate the securities markets, rather than by members of the SROs, who have no corresponding statutory obligation to oversee the securities markets.

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The Commission also considered the comment that provided other suggestions on the governance of the NMS plan and believes that the commenter's concerns regarding a unanimity requirement in the NMS plan have merit.739 Accordingly, the Commission urges the SROs to take into account the need for efficient and fair operation of the NMS plan governing the consolidated audit trail, and consider the appropriateness of a unanimity requirement and the possibility of a governance requirement other than unanimity, or even super-majority approval, for all but the most important decisions. The Commission believes that an alternate approach may be appropriate to avoid a situation where a significant majority of plan sponsors – or even all but one plan sponsor – supports an initiative but, due to a unanimous voting requirement, action cannot be undertaken.740 Therefore, the Commission believes the SROs should consider alternative governance structures that would ensure that decisions made by the SROs are both achieved and implemented efficiently, in the interest of advancing the Commission's mission. The Commission notes that the NMS plan submitted to the Commission for its consideration will be published for public comment, and industry participants will have an opportunity at that time to submit comments on the governance structures proposed by the plan sponsors. Further, the Commission believes, as discussed above, that unanimity need not be the standard for decision-making with regard to matters relating to the operation of the consolidated audit trail. Thus, the plan sponsors have flexibility under the Rule to determine the governance structures that will facilitate the effective and efficient oversight of the plan processor.

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In response to the comments regarding the selection and role of the plan processor,741 the Commission believes that the SROs, as the plan sponsors of the NMS plan governing the operation of the consolidated audit trail, should retain the authority to select and oversee the plan processor. The Commission believes that the SROs are in the best position to understand how the plan processor should operate and to address the need for changes when necessary. The SROs also have the flexibility under the Rule to consult the Advisory Committee, for example, to assist the SROs in their selection process and in their determination of whether modifications are necessary to address innovations in the industry if they believe that such participation is needed.

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The Commission acknowledges that, in addition to the many costs and burdens associated with the creation, implementation, and maintenance of a consolidated audit trail, with regards to the specific requirements discussed in this section, there would be costs to the SROs for appointing a CCO to the central repository, providing the Commission with the written assessment of the operation of the consolidated audit trail, and creating an Advisory Committee.742 For the reasons discussed above, the Commission believes these requirements are important to the efficient operation and practical evolution of the consolidated audit trail, and are responsive to many commenters' concerns about governance structure, cost allocations, and the inclusion of SRO members as part of the planning process. The Commission is therefore requiring the SROs to include these requirements in the NMS plan submitted to the Commission for its consideration. After the SROs submit the NMS plan, the Commission and the public will have more detailed information in evaluating the NMS plan.

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c. Surveillance

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As proposed, Rule 613(f) would have required each SRO subject to the Rule to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated audit trail data. The Rule, as proposed, also would have required each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan.743

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Commenters generally expressed support for the proposal's requirement that SROs implement surveillance systems that make use of the consolidated information.744 One commenter stated that the enhanced surveillance that could be achieved with the audit trail would likely attract additional trading volume to the U.S. markets and that the consolidated audit trail would benefit the SROs by permitting them to conduct surveillance themselves, thus "reducing their risks and their costs."745 Another commenter noted that the proposed consolidated audit trail would be a "critical first step toward consolidated market surveillance," and would lower costs for markets and their participants through economies of scale.746 A third commenter opined that a centralized database such as the consolidated audit trail is necessary to bring together data from exchanges, ECNs, and dark pools to properly regulate trading.747 However, one commenter maintained that a "Commission-mandated market regulator" would be costly for the securities industry and create the potential for a lack of surveillance innovation.748 A commenter recommended that the Commission monitor the surveillance systems and provide guidance to the SROs in establishing their surveillances.749 Finally, one commenter suggested that outsourcing surveillance to regulators could result in lower costs for markets, and recommended several specific security and analytical features for such a surveillance system.750

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After considering the comments, for the reasons discussed below, the Commission is adopting Rule 613(f) as proposed. Specifically, the Rule requires that each SRO develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.751 The Commission believes that it is appropriate to require SROs to enhance their surveillance programs to make full use of the increased functionalities and the timeliness of the consolidated audit trail. Additionally, because trading and potentially manipulative activities could take place across multiple markets, the Commission supports efforts to coordinate surveillance among the SROs, such as through a plan approved pursuant to Rule 17d-2 under the Exchange Act,752 or through regulatory services agreements between SROs. In this regard, as commenters have noted, SROs could "outsource" surveillance efforts to another SRO, if there are efficiencies to be gained. With respect to the comment regarding the benefits to be gained by creating a "single market regulator," the Commission believes that mandating such an entity or structure goes beyond the scope of the Rule.753

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The Commission notes that it intends to review its own surveillance activities in light of the consolidated audit trail and intends to take steps to enhance its surveillance capabilities to take advantage of consolidated audit trail data. The Commission anticipates that such steps will be informed by – and may in turn help inform – the surveillance enhancement measures required to be taken by the SROs under adopted Rule 613(f).

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The Commission also is adopting Rule 613(a)(3)(iv) as proposed, which requires the NMS plan to require each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan. Since Rule 613(a)(3)(iii) will require the NMS plan to require SROs to begin reporting to the central repository within one year after effectiveness of the NMS plan, the Commission believes the two additional months provided by this timeframe is reasonable and sufficient to allow SROs to update their surveillance systems and allow for testing of new surveillances.

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The Commission acknowledges there would be costs to the SROs for developing and implementing surveillance systems, or enhancing existing surveillance systems, reasonably designed to make use of the consolidated audit trail. However, the Commission believes it may be possible for SROs to retire some of their existing, and perhaps less-efficient, audit trail and surveillance systems once the consolidated audit trail is operational. As discussed in Section III.C.a.iv. below, the adopted Rule requires the SROs to consider and discuss the potential for costs savings if other SRO systems, and their associated surveillances, were migrated to the consolidated audit trail.754 Once such information is submitted in the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider the information in evaluating the NMS plan.

+

This scenario illustrates the reporting requirements to CAT when a Market Maker (and Industry Member Market Maker A) submits a displayed (bid) quote to an inter-dealer quotation system - Industry Member OTCM, another Market Maker (and Industry Member, Market Maker B) wants to trade at the displayed quote, sends a message through the inter-dealer quotation system, consummating in a trade.

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In Phase 2a, Industry Member Market Maker A is required to report the following event:

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• A Trade as a Result of a Quote event for execution against Market Maker B

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For this scenario, Industry Member Market Maker B must report the following event:

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• A New Order event

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• A Trade event for execution against Market Maker A

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For this scenario Industry Member OTCM must report the following event:

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• Quote Received event for the receipt of the quote from Market Maker A

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pubdate: N/A effdate: N/A -

C. NMS Plan Process

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Comments, - Adopted Rule, - Cost, - -

As proposed, Rule 613(a)(1) would have required each SRO to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository. Section III.A. above discusses the use of an NMS plan to create, implement, and maintain a consolidated audit trail. This Section focuses on the process the SROs must follow when submitting to the Commission the NMS plan that satisfies the requirements discussed in Section III.B. above and the process the Commission will undergo when evaluating whether to approve the NMS plan.

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pubdate: N/A effdate: N/A -
1. Comments on the NMS Plan Process
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Comments on the NMS Plan Process - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +

2.3. Fulfillment Scenario s

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s + Compliance User: Industry Member + Keywords: +
pubdate: N/A effdate: N/A +
2.3.1. Representative Order Execution
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Representative Order Execution + Compliance User: Industry Member + Keywords: +

This section will illustrate the Phase 2a reporting requirements for the execution of a customer/client order that is not required to be reported for public dissemination purposes and use of an Order Fulfillment, rather than a Trade Event, is required.

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In this scenario, Industry Member Broker A receives two customer orders to BUY XYZ at 10.01. Industry Member Broker A creates a representative order that will be used to fill two customer orders. The representative order is routed to an exchange where it is executed. Upon execution of the representative order, the Industry Member fills each of the customer orders on an agency basis.

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For this scenario, Broker A is required to report the following events to CAT for the customer orders:

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1) New Order events for the customer orders

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2) An Order Fulfillment for each customer order

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Broker A is required to report the following events to CAT for the representative order:

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1) New Order event for the representative order (flagged to indicate it represents customer orders, but no explicit linkage to the underlying orders)

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2) Routing the representative order to the exchange (Order Route event)

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Note that execution of the representative order is only reported by the exchange.

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Because this scenario involves an aggregation of two customer orders that are worked as a single representative order, this is a Phase 2c representative order scenario and linkage between the customer orders and the representative orders is not required. In Phase 2c, the representative order and the underlying customer orders must be linked.

+ + + + +
+
pubdate: N/A effdate: N/A +
2.3.2. Fill of a Single Order on a Riskless Principal Basis
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Single Order on a Riskless Principal Basis + Compliance User: Industry Member + Keywords: + Order Route Event, + New Order event, + +

This scenario illustrates the CAT reporting requirements when an Industry Member fills an order as riskless principal.

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In this example, upon receipt of the customer order, the Industry Member sends a riskless principal or principal order to an exchange for execution, in order to satisfy the customer's order. The representative principal order is linked to the original customer order.

+ +

The Industry Member Broker 1 is required to report the following events to CAT:

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• The creation of the customer order as a New Order event

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• The creation of a riskless principal order with linkage to the original customer order (New Order event with aggregatedOrders field). As an alternative, the Industry Member may report a New Order event (for the principal order) without linkage to the customer order, and an additional New Order Supplement event

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• The route of the principal order to the exchange (Order Route event)

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• After the execution, the flip of the executed shares back to the customer order (an Order Fulfillment Event).

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The exchange will report the following:

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• The receipt of the order B routed from the Broker 1

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• The execution of order

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pubdate: N/A effdate: N/A +
2.3.3. Customer Order Internally Routed to Another Desk and Subsequently Executed Against a Firm Proprietary Account
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Customer Order Internally Routed to Another Desk and Subsequently Executed Against a Firm Proprietary Account + Compliance User: Industry Member Keywords: - Comments, - NMS Plan, - Analysis, + Order Internal Route event, + Trade Event, -

The Commission received several comments regarding how best to develop an NMS plan that will govern the creation and implementation of a consolidated audit trail, as well as the time needed to do so. Several commenters suggested that the Commission undergo a RFP or RFI process to create a consolidated audit trail.755 Specifically, one commenter suggested that the Commission outline a set of goals it intends to achieve through creation of a consolidated audit trail and allow an industry working group to determine the data elements that must be reported and other technical requirements.756 Another commenter opined that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.757 Further, some commenters requested more specific information about the audit trail system to determine the best approach for implementing the consolidated audit trail.758

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Some of these commenters stressed that more time should be allotted for the planning and design of the NMS plan due to the comprehensive business analysis that would be needed in the initial stages of the consolidated audit trail.759 Commenters recommended extensive, "up-front business analysis,"760 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."761 The commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.762 The commenters also suggested that the business analysis could include an RFI "to engage potential solution providers early in the process,"763 and stated that the time needed to perform the analysis to produce a "detailed blueprint for CAT"764 would be closer to six months,765 rather than the proposed 90 days.766 As a basis for their suggestions, one of the commenters provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.767 This commenter noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.768

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In addition, some commenters noted that a consolidated audit trail could be implemented in a number of ways, and thus recommended that the Commission replace the specific system requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal RFP process.769

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This section will illustrate an example of CAT reporting when an Industry Member internally routes a customer order from the sales desk to the trading desk, and subsequently executes against a firm proprietary account. The sales desk and trading desk are separated by information barriers.

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In this scenario, Industry Member Broker 1 must report the following events to CAT:

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• The receipt of the customer order in a New Order event

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• The internal route from the sales desk to the trading desk (Order Internal Route event)

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• The principal execution (Trade event)

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pubdate: N/A effdate: N/A -
2. Adopted Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Adopted Rule - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.3.4. Customer Order Internally Routed to Multiple Desks and Subsequently Executed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Customer Order Internally Routed to Multiple Desks and Subsequently Executed + Compliance User: Industry Member Keywords: - Rule 613(a)(1), - SRO, - NMS Plan, - Considerations, - Features and Details, - Analysis, - Process, - Implementation, - Commission Review, - Cases, - Analyses related to Investigation, - Analyses related to Monitoring, - Order Tracking, - Time Sequence, - Database Security, - Database Access, - Submission, - Extension of Time, + Program Trading Desk, -

After considering the comments regarding the NMS plan process, the Commission is adopting proposed Rule 613(a)(1) with modifications. First, the Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, and when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on efficiency, competition, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., solicitation of input from members of the SROs); and (4) the information about the implementation and milestones of the consolidated audit trail. Second, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." Third, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register. A discussion of these modifications and the "use cases" follows.

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a. NMS Plan Considerations

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As noted above,770 the Commission believes that the collective effect of the modifications and additions described above will be to significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining the consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule. Further, given these changes to the Rule discussed above and the wide array of commenter's views on how to best implement a consolidated audit trail,771 the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration. The costs and benefits of the consolidated audit trail are highly dependent on the specific solutions proposed by SROs.

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Accordingly, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule772) until such time as it may approve the NMS plan submitted to the Commission for its consideration. In light of the expanded set of solutions that should be available as a result of the changes described above and to facilitate a more robust economic analysis, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. The Commission is therefore requiring the SROs to discuss, as part of their NMS plan "considerations" that detail how the SROs propose to implement the requirements of the plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.

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This additional information and analysis are intended to ensure that the Commission and the SROs have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of the extent to which the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. The NMS plan submitted by the SROs will be published for public comment and reviewed by the Commission for consistency with the Exchange Act and the rules thereunder. As a result, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted, which the Commission will review and consider.

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i. Features and Details of the NMS Plan

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The first six considerations the Rule requires the SROs to address in the NMS plan relate to the features and details of the NMS plan. These six considerations require the NMS plan to specify and explain the choices made by the SROs to meet the requirements specified in the Rule for the consolidated audit trail. The Commission intends to use the discussion of these considerations to evaluate the NMS plan submitted for its consideration and how well it meets the objectives described in Section II.B.2.

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Rule 613(a)(1)(i)

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Rule 613(a)(1)(i) requires the NMS plan submitted to discuss "[t]he method(s) by which data is reported to the central repository, including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load and retain such data. . . ." The Rule also requires the NMS plan to discuss the basis for selecting such method(s).

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The Commission believes that requiring that the NMS plan discuss the method(s) by which data is reported to the central repository is important because the method for reporting data and the source of the data are significant to the effectiveness of the consolidated audit trail and could affect, and potentially enhance, the reliability and the accuracy of the data that is reported to the central repository.773 Discussing such method(s), as well as the basis for selecting such method(s), should help assure the Commission that the plan sponsors have considered the various alternatives and selected the method(s) that best achieves the objectives of the consolidated audit trail in a cost-effective manner.774 In addition, Rule 613(a)(1)(i) requires that the NMS plan describe how the central repository will receive, extract, transform, load and retain data because the Commission believes that this information is integral to a comprehensive understanding of the operation of the central repository proposed in the NMS plan.

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Rule 613(a)(1)(ii)

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Rule 613(a)(1)(ii) requires the NMS plan to address "[t]he time and method by which the data in the central repository will be made available to regulators, in accordance with [Rule 613(e)(1)] to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."

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The time and method by which data will be made available to regulators are fundamental to the utility of the consolidated audit trail because the purpose of the consolidated audit trail is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.775 The NMS plan submitted should discuss these issues in detail, guided, in particular, by the issues and questions raised in the "Regulator Use Cases" described in Section III.C.2.b., below.

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The importance of this consideration was discussed in the Proposing Release.776 The Commission emphasized the necessity of the data being in a uniform electronic format so that regulators would be able, among other things, to effectively and efficiently detect and investigate illegal trading across markets, without having to spend valuable time and resources reconciling audit trail formatting differences in the data.777 In addition, the Proposing Release noted that requiring the order and trade data to be collected in one location in a single format would allow regulators ready access to the data for use in market reconstructions, market analyses, surveillance and investigations,778 as regulators could then retrieve the information that they need much faster than the current process of requesting data from multiple parties without having to reconcile disparate audit trail information. Also, in the Proposing Release, the Commission noted the importance of SRO regulatory staff having direct access to consolidated audit trail data.779 The Commission continues to believe that it is vital that regulators have ready access to the consolidated audit trail data in the central repository so that this information can be effectively and efficiently used in fulfilling their regulatory responsibilities.

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Rule 613(a)(1)(iii)

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Rule 613(a)(1)(iii) requires the NMS plan to address "[t]he reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators."

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The Commission believes the reliability and accuracy of the data is a critical aspect of the consolidated audit trail, because the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate. If the reliability and accuracy of reported data is not maintained by the central repository during the period it is required to be retained and throughout the various uses to which it may be put by regulators, then its value to regulators will be substantially diminished.

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Accordingly, the NMS plan submitted should discuss in detail, among other things, how the consolidated audit trail envisioned by the sponsors would be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained by the central repository (e.g., during transmission from the SRO or member to receipt by the central repository,780 data extraction, transformation and loading at the central repository,781 data maintenance and management at the central repository,782 and data access by regulators783).

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The Commission notes that, when proposing Rule 613, it highlighted the importance of this consideration by emphasizing that the reliability and accuracy of the data are critical to the integrity and effectiveness of the consolidated audit trail.784 Indeed, Rule 613(e)(4)(ii), like the proposed Rule, specifically requires the plan sponsors to establish policies and procedures for the plan processor to ensure the timeliness, accuracy and completeness of the audit trail data reported to the central repository.

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Rule 613(a)(1)(iv)

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Rule 613(a)(1)(iv) requires the NMS plan to discuss "[t]he security and confidentiality of the information reported to the central repository."

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The Commission is including this consideration because it believes that keeping the data secure and confidential is crucial to the efficacy of the consolidated audit trail and the confidence of market participants. Exposure of highly-confidential information about the trading strategies and positions of market participants through a security breach, for example, could impact the confidence of the public in the central repository and in trading on the U.S. markets. The Commission understood the importance of security and confidentiality provisions when it proposed Rule 613(e)(4) to require the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository.785 Numerous commenters also noted the importance of maintaining the security and the confidentiality of the data collected pursuant to the proposed Rule.786

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Rule 613(a)(1)(v)

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Rule 613(a)(1)(v) requires the NMS plan to address "[t]he flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments."

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The Commission believes that the flexibility and scalability of the systems used by the central repository are important to the effectiveness of the consolidated audit trail, and, accordingly, the Commission believes the NMS plan under Rule 613 should address potential "built-in" obsolescence that may arise as a result of the SROs' choice of systems or technology. For this reason, the NMS plan should address how, taking into consideration the costs and benefits, including the potential impact on competition, efficiency, and capital formation, the consolidated audit trail systems might be designed to accommodate: (1) potential growth in the trading volume or message traffic relating to NMS securities; (2) possible expansion to include other non-NMS securities;787(3) additional data fields that the SROs or the Commission might determine to require in the future (such as new order characteristics); and (4) potential technological developments that might allow the consolidated audit trail to be operated in a more timely, reliable, and cost-effective manner.

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As noted in the Commission's Concept Release on equity market structure,788 the market for trading securities has changed dramatically in recent years and, as technology advances, trading systems and trading strategies also change. The Commission believes that it is important for the consolidated audit trail to keep pace with market developments. It must be designed in a way that allows it to do so efficiently and in a cost-effective manner to assure regulators of its continued usefulness. Thus, the Commission has identified the flexibility and scalability of the systems used by the central repository to collect, consolidate and store audit trail data as a consideration that must be discussed in the NMS plan submitted to the Commission for its consideration. To sufficiently address this consideration, the Commission expects the NMS plan to describe in detail how the consolidated audit trail envisioned by the sponsors would be designed to accommodate additional message traffic for orders in NMS securities, how readily capacity could be expanded, and the existence of any capacity limits. The Commission also would expect the NMS plan to discuss in detail the extent to which the proposed consolidated audit trail could accommodate potential additional data elements, order characteristics, and other types of securities such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, how quickly this could be done, and whether any limits exist on the ability of the proposed system to accommodate these types of changes. Additionally, the Commission would expect the NMS plan to further discuss whether and how the consolidated audit trail could be upgraded to keep pace with improvements in technology, such as improvements to the speed of systems processing.

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The Commission believes these descriptions are important because, otherwise, what initially appears to be an effective and cost-effective NMS plan could become significantly less so over time as markets evolve and if, for example, order volumes increase, new order types are developed, and additional data elements or other types of securities, such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, are potentially incorporated into the consolidated audit trail.

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The Commission notes that issues relating to the potential flexibility and scalability of the consolidated audit trail were raised in the Proposing Release. For example, the Commission stated that, while the proposal was limited to NMS securities, the Commission ultimately intended the consolidated audit trail to cover secondary market transactions in other securities and information on primary market transactions.789 In fact, as discussed above, the Commission specifically proposed that the NMS plan contain provisions relating to the possible expansion of the consolidated audit trail to products other than NMS securities.790 In addition, in the Proposing Release, the Commission specifically noted its concerns with the lack of scalability of the existing EBS system and the fact that the volume of transaction data subject to reporting under the EBS system can be significantly greater than the system was intended to accommodate in a typical request for data.791

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Rule 613(a)(1)(vi)

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Rule 613(a)(1)(vi) requires the NMS plan to address "[t]he feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner: (A) [t]he identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction; (B) [t]he number of such securities each such market participant is allocated; and (C) [t]he identity of the broker-dealer making each such allocation."

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In the Proposing Release, the Commission stated that "it would be beneficial to provide for the possible expansion of the consolidated audit trail to include information on primary market transactions in NMS stocks" and required in proposed Rule 613 that the plan sponsors address such expansion in a document provided to the Commission within two months after effectiveness of the NMS plan.792 The Commission continues to believe, for the reasons set forth below, that a potential expansion of the consolidated audit trail to cover primary market transactions would be beneficial. Specifically, the Commission believes that the SROs should address – at the time of the submission of the NMS plan to the Commission, rather than as part of a later expansion plan – the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail.

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As with the data sources discussed in Section II.A, the sources of information currently available to the Commission regarding allocations of NMS securities in primary market transactions are each limited in their ability to provide accurate, complete, accessible, and timely information.793 For example, while the Commission and FINRA can request information about allocations from the books and records of broker-dealers, such requests are unduly cumbersome for both regulators and market participants, potentially involving multiple time-consuming individual requests.794 Other sources of information about allocations of NMS securities in primary market transactions – including public sources795 – are also limited in certain respects.796

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In light of these limitations, data about the allocations of NMS securities in primary market transactions could also improve market analysis by the Commission and the SROs, which could in turn help better inform rulemaking and other policy decisions. Specifically, such data might aid the Commission and the SROs in better understanding the role of such allocations in the capital formation process. Combining this data with the secondary market data to be collected by the consolidated audit trail could allow regulators to calculate investor positions and when and how the investors receiving allocations sell their securities. Such data could also facilitate a better understanding of how securities are allocated in a primary market transaction, how allocations differ across broker-dealers and investors, and what types of investors are allocated securities. This analysis is virtually infeasible on a market-wide basis today because the data collection process using current sources of information is so cumbersome.

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In addition, if the consolidated audit trail included data regarding the allocations of NMS securities in primary market transactions, SROs could be better able to monitor for compliance with their rules related to such transactions.797 The data also could more broadly assist SROs in their examinations and investigations related to allocations in initial public offerings ("IPOs") and other primary market transactions by providing a richer data set for evaluating possible compliance issues. For example, the SROs could use IPO allocation information, combined with the secondary market transaction information in a consolidated audit trail, to run surveillance on whether sales in the IPO auction were marked accurately (i.e., "long" or "short") and in compliance with applicable requirements.798 Allocation data could also allow SROs to conduct surveillance for "red flags" they might develop regarding potential suitability issues related to customer allocations, as well as potentially improper allocations to customers (such as kickbacks).

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The Commission could also enhance its own examination and investigation processes if data regarding the allocations of NMS securities in primary market transactions were included in the consolidated audit trail. Without access to a single centralized database of allocations, Commission staff must rely on more limited data sources that generally enable only either broad-based sweeps or one-off investigations based on particularized suspicion of wrongdoing. Because the relevant data would be readily available for analysis, including information about allocations as part of the consolidated audit trail could facilitate the Commission's identification of particular risks and exam candidates. Other examinations undertaken by the Commission staff address whether employees of a regulated entity are in compliance with the rules applicable to their transactions related to primary market transactions. Having allocation information available before such an examination commences could allow staff to enhance their pre-examination research, better focus on the sources of potential violations, and ultimately foster more effective and efficient examinations.

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In investigations related to primary market transactions, the Commission staff generally must obtain data from underwriters post-transaction, which can take considerable time owing to the limitations on current sources of data noted above.799 Including data about the allocations of NMS securities in primary market transactions in the consolidated audit trail could enable investigations to proceed more efficiently and to more quickly assess whether alleged violations of various rules under the Exchange Act, such as Regulation M and Rule 10b-5, warrant investigation.800 In addition, the Commission believes that information about allocations could help the SROs and Commission investigate allegations of improper allocations, such as allocations subject to "spinning"801 or "laddering."802 Currently, these types of investigations would require requesting data from underwriters, and in some cases, other parties (such as investment advisors) involved in the primary market transaction.

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Given these potential benefits, the Commission believes that it is important – consistent with its view in the Proposing Release – for the SROs to address the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail. However, unlike other potential additions to the consolidated audit trail – e.g., the inclusion of debt securities – that will be contemplated later in expansion plans, allocations of NMS securities in primary market transactions are uniquely tied to the central element of the NMS plan – the reporting of data regarding trading in NMS securities. For example, allocations in primary market transactions may have a significant impact on trading and other activity in the secondary market, and behavior in the primary market may influence behavior in the secondary market through initial pricing and other mechanisms. More broadly, IPOs and other primary market transactions continue to be a source of particular interest for market participants and observers because of, among other things, their role in the capital formation process. In light of these considerations, the Commission believes it is appropriate to require the SROs to address allocations of NMS securities in primary market transactions at the time that the NMS plan is submitted under adopted Rule 613(a)(1), rather than as part of an expansion plan under adopted Rule 613(i).

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At the same time, the Commission recognizes that firms may use systems and methods to handle information regarding allocations of NMS securities in primary market transactions that differ from those used to handle information regarding secondary market transactions in such securities. Such differences may affect the extent to which information regarding allocations may be readily incorporated into the consolidated audit trail described by the NMS plan mandated by Rule 613. For example, the unique features of allocations of NMS securities in primary market transactions may require different reporting timeframes, different information security controls, or additional data elements that would not be required for other information being reported to the central repository and that are not contemplated by Rule 613. Because of these potential differences, the Commission believes it is appropriate to require the SROs to address the feasibility, costs, and benefits of their members reporting information regarding allocations of NMS securities in primary market transactions, rather than require the NMS plan to require such reporting at the outset.

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The Commission acknowledges that plan sponsors nevertheless will incur costs to address the feasibility, benefits, and costs of incorporating information about allocations of NMS securities in primary market transactions into the consolidated audit trail. Among other things, the plan sponsors will need to undertake an analysis of technological and computer system acquisitions and upgrades that would be required to include information about such allocations. However, given the potential benefits described above of including such information in the consolidated audit trail, the Commission believes these costs are justified.

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ii. Analysis of the NMS Plan

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As noted above, in consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to a number of the proposed requirements. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means the SROs may use to meet certain requirements. These modifications significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and thus provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the solution set that would have been available under the requirements of the proposed Rule.

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Because these modifications permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards,803 the assumptions underlying the Commission's cost estimate in the Proposing Release that new, large-scale market systems would need to be developed from scratch may no longer be valid.804 Thus, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule)805 until such time as it may approve any NMS plan submitted to the Commission for its consideration – that is, after the NMS plan, together with its detailed information, including cost estimates for the creation, implementation, and maintenance of the consolidated audit trail, and analysis, has been submitted by the SROs to the Commission and there has been an opportunity for public comment. The Commission believes that the information and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can be better informed about the costs for the development, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs in conjunction with – and guided by – their development of an NMS plan that complies with the requirements of the adopted Rule. In addition, as noted above,806 the Rule includes a mandate that in determining whether to approve the plan and whether the plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation.

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Rule 613(a)(1)(vii)

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Rule 613(a)(1)(vii) requires the NMS plan to include "[t]he detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify: (A) [a]n estimate of the costs to the plan sponsors for creating and maintaining the central repository; (B) [a]n estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; (C) [a]n estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and (D) [h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."807

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Commenters opined on the costs of funding the consolidated audit trail in general.808 One commenter stated that the Commission should give "important consideration to alternative means to help fund the creation of what is essentially a public utility in [the consolidated audit trail]," suggesting the Commission "should itself pay user fees to help build and run the [consolidated audit trail]," or that the government should underwrite low-cost loans for market participants aimed to pay the costs of the consolidated audit trail.809 Another commenter suggested that the cost of creating and maintaining the central repository should be shared among all market participants, including broker-dealers, ATSs, and exchanges.810 Another commenter stated that, if the Commission requires the SROs to fund the creation of the consolidated audit trail (i.e., the central repository), SROs may be forced to raise transaction fees, which would "resurrect the distortions caused by high transaction fees, potentially increase the use of flash orders, if allowed, and discourage trading activity."811

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The Commission also received comments regarding the allocation of the costs of the consolidated audit trail.812 One commenter emphasized that the NMS plan must provide for an equitable allocation of costs, including the sharing of expansion costs by the parties that benefit from any new products added to the consolidated audit trail.813 One commenter suggested that the Commission should require trading venues to allocate system costs for the consolidated audit trail "at least partially based on message traffic . . . ."814 Similarly, another commenter, opining that exchanges currently bear a disproportionate amount of the costs for market surveillance and noting that exchanges would also be forced to shoulder the costs of the consolidated audit trail, suggested that other venues, such as ATSs and internal broker-dealer platforms, should bear a proportionate share of the costs of creating, implementing, and maintaining the consolidated audit trail.815 This commenter also suggested that the Commission fund the audit trail using fees assessed on high frequency traders who cancel a "disproportionately high" percentage of their orders,816 arguing that this "would have the added benefit of deterring a practice that, at best, adds little value in the price discovery process and, at worst, is potentially manipulative or even fraudulent."817

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The Commission believes that the issues surrounding how the consolidated audit trail should be funded, and how costs in creating, implementing, and maintaining the consolidated audit trail should be allocated, are important, and the Rule requires information about those issues to be provided by the SROs in the NMS plan submitted to the Commission for its consideration. In response to comments and in recognition that an initiative of the size and scope of the consolidated audit trail necessarily will require substantial expenditures by the SROs and their members, the Commission is requiring, pursuant to Rule 613(a)(1)(vii), the SROs to include in the NMS plan, a discussion of costs and how such costs will be allocated. As discussed above, the Commission believes that the SROs will incur costs to create and maintain the central repository.818 Also, as discussed above, SROs and their members may need to make systems changes or to purchase new systems to record and report the data required by the NMS plan to the central repository.819 SROs and their members will incur upfront costs, as well as ongoing costs to record and report such information. Because, as noted above, these costs can only be analyzed once the SROs narrow the array of choices they have and develop a detailed NMS plan,820 the Commission believes that the most robust approach for estimating these costs is for the SROs to provide such cost estimates in conjunction with, and guided by, their development of the NMS plan. The Commission believes that a fulsome discussion in the NMS plan of the estimated costs to SROs and their members will aid commenters in providing useful comments that will further the Commission's understanding of the cost implications of the consolidated audit trail. In addition, a fulsome discussion will aid the Commission in its evaluation of whether to approve the NMS plan and in conducting its own analysis of the costs and benefits of the NMS plan.

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There also would be costs associated with establishing and operating the central repository that will be jointly owned by the plan sponsors. The Commission believes it is important to understand how the plan sponsors plan to allocate such costs among themselves to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan amongst the SROs. In addition, although the plan sponsors likely would initially incur the costs to establish and fund the central repository directly, they may seek to recover some or all of these costs from their members. If the plan sponsors seek to recover costs from their members, the Commission believes that it is important to understand the plan sponsors' plans to allocate costs between themselves and their members, to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan.

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Rule 613(a)(1)(viii)

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Rule 613(a)(1)(viii) requires the NMS plan to include "[a]n analysis of the impact on competition, efficiency, and capital formation of creating, implementing, and maintaining the national market system plan."

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Rule 608(a)(4)(ii)(C) under Regulation NMS already requires every NMS plan submitted to the Commission to be accompanied by an analysis of the impact on competition of implementation of the plan.821 This requirement is designed to help inform the Commission's evaluation of whether the NMS plan will impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Rule re-states the application of the Rule 608(a)(4)(ii)(C) requirement to provide an analysis of the NMS plan's impact on competition and imposes a requirement that the NMS plan also include an analysis of the impact on efficiency and capital formation.822

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These requirements are designed to help inform the Commission's understanding of whether the NMS plan may promote efficiency and capital formation. As an initial matter, the SROs will be providing an analysis of the economic consequences of the NMS plan they develop and propose. As noted above, because the specific requirements of the NMS plan will not be known until the NMS plan is submitted, and the SROs will be providing that analysis, the Commission will consider the impact of the proposed consolidated audit trail on efficiency, competition, and capital formation in deciding whether to approve the NMS plan. The Commission, however, will consider such analysis in determining whether to approve the NMS plan and whether the plan is in the public interest under Rule 608(b)(2). 823

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iii. Process Followed to Develop the NMS Plan

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The following two considerations require the NMS plan to address how the SROs solicited the input of their members and other appropriate parties in their design of the NMS plan, and to detail the alternative consolidated audit trail designs considered and rejected by the SROs. These considerations will inform the Commission's evaluation of the NMS plan submitted for its consideration.

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Rule 613(a)(1)(xi)

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Rule 613(a)(1)(xi) requires the NMS plan to discuss "[t]he process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan."

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The Commission believes that the SROs' consideration of the views of their members is important because, given the scope of the Rule, it will affect many market participants and will require them to report a broad range of audit trail information. Ensuring that market participants with varied perspectives have a role in developing the NMS plan submitted to the Commission for its consideration could help inform the plan sponsors of operational or technical issues that may arise in the implementation of the NMS plan, and help assure the Commission and market participants that the requirements imposed on members are done so in an efficient and cost-effective manner.824 Similarly, the Commission believes it is important that the SROs consider the views of other parties – such as back office service providers, market operations specialists, and technology and data firms – as may be appropriate in light of the Rule's goal of creating, implementing, and maintaining a complex system that may entail changes to multiple other systems and functionalities involved across the lifecycle of an order. Such parties could offer operational and technical expertise to the SROs, including, among other things, by identifying issues that may arise in the interface between legacy and new systems. In addition, the inclusion of such parties in the deliberative process could also result in the introduction of additional alternative approaches.

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The Commission also believes that it is appropriate to require the SROs to set out in the NMS plan a summary of the views expressed by such members and other parties and how the SROs took those views into account in developing the NMS plan. This requirement is designed to inform the Commission about the extent to which the SROs considered the views of their members and other appropriate parties as they undertook the complex task of developing the NMS plan for a consolidated audit trail, to facilitate a cost estimate by the SROs that takes into account the costs members will incur in creating, implementing, and maintaining the consolidated audit trail, as well as to encourage the consideration of reasonable alternative approaches contemplated by Rule 613(a)(1)(xii) in the plan formulation process.

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The Commission received several comments advocating inclusion of the broker-dealer community and other appropriate parties in the planning of the consolidated audit trail.825 One commenter, with respect to NMS plan governance, urged the inclusion of "an official 'seat at the table' alongside the SROs" for members of the broker-dealer industry.826 Another commenter recommended that the Commission seek greater SRO and broker-dealer involvement in the front-end planning before adopting a final rule to make all parties aware of potential design tradeoffs, and establish appropriate timelines for implementation and compliance.827 A further commenter advocated allowing working groups to engage in dialogue with the Commission, broker-dealers and the SROs to effectively conduct the business analysis needed to build the consolidated audit trail.828 Additionally, one commenter suggested that the Commission staff should form and engage working groups comprised of representatives from the "affected constituents," specifically brokers and "key technology vendors,"829 and that such working groups could work with the Commission to develop a request for proposal."830 Similarly, another commenter urged the Commission to require an industry working group of SROs and a representative group of broker-dealers to address the "complexities involved in developing such a system."831 One commenter suggested encouraging the participation of issuers and other market participants in the creation of the consolidated audit trail,832 and another commenter advocated the inclusion of "broad industry participation from the SEC, FINRA, exchange, broker dealer and vendor communities."833

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The Commission considered the comments recommending wider industry involvement in the creation of the consolidated audit trail and believes that, since the consolidated audit trail will be a regulatory tool used by the SROs and the Commission, it is appropriate for the SROs, when developing the NMS plan, to request input from the securities industry as well as technological advice. The Commission believes that this input should be sought during the preparation of the NMS plan submitted to the Commission for its consideration,834 during the comment process,835 and subsequent to the approval of an NMS plan.836

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Rule 613(a)(1)(xii)

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Rule 613(a)(1)(xii) requires the NMS plan to discuss "[a]ny reasonable alternative approaches to creating a consolidated audit trail that the plan sponsors considered in developing the national market system plan, including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan."837 The Commission believes this consideration is appropriate because it reflects the view, supported by commenters, that there are alternative approaches to creating, implementing, and maintaining the consolidated audit trail. The Commission believes that requiring the SROs to discuss alternatives considered helps ensure that the plan sponsors have appropriately weighed the merits of the various approaches that might be considered to create, implement, and maintain the consolidated audit trail, by requiring the NMS plan to describe the alternatives that the plan sponsors considered before making any significant decision with respect to the consolidated audit trail, and the relative advantages and disadvantages, including costs and benefits, of such alternatives. The Commission also believes that requiring transparency with respect to alternative approaches and the decision-making process of the SROs will facilitate public comment on the NMS plan and the wisdom of the approach selected by the plan sponsors. Similarly, such transparency should provide the Commission with useful insights into the rationale for the approach chosen by the plan sponsors as it considers whether to approve the NMS plan submitted to the Commission. The Commission also notes that this consideration complements Rule 613(a)(1)(vii), discussed above, which requires that the NMS plan discuss the detailed estimated costs to the plan sponsors for creating, implementing, and maintaining the consolidated audit trail, because this consideration requires the NMS plan to provide the costs of the alternatives that were not adopted by the plan sponsors in the NMS plan submitted to the Commission.

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iv. Implementation and Milestones of the Consolidated Audit Trail

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The following two considerations are designed to elicit additional information from the plan sponsors about the implementation and milestones of the consolidated audit trail. These will inform the Commission's evaluation of the NMS plan submitted to the Commission for its consideration, particularly in the degree to which the consolidated audit trail can replace existing data sources and in how effectively the proposed plan will meet the objectives discussed in Section II.B.2.

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Rule 613(a)(1)(ix)

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Rule 613(a)(1)(ix) requires the NMS plan to discuss "[a] plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of: (A) [w]hether collection of such information remains appropriate; (B) [i]f still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and (C) [i]f no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of the phasing-in of the consolidated audit trail and phasing-out of such existing rules and systems (or components thereof)."838

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As noted in the Proposing Release and above, many exchanges and FINRA each have their own disparate audit trail rules.839 Thus, a member of the various exchanges and FINRA could be subject to the audit trail rules of, and be required to submit different information to, more than one exchange and FINRA. In addition, several commenters discussed the potential reduction in costs for the creation, implementation, and maintenance of a consolidated audit trail if existing SRO audit trail requirements were eliminated. In particular, one commenter stated that, "over the long-term, the costs of developing a carefully designed and appropriately scaled consolidated audit trail could be offset in part by eliminating the individual SRO reporting requirements imposed under existing audit trail systems."840 This commenter also urged the SROs and the Commission "to rely to the fullest extent possible on the consolidated audit trail data for market reconstructions, investigations, and analysis, rather than requesting data from broker-dealers. This would be more efficient for both firms and regulators and would help maximize the utility of the consolidated audit trail."841

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Another commenter similarly stated that "a consolidated trail and consolidated market surveillance should achieve economies of scale that ultimately lower costs for both the markets themselves and the market participants."842 This commenter further reasoned that, "[r]ather than each SRO separately maintaining its own surveillance staff and surveillance programs that are searching for the same behavior, and thus creating redundancies, certain technology and staff resources can be consolidated into a single enterprise with costs equitably allocated across all SROs."843 However, the commenter also pointed out that "[s]uch consolidation, of course, would not preclude individual SROs from conducting surveillance for unique attributes and rules of its marketplace, ensuring that specialized market expertise continues to inform surveillance and oversight of trading on that market."844

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Many other commenters shared similar opinions with regards to the efficiency effects that a consolidated audit trail would have on market participants and their requirements to provide data to regulators. One commenter, for example, listed as one of seven benefits of a consolidated audit trail that "it would reduce the time and resources required by market participants to respond to case-by-case requests from regulators."845 Another commenter stated that it "agrees with the Commission that the implementation of the proposed consolidated audit trail would likely render unnecessary existing audit trails and data obtained through the equity blue sheets system."846 Similarly, another commenter also "agree[d] with the Commission that in calculating the total cost to the industry of the audit trail it is important to consider offsetting savings from the retirement of redundant data feeds such as OATS, OTS, COATS, ISG Equity Audit Trail, and EBS. In addition, the industry may be able to avoid the cost of compliance with the Commission's proposed Large Trader Reporting System if the consolidated audit trail contains sufficient information to meet those requirements."847

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The Commission recognizes that the creation of a consolidated audit trail could result in efficiency gains for market participants with respect to their regulatory data reporting requirements and for regulators with respect to their surveillance activities. The Commission also recognizes that the consolidated audit trail could render existing rules and systems that contain the same requirements as the consolidated audit trail redundant. While the Commission is not at this time requiring that existing rules and systems be eliminated, the Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof), including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also provide the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).

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The Commission believes that the implementation of a plan to eliminate duplicative existing rules, systems, and/or components of such rules and systems, will result in increased efficiency to market participants who need to comply with the disparate reporting requirements for orders and with repeated requests for data by regulators who cannot obtain the data they need from existing sources of information.

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Rule 613(a)(1)(x)

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Rule 613(a)(1)(x) requires the NMS plan to include "[o]bjective milestones to assess progress toward the implementation of the national market system plan."

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The creation of a consolidated audit trail is crucial to the effective oversight of the U.S. securities markets, but at the same time is an initiative of substantial scope and complexity. Accordingly, to ensure that the consolidated audit trail is established in a timely and logical manner, and that the SROs can be held accountable for maintaining a workable implementation schedule, the NMS plan submitted is required to set forth a series of detailed objective milestones, with projected completion dates, toward implementation of the consolidated audit trail. In addition to being useful for the Commission in its evaluation of the NMS plan, the milestones will be used by the Commission in its supervision of the implementation of the consolidated audit trail. Such milestones could include, but are not limited to: publication and implementation of the methods for obtaining a CAT-Reporter-ID and the Customer-ID database, testing of the collection of order and execution data from a representative subset of broker-dealers, initial access to the central repository for regulators, demonstration of linking the full lifecycle of events for select test orders, cancels, modifications, and executions, and integration of trade and quote data as currently reported by trading venues into the central repository.

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v. Commission Review

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The Commission believes these considerations represent fundamental characteristics of a meaningful plan to establish an effective and efficient consolidated audit trail. The Commission will assess the NMS plan's discussion of the considerations described as part of its evaluation of the NMS plan.848 The Commission notes that, if the NMS plan submitted does not comply with the requirements of the Rule, or if the Commission determines changes are necessary or appropriate, the Commission may amend the NMS plan pursuant to Rule 608(b)(2 of Regulation NMS with such changes or subject to such conditions as the Commission may deem necessary or appropriate, taking into account the considerations contemplated in Rule 613(a)(1).849 In addition, should the NMS plan and the consolidated audit trail not keep pace with market or technological developments, such that its efficiency or effectiveness becomes impaired,850 the Commission itself may, pursuant to Rule 608(b), propose an amendment to the NMS plan.851

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b. Regulator Use Cases

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In light of the comments recommending that the Commission undertake an RFP process and provide more "business requirements"852 the Commission believes that it is useful to provide further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases," as might typically be found in an RFP. These "use cases" and accompanying questions set forth below are derived directly from the considerations described in adopted Rule 613(a)(1), which, as discussed in Section III.C.2.a., originated from key principles of the consolidated audit trail that had been highlighted by the Commission in the Proposing Release. Specifically, these "use cases" describe the various ways in which, and purposes for which, regulators would likely use, access, and analyze consolidated audit trail data. By describing how regulators would use the consolidated audit trail data, the "use cases" and the related questions are meant to elicit a level of detail about the considerations that should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule. They should also aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail. In particular, the "use cases" will assist in gauging how well the NMS plan will specifically address the needs outlined in this Rule, by describing the features, functions, costs, benefits, and implementation times of the plan.

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The Commission notes that it is not including these "use cases" and accompanying questions to endorse a particular technology or approach to the consolidated audit trail; rather, these "use cases" and accompanying questions are designed to aid the SROs' understanding of the types of useful specific information that the NMS plan could contain that would assist the Commission in its evaluation of the NMS plan. The Commission also notes that its description of "use cases" includes a non-exclusive list of factors that SROs could consider when developing the NMS plan. The SROs also may include in the NMS plan submitted to the Commission for its consideration any other information regarding how data would be stored or accessed that the SROs believe the Commission or the public may find useful in evaluating the NMS plan submitted.

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1. Analyses Related to Investigations and Examinations

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The Commission expects that the consolidated audit trail will provide regulators the ability to more efficiently conduct targeted investigations and examinations. These generally require being able to conduct several types of queries on large amounts of data and extract targeted segments of such data. These targeted segments are likely to be much smaller than the bulk extractions discussed in Section III.C.2.b.2., below.

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Off-Line Analysis. Regulators are likely to frequently require the extraction of relatively small amounts of select data from the consolidated audit trail database at the central repository for their own "off-line" analyses.853 For example, a regulator may need to extract data on all orders in a particular stock, by a particular customer, on a particular day, or based on any other combination of fixed search criteria.854 Though the total data extracted may be small, the number of records that need to be searched to find such data may be enormous.

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i. What technical or procedural mechanisms will regulators be required to use to request data extractions? Does the NMS plan provide for a front-end user interface to perform search and extractions? If not, what types of tools or technologies would regulators need to implement to send search and extract requests to the database? Would regulators be permitted to write and submit their own queries (e.g., Structure Query Language or "SQL") to the database directly? Would the central repository write and submit queries on behalf of a regulator at the regulator's request?

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ii. What response times should regulators expect from search and extract requests? Would a search for all trades in a given security by a given customer over a specified period of time return a response with all requested data in one minute? One hour? Overnight? How would this response time scale with the amount of data requested? With the amount of data being searched?

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iii. How would the database effectively process simultaneous requests by multiple users at one or more regulators? Will each request be queued serially? Can they be processed in parallel? What is the effect of simultaneous requests on response times? Would there be limits to the number of search queries that can be performed at the same time? Would there be limitations on the size of the extractions from such queries?

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iv. A wide range of users at regulators may need to search and extract data for analysis. How are users to be administered? If the NMS plan contemplates a front-end user interface, what validation and security mechanisms will ensure that only permitted users will have access to such data? If the plan contemplates direct access through a means other than a front-end user interface, what security and validation mechanisms would regulators need to deploy to interact with the database?

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Dynamic Search and Extraction. At times, regulators may need to identify and extract small amounts of data from the database based on dynamic search criteria that might require the database to perform calculations on stored data to meet the specified criteria. A few examples of dynamic criteria are: searching for trades with trade sizes above a certain threshold, searching for trades in securities with execution prices that change more than a certain percentage in a given period of time, and searching for orders that are canceled within a certain period of time.

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i. Does the NMS plan contemplate allowing for dynamic search criteria to operate directly on the database? If so, how would the dynamic search criteria be specified and run? What, if any, limitations would there be on the types of search criteria that can be requested? What are the implications for response times? If the plan contemplates a front-end user interface, will dynamic search criteria be included? If the plan allows for dynamic search criteria through a means other than a front-end user interface, what types of tools or technologies would regulators need to implement to request dynamic searches? Have the plan sponsors considered whether such tools or technologies and the personnel to use them are currently available to the regulators?

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ii. If the NMS plan does not contemplate dynamic search criteria, please explain how regulators would be able to use the consolidated audit trail data to perform such searches. Would data need to be downloaded in bulk by the regulators to accomplish these types of searches off-line (see below for related questions)?

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2. Analyses Related to Monitoring, Surveillance, and Reconstruction

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In addition to targeted analysis of select data from the consolidated audit trail database, regulators will also require the analysis of data in bulk form. For example, the Commission is likely to use consolidated audit trail data to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform SRO and Commission rulemaking. To satisfy the surveillance requirements of Rule 613(f), regulators may want the ability to feed consolidated audit trail data into analytical "alert" programs designed to screen for potential illegal activities such as insider trading or spoofing. Surveillances might also benefit if regulators are able to link consolidated audit trail data with databases on certain types of material news events or market participants. This would allow regulators to isolate and aggregate data on trading in advance of those news events or by those participants. If preliminary analyses showed problems, the regulators could then request significant amounts of data for a more thorough and detailed follow-up analysis. In the event of a large scale market event like the May 6, 2010 "flash crash," regulators are likely to use consolidated audit trail data to reconstruct market events on the day of the event, including but not limited to reconstructing entire order books and trading sequences.

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i. What, if any, SRO surveillance data could be replaced by the consolidated audit trail while still improving SROs' ability to surveil?

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ii. How will the NMS plan allow regulators to address these types of large-scale, on-going data analyses?

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iii. In addition to providing regulators with the ability to search and extract data, will the NMS plan provide regulators with access to any plan-hosted applications or interfaces (i.e., those that operate on plan-based systems and resources) that would enable users to perform data analyses on, or create reports or graphs from, data stored in the database (such application or interfaces collectively known as "hosted analytical tools")? If so, how would regulators use and access such tools? What are the limitations of such tools? Would the tools allow regulators to perform the analyses discussed in the examples presented above?

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iv. If the NMS plan does not provide regulators with hosted analytical tools, how would regulators be expected to use their own resources, software, and hardware to perform such analyses? Would the plan provide regulators with an application programming interface ("API") that allows regulators to develop their own tools that interact directly with the consolidated audit trail database? If so, what will the form of such API be? Are there limitations to the number of systems that could connect to the database? How will the plan negotiate priorities for connectivity, searches and queries done via the API? Will there be limitations to the types of queries that could be performed through the API? What types of in-house technologies and systems would be required for regulators to connect to the consolidated audit trail in this fashion?

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v. If the NMS plan does not provide regulators with analytical tools and services and does not provide an API for regulators to connect their own analytics systems to the database, what mechanism would the plan provide to regulators for accessing bulk data in a way that allows for large-scale analyses? Would the plan allow for end-of-day downloads of an entire day's activity so that regulators could load this information into their own systems for such analysis? If so, how is access to such a download to be controlled and implemented? How long would it take to transmit an entire day's worth of consolidated audit trail data to each of the regulators that requires such access? 10 minutes? One hour? Multiple hours? Longer than overnight? Do these time estimates reflect that multiple regulators are likely to simultaneously download consolidated audit trail data each night? What types of technologies or systems would be required for regulators to download this data? What are the expected sizes of such a data download? What type of systems would each regulator need to deploy to store and analyze this data? Have the plan sponsors considered whether such systems and the personnel to operate them are currently available to the regulators?

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vi. Does the plan contemplate data streaming as a method of transmitting bulk data to each regulator? If so, what is the form and mechanism of such data streaming? Would the streaming occur intraday as data is reported to, and processed by, the database, or would the streaming occur after all (or a majority of, or such other criteria) data was reported to, and processed by the database (e.g. overnight streaming)? How would intraday streaming impact the accuracy or completeness of the data received by regulators? Would data be transmitted through different methods or with varying delays by different SROs?

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vii. If the plan does not contemplate any bulk data analyses or means of transmitting data to regulators on a bulk overnight basis or in an intraday or overnight streaming fashion, describe what alternative mechanisms, if any, could be used to enable regulators to perform the types of analyses described at the beginning of the section (b), as well as the various examples described throughout this document of how regulators would make use of consolidated audit trail data.

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3. Order Tracking and Time Sequencing

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As discussed in detail throughout this Release, one of the key requirements of the consolidated audit trail is to provide regulators with a complete record of all of the events that stem from a particular order, from routing to modification, cancellation, or execution. In addition, these events must be stored by the central repository in a linked manner – using either a unique order identifier or a series of unique order identifiers, as discussed in Section III.B.1.d.iv. – so that regulators can quickly and accurately extract a time-sequenced history of each event related to an order.

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i. What methods will the plan use to create the linkages for order events as described above? How will regulators access and search on data in a linked fashion?

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ii. What is the technical form of the order identifier(s) that broker-dealers will be required to send to the consolidated audit trail database so that these linkages can be created? To what extent will broker-dealers be able to generate such identifier(s) using their current systems? To what extent will broker-dealers need to collect or track new data, or modify their systems, to generate such identifier(s)?

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iii. Will the transmission of economic data (such as a price) be sent separately, or via a different technical mechanism, from noneconomic data (such as the identity of a customer)?

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iv. What other changes, if any, will be required of systems typically in use by broker-dealers to provide such data? To what extent can existing broker-dealer systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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v. What changes, if any, will be required of the systems currently in use by regulators to receive such data? To what extent can existing regulatory systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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vi. If data reformatting is required, how much must be done by each broker-dealer using its own systems and resources prior to sending data to the central repository, versus being done on the receiving end by the central repository using plan-based systems and resources?

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vii. If multiple methods for collecting and aggregating are contemplated by the NMS plan, what are the pros and cons of each method?

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viii. How will the plan ensure orders and subsequent events are properly time-sequenced? At what level of granularity will time stamps be stored for each event? Milliseconds? Microseconds? Picoseconds? Describe any differences in the accuracy at which events originating in the same broker-dealer system can be sequenced versus events across different systems at the same broker-dealer, or systems at different broker-dealers. What type of synchronization of clocks will be employed to minimize inter-system timing inaccuracies?

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ix. If time stamps are not stored at a sufficient level of granularity to properly sequence events, what other data or mechanisms will the NMS plan provide to meet the requirement that regulators be able to time-sequence events?

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x. Even if time stamps are sufficiently granular to meet the time-sequencing requirements of today, how would the plan contemplate increasing that granularity as the speed of trading increases?

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4. Database Security, Contingency Planning, and Prospects for Growth

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The data stored in the consolidated audit trail database will contain confidential detailed records of trade and order flow by customer.

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i. How will the plan ensure the security of the database in a way that provides for flexible access by permitted users at multiple regulators (i.e., the Commission and the SROs), but denies access to all other non-permitted users?

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ii. What are the plan's policies and procedures with regards to security? Will the plan make use of any specific national or international security standards? If so, which ones? Will the plan make use of third-party reviews of its security procedures?

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iii. What types of contingency and backup plans will be employed by the plan to safeguard against the loss of data due to technical failures? Will the plan make use of live failover mechanisms so that data being sent to the database is not inadvertently lost in the event of a failure? Will contingency plans provide regulators with uninterrupted access to the database? If not, what are the expectations for recovery times under different failure scenarios?

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iv. As order and trade volumes increase, how does the plan contemplate handling the need for increased capacity and throughput? Would the plan be able to accommodate a doubling in daily volume without materially altering the basic technologies and architecture? A ten-time increase? A 100-times increase?

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5. Database Access

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As part of an investigation or examination, regulators may need to analyze historical trades and orders in the database maintained by the central repository (though not trade and order events occurring prior to the implementation of the consolidated audit trail).

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i. How much historical data will be stored "on-line" in the database and be available for immediate search and extraction?

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ii. How will data be archived if it is no longer stored on-line? How will regulators access and search data that has been archived?

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iii. Will third parties have access to historical data? How will this access differ from the regulatory access?

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c. Extension of time for submission of NMS plan

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Proposed Rule 613 required the SROs to jointly file the NMS plan within 90 days from approval of Rule 613. The Commission received a comment letter specifically suggesting that a six-month period, rather than the 90-day period originally proposed, would be more appropriate for the submission of the NMS plan to ensure that the NMS plan is drafted with an informed understanding of how order and trade processing works so that the consolidated audit trail systems are capable of achieving the Commission's objectives.855 To this end the commenter recommended that the Rule mandate the formation of cross‐market participant working groups; outline the objectives of consolidated audit trail rather than identify technical requirements; and allow six months for the cross‐participant working groups to perform a requirements analysis as part of the development of the NMS plan.856

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In response to this commenter and other commenters that suggested that the Commission rely on an industry working group to create the consolidated audit trail857 and to provide sufficient time for the SROs to draft the additional provisions required by the Rule858 and to prepare responses to the considerations and the use cases for inclusion in the NMS plan,859 the Commission is extending the timeframe for the submission of the NMS plan from 90 days from approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register.860

+

This scenario illustrates the CAT reporting requirements when an Industry Member internally routes a customer order from the sales desk to multiple desks within the Industry Member. Each destination desk subsequently internally fills the order. Each internal route and execution must be reported separately.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events for CAT:

+

• At the Sales Desk

+

• New Order event for the customer order

+

• At the Trading Desk

+

• Order Internal Route event from the sales desk to the trading desk

+

• The principal execution as a Trade event

+

• At the Arbitrage Desk

+

• Order Internal Route event from trading desk to the arbitrage desk

+

• The principal execution as a Trade event

+

• At the Program Trading Desk

+

• Order Internal Route event from the trading desk to the program trading desk

+

• The principal execution as a Trade event

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.3.5. Internal Route and Execution, Leaves Quantity Routed Externally
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Internal Route and Execution, Leaves Quantity Routed Externally + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements to CAT when an Industry Member internally routes an order to another desk where it is partially executed and the remainder is routed to another Industry Member to execute.

+ +

Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Internal Route from the Sales Desk to the Trading Desk

+

• Trade event for the partial execution of the customer order

+

• Order Route of the remaining shares to Broker 2

+

Industry Member Broker 2 is required to report the following events:

+

• Order Accepted event for the order from Broker 1

+

• Trade event for the execution of Broker 1's order

+ + +
-
pubdate: N/A effdate: N/A -
3. NMS Plan Costs
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, NMS Plan Costs - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.3.6. Fill of a Customer Order from a Pre-Existing Principal Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Customer Order from a Pre-Existing Principal Order + Compliance User: Industry Member Keywords: - Cost Estimate, - Preliminary, - Revised, - Programmer Analyst, - Business Analyst, - Attorney, - Compliance Manager, + Order Fulfillment event, -

a. NMS Plan Cost Estimates

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This section sets forth the Commission's estimates of the costs to prepare and file the NMS plan. As noted above, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs to the Commission for its consideration and there has been an opportunity for public comment.861 The Commission believes that an economic analysis of the consolidated audit trail is more appropriately performed once the SROs narrow the expanded array of choices they have and developed a detailed NMS plan.862 At that time, the Commission will have available to it detailed information provided by the SROs, and any additional information provided by commenters once the NMS plan is published for comment. The cost estimates set forth below, therefore, only reflect the Commission's estimates as to the costs to the SROs for developing an NMS plan to be submitted to the Commission. These cost estimates do not reflect the much more significant initial and ongoing costs that would be incurred if such NMS plan were approved by the Commission and the implementation of the consolidated audit trail begins.

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The Commission notes that the requirement to develop and submit the NMS plan also is a collection of information within the meaning of the Paperwork Reduction Act of 1995 ("PRA").863 Section IV. below describes in detail the burdens associated with the requirement that the SROs develop and submit an NMS plan.

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i. Preliminary Cost Estimates from Proposing Release

-

In the Proposing Release, the Commission estimated that each SRO, on average, would incur an aggregate one-time cost of approximately $234,000864 to prepare and file the NMS plan, for an estimated aggregate cost of about $3.5 million.865

-

In making these estimates, the Commission assumed that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be comparable to the cost to create other existing NMS plans.866 Underlying the Commission's estimates were estimates of the amount of time the Commission believed would likely be spent by Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers. The Commission did not receive any comments on these specific cost estimates.

-

ii. Revised Cost Estimates

-

As noted above, the Commission based its original estimates of the cost to prepare and file the NMS plan on the costs incurred with existing NMS plans. The adopted Rule, however, has been modified from the proposed Rule in several significant ways that differentiate the costs to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to: (1) provide additional information and analysis while addressing the considerations that are set forth in Rule 613(a)(1);867 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,868 security and confidentiality,869 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;870 (3) address error rates;871 and (4) provide for the creation of an Advisory Committee.872

-

(A) Revised Initial Costs to Create and File the NMS Plan

-

In light of these modifications to the proposed Rule, the Commission no longer believes that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be sufficiently comparable to the cost to create other existing NMS plans to use those costs as a basis for developing a cost estimate for the NMS plan required by Rule 613. Instead, as discussed in more detail below, the Commission is increasing its estimated costs for the development and filing of the NMS plan due to the increases in the hours that likely would be spent to create the NMS plan by the SROs.873 The Commission also is adjusting its preliminary cost estimate for the creation and filing of an NMS plan to reflect updated 2011 wage figures, as well as the registration of two additional SROs, since the preliminary estimates were developed.874 Specifically, the Commission now estimates that the aggregate one-time cost for creating and filing an NMS plan would be approximately $718,000 per SRO,875 or approximately $12.2 million in the aggregate,876 compared to an initial estimate of $234,000 per SRO, or approximately $3.5 million in the aggregate, to prepare and file an NMS plan.877

-

The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;878 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that the Commission underestimated the time the SROs would spend on business analyses to be performed in designing the NMS plan based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.879 In response, as discussed below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney, and Compliance Manager hours.

-

The Commission notes that the average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

-

(i) Programmer Analyst

-

The Commission is increasing its Programmer Analyst hour estimates from 220 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.i., the Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase substantially its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

-

(ii) Business Analyst

-

The Commission is increasing its Business Analyst hour estimates from 360 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.ii., the Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases," and overall, an amount of time that is comparable to the time that would likely be spent by Programmer Analysts because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, but have separate responsibilities as well.

-

(iii) Attorney

-

The Commission is increasing its estimates for the hours an Attorney would likely spend to prepare and file an NMS plan from 400 hours to 700 hours per SRO. As discussed in more detail in Section IV.D.2.a.iii. below, the Commission anticipates that an Attorney would spend substantially more time than previously estimated to draft the NMS plan.

-

(iv) Compliance Manager

-

The Commission is increasing its Compliance Manager hour estimate from 100 hours to 300 hours per SRO. As discussed in more detail below in Section IV.D.2.a.iv., the Commission anticipates that a Compliance Manager would spend substantially more time than previously estimated to draft the NMS plan.

+

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal order and routes it to an exchange. Before execution of the principal order, the Industry Member receives a customer order. Upon execution of the principal order, the Industry Member fills the customer order on a riskless principal basis.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• The creation of a new principal order (New Order event)

+

• Route the principal order to an exchange via an Order Route event

+

• The receipt of a customer order (New Order event)

+

• Fill of the customer order with the executed principal order via an Order Fulfillment event

+ + + +
-
pubdate: N/A effdate: N/A -
4. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
2.3.7. Fill of a Customer Order from a Pre-Existing Principal Order with Better Price than the Representative Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Customer Order from a Pre-Existing Principal Order with Better Price than the Representative Order + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates and routes a representative order to work a customer order, but ultimately fills the customer order with an existing principal order that executed at a better price.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• A New Order event for the creation of the principal order

+

• The route of the principal order to the exchange (Order Route event)

+

• The receipt of the customer order as a New Order event

+

• The creation of the representative order as a New Order event

+

• The route of the representative order to the exchange as an Order Route event

+

• An Order Fulfillment event for the fill of the customer order against the principal order

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.3.8. Route to Foreign Broker
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Route to Foreign Broker + Compliance User: Industry Member Keywords: - Effective Analysis, - Competition, - Promotion, - NMS Plan, + CAT Reporter, -

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition. Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

-

The Commission has focused its economic analysis in this Release on the requirement that the SROs develop an NMS plan, rather than on the actual creation, implementation, and maintenance of a consolidated audit trail itself, and is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself until such time as it may approve the NMS plan submitted to the Commission for its consideration. The Commission's consideration of the Rule's impact on efficiency, competition, and capital formation is consistent with this approach. Because the Rule focuses only on the process and the requirement of the development of an NMS plan, the Commission believes that the adopted Rule will have minimal, if any, impact on efficiency, competition, and capital formation.

-

The Commission regards the adopted Rule as only a step in the multi-step process of developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail and the Commission recognizes that the creation, implementation, and maintenance of a consolidated audit trail itself could potentially have effects on efficiency, competition, and capital formation. Therefore, Rule 613(a)(5) specifically provides that the Commission will consider the impact of the NMS plan submitted to the Commission for its consideration on efficiency, competition, and capital formation in determining whether to approve the plan or any amendment thereto. A complete consideration of the impact of the NMS plan, or any amendment thereto, on efficiency, competition, and capital formation, however, requires information that will not be known until the SROs submit their NMS plan or any amendment thereto. Accordingly, the Commission is deferring this analysis until such time as it may approve the NMS plan, or any amendment thereto, submitted by the SROs. To facilitate the consideration of such possible impacts, the Rule requires SROs to provide their own analysis of the plan's potential impact on efficiency, competition, and capital formation.

+

This scenario illustrates the reporting requirements to CAT for an Industry Member (Broker 1) that routes an order to a foreign broker-dealer. Because the foreign broker dealer is not a CAT reporter, Broker 1 must report an Order Fulfillment event to represent the outcome of the customer order.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• A New Order event for the receipt of customer order

+

• An Order Route event for the routing of the order to the foreign broker

+

• An Order Fulfillment event to show the executed shares given back to the customer

+ + + +
+
pubdate: N/A effdate: N/A +
2.3.9. Order Fulfillment Amendment
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Order Fulfillment Amendment + Compliance User: Industry Member + Keywords: +

In the following scenario, the Industry Member amends the price of a customer fill that was reported to CAT on a previous day.

+

For this scenario, Industry Member Broker 1 is only required to report an Order Fulfillment Amendment event for T+1.

+ +

Note that the amendment reporting is only applicable to Order Fulfillment events, not the events reported to the TRF for media dissemination (which would have originally been reported as Trade events).

+
-
pubdate: N/A effdate: N/A -

D. Implementation of Rule 613 after Approval of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Implementation of Rule 613 after Approval of the NMS Plan - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Rule 613, - Implementation, - -

Proposed Rule 613(a)(3) sets forth a timetable for the implementation of the consolidated audit trail once the Commission has approved an NMS plan. The Commission proposed that the data collection and submission requirements would have applied first to the national securities exchanges and FINRA, and then to their individual members.880 Specifically, proposed Rule 613(a)(3)(iii) would have required the plan sponsors to provide to the central repository the data to be required by the Rule within one year after effectiveness of the NMS plan. Members of the exchanges and FINRA would have been required to begin providing to the central repository the data required by the proposed Rule two years after the effectiveness of the NMS plan.881 This phased approach was intended to allow members additional time to implement the systems changes necessary to begin providing the information to the central repository, including developing procedures to capture any new information required, such as the unique customer and order identifiers.

-

Additionally, proposed Rule 613(g)(1) would have required each SRO to file a proposed rule change with the Commission on or before 120 days from approval of Rule 613 to require its members to comply with Rule 613. Further, proposed Rule 613(i) would have required the plan sponsors to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how the plan sponsors would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that would be required to be provided, which market participants would be required to provide the data, an implementation timeline, and a cost estimate.

-

Although one commenter agreed that the consolidated audit trail could be implemented according to the timeline originally proposed,882 and another urged the Commission to expedite implementation of Rule 613,883 several commenters stated that more time would be necessary to develop and implement the NMS plan.884 Many commenters suggested extended timelines for various aspects of the consolidated audit trail.885 Two commenters, however, argued that the timetable for implementation should be shortened,886 and one of the commenters suggested that the Commission use existing infrastructure, naming OATS as an example, as the basis of the audit trail to save implementation time.887 Another commenter requested that the Commission move the deadline for submission of the joint document from the SROs outlining a proposal of how an expansion could occur from two months, as proposed, to one year after approval of the NMS plan, to allow time to choose a technology provider and build the infrastructure of the system, stating that "[i]t would be far better to develop the design for the initial products and leverage this knowledge to later phases."888

-

The Commission also received two comment letters recommending that the Rule contain an exemption to accommodate the business model of small broker-dealers.889

-

After considering the comments regarding the proposed timeline for implementation of the Rule, the Commission is adopting Rule 613 with changes to the proposed Rule. First, the Commission is adopting a deadline of 60 days from effectiveness of the NMS plan (rather than 120 days from approval of the Rule, as originally proposed) by when each SRO must file with the Commission proposed rule changes to require its members to comply with the requirements of the Rule and the adopted NMS plan,890 so that SROs can sequence their efforts by acting first on developing the NMS plan to be submitted to the Commission for its consideration, and then on proposed rules requiring compliance by their members. Second, in response to the commenter that advocated extending the deadline for the plan sponsors for submission of the joint document outlining how an expansion could occur from two months, as proposed, to one year after effectiveness of the approved NMS plan, the Commission is modifying the proposed Rule so that the document will be due to the Commission within six months (rather than two months as proposed) after the approval of the NMS plan. The Commission believes that this additional four months will provide the time necessary after the submission of the NMS plan to the Commission for the SROs to plan how to expand the consolidated audit trail to capture orders and trading in these additional securities.891

-

The Commission has considered the comment letters that requested an exemption from the proposed Rule for small broker-dealers,892 but, as discussed above,893 does not believe that it is appropriate to completely exempt smaller broker-dealers from the requirements of the consolidated audit trail. While the Commission does not believe that it is appropriate to completely exempt smaller broker-dealers from the Rule, the Commission, in response to commenters' concerns regarding the potential difficulties for small broker-dealers, is modifying the time by when the NMS plan may require small broker-dealers to comply with Rule 613. The Commission is permitting the SROs in the NMS plan to allow small broker-dealers up to three years after effectiveness, rather than two years as proposed, to begin reporting data to the central repository in recognition that some of these firms may still be handling orders manually and thus will need additional time to upgrade to an electronic method.894 Additionally, because many of these broker-dealers may have limited resources, the Commission encourages plan sponsors to propose in the NMS plan a requirement that small broker-dealers report data to the central repository within three years after effectiveness of the NMS plan, as the Commission believes that providing small broker-dealers a longer implementation time should assist such broker-dealers in identifying the most cost-effective and the most efficient manner in which to procure third-party software or make any systems modifications or other changes to comply with Rule 613.

-

Rule 613(a)(3)(vi) uses the definition of "small broker-dealer" contained in Exchange Act Rule 0-10: "Small entities under the Securities Exchange Act for purposes of the Regulatory Flexibility Act."895 Rule 0-10(c) defines a "small broker-dealer" as a broker or dealer that: (1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this section.896 The Commission believes that applying this definition is appropriate because it is an existing regulatory standard that is an indication of small entities for which regulators should be sensitive when imposing regulatory burdens.

-

The Commission notes that not all of the timeframes for implementation are being revised.897 As discussed in Section III.B.1.f., above, the Commission has learned through the comment process that technology exists today to "normalize" information collected for the consolidated audit trail into a uniform electronic format, which will allow the required data to be captured and reported to the central repository more readily than the Commission originally anticipated. Accordingly, the Commission believes the remaining proposed implementation timeframes are reasonable and is adopting them as proposed.

+
pubdate: N/A effdate: N/A +

2.4. Order Modification Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios + Compliance User: Industry Member + Keywords: +
pubdate: N/A effdate: N/A +
2.4.1. Customer Order and Modification
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Order and Modification + Compliance User: Industry Member + Keywords: + Order Modified event, + +

This scenario illustrates the reporting requirements to CAT for an Industry Member for a customer initiated modification on an order.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Modified event upon receipt of customer request

+ + +
+
pubdate: N/A effdate: N/A +
2.4.2. Customer Initiated Modification of Order Previously Routed to Exchange
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Initiated Modification of Order Previously Routed to Exchange + Compliance User: Industry Member + Keywords: + Order Modification event, + EXCH1, + +

This scenario illustrates a customer-initiated modification of an order which the Industry Member had previously routed to an exchange.

+

In this scenario, Industry Member Broker 1 is required to report the following events to CAT:

+

• A New Order event for the receipt of customer order

+

• Order Route event for the route to the exchange

+

• An Order Modification event

+

• A second Order Route event for the route of the modified order to the exchange

+ + + + +
+
pubdate: N/A effdate: N/A +
2.4.3. Customer Initiated Modification of Order Previously Routed to Another Industry Member
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Initiated Modification of Order Previously Routed to Another Industry Member + Compliance User: Industry Member + Keywords: + EXCH1, + +

This scenario illustrates the reporting requirements to CAT for two Industry Members when a customer of the first Industry Member initiates a modify on an order. The example shown does not illustrate events that would occur following the second Order Route event to account for the New Order and Order Accepted events, such as cancellations, trades, or fulfillments.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Route event for the routing of the order to Broker 2

+

• Order Modified event for customer initiated modification

+

• Order Route event for the routing of the modified order to Broker 2

+

For this scenario, Industry Member Broker 2 is required to report the following events:

+

• Order Accepted event for the received client order from Broker 1

+

• Order Modified event upon receiving the modify notice from Broker 1

+ + + + +
+
pubdate: N/A effdate: N/A +
2.4.4. System Driven Modification of Previously Routed Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, System Driven Modification of Previously Routed Order + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements to CAT for two Industry Members when the Industry Member sending an order uses a programmed algorithmic system, which modifies the order routes. Since the order modification is determined by the algorithm and not by the sending Industry Member, the sending Industry Member does not need to report subsequent Order Route events. The modifications driven by the algorithm are captured by the receiving Industry Member in an Order Modified event.

+

For this scenario, sending Industry Member Broker 1 is required to report the following events:

+

• New Order event for the accept of the customer order

+

• Order Route event for the routing of the order to Broker 2

+

For this scenario, receiving Industry Member Broker 2 is required to report the following events:

+

• Order Accepted event for the received order from Broker 1

+

• Order Modified event upon receiving the modify from Broker 1

+ + + + +
+
pubdate: N/A effdate: N/A +
2.4.5. Order Modification of a PEG Order by a Display ATS
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Order Modification of a PEG Order by a Display ATS + Compliance User: Industry Member + Keywords: + Section 6.4(d)(i) of the CAT NMS Plan, + Order Adjusted Event, + CAT NMS plan, + Per CAT FAQ #H1, + Broker 1, + +

This section will show how an Order Adjusted Event is reported when a display ATS reprices a peg order. Per CAT FAQ #H1, each time an Industry Member reprices a peg order based on a market move (i.e., when there is a change in the national best bid or offer or the best bid or offer on a particular exchange, as applicable based on the terms of the order), the Industry Member must report a price modification of the peg order to the CAT pursuant to Section 6.3(d) of the CAT NMS Plan, as applied to Industry Members by Section 6.4(d)(i) of the CAT NMS Plan, if the price is modified. If the Industry Member does not reprice a peg order when the market moves, the Industry Member does not need to report a modification of the peg order to the CAT since the order was not modified by either the customer or the Industry Member. For example, for both displayed and non-displayed alternative trading systems (ATSs), if an ATS’s matching engine reprices a peg order when the market moves, the price modification must be reported to the CAT. If a matching engine does not reprice a peg order when the market moves, there is no requirement to report a price modification to the CAT.

+

In this scenario, Industry Member Broker 1 routes a customer midpoint PEG order to ATS A. ATS A gives the order a working price upon receipt. Then the NBBO changes while the order stays open on the book. The ATS reprices the order which is required to be reported to CAT.

+

Industry Member Broker 1 in this case is required to report:

+

• The receipt of customer order (New Order event)

+

• The route of the order to the ATS in an Order Route event

+

ATS A must report:

+

• An Order Accepted event for the receipt of the PEG order from Broker 1

+

• The modification of the price due to NBBO changes - this should be reported using an Order Adjusted Event with only the price fields restated

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.4.6. Display Modifications of a Display ATS
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Display Modifications of a Display ATS + Compliance User: Industry Member + Keywords: + Order Adjusted Event, + +

Display modifications can be reported to CAT using the Order Adjusted event. This scenario illustrates the reporting requirements when an order is partially executed on an ATS, and as a result the display size of the order changes.

+ +

In this scenario, an order is routed to an ATS for execution. The sending Industry Member Broker 1 is required to report:

+

• Receipt of the order from the customer in a New Order event

+

• An Order Route event of the order route to ATS A

+

ATS A is required to report:

+

• An Order Accepted event for the receipt of the order routed from Broker 1

+

• Partial execution of the order as a Trade Event

+

• Update to the display size post execution as an Order Adjusted event

+

Note that ATS A and Broker 1 may have subsequent order handlings on the order. This example is to illustrate the display modification reporting only, so not all possible steps are shown here.

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.4.7. Manual Route, Followed by an Electronic Modification
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Manual Route, Followed by an Electronic Modification + Compliance User: Industry Member + Keywords: + Industry Member Broker 2, + Order Route Event, + Order Modified event, + +

This scenario illustrates the Phase 2a reporting requirement to CAT when an order is initially routed manually between two Industry Members, and then an electronic message is sent to modify the material terms of the order.

+ +

In this scenario, Industry Member Broker 1 must report:

+

• Receipt of the customer order in a New Order event

+

• Manual route of the order to Broker 2 (Order Route event)

+

• Order Modified event for reducing the quantity of the order

+

• Route of the modified order to Broker 2 (Order Route event)

+

The following must be reported by Industry Member Broker 2:

+

• Receipt of the manual route from Broker 1 (Order Accepted event)

+

• An Order Modified event for reducing quantity of the order (Order Modified event)

+ + + + +
-
-
pubdate: N/A effdate: N/A -

IV. Paperwork Reduction Act

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Information, - NMS Plan, - -

Certain provisions of the Rule contain "collection of information requirements" within the meaning of the PRA. The Commission published notice requesting comment on the collection of information requirements in the Proposing Release and submitted the proposed collection to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The control number for Rule 613 is OMB Control No. 3235-0671 and the title of the new collection of information is "Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules thereunder."

-

This Release includes the Commission's estimates of the costs to create and file the NMS plan.898 As noted above, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.899 Similarly, the Commission is discussing below its estimates of the burden hours associated with the development and filing of the NMS plan but is deferring its discussion of the much more significant burden hours associated with the other paperwork requirements of the consolidated audit trail. The Commission also is deferring its discussion of the ongoing burden hours associated with the NMS plan because such ongoing burdens would only be incurred if the Commission approves the NMS plan. Instead, the Commission will defer these discussions until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

-
pubdate: N/A effdate: N/A -

A. Summary of Collection of Information under Rule 613

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Summary of Collection of Information under Rule 613 - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Filing of NMS Plan, - SRO, - Paperwork, - -

Rule 613 requires the SROs to develop and file an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository for the collection of information for NMS securities.900 The NMS plan must require each SRO and its respective members to provide certain data to the central repository in compliance with Rule 613.901 The NMS plan also must include a discussion of specified considerations,902 and certain provisions related to administration and operation of the plan903 and the operation of the central repository.904 Further, the NMS plan is required to include certain provisions related to compliance by the SROs and their members with the requirements of the Rule and the NMS plan.905

-

The Commission believes that requiring an NMS plan imposes a paperwork burden on the SROs associated with preparing and filing the joint NMS plan.

+
pubdate: N/A effdate: N/A +

2.5. Cancellation Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios + Compliance User: Industry Member + Keywords: +
pubdate: N/A effdate: N/A +
2.5.1. Order Canceled
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Order Canceled + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements to CAT for an Industry Member when a customer order is canceled on the same day as the order was created.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Order event for the customer order

+

• Order Canceled event upon receipt of notice by the customer

+ +

Note that for illustration purposes, actions taken by the Broker between the receipt of the original order and the customer cancellation are not included.

+ + +
+
pubdate: N/A effdate: N/A +
2.5.2. Partial Cancellation of an Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Partial Cancellation of an Order + Compliance User: Industry Member + Keywords: +

The following scenario illustrates the reporting requirements to CAT if the customer partially cancels an order placed with an Industry Member.

+

In this scenario, Industry Member Broker 1 must report:

+

• The receipt of the customer order as a New Order event

+

• Either a Order Canceled event or an Order Modified event for the partial cancellation

+ + + +
+
pubdate: N/A effdate: N/A +
2.5.3. Cancellation of a Routed Order
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Cancellation of a Routed Order + Compliance User: Industry Member + Keywords: + Order Canceled Event, + +

This scenario illustrates the CAT reporting requirements for an Industry Member when an order that was previously routed to another Industry Member is canceled.

+ +

Industry Member Broker 1 must report:

+

• The receipt of the customer's order as a New Order event

+

• The initial route of the order to Broker 2 (an Order Route event)

+

• The cancellation of the order (an Order Canceled event)

+

Industry Member Broker 2 must report:

+

• The receipt of the route from Broker 1 as an Order Accepted event

+

• The cancellation of the order as an Order Canceled event

+ + + +
-
pubdate: N/A effdate: N/A -

B. Use of Information

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Use of Information - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +

2.6. Additional Reporting Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios + Compliance User: Industry Member Keywords: - Consolidated Audit trail, - Commission, - NMS Plan, + Order Accepted Event, -

The information contained in the NMS plan submitted to the Commission for its consideration will provide the Commission and the public with detailed information regarding how the consolidated audit trail will be created, implemented, and maintained in order for the Commission and the public to be able to carefully consider all aspects of the NMS plan. Further, the information contained in the NMS plan should facilitate an analysis of how well the NMS plan will allow regulators to effectively and efficiently carry out their responsibilities.

+
pubdate: N/A effdate: N/A +
2.6.1. Industry Member Utilizes Multiple Systems at One Desk
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Utilizes Multiple Systems at One Desk + Compliance User: Industry Member + Keywords: +

In the following scenario, the Industry Member has multiple trading systems utilized at a single desk. For CAT reporting, the Industry Member is not required to report information regarding an order's movement between two systems within the same desk or department as an internal route.

+

In this scenario, the desk which received the customer's order transfers the order into another internal application in order to route the order to an exchange. Since the desk handling the order does not change, the Industry Member Broker 1 is required to report:

+

• New Order event for the receipt of the customer order

+

• Order Route event for route to the exchange

+ + + +
+
pubdate: N/A effdate: N/A +
2.6.2. Industry Member Creates Child Orders and Routes
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Creates Child Orders and Routes + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements should an Industry Member chose to slice an order into multiple child orders before further handling.

+

For this scenario, Industry Member Broker 1 is required to report:

+

• Receipt of the customer order as New Order Event

+

• A Child Order event for each slice of the order created

+

• An Order Route event for each child order

+

Receipt Industry Members Broker 2 and 3 are required to report:

+

• Order Accepted events for receipts of the order from Broker 1 (and any subsequent order handling)

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.6.3. Industry Member Creates Multiple Branches of Child Orders
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Creates Multiple Branches of Child Orders + Compliance User: Industry Member + Keywords: + Order Internal Route event, + Participant Order Accepted, + Order Route, + Child Order, + +

This scenario illustrates the reporting requirements for an Industry Member where each internal desk has chosen to work an order by splitting the original order into smaller components. The Industry Member has the flexibility to report different events for each desk, should it better reflect the firm's internal systems.

+ +

For this scenario, Industry Member Broker 1 must report:

+

• The receipt of the customer order at the Sales Desk as a New Order event

+

• A Child Order event for each slice created at the Sales Desk prior to routing to another desk

+

• An Order Internal Route event for each child order

+

• For the Child Order sent to the Arbitrage Desk, a Child Order event for each new slice created

+

• An Order Route event for each Child Order routed from the Arbitrage Desk

+

• For the Child Order sent to the Trading Desk, an Order Internal Route event for each slice of the order (and any subsequent events not shown)

+ + + + + + + +
+
pubdate: N/A effdate: N/A +
2.6.4. Order Received and Routed Manually, Electronically Captured at Subsequent Desk
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Received and Routed Manually, Electronically Captured at Subsequent Desk + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements for an Industry Member when an order is received and then manually internally routed to another department where it is immediately entered into an electronic order management system upon receipt (e.g. the branch receives an order and calls the Trading Desk).

+ +

For this scenario, Industry Member Broker 1 must report:

+

• The receipt of the order from the customer (a New Order event with manualFlag = true)

+

• An Order Internal Route event for route of the order to the trading desk which will enter the trade into the Industry Member's electronic system

+

• The route of the order to the exchange (Order Route event)

+ + +
+
pubdate: N/A effdate: N/A +
2.6.5. Order Routed and Executed via a Clearing Firm
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routed and Executed via a Clearing Firm + Compliance User: Industry Member + Keywords: +

This example illustrates the reporting requirements when an introducing firm enters the customer order into the clearing firm's system. The clearing firm then executes the order from a proprietary account. Both the introducing firm and clearing firm are Industry Members.

+ +

For this scenario, the introducing firm (Broker 1) must report:

+

• The receipt of the order from the customer in a New Order event

+

• The route of the order to the clearing firm in an Order Route event

+

The clearing firm would report the following:

+

• The receipt of the order by the clearing firm in an Order Accepted event

+

• The execution of the order in a Trade event

+

Only the executing entity is required to report executions to CAT. In this scenario only the clearing firm is responsible to report a Trade event.

+ + +
+
pubdate: N/A effdate: N/A +
2.6.6. Direct Order Routing via a Clearing Firm's System
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Direct Order Routing via a Clearing Firm's System + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirement when an introducing firm receives a customer order and, using its clearing firm's system, directs the order to an exchange for execution. The clearing firm does not participate in any order routing or handling instructions but only provides the technology to the introducing firm to route the order.

+

The introducing firm, Industry Member Broker 1, must report the following to CAT:

+

• The receipt of the order from the customer in a New Order event

+

• The route of the order to the Exchange 1 in an Order Route event

+

The clearing firm does not have CAT reporting obligations.

+

The exchange follows Participant reporting requirements for subsequent handling.

+ + + +
+
pubdate: N/A effdate: N/A +
2.6.7. Order Routing via an Algorithm Provided by the Clearing Firm
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routing via an Algorithm Provided by the Clearing Firm + Compliance User: Industry Member + Keywords: +

This scenario illustrates the reporting requirements to CAT when an introducing firm receives a customer order and enters it into its clearing firm's system. The clearing firm's system automatically determines the routing destination based on pre-defined criteria developed by the clearing firm. The clearing firm makes the determination as to where the order is routed. The introducing firm does not direct the order. Both the introducing firm and the clearing firm are Industry Members. In this case, the following CAT events must be reported:

+

The introducing firm, Broker 1, must report:

+

• The receipt of the customer order in a New Order event

+

• The route of the order to the clearing firm in an Order Route event

+

The clearing firm must report:

+

• The receipt fo the order from the introducing firm in an Order Accepted event

+

• The route of the order to the routing destination as an Order Route event

+

The routing destination (exchange) must report:

+

• The receipt of order routed from the clearing firm

+

• The subsequent order handling actives that are CAT reportable

+ + + + +
+
pubdate: N/A effdate: N/A +
2.6.8. Order Routing via Smart Router Provided by another Industry Member
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routing via Smart Router Provided by another Industry Member + Compliance User: Industry Member + Keywords: + Destination Market Center, + SEC Rule 11Ac1-6, + SEC Rule 606, + Handling Instructions, + Trade Event, + +

In this scenario, the introducing firm receives a customer order and enters it directly to a Smart Router provided by another Industry Member to route the order. The Smart Router provided by another industry member does not need to separately report to CAT when all the following conditions apply:

+

1. The Industry Member providing the order routing system has no discretion over the order once it is entered into the Industry Member's order-routing system. The order routing destination ("Destination Market Center") must either be directed by the originating Industry Member or be subject to the pre-determined algorithm of the routing system agreed to by the originating Industry Member. The Industry Member providing the order routing system would have no involvement relating to the routing of the order, other than providing the routing mechanism.

+

2. The originating Industry Member must have established a relationship with the Destination Market Center, including meeting any and all applicable requirements to route orders to that destination. The originating Industry Member understands that the Industry Member providing the order routing system has no involvement with respect to the order in any way, except for providing a routing mechanism. No pre-established relationship between the Industry Member providing the order routing system and the Destination Market Center would be necessary for the originating Industry Member to access the routing destination.

+

3. The Destination Market Center views the order as coming directly from the originating Industry Member, not the Industry Member providing the order routing system, for all purposes, but not limited to, CAT reporting, trade reporting, applicable fees, etc.

+

4. The originating Industry Member, rather than the member providing the order routing system, identifies itself as the routing firm for purposes for the SEC Rule 606 (formerly SEC Rule 11Ac1-6).

+ +

The introducing firm, Industry Member Broker 1, is required to report:

+

• The receipt of the customer order in a New Order event

+

• The route of the order through a smart router (Order Route event with handlingInstructions = SMT)

+

The destination, Industry Member Broker 2, is required to report:

+

• The receipt of the order from Broker 1 as an Order Accepted event

+

• Execution of the order (Trade event)

+

The Industry Member providing the order routing system is not required to report to CAT.

+ + + +
+
pubdate: N/A effdate: N/A +
2.6.9. GTC Order Routed to Exchange, Modified by Customer
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, GTC Order Routed to Exchange, Modified by Customer + Compliance User: Industry Member + Keywords: + Industry Member Broker 1, + +

The following scenario illustrates the reporting requirements for handling order types that can live across days (e.g. GTC, GTD). Industry Member Broker 1 receives a "GTC" order from a customer. From Broker 1's perspective, the order is reported as GTC as maintained on their book. When Broker 1 routes the order to the exchange for execution, the order is a "DAY" order from the exchange's perspective and should be reported as timeInForce = DAY on the Order Route event as well as relevant Participant events. The Industry Member must submit an Order Route event every day the order is sent to the exchange until the order is executed or canceled.

+

On T+1, the customer modifies the GTC order. Broker 1 must report an Order Modified event with the original order date and an Order Route event for the modification on the exchange.

+ +

For this scenario, Industry Member Broker 1 is responsible for reporting:

+

• The receipt of the customer GTC order on T (New Order event)

+

• An Order Route event for the route to the exchange (as a "DAY" order)

+

• Another Order Route event for the route to exchange on T+1 (start of day) as the order was not executed or canceled on T

+

• The modification of the customer order on T+1 (during market hours) in an Order Modified

+

• The route of the modified order to the exchange on T+1 (Order Route event)

+ + + + +
+
pubdate: N/A effdate: N/A +
2.6.10. Dividend Reinvestment
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Dividend Reinvestment + Compliance User: Industry Member + Keywords: + dividend reinvestment investment program (DRIP), + Post Trade Allocation events, + New Order event, + Order Route Event, + handlingInstructions = DIV, + +

The following scenario illustrates the reporting requirements for an Industry Member whose customers participate in a dividend reinvestment program. Industry Member Broker 1 aggregates dividend reinvestment investment program (DRIP) orders for participating customers, rounds up to the the next whole share, and creates a new order to purchase shares that need to allocate to customers. This order is routed to the street, executed, and allocated to the participating customers. The remaining fractional share is allocated to the proprietary account of Broker 1. It is not required for Broker 1 to report Post Trade Allocation events for allocations to sub-accounts for dividend repurchase orders until Phase 2c.

+ +

For this scenario, Industry Member Broker 1 is responsible for reporting:

+

• A New Order event for a single order to acquire shares for all customers participating in the dividend reinvestment program

+

• An Order Route event for routing the principal purchase to Broker 2

+

Industry Member Broker 2 is responsible for reporting:

+

• An Order Accepted event to confirm receipt of the order from Broker 1

+

• A Trade event confirming execution of the order

+

Once the fractional inventory reaches a whole share threshold, Broker 1 would follow standard procedures for sales from proprietary accounts if actions were taken to flatten fractional share inventory.

+ +

Industry Member Broker 1 is responsible for reporting:

+

• A New Order event for the whole share order

+

• An Order Route event for routing the sale order to Broker 3

+

Industry Member Broker 3 is responsible for reporting:

+

• An Order Accepted event for the receipt of the order from Broker 1

+

• A Trade event for the execution of the order

+ + + + + +
+
pubdate: N/A effdate: N/A +
2.6.11. Routing of the Equity Leg of a Complex Option to another Industry Member
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Routing of the Equity Leg of a Complex Option to another Industry Member + Compliance User: Industry Member + Keywords: + New Order event, + Order route events, + equity leg order (Sell), + equity leg order (Buy), + +

This scenario illustrates the reporting requirements when an Industry Member splits the equity leg of complex options from customers. Upon determining the price at which the equity legs must be executed, the Industry Member routes the equity legs to another Industry Member for execution.

+

Note that the reporting requirement descriptions and flow chart below only show the equity leg handlings. It does not include the complex option orders or option legs.

+

In this scenario, the Industry Member (Broker 1) must report:

+

• The receipt of an equity order from the customer (New Order events)

+

• The route of the equity order to Broker 2 (Order Route events)

+

Industry Member Broker 2 receives the equity leg orders from Broker 1. The orders may come along with an offsetting order to be crossed, or Broker 2 may receive the offsetting order from another Industry Member. Broker 2 then executes as agency cross.

+

In this scenario, Broker 2 must report the following events to CAT:

+

• The receipt of the equity leg order (Sell) from Broker 1 in an Order Accepted event

+

• The receipt of the equity leg order (Buy) from Broker 1 (Or receipt of a Buy order from another Industry Member) in an Order Accepted event

+

• The execution of the orders in a Trade Event

+ + + + + + +
-
pubdate: N/A effdate: N/A -

C. Respondents

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Respondents - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Securities association, - -

Rule 613 applies to the 16 national securities exchanges and to one national securities association (FINRA) currently registered with the Commission.906

+
pubdate: N/A effdate: N/A +

2.7. JSON and CSV Examples

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples + Compliance User: Industry Member + Keywords: +

This provides an illustration of the different reporting formats of JSON and CSV.

+
pubdate: N/A effdate: N/A +
2.7.1. JSON Representation
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples, JSON Representation + Compliance User: Industry Member + Keywords: + JSON representation, + Internalized Trade, + +

Below is a JSON representation using the example in section 2.2.2 Internalized Trade Against Proprietary Account.

+ + +
+
pubdate: N/A effdate: N/A +
2.7.2. CSV Representation
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples, CSV Representation + Compliance User: Industry Member + Keywords: + CSV representation, + +

Below is the corresponding CSV representation of the same sample events.

+

Step 2: New Order Event MENO,20180416T153035.234456,E,false,,,XYZ,O12345,N,T,A,,Buy,10.00,,,50 0,,,LMT,,DAY,REG,,,false,INS001,A,,,N,,false,,,,,,,

+

Step 3: New Order Event MENO,20180416T153035.234457,E,false,,,XYZ,P12345,F,T,PR,,Sell,10.00,,, 500,,,LMT,,DAY,REG,,,false,PROP123,P,,,N,,false,,,,,,,

+

Step 4: Trade Event MEOT,20180416T153035.253456,false,,,XYZ,TXYZ555,500,10.00,DN,NA,TERM123,O1234 5, FRMA,Buy,0,Agency,TRF123,P12345,FRMA,Sell,0,Principal,TRF123,,,,,,,

+
-
pubdate: N/A effdate: N/A -

D. Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Estimated Hours, - -
pubdate: N/A effdate: N/A -
1. Preliminary Burden Hour Estimates from Proposing Release
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Preliminary Burden Hour Estimates from Proposing Release - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
+
pubdate: N/A effdate: N/A +

3. Option Scenarios and Examples

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples + Compliance User: Industry Member + Keywords: +

This section illustrates reporting scenarios for single leg electronic option events in scope for Phase 2b. Each example includes a process flow table and sample reporting values.

+
pubdate: N/A effdate: N/A +

3.1. Option Order Origination and Route Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios + Compliance User: Industry Member + Keywords: +

This section lays out the fundamental and common reporting scenarios. In addition to the scenarios provided below, please also refer to Equity Event Scenarios 2.1.5 (assume split route is two non-ATS Industry Members) and 2.1.6. The guidance also applies to single leg electronic option order reporting.

+
pubdate: N/A effdate: N/A +
3.1.1. New Principal Option Order Routed to Exchange and Executed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, New Principal Option Order Routed to Exchange and Executed + Compliance User: Industry Member + Keywords: + New Option Order (Principal), + Option Order Route event, + +

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal option order electronically, and electronically routes it to an exchange where it is executed.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• The creation of a New Option Order (Principal)

+

• The route to an exchange as an Option Order Route event

+ + + +
+
pubdate: N/A effdate: N/A +
3.1.2. Customer Option Order Routed to the Exchange
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Routed to the Exchange + Compliance User: Industry Member + Keywords: + New Option Order event, + Option Order Route event, + +

This scenario illustrates the reporting requirements to CAT for an Industry Member that routes a customer order to an exchange.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the customer order which was received electronically

+

• Option Order Route event for routing the customer order to the exchange

+

In this scenario, the execution is passed back directly to the customer, therefore no Option Order Fulfillment is required to be reported.

+ + + +
+
pubdate: N/A effdate: N/A +
3.1.3. Option Order Electronically Routed between Two Industry Members and Subsequently Executed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Option Order Electronically Routed between Two Industry Members and Subsequently Executed + Compliance User: Industry Member + Keywords: + FLEX Percent option, + New Option Order event, + Option Order Route event, + Option Order Accepted event, + Option Order Route event, + +

This scenario illustrates the reporting requirements when an option order is electronically routed from one Industry Member to another.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the customer order which was received electronically

+

• Option Order Route event for routing the customer option order to Broker 2

+

For this scenario, Industry Member Broker 2 is required to report the following events:

+

• Option Order Accepted event for receiving the client order from Broker 1

+

• Option Order Route event for routing the order to the Exchange

+ + + +
+
pubdate: N/A effdate: N/A +
3.1.4. Customer Option Order Manually Received, Routed Electronically
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Manually Received, Routed Electronically + Compliance User: Industry Member Keywords: - Estimated Hours, + CAT Reporting, + priorUnlinked = M, -

In the Proposing Release, the Commission estimated that each SRO, on average, would spend approximately 840 hours of legal, compliance, information technology, and business operations time to prepare and file the NMS plan. All together the SROs would spend an estimated 12,600 hours.907 The Commission's 840 hour estimate included internal personnel time and external legal costs - 400 Attorney hours, 100 Compliance Manager hours, 220 Programmer Analyst hours, and 120 Business Analyst hours. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal time to develop and draft the NMS plan, at an average hourly rate of $400, for a total external cost of $20,000 per SRO.908 All together, the SROs would spend an estimated $300,000 in external costs.909

-

In making these estimates, the Commission assumed that the burden hours necessary for preparing and filing the NMS plan pursuant to the proposed Rule would be comparable to the burden hours needed to create other existing NMS plans.910 The Commission's estimates included anticipated work hours for Programmer Analysts, Business Analysts, Attorneys and Compliance Managers. The Commission did not receive comments on any of these burden estimates.

+

This scenario illustrates the reporting requirements for Phase 2b for a customer order received manually by an Industry Member that is systematized and electronically routed.

+

For this scenario, Industry Member Broker 1 is required to report the following events: • Option Order Route event for the route of the option order to the exchange

+

In Phase 2b, the Option Order Route event must include the priorUnlinked= M, indicating the prior step is a manual handling not reported in Phase 2b.

+ + +
-
pubdate: N/A effdate: N/A -
2. Revised Burden Hour Estimates
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Revised Burden Hour Estimates - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: N/A effdate: N/A +
3.1.5. Customer Option Order Received Electronically, Manually Routed
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Received Electronically, Manually Routed + Compliance User: Industry Member Keywords: - Estimated Hours, - Revised Initial, - Filing NMS Plan, - Programmer Analyst, - Business Analyst, - Attorney, - Compliance Manager, + Participant Simple Option Order Accepted event, + Exchange reports a Participant Simple Option Trade event, + nextUnlinked flag, + priorUnlinked flag, -

As noted above, the Commission based its original estimates of SRO burden hours to prepare and file the NMS plan on the burden hours spent for existing NMS plans. The Commission, however, has modified the proposed Rule in several significant ways that differentiate the burden hours to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to expand the NMS plan in the following four ways: (1) provide additional information and analysis to address the considerations that are set forth in Rule 613(a)(1);911 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,912 security and confidentiality,913 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;914 (3) address error rates;915 and (4) provide for the creation of an Advisory Committee.916

-

a. Revised Initial Burden Hours Needed to Prepare and File the NMS Plan

-

In light of these modifications to the proposed Rule, the Commission is increasing substantially its estimated burden hours needed for the development and filing of the NMS plan. The Commission also is adjusting its preliminary burden hour estimates for the preparation and filing of an NMS plan to reflect the registration of two additional SROs after it issued the preliminary estimates.917 The Commission now estimates that the aggregate one-time burden hour amount for preparing and filing an NMS plan would be approximately 2,760 burden hours with $20,000 in external costs per SRO,918 or approximately 46,920 burden hours and $340,000 in external costs in the aggregate,919 compared to an initial estimate of 840 burden hours per SRO with $20,000 in external costs, or approximately 12,600 burden hours in the aggregate and $300,000 in external costs, to prepare and file an NMS plan.920

-

The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the Commission's analysis, set forth below, of the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;921 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that asserted that the Commission underestimated the time the SROs would spend on the business analyses to be performed in designing the NMS plan, based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.922 In response, as discussed in more detail below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney and Compliance Manager hours.

-

The Commission notes that these revised average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these revised hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

-

(i) Programmer Analyst

-

The Commission is increasing its estimates for the hours a Programmer Analyst would likely spend with respect to the preparation and filing of the NMS plan from 220 hours, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Specifically, the SROs will need to rely on Programmer Analysts to help address many of the considerations, as many of those are of a technical nature. For example, several of the considerations relate to the specific features and details of the NMS plan. Programmer Analysts likely will be consulted when the SROs are considering the specific features and details of the NMS plan. The Programmer Analysts likely will provide guidance and information regarding whether a particular feature or detail is technologically possible. The SROs also likely will consult Programmer Analysts when drafting the additional provisions required by the Rule. For example, in drafting the security and confidentiality provisions, Programmer Analysts, who may have knowledge about the information security practices and issues, may be consulted to provide input on a draft provisions in light of technologies with respect to security and confidentiality. Programmer Analysts also may be consulted with respect to addressing errors rates because such analysts may have a technical understanding of trading and reporting systems and be able to provide recommendations on how errors that are introduced can be addressed. In each of these instances, Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

-

(ii) Business Analyst

-

The Commission is increasing its estimates for the hours a Business Analyst would likely spend with respect to the preparation and filing of an NMS plan from 360 hours per SRO, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases." Overall, the Commission anticipates that this amount of additional time will be comparable to the additional time that would likely be spent by Programmer Analysts for the same reasons because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, albeit with separate responsibilities. The SROs will need to rely on Business Analysts to help address many technical considerations that have relevance to the business and operations of SROs. The Commission also believes that the SROs will need to rely on Business Analysts to work with the Programmer Analysts and the Compliance Managers to analyze the business impact of particular features and details of the NMS plan. Because Rule 613 is less prescriptive than the proposed Rule, Business Analysts may have a larger role in helping to determine which option the NMS plan will propose. Business Analysts also will likely be involved in determining the cost estimates and in analyzing the NMS plan's impact on efficiency, competition, and capital formation. The SROs also likely will consult with Business Analysts when drafting the responses to the considerations and the "use cases," as well as the additional provisions required by the Rule. For example, the SROs likely will consult with Business Analysts on the feasibility, benefits, and costs of any technological upgrades that may be required in order to provide the allocation information described in Rule 613(a)(1)(vi). Further, in drafting the security and confidentiality provisions, Business Analysts may have knowledge about the costs and the business risks of certain security and confidentiality decisions. Business Analysts also may be consulted with respect to addressing error rates because any decisions made may impact business operations and the cost estimates. Further, Business Analysts may likely be consulted by Attorneys with respect to the performance assessment and improvement plan. In each of these instances, Business Analysts may be involved in the NMS plan research, any industry discussions (particularly with members and other SROs), negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Business Analysts in the creation and filing of the NMS plan.

-

(iii) Attorney

-

The Commission is increasing its Attorney hour estimates from 400 hours to 700 hours per SRO. The Commission now anticipates that an Attorney would spend substantially more time than the Commission had previously estimated to draft the NMS plan. The NMS plan that Attorneys would draft must now include a discussion of the considerations and the additional provisions required by the Rule, and must reflect additional consultations with Programmer Analysts, Business Analysts and Compliance Managers. Further, the NMS plan drafted also would likely reflect additional consultation on the "use cases." The NMS plan proposal would also likely require Attorney work on the Advisory Committee requirement and on the NMS plan policies and procedures to be used by the plan processor923 to ensure the security and confidentiality and accuracy of the information submitted to the central repository.924 Attorney work would also be required on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. The Commission believes that an Attorney would also be involved in the NMS plan research, any industry discussions, negotiations with vendors, negotiations with SROs (in particular, to reach consensus on an NMS plan), and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Attorneys in the creation and filing of the NMS plan.

-

(iv) Compliance Manager

-

The Commission is increasing its Compliance Manager hour estimates from 100 hours to 300 hours per SRO. The Commission now anticipates that a Compliance Manager would spend substantially more time than the Commission had previously estimated to draft the NMS plan. Compliance Managers likely will help shape provisions of the NMS plan that deal with monitoring member and SRO compliance with the NMS plan's requirements. Compliance Managers likely will also be involved in the Advisory Committee requirement. They likely will also work on NMS plan policies and procedures to be used by the plan processor to ensure the security and confidentiality and accuracy of the information submitted to the central repository, and to ensure that these policies and procedures are feasible for SRO compliance and for member compliance.925 They will likely also work on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. Further, Compliance Managers will also work on NMS plan provisions that address error rates and performance assessment and improvement. The Commission believes that Compliance Managers may also be involved in the NMS plan research and industry discussions (particularly with regard to SRO and member compliance issues). Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Compliance Managers in the creation and filing of the NMS plan.

+

This scenario illustrates the reporting requirement for Phase 2b for a customer order received electronically by an Industry Member that is manually routed to another Industry Member. The order is then subsequently routed to the exchange.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the customer order which was received electronically (The nextUnlinked flag must be marked as "M" indicating next step is a manual handling so no linkage is available)

+

For this scenario, Industry Member Broker 2 is required to report the following events:

+

• Option Order Route event for the route of the option order to the exchange (The priorUnlinked flag must be marked as "M" indicating prior step is a manual handling so no linkage is available)

+ +
-
pubdate: N/A effdate: N/A -

E Collection of Information is Mandatory

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Collection of Information is Mandatory - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Collection, - -

The collection of information discussed above is a mandatory collection of information.

+
pubdate: N/A effdate: N/A +

3.2. Fulfillment Scenario s

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Fulfillment Scenario s + Compliance User: Industry Member + Keywords: +
pubdate: N/A effdate: N/A +
3.2.1. Broker Receives Single-Leg Electronic Orders, Creates Complex Order and Routes to Exchange
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Fulfillment Scenario s, Broker Receives Single-Leg Electronic Orders, Creates Complex Order and Routes to Exchange + Compliance User: Industry Member + Keywords: + nextUnlinked = C, + fulfillmentLinkType = YF, + priorUnlinked = C, + New Option Order events, + Option Order Fulfillment events, + +

This scenario illustrates the Phase 2b reporting requirements for Industry Members when a complex option order is created from multiple single leg option orders. For Phase 2b, there is no linkage required between the single leg option orders and the complex order.

+ +

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order events for each single leg customer order electronically received

+

• Option Order Fulfillment events for each single leg customer order post execution of the complex order

+

In Phase 2b, the two New Option Order events must be flagged as nextUnlinked = C, indicating that the orders are represented by a complex order so no linkage to the complex order in Phase 2b.

+ + + +
-
pubdate: N/A effdate: N/A -

F. Confidentiality

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Confidentiality - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Policies, - Reporting, - Central Repository, - -

The Rule requires that the data to be recorded and reported to the central repository will only be available to the SROs and the Commission for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.926 Further, the NMS plan submitted to the Commission for its consideration pursuant to the adopted Rule is required to include policies and procedures to ensure the security and confidentiality of all information submitted to the central repository, and to ensure that all plan sponsors and their employees, as well as all employees of the central repository, use appropriate safeguards to ensure the confidentiality of such data and shall agree not to use such data for any purpose other than surveillance and regulatory purposes.927

+
pubdate: N/A effdate: N/A +

3.3. Option Order Modification Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Modification Scenarios + Compliance User: Industry Member + Keywords: +

This section illustrates the common scenarios of single-leg option modifications and the CAT reporting requirements for Phase 2b. In addition to the scenarios provided below, please refer to Equity Event Scenarios 2.4.1,2.4.3, and 2.4.4. The guidance also applies to single leg electronic option order reporting.

+
pubdate: N/A effdate: N/A +
3.3.1. Customer Initiates Modification of Option Order Previously Routed to the Exchange
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Modification Scenarios, Customer Initiates Modification of Option Order Previously Routed to the Exchange + Compliance User: Industry Member + Keywords: + New Option Order event, + Option Order Route event, + Option Order Modification event, + second Option Order Route event, + +

This scenario illustrates a customer-initiated modification (electronically) of an option order which the Industry Member had previously routed to an exchange.

+

In this scenario, Industry Member Broker 1 is required to report the following events:

+

• A New Option Order event for the electronic receipt of the customer order

+

• Option Order Route event for the route to the exchange

+

• An Option Order Modification event for the electronic receipt of the order modification

+

• A second Option Order Route event for the route of the modified option order to the exchange

+ + + + +
-
pubdate: N/A effdate: N/A -

G. Retention Period of Recordkeeping Requirements

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Retention Period of Recordkeeping Requirements - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Rule 17a-1, - Retention, - -

The SROs are required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.928 Members are required to retain records and information in accordance with Rule 17a-4 under the Exchange Act.929

+
pubdate: N/A effdate: N/A +

3.4. Cancellation Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Cancellation Scenarios + Compliance User: Industry Member + Keywords: +

Reporting option order cancellations follow the same guidance as equities. Please refer to Section 2.5 for examples.

+
+
pubdate: N/A effdate: N/A +

3.5. Additional Reporting Scenarios

+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios + Compliance User: Industry Member + Keywords: +

In addition to the scenarios provided below, please refer to Equity Event Scenarios 2.6.1, 2.6.3, 2.6.6, 2.6.7, 2.6.8, and 2.6.9. The guidance also applies to single leg electronic option order reporting.

+
pubdate: N/A effdate: N/A +
3.5.1. Customer Option Order Internally Routed Electronically
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Customer Option Order Internally Routed Electronically + Compliance User: Industry Member + Keywords: + eventTimestamp, + openCloseIndicator, + +

This scenario illustrates the reporting requirements for CAT when an Industry Member internally routes a customer option order from the sales desk to the trading desk within the same Industry Member firm.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the customer order which was received electronically

+

• Option Order Internal Route event from the sales desk to the trading desk

+

• Option Order Route event for the route of the option order to the exchange

+ + + +
+
pubdate: N/A effdate: N/A +
3.5.2. Customer Option Order Internally Routed Electronically, Trading Desk Creates Child Orders Prior to Route
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Customer Option Order Internally Routed Electronically, Trading Desk Creates Child Orders Prior to Route + Compliance User: Industry Member + Keywords: + Child Order events, + Option Order Internal Route event, + orderIDs, + Option Order Route events, + +

This scenario illustrates the reporting requirements for an Industry Member that creates child orders prior to routing the order slices. Child Order events are always electronically created.

+

For this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the customer order which was received electronically

+

• Option Order Internal Route event from the sales desk to the trading desk

+

• Child Order events for slicing the original order into smaller quantities and assigning new orderIDs prior to routing from the Trading Desk

+

• Option Order Route events for the route of each child option order to an exchange

+ + + + +
+
pubdate: N/A effdate: N/A +
3.5.3. Industry Member Receives Complex Option Order, Splits into Individual Single Order Legs to be Worked in the Customer's Account
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Receives Complex Option Order, Splits into Individual Single Order Legs to be Worked in the Customer's Account + Compliance User: Industry Member + Keywords: + priorUnlinked = C, + +

This scenario illustrates the reporting requirements for an Industry Member in Phase 2b that receives a complex option order but routes single leg option orders directly from the customer's account to the exchange without creating new single leg option orders. Linkage between the original complex option order and the single leg option order routes is not required in Phase 2b, but reporters must indicate on the Option Order Route event there is no prior step reported since it was a complex order by populating field priorUnlinked = C. Since the single leg orders were routed to the exchange as single legs, linkage to the related single leg exchange order is required.

+

In this scenario, Industry Member Broker 1 is required to report the following events:

+

• Option Order Route events for each single leg option order routed to the exchange

+ + + +
+
pubdate: N/A effdate: N/A +
3.5.4. Industry Member Receives Complex Option Order, but Client Sends Multiple Single Leg Option Orders Electronically
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Receives Complex Option Order, but Client Sends Multiple Single Leg Option Orders Electronically + Compliance User: Industry Member + Keywords: + handlingInstruction 'CMPX, + nextUnlinked = 'C, + +

This scenario illustrates the reporting requirements for an Industry Member that receives a complex order that is routed by the Industry Member to an exchange as a complex order but where the client sends single leg electronic messages due to limitations in the client's system.

+

For Phase 2b, reporting this order is out of scope as it was intended to be handled as a complex order. In Phase 2b, the preferred approach is that the Industry Member not report the electronic single leg orders as complex orders are not in scope. However, if Industry Member's elects to report the single legs, they must populate handlingInstruction 'CMPX' and include the nextUnlinked = 'C', to indicate there is no linkage to additional order events as subsequent handling was at the complex order level.

+ + + + +
+
pubdate: N/A effdate: N/A +
3.5.5. Industry Member Routes Multiple Single Leg Option Orders to another Industry Member, Calls with Complex Order Instructions
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Routes Multiple Single Leg Option Orders to another Industry Member, Calls with Complex Order Instructions + Compliance User: Industry Member + Keywords: + Option Order Route, + +

This scenario illustrates the reporting requirements for Phase 2b when a complex order is routed manually between two Industry Members, but the related electronic order messages are sent and received as single leg option orders. In Phase 2b, the preferred approach is that the Industry Member not report the electronic single leg orders as complex orders are not in scope. However, if Industry Member's elects to report the single legs, they must include handlingInstruction = 'CMPX'. The sending Industry Member must populate nextUnlinked = C on the Option Order Routes events, as no linkage will be available to the complex order at the receiving broker. Similarly, the receiving Industry Member should populate priorUnlinked = C on the Option Order Accepted events.

+

In this scenario, if suppression of the electronic message is not possible, Industry Member Broker 1 would report the following events:

+

• Four (4) New Option Order events for the electronic single leg orders

+

• Four (4) Option Order Route events for the route of the single leg orders to Broker 2

+

Industry Member Broker 2 would report the following events:

+

• Four (4) Option Order Accepted events for the electronic routes received from Broker 1

+ + + + + + + + + +
+
pubdate: N/A effdate: N/A +
3.5.6. Industry Member Solicits Order, Creates Paired Option for Partial Quantity
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Solicits Order, Creates Paired Option for Partial Quantity + Compliance User: Industry Member + Keywords: + Industry Member Broker, + +

This scenario illustrates the reporting requirements for an Industry Member that electronically received a single leg order from a customer, solicits another Industry Member to pair the order, but is left with a partial quantity of the single leg order still to work. Only the single leg components of the lifecycle are required for CAT reporting in Phase 2b, as paired option orders are not required until Phase 2d.

+

In this scenario, Industry Member Broker 1 is required to report the following events:

+

• New Option Order event for the receipt of the customer order

+

• Option Order Route for the un-paired quantity of the single leg order

+ + + + +
+
pubdate: N/A effdate: N/A +
3.5.7. Response to an Exchange Auction
+ Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Response to an Exchange Auction + Compliance User: Industry Member + Keywords: + Exchange Auction, + +

This scenario illustrates the reporting requirements for a proprietary option order created in response to an Exchange Auction of a simple option or paired order of simple options. Responses to the complex auctions are deferred until 2D. The Industry Member must include the auction details on the handlingInstructions when reporting to CAT.

+

In this scenario, Industry Member Market Maker 1 is required to report the following events:

+

• New Option Order event for the creation of the proprietary order

+

• Option Order Route event for the response to the exchange auction

+ + + +
-
-
pubdate: N/A effdate: N/A -

V. Regulatory Flexibility Act Certification

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Regulatory Flexibility Act Certification - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Administrative Procedure Act, - RFA, - Rule 605(b), - FINRA, - NMS Plan, - -

The Regulatory Flexibility Act ("RFA")930 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative Procedure Act, as amended by RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on "small entities."931 Rule 605(b) of the RFA states that this requirement shall not apply to any proposed rule or proposed rule amendment, which if adopted, would not "have a significant economic impact on a substantial number of small entities."932

-

In the Proposing Release, the Commission requested comment on whether proposed Rule 613 would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities.933 The Commission also requested that commenters provide empirical data to support the extent of such impact.934 The Commission received two comments on the general anticipated effect of the proposed Rule on small-broker dealers; FINRA and a small broker-dealer that solely handles orders manually requested that an exemption from the proposed Rule be adopted to accommodate the business model of small broker-dealers.935 In response to the commenters, the Commission amended the Rule as proposed to provide additional time for small broker-dealers to comply with the reporting requirements of Rule 613.936 The Commission notes that none of the comment letters received specifically responded to the Commission's initial regulatory flexibility analysis.

-

As proposed and as adopted, Rule 613 requires the SROs to file an NMS plan to create, implement, and maintain the consolidated audit trail. In response to commenters and as discussed in this release, the Commission has modified the proposed Rule to provide the SROs with a range of options and greater flexibility for how they choose to meet the requirements of the Rule. As a result, the Commission will not know the specific requirements of the NMS plan until it is filed with the Commission, and cannot analyze how the NMS plan will impact small entities until then. At this time, there are no small entities "subject to the requirements" of Rule 613.937

-

However, because Rule 613 requires that the national securities exchanges and national securities associations (i.e., FINRA) file an NMS plan with the Commission, for purposes of the RFA, the Commission is undertaking an analysis of how the NMS plan filing requirement will impact the exchanges and FINRA to ascertain whether the exchanges and FINRA are "small businesses." Paragraph (e) of Rule 0-10 provides that for the purposes of the RFA, an exchange is considered a "small business" if it has been exempted from the reporting requirements of Rule 601 of Regulation NMS,938 and is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0-10. Under this standard, none of the national securities exchanges subject to Rule 613 is a "small business" for purposes of the RFA. In addition, FINRA is not a small entity as defined in Rule 0-10.939 Therefore, the Commission believes that Rule 613, which requires that the SROs file an NMS plan with the Commission to create, implement, and maintain the consolidated audit trail, will not have a significant economic impact on a substantial number of small entities because this requirement will only apply to the existing national securities exchanges and national securities associations, which do not qualify as small entities pursuant to the RFA.

-

For the foregoing reasons, the Commission hereby certifies that, pursuant to 5 U.S.C. 605(b), Rule 613 will not have a significant economic impact on a substantial number of small entities.

-
-
pubdate: N/A effdate: N/A -

VI. Statutory Authority

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Statutory Authority - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - 17 CFR Part 242, - § 242.613, - Data Recording, - Data Reporting, - CAT-Order, - -

Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), the Commission is adopting Rule 613 of Regulation NMS, as set forth below.

-

Text of Rule

-

List of Subjects in 17 CFR Part 242

-

Brokers, Reporting and recordkeeping requirements, Securities.

-

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows.

-

PART 242 — REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

-

1. The authority citation for part 242 continues to read as follows:

-

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.

-

2. Add § 242.613 to read as follows:

-

§ 242.613 Consolidated Audit Trail.

-

(a) Creation of a National Market System Plan Governing a Consolidated Audit Trail.

-

(1) Each national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section. The national market system plan shall discuss the following considerations:

-

(i) The method(s) by which data will be reported to the central repository including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load, and retain such data; and the basis for selecting such method(s);

-

(ii) The time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities;

-

(iii) The reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators;

-

(iv) The security and confidentiality of the information reported to the central repository;

-

(v) The flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments;

-

(vi) The feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

-

(A) The identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction;

-

(B) The number of such securities each such market participant is allocated; and

-

(C) The identity of the broker-dealer making each such allocation;

-

(vii) The detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify:

-

(A) An estimate of the costs to the plan sponsors for establishing and maintaining the central repository;

-

(B) An estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan;

-

(C) An estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and

-

(D) How the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors;

-

(viii) An analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining of the national market system plan;

-

(ix) A plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of:

-

(A) Whether the collection of such information remains appropriate;

-

(B) If still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and

-

(C) If no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof);

-

(x) Objective milestones to assess progress toward the implementation of the national market system plan;

-

(xi) The process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan; and

-

(xii) Any reasonable alternative approaches to creating, implementing, and maintaining a consolidated audit trail that the plan sponsors considered in developing the national market system plan including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan.

-

(2) The national market system plan, or any amendment thereto, filed pursuant to this section shall comply with the requirements in § 242.608(a), if applicable, and be filed with the Commission pursuant to § 242.608.

-

(3) The national market system plan submitted pursuant to this section shall require each national securities exchange and national securities association to:

-

(i) Within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor;

-

(ii) Within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with paragraph (d) of this section;

-

(iii) Within one year after effectiveness of the national market system plan provide to the central repository the data specified in paragraph (c) of this section;

-

(iv) Within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by paragraph (f) of this section;

-

(v) Within two years after effectiveness of the national market system plan require members of each such exchange and association, except those members that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter, to provide to the central repository the data specified in paragraph (c) of this section; and

-

(vi) Within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter to provide to the central repository the data specified in paragraph (c) of this section.

-

(4) Each national securities exchange and national securities association shall be a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

-

(5) No national market system plan filed pursuant to this section, or any amendment thereto, shall become effective unless approved by the Commission or otherwise permitted in accordance with the procedures set forth in § 242.608. In determining whether to approve the national market system plan, or any amendment thereto, and whether the national market system plan or any amendment thereto is in the public interest under § 242.608(b)(2), the Commission shall consider the impact of the national market system plan or amendment, as applicable, on efficiency, competition, and capital formation.

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(b) Operation and Administration of the National Market System Plan.

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(1) The national market system plan submitted pursuant to this section shall include a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor.

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(2) The national market system plan submitted pursuant to this section shall include a provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan.

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(3) The national market system plan submitted pursuant to this section shall include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.

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(4) The national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan.

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(5) The national market system plan submitted pursuant to this section shall require the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

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(6) The national market system plan submitted pursuant to this section shall include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum:

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(i) An evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with paragraph (e)(6) of this section), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with paragraph (e)(4) of this section), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics;

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(ii) A detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the national market system plan to include new instruments and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer;

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(iii) An estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and

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(iv) An estimated implementation timeline for any such potential improvements, if applicable.

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(7) The national market system plan submitted pursuant to this section shall include an Advisory Committee which shall function in accordance with the provisions set forth in this paragraph (b)(7). The purpose of the Advisory Committee shall be to advise the plan sponsors on the implementation, operation, and administration of the central repository.

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(i) The national market system plan submitted pursuant to this section shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsors.

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(ii) Members of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors; provided, however, that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.

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(c) Data Recording and Reporting.

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(1) The national market system plan submitted pursuant to this section shall provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part) of the order.

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(2) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to report to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format, or in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage.

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(3) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event. The national market system plan shall require that information recorded pursuant to paragraphs (c)(7)(i) through (v) of this section must be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association, or member. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(4) The national market system plan submitted pursuant to this section shall require each member of a national securities exchange or national securities association to record and report to the central repository the information required by paragraphs (c)(7)(vi) through (viii) of this section by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such information. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(5) The national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

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(6) The national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association.

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(7) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and any member of such exchange or association to record and electronically report to the central repository details for each order and each reportable event, including, but not limited to, the following information:

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(i) For original receipt or origination of an order:

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(A) Customer-ID(s) for each customer;

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(B) The CAT-Order-ID;

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(C) The CAT-Reporter-ID of the broker-dealer receiving or originating the order;

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(D) Date of order receipt or origination;

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(E) Time of order receipt or origination (using time stamps pursuant to paragraph (d)(3) of this section); and

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(F) Material terms of the order.

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(ii) For the routing of an order, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is routed;

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(C) Time at which the order is routed (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order;

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(E) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed;

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(F) If routed internally at the broker-dealer, the identity and nature of the department or desk to which an order is routed; and

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(G) Material terms of the order.

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(iii) For the receipt of an order that has been routed, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is received;

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(C) Time at which the order is received (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order;

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(E) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order; and

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(F) Material terms of the order.

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(iv) If the order is modified or cancelled, the following information:

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(A) The CAT-Order-ID;

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(B) Date the modification or cancellation is received or originated;

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(C) Time the modification or cancellation is received or originated (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Price and remaining size of the order, if modified;

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(E) Other changes in material terms of the order, if modified; and

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(F) The CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction.

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(v) If the order is executed, in whole or part, the following information:

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(A) The CAT-Order-ID;

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(B) Date of execution;

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(C) Time of execution (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Execution capacity (principal, agency, riskless principal);

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(E) Execution price and size;

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(F) The CAT-Reporter-ID of the national securities exchange or broker-dealer executing the order; and

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(G) Whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information.

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(vi) If the order is executed, in whole or part, the following information:

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(A) The account number for any subaccounts to which the execution is allocated (in whole or part);

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(B) The CAT-Reporter-ID of the clearing broker or prime broker, if applicable; and

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(C) The CAT-Order-ID of any contra-side order(s).

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(vii) If the trade is cancelled, a cancelled trade indicator.

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(viii) For original receipt or origination of an order, the following information:

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(A) Information of sufficient detail to identify the customer; and

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(B) Customer account information.

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(8) All plan sponsors and their members shall use the same Customer-ID and CAT-Reporter-ID for each customer and broker-dealer.

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(d) Clock Synchronization and Time Stamps. The national market system plan submitted pursuant to this section shall require:

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(1) Each national securities exchange, national securities association, and member of such exchange or association to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event that must be reported pursuant to this section to the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

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(2) Each national securities exchange and national securities association to evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards; and

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(3) Each national securities exchange, national securities association, and member of such exchange or association to utilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in the national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond. To the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, the plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced. The national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments.

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(e) Central Repository.

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(1) The national market system plan submitted pursuant to this section shall provide for the creation and maintenance of a central repository. Such central repository shall be responsible for the receipt, consolidation, and retention of all information reported pursuant to paragraph (c)(7) of this section. The central repository shall store and make available to regulators data in a uniform electronic format, and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information required by paragraph (c)(7) of this section for all reportable events for that order.

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(2) Each national securities exchange, national securities association, and the Commission shall have access to the central repository, including all systems operated by the central repository, and access to and use of the data reported to and consolidated by the central repository under paragraph (c) of this section, for the purpose of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. The national market system plan submitted pursuant to this section shall provide that such access to and use of such data by each national securities exchange, national securities association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports.

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(4) The national market system plan submitted pursuant to this section shall include policies and procedures, including standards, to be used by the plan processor to:

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(i) Ensure the security and confidentiality of all information reported to the central repository by requiring that:

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(A) All plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in this paragraph (A) shall be construed to prevent a plan sponsor from using the data that it reports to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation;

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(B) Each plan sponsor adopt and enforce rules that:

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(1) Require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository; and

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(2) Permit only persons designated by plan sponsors to have access to the data in the central repository;

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(C) The plan processor:

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(1) Develop and maintain a comprehensive information security program for the central repository, with dedicated staff, that is subject to regular reviews by the Chief Compliance Officer;

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(2) Have a mechanism to confirm the identity of all persons permitted to access the data; and

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(3) Maintain a record of all instances where such persons access the data; and

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(D) The plan sponsors adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository with respect to information security.

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(ii) Ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository pursuant to paragraph (c) of this section; and

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(iii) Ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository pursuant to paragraph (c) of this section.

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(5) The national market system plan submitted pursuant to this section shall address whether there will be an annual independent evaluation of the security of the central repository and:

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(i) If so, provide a description of the scope of such planned evaluation; and

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(ii) If not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead.

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(6) The national market system plan submitted pursuant to this section shall:

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(i) Specify a maximum error rate to be tolerated by the central repository for any data reported pursuant to paragraphs (c)(3) and (c)(4) of this section; describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce such maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof;

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(ii) Require the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan;

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(iii) Specify a process for identifying and correcting errors in the data reported to the central repository pursuant to paragraphs (c)(3) and (c)(4) of this section, including the process for notifying the national securities exchanges, national securities association, and members who reported erroneous data to the central repository of such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and

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(iv) Specify the time by which data that has been corrected will be made available to regulators.

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(7) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information consolidated and stored pursuant to paragraph (c)(7) of this section:

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(i) Information, including the size and quote condition, on the national best bid and national best offer for each NMS security;

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(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, § 242.601; and

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(iii) Last sale reports reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, § 242.608.

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(8) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years.

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(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

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(g) Compliance by Members.

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(1) Each national securities exchange and national securities association shall file with the Commission pursuant to section 19(b)(2) of the Act> (15 U.S.C. 78s(b)(2)) and § 240.19b-4 of this chapter on or before 60 days from approval of the national market system plan a proposed rule change to require its members to comply with the requirements of this section and the national market system plan approved by the Commission.

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(2) Each member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to agree to enforce compliance by its members with the provisions of any approved plan.

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(4) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance with the requirements of any approved plan by the members of a national securities exchange or national securities association.

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(h) Compliance by National Securities Exchanges and National Securities Associations.

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(1) Each national securities exchange and national securities association shall comply with the provisions of the national market system plan approved by the Commission.

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(2) Any failure by a national securities exchange or national securities association to comply with the provisions of the national market system plan approved by the Commission shall be considered a violation of this section.

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(3) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance by the sponsors of the plan with the requirements of any approved plan. Such enforcement mechanism may include penalties where appropriate.

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(i) Other Securities and Other Types of Transactions. The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission within six months after effectiveness of the national market system plan a document outlining how such exchanges and associations could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

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(j) Definitions.

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(1) The term CAT-Order-ID shall mean a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of such order.

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(2) The term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository.

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(3) The term customer shall mean:

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(i) The account holder(s) of the account at a registered broker-dealer originating the order; and

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(ii) Any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

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(4) The term customer account information shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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(5) The term Customer-ID shall mean, with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository.

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(6) The term error rate shall mean the percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market.

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(7) The term material terms of the order shall include, but not be limited to, the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator; time in force (if applicable); if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions.

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(8) The term order shall include:

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(i) Any order received by a member of a national securities exchange or national securities association from any person;

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(ii) Any order originated by a member of a national securities exchange or national securities association; or

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(iii) Any bid or offer.

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(9) The term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order.

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By the Commission.

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Elizabeth M. Murphy

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Secretary

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Dated: July 18, 2012

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Exhibit A

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Key to Comment Letters Cited in Adopting Release Proposal to Implement Consolidated Audit Trail (File No. S7-11-10)

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1. Letter from Rep. Melissa L. Bean, U.S. Congress, to Mary Schapiro, Chairman, Commission, dated May 20, 2010 ("Bean Letter").

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2. Letter from Norris W. Beach to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Beach Letter").

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3. Letter from Steven Vannelli to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Vannelli Letter").

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4. Letter from Simhan Mandyam, Managing Partner, Triage Life Sciences LLC, to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Triage Letter").

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5. Letter from Paul Drescher, Registered Principal, Foothill Securities, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated May 28, 2010 ("Foothill Letter").

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6. Letter from Chandler Green to Elizabeth M. Murphy, Secretary, Commission, dated June 1, 2010 ("Green Letter").

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7. Letter from Dan T. Nguyen, Wealth Management Company, to Elizabeth M. Murphy, Secretary, Commission, dated June 5, 2010 ("Wealth Management Letter").

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8. Letter from Nicos Anastaspoulos to Elizabeth M. Murphy, Secretary, Commission, dated June 6, 2010 ("Anastaspoulos Letter").

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9. Letter from Ning Wen, Sales Director, Know More Software, Inc., to Heather Seidel, Division of Trading and Markets, Assistant Director, Commission, dated June 9, 2010 ("Know More Letter").

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10. Letter from John McCrary to Elizabeth M. Murphy, Secretary, Commission, dated June 11, 2010 ("McCrary Letter").

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11. Letter from Howard Meyerson, General Counsel, and Vlad Khandros, Market Structure and Public Policy Analyst, Liquidnet, to Elizabeth M. Murphy, Secretary, Commission, dated July 19, 2010 ("Liquidnet Letter").

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12. Letters from Justin S. Magruder, President, Noetic Partners, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated July 22, 2010 and August 3, 2010 ("Noetic Partners Letter I" and "Noetic Partners Letter II).

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13. Letter from Martin Koopman, Director, Aditat, to Elizabeth M. Murphy, Secretary, Commission, dated July 28, 2010 ("Aditat Letter").

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14. Letter from Courtney Doyle McGuinn, FPL Operations Director, FIX Protocol Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("FIX Letter").

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15. Letter from Senator Edward E. Kaufman, U.S. Senate, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kaufman Letter").

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16. Letter from Mahesh Kumaraguru to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kumaraguru Letter").

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17. Letter from R. T. Leuchtkafer to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Leuchtkafer Letter").

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18. Letter from Horst Simon, Associate Laboratory Director for Computing Sciences and Division Director, Computational Research Department, and David Leinweber, Director, LBNL Center for Innovative Financial Technology Computing Sciences, Lawrence Berkeley National Laboratory, to Elizabeth M. Murphy, Secretary, Commission, dated August 8, 2010 ("Berkeley Letter").

-

19. Letter from Peter A. Bloniarz, Dean, College of Computing & Information, University of Albany, George Berg, Associate Professor and Chair, Department of Computer Science, University of Albany, Sandor P. Schuman, Affiliated Faculty, Department of Informatics, University of Albany, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Albany Letter").

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20. Letter from Christopher Nagy, Managing Director Order Strategy, Co-Head Government Relations, and John Markle, Deputy General Counsel, Co-Head Government Relations, TD AMERITRADE, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Ameritrade Letter").

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21. Letter from James J. Angel, Associate Professor of Finance, Georgetown University, Commission, dated August 9, 2010 ("Angel Letter").

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22. Letter from Eric J. Swanson, Senior Vice President and General Counsel, BATS Exchange, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BATS Letter").

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23. Letter from Anthony D. McCormick, Chief Executive Officer, Boston Options Exchange Group, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BOX Letter").

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24. Letter from Charlie J. Marchesani, President Broadridge Financial Solutions, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Broadridge Letter").

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25. Letter from Eric W. Hess, General Counsel, Direct Edge Holdings, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Direct Edge Letter").

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26. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA Letter").

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27. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, and Janet McGinness Kissane, Senior Vice President and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA/NYSE Euronext Letter").

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28. Letter from Ted Myerson, Chief Executive Officer, Doug Kittelsen, Chief Technology Officer, and M. Gary LaFever, General Counsel and Chief Corporate Development Officer, FTEN, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FTEN Letter").

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29. Letter from Karrie McMillan, General Counsel, Investment Company Institute, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("ICI Letter").

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30. Letter from Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel, Managed Funds Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Managed Funds Association Letter").

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31. Letter from Dror Segal and Lou Pizzo, Mansfield Consulting, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Mansfield Letter").

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32. Letter from Andrew C. Small, General Counsel, Scottrade, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Scottrade Letter").

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33. Letter from Devin Wenig, Chief Executive Officer, Markets Division, Thomson Reuters, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Thomson Reuters Letter").

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34. Letter from Jon Feigelson, Senior Vice President, General Counsel and Head of Corporate Governance, TIAA-CREF Individual and Institutional Services, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("TIAA-CREF Letter").

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35. Letter from Ronald C. Long, Director, Regulatory Affairs, Wells Fargo Advisors, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Wells Fargo Letter").

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36. Letter from John A. McCarthy, General Counsel, GETCO, to Elizabeth M. Murphy, Secretary, Commission, dated August 10, 2010 ("GETCO Letter").

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37. Letter from Michael Erlanger, Managing Principal, Marketcore, Inc., to Commission, dated August 10, 2010 ("Marketcore Letter").

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38. Letter from Edward J. Joyce, President and Chief Operating Officer, Chicago Board Options Exchange, Inc., to Commission, dated August 11, 2010 ("CBOE Letter").

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39. Letter from Leonard J. Amoruso, Senior Managing Director and General Counsel, Knight Capital Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 11, 2010 ("Knight Letter").

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40. Letter from Jose Manso, Executive Vice President, Sales and Marketing, Middle Office Solutions LLC, to Commission, dated August 11, 2010 ("Middle Office Letter").

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41. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("FIF Letter").

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42. Letter from John Harris, Chief Executive Officer, BondMart Technologies, Inc., to Commission, dated August 12, 2010 ("BondMart Letter").

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43. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("Nasdaq Letter I").

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44. Letter from Patrick J. Healy, Chief Executive Officer, Issuer Advisory Group LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 15, 2010 ("IAG Letter").

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45. Letter from James T. McHale, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 17, 2010 ("SIFMA Letter").

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46. Letter from Mike Riley, Chief Executive Officer, Endace Technology Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 30, 2010 ("Endace Letter").

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47. Letter from Terry Keene, Chief Executive Officer, Integration Systems LLC, to Elizabeth M. Murphy, Secretary, Commission, dated November 12, 2010 ("iSys Letter").

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48. Letter from Bonnie K. Wachtel, Wachtel & Co., Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 24, 2010 ("Wachtel Letter").

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49. Letter from Richard A. Ross to Elizabeth M. Murphy, Secretary, Commission, dated December 6, 2010 ("Ross Letter").

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50. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to David Shillman, Associate Director, Division of Trading and Markets, Commission, dated January 12, 2011 ("SIFMA Drop Copy Letter").

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51. Letter from Daniel J. Connell, Chief Executive Officer, Correlix, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated February 4, 2011 ("Correlix Letter").

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52. Letter from Richard A. Ross, Founder, High Speed Analytics, to Elizabeth M. Murphy, Secretary, Commission, dated February 9, 2011 ("High Speed Letter").

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53. Letter from Michael Belanger, President, Jarg Corporation; Joseph Carrabis, Chief Regulatory Officer and Founder, NextStage Evolution; Wayne Ginion, Vice President, Enterprise Infrastructure Services; and David Morf, Partner, Senior Regional Economics Advisor, Founding Member, Center for Adaptive Solutions, to Elizabeth M. Murphy, Secretary, Commission, dated April 6, 2011 ("Belanger Letter") (note, this letter is an amended letter that replaces a letter submitted by the same parties on March 30, 2011).

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54. Letter from Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, to Robert Cook, Director, Division of Trading and Markets, and Carlo DiFlorio, Director, Office of Compliance Inspections and Examinations, Commission, dated April 6, 2011 ("FINRA Proposal Letter").

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55. Letter from Senator Charles E. Schumer, U.S. Senate, to Mary L. Schapiro, Chairman, Commission, dated May 9, 2011 ("Schumer Letter").

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56. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 18, 2011 ("Nasdaq Letter II").

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57. Letter from Geraldine M. Lettieri to Elizabeth M. Murphy, Secretary, Commission, dated November 29, 2011 ("Lettieri Letter").

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58. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to Robert Cook, Director, Division of Trading and Markets, Commission, dated February 7, 2012 ("SIFMA February 2012 Letter").

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59. Letter from John M. Damgard, President, Futures Industry Association, to Elizabeth M. Murphy, Secretary, Commission, dated February 22, 2012 ("FIA Letter").

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60. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, Commission, dated March 2, 2012 ("FIF Letter II").

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61. Letter from Jennifer Setzenfand, Chairman, Security Traders Association, dated March 7, 2012 ("STA Letter").

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62. Letter from Dr. Gil Van Bokkelen, Chairman and Chief Executive Officer, Athersys, Inc., to Mary Schapiro, Chairman, Commission, dated March 14, 2012 ("Van Bokkelen Letter").

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1 EBSs are trading records requested by the Commission and SROs from broker-dealers that are used in regulatory investigations to identify buyers and sellers of specific securities. See Securities Exchange Act Release No. 44494 (June 29, 2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (adopting Rule 17a-25). See also Securities Exchange Act Release Nos. 26235 (November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the Chicago Board Options Exchange's ("CBOE") rule for the electronic submission of transaction information); 26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the National Association of Securities Dealers' (n/k/a FINRA) rule for the electronic submission of transaction information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 1989) (approving the Philadelphia Stock Exchange's (n/k/a NASDAQ OMX PHLX LLC) ("Phlx") rule for the electronic submission of transaction information). To partially address some of the current limitations of the EBS system, and to provide the Commission, in the short term, with more detailed and timely trade information for large traders, the Commission recently adopted new Rule 13h-1 concerning large trader reporting. See Securities Exchange Act Release No. 61908 (July 27, 2011), 76 FR 46960 (August 3, 2011) ("Large Trader Release"). Rule 13h-1 requires "large traders" to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See also Section II.A.3., infra. On April 20, 2012, the Commission, among other things, extended the time by which registered broker-dealers were required to comply with Rule 13h-1 to allow broker-dealers additional time to develop, test, and implement enhancements to their recordkeeping and reporting systems as required under Rule 13h-1. See Securities Exchange Act Release No. 66839, 77 FR 25007 (April 26, 2012) (Order Temporarily Exempting Broker-Dealers From the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 Under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions) ("Large Trader Extension").

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2 The Commission uses the National Securities Clearing Corporation's ("NSCC") equity cleared report for initial regulatory inquiries. This report is generated on a daily basis by the SROs and is provided to the NSCC in a database accessible by the Commission, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.

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3 See Large Trader Extension, supra note 1.

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4 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) ("Proposing Release"). The comment file is on the Commission's website at: http://www.sec.gov/comments/s7-11-10/s71110.shtml.

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5 In this release, "consolidated audit trail" means both a system capable of capturing a complete record of all transactions relating to an order, from origination to execution or cancellation, and the complete record for an order generated by such a system, as the context may require.

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6 NMS plan is defined in Rule 600(b)(43) to mean "any joint self-regulatory organization plan in connection with: (i) [t]he planning, development, operation or regulation of a national market system (or a subsystem thereof) or one or more facilities thereof; or (ii) [t]he development and implementation of procedures and/or facilities designed to achieve compliance by self-regulatory organizations and their members with any section of [Regulation NMS] . . . ." 17 CFR 240.600(b)(43). Such NMS plan may be subject to modification prior to approval by the Commission pursuant to Rule 608 of Regulation NMS, as discussed in Section III.C.2.a.v., infra.

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7 "NMS security" is defined in Rule 600(a)(46) of Regulation NMS to mean "any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options." 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) to mean "any NMS security other than an option." 17 CFR 242.600(a)(46). A listed option is defined in Rule 600(a)(35) of Regulation NMS to mean "any option traded on a registered national securities exchange or automated facility of a national securities association." 17 CFR 242.600(a)(35).

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8 See Exhibit A for a citation key to the comment letters received by the Commission on the proposed rule. The Commission also received four comment letters that do not address the substance of the consolidated audit trail proposal. See Ericson Letter; Kondracki Letter; Grady Letter; Deep Liquidity Letter.

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9 The Commission notes that, in some cases, commenters fell into more than one such category.

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10 See Vannelli Letter; Beach Letter; Foothill Letter; Green Letter; Wealth Management Letter; McCrary Letter; Anastasopoulos Letter; Triage Letter; FTEN Letter; Middle Office Letter; Correlix Letter; Lettieri Letter; Bean Letter.

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11 See ICI Letter; Thomson Reuters Letter; Scottrade Letter; Liquidnet Letter; FINRA/NYSE Euronext Letter; BOX Letter; Nasdaq Letter I; Nasdaq Letter II; TIAA-CREF Letter; GETCO Letter; BATS Letter; SIFMA Letter; SIFMA February 2012 Letter; CBOE Letter; Direct Edge Letter; Angel Letter; IAG Letter; Managed Funds Association Letter; Mansfield Letter; Marketcore Letter; Kumaraguru Letter; Ameritrade Letter; FINRA Letter; Wells Fargo Letter; Noetic Partners Letters; Knight Letter; FIF Letter; FIF Letter II; Albany Letter; Endace Letter; Ross Letter; FINRA Proposal Letter; Schumer Letter; FIA Letter; STA Letter; Van Bokkelen Letter.

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12 See Belanger Letters; SIFMA Drop Copy Letter; Wachtel Letter; High Speed Letter (recommending next steps in the development of the consolidated audit trail).

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13 See BondMart Letter; Leuchtkafter Letter.

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14 See Broadridge Letter; FIX Letter; Know More Letter; Aditat Letter; iSys Letter; Kaufman Letter; Berkeley Letter.

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15 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

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16 See Ameritrade Letter, p. 3; Kumaraguru Letter, p. 1; FINRA Proposal Letter, p. 6-8, 13 and Appendix A.; Angel Letter, p. 2-3; Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11-12, 14; SIFMA Drop Copy Letter, p. 2; Liquidnet Letter p. 6-7; FINRA Letter, p. 4, 7-9; CBOE Letter, p. 2; Knight Letter, p. 2; Scottrade Letter, p. 1; DirectEdge Letter, p. 3; FIF Letter, p. 2-3, 6-7; FIF Letter II, p. 2; BOX Letter, p. 2; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; Thomson Reuters Letter, p. 3; Endace Letter, p. 1-2; GETCO Letter, p. 4.

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17 See Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2, 4-5; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 3-4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; FINRA Proposal Letter, p. 2-3.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Correlix Letter, p. 2.; FTEN Letter, p. 13; SIFMA Letter, p.1-8, 15-16; FINRA/NYSE Euronext Letter, p 4, 7; FINRA Letter, p. 3, 10-13; Scottrade Letter, p. 1; ICI Letter, p. 4-6; GETCO Letter, p. 2; BATS Letter, p. 1-2; Direct Edge Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; SIFMA February 2012 Letter; FIA Letter, p. 1-2; Noetic Partners Letter II, p. 2; High Speed Letter, p. 1.

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18 See FINRA Proposal Letter; Angel Letter, p. 3; BOX Letter, p. 2; BATS Letter, p. 2; CBOE Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIF Letter, p. 1-3; FINRA Letter, p. 3, 6; FINRA/NYSE Euronext Letter, p. 8, 14; SIFMA Drop Copy Letter.

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19 As used herein, the term "order event data" is used to refer to the information reported pursuant to Rule 613(c)(3) and identified in Rule 613(c)(7)(i) through (v), generally including: (1) the Customer-ID(s) for each customer, including the person giving a modification or cancellation instruction; (2) the CAT-Order-ID; (3) the CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving, originating, routing, modifying, cancelling or executing an order, and to which an order is being routed; (4) the identity and nature of the department or desk to which an order is routed, if routed internally at the broker-dealer; (5) the date an order was received, originated, routed, modified, cancelled, or executed; (6) the time an order was received, originated, routed, modified, cancelled, or executed; (7) material terms of an order and any changes of such terms, if modified; (8) the price and remaining size of an order, if modified; (9) execution capacity (principal, agency, riskless principal); (10) execution price and size; and (11) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("OPRA"). See Section III.B.1.d., infra. Information reported pursuant to Rule 613(c)(4) and identified in Rule 613(c)(7)(vi) through (viii) is referred to as "supplemental data."

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20 See Rule 613(c)(3); Sections II.A., III.B.1.e., infra.

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21 See Rule 613(c)(2); Sections III.B.1.f., III.B.2., infra.

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22 See Rule 613(j)(1); Section III.B.1.d.iv., infra.

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23 See Rule 613(a)(3)(vi); Section III.B.1.c., infra.

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24 See Rule 613(a)(1)(xii); Section III.C.2.a., infra.

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25 See Rule 613(a)(1)(ix); Section III.C.2.a., infra.

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26 See Rule 613(a)(1)(xi).

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27 See Rule 613(b)(7). For a further discussion of the composition of the Advisory Committee, see Section III.B.3.b., infra.

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28 See Section III.B.2., infra.

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29 See Rule 613(e)(4).

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30 See Rule 613(e)(6); Section III.B.2., infra.

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31 See Section II.A., infra, for a discussion of the objectives of the consolidated audit trail.

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32 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail).

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33 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

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34 See Section III.C.2.b., infra.

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35 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597, n. 352.

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36 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

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37 See Rule 613(a)(1).

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38 See Rule 613(a)(5).

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39 The proposed Rule would have required SROs to submit such proposed rule changes on or before from 120 days from approval of the Rule. Because the adopted Rule permits the SROs up to 270 days from the date of publication of the Adopting Release in the Federal Register to submit NMS plans, the Commission believes that the more appropriate deadline for SROs to submit rule changes is 60 days from the date the Commission approves an NMS plan.

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40 Specifically, the adopted Rule provides SROs six months, instead of two months, after effectiveness of the NMS plan to submit this document to the Commission.

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41 See Proposing Release, supra note 4, at 32558-61.

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42 See FINRA/NYSE Euronext Letter, p. 1-3; Nasdaq Letter I, p. 1-5.

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43 See note 1, supra; Proposing Release, supra note 4, at 32557-58.

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44 See note 2, supra.

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45 The term "market reconstruction" is used to refer to the efforts by SRO and Commission staff to collect and process detailed trade and order data, often from multiple and varied data sources (e.g., market participants, trading venues, and other SROs) to recreate the sequence of events and market conditions that existed over a given period of time. A recent example of this occurred following the "Flash Crash" of May 6, 2010, with the market reconstruction analysis undertaken by Commission and the Commodity Futures Trading Commission ("CFTC") staff, which can be found in the "Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." See http://www.sec.gov/news/studies/2010/marketevents-report.pdf.

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46 The Commission recognizes that the accuracy of the data available may also be subject to occasional errors, including errors caused by rare and unexpected events.

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47 The effectiveness of such efforts with respect to cross-market activities within the Commission's jurisdiction depends on the qualities of data from multiple sources, such as separate SRO audit trails used for equities and equity options. See Section II.A.1.c., infra. This dependency also exists with respect to market activities that involve other products outside the Commission's jurisdiction, such as futures and certain swaps. See note 239, infra.

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48 17 CFR 240.17a-25. Rule 17a-25 codified the requirement that broker-dealers submit to the Commission, upon request, information on their customer and proprietary securities transactions in an electronic format. The rule requires submission of the same standard customer and proprietary transaction information that SROs request through the EBS system in connection with their market surveillance and enforcement inquiries.

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49 See Rule 17a-25; supra note 1, and accompanying text.

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50 See FIF Letter I, p. 3; SIFMA Letter, p. 18-19.

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51 As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See Large Trader Release and Large Trader Extension, supra note 1.

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52 A 1990 Senate Report acknowledged the immense value of the EBS system, but noted that "it is designed for use in more narrowly focused enforcement investigations that generally relate to trading in individual securities. It is not designed for use for multiple inquiries that are essential for trading reconstruction purposes." See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.

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53 See, generally, Sections II.A.1. and II.A.2., infra.

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54 See note 2, supra, and accompanying text.

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55 The Commission also uses the Options Cleared Report, with data supplied by the Options Clearing Corporation ("OCC"), for analysis of trading in listed options. The OCC is an equity derivatives clearing organization that is registered as a clearing agency under Section 17A, 15 U.S.C. 78q-1, of the Exchange Act, and operates under the jurisdiction of both the Commission and the CFTC.

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56 A CUSIP number is a unique alphanumeric identifier assigned to a security and is used to facilitate the clearance and settlement of trades in the security.

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57 In 2007, NASD and the member-related functions of NYSE Regulation, Inc., the regulatory subsidiary of New York Stock Exchange LLC ("NYSE"), were consolidated. As part of this regulatory consolidation, the NASD changed its name to FINRA. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (August 1, 2007). FINRA and the National Futures Association ("NFA") are currently the only national securities associations registered with the Commission; however, the NFA has a limited purpose registration with the Commission under Section 15A(k) of the Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 2001).

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58 See In the Matter of National Association of Securities Dealers, Inc., Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions, Exchange Act Release No. 37538 (August 8, 1996), Administrative Proceeding File No. 3-9056 and Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and The Nasdaq Stock Market LLC ("Nasdaq"). See also Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules comprising OATS) ("OATS Approval Order").

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59 See Securities Exchange Act Release No. 47689 (April 17, 2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule change by NYSE relating to order tracking) ("OTS Approval Order").

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60 See In the Matter of Certain Activities of Options Exchanges, Administrative Proceeding File No. 3-10282, Securities Exchange Act Release No. 43268 (September 11, 2000) (Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions) ("Options Settlement Order"). See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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61 See Securities Exchange Act Release No. 63311 (November 12, 2010), 75 FR 70757 (November 18, 2010) (SR-FINRA-2010-044) (order approving proposed rule change by FINRA relating to the expansion of OATS to all NMS stocks).

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62 See Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011) (SR-NYSE-2011-49); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011) (SR-NYSEAmex-2011-74); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (SR-NYSEArca-2011-69).

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63 See FINRA Rule 7410(j) (defining "Order" for purposes of OATS, to mean "any oral, written, or electronic instruction to effect a transaction in an NMS stock or an OTC equity security that is received by a member from another person for handling or execution, or that is originated by a department of a member for execution by the same or another member, other than any such instruction to effect a proprietary transaction originated by a trading desk in the ordinary course of a member's market making activities." Additionally, Nasdaq, Nasdaq OMX BX, Inc. ("BX") and Phlx equities ("PSX") members that are registered as market makers in a certain security are similarly exempted from recording OATS audit trail data for the security in which they are registered to make a market. See Nasdaq and BX Rules 6951(i); PSX Rule 3401(i). The Commission notes that members of Nasdaq, BX and PSX, that are not also members of FINRA, are required by those exchanges to record the audit trail data required by OATS; however, they are only required to report that data through OATS upon request by their respective exchanges. See Nasdaq and BX Rules 6955(b); PSX Rule 3405(b). Additionally, as of October 17, 2011, members of NYSE and NYSE Amex, who are not also FINRA members, are required to record their trade and order activity. These non-FINRA members are not required to report this data through OATS unless requested. See NYSE and NYSE Amex Equities Rules 7450(b); see, e.g., Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE and NYSE Amex Equities rules). Members of NYSE Arca, who are not also FINRA members, were required to record their trade and order activity as of March 31, 2012. See NYSE Arca Equities Rule 7450(b); see Securities Exchange Act Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE Arca Equities rules). See also Securities Exchange Act 66094 (January 4, 2012), 77 FR 1545 (January 10, 2012) (notice of immediate effectiveness to extend the implementation date of the NYSE Arca Equities Rule 7400 Series, the OATS rules, for Equity Trading Permit Holders that are not FINRA members from January 31, 2012 to March 31, 2012).

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64 FINRA has represented to Commission staff that, as part of its own surveillance activities, FINRA acquires some of this order handling system data from non-FINRA members to supplement the data it receives from its members via OATS, but that matching data across the audit trails yields varying levels of success and accuracy due to the disparate methods used by the different order handling systems to collect and store data. FINRA represented that, during the period from November 28, 2011 to February 24, 2012, approximately 2% of reportable OATS data related to exchange orders could not be linked with matching exchange data. See Commission Staff Memorandum to File No. S7-11-10 regarding telephone conversations with FINRA, dated April 17, 2012 ("Commission Staff Memorandum"). Also, since this process only involves acquiring trade and order data from select sources, it still does not produce a complete record of all market activity. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of reportable OATS data related to exchange orders that could not be linked with matching exchange data remained at approximately 2%. Id.

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65 Common reasons given by FINRA for syntax rejections include: missing mandatory fields, invalid fields, and invalid field combinations (e.g., a Limit Price without a Time in Force Code). OATS will reject records as duplicates if more than one record is submitted with the same Order Receiving Firm Market Participant Identifier, Order Received Date, and Order Identifier or if more than one record contains all of the same information. http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085542 (last viewed on May 23, 2012).

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66 See Commission Staff Memorandum, supra note 64. FINRA estimates that, from the period November 28, 2011 to February 24, 2012 approximately 0.10% of the intra-firm data reported daily by broker-dealers were rejected for errors. Id. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of the intra-firm data reported daily by broker-dealers rejected for errors was more than double this amount. Id.

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67 See FINRA Letter, p. 11. FINRA represented to Commission staff that many of the validation errors result from problems encountered in translating order information from broker-dealer formats into OATS format. See Commission Staff Memorandum, supra note 64.

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68 Id.

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69 Id.

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70 FINRA estimates that during the period from November 28, 2011 to February 24, 2012 approximately 0.5% of each day's reportable events remained unmatched (i.e., multi-firm events, such as routes, that cannot be reconciled). See Commission Staff Memorandum, supra note 64. When considering data covering a time period of approximately 26 months, the percentage of each day's reportable events remaining unmatched was more than double this amount. Id.

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71 For example, FINRA has been given access to order audit trail information from certain SROs pursuant to Regulatory Services Agreements.

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72 ISG is an international group of exchanges, market centers, and regulators that perform market surveillance in their respective jurisdictions. The organization provides a forum for its members to share information and coordinate regulatory efforts to address potential intermarket manipulation and trading abuses.

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73 See Section II.A.2.b., infra.

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74 See FINRA/NYSE Euronext Letter, p. 3.

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75 Examples of schemes that typically rely on orders from accounts at multiple brokers include: (1) "network" insider trading schemes in which the participants cultivate multiple sources of non-public information and trade on the information they receive over an extended period of time and through accounts at a large number of broker-dealers; (2) wash trading; and (3) order layering. Unlike insider trading, for example, which is neither defined nor expressly prohibited in the Act, wash trading is specifically prohibited in the statute. The entering of matched orders for the purpose of creating the illusion of market activity or to artificially affect the price is one of the oldest and most difficult to detect manipulative practices. Technology that permits the routing of thousands of orders to different venues in micro seconds has made cross market surveillance for this activity extremely difficult. "Order layering" is similar to wash trading. In this practice, a market participant can enter numerous non-bona fide market moving orders, often in substantial size relative to a security's legitimate volume to create the false impression of buy or sell side pressure. When such orders induce others to execute against profitable limit orders, the market participants immediately cancel the pending orders that manipulated the price. As with wash sales, multiple traders can enter orders on different venues, impacting the NBBO and making the activity difficult to detect.

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76 For example, implementation of a consolidated audit trail also will help regulators monitor reliance on the use of the safe harbor provision for issuer repurchases in Rule 10b-18 under the Exchange Act. 17 CFR 240.10b-18. Rule 10b-18 under the Exchange Act provides issuers with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, when they repurchase their common stock in the market in accordance with the Rule's manner, timing, price, and volume conditions. The data required to be included in the consolidated audit trail will assist regulators in monitoring issuer repurchases that rely on Rule 10b-18's safe harbor protections to ensure that they comply with all required criteria.

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77 The Commission receives an average of over 200 market-related TCRs each month.

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78 See FINRA/NYSE Euronext Letter, p. 2.

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79 See Rule 613(f).

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80 See note 45, supra.

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81 See "Preliminary Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." (May 18, 2010). See http://www.sec.gov/sec-cftc-prelimreport.pdf.

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82 For detailed discussions and chronologies of the investigation into the events of May 6, 2010, see SEC (http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml) and CFTC (http://www.cftc.gov/PressRoom/Events/AdvisoryCommitteeMeetings/index.htm) webcasts and minutes of public meetings held with the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on May 24, 2010, June 22, 2010, August 11, 2010, November 5, 2010, and February 18, 2011.

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83 See note 45, supra, at p. 11.

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84 Id.

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85 Id.

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86 Id. at p. 18, 80.

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87 See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) ("Concept Release on Equity Market Structure").

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88 See note 1, supra.

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89 See ICI Letter, p. 6-7; Liquidnet Letter, p. 4-5; SIFMA Letter, p. 18-19; CBOE Letter, p. 6 (questioning the need for a large trader reporting system if a consolidated audit trail is implemented).

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90 See FINRA/NYSE Euronext letter, p. 7.

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91 See SIFMA Letter, p. 18.

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92 See Liquidnet Letter, p. 5.

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93 Id.

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94 See Rule 613(j)(4).

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95 Though certain reporting requirements of Rule 13h-1 may eventually be unnecessary due to Rule 613, the Commission notes that Rule 13h-1 will be implemented much more expeditiously compared to the consolidated audit trail, and therefore will address the Commission's near-term need for access to more information about large traders and their activities.

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96 Section 3(a)(3)(A) of the Exchange Act defines the term "member" to mean: "(i) any natural person permitted to effect transactions on the floor of the exchange without the services of another person acting as broker; (ii) any registered broker or dealer with which such a natural person is associated; (iii) any registered broker or dealer permitted to designate as a representative such a natural person; and (iv) any other registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of the [Exchange Act], the rules and regulations thereunder, and its own rules." Section 3(a)(3)(A) further provides that, "[f]or purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 17(d), 19(d), 19(e), 19(g), 19(h), and 21 of [the Exchange Act], the term 'member' when used with respect to a national securities exchange also means, to the extent of the rules of the exchange specified by the Commission, any person required by the Commission to comply with such rules pursuant to Section 6(f) of this title." Finally, Section 3(a)(3)(B) provides that "[t]he term 'member' when used with respect to a registered securities association means any broker or dealer who agrees to be regulated by such association and with respect to whom the association undertakes to enforce compliance with the provisions of [the Exchange Act]." See 15 U.S.C. 78c(a)(3)(A) and 15 U.S.C. 78c(a)(3)(B).

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97 The proposed Rule would have explicitly required each national securities exchange and national securities association to be a sponsor of the NMS plan submitted pursuant to the Rule and approved by the Commission. See proposed Rule 613(a)(4). "Sponsor," when used with respect to an NMS plan, is defined in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory organization which is a signatory to such plan and has agreed to act in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).

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98 Proposed Rule 613(j)(1) would have defined the term "customer" to mean the beneficial owner(s) of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner(s).

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99 The proposed Rule would have defined "material terms of the order" to include, but not be limited to: the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, or short exempt; if a short sale, the locate identifier, open/close indicator, time in force (if applicable), whether the order is solicited or unsolicited, and whether the account has a prior position in the security; if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions. See proposed Rule 613(j)(3).

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100 "The OPRA Plan" is the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS. The OPRA Plan governs the dissemination of trade and quotation information for listed options. In this capacity, it provides real-time quotation and transaction information to market participants. See 17638 (March 18, 1981), 22 SEC Docket 484 (March 31, 1981) (order approving the OPRA Plan).

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101 The effective transaction reporting plans include the Consolidated Tape Association Plan ("CTA Plan") and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis ("UTP Plan").

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102 See Proposing Release, supra note 4, at 32586 and 32594.

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103 Id.

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104 For comments on general costs of the proposed Rule, see, e.g., Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; SIFMA Letter, p. 1-2, FINRA Letter, p. 3; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8.

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105 See Section II.C., infra, for a discussion of specific concerns raised by commenters.

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106 See FINRA/NYSE Euronext Letter, p. 1. NYSE Euronext is the publicly traded parent of a number of subsidiaries, including three SROs, NYSE, NYSE Amex, and NYSE Arca.

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107 See Nasdaq Letter I, p. 2. The NASDAQ OMX Group, Inc. is the publicly traded parent of a number of subsidiaries, including three SROs, Nasdaq, Phlx, and BX.

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108 See Direct Edge Letter, p. 1. Direct Edge is the parent of two SROs, EDGA Exchange, Inc. and EDGX Exchange, Inc.

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109 See CBOE Letter, p. 2.

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110 See, e.g., Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; euchtkafer Letter; Broadridge Letter, p. 3; SIFMA Proposal Letter, p. 1; FINRA Proposal Letter, p. 3.; Liquidnet Letter, p. 3 & p. 5-6; Ameritrade Letter, p. 2-3

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111 Id.

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112 Id.

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113 See BATS Letter, p. 1.

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114 See Liquidnet Letter, p. 1.

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115 Id. at p. 1-2.

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116 See SIFMA Letter, p. 1-2.

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117 Id. at p. 2.

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118 See, e.g., FINRA/NYSE Euronext Letter, p. 7, FINRA Letter, p. 3, FINRA Proposal Letter, p. 1-16, FTEN Letter, p.1, 4-5, Correlix Letter, p. 2-3; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2; Angel Letter, p. 2; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1.

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119 See FIF Letter, p. 1.

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120 See Nasdaq Letter I, p. 2.

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121 See Thomson Reuters Letter, p. 2; Noetic Partners Letter, p. 2; FTEN Letter, p. 1; Ross Letter; Correlix Letter, p. 2.; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Aditat Letter, p. 2 (stating that FIX protocol is already used in the industry today, making it cheaper to create systems to handle consolidated audit trail data as the data already exists in a "suitable format").

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122 See FTEN Letter, p. 13; Thomson Reuters Letter, p. 2-3.

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123 See FTEN Letter, p. 1.

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124 Id. at p. 3.

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125 See Know More Software Letter, p. 1.

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126 See Belanger Letter, p. 4.

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127 See Leuchtkafer Letter, p. 4. See also IAG Letter, p. 3.

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128 See, e.g., SIFMA Letter, p. 2, 15-16; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; Angel Letter, p. 2; CBOE Letter, p. 2-6 (suggesting several ways that the costs of the proposal could be reduced, including: leveraging existing SRO experience with audit trail systems and imposing uniformity across markets in those systems; requiring the submission of audit trail information through a batch process after the close of the trading day; deleting the requirement that all market maker quotes be submitted to the proposed consolidated audit trail; making clear that broker-dealers have no obligation to report order information that has already been reported to an exchange; and revisiting the need for a large trader reporting system if that proposed rule is adopted.).

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129 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 1-2.

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130 See Section III.F.2., infra; see also, e.g., BATS Letter, p. 1-2; Broadridge Letter, p. 3; FIF Letter, p. 4-5; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; ICI Letter, p. 4-5; Knight Letter, p. 2; Scottrade Letter, p. 1-2; SIFMA Letter, p. 3-6; SIFMA February 2012 Letter. Some commenters also questioned whether the costs to provide data on a real-time basis would outweigh the benefits. See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; ICI Letter, p. 4-6; GETCO Letter, p. 2; Direct Edge Letter, p. 3; Leuchtkafer Letter; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 2.

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131 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4; Knight Letter, p. 2. See also Broadridge Letter, p. 3; FIF Letter, p. 4; FIA Letter, p. 2.

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132 See SIFMA Letter, p. 4-6.

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133 Id. at p. 5.

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134 See SIFMA Letter, p. 3-4.

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135 See SIFMA Drop Copy Letter.

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136 Id.

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137 A "drop copy" is an electronic copy of a message automatically generated by the existing order management and execution systems used by broker-dealers and SROs.

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138 See SIFMA Drop Copy Letter.

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139 See GETCO Letter, p. 3-4.

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140 See Wells Fargo Letter, p. 3.

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141 See Correlix Letter, p. 2-3.

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142 Id.

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143 As discussed in Section II.C.4, infra, both SIFMA and FINRA submitted several comment letters with increasing levels of detail on the extent to which existing infrastructures could be used to achieve different forms of the various reporting requirements of the proposed Rule. In one of its later comment letters, FINRA submitted a detailed blueprint describing how it would build a consolidated audit trail that it believed would meet the primary objectives of the proposed Rule in a relatively short timeframe and with minimum costs to the industry. See FINRA Proposal Letter; SIFMA Letter, p. 16-18. See also BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 3.

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144 See, e.g., FINRA/NYSE Euronext Letter; FINRA Letter; Schumer Letter, p. 1.

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145 See Noetic Partners Letter II, p. 2; High Speed Letter, p. 1 (opining that estimated costs could be reduced if data were stored in an off-the-shelf cloud-based storage system or if a petabyte storage facility was built to store data and also estimating that "an integrated analysis system combining bespoke software for first-cut filtering of data from the repository, along with [commercial off-the-shelf software] for detailed analysis, could be developed for less than $10M"). See also Know More Software Letter, p. 1; Belanger Letter, p. 4; FTEN Letter, p. 1, 13.

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146 See Noetic Partners Letter II, p. 2.

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147 Id.

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148 See Section I., supra.

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149 See, generally, Section III., infra.

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150 See Section I., supra, for a summary of the changes to proposed Rule 613.

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151 See Rule 613(c)(3); Section I., supra; Section III.B.1.e., infra.

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152 See Rule 613(j)(1); Section I., supra; Section III.B.1.d.iv., infra.

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153 See Rule 613(a)(1)(i) through (xii); Section I., supra; Section III.C.2.a., infra.

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154 See FIF Letter II, p. 2-3; STA Letter, p. 2; Nasdaq Letter I, p. 6-7.

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155 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3.

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156 See FIF Letter II, p. 2; STA Letter, p. 1.

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157 See FIF Letter II, p. 1; STA Letter, p. 1-2.

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158 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5.

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159 See FIF Letter, p. 1.

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160 See FIF Letter II, p. 2.

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161 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3 (recommending the use of working groups comprising the Commission, FINRA, exchanges, broker-dealers, investors, vendors, and institutional asset managers to conduct business analysis and requisite discussions with the industry in planning a consolidated audit trail that meets the Commission's goals).

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162 Id. at p. 3.

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163 See Broadridge Letter, p. 2.

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164 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

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165 See FIF Letter II, p. 1-2; STA Letter, p. 2.

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166 See FIF Letter II, p. 2; STA Letter, p. 2-3; see also Nasdaq Letter I, p. 7 (arguing for "scheduling flexibility at the initial stage" of designing the consolidated audit trail).

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167 See proposed Rule 613(a)(1).

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168 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely applicable to the cost of the creating and filing the NMS plan required by Rule 613.

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169 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

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170 See Section III.C.2.a., infra.

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171 See Section III.C.2.b., infra.

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172 17 CFR 242.608.

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173 17 CFR 242.608(b)(2).

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174 See FINRA Proposal Letter.

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175 See FINRA Proposal Letter, p. 4, 6 (arguing against requiring the name and address of the beneficial owner of an account, as well as of the individual making the investment decision, and against requiring tax identification or social security numbers for individual investors).

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176 Id. at p. 7 and Appendix B.

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177 Id.

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178 Id. at p. 3-4 (noting that this information would be available for query by regulators within one hour of receipt, would include a unique order identifier and MPID, and would be added on T+1 to the "order lifecycle" using OATS and TRF data).

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179 Id. at p. 4.

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180 See Angel Letter, p. 3 (also noting, "While the OATS data are extremely useful for understanding market behavior and for searching for various violations, these data are not really needed for real time surveillance. Real time surveillance is generally focused on the question of whether or not some change needs to take place immediately . . . . The extensive OATS data regarding the handling of individual orders are more useful for economic analysis and enforcement activities and do not need to be reported in real time.")

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181 Id.

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182 See FINRA Proposal Letter; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 1-3.

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183 See FINRA/NYSE Euronext Letter, p. 7. See also FINRA Letter, p. 3 (stating that "the necessary components to an effective, comprehensive, and efficient consolidated audit trail are: (1) uniform data (both data content and data format); (2) reliable data; and (3) timely access to the data by SROs and the SEC. FINRA believes this can be achieved most effectively, efficiently, and expeditiously by expanding FINRA's existing OATS requirements to additional securities and non-FINRA member broker-dealers and by consolidating exchange data in a central repository to be used with OATS data").

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184 See BATS Letter, p. 2.

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185 See FINRA/NYSE Euronext Letter, p. 14; FINRA Letter.

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186 Id.

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187 See FINRA Letter, p. 6. Specifically, FINRA proposed enhancements to OATS and outlined a phased approach for implementation. It explained that, under its approach, implementation would begin with equity securities in the first two phases, followed by options in the third and fourth phases. FINRA further proposed that it could "establish an intraday abbreviated order submission capability based on SIFMA's drop-copy proposal." FINRA estimated the initial cost for the first two phases of the OATS enhancement would be between $100 to $125 million and the ongoing annual costs to be between $30 million and $40 million. While FINRA's proposal appears to include many of the elements required by Rule 613, the Commission notes that the proposal does not include a Customer-ID (which was similarly lacking in the SIFMA proposal), nor would all broker-dealers be required to report order information to the central repository (certain firms that route orders exclusively to another reporting firm that is solely responsible for further routing decisions would be exempt from reporting obligations; additionally, FINRA proposed retaining exemptive authority in certain limited situations to provide relief to small member firms that do not otherwise qualify for exclusion from the definition of an OATS Reporting Member). Further, FINRA's proposal would not collect customers' names, addresses and account numbers. See FINRA Proposal Letter, p. 10; 14-16; Appendix. The Commission believes a unique Customer-ID and customer account information are critical to the efficacy and usefulness of the consolidated audit trail, and therefore is requiring the NMS plan submitted for its consideration to include such information.

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188 Id. This commenter also noted that OATS compliance rates have improved to over 99% since the system was first implemented, and emphasized that creating a new system would result initially in low compliance rates until users became familiar with the system. Id. at p. 11; see also FINRA/NYSE Euronext Letter, p. 8.

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189 See FIF Letter, p. 6 (also providing thoughts on the functionalities of OATS that should be considered in creating the consolidated audit trail, such as OATS' ability to identify and reject duplicative reporting; to link reports between firms and Nasdaq exchanges without using a unique customer identifier; its possible flexibility in incorporating additional order types; its current incorporation of quote data; and its current identification of index arbitrage and program trading, and ability to possibly add a large trader identification field "to enhance analysis of high volume, algorithm trading").

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190 See BOX Letter, p. 2; CBOE Letter, p. 2.

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191 See BOX Letter, p. 2.

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192 See CBOE Letter, p. 2.

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193 See SIFMA Drop Copy Letter. The FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. These market participants share a vision of a common, global language for the automated trading of financial instruments. See http://fixprotocol.org/what-is-fix.shtml (last viewed on May 30, 2012).

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194 Id. at p. 1.

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195 Id. at p. 1-2.

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196 See Section II.A.1.c., supra.

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197 This Section III.A. discusses the use of a NMS plan to create, implement, and maintain a consolidated audit trail. Section III.C., infra, focuses on the process the SROs must follow when submitting the NMS plan to the Commission.

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198 17 CFR 242.608. See Rule 613(a)(2).

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199 See Proposing Release, supra note 4, at 32568.

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200 See Thomson Reuters Letter, p. 2; CBOE Letter, p. 7.

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201 See Thomson Reuters Letter, p. 2.

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202 See CBOE Letter, p. 7.

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203 See FINRA Letter, p. 15; Angel Letter, p. 3.

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204 See FINRA Letter, p. 15.

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205 See Angel Letter, p. 3.

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206 See Rule 613(a). The proposed Rule provided that the NMS plan must be filed with the Commission pursuant to Rule 608. Adopted Rule 613(a)(2) clarifies that the NMS plan must also satisfy the requirements set forth in Rule 608(a). See Rule 608(a) of Regulation NMS; 17 CFR 242.608(a).

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207 See Section III.C., infra.

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208 17 CFR 242.608. See Rule 613(a)(2).

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209 See Thomson Reuters Letter, p. 2.

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210 See Section I., supra; Sections III.B., III.C., infra.

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211 See Section III.B.1.d.i.(A)., infra.

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212 See FINRA Letter, p. 15.

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213 See CBOE Letter, p. 7.

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214 See Rule 613(a)(1)(xi).

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215 See Rule 613(b)(7)(i). Because members of the SROs will be required to report data pursuant to the NMS plan, the Rule provides that the plan must require that the Advisory Committee include representatives of the member firms of the SROs. However, the Commission believes that it is advisable for the SROs to consider including other interested parties such as SIPs, vendors, investors, and/or academics on the Advisory Committee. In addition, the Commission expects that the Advisory Committee would include the Commission's Chief Technology Officer as an observer. See Section III.B.3.b., infra.

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216 See Rule 613(b)(7).

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217 17 CFR 242.608(b)(1).

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218 See Angel Letter, p. 3.

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219 See Section II.A., supra. The Commission notes that, in the Proposing Release, it used the term "proprietary orders" to describe orders that were generated for the account of a broker-dealer. See Proposing Release, supra note 4, at 32570. To avoid confusion with the proposed "Volcker Rule," which proposes new regulations with respect to "proprietary" trading by commercial banks and their affiliates, the Commission is using the term "principal orders" in this Release to describe orders that were generated for the account of a broker-dealer. See Securities Exchange Act Release No. 65545 (October 12, 2011), 76 FR 68846 (November 7, 2011) (File No. S7-41-11).

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220 See Section I., supra.

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221 See proposed Rule 613(c)(5).

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222 The Commission notes that any expansion of the consolidated audit trail to cover non-NMS securities would be effectuated through notice and comment.

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223 See Liquidnet Letter, p. 2 (suggesting limiting the scope of the first phase of audit trail implementation to end-of-day-reporting to ensure that it can be completed in a timely and cost-effective manner; this commenter also recommended that the first phase apply the consolidated audit trail to all market participants, not just the SROs, as proposed). See also FIF Letter, p. 7 (suggesting that the consolidated audit trail cover just NMS stocks - then at a later date, all NMS securities, including options); FINRA Proposal Letter, p. 5 (suggesting several phases of expansion, beginning with NMS stocks and over-the-counter ("OTC") equity securities, and ultimately including standardized options, fixed income securities, conventional options, and security-based derivatives in the consolidated audit trail); SIFMA Letter, p. 16-17 (believing that OATS could form the basis for the consolidated audit trail, stating that OATS should be modified to include non-Nasdaq-listed securities, listed options, quotes, street side and exchange-to-exchange routing and market making and recommending phasing in NMS stocks first, then any additional data elements, then listed options and, finally, non-NMS securities); FIF Letter II, p. 2 (suggesting that the consolidated audit trail have "multi-instrument capabilities, most importantly options and futures but also fixed income and other instruments).

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224 See Broadridge Letter, p. 4.

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225 See Nasdaq Letter II, p. 3.

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226 See Liquidnet Letter, p. 2; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17; Marketcore Letter, p. 1.

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227 See Marketcore Letter, p. 1.

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228 See Ameritrade Letter, p. 3. See also Mansfield Letter, p. 1 (suggesting other data, including "metrics" and "market environmental information" to be included in the consolidated audit trail).

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229 See Direct Edge Letter, p. 4.

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230 See Proposing Release, supra note 4, at 32568-70; Rule 613(c)(5).

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231 See Rule 613(i). Specifically, Rule 613(i) now provides that the SROs provide a document outlining how such exchanges and associations "could" incorporate non-NMS securities into the consolidated audit trail, rather than how the exchanges and associations "would propose to" incorporate non-NMS securities; and that the exchanges and associations should provide details for each order and reportable event that "may" be required to be provided, and which market participants "may" be required to provide the data. As proposed, the comparable provision of Rule 613(i) required that the exchanges and associations should provide details for each order and reportable event that "would" be required to be provided, and which market participants "would" be required to provide the data.

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232 See Section III.B.3.b., infra.

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233 See Ameritrade Letter, p. 3; Liquidnet Letter, p. 2; Marketcore Letter, p. 1; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17.

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234 See Rule 613(a)(1)(vi). See also Section III.C.2.a.i., infra.

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235 See note 222, supra.

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236 See Rule 613(a)(3), which states that the NMS plan must require the plan sponsors: (i) within two months after effectiveness of the NMS plan to select a plan processor; (ii) within four months after effectiveness of the NMS plan to synchronize their business clocks and require the members of each such exchange and association to synchronize their business clocks; (iii) within one year after effectiveness of the NMS plan to provide to the central repository the data specified in Rule 613(c); (iv) within fourteen months after effectiveness of the NMS plan to implement a new or enhanced surveillance system(s) as required by Rule 613(f); (v) within two years after effectiveness of the NMS plan to require their members, except those members that qualify as small broker-dealers as defined in § 240.0–10(c), to provide to the central repository the data specified in Rule 613(c); and (vi) within three years after effectiveness of the NMS plan to require their members that qualify as small broker-dealers as defined in § 240.0–0(c) to provide to the central repository the data specified in Rule 613(c).

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237 See Section III.D., infra.

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238 The Commission also believes that limiting the application of the Rule initially to only NMS securities should help ensure that the implementation schedule prescribed by the Rule is achievable. See Section III.D., infra.

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239 See Section II.A.2, supra.

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240 See note 223, supra.

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241 The Commission notes that the financial markets have become increasingly interrelated, with transactions occurring in the futures markets affecting transactions in the securities markets. To the extent that instruments other than NMS securities (e.g., futures on a securities index or security-based swaps) can be substitutes for trading in NMS securities, or are otherwise linked to such trading (e.g., as part of a strategy that involves multiple products), having access to an audit trail that includes these instruments would improve regulators' ability to more quickly detect potentially manipulative or other illegal activity that could occur across markets. The Commission recognizes, however, that any such expansion to include products not under the Commission's jurisdiction, and thus not contemplated by this Rule, would need to be coordinated with the CFTC or other applicable regulatory authorities, and would likely require a separate rulemaking, which would include a consideration of the costs and benefits of such an expansion. In this regard, the Commission believes that it could be beneficial to discuss with the CFTC, at the appropriate time, the possibility of including within the consolidated audit trail data relating to futures or swap products regulated by the CFTC that are based on securities. The Commission is therefore directing the Commission staff to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail. The information from such an expanded consolidated audit trail could benefit both the CFTC and the Commission. An example of a non-NMS security is a security-based swap. The Commission notes that, separately, it has proposed rules requiring the reporting of security-based swap information to registered security-based swap data repositories ("SDR") or the Commission. See Securities Exchange Act Release No. 63446, File No. S7-34-10 (November 19, 2010), 75 FR 75208 (December 2, 2010) (proposing Regulation SBSR under the Exchange Act providing for the reporting of security-based swap information to registered security-based SDR or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information); see also Securities Exchange Act Release No. 63447, File No. S7-35-10 (November 19, 2010), 75 FR 77306 (December 10, 2010) (proposing rules governing the SDR registration process, duties, and core principles).

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242 See 17 CFR 242.100 et seq.; 17 CFR 240.10b-5. Rule 105 of Regulation M prohibits the short selling of equity securities that are the subject of a public offering for cash and the subsequent purchase of the offered securities from an underwriter or broker or dealer participating in the offering if the short sale was effected during a period that is the shorter of the following: (i) beginning five business days before the pricing of the offered securities and ending with such pricing; or (ii) beginning with the initial filing of such registration statement or notification on Form 1-A or Form 1-E and ending with the pricing. Thus, Rule 105 prohibits any person from selling short an equity security immediately prior to an offering and purchasing the security by participating in the offering. Rule 10b-5 provides that "[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

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243 See Direct Edge Letter, p. 4.

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244 See Rule 613(i).

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245 See Section III.B.3.b., infra.

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246 See note 2145, supra.

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247 See Proposing Release, supra note 4, at 32570; proposed Rule 613(j)(4).

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248 Id.

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249 See note 219, supra.

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250 See Proposing Release, supra note 4, at 32571.

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251 See FINRA Letter, p. 10; SIFMA Letter, p. 15; Liquidnet Letter, p. 3; FINRA Proposal Letter, p. 6.

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252 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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253 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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254 See CBOE Letter, p. 5. See also Options Settlement Order, supra, note 60. See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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255 See Liquidnet Letter, p. 3.

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256 See Ameritrade Letter, p. 3.

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257 See SIFMA Letter, p. 15.

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258 See BOX Letter, p. 3.

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259 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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260 See Rule 613(j)(4).

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261 See, e.g., FINRA Rule 5320; NYSE Arca Equities Rule 6.16.

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262 See Section II.A., supra.

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263 See BOX Letter, p. 3.

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264 See SIFMA Letter, p. 15.

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265 See Rule 613(c)(7)(ii)(F). The Commission notes that the NMS plan submitted by the plan sponsors would need to provide appropriate detail as to how orders routed within a single broker-dealer would be reported. For example, the NMS plan would need to address the routing of an order received by a customer-facing sales desk within a broker-dealer to a separate trading or market-making desk within the same broker-dealer that actually determines how to execute the order.

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266 See Ameritrade Letter, p. 3.

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267 See CBOE Letter, p. 5; TIAA-CREF Letter, p. 2; Wachtel Letter, p. 1; SIFMA Letter p. 13; FINRA Proposal Letter, p. 5-6; GETCO Letter, p. 3-4; Nasdaq Letter II, p. 3.

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268 See TIAA-CREF letter, p. 2-3. Another commenter echoed this concern and recommended that the consolidated audit trail develop a means to avoid such duplicative reporting, explaining that this is a problem with the current OATS system. See Wells Fargo Letter, p. 2.

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269 See TIAA-CREF letter, p. 2.

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270 See FINRA Proposal Letter, p. 5-6.

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271 Id.

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272 See Wachtel Letter, p. 1. The Commission notes any exemptions granted by FINRA under FINRA Rule 7470 may not exceed a period of two years, unless extended. See FINRA Rule 7470. FINRA's authority to grant exemptions under FINRA Rule 7470 expires on July 10, 2015. See FINRA Rule 7470(c).

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273 See CBOE Letter, p. 5-6; SIFMA Letter, p. 13; GETCO Letter, p. 3-4.

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274 See CBOE Letter, p. 5-6 (stating its belief that "it would be redundant for both the market makers and the exchanges to all submit this information to the CAT. We recommend that the exchanges be permitted to submit information on market maker quotes to the CAT. Market makers who submit quotes to an exchange would have no obligation other than to correctly identify themselves to the exchange as the party submitting the quotation. The exchange could add the rest of the required information (participant identifier, unique order identifier, etc.) to the quote and transmit it to the CAT").

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275 See SIFMA Letter, p. 13.

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276 See GETCO Letter, p. 3-4. Another commenter proposed to develop a platform that would collect audit trail information from the SROs and other sources of information, and thus reduce the obligations on broker-dealers to report data. See Nasdaq Letter II, p. 3.

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277 See Rules 613(c)(5) through (7).

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278 The Commission notes that the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf. In particular, the Commission recognizes that introducing brokers may wish to contract with clearing broker-dealers for this purpose and that the SROs may need to amend their rules to address the allocation of responsibility between the parties. In such cases, the Commission expects that the clearing contract, as mandated by the SRO's rules, as amended, would address the allocation of responsibility for the reporting of required data.

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279 The Commission has adopted Rule 613(c)(5) and (6) using the terms "record" and "report" the required audit trail data, rather than "collect" and "provide" the required audit trail data, as proposed. See also Section III.B.1.e., infra.

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280 The Rule as adopted requires the NMS plan submitted to the Commission for its consideration to require broker-dealers and SROs to record and report to a central repository only the audit trail information for actions each took with respect to an order. For example, if a member receives an order from a customer, the member will be required to report its receipt of that order (with the required information) to the central repository. If the member then routes the order to an exchange for execution, the member will be required to report the routing of that order (with the required information) to the central repository. Likewise, the exchange receiving the routed order will be required to report the receipt of that order from the member (with the required information) to the central repository. If the exchange executes the order on its trading system, the exchange will be required to report that execution of the order (with the required information) to the central repository, but the member will not also be required to report the execution of the order. If the member executes the order in the OTC market, however, rather than routing the order to an exchange (or other market center) for execution, the member will be required to report the execution of the order (with the required information) to the central repository. In this regard, there is no duplicative reporting of audit trail information because each market participant is required to report only the audit trail data for the actions it has taken with respect to an order. The Commission notes that, for orders that are modified or cancelled, Rule 613(c)(7)(iv) would require the broker-dealer who received the modification from a customer, for example, to report the order modification to the central repository. Thus, if broker-dealer A received a modification to a customer's order from the customer, broker-dealer A would be required to report such modification to the central repository. If broker-dealer A had already routed the customer's order to another broker-dealer ("broker-dealer B"), the customer's modification would also need to be reported by broker-dealer A to broker-dealer B. The receipt of the customer's modification by broker-dealer B would also need to be reported to the central repository, pursuant to Rule 613(c)(7)(iv). The same reporting obligations would apply if the modification were originated by broker-dealer A.

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281 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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282 See Section III.C.2.iii., infra.

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283 See Wachtel Letter, p. 1.

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284 See Section III.D., infra.

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285 If a clearing broker-dealer receives an order from a small broker-dealer during the period between the time the Rule is applicable to large broker-dealers and the time the Rule is applicable to small broker-dealers, the broker-dealer performing the clearing function for the small introducing broker will be subject to only the requirements of the Plan applicable directly to the clearing broker-dealer, while the small introducing broker will not be subject to the reporting requirements at that time.

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286 In particular, the Commission acknowledges that certain elements are not collected by existing audit trails and thus SROs and members would incur additional costs to record and report such information. The Commission also acknowledges that there might be additional costs with respect to assigning customer identifiers, the broker-dealer identifiers and the order identifiers because such assignments might, depending on the NMS plan, require coordination amongst various different entities and possibly further systems changes.

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287 See proposed Rules 613(c)(7)(i)(I), 613(c)(7)(ii)(G), 613(c)(7)(iii)(F) and 613(c)(7)(iv)(D).

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288 A broker or dealer currently must mark all sell orders of any equity security as long, short, or short exempt. See Rule 200(g)(1) under the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked short exempt only if the conditions of Rule 201(c) or (d) under the Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 200(g)(2) under the Exchange Act, 17 CFR 242.200(g)(2).

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289 See Kumaraguru Letter, p. 1.

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290 Id.

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291 See Ameritrade Letter, p. 3.

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292 Id.

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293 See FINRA Proposal Letter, Appendix A.

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294 See Section II.A.2., supra.

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295 See Kumaraguru Letter, p. 1.

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296 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C).(2)., infra (discussing the definition of "customer" as applied to investment advisers).

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297 See Section III.B.1.d.ii., infra, for a discussion of the proposed requirement to report the unique identifier of the registered representative receiving or originating an order.

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298 See Proposing Release, supra note 4, at 32575.

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299 See Angel Letter, p. 2-3.

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300 Order type information is important because it reflects the intention of the person originating an order with regard to how an order should be handled, and also provides information regarding the potential impact of orders on the market.

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301 See Proposing Release, supra note 4, at 32575.

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302 See proposed Rule 613(j)(3).

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303 See Angel Letter, p. 2-3.

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304 Id.

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305 See Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11; SIFMA Drop Copy Letter, p. 2.

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306 See Managed Funds Association Letter, p. 25-7">

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307 See SIFMA Letter, p. 11. SIFMA subsequently submitted an alternative proposal that did not include a flag for algorithms, citing lack of clarity in the Commission's definition of algorithmic order, and stating that the FIX standard lacks existing fields to flag such orders. Id. at 2.

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308 See Angel Letter, p. 2-3.

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309 See Rule 613(j)(7).

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310 See Proposed Rule 613(c)(7)(i)(F).

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311 See SIFMA Letter, p. 12; Liquidnet Letter, p. 6; FINRA Letter, p. 4; FINRA Proposal Letter, p. 6.

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312 See FINRA Letter, p. 4 (explaining that "multiple firms can currently be represented by a single MPID that is used for market access arrangements and is assigned to another firm that has no direct relationship to the trading activity being reported under that MPID"). This commenter also supported the use of more specific "sub-identifiers" to allow regulators to distinguish between desks or trading units within a firm.

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313 Id. at p. 9. FINRA also requested that the Commission reconsider the need for reporting the identification of the beneficial owner, the identification of the person exercising investment discretion, and the unique identifier of the branch office and registered representative. For further discussion of this comment, see note 170 supra and accompanying text.

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314 See FINRA Proposal Letter, p. 6, 13. The CRD is the central licensing and registration system operated by FINRA which contains employment, qualification and disciplinary histories for securities industry professionals who do business with the public.

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315 See FINRA Proposal Letter, p. 6, 13.

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316 Id. at p. 6.

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317 See Angel Letter, p. 2.

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318 This standard is being developed by Technical Committee 68 (TC68) of ISO, in whose meetings a Commission staff representative participates. Its final publication is subject to the resolution of specific issues on implementation, operating procedures, and the need to coordinate with a global legal entity identifier initiative conducted by the global regulatory community, in which a Commission staff representative is also participating.

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319 One commenter requested the Commission consider how the Department of Treasury's newly-created Office of Financial Research ("OFR") would impact reporting requirements imposed by the consolidated audit trail. See SIFMA Letter, p. 22-23. The commenter noted that the collection powers granted to the OFR, as well as its authority to require standardized reporting of data, could affect how data is submitted to the consolidated audit trail. Id. at p. 22. The commenter suggested that any information that is provided to the consolidated audit trail should not be required to be provided to the OFR again or in a different format. Id. The Commission understands that the OFR has been participating in and encouraging efforts by interested parties to have a standard for assigning unique entity identifiers created by an internationally recognized standards body ("IRSB") and that the ISO has issued a draft ISO standard, ISO 17442, for the financial services industry that is proposed to provide a viable global solution for the accurate and unambiguous identification of legal entities engaged in financial transactions. See ISO Press Release "ISO Financial Services Standard Wins Industry Support Six Months Ahead of Publication," July 25, 2011. Because the ISO standard is still in draft form and issues of implementation, governance and operating procedures remain to be resolved, the Commission does not believe that it is appropriate for it to mandate the use of the ISO standard at this time. The Commission notes, however, that to the extent that unique entity identifiers become available from an IRSB, Rule 613 provides SROs with sufficient flexibility to submit, if they so chose, an NMS plan that makes use of those identifiers and requires all or some reporting parties to obtain such identifiers, assuming such identifiers otherwise meet the requirements of the Rule.

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320 See proposed Rule 613(c)(7)(iv)(E) (requiring the reporting of the identity of the person giving a modification or cancellation instruction for an order); adopted Rule 613(c)(7)(iv)(F) (requiring the CAT-Reporter-ID or Customer-ID of such person instead).

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321 See note 313, supra.

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322 See proposed Rule 613(c)(7)(i)(F).

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323 17 CFR 240.17a-3(a)(6)(i).

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324 17 CFR 240.17a-4(b)(1).

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325 See Rule 613(j)(3) for a definition of "customer."

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326 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(B).

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327 See CBOE Letter, p. 2; Managed Funds Association Letter, p. 2; FINRA Letter, p. 9; SIFMA Drop Copy Letter, p. 1; SIFMA Letter, p. 9.

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328 See CBOE Letter, p. 2.

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329 See Managed Funds Association Letter, p. 2.

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330 See FINRA Letter, p. 9.

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331 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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332 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4.

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333 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, 2.

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334 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; FIF Letter, p. 2.

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335 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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336 Id.

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337 See SIFMA Letter p. 9, 10.

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338 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4; SIFMA Letter, p. 11.

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339 See Proposing Release, supra note 4, at 32573; Liquidnet Letter, p. 4.

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340 See SIFMA Letter, p. 10.

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341 See Knight Letter, p. 2.

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342 See Scottrade Letter, p. 1. See also Knight Letter, p. 2; Direct Edge Letter, p. 4.

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343 See Direct Edge Letter, p. 3.

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344 See FINRA Proposal Letter, p. 4.

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345 See SIFMA Letter, p. 11.

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346 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, p 2.

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347 See Angel Letter, p. 2. This commenter stated that "[i]t would be relatively simple and cheap to add four fields to each trade report that would contain the account numbers of the buyer and seller and the Market Participant Identifier (MPID) for the original order entry firms."

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348 See FIF Letter, p. 2. This commenter recommended that the requirement for such unique customer identifiers be tabled until after regulators have experience using CAT without this identifier.

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349 See FIF Letter, p. 2.

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350 See BOX Letter, p. 2.

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351 See Section II.A.3., supra.

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352 See SIFMA Letter, p. 11; FINRA Proposal Letter, p. 6-7.

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353 See SIFMA Letter, p. 11.

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354 Id. See also FINRA Proposal Letter, Appendix B (setting forth a method for identifying large traders through the "registration of unique market participant identifiers rather than by requiring broker-dealers to provide the CAT processor with any large trader numbers assigned by the SEC in order reports, thereby minimizing the ability of market participants to reverse engineer a large trader's identity or trading strategy").

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355 See FINRA Proposal Letter, p. 6-7.

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356 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 2; FIF Letter, p. 2.

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357 See SIFMA Letter, p. 10 (noting that "in recent years, increased concerns about identity theft and client confidentiality have led the securities industry to move away from using social security identification numbers or taxpayer identification numbers as a way to monitor clients and customers. The SEC has affirmed that it would guard access to customer social security and taxpayer identification numbers with even more safeguards than it does other information in the central repository of the consolidated audit trail. Although the SEC has a strong record of protecting investor privacy, the very presence of potentially billions of unique customer identifiers tied to personal information in a central repository would create a substantial risk of misuse and identity theft. The risk of unique customer identifiers being stolen or misused would be magnified in a real-time reporting system").

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358 See Wells Fargo Letter, p. 3. However, this commenter also noted that, "[w]hile the full panoply of privacy concerns that flow from having a unique order identifier being available to every participant in the order execution process may be difficult to assess, creating a system that has that unique identifier available for primarily the post trade review likely solves both the privacy and cost issues in a manner reasonable for both clients, market participants and regulators." Id.

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359 See Ross Letter, p. 1 (asking at what level of security to encrypt customer data, and for how long to encrypt it for, as well as how long the Commission would need to decrypt the customer's name – whether on a real time or overnight basis, and noting that data encryption is expensive and could enlarge message sizes.) See also ICI, p. 3 (suggesting that the Commission expressly state who would have access, when they could access it, and how they could use it; and also recommending requiring that all data sent to the central repository be encrypted and that certain fields be "masked" or that reporting of information in such fields be delayed until end-of-day to reduce concerns about leaked information being used for frontrunning).

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360 See FIF Letter, p. 2.

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361 Because existing SRO audit trails do not require customer information to be reported, regulators must request that information identifying the customer, often from a multitude of sources, which can result in significant delays in investigating market anomalies or violative trading. Additionally, indirect access to an exchange (such as "sponsored access" arrangements) also has made it more difficult to use the current EBS system and Rule 17a–25 to identify the originating customer because the broker-dealer through whom an order is sent to an exchange may not know or have direct access to information identifying the customer who originally submitted the order.

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362 See notes 331-334, supra, and accompanying text.

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363 See Angel Letter, p. 2.

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364 See SIFMA Letter, p. 9-11; FINRA Proposal Letter, p. 4 and 6.

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365 For purposes of the following discussion, the Commission will use the terms "unique customer identifier" and "Customer-ID" interchangeably.

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366 Under the Rule, each customer would be assigned a unique customer identifier, or Customer-ID. However, an order may have more than one Customer-ID if the account holder differs from the person from whom the broker-dealer is authorized to take trading instructions or if more than one person is an account holder for the account or is authorized to give trading instructions for the account.

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367 See Rule 613(a)(1)(xi).

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368 See SIFMA Letter, p. 11.

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369 See SIFMA Letter, p. 11.

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370 See Section III.B.1.e., infra.

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371 See FINRA Letter, p. 8-9.

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372 See ICI Letter, p. 2-4; SIFMA Letter, p. 10-11; Angel Letter, p. 2; Ross Letter, p. 1.

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373 See Section III.B.2.e., infra.

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374 See Ross Letter, p. 1.

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375 See Rule 613(a)(1)(iv).

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376 See also Section III.B.2.e., infra, for a discussion of the provisions in the NMS plan designed to protect the privacy and confidentiality of the consolidated audit trail data.

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377 See Rule 613(j)(4).

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378 See Rule 613(e)(2). See also Section III.B.2.d., infra.

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379 See FINRA Letter, p. 9.

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380 See SIFMA Letter, p. 11.

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381 Id.

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382 The Commission also notes that it retains the authority to request additional information from broker-dealers (and other market participants it regulates) where information about a customer of a broker-dealer beyond that required by Rule 613(j)(3) is needed to fulfill its mission.

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383 Rule 17a-3(a)(9), among other things, requires a broker-dealer to make and keep a record of the name and address of the "beneficial owner" of each cash or margin account with the broker-dealer. 17 CFR 240.17a-3(a)(9). Rule 613 is not intended to alter in any way the information that a broker-dealer is currently required to obtain under Rule 17a-3(a)(9).

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384 The Commission notes that, under Rule 613, both joint account holders would also receive their own unique customer identifier.

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385 See Rule 613(j)(3)(ii).

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386 For the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(i).

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387 Pursuant to the definition of "customer" under adopted Rule 613, the Rule would not capture owners of a fund because they are not the account holders at the broker-dealer.

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388 This is because, for the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(ii). If an individual creates and operates two separate entities (as an employee of each such entity) that each maintain a trading account at one or more broker-dealers, the broker-dealers would be required to record and report the Customer-IDs of those entities, and not the customer ID of the individual trader.

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389 See Proposing Release, supra note 4, at 32576.

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390 See Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3; FIF Letter II, p. 2.

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391 See Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3.

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392 See FINRA Letter, p. 7-8. FINRA expressed concern that, if two child orders from the same parent order are sent to the same market center, regulators would need to look at time stamps and other attributes, such as share quantity and price, to attempt to create an accurate linkage for each individual child order. FINRA stated that this complexity could be avoided if members used a separate unique routed order identifier for each routed order. Id.

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393 See FINRA Proposal Letter, p. 7-8.

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394 See FIF Letter II, p. 2.

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395 See SIFMA Letter, p. 12. See also SIFMA Drop Copy Letter, p. 2 (suggesting a routed order identifier or a child order identifier which would be separate from the unique order identifier of the parent order, and would be reported to the consolidated audit trail separately on a non-real-time basis, as well as linkage information).

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396 See FIF Letter, p. 3 (recommending the linking of the order information in a fashion similar to OATS whereby the information would only be available to regulators).

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397 See SIFMA Letter, p. 12. In addition, another commenter suggested that order identifiers should be unique by broker and day, similar to the approach used by OATS. See Liquidnet Letter, p. 7.

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398 See Rule 613(c)(7)(i)(B); Rule 613(c)(7)(ii)(A); Rule 613(c)(7)(iii)(A); Rule 613(c)(7)(iv)(A); Rule 613(c)(7)(v)(A); Rule 613(c)(7)(vi)(C); and Rule 613(j)(1).

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399 See Rule 613(j)(1).

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400 See Section III.C.2.a., infra.

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401 See FIF Letter, p. 3; Liquidnet Letter, p. 7; SIFMA Letter, p. 12; SIFMA Drop Copy Letter, p. 12; FINRA Letter, p. 8.

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402 See Section II.A., supra.

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403 See Rule 613(j)(1). For example, one of the methods that the SROs could consider using to demonstrate the efficacy of their approach would be to engage appropriate third party experts to confirm that the system's proposed design and functionality would achieve its stated accuracy and reliability benchmarks.

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404 See Section III.C.2.a.i., infra; Rule 613(a)(1)(iii) and (iv).

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405 See Rule 613(e)(1).

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406 See FINRA Letter, p. 4-7.

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407 See SIFMA Letter, p. 12. See also FIF Letter, p. 3.

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408 See SIFMA Letter, p. 12.

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409 See proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), 613(c)(7)(v)(C).

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410 See Endace Letter, p. 1-2.

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411 See Endace Letter, p. 1. The Commission notes that this commenter also suggested that the same time increment be extended to market data feeds to help increase transparency and deter fraudulent activity; however, this comment is outside the scope of this Release.

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412 Id. at 2-3.

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413 See SIFMA Letter, p. 14.

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414 See FIF Letter, p. 6-7.

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415 Id. See Section III.B.1.d.v., infra, for further discussions of "time drift" and the issues raised by this commenter in that regard.

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416 See Proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), and 613(c)(7)(v)(C).

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417 See Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(C), and 613(c)(7)(v)(C).

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418 See, e.g., Securities Industry Automated Corporation's ("SIAC") Consolidated Quotation System ("CQS") Output Specifications Revision 40 (January 11, 2010); SIAC's Consolidated Tape Service ("CTS") Output Specifications Revision 55 (January 11, 2010); and Nasdaq's Unlisted Trading Privileges Plan Quotation Data Feed Interface Specifications Version 12.0a (November 9, 2009).

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419 See, e.g., http://batstrading.com/resources/features/bats_exchange_Latency.pdf (describing, among other things, the time it takes to accept, process, and acknowledge or fill a member order).

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420 See Endace Letter, p. 1.

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421 See FIF Letter, p. 7.

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422 See Section III.B.1.h., infra, for a discussion of clock synchronization.

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423 See FIF Letter, p. 6-7.

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424 Similarly, although reporting in increments finer than a millisecond would also enable the accurate time-sequencing of events originating from within a single system or systems operating off the same clock, the Commission recognizes that the effects of time drift across the clocks of different systems could limit the efficacy of time-sequencing sub-millisecond events across those systems.

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425 See FINRA's Order Audit Trail System, Frequently Asked Questions, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/P122893 (last visited on May 15, 2012).

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426 See Endace Letter, p. 1 (stating that "[t]oday Exchanges such as NYSE Euronext and BATS are claiming that they are executing orders in less than a millisecond (see Wall Street Journal on the January 6th 2010) and are displaying details of these trades in increments of milliseconds on their market data feeds. Clearly from an Exchange perspective the publishing of trade data at one millisecond increments is not just possible, its current practice. However, Endace believes that one millisecond increments is not good enough"); SIFMA Letter, p. 14 (acknowledging that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second").

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427 See SIFMA Letter, p. 14.

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428 See Rule 613(a)(1)(xii).

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429 See Rule 613(a)(1)(vii).

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430 See Rule 608(b)(1) under Regulation NMS, 17 CFR 242.608(b)(1).

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431 See GETCO Letter, p. 4.

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432 Id.

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433 Id.

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434 OATS rules currently require the recording and reporting of orders routed internally. See FINRA Rule 7440(c).

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435 The Commission acknowledges that certain orders received by an exchange may be routed to another exchange; however, the routing of such an order to the other exchange is largely subject to the rules of the exchange and Rule 613 will capture such routing as a reportable event.

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436 In general, flash orders are communicated to certain market participants and either executed immediately or withdrawn immediately after communication. The Commission has proposed and sought comment on whether to amend Rule 602 of Regulation NMS under the Exchange Act to eliminate an exception for the use of flash orders by equity and options exchanges. See Securities Exchange Act Release Nos. 60684 (September 18, 2009), 74 FR 48632 (September 23, 2009); 62445 (July 2, 2010), 75 FR 39625 (July 9, 2010).

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437 See Section III.B.1.d.vi., supra, for a discussion of the modifications to Rule 613(c)(7)(ii) through (iii).

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438 The Commission notes that OATS rules also require both the FINRA reporting member routing an order and the FINRA reporting member receiving the order to record and report certain audit trail data. See FINRA Rule 7440(C). See also Rule 613(c)(7)(ii)(D) and Rule 613(c)(7)(iii)(D) through (E).

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439 See SIFMA Drop Copy Letter, p. 4.

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440 Id.

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441 See Liquidnet Letter, p. 7.

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442 See, e.g., FINRA Rule 7440(d); Nasdaq Rule 6950; NYSE Rule 132B.

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443 See SIFMA Drop Copy Letter, p. 4.

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444 See Section III.B.1.iii., supra.

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445 See Liquidnet Letter, p. 7.

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446 While the Commission is not requiring that execution data be linked with the public trade report using a common identifier, the Commission notes that the Rule does not prohibit the SROs from including a provision in the NMS plan for the establishment of a common identifier to link the audit trail execution reports for buy and sell orders to the public trade report.

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447 See Rule 613(j)(9) for a definition of "reportable event."

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448 See proposed Rule 613(c)(3).

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449 See Proposing Release, supra note 4, at 32572.

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450 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

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451 See Ameritrade Letter, p. 1.

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452 See Aditat Letter, p. 1-2. FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. See What is FIX? available at http://fixprotocol.org/what-is-fix.shtml (last visited on May 7, 2011).

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453 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

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454 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4-5; Knight Letter, p. 2. See also BATS Letter, p. 2; Broadridge Letter, p. 3; FIF Letter, p. 4; GETCO Letter, p. 3-4; CBOE Letter, p. 4; FIA Letter, p. 2. In particular, FIA noted its belief that "real-time reporting accounts for a significant portion of the considerable costs associated with the CAT." See FIA Letter, p. 2.

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455 See FINRA/NYSE Euronext Letter, p. 5; FINRA Letter, p. 13; SIFMA Letter, p. 5; CBOE Letter, p. 4 (stating that, "given the increased speed of order submission, quote changes, and order cancellation, modifications and executions, a real time submission requirement could strain the systems capacities and computer resources of SROs and many member firms").

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456 See FINRA Letter, p. 13. See also Berkeley Letter, p. 2 (noting the "peta-scale" problem of collecting audit trail data generally).

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457 See FINRA/NYSE Euronext Letter, p. 5-6; Knight Letter, p. 2-3; CBOE Letter, p. 4; Wells Fargo Letter, p. 3; FINRA Letter, p. 11-12; SIFMA Letter, p. 5; Direct Edge Letter, p. 3; FIA Letter, p. 2.

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458 See FINRA/NYSE Euronext Letter, p. 5-6 (noting that "drawing conclusions based solely on real time data increases the potential for inaccuracy because the data has not gone through the full range of validations . . . ."). See also Wells Fargo Letter, p. 3 ("[A]ccurate market information often does not happen in real time."); FINRA Letter, p. 11-12 (stating that current order-handling practices make "accurate real time order reporting problematic, and automated surveillance is only useful if the underlying data is accurate and complete . . . ."); SIFMA Letter, p. 5 ("There also would be data integrity costs in the form of less reliable data, or data that would have to be revised or resubmitted where it otherwise may not have been required if firms had a short window of time to more thoroughly 'scrub' or validate their submissions."); Direct Edge Letter, p. 3 ("Real-time data may be less reliable than information collected after the validations that come with settling a transaction.").

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459 See Knight Letter, p. 2-3. See also CBOE Letter, p. 4 ("[G]enerally our belief is that next day (T+1) data, which incorporates additional information such as cleared trade data, is a better report resource for generating surveillance and compliance reviews."); FINRA/NYSE Euronext Letter, p. 6 (stating that, "from a market surveillance standpoint, reliable and complete data received on a T+1 basis . . . is generally superior to unvalidated real-time data"); FIA Letter, p. 2 ("We believe the Commission's Proposal overvalues any potential benefits achieved by real-time reporting as compared to reporting on day after trade, or 'T+1,' basis.").

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460 See FINRA Letter, p. 11-12.

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461 Id. at p. 11.

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462 See Nasdaq Letter I, p. 9-10.

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463 See Nasdaq Letter II, p. 3.

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464 See ICI Letter, p. 5; Leuchtkafer Letter; GETCO Letter, p. 2; FIA Letter, p. 2; Scottrade Letter, p. 2; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3; CBOE Letter, p. 4; FINRA/NYSE Euronext Letter, p. 4, 6; FINRA Letter, p. 11; SIFMA Letter, p. 3, 7; SIFMA Drop Copy Letter, p. 1; FINRA Proposal Letter, p. 4, 10-11.

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465 See FINRA Letter, p. 11.

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466 See SIFMA February 2012 Letter, p. 1.

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467 See FINRA/NYSE Euronext Letter, p. 4; FINRA Letter, p. 11; FIA Letter, p. 2.

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468 See FINRA Proposal Letter, p. 4.

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469 See SIFMA Drop Copy Letter, p. 1-2. See also FINRA Proposal Letter, p. 10.

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470 See GETCO Letter, p. 2; BATS Letter, p. 2.

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471 See FIA Letter, p. 2.

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472 See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; FIA Letter, p. 2.

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473 See FINRA/NYSE Euronext Letter, p. 4. Similarly, FINRA believes "the SEC has significantly overvalued the regulatory benefits to be achieved . . . while underestimating some of the problems with relying on real-time data. This is true not only because certain information is difficult, if not impossible, to provide on a real-time basis, but also because real-time data is less reliable." See FINRA Letter, p. 10-11. See also SIFMA February 2012 Letter, p. 1 (stating, "[a]ny potential incremental benefit of receiving this information on a real-time basis is, in our view, substantially outweighed by the additional expense and implementation delays associated with building and maintaining a real-time system"); FIA Letter, p. 2 ("It is not apparent to us from the Proposal that the additional costs associated with a real-time audit trail, compared to a T+1 audit trail, would be offset by any incremental benefits to the Commission.").

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474 See CBOE Letter, p. 4.

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475 See SIFMA Letter, p. 3; see also SIFMA February 2012 Letter, p. 1 (questioning the regulatory need for real-time data versus data provided on an "end-of-day or 'T+1" basis); FIA Letter, p. 2.

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476 See Scottrade Letter, p. 2; ICI Letter, p. 5; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3.

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477 See ICI Letter, p. 6.

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478 See SIFMA Drop Copy Letter, p. 1. The commenter stated that "implementation options and complexity are significantly different if the reporting regime is within'minutes' rather than 'seconds.' If real-time reporting is required in seconds, then significant re-engineering is required within broker-dealer order management systems and trading systems to support such a requirement (e.g., passing additional information between systems, performance tuning to compensate for additional processing of payload). Instead, if the definition of real-time allows for reporting within minutes (e.g., 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications, as described below. Also, as with prior implementations of new trade reporting regimes in the U.S. (e.g., ACT and TRACE), having more liberal reporting timeframes for an appropriate initial period (e.g., 12 months or more) to provide a sufficient period to optimize processes would be very helpful." This commenter also questioned "the need for real-time reporting of the entire set of data elements in the CAT proposal," and believed that "reporting on a T+1 (or in some cases later) basis should satisfy the SEC's stated regulatory objectives more efficiently." Id. See also Nasdaq Letter II, p. 3 (stating its proposed platform could support the provision of data in real time or within 10-15 minutes using drop copies).

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479 See GETCO Letter, p. 4. The commenter also believed this approach would lower the costs of the consolidated audit trail.

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480 See Bean Letter, p. 1.

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481 See BOX Letter, p. 2.

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482 Id. at p. 3.

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483 See Nasdaq Letter II, p. 2.

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484 See FINRA/NYSE Euronext Letter, p. 6. This commenter stated that "[a]n alternative to the all-encompassing real time order audit trail set forth in the Proposal would be to standardize and consolidate existing real time reporting systems (e.g., enhancing trade reporting and quotation systems with standardized and uniform identification for all broker-dealers) and enhance existing reporting requirements where the need is narrowly focused." See also FINRA Proposal Letter, p. 3-4, 10-11.

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485 See FIF Letter, p. 4; Ross Letter, p. 1.

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486 See FIF Letter, p. 4.

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487 See Ross Letter, p. 1.

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488 See Ameritrade Letter, p. 2.

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489 Id.

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490 Id.

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491 Id.

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492 Id.

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493 See Thomson Reuters Letter, p. 2.

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494 See Rule 613(c)(3). The Rule further provides that the NMS plan "may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties." Id.

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495 Id.

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496 See Scottrade Letter, p. 1-2; Angel Letter, p. 3; ICI Letter, p. 3-6; FINRA/NYSE Euronext Letter, p. 4, 6; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; Nasdaq Letter II, p. 3-4; FIA Letter, p. 1-2.

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497 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

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498 See SIFMA Drop Copy Letter.

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499 See Section II.A.1.c., supra.

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500 See Rule 613(c)(3). The Commission notes that Rule 613, as proposed, was inconsistent in its use of the terms "provide" and "report." To eliminate this inconsistency, the Commission is replacing all uses of "provide" with "report," which the Commission believes more accurately describes the requirement the Commission is imposing on national securities exchanges, national securities associations, and members.

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501 See note 494, supra.

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502 See note 453, supra, and accompanying text.

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503 The Commission notes that, consistent with adopting an incremental approach to the creation of a consolidated audit trail, even though it is not requiring audit-trail data to be reported in real time, it is adding various additional requirements, discussed in Section III.C.2.a., infra, to the Rule regarding the evolution of the consolidated audit trail, including the possibility for reduced reporting times in the future as technologies evolve.

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504 The current OATS technical specifications require OATS reporting by 8: 00 a.m. on the calendar day after the reportable event. The Commission notes that the FINRA rules for OATS reporting, however, require that data "shall be transmitted on the day such event occurred" – unless information required by FINRA Rule 7440(b), (c), or (d) (order receipt and origination; order transmittal; order modifications, cancellations, and executions) is unavailable – in such cases, OATS requires reporting on the day the information becomes available. See FINRA Rule 7450(b)(2). Because of the discrepancy between the technical specifications and the applicable FINRA rule, the Commission approved FINRA's proposed rule change to allow OATS reporting as late as 8: 00 a.m. the next day. See Securities Exchange Act Release No. 66021 (December 21, 2011), 76 FR 81551 (December 28, 2011).

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505 The Commission notes that the Rule, as adopted, provides that an NMS plan must require information to be reported by 8: 00 a.m. the following trading day, while OATS requires information to be reported by 8: 00 a.m. the following calendar day. Thus, the Rule as adopted provides for a longer reporting period than does OATS with respect to weekends and holidays.

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506 As noted in the Proposing Release, supra note 4, at 32592, broker-dealers that rely mostly on their own internal order routing and execution management systems would have needed to make changes to or replace those systems to collect and report the required order and reportable event information to the central repository to comply with the proposed Rule.

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507 See e.g., BATS Letter, p. 2; CBOE Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; High Speed, p. 1; FTEN Letter p. 1; Correlix Letter, p. 2; Thomson Reuters Letter, p. 2; FINRA Proposal Letter, p. 16; FINRA/NYSE Euronext Letter, p. 7.

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508 See Proposing Release, supra note 4, at 32572.

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509 See FTEN Letter, p. 3-4, 13-15; Thomson Reuters Letter, p. 2-3.

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510 Id.

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511 See FTEN Letter, p. 4, 12, 14. See also SIFMA Drop Copy Letter.

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512 See FIX Letter, p. 1; Aditat Letter, p. 2.

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513 Id.

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514 See Nasdaq Letter II, p. 3.

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515 See Rule 613(c)(2).

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516 See FTEN Letter, p. 3-4, 13; Thomson Reuters Letter, p. 2-3. See also SIFMA Drop Copy Letter.

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517 The Commission believes that, if the NMS plan does not require data to be reported to the central repository in a uniform format, broker-dealers and SROs may not have to make substantial changes to their order management and execution systems to comply with Rule 613, and thus may face lower costs than if data were required to be reported in a uniform format because in that instance, broker-dealers may need to make substantial changes to their order management and execution systems to comply with Rule 613. The Commission acknowledges, however, that there would be costs to convert data to a "uniform electronic format for consolidation and storage." On balance, however, the Commission preliminarily believes that broker-dealers might benefit from economies of scale when normalizing data.

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518 See Rule 613(a)(1)(iii).

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519 See Proposing Release, supra note 4, at 32578.

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520 See proposed Rule 613(c)(4), 613(c)(7)(vi) through (vii).

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521 See SIFMA Letter, p. 8; SIFMA Drop Copy Letter, p. 1.

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522 See Rule 613(c)(7)(viii).

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523 See Section III.B.1.g.i., supra.

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524 Rule 613(c)(4) now requires that "each member of a national securities exchange or national securities association" provide the information set forth in the Rule; as proposed, Rule 613(c)(4) required "each national securities exchange, national securities association, and member" to provide the information set forth in the Rule.

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525 The Commission has also amended Rule 613(c)(4), as proposed, to include the provision of information sufficient to identify the customer and customer account information. See Rule 613(c)(7)(viii); Section III.B.1.g.ii.(C)., supra.

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526 See proposed Rule 613(c)(4), 613(c)(7)(vi), 613(c)(7)(vii).

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527 See proposed Rules 613(c)(7)(vi)(D), 613(c)(7)(vi)(E), and 613(c)(7)(vi)(F).

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528 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(A), (C).

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529 See Liquidnet Letter, p. 3; Direct Edge Letter, p. 4 (emphasizing that it would be more important for exchanges to obtain the identity of the brokers on both sides of an execution for cross-market surveillance purposes); SIFMA Letter, p. 6, 9; Ameritrade Letter, p. 3.

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-
fn -

530 See FIF Letter, p. 2-3.

-
-
fn -

531 This commenter suggested an alternative if the Commission believed customer information was necessary, using both EBS and OATS: EBS could send the central repository customer account information (including account number), and OATS would add a field for the account number to link the OATS reports and customer information together. Id. at p. 2-3.

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-
fn -

532 See SIFMA Letter, p. 6, 9.

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-
fn -

533 See Ameritrade Letter, p. 2-3.

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-
fn -

534 Id.

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-
fn -

535 See Liquidnet Letter, p. 3.

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-
fn -

536 See Liquidnet Letter, p. 3, 5-6.

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-
fn -

537 See FIF Letter II, p. 2.

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-
fn -

538 See SIFMA Letter, p. 6; Liquidnet Letter, p. 3.

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-
fn -

539 See also Rule 613(j)(4) which defines "customer account information" to include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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-
fn -

540 Rule 613(j)(3), as adopted, defines the term "customer" to mean the account holder(s) of the account at a registered broker-dealer originating the order; and any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

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-
fn -

541 See Proposing Release, supra note 4, at 32573.

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-
fn -

542 The Commission notes that, under the Rule, a broker-dealer must only report the account number for the account the customer used to submit an order, not the account numbers for all accounts of a customer.

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-
fn -

543 See Rule 613(c)(4).

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-
fn -

544 As adopted, Rule 613(c)(7)(viii) provides that, "[f]or original receipt or origination of an order, the following information: (A) Information of sufficient detail to identify the customer; and (B) Customer account information" be recorded and reported to the central repository.

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-
fn -

545 See Proposing Release, supra note 4, at 32578.

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-
fn -

546 See Section III.B.1.d.iii., supra.

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-
fn -

547 See FIF Letter, p. 3.

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-
fn -

548 See Section III.B.3.b., infra.

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-
fn -

549 See Ameritrade Letter, p. 2-3.

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-
fn -

550 However, if any information previously reported by a broker-dealer to the central repository changes, the broker-dealer would need to report the updated information to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that the broker-dealer receives the updated information

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-
fn -

551 See Proposing Release, supra note 4, at 32566.

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fn -

552 See, e.g., Rules 17a-3, 17a-4, 17a-25 under the Exchange Act, 17 CFR 240.17a-3, 17a-4, 17a-25.

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-
fn -

553 See Liquidnet Letter, p. 3, 5-6.

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fn -

554 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C)(2)., supra (discussing the definition of "customer" as applied to investment advisers).

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-
fn -

555 See Proposing Release, supra note 4, at 32573.

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-
fn -

556 See SIFMA Letter, p. 21.

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-
fn -

557 Id.

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-
fn -

558 Id.

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-
fn -

559 The Rule does, of course, require the NMS plan submitted to the Commission for its consideration to require the foreign broker-dealer to disclose information about itself to the U.S. broker-dealer, as such information would be expected to be part of the records of the U.S. broker-dealer holding a foreign broker-dealer account.

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-
fn -

560 See proposed Rule 613(d)(1).

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-
fn -

561 See proposed Rule 613(d)(2).

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-
fn -

562 See proposed Rule 613(a)(3)(ii).

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-
fn -

563 See SIFMA Letter, p. 14; FIF Letter, p. 6-7; Broadridge Letter, p. 3; Endace Letter, p. 2.

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-
fn -

564 See FIF Letter, p. 6.

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-
fn -

565 See FIF Letter, p. 6-7 (stating that currently "time drift" is an issue, despite advancements in synchronization technology, with at least one exchange experiencing time drifts between one and three seconds, and the SIP having its own time drift).

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fn -

566 See SIFMA Letter, p. 14.

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fn -

567 See Broadridge Letter, p. 3.

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-
fn -

568 See FIF Letter, p. 7.

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-
fn -

569 See Endace Letter, p. 2.

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-
fn -

570 See Liquidnet Letter, p. 8.

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fn -

571 See OATS Reporting Technical Specifications (May 3, 2011), available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p123579.pdf (last accessed December 8, 2011). In addition, FINRA allows clock drift of an additional two seconds before re-synchronization is required.

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fn -

572 See Endace Letter, p. 2.

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-
fn -

573 See FIF Letter, p. 6-7.

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fn -

574 The Commission notes that one commenter suggested that the cost might be limited because GPS receivers could be used and installed for a few thousand dollars per installation. See Endace Letter, p. 2.

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-
fn -

575 See Section III.B.1.d.v., supra (explaining the importance to enforcement cases of an accurately timed record of order events).

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-
fn -

576 See proposed Rule 613(d)(2).

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fn -

577 See Rule 613(d)(2).

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-
fn -

578 Rule 613(d)(2) provides that "[e]ach national securities exchange and national securities association [shall] evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards . . . ."

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fn -

579 See FIF Letter, p. 7.

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fn -

580 See proposed Rule 613(e)(1).

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-
fn -

581 The term "facility" is defined in Section 3(a)(2) of the Exchange Act, with respect to an exchange, to include "its premises, tangible or intangible property whether on the premises or not, any right to use such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service." 15 U.S.C. 78c(a)(2).

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fn -

582 See proposed Rule 613(e)(2).

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-
fn -

583 See proposed Rule 613(a)(4).

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fn -

584 See proposed Rule 613(a)(3)(i).

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-
fn -

585 See Ameritrade Letter, p. 4; High Speed Letter, p. 1; BATS Letter, p. 2.

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-
fn -

586 See Ameritrade Letter, p. 4.

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-
fn -

587 See High Speed Letter, p. 1.

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-
fn -

588 See BATS Letter, p. 2.

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fn -

589 See FINRA Proposal Letter, p. 14-16.

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-
fn -

590 See High Speed Letter, p. 1.

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-
fn -

591 See Ameritrade Letter, p. 4.

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-
fn -

592 See note 581, supra (describing the nature of a "facility").

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-
fn -

593 See Ameritrade Letter, p. 4.

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fn -

594 See, e.g., 15 U.S.C. 78b; 15 U.S.C. 78f(b); 15 U.S.C. 78o-3(b); 15 U.S.C. 78s(h)(1).

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-
fn -

595 Section 19(b)(1) of the Exchange Act defines the term "proposed rule change" to mean "any proposed rule or rule change in, addition to, or deletion from the rules of [a] self-regulatory organization." Pursuant to Section 3(a)(27) and 3(a)(28) of the Exchange Act, the term "rules of a self-regulatory organization" means (1) the constitution, articles of incorporation, bylaws and rules, or instruments corresponding to the foregoing, of an SRO, and (2) such stated policies, practices and interpretations of an SRO (other than the Municipal Securities Rulemaking Board) as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules.

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-
fn -

596 See Ameritrade Letter, p. 4.

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fn -

597 See note 581, supra (describing the nature of a "facility").

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-
fn -

598 15 U.S.C. 78s.

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-
fn -

599 17 CFR 242.608(d)(1). If the Commission does not make a finding that the action or failure to act is consistent with the provisions of the NMS plan and was applied in a manner consistent with the Act, or if it finds that such action or failure to act imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, the Commission, by order, can set aside such action and/or require such action with respect to the matter reviewed as the Commission deems necessary or appropriate in the public interest, for the protection of investors, and the maintenance of fair and orderly markets, or to remove impediments to, and perfect the mechanisms of, the NMS plan. 17 CFR 242.608(d)(3).

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-
fn -

600 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any penalty provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any penalty provisions set out in the NMS plan approved by the Commission.

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-
fn -

601 See Section III.B.2.b., infra; Rule 613(e)(1).

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fn -

602 See Section III.B.2.e., infra; Rule 613(e)(4)(i).

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-
fn -

603 See proposed Rule 613(e)(1).

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-
fn -

604 See Sections III.B.1.d. and III.B.1.f., supra.

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-
fn -

605 See Rule 613(c)(2); see Section III.B.1.f., supra.

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-
fn -

606 See Proposing Release, supra note 4, at 32564. See also Section III.B.2.d., infra.

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-
fn -

607 See note 516, supra.

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-
fn -

608 See Section III.B.1.d., supra.

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-
fn -

609 See proposed Rule 613(e)(5)(i).

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-
fn -

610 The effective transaction reporting plans include the CTA Plan and the UTP Plan. See note 101, supra; proposed Rule 613(e)(5)(ii).

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fn -

611 See proposed Rule 613(e)(5)(iii).

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-
fn -

612 See Liquidnet Letter, p. 7. See also Section III.B.d.vii., supra.

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-
fn -

613 See proposed Rule 613(e)(5)(i) through (iii).

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-
fn -

614 See proposed Rule 613(e)(7)(i) through (iii).

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-
fn -

615 See Liquidnet Letter, p. 7.

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fn -

616 Quote condition is a field in the CQS feed that provides information on a quote, including whether such quote is an opening quote, closing quote, news pending, slow on ask side, slow on bid side, order imbalance or non-firm quote. See CQS Output Multicast Line Interface Specification, Version 48 (October 11, 2011), Appendix G.

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-
fn -

617 Manual quotes are not eligible for automatic execution and do not have trade through protection under Rule 611 of Regulation NMS. See 17 CFR 242.600(57) for a definition of a protected bid or protected offer.

-
-
fn -

618 17 CFR 242.611.

-
-
fn -

619 See proposed Rule 613(e)(6).

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-
fn -

620 See Nasdaq Letter I, p. 10-11.

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-
fn -

621 See Ross Letter, p. 1.

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-
fn -

622 See proposed Rule 613(e)(6).

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-
fn -

623 See Section III.C.2.a.i., infra.

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-
fn -

624 See Rule 613(a)(1)(ii).

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-
fn -

625 The Commission acknowledges there would be costs to the central repository for retaining data received or collected by the central repository pursuant to Rule 613. As discussed in Section I., supra, the NMS plan submitted to the Commission for its consideration will include a detailed analysis of the costs of the Rule for the Commission and the public to consider after the NMS plan has been submitted.

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-
fn -

626 See Proposing Release, supra note 4, at 32582.

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-
fn -

627 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

-
-
fn -

628 See Nasdaq Letter I, p. 8.

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-
fn -

629 See FIF letter, p. 4.

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-
fn -

630 See Aditat Letter, p. 2.

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-
fn -

631 See Commission Staff Memorandum, supra, note 64.

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-
fn -

632 Id.

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-
fn -

633 Id.

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-
fn -

634 See FINRA Letter, p. 11.

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-
fn -

635 Id.

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-
fn -

636 Id.

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-
fn -

637 Id.

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-
fn -

638 Id.

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-
fn -

639 Id. FINRA also noted, however, that "compliance rates for OATS steadily improved over time as members gained experience with the system. For example, when the OATS rules were first implemented, the match rate between executed orders and the related trade report submitted to an NASD transaction reporting system was only 76%. Currently, this match rate is consistently over 99%, which reflects the significant time and effort that has been expended by the industry to make their systems OATS compliant. FINRA believes that creation of a new system, rather than building off of an existing reporting infrastructure, will necessarily create a learning curve and lead to reduced compliance rates over the short-term." Id. The Commission acknowledges that there could be a learning curve for compliance with the NMS plan requirements for the reporting of data. The Commission, however, expects the NMS plan to minimize such reduced compliance rates to the extent reasonably practicable.

-
-
fn -

640 See Nasdaq Letter I, p. 13.

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-
fn -

641 See Endace Letter, p. 2-3.

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-
fn -

642 Id. at p. 3.

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-
fn -

643 Rule 613(e)(4)(ii) provides that the NMS plan shall include policies and procedures, including standards, to ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository.

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-
fn -

644 See Section II.A., supra.

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-
fn -

645 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

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-
fn -

646 See Rule 613(e)(6)(i). The term "error rate" is defined in Rule 613(j)(6) to mean "[t]he percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market." The SROs should consider calculating an aggregate error rate as well as error rates for subcategories such as trade reporting and quote reporting.

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-
fn -

647 See Rule 613(e)(6)(iii) through (iv).

-
-
fn -

648 See Rule 613(e)(6).

-
-
fn -

649 The Commission recognizes that in any complex system there is always a risk of occasional unexpected errors, or errors caused by rare and unexpected events. However, the Commission believes that, by tracking error rates on a daily basis, the SROs, and the Commission would be able to observe any repeated patterns or longer-term trends that suggest more systematic problems or concerns with data collection, reporting, or consolidation processes.

-
-
fn -

650 See Rule 613(e)(6)(iii) through (iv).

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-
fn -

651 See Commission Staff Memorandum, supra note 64.

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-
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652 See Rule 613(a)(1)(ii).

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-
fn -

653 See proposed Rule 613(e)(2).

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-
fn -

654 Id.

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-
fn -

655 See proposed Rule 613(e)(3).

-
-
fn -

656 See Liquidnet Letter, p. 8-9. See also SIFMA Letter, p. 19.

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-
fn -

657 See Angel Letter, p. 3; Albany Letter, p.1-4; and TIAA-CREF Letter, p.4.

-
-
fn -

658 See Angel Letter, p. 3.

-
-
fn -

659 See Albany Letter, p. 1-3. This commenter acknowledged the privacy concerns involved in making the data available for academic research, but stated that researchers have faced similar challenges before and researchers are capable of developing a way to access and share information without the risk of divulging trading strategies or identities. The commenter also stated that data released after a delay would limit the data's usefulness.

-
-
fn -

660 See Van Bokkelen Letter, p. 1.

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-
fn -

661 See Rule 613(e)(3). See also Rule 613(a)(1)(ii) (requiring the NMS plan to detail how readily the NMS plan will allow data in the central repository to be accessed by regulators, as well as the regulators' manner of access); see also Section III.C.2.a.i., infra.

-
-
fn -

662 See Sections III.C.2.a.i through ii., infra; Rule 613(a)(1)(ii) through (vii).

-
-
fn -

663 See proposed Rule 613(e)(4)(i). However, a plan sponsor also would be permitted to use the data it submits to the central repository for commercial or other purposes as otherwise permitted by applicable law, rule or regulation. Id.

-
-
fn -

664 See proposed Rule 613(h)(3), Rule 613(g)(4).

-
-
fn -

665 See Proposing Release, supra note 4, at 32582.

-
-
fn -

666 See Scottrade Letter, p. 2 (expressing concern that trading strategies and confidential customer information could be at risk from cyber-attacks or accidental data breaches); ICI Letter, p. 2-4; Ross Letter, p.; 1 Liquidnet Letter, p. 4. See also Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3.

-
-
fn -

667 See Ameritrade Letter, p. 3-4.

-
-
fn -

668 See Liquidnet Letter p. 4.

-
-
fn -

669 See Thomson Reuters Letter, p. 4.

-
-
fn -

670 See TIAA-CREF Letter, p. 4.

-
-
fn -

671 See ICI Letter, p. 2-4.

-
-
fn -

672 Id. at 3.

-
-
fn -

673 Id.

-
-
fn -

674 See BATS Letter, p. 3.

-
-
fn -

675 See Managed Funds Association Letter, p. 2-3.

-
-
fn -

676 Id.

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-
fn -

677 See Ross Letter, p. 1.

-
-
fn -

678 Id.

-
-
fn -

679 5 U.S.C. 552.

-
-
fn -

680 See ICI Letter, p. 4.

-
-
fn -

681 For example, appropriate confidentiality protections will need to be programmed in any Commission systems that collect, store, or access data collected from the central repository. In addition, it may be appropriate to establish multiple access levels for Commission staff so that staff members are allowed only as much access as is reasonably necessary in connection with their duties.

-
-
fn -

682 See ICI Letter, p. 3

-
-
fn -

683 Rule 613(e)(4)(i)(B); see ICI Letter, p. 3 (recommending that "the confidential nature of the information supports limiting access to the CAT data to regulators and repository staff").

-
-
fn -

684 See Rule 613(e)(4)(i)(C). The Commission expects that the central repository's CCO would be responsible for determining the frequency of these regular reviews in the first instance, in accordance with industry standards for the review of information security, taking into account the sensitivity of the data stored in the central repository. See Rule 613(b)(5) for a description of the CCO.

-
-
fn -

685 See BATS Letter, p. 3. See also Managed Funds Association Letter, p. 2-3.

-
-
fn -

686 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any security and confidentiality provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any such provisions set out in the NMS plan approved by the Commission, and whether their uses of the consolidated audit trail were consistent with the plan and the Exchange Act.

-
-
fn -

687 See Ross Letter, p. 1.

-
-
fn -

688 Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, submitted to the central repository, will be ensured. See Rule 613(a)(1)(iv).

-
-
fn -

689 See ICI Letter, p. 4.

-
-
fn -

690 See Rule 613(e)(4)(i)(D).

-
-
fn -

691 See Liquidnet Letter, p. 4.

-
-
fn -

692 See Section III.C.2.a.i., infra.

-
-
fn -

693 See Rule 613(a)(1)(iv).

-
-
fn -

694 See proposed Rule 613(h)(1).

-
-
fn -

695 See proposed Rule 613(h)(2).

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-
fn -

696 See proposed Rule 613(h)(3).

-
-
fn -

697 See Nasdaq Letter I, p. 13.

-
-
fn -

698 Id.

-
-
fn -

699 Id.

-
-
fn -

700 Id.

-
-
fn -

701 This technical modification simplifies the language of Rule 613(h)(1) and (2) from the proposal. Adopted Rule 613(h)(1) and (2) deletes the language "submitted pursuant to this section" and "of which it is a sponsor." Adopted Rule 613(h)(1) and (2), like the proposed Rule, requires each SRO to comply with the provisions of the NMS plan "approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the phrases not adopted.

-
-
fn -

702 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

-
-
fn -

703 The Commission notes that any failure by a national securities exchange or national securities association to comply with the provisions of the NMS plan approved by the Commission will be considered a violation of Rule 613, and that the Commission could take appropriate steps to address such a violation, including imposing penalties as appropriate. See Rule 613(h)(2).

-
-
fn -

704 See Section III.B.2.a., supra.

-
-
fn -

705 See supra note 581 (describing the nature of a "facility").

-
-
fn -

706 15 U.S.C. 78q.

-
-
fn -

707 17 CFR 242.608(d)(1).

-
-
fn -

708 Id.

-
-
fn -

709 See Nasdaq Letter I, p. 13.

-
-
fn -

710 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

-
-
fn -

711 15 U.S.C. 78s(b)(2).

-
-
fn -

712 17 CFR 240.19b-4.

-
-
fn -

713 See proposed Rule 613(g)(1). This provision in the proposed Rule echoes the requirement contained in Rule 608 that "each self-regulatory organization also shall, absent reasonable justification or excuse, enforce compliance with any such plan by its members and persons associated with its members." 17 CFR 242.608(c).

-
-
fn -

714 See proposed Rule 613(g)(2).

-
-
fn -

715 See proposed Rule 613(g)(3).

-
-
fn -

716 See proposed Rule 613(g)(4).

-
-
fn -

717 See Knight Letter, p. 3.

-
-
fn -

718 See Knight Letter, p. 3.

-
-
fn -

719 See Proposing Release, supra note 4, at 32585.

-
-
fn -

720 See Nasdaq Letter I, p. 3, 13; Direct Edge Letter, p. 5; FIF Letter, p. 1, 8; FINRA Letter, p. 15; SIFMA February 2012 Letter, p. 1.

-
-
fn -

721 See Nasdaq Letter I, p. 3, 13.

-
-
fn -

722 Id. at p. 3.

-
-
fn -

723 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

-
-
fn -

724 See FIF Letter, p. 8.

-
-
fn -

725 See Direct Edge Letter, p. 4-5.

-
-
fn -

726 Id. at p. 5.

-
-
fn -

727 Id.

-
-
fn -

728 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

729 Proposed Rule 613(b) required that the NMS plan include "a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor, . . . [a] provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan, . . . [a] provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, . . . [a] provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan. . . [and the] appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed."

-
-
fn -

730 See Rule 613(b)(6); Rule 613(b)(7).

-
-
fn -

731 See Rule 613(b)(5).

-
-
fn -

732 See Rule 613(b)(6). The written assessment could also further inform the extent to which it could be appropriate to share certain information collected by the consolidated audit trail with third parties. See Section III.B.2.d.

-
-
fn -

733 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

734 See Rule 613(b)(7)(i).

-
-
fn -

735 See Rule 613(b)(7)(ii).

-
-
fn -

736 See Rule 613(b)(7)(i).

-
-
fn -

737 See Rule 613(b)(7)(ii).

-
-
fn -

738 See Rule 613(a)(1)(xi); Section III.C.2.a.iii.c., infra, for a discussion of the tenth consideration.

-
-
fn -

739 See Nasdaq Letter I, p. 3, 13.

-
-
fn -

740 See, e.g., Options Order Protection and Locked/Crossed Market (Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009)) (including a unanimous voting requirement).

-
-
fn -

741 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

-
-
fn -

742 As discussed and for the reasons set forth in Section I., supra, in light of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring a detailed analysis of costs and benefits of this requirement of the Rule until after the NMS plan has been submitted.

-
-
fn -

743 See proposed Rule 613(a)(3)(iv).

-
-
fn -

744 See Nasdaq Letter I, p. 10; Thomson Reuters Letter, p. 4.

-
-
fn -

745 See Thomson Reuters Letter, p. 4.

-
-
fn -

746 See FINRA/NYSE Euronext Letter, p. 3-4. See also Nasdaq Letter I, p. 8.

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-
fn -

747 See IAG Letter, p. 2.

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-
fn -

748 See BATS Letter, p. 2-3.

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-
fn -

749 See Nasdaq Letter I, p. 10.

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-
fn -

750 See iSys Letter, p. 2-3.

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-
fn -

751 See Rule 613(f).

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-
fn -

752 17 CFR 240.17d-2.

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-
fn -

753 The Commission has examined the issue of a single market regulator in the past, specifically in the Intermarket Trading Concept Release (see Securities Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20, 2003)); however, a single regulator structure is not suggested by the adopted Rule.

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-
fn -

754 These cost savings may accrue to any SRO that would no longer need to operate a retired system, as well as to any SRO members that would no longer be required to report to such systems.

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-
fn -

755 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5. See also Section II.C.3.

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-
fn -

756 See FIF Letter II, p. 2.

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-
fn -

757 Id. at p. 3.

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-
fn -

758 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

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-
fn -

759 See FIF Letter II, p. 2-3; STA Letter, p. 2. See also Nasdaq Letter I, p. 6.

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-
fn -

760 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3. See also Nasdaq Letter I, p. 6.

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-
fn -

761 See FIF Letter II, p. 2; STA Letter, p. 1.

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-
fn -

762 See FIF Letter II, p. 1; STA Letter, p. 1-2.

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-
fn -

763 See FIF Letter II, p. 2; STA Letter, p. 2.

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-
fn -

764 See FIF Letter II, p. 1-2; STA Letter, p. 2.

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-
fn -

765 See FIF Letter II, p. 2; STA Letter, p. 2-3.

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-
fn -

766 See proposed Rule 613(a)(1).

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-
fn -

767 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely attributable to the cost of the creation and filing of the NMS plan required by Rule 613.

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-
fn -

768 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

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-
fn -

769 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

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-
fn -

770 See Section I., supra.

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-
fn -

771 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail). See also Section II.C.4., supra.

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-
fn -

772 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

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-
fn -

773 See Section III.B.2.c., supra.

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-
fn -

774 The Commission notes that another related consideration that must be discussed by the NMS plan includes the alternative approaches to creating the consolidated audit trail that the plan sponsors considered. See Rule 613(a)(1)(xii).

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-
fn -

775 See Section II.A., supra, for additional discussion of the timeliness of access to current audit trail data.

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-
fn -

776 See Proposing Release, supra note 4, at 32564.

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-
fn -

777 Id. at 32564-32565 and 32594. Differences in audit trail data requirements between markets can hinder the ability of regulators to piece together related illegal trading activity occurring across several markets.

-
-
fn -

778 Id. at 32594.

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-
fn -

779 Id. at 32567.

-
-
fn -

780 "Transmission from the SRO or member to receipt by the central repository" refers to the process through which SROs and their members report data to the central repository.

-
-
fn -

781 "Data extraction, transformation and loading at the central repository" is the process during which the central repository accepts data reported by the SROs and their members, converts it into a uniform electronic format, if necessary, and receives it into the central repository's internal systems.

-
-
fn -

782 "Data maintenance and management at the central repository" refers to the process for storing data at the central repository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.

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-
fn -

783 As noted in Section III.B.1.d.iv., supra, for example, regardless of whether the NMS plan elects to use a series of order identifiers or a unique order identifier, it will be very important to demonstrate how the approach selected in the NMS plan will ensure that information about all events pertaining to an order will be reliably and accurately linked together in a manner that allows regulators efficient access to complete order information.

-
-
fn -

784 See Proposing Release, supra note 4, at 32582, 32596.

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-
fn -

785 In addition, proposed Rule 613(e)(4)(i) required plan sponsors, and employees of the plan sponsors and central repository to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.

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-
fn -

786 See Scottrade Letter, p. 2; ICI Letter, p. 2-4; Liquidnet Letter, p. 4; Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3; Ross Letter, p. 1. The Commission notes that it is adopting Rule 613(e)(4) with modifications – the Commission has added provisions to the Rule to help ensure the confidentiality of the data submitted to and retained by the central repository. See Section III.B.2.e., supra.

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-
fn -

787 Rule 613(i) requires the NMS plan to include a provision requiring each SRO to jointly provide to the Commission a document outlining how the consolidated audit trail could be expanded to products other than NMS securities. See also Section III.B.1.a., supra. The consideration of flexibility and scalability of the systems requires the SROs to address whether the system proposed in the SRO's NMS plan submission can accommodate the expansion, while the document required by Rule 613(i) will discuss more broadly how the SROs could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

-
-
fn -

788 See Concept Release on Equity Market Structure, supra note 87.

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-
fn -

789 See Proposing Release, supra note 4, at 32568-32569.

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-
fn -

790 Id. at 32569-70.

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-
fn -

791 Id. at 32567.

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-
fn -

792 See Proposing Release, supra note 4, at 32569 and 32610. The Commission noted in the Proposing Release that a "primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering." Proposing Release at n. 167.

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-
fn -

793 See Section II.A. for a discussion of these four qualities.

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-
fn -

794 See, e.g., Exchange Act Rules 17a-3 and 17a-4 (requiring broker-dealers to make and keep "records of purchases and sales of securities").

-
-
fn -

795 Regulation S-K requires registrants to provide information related to the number of offered securities that are underwritten by each syndicate member in an effort to describe the nature of the obligation of the syndicate members with respect to the offered securities. See 17 CFR 229.508(a). This information comprises investor-focused disclosures, rather than information that may be needed by regulators for investigative and other purposes, such as the information contemplated by Rule 613(a)(1)(vi).

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-
fn -

796 For example, FINRA rules require the lead underwriters of an IPO to collect and provide issuers – but not the public, FINRA, or the Commission – with names of institutional investors who received allocations and aggregated information regarding the allocation to retail investors. See FINRA Rule 5131(d). The Depository Trust Company ("DTC") also collects information on some IPO allocations in its IPO Tracking System at the discretion of the lead underwriter. See 61 FR 25253 (May 20, 1996). However, as well as being discretionary and therefore only addressing a subset of primary market transactions, the IPO Tracking System only includes allocations to persons with DTC accounts, which generally excludes retail investors.

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-
fn -

797 See, e.g., FINRA Rules 5130 and 5131. FINRA Rule 5130 imposes certain restrictions on primary market transactions. FINRA Rule 5131 prohibits certain allocation practices such as "spinning," which refers to an underwriter's allocation of IPO shares to directors or executives of investment banking clients in exchange for receipt of investment banking business. See Securities Exchange Act Release No. 64521 (May 18, 2011), 76 FR 29808 (May 23, 2011) (Order Approving SR-FINRA-2011-017). Certain "quid pro quo" practices are also addressed by FINRA Rule 5131.

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-
fn -

798 Currently, SROs must request customer account information during examinations of broker-dealers to check for compliance with order marking rules.

-
-
fn -

799 This approach also may unduly burden the lead underwriter as the "gatekeeper" of such information and prevents the Commission and SROs from pursuing investigative techniques that may rely on reaching out to individual market participants for preliminary information without using the underwriter.

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-
fn -

800 See note 242, supra.

-
-
fn -

801 See note 795, supra.

-
-
fn -

802 "Laddering" is a practice that generally refers to inducing investors to give orders to purchase shares in the aftermarket at particular prices in exchange for receiving IPO allocations. See NYSE/NASD IPO Advisory Committee report and Recommendations (May 2003), at 6, available at http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p010373.pdf.

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-
fn -

803 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

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-
fn -

804 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597 n. 352. See also Section I., supra.

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-
fn -

805 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

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-
fn -

806 See Section I., supra.

-
-
fn -

807 See Rule 613(a)(1)(vii).

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-
fn -

808 See Wells Fargo Letter, p. 4; SIFMA Letter, p. 22.

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-
fn -

809 See Wells Fargo Letter, p. 4.

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-
fn -

810 See Liquidnet Letter, p. 9.

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-
fn -

811 See SIFMA Letter, p. 22.

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-
fn -

812 See Nasdaq Letter I, p. 13-14; BOX Letter, p. 3; Liquidnet Letter, p. 9; Kaufman Letter, attachment p. 3.

-
-
fn -

813 See Nasdaq Letter I, p. 13-14.

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-
fn -

814 See Kaufman Letter, attachment p. 3.

-
-
fn -

815 See Schumer Letter, p. 1.

-
-
fn -

816 Id. at p. 1-2.

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-
fn -

817 Id. at p. 2.

-
-
fn -

818 See Section III.B.2., supra.

-
-
fn -

819 See Section III.B.1., supra.

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-
fn -

820 See Section I., supra.

-
-
fn -

821 See 17 CFR 242.608(a)(4)(ii)(C).

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-
fn -

822 See Rule 613(a)(1)(viii).

-
-
fn -

823 See Rule 613(a)(5).

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-
fn -

824 See Section II.C.3., supra, for a summary of comments suggesting wider involvement in the development of the consolidated audit trail.

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-
fn -

825 See FIF Letter II, p. 2; SIFMA February 2012 Letter, p. 1; STA Letter, p. 1-2.

-
-
fn -

826 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

827 See Broadridge Letter, p. 2.

-
-
fn -

828 See FIF Letter II, p. 2, STA Letter, p. 1-2.

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-
fn -

829 See Direct Edge Letter, p. 2.

-
-
fn -

830 See Direct Edge Letter, p. 2.

-
-
fn -

831 See Ameritrade Letter, p. 2.

-
-
fn -

832 See IAG Letter, p. 3 (also recommending that the consolidated audit trail, in general, should involve a reduction in its size and scope, as well as a review of the capabilities of existing systems).

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-
fn -

833 See FIF Letter II, p. 1-3. See also STA Letter, p. 1-3 (recommending the same, but with the inclusion of the investor community and institutional asset managers).

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-
fn -

834 See also Rules 613(a)(1)(vii)(A) and (D), respectively requiring "[a]n estimate of the costs to the plan sponsors for establishing and maintaining the central repository" and an explanation of "[h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."

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-
fn -

835 The Commission notes that any NMS plan submitted and any amendment to the plan would be subject to notice and public comment, during which members of the industry and other interested persons may provide comments on the NMS plan. 17 CFR 242.608(b)(1).

-
-
fn -

836 See Rule 613(b)(7). See also Section III.B.3.b., supra.

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-
fn -

837 See Rule 613(a)(1)(xii).

-
-
fn -

838 See Rule 613(a)(1)(ix).

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-
fn -

839 See Proposing Release, supra note 4, at 32595.

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-
fn -

840 See SIFMA Letter, p. 2.

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-
fn -

841 Id.

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-
fn -

842 See FINRA Letter, p. 2.

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-
fn -

843 Id. at p. 2-3.

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-
fn -

844 See FINRA/NYSE Euronext Letter, p. 4.

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-
fn -

845 See Liquidnet Letter, p. 1.

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-
fn -

846 See BATS Letter, p. 4. See also FIA Letter, p. 1; FIF Letter II, p. 2.

-
-
fn -

847 See Nasdaq Letter I, p. 11. The Commission notes that this comment letter was submitted prior to the adoption of the Large Trader Reporting Rule. See note 1, supra, and accompanying text.

-
-
fn -

848 To further facilitate this review, the Commission expects that the plan sponsors would keep minutes of their meetings to formulate the NMS plan, and that such minutes would be readily reviewable by the Commission.

-
-
fn -

849 17 CFR 242.608(b)(2). To approve such a plan, the Commission must find that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

-
-
fn -

850 See Rules 613(a)(1)(v), (b)(6), (d)(2). See also Sections III.B. and III.C.2.a.i., supra (discussing the consideration of flexibility and scalability of the systems used by the central repository; the requirement that the NMS plan require the plan sponsors to provide a written assessment with an evaluation of, and a detailed plan to improve, the performance of the consolidated audit trail at least every two years; and the requirement to annually evaluate the clock synchronization and time stamp standards).

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fn -

851 17 CFR 242.608(a)(2). For example, if the requirements of the plan are not amended after the annual evaluation of the clock synchronization and time stamp standards to be consistent with changes in the industry standards, the Commission has the authority and means to propose an amendment to those requirements of the plan. The Commission can approve an amendment to an effective national market system plan that was initiated by the Commission, by rule. 17 CFR 242.608(b)(2).

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-
fn -

852 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; Direct Edge Letter, p. 2-3, 5; Section III.C.1.a., supra.

-
-
fn -

853 For purposes of these use-cases, an "off-line" analysis is defined to be any analysis performed by a regulator based on data that is extracted from the consolidated audit trail database, but that uses the regulator's own analytical tools, software, and hardware.

-
-
fn -

854 Fixed search criteria are those that are based on specific pre-defined data elements that are stored in the consolidated audit trail database. In contrast, dynamic search criteria are those that are based on numerical levels, thresholds, or other combinations of mathematical formula or logic that would require some amount of additional calculations to be performed on, and derived from, pre-defined data elements already stored in the database to complete the search operation and return to the user the data that meets the requested criteria.

-
-
fn -

855 See FIF Letter II, p. 2. See also STA Letter, p. 2 (stating "[t]he SEC should allow six months for the CAT selection process rather than the two months currently identified in the proposed release").

-
-
fn -

856 See FIF Letter II, p. 3.

-
-
fn -

857 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3.

-
-
fn -

858 These additional provisions relate to: (1) the security and confidentiality of the central repository (see Rule 613(e)(4)(i)(A) through (D) and Section III.B.2.e., supra); (2) error rates (see Rule 613(e)(6) and Section III.B.2.c., supra); (3) an Advisory Committee (see Rule 613(b)(7) and Section III.B.3.b., supra); (4) a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance (see Rule 613(b)(6)(i) through (iv) and Section III.B.3.b., supra); and (5) potential penalties (see Rule 613(h)(3) and Section III.B.3.a.1., supra).

-
-
fn -

859 See Sections III.C.2.a. and c., supra.

-
-
fn -

860 See Section I., supra. See also Section III.D., infra, for a discussion of the timelines pertaining to the implementation of the consolidated audit trail.

-
-
fn -

861 See Section I., supra. See also Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan, or amendment, as applicable, on efficiency, competition, and capital formation").

-
-
fn -

862 See Section I., supra.

-
-
fn -

863 44 U.S.C. 3501 et. seq.

-
-
fn -

864 Commission staff estimated that each SRO would expend (400 Attorney hours x $305 per hour) + (100 Compliance Manager hours x $258 per hour) + (220 Programmer Analyst hours x $193 per hour) + (120 Business Analyst hours x $194 per hour) = $213,540 per SRO to prepare and file the NMS plan. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal work, at an average hourly rate of $400, for a total of $20,000 per SRO, for an aggregate one-time cost to prepare and file an NMS plan of $233,540 per SRO. See Proposing Release, supra note 4, at 32596. The $305 per hour figure for an Attorney; the $258 per hour figure for a Compliance Manager; the $193 per hour figure for a Programmer Analyst; and the $194 per hour figure for a Business Analysis (Intermediate) were from SIFMA's Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

-
-
fn -

865 Commission staff estimated that the SROs would incur an aggregate one-time cost of ($233,540 per SRO) x (15 SROs) = $3,518,100 to prepare and file an NMS plan.

-
-
fn -

866 See Proposing Release, supra note 4, at note 299.

-
-
fn -

867 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

-
-
fn -

868 See Rule 613(h)(3); Section III.B.3.a.1., supra.

-
-
fn -

869 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

-
-
fn -

870 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

-
-
fn -

871 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See also Rule 613(e)(6)(iii) through (iv).

-
-
fn -

872 See Rule 613(b)(7).

-
-
fn -

873 Commission staff now estimates that each SRO would expend 700 Attorney hours, 300 Compliance Manager hours, 880 Programmer Analyst hours, and 880 Business Analyst hours.

-
-
fn -

874 The $378 per-hour figure for an Attorney; the $279 per hour figure for a Compliance Manager; the $196 per hour figure for a Programmer Analyst; and the $201 per hour figure for a Business Analyst (Intermediate) are from SIFMA's Management & Professional Earnings in the Securities Industry 2011, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

-
-
fn -

875 Commission staff estimates that each SRO would incur an aggregate one-time cost of (700 Attorney hours x $378 per hour) + (300 Compliance Manager hours x $279 per hour) + (880 Programmer Analyst hours x $196 per hour) + (880 Business Analyst hours x $201 per hour) = $697,660 per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a one-time external cost of (50 legal hours x $400 per hour) = $20,000. As a result, the Commission staff estimates that the aggregate one-time cost to each SRO to prepare and file an NMS plan, including external costs, would be ($20,000 in external costs) + ($697,660 in aggregate internal costs) = $717,660 per SRO to prepare and file an NMS plan.

-
-
fn -

876 Commission staff estimates that the SROs would incur an aggregate one-time cost of ($717,660 per SRO) x (17 SROs) = $12,200,200 to prepare and file an NMS plan.

-
-
fn -

877 See Proposing Release, supra note 4, at 32596.

-
-
fn -

878 See Section I., supra.

-
-
fn -

879 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

-
-
fn -

880 See proposed Rule 613(a)(3)(iii).

-
-
fn -

881 See proposed Rule 613(a)(3)(v).

-
-
fn -

882 See Nasdaq Letter I, p. 3.

-
-
fn -

883 See Bean Letter, p. 1.

-
-
fn -

884 See FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15; Scottrade Letter, p. 1; CBOE Letter, p. 7; FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Nasdaq Letter I, p. 6-7; Wells Fargo Letter, p. 2-3; Direct Edge Letter, p. 2-3.

-
-
fn -

885 See CBOE Letter, p. 6; Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 2-3, 9; Ameritrade Letter, p. 3; Nasdaq Letter I, p. 7-9; Scottrade Letter, p. 1; SIFMA Letter, p. 13. See also FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Wells Fargo Letter, p. 2-3; FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15.

-
-
fn -

886 See Kaufman Letter, Attachment p. 1; Schumer Letter, p. 1.

-
-
fn -

887 See Schumer Letter, p. 1.

-
-
fn -

888 See Nasdaq Letter I, p. 7.

-
-
fn -

889 See FINRA Proposal Letter, p. 5-6; and Wachtel Letter, p. 1.

-
-
fn -

890 See Rule 613(g)(1).

-
-
fn -

891 The Commission notes that the SROs could begin drafting the document even before an NMS plan is approved by the Commission.

-
-
fn -

892 See FINRA Proposal Letter, p. 5-6; Wachtel Letter, p. 1.

-
-
fn -

893 See Section III.B.1.c., supra.

-
-
fn -

894 See Rule 613(a)(3)(vi); see also Rule 613(a)(3)(v).

-
-
fn -

895 17 CFR 240.0-10.

-
-
fn -

896 17 CFR 240.0-10(c).

-
-
fn -

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

-

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

-
-
fn -

898 See Section III.C.3., supra.

-
-
fn -

899 See Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan on efficiency, competition, and capital formation"). See also Section I., supra.

-
-
fn -

900 See Rule 613(a)(1).

-
-
fn -

901 See Rule 613(c).

-
-
fn -

902 See Rule 613(a)(1)(i) through (xii).

-
-
fn -

903 For example, the NMS plan must include provisions: (1) to ensure fair representation of the plan sponsors; (2) for administration of the central repository, including selection of the plan processor; (3) addressing the requirements for admission of new plan sponsors and withdrawal of existing plan sponsors; (4) addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan; (5) addressing the manner in which the costs of operating the central repository would be allocated among the SROs that are sponsors of the plan, including a provision addressing the manner in which costs would be allocated to new sponsors to the plan; (6) requiring the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed; and (7) including an enforcement mechanism to ensure that each SRO and member is collecting and providing to the central repository the information required. See Rule 613(b), 613(g)(4), and 613(h)(3).

-
-
fn -

904 For example, the NMS plan must include a provision requiring the creation and maintenance by the plan processor of a method of access to the data stored in the central repository, that includes the ability to run searches and generate reports. See Rule 613(e)(3). Additionally, the NMS plan is required to include policies and procedures, including standards, to be used by the plan processor to: (1) ensure the security and confidentiality of all information submitted to the central repository; (2) ensure the timeliness, accuracy, integrity and completeness of the data provided to the central repository; (and (3) ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository. See Rule 613(e)(4). The NMS plan also must include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. See Rule 613(b)(6). The NMS plan is also required to include an Advisory Committee to advise the plan sponsors on the implementation, operation and administration of the central repository. See Rule 613(b)(7). Further, the NMS plan must specify a maximum error rate to be tolerated by the central repository for the data it collects, and processes for identifying and correcting errors in the data, for notifying the entities responsible for the reporting of the erroneous data, and for disciplining those who repeatedly report erroneous data. See Rule 613(e)(6)(i) through(iv). The NMS plan must also specify as a time by which the corrected data will be available to regulators. See Rule 613(e)(6)(iv).

-
-
fn -

905 The NMS plan must include: (1) a provision that makes each SRO that sponsors the plan responsible for enforcing compliance by its members with the provisions of the plan; and (2) mechanisms to ensure that plan sponsors and their members comply with the requirements of the plan. See Rules 613(g)(3), 613(g)(4), and 613(h)(3).

-
-
fn -

906 At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

-
-
fn -

907 Commission staff estimated that each SRO would spend an aggregate one-time amount of (400 Attorney hours) + (100 Compliance Manager hours) + (220 Programmer Analyst hours) + (120 Business Analyst hours) x (15 SROs) = 12,600 burden hours to prepare and file the NMS plan.

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-
fn -

908 Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

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-
fn -

909 Commission staff estimated that the SROs would spend ($20,000 per SRO) x (15 SROs) = $300,000 in external costs to develop and draft the NMS plan.

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-
fn -

910 See Proposing Release, supra note 4, at 32596.

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-
fn -

911 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

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-
fn -

912 See Rule 613(h)(3); Section III.B.3.a.1., supra.

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-
fn -

913 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

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-
fn -

914 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

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-
fn -

915 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See Rule 613(e)(6)(iii) through (iv).

-
-
fn -

916 See Rule 613(b)(7).

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-
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917 See note 906, supra.

-
-
fn -

918 Commission staff estimates that each SRO would spend an aggregate one-time amount of (700 Attorney hours) + (300 Compliance Manager hours) + (880 Programmer Analyst hours) + (880 Business Analyst hours) = 2,760 burden hours per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a onetime external cost of (50 legal hours x $400 per hour) = $20,000.

-
-
fn -

919 Commission staff estimates that the SROs would incur an aggregate one-time amount of (2,760 burden hours per SRO) x (17 SROs) = 46,920 burden hours to prepare and file an NMS plan. Commission staff estimates that ($20,000 per SRO) x (17 SROs) = $340,000 in external costs to prepare and file the NMS plan.

-
-
fn -

920 See Proposing Release, supra note 4, at 32596.

-
-
fn -

921 See Section I., supra.

-
-
fn -

922 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

-
-
fn -

923 See Rule 613(e)(4). The Commission believes that an outline or overview description of the policies and procedures, including standards, to be used by the plan processor that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed. See Section III.B.2.e., supra.

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-
fn -

924 See Rule 613(e)(4)(i)(A) through (D).

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-
fn -

925 See Rule 613(e)(4)(i)(A) through (D).

-
-
fn -

926 See Rule 613(e)(2).

-
-
fn -

927 See proposed Rule 613(e)(4)(i).

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-
fn -

928 17 CFR 240.17a-1.

-
-
fn -

929 17 CFR 240.17a-4.

-
-
fn -

930 5 U.S.C. 601 et seq.

-
-
fn -

931 Although Section 601(6) of the RFA defines the term "small entity," the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term "small entity" for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).

-
-
fn -

932 5 U.S.C. 605(b).

-
-
fn -

933 See Proposing Release, supra note 4, at 32607.

-
-
fn -

934 Id.

-
-
fn -

935 See FINRA Proposal Letter, p. 5-6 and Wachtel Letter, p. 1.

-
-
fn -

936 See Rule 613(a)(3)(vi).

-
-
fn -

937 Section 604(a)(4) of the RFA.

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-
fn -

938 17 CFR 242.601.

-
-
fn -

939 13 CFR 121.201.

-
\ No newline at end of file diff --git a/spider/files/data000002.html b/spider/files/data000002.html index 736aade..138c4e2 100644 --- a/spider/files/data000002.html +++ b/spider/files/data000002.html @@ -1,719 +1,2250 @@ - + jurisdiction: US - regulatory_authority: Financial Industry Regulatory Authority + regulatory_authority: US/SEC content_type: compilation - document_title: 6800. CONSOLIDATED AUDIT TRAIL COMPLIANCE RULE - source: FINRA Rule 6800 - source_type: FINRA Manual + document_title: CAT Reporting Technical Specifications for Industry Members + document_type: Specifications + source: US/SEC/Specifications/Technical Specifications + source_type: Technical Specifications language: English -
pubdate: N/A effdate: N/A -

6800. CONSOLIDATED AUDIT TRAIL COMPLIANCE RULE

- Topic: FINRA Manual, Rules, 6800 - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b + citation: N/A +
pubdate: February 28, 2019 effdate: N/A +

CAT Reporting Technical Specifications for Industry Members

+ Topic: CAT Reporting Technical Specifications for Industry Members + Compliance User: Industry Members Keywords: - Trading, - Small industry, + Technical Specifications, -
pubdate: N/A effdate: June 30, 2017 -

6810. Definitions

- Topic: FINRA Manual, Rules, 6800, Definition - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +

2/28/2019

+

DRAFT Version 1.1

+
pubdate: February 28, 2019 effdate: N/A +

Preface

+ Topic: CAT Reporting Technical Specifications for Industry Members, Preface + Compliance User: Industry Members Keywords: + CAT NMS plan, SRO, - Definition, - Trading, + CAT NMS LLC, -

For purposes of the Rule 6800 Series:

-

(a) "Account Effective Date" means:

-

(1) with regard to those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution:

-

(A) when the trading relationship was established prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members, either

-

(i) the date the relationship identifier was established within the Industry Member;

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(ii) the date when trading began (i.e., the date the first order was received) using the relevant relationship identifier; or

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(iii) if both dates are available, the earlier date will be used to the extent that the dates differ; or

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(B) when the trading relationship was established on or after November 15, 2018 for Industry Members other than Small Industry Members, or on or after November 15, 2019 for Small Industry Members, the date the Industry Member established the relationship identifier, which would be no later than the date the first order was received;

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(2) where an Industry Member changes back office providers or clearing firms prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members, the date an account was established at the relevant Industry Member, either directly or via transfer;

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(3) where an Industry Member acquires another Industry Member prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members, the date an account was established at the relevant Industry Member, either directly or via transfer;

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(4) where there are multiple dates associated with an account established prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members, the earliest available date;

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(5) with regard to Industry Member proprietary accounts established prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members:

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(A) the date established for the account in the Industry Member or in a system of the Industry Member or

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(B) the date when proprietary trading began in the account (i.e., the date on which the first orders were submitted from the account).

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With regard to paragraph (a)(2) through paragraph (a)(5), the Account Effective Date will be no later than the date trading occurs at the Industry Member or in the Industry Member's system.

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(b) "Active Accounts" means an account that has had activity in Eligible Securities within the last six months.

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(c) "Allocation Report" means a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation; provided, for the avoidance of doubt, any such Allocation Report shall not be required to be linked to particular orders or executions.

-

(d) "Business Clock" means a clock used to record the date and time of any Reportable Event required to be reported under this Rule Series.

-

(e) "CAT" means the consolidated audit trail contemplated by Rule 613 of SEC Regulation NMS.

-

(f) "CAT NMS Plan" means the National Market System Plan Governing the Consolidated Audit Trail, as amended from time to time.

-

(g) "CAT-Order-ID" means a unique order identifier or series of unique order identifiers that allows the Central Repository to efficiently and accurately link all Reportable Events for an order, and all orders that result from the aggregation or disaggregation of such order.

-

(h) "CAT Reporting Agent" means a Data Submitter that is a third party that enters into an agreement with an Industry Member pursuant to which the CAT Reporting Agent agrees to fulfill such Industry Member's reporting obligations under this Rule Series.

-

(i) "Central Repository" means the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT pursuant to Rule 613 of SEC Regulation NMS and the CAT NMS Plan.

-

(j) "Compliance Threshold" has the meaning set forth in Rule 6893(d).

-

(k) "Customer" means:

-

(1) the account holder(s) of the account at an Industry Member originating the order; and

-

(2) any person from whom the Industry Member is authorized to accept trading instructions for such account, if different from the account holder(s).

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(l) "Customer Account Information" shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable); except, however, that:

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(1) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will:

-

(A) provide the Account Effective Date in lieu of the "date account opened";

-

(B) provide the relationship identifier in lieu of the "account number"; and

-

(C) identify the "account type" as a "relationship";

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(2) in those circumstances in which the relevant account was established prior to November 15, 2018 for Industry Members other than Small Industry Members, or prior to November 15, 2019 for Small Industry Members, and no "date account opened" is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances:

-

(A) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system;

-

(B) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system;

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(C) where there are multiple dates associated with an account in an Industry Member's system, and the parameters of each date are determined by the individual Industry Member; and

-

(D) where the relevant account is an Industry Member proprietary account.

-

(m) "Customer Identifying Information" means information of sufficient detail to identify a Customer, including, but not limited to:

-

(1) with respect to individuals: name, address, date of birth, individual tax payer identification number ("ITIN")/social security number ("SSN"), individual's role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney); and

-

(2) with respect to legal entities: name, address, Employer Identification Number ("EIN")/Legal Entity Identifier ("LEI") or other comparable common entity identifier, if applicable; provided, however, that an Industry Member that has an LEI for a Customer must submit the Customer's LEI in addition to other information of sufficient detail to identify a Customer.

-

(n) "Data Submitter" means any person that reports data to the Central Repository, including national securities exchanges, national securities associations, broker-dealers, the SIPs for the CQS, CTA, UTP and Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("OPRA") Plans, and certain other vendors or third parties that may submit data to the Central Repository on behalf of Industry Members.

-

(o) "Eligible Security" includes (1) all NMS Securities and (2) all OTC Equity Securities.

-

(p) "Error Rate" means the percentage of Reportable Events collected by the Central Repository in which the data reported does not fully and accurately reflect the order event that occurred in the market.

-

(q) "Firm Designated ID" means a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.

-

(r) "Industry Member" means a member of a national securities exchange or a member of a national securities association that is required to record and report information pursuant to the CAT NMS Plan and this Rule 6800 Series.

-

(s) "Industry Member Data" has the meaning set forth in Rule 6830(a)(2).

-

(t) "Initial Plan Processor" means the first Plan Processor selected by the Operating Committee in accordance with Rule 613 of SEC Regulation NMS and Section 6.1 of the CAT NMS Plan.

-

(u) "Listed Option" or "Option" have the meaning set forth in Rule 600(b)(35) of SEC Regulation NMS.

-

(v) "Manual Order Event" means a non-electronic communication of orderrelated information for which Industry Members must record and report the time of the event.

-

(w) "Material Terms of the Order" includes: the NMS Security or OTC Equity Security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator (except on transactions in equities); time in force (if applicable); if the order is for a Listed Option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close (except on market maker quotations); and any special handling instructions.

-

(x) "NMS Security" means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.

-

(y) "NMS Stock" means any NMS Security other than an option.

-

(z) "Operating Committee" means the governing body of the CAT NMS, LLC designated as such and described in Article IV of the CAT NMS Plan.

-

(aa) "Options Market Maker" means a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.

-

(bb) "Order" or "order", with respect to Eligible Securities, shall include:

-

(1) Any order received by an Industry Member from any person;

-

(2) Any order originated by an Industry Member; or

-

(3) Any bid or offer.

-

(cc) "OTC Equity Security" means any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association's equity trade reporting facilities.

-

(dd) "Participant" means each Person identified as such in Exhibit A of the CAT NMS Plan, as amended, in such Person's capacity as a Participant in CAT NMS, LLC.

-

(ee) "Person" means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

-

(ff) "Plan Processor" means the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to Rule 613 of SEC Regulation NMS and Sections 4.3(b)(i) and 6.1 of the CAT NMS Plan to perform the CAT processing functions required by Rule 613 of SEC Regulation NMS and set forth in the CAT NMS Plan.

-

(gg) "Received Industry Member Data" has the meaning set forth in Rule 6830(a)(2).

-

(hh) "Recorded Industry Member Data" has the meaning set forth in Rule 6830(a)(1).

-

(ii) "Reportable Event" includes, but is not limited to, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.

-

(jj) "SRO" means any self-regulatory organization within the meaning of Section 3(a)(26) of the Exchange Act.

-

(kk) "SRO-Assigned Market Participant Identifier" means an identifier assigned to an Industry Member by an SRO or an identifier used by a Participant.

-

(ll) "Small Industry Member" means an Industry Member that qualifies as a small broker-dealer as defined in SEA Rule 0-10(c).

-

(mm) "Trading Day" shall have the meaning as is determined by the Operating Committee. For the avoidance of doubt, the Operating Committee may establish different Trading Days for NMS Stocks (as defined in Rule 600(b)(47) of SEC Regulation NMS), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time.

-

Amended by SR-FINRA-2017-024 eff. June 30, 2017.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

Rule 613 of the Securities Exchange Act of 1934 requires national securities exchanges and national securities associations (“SROs”) to submit a national market system plan to the Securities and Exchange Commission (“Commission” or “SEC”) to create, implement, and maintain a consolidated audit trail (the “CAT”) that would allow regulators to more efficiently and accurately track all activity in U.S. equity and listed options markets. Pursuant to Rule 613, the SROs filed with the Commission the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”), which was approved by the Commission on November 15, 2016.

+

Under Rule 613(g)(2), each member of a national securities exchange or national securities association is required to comply with all the provisions of the CAT NMS Plan. Relatedly, as mandated under Rule 613, the CAT NMS Plan requires each SRO to adopt rules requiring its members to comply with Rule 613 and the CAT NMS Plan, and to agree to enforce compliance by its members in that regard. Accordingly, each SRO has adopted rules requiring its members to comply with Rule 613 and the CAT NMS Plan. See, e.g., FINRA Rule 6800 Series.

+

The SROs jointly own CAT NMS, LLC, which was formed by the SROs to arrange for and oversee the creation, implementation, and maintenance of the CAT as required under Rule 613. Thus, the CAT is a facility of each SRO.

+

This specification represents a phased approach to industry reporting. Key dates are as noted below. Please note that a proposed amendment to the CAT NMS Plan will be filed with the Commission to reflect the phased approach for Industry Member CAT reporting described in these Technical Specifications. The proposed amendment will be subject to the Commission's approval.

+ +
-
pubdate: N/A effdate: March 15, 2017 -

6820. Clock Synchronization

- Topic: FINRA Manual, Rules, 6800, Clock Synchronization - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

Executive Summary

+ Topic: CAT Reporting Technical Specifications for Industry Members, Executive Summary + Compliance User: Industry Members Keywords: - Business Clock, - Documentation, - Certification, - Violation, + CAT Industry Member Reporting Scenarios, -

(a) Clock Synchronization

-

(1) Each Industry Member shall synchronize its Business Clocks, other than such Business Clocks used solely for Manual Order Events or used solely for the time of allocation on Allocation Reports, at a minimum to within a fifty (50) millisecond tolerance of the time maintained by the atomic clock of the National Institute of Standards and Technology ("NIST"), and maintain such synchronization.

-

(2) Each Industry Member shall synchronize (A) its Business Clocks used solely for Manual Order Events and (B) its Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within a one second tolerance of the time maintained by the NIST atomic clock, and maintain such synchronization.

-

(3) The tolerance for paragraph (a)(1) and (2) of this Rule includes all of the following:

-

(A) The difference between the NIST atomic clock and the Industry Member's Business Clock;

-

(B) The transmission delay from the source; and

-

(C) The amount of drift of the Industry Member's Business Clock.

-

(4) Business Clocks must be synchronized every business day before market open to ensure that timestamps for Reportable Events are accurate. To maintain clock synchronization, Business Clocks must be checked against the NIST atomic clock and re-synchronized, as necessary, throughout the day.

-

(b) Documentation

-

Industry Members must document and maintain their synchronization procedures for Business Clocks. Industry Members must keep a log of the times when they synchronize their Business Clocks and the results of the synchronization process. This log should include notice of any time a Business Clock drifts more than the applicable tolerance specified in paragraph (a) of this Rule. Such log must include results for a period of not less than five years ending on the then current date, or for the entire period for which the Industry Member has been required to comply with this Rule if less than five years.

-

(c) Certification

-

Each Industry Member shall certify to FINRA that its Business Clocks satisfy the synchronization requirements set forth in paragraph (a) of this Rule periodically in accordance with the certification schedule established by the Operating Committee pursuant to the CAT NMS Plan.

-

(d) Violation Reporting

-

Each Industry Member with Business Clocks must report to the Plan Processor and FINRA violations of paragraph (a) of this Rule pursuant to the thresholds set by the Operating Committee pursuant to the CAT NMS Plan.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

This document describes the requirements for the reporting of data to CAT by Industry Members, including detailed information about data elements and file formats of each Reportable Event. It also describes how Industry Members should submit files to CAT, including access instructions, network and transport options, and testing requirements.

+

A separate companion document containing detailed reporting scenarios entitled CAT Industry Member Reporting Scenarios should be used as a guide for determining how the event types and field values laid out in this document should be applied when reporting various order handling and execution scenarios for both equities and options.

+

Revision / Change Process

+ +
-
pubdate: N/A effdate: March 15, 2017 -

6830. Industry Member Data Reporting

- Topic: FINRA Manual, Rules, 6800, Industry Member Data Reporting - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Recording, - Reporting, - CAT-Order-ID, - Industry Member Data, - NMS Security, - Symbology, - Error Correction, - -

(a) Recording and Reporting Industry Member Data

-

(1) Subject to paragraph (a)(3) below, each Industry Member shall record and electronically report to the Central Repository the following details for each order and each Reportable Event, as applicable ("Recorded Industry Member Data") in the manner prescribed by the Operating Committee pursuant to the CAT NMS Plan:

-

(A) for original receipt or origination of an order:

-

(i) Firm Designated ID(s) for each Customer;

-

(ii) CAT-Order-ID;

-

(iii) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order;

-

(iv) date of order receipt or origination;

-

(v) time of order receipt or origination (using timestamps pursuant to Rule 6860); and

-

(vi) Material Terms of the Order;

-

(B) for the routing of an order:

-

(i) CAT-Order-ID;

-

(ii) date on which the order is routed;

-

(iii) time at which the order is routed (using timestamps pursuant to Rule 6860);

-

(iv) SRO-Assigned Market Participant Identifier of the Industry Member routing the order;

-

(v) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed;

-

(vi) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed; and

-

(vii) Material Terms of the Order;

-

(C) for the receipt of an order that has been routed, the following information:

-

(i) CAT-Order-ID;

-

(ii) date on which the order is received;

-

(iii) time at which the order is received (using timestamps pursuant to Rule 6860);

-

(iv) SRO-Assigned Market Participant Identifier of the Industry Member receiving the order;

-

(v) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; and

-

(vi) Material Terms of the Order;

-

(D) if the order is modified or cancelled:

-

(i) CAT-Order-ID;

-

(ii) date the modification or cancellation is received or originated;

-

(iii) time at which the modification or cancellation is received or originated (using timestamps pursuant to Rule 6860);

-

(iv) price and remaining size of the order, if modified;

-

(v) other changes in the Material Terms of the Order, if modified; and

-

(vi) whether the modification or cancellation instruction was given by the Customer or was initiated by the Industry Member;

-

(E) if the order is executed, in whole or in part:

-

(i) CAT-Order-ID;

-

(ii) date of execution;

-

(iii) time of execution (using timestamps pursuant to Rule 6860);

-

(iv) execution capacity (principal, agency or riskless principal);

-

(v) execution price and size;

-

(vi) SRO-Assigned Market Participant Identifier of the Industry Member executing the order;

-

(vii) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information; and

-

(F) other information or additional events as may be prescribed pursuant to the CAT NMS Plan.

-

(2) Subject to paragraph (a)(3) below, each Industry Member shall record and report to the Central Repository the following, as applicable ("Received Industry Member Data" and collectively with the information referred to in Rule 6830(a)(1) "Industry Member Data")) in the manner prescribed by the Operating Committee pursuant to the CAT NMS Plan:

-

(A) if the order is executed, in whole or in part:

-

(i) An Allocation Report;

-

(ii) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and

-

(iii) CAT-Order-ID of any contra-side order(s);

-

(B) if the trade is cancelled, a cancelled trade indicator; and

-

(C) for original receipt or origination of an order, the Firm Designated ID for the relevant Customer, and in accordance with Rule 6840, Customer Account Information and Customer Identifying Information for the relevant Customer.

-

(3) Each Industry Member that is an Options Market Maker is not required to report to the Central Repository the Industry Member Data regarding the routing, modification or cancellation of its quotes in Listed Options. Each Industry Member that is an Options Market Maker shall report to the Exchange the time at which its quote in a Listed Option is sent to the Exchange (and, if applicable, any subsequent quote modification time and/or cancellation time when such modification or cancellation is originated by the Options Market Maker).

-

(b) Timing of Recording and Reporting

-

(1) Each Industry Member shall record Recorded Industry Member Data contemporaneously with the applicable Reportable Event.

-

(2) Each Industry Member shall report:

-

(A) Recorded Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member records such Recorded Industry Member Data; and

-

(B) Received Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such Received Industry Member Data.

-

(3) Industry Members may, but are not required to, voluntarily report Industry Member Data prior to the applicable 8:00 a.m. Eastern Time deadline.

-

(c) Applicable Securities

-

(1) Each Industry Member shall record and report to the Central Repository the Industry Member Data as set forth in paragraph (a) of this Rule for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

-

(2) Each Industry Member shall record and report to the Central Repository the Industry Member Data as set forth in this paragraph (a) of this Rule for each Eligible Security for which transaction reports are required to be submitted to FINRA.

-

(d) Security Symbology

-

(1) For each exchange-listed Eligible Security, each Industry Member shall report Industry Member Data to the Central Repository using the symbology format of the exchange listing the security.

-

(2) For each Eligible Security that is not exchange-listed, each Industry Member shall report Industry Member Data to the Central Repository using such symbology format as approved by the Operating Committee pursuant to the CAT NMS Plan.

-

(e) Error Correction

-

For each Industry Member for which errors in Industry Member Data submitted to the Central Repository have been identified by the Plan Processor or otherwise, such Industry Member shall submit corrected Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on T+3.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+
pubdate: February 28, 2019 effdate: N/A +

1. Introduction

+ Topic: CAT Reporting Technical Specifications for Industry Members, Introduction + Compliance User: Industry Members + Keywords: +
pubdate: February 28, 2019 effdate: N/A +

1.1. CAT Overview

+ Topic: CAT Reporting Technical Specifications for Industry Members, Introduction, CAT Overview + Compliance User: Industry Members + Keywords: + Sec Rule 613, + CAT NMS plan, + CAT Reporting Agents, + Securities Information Processors (SIPS), + +

The Securities and Exchange Commission (SEC) approved Rule 613 under the Securities Exchange Act of 1934, which requires national securities exchanges and national securities associations (collectively, the Participants) to submit a national market system plan to create, implement, and maintain a consolidated audit trail (CAT NMS Plan) that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities (Eligible Securities), across all markets, from the time of order inception through routing, cancellation, modification, execution, and allocation. The SEC approved the CAT NMS Plan on November 15, 2016.

+

In accordance with SEC Rule 613, the CAT NMS Plan requires a Central Repository that will comprehensively track orders throughout their lifecycle and identify the Participants and Industry Members handling them, as well as the account holders and authorized traders for any account that originates an order (Customers1). Specific data elements will be submitted to the Central Repository by Participants, Industry Members, and CAT Reporting Agents. CAT Reporting Agents may be third-party firms reporting on behalf of other entities, or may be outside parties that are not required to submit data to the CAT, but from which the CAT may receive data per the CAT NMS Plan, such as the Securities Information Processors (SIPs).

+

The CAT NMS Plan also requires the selection of an entity as the Plan Processor to be responsible for performing the processing functions required by Rule 613 and the Plan. The Operating Committee of CAT NMS LLC, a governing body composed of representatives of the Participants, oversees the operation of the CAT. The duties of the Operating Committee are further described in Article IV of the CAT NMS Plan.

+

Refer to SEC Rule 613, available at: https://www.sec.gov/rules/final/2012/34-67457.pdf for more details. Refer also to CAT NMS Plan, available at: https://www.catnmsplan.com/wpcontent/uploads/2018/02/34-79318-exhibit-a.pdf

+
-
pubdate: N/A effdate: March 15, 2017 -

6840. Customer Information Reporting

- Topic: FINRA Manual, Rules, 6800, Customer Information Reporting - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

2. CAT Reporting Fundamentals

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals + Compliance User: Industry Members Keywords: - Customer Information, - Updating, - Error Correction, + Industry Member, -

(a) Initial Set of Customer Information

-

Each Industry Member shall submit to the Central Repository the Firm Designated ID, Customer Account Information and Customer Identifying Information for each of its Customers with an Active Account prior to such Industry Member's commencement of reporting to the Central Repository and in accordance with the deadlines set forth in Rule 6880.

-

(b) Daily Updates to Customer Information

-

Each Industry Member shall submit to the Central Repository any updates, additions or other changes to the Firm Designated ID, Customer Account Information and Customer Identifying Information for each of its Customers with an Active Account on a daily basis.

-

(c) Periodic Updates to Complete Set of Customer Information

-

On a periodic basis as designated by the Plan Processor and approved by the Operating Committee, each Industry Member shall submit to the Central Repository a complete set of Firm Designated IDs, Customer Account Information and Customer Identifying Information for each of its Customers with an Active Account.

-

(d) Error Correction

-

For each Industry Member for which errors in Firm Designated ID, Customer Account Information and Customer Identifying Information for each of its Customers with an Active Account submitted to the Central Repository have been identified by the Plan Processor or otherwise, such Industry Member shall submit corrected data to the Central Repository by 5:00 p.m. on T+3.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+
pubdate: February 28, 2019 effdate: N/A +

2.1. Industry Member Perspective

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Industry Member Perspective + Compliance User: Industry Members + Keywords: + Industry Member, + New Order, + Order Accepted, + +

Industry Members should populate fields from their own perspective. For example, for “capacity”, the Industry Member should report based on the capacity in which the Industry Member acted. For a New Order and Order Accepted, reports should indicate the instructions as received; for an Order Route, the fields should include the instructions as sent to the destination.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.2. Key Data Elements

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements + Compliance User: Industry Members + Keywords: + Elements of CAT, + +

The sections below describe the key data elements of CAT that may be used in order events and/or metadata files.

+
pubdate: February 28, 2019 effdate: N/A +

2.2.1. Reporter ID and Submitter ID

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Reporter ID and Submitter ID + Compliance User: Industry Members + Keywords: + Reporter ID, + Submitter ID, + CAT Reporting Agents, + +

Two CAT identifiers, the Reporter ID and the Submitter ID, i.e., CAT Reporting Agent, are used during the CAT file submission process to identify the Industry Member and, if applicable, the party authorized to submit CAT files on behalf of the Industry Member (CAT Reporting Agent).

+

Reporter ID

+

The CAT Reporter ID is the SRO assigned identifier that an Industry Member used to report order events to CAT. A CAT Reporter may use any SRO assigned identifier that is valid on the CAT Trading Day for which order events are submitted. CAT will use reference data submitted by Participant Reporters each day to identify the Industry Member to which the specific identifier is assigned. Each SRO assigned identifier is linked to the Industry Member's CRD number so that all reporting activity of a single Industry Member CAT reporter can be consolidated at the firm level in CAT.

+

Submitter ID

+

The Submitter ID is the identifier of the CAT Reporting Agent, the entity authorized to submit the files to CAT on behalf of the Industry Member. CAT Reporters may authorize third-parties (“CAT Reporting Agents”) to submit data to CAT on their behalf. The CAT Reporting Agent must be authorized to submit data on behalf of the Reporter. Each CAT Reporting Agent will be assigned a unique Submitter ID by CAT during onboarding. If an Industry Member submits data on its own behalf, then the Submitter ID assigned to the entity may be the same as the CAT Reporter ID.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.2.2. Order ID

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order ID + Compliance User: Industry Members + Keywords: + Order ID, + +

The order ID used in order events, representing the internal order IDs assigned by the Industry Member, must be unique when combined with the date, reporter and symbol (or optionID).

+
+
pubdate: February 28, 2019 effdate: N/A +

2.2.3. Timestamps

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Timestamps + Compliance User: Industry Members + Keywords: + Manual Order Events, + Industry Members, + Alternative Trading systems, + Member Data, + +

Each Industry Member must record and report Industry Member Data to the CAT with timestamps in milliseconds. However, to the extent that any Industry Member’s order handling or execution systems utilize timestamps in increments finer than milliseconds, such Industry Member must record and report Industry Member Data to the CAT with timestamps in such finer increments. CAT will accept granularity up to nanoseconds. Each Industry Member may record and report Manual Order Events to the CAT in increments up to and including one second, provided that each Industry Member shall record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Industry Member (“Electronic Capture Time”) in milliseconds. Each Industry Member may record and report the time of Allocation Reports in increments up to and including one second.

+

There are two timestamps fields in each event - eventTimestamp and electronicTimestamp. The eventTimestamp is the time of order handling or execution pursuant to Section 6.8 of the CAT NMS Plan (e.g. origination, receipt, etc, depending on the respective order event). For manual order handling, eventTimestamp is the manual handling or execution time, which is required to be reported in increments of at least one second. When the manual order is later captured electronically, the systematized time must be captured in the electronicTimestamp field.

+

With respect to sequence numbers, Alternative Trading Systems (ATSs) must provide a sequence number assigned by the ATS’s matching engine on all Reportable Events.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.2.4. Order Types

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order Types + Compliance User: Industry Members + Keywords: + Data Dictionary, + +

CAT uses a standardized list of order types for Industry Members that can be found in the Data Dictionary. All events with the field orderType will require one of these standard order types as a value.

+

For events reported by ATSs, an additional field (in addition to orderType) - atsOrderType - is used to capture ATS-specific order types. Please see Section 3.1.2 ATS Order Types for more details.

+

Please note that brokers routing to ATSs are not required to use the atsOrderType field, nor the ATS specific codes in the standardized orderType field in their Order Route events. The orderType on the Order Route event will not be validated against an atsOrderType.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.2.5. Order Handling Instructions

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order Handling Instructions + Compliance User: Industry Members + Keywords: + RAR, + New Order, + Order Accepted, + +

Special handling instructions are reported in the handlingInstructions field using a standardized list of handling instructions based on common exchange order types and codes. Multiple codes and values can be used in combination to describe the special handling instructions.

+

In the event an Industry Member routes an order with exactly the same handling instructions received from the customer, they may use handlingInstructions code "RAR" (Routed as Received) on the Order Route event rather than re-stating all handlingInstructions values from the New Order/Order Accepted event.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

2.3. Reference Data

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data + Compliance User: Industry Members + Keywords: + IMID, + +
pubdate: February 28, 2019 effdate: N/A +

2.3.1. Industry Member Identifier (IMID)

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Industry Member Identifier (IMID) + Compliance User: Industry Members + Keywords: + Industry Member Identifier, + CHX Acronyms, + FINRA, + MPIDs, + Nasdaq MPIDs, + SRO, + +

An Industry Member Identifier, IMID, is any identifier assigned by an SRO to one of its members. Examples of SRO assigned identifiers include FINRA MPIDs, Nasdaq MPIDs, NYSE Mnemonics, CBOE User Acronyms, and CHX Acronyms.

+

Reportable events will use fields with the Data Type "IMID" to refer to the Industry Member performing the action described by the event, and/or the entity that is the subject of the action described by the event. In other words, an IMID type field will be used in all scenarios where an Industry Member must refer to themselves or another Industry Member in an event.

+

This IMID approach allows the Industry Member to use any SRO-Assigned Industry Member Identifier in the Reportable Events. Acknowledging the potential that the same SRO-assigned Industry Member Identifier may be used by different SRO for different entities, CAT will publish a daily file to highlight any conflict among the SRO-assigned Industry Member Identifiers. Such conflicts are detected in the processing of the daily member dictionaries submitted by each SRO. If a conflict is identified for a specific IMID, the Industry Member may choose to use either the SRO-Assigned Industry Member Identifier by another SRO that is not conflicted with other IDs, or the full format of the IMID - the combination of source (issuing SRO) and the SRO-Assigned Industry Member Identifier - to guarantee uniqueness of the IMID. For example, if AAAA is conflicted with another SRO-Assigned Market Participant Identifier in the CAT, the alternative can be to either use a different SRO-Assigned Market Participant Identifier assigned by another SRO (e.g., AAAB, pointing to the same Industry Member), or the full format FINRA:AAAA - a combination of ID and the source SRO.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.3.2. Firm Designated ID (FDID)

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Firm Designated ID (FDID) + Compliance User: Industry Members + Keywords: + FDID, + CAT NMS plan, + CAT Interpretative FAQ, + +

FDID is defined in Section 1.1 of the CAT NMS Plan as “a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.”

+

FDID represents an account and not a specific customer. For example, John Doe has two accounts at BDA, a regular trading account (account #124) and an IRA account (account #456). BDA would have two different FDIDs in this case, one for John Doe's regular trading account and a second for John Doe's IRA account.

+

The FDID for the trading account an order was received or originated for must be reported on all New Order Events.

+

Unless a new account or entity identifier is assigned to a client or customer, each FDID must be unique and persistent for each trading account on any given day so that a single account may be tracked across time within a single broker-dealer. For example, if an Industry Member assigns a new account or entity identifier to a client or customer for any reason, such as due to a merger, acquisition or some other corporate action, then a new FDID may be created to identify the new account identifier/entity identifier in use at the Industry Member for the entity

+

An actual account may not be used as the FDID for CAT reporting. See CAT Interpretive FAQ M2 for more information on the prohibition on use of actual account numbers.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.3.3. Equity Symbols

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Equity Symbols + Compliance User: Industry Members + Keywords: + Reportable Events, + Eligible Securities, + FINRA OTC Symbology, + +

Industry Members must report Reportable Events related to listed equity Eligible Securities to CAT using the symbology of the primary listing exchange and must report Reportable Events related to OTC Equity Securities using FINRA OTC symbology.

+
pubdate: February 28, 2019 effdate: N/A +
2.3.3.1. CAT Symbol Master
+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Equity Symbols, CAT Symbol Master + Compliance User: Industry Members + Keywords: + Symbol, + +

CAT will provide a start-of-day equity symbol master list at 6:00AM and an end-of-day equity symbol master list each day on www.catnmsplan.com.

+

The symbol master file for Industry Members contains the following information:

+

• the listing exchange,

+

• the symbol in the symbology of the listing exchange, and

+

• a flag indicating whether the symbol is a test symbol.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

2.3.4. Option Symbols

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Option Symbols + Compliance User: Industry Members + Keywords: + CAT NMS plan, + CAT Symbology, + +

As stated above, the CAT NMS Plan requires symbols to be reported to CAT in the symbology of the listing exchange. Standard option symbols established across exchanges as the result of the Option Symbology Initiative (OSI) should be used for any single-leg listed options.

+
pubdate: February 28, 2019 effdate: N/A +
2.3.4.1. Flex Percent Option Symbols
+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Option Symbols, Flex Percent Option Symbols + Compliance User: Industry Members + Keywords: + Flex Percent Options, + CAT System, + +

FLEX Percent options can only be uniquely identified using the OSI once their deterministic prices are known. When reporting the optionID for a FLEX Percent option, Industry Members must append "%" to the beginning of the standard OSI symbol. This will enable the CAT system to differentiate between a strike value that is expressed in percent terms from one that is expressed in dollars and cents.

+

Thus, FLEX Percent option symbols expressed with percentage strike values will have 22 characters. For example, an option order with optionID %1AAPL 200131C00095000 indicates it is a Flex Percent option order on OSI symbol 1AAPL 200131C00095000.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

2.3.5. Corporate Actions

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Corporate Actions + Compliance User: Industry Members + Keywords: + Central Repository, + FINRA OTC Equity Symbols, + Data Distribution Service, + Industry Members, + +

The CAT System will maintain a historical symbology in the Central Repository that includes corporate actions.

+

CAT will receive daily corporate action files and symbol updates from the various data sources (including equity and options listing exchanges, FINRA OTC Equity Symbols, Data Distribution Services from Options Clearing Corporation, etc.) and publish daily symbol master files to the Industry Members. The symbol changes impacted by corporate actions will be reflected in the daily symbol master files. Industry Members must use the updated symbol in Reportable Events from the effective date of the symbol change. Failure to report in the updated symbol would result in rejects of the record(s).

+

Industry Members are not required to report order adjustments due to corporate actions, e.g., price or size changes. However, if an Industry Member chooses to report an adjustment resulting from a corporate action, the adjustment should be reported using the Order Modified event (or Order Adjusted event).

+
pubdate: February 28, 2019 effdate: N/A +
2.3.5.1. Options Intraday Listing or Delisting
+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Corporate Actions, Options Intraday Listing or Delisting + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + +

CAT accommodates intraday listing of options by exchanges. Industry Members must report the OSI symbol as the optionID, just like for previously listed options.

+

CAT will maintain a historical record of option symbols, including symbols that have been delisted.

+

Exchanges and the OCC will provide reference data to CAT for option symbols that are listed or delisted intraday.

+
+
+
+
pubdate: February 28, 2019 effdate: N/A +

2.4. Data Types

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types + Compliance User: Industry Members + Keywords: + CAT, + Data Validation, + Reporter Submitter, + Data Submitted, + Industry Members, + JSON, + CSV, + SRO, + +

CAT will accept two kinds of text-based files: JSON and CSV. The fundamental data types used throughout this document are described below. Other data types are defined in the Data Dictionary provided in Appendix G of this document.

+

To support both JSON and CSV submissions, CAT will publish a JSON schema file on the CAT public website that describes each data type with required representation formats and a mapping that defines the position in a CSV representation that the data element would assume. A schema will be provided for each data object that can be reported in both JSON and CSV.

+

Data Validation Based on Data Types

+

All data submitted to CAT will be validated based on the defined data type of each item, including proper formatting and range checking. Examples of accepted values are detailed in the table below. Valid values for Choice fields are defined in the Data Dictionary for each data element. Valid data values, ranges, and formats will be specified in the record schema files, which will be used to validate submitted data element values. Records and values that fail validation will be marked as a failure and will be reported as feedback to the Reporter and Data Submitter as detailed in Section 7.

+

Data Types

+ + + + + +
pubdate: February 28, 2019 effdate: N/A +

2.4.1. Name/Value Pairs

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types, Name/Value Pairs + Compliance User: Industry Members + Keywords: + Name Part, + Value Part, + JSON, + CSV, + +

Some fields are described as containing Name/Value pairs. This signifies a list of zero or more attributes, where each attribute is either a name with no value, or a name with an accompanying value such that the name and value are separated by a single equal sign (ASCII decimal 61, hex 3D). Multiple attributes, i.e., Name/Value Pairs, are separated by the pipe symbol (ASCII decimal 124, hex 7C). If an attribute is boolean in nature, it can optionally be represented as a name alone, where its value is implied by its presence (true) or absence (false).

+

The Name part is the string up to the first pipe symbol or equal sign. Names must not contain commas (ASCII 44, hex 2C), pipes, equal-signs, or double-quotes (ASCII decimal 34, hex 22). If the name terminates with a pipe, it is a boolean value, and its presence indicates true. If the name terminates with an equal sign, the value must follow.

+

The Value part is the string starting with the character just after the equal sign, up to either a pipe symbol or the end of the string. Values may contain an equal sign, but must not contain commas, pipes or double-quotes.

+

For example, the following JSON represents a hypothetical name/value pair field, with a boolean attribute and a price attribute: { "data": "XYZ|ABC=12.55" }

+

The above format works for both JSON and CSV data entry. However, when submitting data in JSON, a more native JSON style can optionally be used by assigning a JSON object as the value for a Name Value Pair attribute. Note, however, that boolean values must be explicitly set. The above example can alternatively be submitted as:

+

{ "data": { "XYZ": true, "ABC": 12.55 } }

+
+
pubdate: February 28, 2019 effdate: N/A +

2.4.2. Required, Conditional, and Optional Fields

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types, Required, Conditional, and Optional Fields + Compliance User: Industry Members + Keywords: +

Throughout this document, event types and their fields will be defined. Each field will be notated with the abbreviation R, C, O or A to represent whether it is required, conditionally required, optional or required for ATSs only. This codification will appear in the last column of each table describing an event.

+ +
+
+
pubdate: February 28, 2019 effdate: N/A +

2.5. Linkage Overview

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview + Compliance User: Industry Members + Keywords: + CAT, + +

This section describes the linkage keys that are used to create lifecycles in CAT and explains how the linkage keys are constructed via different data elements in respective Reportable Events.

+
pubdate: February 28, 2019 effdate: N/A +

2.5.1. CAT Linkage Keys

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, CAT Linkage Keys + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + +

All Reportable Events will be linked in CAT via the daisy chain approach. Below is the list of linkage keys that connect order events within an Industry Member and across Industry Members.

+

• Order Key links together the events of the same order, within an Industry Member, e.g. linking an Order Route event to the Order Accepted event. The Order Key is constructed by date, reporter, symbol (or optionID) and orderID.

+

• Prior Order Key links together the modified, cancel/replaced or internally routed order to the original order. For example, linking an Order Modified event to the Order Accepted event. Generally, the data elements to construct the Prior Order Key are date, reporter, symbol (or optionID), priorOrderID. However, the field names may vary depending on the order events. Please see each order events sections for more details.

+

• Route Linkage Key links the order events by the Industry Member routing an order away and the Industry Member accepting the order. Please see Section 2.5.2 below for more detailed descriptions.

+

• Trade Key: Each Trade event has a Trade Key (date, reporter, symbol (or optionID), tradeID), and each side of the trade has an Order Key that links to the order on side.

+

• Fulfillment Key: date, reporter, symbol (or optionID), fulfillmentID

+

• Prior Fulfillment Key: date, reporter, symbol (or optionID), priorFulfillmentID

+

• Quote Key: date, reporter, symbol, quoteID

+

Generally, the date used in the linkage key is the calendar date of the event (the date portion of the eventTimestamp). In the scenario when an order event needs to be linked to a prior event on a different date (e.g., modify a GTC order on a prior day), an additional field priorOrderDate is reported on the event and will be used in linking.

+
+
pubdate: February 28, 2019 effdate: N/A +

2.5.2. Reporting Responsibilities of Sender/Receiver in Order Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, Reporting Responsibilities of Sender/Receiver in Order Route + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + OATS, + +

In Phase 2a, Industry Members are responsible for reporting routes, modifications, and cancellations in line with OATS guidance. Below are a list of sample scenarios and the reporting responsibilities of the sender (Broker A) and the receiver (Broker B).

+ + +
+
pubdate: February 28, 2019 effdate: N/A +

2.5.3. Summary of Route Linkage Keys

+ Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, Summary of Route Linkage Keys + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + +

The table below summarizes the required data elements to construct the route key for linking Route and Order Accepted events reported by different entities in CAT. The combination of the data elements must be unique. Data elements in the same row must always be equal values. Note that only the data elements used to create linkage are listed here.

+

For Participant related event details, please refer to the CAT Reporting Technical Specifications for Participants.

+ + +

* Not required for manual order route/receipt.

+

• session - The session field contains an ID string for the specific session used to route the order. Note that this differs from the trading session (e.g., pre-market, regular, post-market, etc.) Session can constitute an actual protocol session name, IP/port combination, unique login account, or some other means of identifying a particular API session. It must be reported as the same value by both the sending and receiving entities. When routing between two Industry Members, the session must be left blank by both the sending and receiving entities.

+

• routedOrderID - When an order is routed away, it may be assigned another ID on the route - this is noted in the Order Route event as the routedOrderID (e.g., the ClOrdID in FIX, ClientOrderID for NYSE UTP direct users, etc). This ID must match the routedOrderID reported by the receiving entity in its Order Accepted event.

+

Routing Between Industry Members

+

For orders routed between Industry Members, the linkage between sender and receiver is established via a combination of:

+

- Date, symbol (or optionID), session (must be blank), destination, senderIMID, and routedOrderID on the Order Route events reported by the sender; and

+

- Date, symbol (or optionID), session (must be blank), receiverIMID, routingOrigin, and routedOrderID on Order Accepted event reporter by the receiver.

+

• destination - The IMID of the destination receiving this routed order. It must equal the receiverIMID field on the Order Accepted event reported by the destination Industry Member. The sending and receiving firms must mutually agree on the IMID to be used if they have multiple SRO-assigned IMIDs.

+

• senderIMID - The IMID of the sender that is routing out the order, known also by the destination. The destination has to report the same value on the routingOrigin field of the Order Accepted event.

+

• receiverIMID - The IMID of the Industry Member receiving the routed order. It must match the destination field on the Order Route event reported by the sender.

+

• routingOrigin - The IMID of the Industry Member from which the order is routed. It must match senderIMIDin the Order Route event reported by the routing entity.

+

Routing to Exchanges

+

When routing to exchanges, the destination must be the Exchange ID to which the order is routed. Hence, the linkage will be created by:

+

- Date, symbol (or optionID), session, destination (ExchangeID), senderIMID, and routedOrderID on the Order Route event; and

+

- Date, symbol (or optionID), session, exchange, routingParty, and routedOrderID on the Participant Order Accepted event to create linkages. See CAT Reporting Technical Specifications for Participants for more details.

+

Note that, when using Order Route event to report a modification to an order that was previously routed to an exchange, the linkage key is created via the same set of data elements.2

+

Routing to Foreign Destinations

+

If the order is routed to a foreign non-CAT-reporting entity, the destinationType must be marked as N (Foreign). However, there is no requirement to report destination or routedOrderID, thus there is no subsequent linkage in CAT.

+

Routing from an Exchange to the Exchange's Routing Broker

+

When an Industry Member, that is an exchange routing broker, receives an order routed from the exchange, the routingOrigin field must be the Exchange ID from which the order is routed. Hence the linkage will be created by:

+

- Date, symbol (or optionID), exchange, routedOrderID, session, routingParty on the Participant Order Route event (See CAT Reporting Technical Specifications for Participants for more details);

+

- Date, symbol (or optionID), routingOrigin (Exchange ID), routedOrderID, session, receiverIMID on the Industry Member Order Accepted event.

+
+
-
pubdate: N/A effdate: March 15, 2017 -

6850. Industry Member Information Reporting

- Topic: FINRA Manual, Rules, 6800, Industry Member Information Reporting - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Reporting, - -

Each Industry Member shall submit to the Central Repository information sufficient to identify such Industry Member, including CRD number and LEI, if such LEI has been obtained, prior to such Industry Member's commencement of reporting to the Central Repository and in accordance with the deadlines set forth in Rule 6880, and keep such information up to date as necessary.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

-
-
pubdate: N/A effdate: March 15, 2017 -

6860. Time Stamps

- Topic: FINRA Manual, Rules, 6800, Time Stamps - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b - Keywords: - Record, - Report, - Time Stamps, - -

(a) Millisecond Time Stamps

-

(1) Subject to paragraphs (a)(2) and (b), each Industry Member shall record and report Industry Member Data to the Central Repository with time stamps in milliseconds.

-

(2) Subject to paragraph (b), to the extent that any Industry Member's order handling or execution systems utilize time stamps in increments finer than milliseconds, such Industry Member shall record and report Industry Member Data to the Central Repository with time stamps in such finer increment.

-

(b) One Second Time Stamps/Electronic Order Capture

-

(1) Each Industry Member may record and report Manual Order Events to the Central Repository in increments up to and including one second, provided that each Industry Member shall record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Industry Member ("Electronic Capture Time") in milliseconds; and

-

(2) Each Industry Member may record and report the time of Allocation Reports in increments up to and including one second.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+
pubdate: February 28, 2019 effdate: N/A +

3. Special Reporting Requirements

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements + Compliance User: Industry Members + Keywords: +
pubdate: February 28, 2019 effdate: N/A +

3.1. Alternative Trading Systems (“ATSs”) Reporting

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting + Compliance User: Industry Members + Keywords: + ATSs, + +

ATSs are required to submit additional information in applicable order events.

+
pubdate: February 28, 2019 effdate: N/A +

3.1.1. National Best Bid and Offer (NBBO)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, National Best Bid and Offer (NBBO) + Compliance User: Industry Members + Keywords: + ATSs, + Industry Members, + CAT, + NBBO, + BBO, + +

ATSs are required to report to CAT NBBO prices, though such information is optional for other Industry Members. The quantities being bid or offered for the NBBO are optional for all Industry Members.

+

The NBBO should be reported to CAT from the perspective of the Industry Member. An ATS is required to report, for orders, the NBBO (or relevant reference price) in effect at the time of the order event, and the timestamp of when the ATS captured the effective NBBO (or relevant reference price). In addition, the ATS must identify the market data feed (NBBO Source) it used to obtain the NBBO (or relevant reference price).

+

If another reference price, such as the primary market's BBO, is used by the ATS, then the applicable reference price should be reported instead of the NBBO.

+
+
pubdate: February 28, 2019 effdate: N/A +

3.1.2. ATS Order Types

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, ATS Order Types + Compliance User: Industry Members + Keywords: + ATSs, + CAT, + +

For events reported by ATSs, an additional field (in addition to orderType) - atsOrderType - is used to report ATS-specific order types. Note that orderType and atsOrderType are not mutually exclusive; ATSs must populate both of these fields with a value where they are present on Reportable Events.

+

The field atsOrderType is defined as Name/Value Pairs where "name" must be equal to a unique code that has been provided to CAT by the ATS through the CAT web interface. All codes must be registered before any relevant order events are submitted. Specific instructions for registering atsOrderTypes will be published in a CAT Alert available on catnmsplan.com. All atsOrderTypes must be registered with CAT 20 business days prior to the order type becoming effective.

+
+
pubdate: February 28, 2019 effdate: N/A +

3.1.3. Sequence Number

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, Sequence Number + Compliance User: Industry Members + Keywords: + ATSs, + +

Alternative Trading Systems (ATSs) must also provide a sequence number assigned by the ATS’s matching engine on all reportable events.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

3.2. Manual Orders

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders + Compliance User: Industry Members + Keywords: + CAT, + NMS Plan, + +

The CAT NMS Plan defines a Manual Order Event as “non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.” This version of the Technical Specifications addresses manual equity orders, which are reportable in Phase 2a, while manual option orders will be addressed in the Phase 2d Technical Specifications.

+
pubdate: February 28, 2019 effdate: N/A +

3.2.1. Manually Received Order Events Immediately Systematized

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders, Manually Received Order Events Immediately Systematized + Compliance User: Industry Members + Keywords: + Industry Members, + +

Orders which are non-electronically communicated but immediately systematized (e.g., a broker received a call and directly enters the order into the order management system) must be marked as a manual event using the manualFlag. In this scenario, the Industry Member is required to report both the manual time of order receipt and the electronic capture time, and the same timestamp should be reported in both fields in milliseconds.3

+
+
pubdate: February 28, 2019 effdate: N/A +

3.2.2. Manual Order Events Followed by Separate Electronic Messages

+ Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders, Manual Order Events Followed by Separate Electronic Messages + Compliance User: Industry Members + Keywords: + Manual order event, + CAT, + Industry Members, + +

Manual order events must be reported to CAT marked as a manual event using the manualFlag and must include an electronic capture time if the manual event is captured in an order management or execution system.

+

If an Industry Member routes or receives an order manually and then subsequently sends or receives an electronic message to represent the manual instruction, the following reporting requirements apply:

+

• All material terms and conditions of a manually received or routed order, including time of route and receipt, must be reported to CAT on the required manual event, with all relevant timestamps representing when the manual order event occurred.

+

• Additional electronic messages related to a manual order or route that do not change any material term or condition of the original order are not required to be reported to CAT as they represent a duplicate of the original order.

+

• If the duplicate electronic message includes a routed order identifier that could be used to link the sender's route report to the receiver's new order, and the member has the ability to include this electronic information on the manual event (referred to as a "merged" event), the Industry Member should do so.

+

• If the Industry Member is not able to merge the manual and electronic information in a single manual event and elects to report the duplicate electronic message independently, such messages must be reported with the electronicDupFlag = true. Further, the manualOrderID may be populated with the Order ID of the original manual order. This is optional in Phase 2a, but will be mandatory in Phase 2c.

+

No linkage will be attempted for electronic duplicate events in Phase 2a.

+
+
-
pubdate: N/A effdate: March 15, 2017 -

6865. Time Stamp and Clock Synchronization Rule Violations

- Topic: FINRA Manual, Rules, 6800, Time Stamps and Clock Synchronization Rule Violations - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

4. Equity Events

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events + Compliance User: Industry Members Keywords: - Reporting, - Business Clocks, - Violation, + Equity Events, + SROs, + Industry Members, + ATS, + Agency Order Crosses, -

An Industry Member that engages in a pattern or practice of reporting Reportable Events with time stamps generated by Business Clocks that are not synchronized according the requirements set forth in this Rule Series without reasonable justification or exceptional circumstances may be considered in violation of this Rule.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

This section describes Reportable Events for equities that are Eligible Securities. The following table lists each equity event type with its corresponding Message Type code.

+

Events and data elements that are greyed out do not apply to Phase 2a.

+

Equity Events

+ + +
pubdate: February 28, 2019 effdate: N/A +

4.1. New Order Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Order Event + Compliance User: Industry Members + Keywords: + Industry Members, + CAT, + New customer orders, + Representative orders, + Proprietary orders, + non-reporting foreign broker-dealer, + ATS, + +

An Industry Member must report a New Order event to CAT when an order is received or originated. This includes:

+

• New customer orders4

+

• Representative orders5

+

• Proprietary orders

+

• Order(s) received from a non-reporting foreign broker-dealer or affiliate.

+

Note that an order received from another CAT Reporter (US broker-dealer, ATS or an exchange) must be reported as an Order Accepted event.

+

Phase 2a Representative Orders

+

In Phase 2a, linkage is required between the representative street-side order and the customer order or client order being represented when the representative order was originated specifically to represent a single order and there is:

+

• An existing direct electronic link in the Industry Member’s system between the order being represented and the representative order, and

+

• Any resulting executions are immediately and automatically applied to the represented order in the Industry Member’s system.

+

Phase 2c Representative Orders

+

Any scenario that does not meet the definition of Phase 2a representative order will fall into this category. The Industry Member must report a New Order event for the creation of the representative order in Phase 2a and flag the New Order event properly to indicate that it is a representative order. It is not mandatory to report the linkage to the underlying orders (the aggregatedOrders field) until Phase 2c.

+

Appendix C contains detailed descriptions of representative order scenarios and illustrates when marking of the representative order, linkage between the represented order and the representative order, and Order Fulfillment linkage is required in each phase.

+

The representativeInd is used to show whether an order is originated to represent a customer/client order and whether the linkage is present. It is required for all New Order events.

+

Note that all fields and values necessary to support Phase 2c linkages are included in this version of the specification and Industry Member Reporters may voluntarily report these linkages prior to the start of Phase 2c.

+

New Order Event Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Quote Key: date, reporter, symbol, quoteID (if applicable)

+

• Order Key: date, reporter, symbol, aggregatedOrders.Name

+
+
pubdate: February 28, 2019 effdate: N/A +

4.2. New Order Supplemental Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Order Supplemental Event + Compliance User: Industry Members + Keywords: + Supplement Event, + Name/Value Pairs, + CAT, + +

The Supplement Event serves as a supplement to the New Order event. This event accommodates reporting in two scenarios:

+

1) When the number of Name/Value pairs included under the aggregatedOrders field causes the New Order event to exceed the maximum allowed message length. Generally, this includes scenarios where so many orders are being aggregated together in a New Order that the number of Name/Value Pairs included in the field aggregatedOrders causes the message to exceed the allowed length.

+

2) When there is no explicit linkage to disparate orders when a representative order is generated. This supplement event can be used to capture the relationship of representative and disparate orders and submitted to CAT separately as an addition to the original New Order event.

+

This event can be submitted in the same file as the original New Order event or in a separate file, so long as it is submitted on the same date as the New Order event. One New Order event can have multiple New Order Supplement events. Multiple New Order Supplement events are considered as additions (not replacements or modifications). The aggregatedOrders field in the New Order Supplement event should only contain the additional Name/Value Pairs that have not been captured in the original New Order event (or another Supplement event for the same New Order).

+

New Order Supplement Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Order Key: date, reporter, symbol, aggregatedOrders.Name

+
+
pubdate: February 28, 2019 effdate: N/A +

4.3. Order Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route + Compliance User: Industry Members + Keywords: + Industry Member, + foreign broker-dealer, + Exchanges, + FINRA, + SEC Rule 201, + ATS, + +

An Industry Member must report to CAT an Order Route event when:

+

• Routing to another Industry Member

+

• Routing to foreign broker-dealers

+

• Routing to exchanges

+

• Routing between two IMIDs (e.g. two different FINRA MPIDs) attributed to the same legal entity (i.e. the same CRD)

+

• Routing partial quantities of an order (assigned using routedOrderID in routing message)

+

In order to maintain order lifecycle linkage, the orderID populated in the Order Route event must reflect any changes made to the orderID internally by the broker before routing the order. If, for example, an order was subject to a Cancel/Replace that changed the Order ID, then the value used for orderID in an Order Route event must reflect those changes - in other words, the most recent orderIDis used to reference the order.

+

Handling Instructions on the Order Route

+

The handling instructions included in this event should represent those on the routed order. If the handling instructions do not change from the Order Accepted or New Order associated with the order, Industry Members may use the handling instruction code "RAR" - routed as received, instead of repeating each individual handling instruction.

+

Notes

+

• Please note that internal routes to another desk or department within an Industry Member are not reported using the Order Route event; instead an Order Internal Route event is used. See the Order Internal Route section for more details.

+

Order Route Event Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, orderID

+

• Order Key: priorOrderDate (when present), reporter, symbol, orderID

+

• Route Link Key: date, senderIMID, destination, symbol, session, routedOrderID

+
pubdate: February 28, 2019 effdate: N/A +

4.3.1. Order Modify Route (Potential Phase 2c Event)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route, Order Modify Route (Potential Phase 2c Event) + Compliance User: Industry Members + Keywords: + SRO, + +

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a modified route event after reviewing Phase 2a/2b data and include event in Phase 2c, if necessary.>

+
+
pubdate: February 28, 2019 effdate: N/A +

4.3.2. Order Cancel Route (Potential Phase 2c Event)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route, Order Cancel Route (Potential Phase 2c Event) + Compliance User: Industry Members + Keywords: + SRO, + +

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a canceled route event after reviewing Phase 2a/2b data and include event in Phase 2c, if necessary.>

+
+
+
pubdate: February 28, 2019 effdate: N/A +

4.4. Order Accepted

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Accepted + Compliance User: Industry Members + Keywords: + CAT Reporter, + Industry Member, + ATS, + CAT, + foreign broker-dealer, + FINRA, + Equity Securities, + FINRA Rule 5320.02, + NBBO, + +

When an Industry Member receives a routed order from another CAT Reporter (i.e., Industry Member, ATS or exchange), then an Order Accepted event must be reported to CAT by the Industry Member receiving the routed order. As described in Order Route event, if an Industry Member accepts a routed order from another IMID belonging to the same Industry Member, i.e., the same CRD, an Order Accepted event must be reported.

+

Once all Industry Members are reporting to CAT, in all cases, the order reported with this event should have already been originated by another broker and reported upon origination with a New Order event. A New Order event represents the beginning of the order lifecycle in CAT, therefore a new customer order is represented with a New Order event - not an Order Accepted event. Similarly, orders received by an Industry Member from its non-broker-dealer affiliates or from a non-reporting foreign broker-dealer should be reported as a New Order event - NOT an Order Accepted event. (Note: At the start of Phases 2a and 2b, there will be some lifecycles beginning at Order Accepted event, as small Industry Members will not be required to report until a later phase).

+

Order Accepted Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Route Link Key: date, senderIMID, destination, symbol, session, routedOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.5. Order Internal Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route + Compliance User: Industry Members + Keywords: + Industry Member, + Order Accepted Event, + New Order event, + Child Order event, + CAT, + +

An Order Internal Route event must be reported when an order is passed to different departments or desks within the reporterIMID.

+

Although multiple reporterIMIDs may be attributed to a single Industry Member, routes between different IMIDs attributed to the same Industry Member are not considered internal routes.

+

Note that an Order Internal Route event does not follow the logic of sending / receiving two-sided reporting followed throughout the rest of these Industry M ember Technical Specifications. It is required to be reported from the perspective of the recipient desk. The Order Internal Route merely shows that an order was received by an internal destination and if a new orderID has been assigned to the order as a result of this Order Internal Route.

+

• Order Internal Route may also represent the routing of partial quantities of an order internally, and the practice of assigning those slices new orderIDs. In this case, multiple internal routes may occur on the same original orderID reported in an Order Accepted event or New Order event. Similarly, if an order is routed internally and then subsequently multiple slices are routed to yet another destination internally, this event should represent the receiving desk, quantities, and new orderIDs of those routed slices as received by the subsequent internal destination. This approach will allow CAT to track changes in orderID within an Industry Member as an order is passed between internal entities or partial quantities are routed to internal entities as slices of another order.

+

• The major difference between Order Internal Route and Child Order events is that Child Order event can only be used when no desk change or desk route happens. For example, some Industry Members may choose to first generate child orders using the Child Order event to represent slices of a parent order, then to route those slices internally to another desk (Order Internal Route event). This approach is also acceptable for CAT reporting and will not result in unlinked events.

+

Order Internal Route Modified and Order Internal Route Canceled are not required to be reported until Phase 2c.

+
pubdate: February 28, 2019 effdate: N/A +

4.5.1. Order Internal Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route + Compliance User: Industry Members + Keywords: + FINRA, + OTC Equity Securities, + FINRA Rule 5320.02, + +

Order Internal Route event is used to report routing within a reporterIMID as described above.

+

Internal Route Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Prior Order Key: date, reporter, symbol, priorOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.5.2. Order Internal Route Modified (Phase 2c)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route Modified (Phase 2c) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2c>

+
+
pubdate: February 28, 2019 effdate: N/A +

4.5.3. Order Internal Route Canceled (Phase 2c)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route Canceled (Phase 2c) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2c>

+
+
+
pubdate: February 28, 2019 effdate: N/A +

4.6. Child Order

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + Child Order event, + FDID, + +

CAT provides several ways to report parent/child order activity. The Child Order event is provided solely for the convenience of Industry Members to help model scenarios in which an order is split or sliced into smaller "child" orders that are handled independently of their parent order - in a way that best reflects each individual Industry Member’s system(s).

+

For example, in the scenario when Industry Members create independent child orders with new orderIDs, if the Child Order event is reported, then the changes of order IDs are captured. Afterwards, the Industry Member can reference each individual child order in any subsequent event by the new order ID. However, if no Child Order event is reported, then the Industry Member can only reference the order at the parent level by the order ID of the parent. There is no scenario in which the use of Child Order event is mandatory.

+

Notes:

+

• Child Order event can only be used when an order is sliced and assigned new order IDs within the same desk. An Order Internal Route event must be reported when routed to another desk.

+

• There is no limit to how many "generations" can be created through Child Order events. The parentOrderID will be the orderID of the most recent order, whether that was a New Order/Order Accepted or a previous Child Order.

+

• Child Orders must belong to the same FDID as the parent orders. Child Orders should not be used to create representative orders. If the FDID changes, a representative New Order event must be used and not a Child Order.

+

• Child Orders should not be used for equity legs of a multi-leg option order.

+

• This event only includes the key data elements and fields that may be changed from the parent order or that are required for linkage, i.e., certain key data elements from the parent order may not be changed when creating Child Orders.

+
pubdate: February 28, 2019 effdate: N/A +

4.6.1. Child Order Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Event + Compliance User: Industry Members + Keywords: + FINRA, + OTC Equity Securities, + NBBO, + +

Child Order Event

+ + +

Linakge keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Prior Order Key: date, reporter, symbol, parentOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.6.2. Child Order Modified

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Modified + Compliance User: Industry Members + Keywords: + CAT, + FINRA, + OTC Equity Securities, + Industry Members, + +

When the price, quantity or any Material Terms of the child order has been changed, a Child Order Modified event must be reported to CAT. This modification event is only used when the child order creation is reported to CAT in a Child Order event. As such, modifying a partial quantity internal route can not be reported in this event.

+

All attributes and Material Terms of the Order of a modified child order listed on this event should be reported when applicable, including the fields that remain unchanged.

+

Child Order Modified Event Field Specifications

+ + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Prior Order Key: date, reporter, symbol, priorOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.6.3. Child Order Canceled

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Canceled + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + +

If a child order is canceled, a Child Order Canceled event must be reported to CAT by the Industry Member.

+

Note that a partial cancellation can be reported either with a Child Order Modified event or Child Order Canceled event with leavesQty, depending on how it is handled by the Industry Member. If an actual Cancel message was used, the Industry Member should report a Child Order Canceled event to CAT. If a modify or cancel/replace message was used, a Child Order Modified event should be reported to CAT. This keeps the reported event in line with the action taken by the Industry Member.

+

Child Order Canceled Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+
+
+
pubdate: February 28, 2019 effdate: N/A +

4.7. Order Modified and Cancel/Replace Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Modified and Cancel/Replace Event + Compliance User: Industry Members + Keywords: + Material Term, + NBBO, + ATS, + +

When the price, quantity or any other Material Term of an order has been changed or when an order is cancel/replaced, an Industry Member must report an Order Modified event to CAT. This Order Modified event concerns both of the following scenarios:

+

1) A new order is generated (with a new Order ID) during the modification and completely replaces the prior order. In this case, the orderID field must capture the identifier for the new order. Additionally, the new order must be linked to the prior one through priorOrderID.

+

2) If the order ID remains the same during the modification, the priorOrderID must match orderID.

+

Note that in the first scenario, if the order has been modified several times, the priorOrderID must refer to the most recent order ID prior to this modification, which may not always be the original order ID.

+

Side is required to be reported, but side adjustments are only allowed for same-side changes (e.g., changes between short and long sell).

+

All attributes and Material Terms of the modified order listed on this event should be reported when applicable, including the fields that remain unchanged.

+

Order Modified and Cancel/Replace Event Field Specifications

+ + + + +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp), reporter, symbol, orderID

+

• Prior Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, priorOrderID

+

• Prior Order Key: priorOrderDate (when present), reporter, symbol, priorOrderID

+

• Route Link Key: date, symbol, receiverIMID, routingOrigin, session, routedOrderID

+

• Quote Key: date, reporter, symbol, quoteID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.8. Order Modified (Cancel/Replace) Supplement Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Modified (Cancel/Replace) Supplement Event + Compliance User: Industry Members + Keywords: + Order Modified event, + +

The Order Modified Supplement event serves as a supplement to the Order Modified event, just as the Supplement Event serves as a supplement to the New Order event.

+

Order Modified Supplement Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Order Key: date, reporter, symbol, aggregatedOrders.Name

+
+
pubdate: February 28, 2019 effdate: N/A +

4.9. Order Adjusted Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Adjusted Event + Compliance User: Industry Members + Keywords: + Order Modified event, + Industry Member, + FINRA, + OTC Equity Securities, + NBBO, + +

The Order Modified event requires the full state of the order be reported to CAT for each modify. However, there are some common cases where only the price or quantity are modified. If such changes are initiated by the Industry Member, which can occur frequently, the Order Adjusted event can be used in these situations. However, Order Adjusted events may not be used if a price or quantity change is initiated by a routing Industry Member.

+

The only types of modifications that are allowed to be reported with this event are changes to the side, price or quantity of the order.

+

• Side adjustments are only allowed for same-side changes (e.g., changes between short and long sell). The side only needs to be reported if it changes.

+

• If a price change is reported, then all three price fields (price, displayPrice, and workingPrice) must represent the current state of the order relative to price. The quantity fields can be omitted.

+

• Likewise, if a quantity change is reported, then all three quantity fields must represent the current state of the order relative to quantity. The price fields can be omitted.

+

When the display price or quantity changes as the result of a display ATS matching engine action and not from a customer instruction, an Order Adjusted event must be used (the Order Modified event cannot be used in this scenario).

+

Any modification that cannot be fully represented in this Reportable Event must be reported via the Order Modified event.

+

Order Adjusted Event Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, orderID

+

• Prior Order Key: date, reporter, symbol, priorOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.10. Order Canceled

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Canceled + Compliance User: Industry Members + Keywords: + Broker, + Order Canceled Event, + FINRA, + OTC Equity Securities, + +

The Order Canceled event is used in specific situations when an order is fully or partially canceled. Note:

+

• Partial cancellation of an order may be reported to CAT using either an Order Canceled event or an Order Modified event.

+

• This Order Canceled Event is only reported by the entity that performs the cancellation. Cancellations by away venues are not required to be reported. For example, if Broker B accepts an order from Broker A, and Broker B initiated a cancel on the order, then B is responsible for reporting the order canceled (not Broker A).

+

• Implicit order cancellations are not required to be reported to CAT (e.g., cancellation due to expiration of Time in Force.)

+

Order Canceled Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, orderID

+

• Order Key: priorOrderDate (when present), reporter, symbol, orderID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.11. New Quote

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote + Compliance User: Industry Members + Keywords: + NMS Securities, + OTC Equity Securities, + Industry Member, + NMS Plan, + New Quote Event, + Quote Modify event, + FINRA, + Symbol, + +

In Phase 2a, the following quotations must be reported:

+

• Quotes in NMS Securities sent to an exchange or the ADF

+

• Quotes in OTC Equity Securities received by an Industry Member CAT Reporter operating an inter-dealer quotation system.

+

• Quotes in OTC Equity Securities that meet the definition of bid or offer under the CAT NMS Plan sent by a broker-dealer to a quotation venue not operated by a CAT Reporter.

+

Quotes in OTC equity securities sent to an inter-dealer quotation system operated by an Industry Member CAT Reporter must be reported in Phase 2c.

+

The New Quote Event is used to report quotes in OTC equity securities. Quotes in NMS Securities sent to an exchange must be reported using the New Order and Route Events.

+

For two-sided quotes - bidPrice, bidQty, askPrice, and askQty must all be populated. For one-sided quotes both a quantity and a price field must be populated for either the bid or the ask.

+

Note that there is no Quote Modify event. The field priorQuoteID is used to report modifications to a previously reported New Quote. If the field priorQuoteID is populated with a value in the New Quote event, then this New Quote is considered to replace the quote described in the priorQuoteID field. In the case when quote ID does not change for a modified quote, the priorQuoteID and the quoteID (new) will have the same value.

+

Otherwise, if the field onlyOneQuoteFlag = true, any New Quote event offered by the same reporterIMID to the same destination in the same symbol will be considered canceled by CAT.

+

New Quote Event Field Specifications

+ + + +
pubdate: February 28, 2019 effdate: N/A +

4.11.1. Quote Received

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote, Quote Received + Compliance User: Industry Members + Keywords: + Industry Member, + Order Accepted Event, + +

When Quotes are sent to another Industry Member, that receiving Industry Member must report their receipt of the quote. Note that Industry Members do not have to report the quotes that they do not accept.

+

Quote Received Event Field Specifications

+ + +
+
pubdate: February 28, 2019 effdate: N/A +

4.11.2. Quote Canceled

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote, Quote Canceled + Compliance User: Industry Members + Keywords: + Industry Member, + ATS, + Quote Canceled events, + FINRA, + OTC Equity Securities, + + +

Quote Canceled Event Field Specifications

+ + +
+
+
pubdate: February 28, 2019 effdate: N/A +

4.12. Trade

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade + Compliance User: Industry Members + Keywords: + Trade Event, + Industry Member, + Reporting Exception Code, + Trade Side Details, + Internalized Trade, + Negotiated Trade, + +

Trade A Trade Event is used when the Industry Member acts as the executing broker and is required to report the trade for public dissemination purposes. When an Industry Member is not required to report the execution of a customer order for public dissemination purposes, an Order Fulfillment event must be used. See Section 4.13 Order Fulfillment for more details.

+

Note there are two circumstances where a Reporting Exception Code (REC) will be required on a Trade Event. The first is when an Industry Member executes a trade between two desks or departments involving two proprietary accounts of the firm, but because there is no change in beneficial ownership, no trade is reported for public dissemination. In this instance a REC of “P” should be used on the Trade Event. The second is when an Industry Member executes a trade and must report the trade via Form T. In this instance a REC of “F” should be used on the Trade Event.

+

Trade Side Details

+

Trade events are generally two-sided, containing information on both sides of the trade (with the exception of negotiated trades and internalized trades). The details of each side are reported in buyDetails and sellDetails respectively. The buyDetails must contain the orderID of the buy side of the trade and the sellDetails must contain the orderIDof the sell side of the trade. Side Details may contain only one orderID per side. If a single order is crossed against multiple orders, a separate Trade Event must be reported for the execution of each individual order.

+

Note that the data type Trade Side Details is described as a list of fields in the table immediately following the Trade event table. These are data elements such as an orderID associated with a side of the trade.

+

Internalized Trade

+

In the scenario where the Industry Member internalizes an order by filling it from a proprietary account, the Industry Member must report the orderID on the customer side and the FDID and the account type of the proprietary account on the firm side. No order ID is required on the firmSideDetails.

+

Negotiated Trade

+

If an execution occurs as the result of a negotiated trade between two Industry Members, both of the Industry Members, for CAT purposes, are considered to have executed the trade and must submit a Trade event with the negotiatedTradeSide marked appropriately. The negotiatedTradeSide indicates whether the Industry Member is performing a negotiated buy or negotiated sell in this execution. The Industry Member must capture the full details for its own side, while only the IMID of the contra-side.

+

Trades that are executed by a market maker as the result of a displayed quotation must be reported using the Trade as Result of Quote Event. See Section 4.12.2 for the reporting requirements for trades executed by a market maker as the result of a quote.

+
pubdate: February 28, 2019 effdate: N/A +

4.12.1. Trade Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade, Trade Event + Compliance User: Industry Members + Keywords: + Data Elements, + FINRA, + OTC Equity Securities, + National Securities Exchange, + NBBO, + Order Accepted Event, + New Order event, + +

The tables below describe the data elements to report agency cross or internalized orders by filling them from a proprietary account.

+

Trade Event Field Specifications

+ + +

Trade Side Details

+ + +

Linkage Keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, buyDetails.orderID

+

• Order Key: date, reporter, symbol, sellDetails.orderID

+

• Trade Key: date reporter symbol tradeID

+

• TRF Key: date, reporter, symbol, tapeTradeID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.12.2. Trade as the Result of a Quote

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade, Trade as the Result of a Quote + Compliance User: Industry Members + Keywords: + FINRA, + Quote event, + OTC Equity Securities, + National Securities Exchange, + +

If a trade is the result of a quote displayed by a market maker on an inter-dealer quotation system where the market maker is the executing broker under FINRA trade reporting rules and required to report the trade to the FINRA ORF, the Trade as the Result of a Quote event must be used to report the trade. The market maker is required to report the Quote ID of the quote from the inter-dealer quotation in order to link the quote to the trade.

+

Trade on a Quote Event Field Specifications

+ +

Trade on a Quote Side Details

+ + +

Linkage Keys for this Reportable Event:

+

• Order Key: date, reporter, symbol, buyDetails.orderID

+

• Order Key: date, reporter, symbol, sellDetails.orderID

+

• Order Key: date, reporter, symbol, buyDetails.quoteID

+

• Order Key: date reporter symbol sellDetails.quoteID

+

• Trade Key: date reporter symbol tradeID

+

• TRF Key: date, reporter, symbol, tapeTradeID

+
+
+
pubdate: February 28, 2019 effdate: N/A +

4.13. Order Fulfillment

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment + Compliance User: Industry Members + Keywords: + Industry Member, + CAT, + Order Fulfillment event, + +

The Order Fulfillment event is used to report the execution of a customer/client order that is not required to be reported for public dissemination purposes. Order Fulfillment reports are required for scenarios where a representative order was used to facilitate the execution of the customer/client order. Examples include orders executed on a riskless principal basis and orders executed on an agency basis via a representative agency order, such as in aggregation scenarios. An Order Fulfillment is also required when an order is routed to a foreign market and the resulting foreign execution is not captured by CAT. In this scenario, the Order Fulfillment is used to obtain the execution information for the customer order since such information is not otherwise available in CAT.

+

The Order Fulfillment event is designed to capture the customer/client details and the firm side details, which reflect the representative order details for the order used to execute the customer/client order. In Phase 2a, not all scenarios require the firm side details to be populated.

+

The field fulfillmentLinkType is used to indicate if the Industry Member (firm) side details are required. Below are the values allowed:

+

• Y – Representative Order; linkage required

+

• YF – Representative order; linkage required in future phase

+

• YP – Fill from pre-existing Principal order; linkage required

+

• FOR – No linkage required; Fulfillment on an order routed to a foreign destination

+

• O - Options Order Fulfillment

+

Appendix C contains detailed descriptions of representative order scenarios and illustrates when marking of the representative order, linkage between the represented order and the representative order, and Order Fulfillment linkage is required in each phase.

+
pubdate: February 28, 2019 effdate: N/A +

4.13.1. Order Fulfillment Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment, Order Fulfillment Event + Compliance User: Industry Members + Keywords: + Order Fulfillment event, + FINRA, + OTC Equity Securities, + Industry Member, + Order Accepted Event, + +

Order Fulfillment Event Field Specifications

+ + +

Fulfillment Side Details

+ +

Linkage Keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter, symbol, firmDetails.orderID

+

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter, symbol, clientDetails.orderID

+

• Order Key: firmDetails.priorOrderDate (when present), reporter, symbol, firmDetails.orderID

+

• Order Key: clientDetails.priorOrderDate (when present), reporter, symbol, clientDetails.orderID

+

• Fulfillment: date, reporter, symbol, fulfillmentID

+
+
+
pubdate: February 28, 2019 effdate: N/A +

4.14. Order Fulfillment Amendment

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment Amendment + Compliance User: Industry Members + Keywords: + Industry Member, + Order Fulfillment, + debit/credit, + FINRA, + OTC Equity Securities, + +

If the order fulfillment is amended, an amendment event must be reported to CAT with required details. This Reportable Event must capture the entire state of the fulfillment after it has been amended, even though some of the data elements may remain unchanged.

+

For example, an Industry Member has a trade correction from the exchange after the customer order has already been fulfilled. Subsequently, the Industry Member decided to amend the executed shares given back to the customer. In this scenario, both the original Order Fulfillment and Order Fulfillment Amendment events must be reported to CAT, even though they may happen on the same day. However, if the trade correction comes before any initial fulfillment has been made, and the Industry Member directly gives the corrected shares to the customer, then only one Order Fulfillment event is necessary to be reported.

+

If an Industry Member makes a correction via a debit/credit to the customer's account instead of modifying the executed shares given back to the customer, then the Industry Member does not need to report an Order Fulfillment Amendment event.

+

Note that the amendment reporting is only applicable to Order Fulfillment events, not the events reported to the TRF for media dissemination (which would have originally been reported as Trade events).

+

Order Fulfillment Amendment Event

+ + +

Linkage Keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter symbol firmDetails.orderID

+

, , . • Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter symbol clientDetails.orderID

+

• Order Key: firmDetails.priorOrderDate (when present), reporter, symbol, firmDetails.orderID

+

• Order Key: clientDetails.priorOrderDate (when present), reporter, symbol, clientDetails.orderID

+

• Fulfillment Key: date, reporter, symbol, fulfillmentID

+

• Prior Fulfillment Key: date, reporter, symbol, priorFulfillmentID

+
+
pubdate: February 28, 2019 effdate: N/A +

4.15. Post-trade Allocation (Phase 2c)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Post-trade Allocation (Phase 2c) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2c>

+
-
pubdate: N/A effdate: March 15, 2017 -

6870. Connectivity and Data Transmission

- Topic: FINRA Manual, Rules, 6800, Connectivity and Data Transmission - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

5. Single Leg Option Events

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events + Compliance User: Industry Members Keywords: - Data Transmission, - Connectivity, - CAT Reporting, - Agents, + Reportable Event, + Industry Members, + CAT, + SROs, -

(a) Data Transmission

-

Each Industry Member shall transmit data as required under the CAT NMS Plan to the Central Repository utilizing such format(s) as may be provided by the Plan Processor and approved by the Operating Committee.

-

(b) Connectivity

-

Each Industry Member shall connect to the Central Repository using a secure method(s), including but not limited to private line(s) and virtual private network connection(s).

-

(c) CAT Reporting Agents

-

(1) Any Industry Member may enter into an agreement with a CAT Reporting Agent pursuant to which the CAT Reporting Agent agrees to fulfill the obligations of such Industry Member under this Rule 6800 Series. Any such agreement shall be evidenced in writing, which shall specify the respective functions and responsibilities of each party to the agreement that are required to effect full compliance with the requirements of this Rule Series.

-

(2) All written documents evidencing an agreement described in paragraph (a)(1) shall be maintained by each party to the agreement.

-

(3) Each Industry Member remains primarily responsible for compliance with the requirements of this Rule 6800 Series, notwithstanding the existence of an agreement described in this paragraph (c).

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

This section describes Reportable Events for single leg option transactions. The following table lists each option Reportable Event type with its corresponding Message Type code.

+

Notes

+

•In Phase 2b, Industry Members are required to report CAT Industry Member Data related to Eligible Securities that are options and meet the definition of Simple Electronic Option Orders6, excluding Electronic Paired Option Orders.

+

Events and data elements that are greyed out do not apply to Phase 2b.

+

• The greyed out order events will not be supported in Phase 2b; any submission on unsupported event types will generate an error.

+

• If data elements are greyed out for Phase 2b on a supported order event, the fields will be supported7 though not required. The Industry Member may voluntarily report the elements in Phase 2b.

+

Linkages in Phase 2b

+

In Phase 2b, the definition of an electronic single option order will result in unlinked events within a single CAT Reporter. To address these expected unlinked events, two fields (priorUnlinked and nextUnlinked) are used as described below. The purpose of these fields is to identify that the immediately preceding or following event is not reportable in Phase 2b and is not present for linkage. An immediately preceding or following event may be a manual event, complex order event, or a paired order. The priorUnlinked and nextUnlinked fields have values to indicate why the immediately preceding or following event is not present.

+ +

One or both of these fields will be on all options event types as conditional. If an event does not have this field populated, linkage will be attempted.

+

Special circumstances of a complex order being represented as individual legs in Phase 2b

+

In the special circumstance of an Industry Member sending (receiving) a complex order electronically as individual legs of the complex orders, the preferred method of reporting is to suppress the events associated with these messages. If an Industry Member cannot do this, the Industry Member must populate the handlingInstructions field with 'CMPX' to indicate that the order (route) is part of a complex option order in Phase 2b. In addition, such voluntarily reported single leg orders must include a priorUnlinked or nextUnlinked flag of 'C', as applicable, to indicate they will not link to a related order at the sending (receiving) firm.

+

Summary of Option Order Events

+ + +
pubdate: February 28, 2019 effdate: N/A +

5.1. New Option Order Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, New Option Order Event + Compliance User: Industry Members + Keywords: + Industry Members, + CAT, + non-reporting foreign broker-dealer, + CMTA trades, + +

An Industry Member must report a New Option Order event to CAT when an order is received or originated. This includes:

+

• New customer orders8

+

• Representative orders

+

• Proprietary orders

+

• Order(s) received from a non-reporting foreign broker-dealer or affiliate.

+

Note that an order received from another CAT Reporter (US broker-dealer, ATS, or an exchange) must be reported as an Option Order Accepted event.

+

Representative Orders

+

Phase 2b Representative Orders

+

While there are fewer representative order scenarios for options than equities, to the extent they are used, representative orders will be treated the same as equity representative orders, including the phased reporting approach for such orders.

+

Specifically, in Phase 2b, representative orders and linkage to the represented order is required for simple, electronic orders between the representative street-side order and the customer or client order being represented, when the representative order was originated specifically to represent a single customer/client order and there is:

+

• An existing, direct electronic link in the Industry Member's system between the order being represented and the representative order, and

+

• Any resulting executions are immediately and automatically applied to the represented order in the Industry Member's system.

+

Any portion of a specific order handling scenario that involves a complex or paired order is not reportable until Phase 2d.

+

See Appendix C for a detailed description of representative order reporting.

+

Phase 2d Representative Orders

+

Any scenario that does not meet the definition of Phase 2b representative order will fall into this category, including any scenario involving a manual or complex order.

+

See the CAT Industry Member Reporting Scenarios document for detailed examples of how representative order scenarios for options are reported in Phase 2b.

+

New Option Order Event

+ + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+

• ComplexOrderKey: date, reporter, (complexOptionID), complexOrderID (Not applicable in Phase 2b)

+
+
pubdate: February 28, 2019 effdate: N/A +

5.2. Option Order Supplement Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Supplement Event + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
pubdate: February 28, 2019 effdate: N/A +

5.3. Paired Option Order (Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Paired Option Order (Phase 2d) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
pubdate: February 28, 2019 effdate: N/A +

5.4. Option Order Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route + Compliance User: Industry Members + Keywords: + Industry Members, + CAT, + +

Industry Members must report Option Order Route events to CAT when reporting the routing of option orders.

+
pubdate: February 28, 2019 effdate: N/A +

5.4.1. Option Order Route Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Route Event + Compliance User: Industry Members + Keywords: + CAT, + Industry Members, + foreign broker-dealers, + Exchanges, + FINRA, + Order Accepted Event, + foreign broker-dealer, + +

An Industry Member must report to CAT an Option Order Route Event when:

+

• Routing to other Industry Members

+

• Routing to foreign broker-dealers

+

• Routing to exchanges

+

• Routing between two IMIDs (e.g. two different FINRA MPIDs) attributed to the same legal entity (i.e. the same CRD)

+

• Routing partial quantities of an order (assigned using routedOrderId in routing message)

+

In order for CAT to maintain order lifecycle linkage, the orderID populated in the Option Order Route event must reference the most recent internal ID of the order. For example, if an order was modified before routing out, the Route Event must use the ID assigned on the order modification.

+

Internal routes to another desk or department within an Industry Member are not reported using the Option Order Route event; instead an Option Order Internal Route event is used. See the Option Order Internal Route section for more details.

+

Handling Instructions on the Option Order Route

+

The handling instructions included in this event should represent those on the routed order. If the handling instructions do not change from the Option Order Accepted or New Option Order associated with the order, Industry Members may use the handling instruction code "RAR" - routed as received, instead of repeating each individual handling instruction.

+

Option Order Route Event Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, orderID

+

• Order Key: priorOrderDate (when present), reporter, optionID, orderID

+

• Route Link Key: date, senderIMID, destination, optionID, session, routedOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.4.2. Option Order Modify Route Event (Potential Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Modify Route Event (Potential Phase 2d) + Compliance User: Industry Members + Keywords: + SROs, + +

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a modified route event after reviewing Phase 2a/2b data and include event in Phase 2d, if necessary.>

+
+
pubdate: February 28, 2019 effdate: N/A +

5.4.3. Option Order Cancel Route Event (Potential Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Cancel Route Event (Potential Phase 2d) + Compliance User: Industry Members + Keywords: + SROs, + +

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a canceled route event after reviewing Phase 2a/2b data and include event in Phase 2d, if necessary.>

+
+
+
pubdate: February 28, 2019 effdate: N/A +

5.5. Option Order Accepted

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Accepted + Compliance User: Industry Members + Keywords: + Industry Members, + CAT, + non-reporting foreign entity, + CMTA trades, + +

When an Industry Member receives a routed option order from another Industry Member or an exchange, then an Option Order Accepted event must be reported to CAT. As described in Options Order Route event, if an Industry Member accepts a routed order from another Industry Member, even though that IMID may attribute to the same Industry Member, i.e., the same CRD, an Order Accepted event must be reported.

+

Once all Industry Member are reporting, in all cases, the order reported with this event should have already been originated by another Industry Member and reported upon origination with a New Option Order event. A New Option Order event represents the beginning of the order lifecycle in CAT, therefore a new customer order is represented with a New Option Order event - not an Option Order Accepted event. At the start of Phase 2b, there will be some lifecycles beginning at Option Order Accepted event, as Small Industry Members are not required to report until a later phase.

+

Orders received from a non-reporting foreign entity or affiliate should be reported as a New Option event instead of an Option Order Accepted event.

+

Option Order Accepted Field Specifications

+ + + +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+

• Route Link Key: date, senderIMID, destination, optionID, session, routedOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.6. Option Order Internal Route

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route + Compliance User: Industry Members + Keywords: + Industry Members, + CAT, + Child Option Order event, + +

An Option Order Internal Route events must be reported when an order is passed internally to a different department or desk within a reporterIMID.

+

Although multiple reporterIMIDs may be attributed to a single Industry Member, routes between different IMIDs attributed to the same Industry Member are not considered internal routes.

+

Note that an Optional Order Internal Route event does not follow the logic of sending/receiving two-sided reporting followed throughout the rest of these Industry Member Technical Specifications. It is required to be reported from the perspective of the recipient desk. The Option Order Internal Route merely shows that an order was received by an internal destination and if a new orderID has been assigned to the order as a result of the Option Order Internal Route.

+

• An Option Order Internal Route may also represent the routing of partial quantities of an option order internally, and the practice of assigning those slices new orderIDs. In this case, multiple slices are routed to yet another destination internally - this event should represent the receiving desk, quantities, and new orderIDs of those routed slices as received by the subsequent internal destination. This approach will allow CAT to track changes in orderID within an Industry Member as an order is passed between internal entities or partial quantities are routed to internal entities as slices of another order.

+

• The major difference between Option Order Internal Route and Child Option Order events is that the Child Option Order event can only be used when no desk change or desk route happens. For example, some Industry Members may first choose to generate child orders using the Child Option Order event to represent slices of a parent order, then route those slices internally to another desk (Option Order Internal Route event). This approach is also acceptable for CAT reporting and will not result in unlinked events.

+

Option Order Internal Route Modified and Option Order Internal Route Canceled are not required to be reported until Phase 2d.

+
pubdate: February 28, 2019 effdate: N/A +

5.6.1. Option Order Internal Route Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Event + Compliance User: Industry Members + Keywords: + Symbol, + +

Option Order Internal Route event is used to report an order sent internally to another desk.

+

Option Order Internal Route Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.6.2. Option Order Internal Route Modify Event (Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Modify Event (Phase 2d) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
pubdate: February 28, 2019 effdate: N/A +

5.6.3. Option Order Internal Route Canceled Event (Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Canceled Event (Phase 2d) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
+
pubdate: February 28, 2019 effdate: N/A +

5.7. Child Option Order

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order + Compliance User: Industry Members + Keywords: + Industry Members, + +

The Child Option Order event is provided solely for the convenience of Industry Members to help model scenarios in which an order is split or sliced into smaller "child" orders that are handled independently of their parent order - in a way that best reflects each individual Industry Member's system(s).

+

For example, in the scenario when Industry Members create independent child orders with new orderIDs, if the Child Option Order event is reported, then the changes of order IDs are captured. Afterwards, the Industry Member can reference each individual child option order in subsequent events by the new order ID. However, if no Child Option Order event is reported, then the Industry Member can only reference the order at the parent level by the order ID of the parent. There is no scenario in which the use of a Child Option Order event is absolutely mandatory.

+

Notes:

+

• Child Option Order events can only be used when an order is sliced and assigned new order IDs within the same desk. An Option Order Internal Route event must be reported when routed to another desk.

+

• There is no limit to how many "generations" can be created using Child Option Order events. The parentOrderID will be the orderID of the most recent order, whether that was a New Option Order/Option Order Accepted or a previous Child Option Order.

+

• Child Option Orders must belong to the same FDID as the parent order.

+

• Child Option Orders should not be used for single legs of a multi-leg option order.

+

• This event only includes the key data elements and fields that may be changed from the parent order or that are required for linkage, i.e., certain key data elements from the parent order may not be changed when creating Child Option Orders.

+
pubdate: February 28, 2019 effdate: N/A +

5.7.1. Child Option Order Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Event + Compliance User: Industry Members + Keywords: + Industry Members, + contracts, + Reportable Event, + +

Child Option Order Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+

• Prior Order Key: date, reporter, optionID, parentOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.7.2. Child Option Order Modified Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Modified Event + Compliance User: Industry Members + Keywords: + CAT, + Material Terms of the Order, + +

When the price, quantity, or any Material Term of the child option order has been changed, a Child Option Order Modified event must be reported to CAT. This modification event is only used when the child option order creation is reported to CAT in a Child Option Order event. As such, modifying a partial quantity internal route cannot be reported in this event.

+

All attributes and Material Terms of the Order of a modified child option order listed on this event should be reported when applicable, including the fields that remain unchanged.

+

Child Option Order Modified Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+

• Prior Order Key: date, reporter, optionID, priorOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.7.3. Child Option Order Canceled

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Canceled + Compliance User: Industry Members + Keywords: + Canceled event, + Industry Member, + +

If a child option order is canceled, a Child Option Order Canceled event must be reported to CAT by the Industry Member.

+

Note that a partial cancellation can be reported either with a Child Option Order Modified event or Child Option Order Canceled event with leavesQty, depending on how it is handled by the Industry Member. If an actual cancel message was used, the Industry Member should report a Child Option Order Canceled event to CAT. If a modify or cancel/replace message was used, a Child Option Order Modified event should be reported to CAT. This keeps the reported event in line with the action taken by the Industry Member.

+

Child Option Order Canceled Event Field Specifications

+ +

Linkage Keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+
+
+
pubdate: February 28, 2019 effdate: N/A +

5.8. Option Order Modified and Cancel/Replace Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Modified and Cancel/Replace Event + Compliance User: Industry Members + Keywords: + Material Terms of the Order, + Industry Member, + contracts, + CMTA trades, + +

When the price, quantity or any other Material Terms of the Order has been changed or when an order is cancel/replaced, an Industry Member must report an Option Order Modified event to CAT. This Option Order Modified event concerns both of the following scenarios:

+

1) A new order is generated (with a new Order ID) during the modification and completely replaces the prior order. In this case, the orderID field must capture the identifier for the the order. Additionally, the new order must be linked to the prior order through priorOrderID.

+

2) If the Order ID remains the same during the modification, the priorOrderIDmust match the event orderID.

+

Note that in the first scenario, if the order has been modified several times, the priorOrderID must refer to the most recent orderID prior to this modification, which may not always be the original order ID.

+

Side is required to be reported, but side adjustments are only allowed for same-side changes (e.g., changes between short and long sell).

+

All attributes and Material Terms of the modified order listed on this event should be reported when applicable, including the fields that remain unchanged.

+

Option Order Modified and Cancel/Replace Event

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp), reporter, optionID, orderID

+

• Prior Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, priorOrderID

+

• Prior Order Key: priorOrderDate (when present), reporter, optionID, priorOrderID

+

• Route Link Key: date, optionID, receiverIMID, routingOrigin, session, routedOrderID

+
pubdate: February 28, 2019 effdate: N/A +

5.8.1. Option Order Modified Supplement Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Modified and Cancel/Replace Event, Option Order Modified Supplement Event + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
+
pubdate: February 28, 2019 effdate: N/A +

5.9. Option Order Adjusted Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Adjusted Event + Compliance User: Industry Members + Keywords: + CAT, + Option Order Modified event, + Reportable Event, + +

Industry Members must report to CAT the Option Order Modified event, which records the full state of the order reported to CAT on each modification. However, there are some common scenarios where only the order price and/or quantity of an order are modified. If such changes are initiated by the Industry member, the Option Order Adjusted event can be used. However, Option Order Adjusted events may not be used if a price or quantity change is initiated by a routing Industry Member.

+

• Price change only - the price field and leavesQty must be reported to represent the current state of the order with respect to price. The two conditionally-required quantity fields (quantity, minQty) can be omitted.

+

• Quantity change only - both conditionally-required quantity fields (quantity, minQty) and leavesQty must be reported. The price field can be omitted.

+

• Both price and quantity change - If both price and quantity change, all fields must be reported.

+

Any modification that cannot be fully represented in this Reportable Event must be reported via the Option Order Modified event.

+

Option Order Adjusted Event Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date, reporter, optionID, orderID

+

• Prior Order Key: date, reporter, optionID, priorOrderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.10. Option Order Canceled Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Canceled Event + Compliance User: Industry Members + Keywords: + CAT, + Broker, + Industry Member, + +

The Option Order Canceled event is used in specific situations when an options order is fully or partially canceled. Note:

+

• Partial cancellation of an order may be reported to CAT using either an Option Order Canceled event or an Option Order Modified event.

+

• This Option Order Canceled Event is only reported by the Industry Member that performs the cancellation. Cancellations by away venues are not required to be reported. For example, if Industry Member Broker B accepts an order from Industry Member Broker A, and Broker B initiated a cancel on the order, then B is responsible for reporting the order canceled (not Broker A).

+

• Implicit order cancellations are not required to be reported to CAT (e.g., cancellation due to expiration of Time in Force).

+

Option Order Canceled Field Specifications

+ +

Linkage keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, orderID

+

• Order Key: priorOrderDate (when present), reporter, optionID, orderID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.11. Option Order Fulfillment

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment + Compliance User: Industry Members + Keywords: + Industry Member, + contracts, + foreign non-reporting entity, + +

The Option Order Fulfillment event is designed to show an execution given back to the original option order(s), informing its customer/client of the number of contracts executed and at what price, that is not required to be reported for public dissemination purposes.

+

An Order Fulfillment event must be reported in the following scenarios:

+

• When an aggregated order executes, and the Industry Member gives back executed contracts to each order that was part of the aggregated order. An Option Order Fulfillment event will be reported for each order that was part of an aggregated order.

+

• When an Industry Member creates a “representative" multi-leg complex option order. If the representative order is executed, the Industry Member must report an Option Order Fulfillment event for each of the orders being represented.

+

• When an order is routed to a foreign non-reporting entity, the Industry Member must report an Option Order Fulfillment to represent the outcome of the order.

+

For the first two scenarios above, Phase 2b does not require explicit order linkage between the bunched or representative order and the "underlying" order. Prior to Phase 2d, the Order Fulfillment events only contain the clientDetails. The fulfillmentLinkType must be marked as "YF".

+

In the scenario of routing to a foreign non-reporting destination, the fulfillment event is always one sided (customer order only) and the fulfillmentLinkType must be marked as "FOR".

+
pubdate: February 28, 2019 effdate: N/A +

5.11.1. Option Order Fulfillment Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment, Option Order Fulfillment Event + Compliance User: Industry Members + Keywords: + Industry Member, + Option Order Accepted event, + +

Option Order Fulfillment Event Field Specifications

+ +

Options Fulfillment Side Details

+ +

Linkage Keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter optionID firmDetails.orderID

+

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter optionID clientDetails.orderID

+

• Order Key: firmDetails.priorOrderDate (when present), reporter, optionID, firmDetails.orderID

+

• Order Key: clientDetails.priorOrderDate (when present), reporter, optionID, clientDetails.orderID

+

• Fulfillment: date, reporter, optionID, fulfillmentID

+
+
pubdate: February 28, 2019 effdate: N/A +

5.11.2. Option Order Fulfillment Amendment Event

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment, Option Order Fulfillment Amendment Event + Compliance User: Industry Members + Keywords: + Industry Member, + CAT, + Option Order Fulfillment event, + +

If an order fulfillment is amended by an Industry Member on or after the trade date, an Option Order Fulfillment Amendment event is used. This Reportable Event must capture the entire state of the fulfillment after it has been amended, even though some of the data elements may remain unchanged.

+

For example, if an Industry Member fulfills its customer's/client's order on an average price basis or work the order through representative or bunched orders. Afterwards, when a trade correction or trade break comes from the exchange and subsequently changes the price or quantity of the fulfilled contracts, both the original Option Order Fulfillment event and the Option Order Fulfillment Amendment event would be reported to CAT.

+

The Option Order Fulfillment Amendment is not used in the following scenarios.

+

• If a customer order is worked directly in an Agency capacity (without any representing or bunching) and filled print-for-print, when a trade break or trade correction occurs, the Industry Member does not need to report a Fulfillment Amendment event.

+

• When a trade correction occurred same-day before the client order was fulfilled, only the Order Fulfillment event would be necessary to report to CAT, presuming it contained the updated (post-correction) average price.

+

• When an Industry Member fulfills an order and receives a trade break from the exchange, it is possible that the Industry Member may choose to take the delta (e.g. using an error account) without amending the manner by which the order was fulfilled.

+

Options Order Fulfillment Amendment Event Field Specifications

+ +

Linkage Keys for this Reportable Event:

+

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter optionID firmDetails.orderID

+

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter, optionID, clientDetails.orderID

+

• Order Key: firmDetails.priorOrderDate (when present), reporter, optionID, firmDetails.orderID

+

• Order Key: clientDetails.priorOrderDate (when present), reporter, optionID, clientDetails.orderID

+

• Fulfillment Key: date reporter optionID, fulfillmentID

+

• Prior Fulfillment Key: date, reporter, optionID, priorFulfillmentID

+
+
+
pubdate: February 28, 2019 effdate: N/A +

5.12. Linked Multi-Leg Option Order Events (Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Linked Multi-Leg Option Order Events (Phase 2d) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
+
pubdate: February 28, 2019 effdate: N/A +

5.13. Option Post-Trade Allocations (Phase 2d)

+ Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Post-Trade Allocations (Phase 2d) + Compliance User: Industry Members + Keywords: +

<Deferred - Not Required Until Phase 2d>

+
-
pubdate: N/A effdate: March 15, 2017 -

6880. Development and Testing

- Topic: FINRA Manual, Rules, 6800, Development and Testing - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

6. Submission Process

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process + Compliance User: Industry Members Keywords: - Connectivity, - Reporting, - Member Information, - Submission, - Order Data, - Testing, + CAT, -

(a) Development

-

(1) Connectivity and Acceptance Testing

-

(A) Industry Members (other than Small Industry Members) shall begin connectivity and acceptance testing with the Central Repository no later than August 15, 2018.

-

(B) Small Industry Members shall begin connectivity and acceptance testing with the Central Repository no later than August 15, 2019.

-

(2) Reporting Customer and Industry Member Information

-

(A) Industry Members (other than Small Industry Members) shall begin reporting Customer and Industry Member information, as required by Rules 6840(a) and 6850, respectively, to the Central Repository for processing no later than October 15, 2018.

-

(B) Small Industry Members shall begin reporting Customer and Industry Member information, as required by Rules 6840(a) and 6850, respectively, to the Central Repository for processing no later than October 15, 2019.

-

(3) Submission of Order Data

-

(A) Industry Members (other than Small Industry Members)

-

(i) Industry Members (other than Small Industry Members) are permitted, but not required, to submit order data for testing purposes beginning no later than May 15, 2018.

-

(ii) Industry Members (other than Small Industry Members) shall participate in the coordinated and structured testing of order submission, which will begin no later than August 15, 2018.

-

(B) Small Industry Members

-

(i) Small Industry Members are permitted, but not required, to submit order data for testing purposes beginning no later than May 15, 2019.

-

(ii) Small Industry Members shall participate in the coordinated and structured testing of order submission, which will begin no later than August 15, 2019.

-

(4) Submission of Options Market Maker Quote. Industry Members are permitted, but not required, to submit Quote Sent Time on Options Market Maker quotes, beginning no later than October 15, 2018.

-

(b) Testing

-

Each Industry Member shall participate in testing related to the Central Repository, including any industry-wide disaster recovery testing, pursuant to the schedule established pursuant to the CAT NMS Plan.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

In this section, information is provided regarding how to format submission files, submit to CAT (including a general data flow overview), the registration process, network and transport options, and CAT access and reporting hours.

+
pubdate: February 28, 2019 effdate: N/A +

6.1. File and Data Formats

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats + Compliance User: Industry Members + Keywords: + CAT, + ISO-8859-1, + +

All files sent from the CAT Reporter (or the third-party CAT Reporting Agent for the CAT Reporter) must be compressed, encrypted, and signed. However, the information in this section assumes, for the most part, that the file being described is the raw, unencrypted data (after being verified, decrypted, and uncompressed).

+

All files submitted on a given date must have a unique file name, as defined in 6.1.1. The mechanism used for uploading files will prevent duplicate file names from being accepted into the CAT system.

+

Archive files are not allowed to be submitted into the CAT System. Each set of records must be submitted as an individually compressed, encrypted, and signed file. For example: Do NOT zip, tar, or 7z all of the submitted files into one consolidated file. The files must be individually compressed, encrypted, and submitted.

+

All data elements are submitted using ISO-8859-1 encoding. This is a one-byte-per-character encoding, with possible values in the range of [0, 255]. This encoding has the characteristic that the encoding character definitions are the same as the first 256 code points of UTF-8. However, only fully defined values will be accepted.

+

According to the encoding specification, byte values in the ranges [0, 31] and [127, 159] are undefined. As a result, any record submitted with character values in those ranges will be rejected as invalid. In cases where data is echoed back in feedback files, invalid characters will be translated to a 3-character octal value, preceded by a backslash.

+
pubdate: February 28, 2019 effdate: N/A +

6.1.1. File Names

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, File Names + Compliance User: Industry Members + Keywords: + CAT Reported ID, + Encryption Extension, + +

Files are to be named in the following manner:

+

<CAT Reporter ID>_<Date>_[<Group>_]<File Kind>_<File Number>.<Extension>[.<Compression Extension>].<Encryption Extension>

+

• CAT Reporter ID is the unique ID assigned to the reporter by CAT

+

• Date is the calendar date for all events in the file in YYYYMMDD format - not the date the file was generated or reported

+

• Group is an optional reporter-defined string. It must either be missing, or composed of up to 20 alphanumeric characters. The field exists solely for reporters’ convenience. Other than file name validation, it is ignored by the CAT processor

+

• File Kind is “OrderEvents” for Industry Members

+

• File Number is the sequence number of this file, 6-digits long, left-padded with zeros The tuple (CAT Reporter ID, Date, File Kind, File Number) must be unique. The File Number determines the order that a file will be processed within a File Kind.

+

• Extension is the extension, representing the format of the data inside: json, csv

+

• Compression Extension is the extension representing the compression used to compress the data file: gz, bz2, xz, zip. It is only needed if compression is done outside of the encryption process. If your OpenPGP tool handles compression, Compression Extension should be left off

+

• Encryption Extension is the extension indicating that the file is encrypted and must be either .gpg or .pgp.

+
+
pubdate: February 28, 2019 effdate: N/A +

6.1.2. Metadata Files

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Metadata Files + Compliance User: Industry Members + Keywords: + CAT, + Reported ID, + +

For each data file that is uploaded to CAT, associated metadata must also be uploaded. Submitters may pair the metadata file one-to-one with the data file, so that when the "pair" is ready, both files can be moved and processed in a timely manner, or the submitter may choose to package multiple metadata "blocks" for multiple data files into one metadata file. But they must be for the same calendar date, reporter, on the same file version and by the same submitter. Each metadata "block" contains checksum and signing of the files that are submitted, which are needed to verify integrity and track provenance of the submissions.

+

The metadata file must be named in the following manner:

+

<CAT Reporter ID>_<Date>_[<Group>_]<File Kind>_<Metadata File Number>.<Extension>[.<Compression Extension>].<Encryption Extension>

+

• CAT Reporter ID, Date (and Group) must be consistent with the data file(s)

+

• Metadata file number is the sequence number of the metadata file, 6-digits long, left-padded with zeros The combination (CAT Reporter ID, Date, Metadata File Number) must be unique.

+

• Extension is .meta

+

• The metadata file must be first signed in cleartext, then compressed and then encrypted.

+

An Industry Member may use multiple metadata files for a day. If an Industry Member is uploading multiple metadata files, the Industry Member should set the doneForDay flag as false until the last metadata file is submitted for the date with doneForDay = true. Once a metadata file with doneForDay = true is received, this signals that the files submitted by the Industry Member are ready for the linkage discovery processing stage. However, this will not "close" the submission process. If an Industry Member discovers it needs to make additional data submissions, the Industry Member may continue to submit the additional data files with a new metadata file. If no metadata files for a trading day are flagged doneForDay = true, the doneForDay flag(s) those files will be automatically set to true upon submission deadline at 8:00AM.

+

The metadata file does not need to be compressed, but must still be encrypted and signed like the data file. The metadata file is in JSON format, and contains:

+

Metadata Files

+ +

The hashes are to be submitted as 64-character hexadecimal string encodings of the hash value.

+ +

If a metadata block in the file has an error, the erroneous block will be dropped, and proper corresponding feedback will be returned (see Section 7 for File Acknowledgment Feedback or Basic File Integrity Feedback). The rest of the "blocks" of the metadata file will continue to be processed. The reporter can resubmit the corrected metadata block in another metadata file.

+

Reporters can include the metadata for original data files and for correction files into one metadata file, as long as they are for the same reporter, submitter and calendar day.

+
+
pubdate: February 28, 2019 effdate: N/A +

6.1.3. Data Files

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files + Compliance User: Industry Members + Keywords: + JSON, + CSV Records, + +

All data files are either new-line delimited JSON objects, or new-line delimited CSV records. This means that for JSON, there is no top level object. Instead, the file acts as the top level container for each object. Each object is a normal JSON object, separated with a new-line (ASCII decimal 10, hex 0A). For CSV files, each record’s fields are separated with a comma (ASCII decimal 44, hex 2C).

+

Each JSON object is terminated by a new-line, but the data in the object itself must not include new-lines. Specifically, each line in the file must contain exactly one complete record, no matter whether the submission format is JSON or CSV. In either case, the total maximum length of any line is 4095 bytes. The examples in the document include new-lines between elements for readability.

+
pubdate: February 28, 2019 effdate: N/A +
6.1.3.1. JSON Schema
+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files, JSON Schema + Compliance User: Industry Members + Keywords: + JSON, + CAT, + +

JSON schema files for each record type will be provided on the CAT public website. Industry Members will be able to download and use these schemas to format and validate their CSV and JSON data files prior to submission. These schemas will also allow Industry Members to translate their data files from JSON to CSV or from CSV to JSON formats, as desired.

+

The schema files will be maintained by the Plan Processor and will be versioned as the message specifications change. The meta files submitted to CAT will contain a version identifier specifying which version of the schema the associated reference or order data was formatted in accordance with. This will allow the CAT System to perform a basic initial formatting validation of all submitted data.

+

Provided here is an abbreviated example of a JSON schema containing only part of the equity New Order event and a couple definitions for Choice fields:

+ + +

Note that the file is not a typical "JSON schema" but a schema describing the Reportable Events in JSON.

+

The field "JSONDataType" indicates the underlying JSON data type.

+

The field "dataType" is the actual type, as indicated in this specification, with some further restrictions over the underlying JSON data type.

+

The field "name" is the JSON field name. The "name" is also used as a lookup key to find valid values for a field of dataType "Choice."

+

Each field of dataType "Choice" will contain a corresponding entry in the "choices" object, which contains the list of valid choices. The key is the value in the name field. If the name field contains a '.' (period), then the value is part of a nested JSON object and the key will be the trailing name. For example, if the field has a Choice field with the name "buyDetails.side" then the field "buyDetails" contains a JSON object with a member named "side" and "side" would be used as the key to lookup the valid choices for the element.

+

The field "position" is the 0-based index where this field would be expected in a CSV version of the data.

+

The field "required" indicates whether the field is "Required," "Conditional," or "Optional." If submitting in JSON, any conditional or optional field that is not provided must be omitted. If submitting in CSV, and conditional or optional field that it not provided must be an empty column (i.e., in the following example position 2 is considered to be omitted: zero,1,,three).

+

Note that the Timestamp data type has two possible representations, so the JSONDataType is an array of choices: String for a formatted string and Number for nanoseconds since the epoch.

+
+
pubdate: February 28, 2019 effdate: N/A +
6.1.3.2. CSV Conversion
+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files, CSV Conversion + Compliance User: Industry Members + Keywords: + JSON Schema, + CAT, + +

The JSON schema defines valid data types, and mappings between JSON and CSV. Note that schemas can change with each specification version, and the authoritative schemas will be available on the CAT website. For this discussion, assume the following schema for an Equity Order Adjusted event. Provided here is an abbreviated example of a JSON schema containing only part of the Order Adjusted event and a couple definitions for Choice fields:

+ + +

The corresponding CSV would be:

+

MEOJ,20170901T120201.123456,E,false,,,XYZ,T12346,T12345,Customer,Buy,,,,1100, 100,100,,,,,,,,

+
+
+
+
pubdate: February 28, 2019 effdate: N/A +

6.2. Connectivity and Registration

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Connectivity and Registration + Compliance User: Industry Members + Keywords: + Network Access, + Industry Member Onboarding User Guide, + +

CAT supports network access for reporting order events via VPN or direct connections (i.e., cross connects).

+

More detailed information on connectivity and the registration process will be provided in the Industry Member Onboarding User Guide.

+
+
pubdate: February 28, 2019 effdate: N/A +

6.3. Transport Options

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options + Compliance User: Industry Members + Keywords: + Industry Member, + Administrative Information, + +

Industry Members may use different mechanisms (SFTP or the Reporter Web Portal) to send/obtain different types of information to/from CAT.

+

Basic types of CAT information:

+

1) Submissions (e.g. initial submission of files of order events, resubmission of files that were previously rejected, and corrections or deletions to previously accepted records;

+

2) Feedback (e.g. upload status, rejections, and reporting statistics); and

+

3) Administrative information.

+ +

SFTP submission allows file(s) only. If the submission is via the Reporter Web Portal, it may be sent by typing the information directly into the Web page or by submitting small files. The file size allowed via Reporter Web Portal is limited to 1GB before compression.

+
pubdate: February 28, 2019 effdate: N/A +

6.3.1. File Size, Encryption, and Compression

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options, File Size, Encryption, and Compression + Compliance User: Industry Members + Keywords: + File Compression, + Encrypting, + Metadata File, + +

Any files transmitted via SFTP or Reporter Web Portal must be 1) compressed AND 2) encrypted AND 3) signed, for the purpose of security and efficient network usage. The following compression algorithms will be allowed:

+

• ZIP (extension: zip)

+

• Gzip (extension: gz)

+

• BZip2 (extension: bz2)

+

• LZMA2 (extension: xz)

+

The size of files uploaded via SFTP is limited to 100GB per file, before compression and encryption. Resumable file upload is enabled for SFTP. The size limit for the Reporter Web Portal is 1GB per file, before compression and encryption.

+

Submission of data to CAT requires a number of supporting requirements that include security, confidentiality, authentication, and provenance of the data submitted. To achieve this the standard capabilities of PGP will be utilized and will require encrypting, signing, and secure hashing of data. While these steps must be followed, Submitters have a choice of compression algorithms, passphrase selection and length, as well as what tools they use on their platform. When encrypting a metadata file, the CAT public encryption key must be used. This public key will be made available to reporters. The file may also be encrypted with the public key of the submitter and the public key of the reporter. Encrypted files can only be decrypted by the private key corresponding with the public key used to encrypt the file; including the optional public keys of Submitter and Reporter ensures that private key holders of CAT, Reporter, and Submitter can decrypt the encrypted file.

+

Public/Private keys should be RSA with a bit length of at least 2048 (minimum and recommended), and up to 4096. Interested parties can read more at https://www.gnupg.org/faq/gnupg-faq.html Sections 13.3-4 are directly relevant. The cipher algorithm must be AES-256(recommended) or higher. When encrypting data files, the submitter may also sign the file with their private key. Metadata files must always be signed in cleartext, and then encrypted. All files must be compressed before, or with the encryption process. The digest algorithm used to sign the file must be SHA256. The signature should also be part of the encrypted file (i.e. no detached signatures). Once a file has been encrypted and/or signed, the extensions .pgp, .gpg, or .asc must be appended to the end of the filename; OpenPGP compliant tools will do this for you.

+
+
pubdate: February 28, 2019 effdate: N/A +

6.3.2. SFTP Upload Process

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options, SFTP Upload Process + Compliance User: Industry Members + Keywords: + STFP Upload, + +

Each file that is uploaded must follow these basic steps.

+

1. Upload the data file and the metadata file into the upload/transit directory, which will be at the base of the home directory for each sftp account.

+

2. Upon successful upload of both file types (the metadata file as well as all the data files covered by the metadata file), move all files into the upload/complete directory. Note that all files should be uploaded before moving either to the complete directory.

+

A file should never be directly uploaded into the upload/complete directory, as once a file has appeared there it is assumed to be the desired complete file submission. Only files that have a .pgp or .gpg extension will be processed.

+

The Plan Processor will remove files from the upload/complete directory. The Submitter should never attempt to delete files from the upload/complete directory.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

6.4. Accessing Feedback Information

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Accessing Feedback Information + Compliance User: Industry Members + Keywords: + CAT Feedback, + +
pubdate: February 28, 2019 effdate: N/A +

6.4.1. CAT Feedback

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Accessing Feedback Information, CAT Feedback + Compliance User: Industry Members + Keywords: + Receipts, + Failure Reports, + File Submission Status, + Reporting Statistics, + +

Multiple types of feedback will be provided to Industry Members through various mechanisms, dependent upon the type of feedback provided.

+

• Receipts - receipt of a file or the arrival of a file at the next stage of processing is provided in a feedback file. A File Acknowledgement Feedback File will be provided when each file is first received. A separate file will be generated when the file reaches each stage of processing. Processing stages (and thus feedback file types) vary based on the type of file being processed. Feedback files will be available via sftp. Receipt and feedback information will also be available via the Reporter Web Portal.

+

• Failure Reports - if records in a file are rejected, if an entire file is rejected, or if there are warnings generated by a file, the feedback file will detail which records were rejected, why they were rejected, and at which stage of processing they were rejected. Note that CAT will not completely reject a file at the INGESTION stage. (Please refer to Section 7 for more details on various processing stages and feedbacks.)

+

• File submission status - current processing status (whether a file has been received, which stage of processing a file is in, etc.) will be made available via the Reporter Web Portal.

+

• Reporting Statistics - reporting statistics will be made available via the CAT Reporter Web Portal on a daily basis, and are posted when processing for all files has completed. The daily statistics will include, at a minimum, the following information for order events and reference data:

+

• CAT Reporter ID

+

• Date of Submission

+

• Number of files received

+

• Number of files accepted

+

• Number of files rejected

+

• Number of total order events received

+

• Number of order events accepted

+

• Number of order events rejected

+

• Number of each type of report received

+

• Number of each type of report accepted

+

• Number of each type of report rejected

+

• Number of unknown accounts

+

• Number of late submissions

+

• Order-IDs rejected

+

• Reasons(s) for rejection

+

• Number of records attempted to be matched

+

• Number of records matched

+

• Percentage of records matched

+
+
+
pubdate: February 28, 2019 effdate: N/A +

6.5. CAT Reporting Hours

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, CAT Reporting Hours + Compliance User: Industry Members + Keywords: + Sec Rule 613, + CAT NMS plan, + +

Submission of Order Events

+

Pursuant to SEC Rule 613, the CAT NMS Plan requires Industry Members to record order events contemporaneously with the actual transactions themselves. Realtime reporting to CAT is not required. Data may be bulk uploaded at the end of the Trading Day, or may be broken into multiple batches and uploaded in pieces throughout the day. However, all Reportable Events for one Trading Day must be reported to CAT by 8:00 AM Eastern Time on the next Trading Day.

+

Trading Day for Industry Members is defined as:

+

• Start: immediately after 4:15:00PM and no fractions of a second Eastern Time on one trade date

+

• End: exactly 4:15:00PM and no fraction of a second Eastern Time on the next trade date (T=Trading Day, a defined term)9

+

Note that the Trading Day is only used to determine the reporting deadline of order events. It does not impact the date on the file name (calendar day) or the date used to create linkages (date on eventTimestamp). Additional details on reporting dates and deadlines are included in Appendix D.

+

CAT accepts submissions (via SFTP and Reporter Web Portal) 24 hours per day, 7 days per week, other than during announced scheduled maintenance. Events that occurred during a particular Trading Day may be reported anytime between the time the event occurred and the reporting deadline, which is 8:00 AM Eastern Time on the following Trading day. Reports received after the deadline will be marked late by CAT.

+

The table below gives some examples of the reporting deadline.

+ +

Deadline of Rejection Repair

+

Rejections willbe provided to Industry Members in the following order:

+

• File Format Validation Error

+

• Syntax and Semantics Error

+

• Context Issues

+

Once rejections are available, repairs can be made immediately.

+

In order to comply with the rule, all rejections that require repair should be repaired before 8AM Eastern Time on T+3 (transaction date + three Trading Days). Repairs received after the standard repair window will be classified as late.

+

If corrections are not received by 8AM Eastern Time T+5 (transaction date + five Trading Days), Participants’ regulatory staff and the SEC will be notified. The Plan Processor shall notify the Participants’ regulatory staff and the SEC as to how corrections submitted after T+5 will be re-processed. The Operating Committee will be involved with decisions on how to re-process the data.

+ +

Deadline for Corrections and Deletions

+

Sometimes an Industry Member will have occasion to correct a report that may have passed all data validation and integrity checks. All such corrections must be submitted within the same three day timeframe as provided for record repairs. Specifically, Industry Members will be provided the same T+3 window for submitting timely corrections to data.

+
+
pubdate: February 28, 2019 effdate: N/A +

6.6. Security

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Security + Compliance User: Industry Members + Keywords: + CAT, + Industry Member, + Submission or Correction, + +

In recognition of the importance of security, CAT has strict mechanisms for security controls. This section describes the CAT security overview and data security standards, to make sure the data is secured both during in transit and while stored in CAT.

+

Submission to CAT requires a valid user ID and password. Industry Members must obtain a master user ID and password combination during the CAT registration process.

+

Industry Members will also be assigned a multi-factor authentication (MFA) token during the registration process. An MFA token is required for authentication when accessing SFTP and Reporter Web Portal.

+

Order Submission or Correction via SFTP or Reporter Web Portal must be compressed and encrypted. All communication with the web portal is done through secure HTTPS, and all such activity is captured in system logs.

+

Industry Members are not allowed to view or download the actual data files from SFTP or Reporter Web Portal after submission. Data will be deleted from SFTP in a predefined time window, after it has been successfully processed and loaded into CAT data store.

+
pubdate: February 28, 2019 effdate: N/A +

6.6.1. Data Security Standard

+ Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Security, Data Security Standard + Compliance User: Industry Members + Keywords: + CAT, + CAT Private Key, + +

In addition to data transport security provided by TLS and SSH, CAT requires that the data be secure at rest. To achieve this, CAT recommends one of the supported, industry standard tools for encryption to be used. PGP, OpenPGP, and GPG (GNU Privacy Guard), in addition to OpenSSL may be used for both symmetric and asymmetric encryption and decryption.

+

Asymmetric encryption will be accomplished by the Industry Member using the Industry Member's private key and the CAT public key. Upon retrieval by CAT, the CAT private key will be used to decrypt the files. Should the Industry Member desire to be able to decrypt the data at another time, the Industry Member should encrypt with both the Industry Member's public key, as well as the CAT public key.

+

Automated systems are an anticipated component of CAT submission, error retrieval, and status monitoring, and automated access is permitted in limited roles.

+

CAT provides restricted automated (role based) sub-accounts with restricted access. Please note that automated access accounts must be associated with a person. These accounts will be permitted to use public security keys from their registered location. Public security keys will be registered via the Web portal, and associated with the restricted functional account. Should a Participant desire HSM support, most HSM devices allow public key extraction using commonly available tools from OpenSSL and OpenSSH, utilizing the pkcs12, ssh-keygen modules.

+
+
-
pubdate: N/A effdate: March 15, 2017 -

6890. Recordkeeping

- Topic: FINRA Manual, Rules, 6800, Recordkeeping - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

7. Feedback and Corrections

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections + Compliance User: Industry Members Keywords: - Recordkeeping, - Records, - SEA Rule 17a-4(f)(1)(i), - SEA Rule 17a-4(f)(1)(ii), + CAT, + Obtaining Feedback, -

Each Industry Member shall maintain and preserve records of the information required to be recorded under this Rule 6800 Series for the period of time and accessibility specified in SEA Rule 17a-4(b). The records required to be maintained and preserved under this Rule may be immediately produced or reproduced on "micrographic media" as defined in SEA Rule 17a-4(f)(1)(i) or by means of "electronic storage media" as defined in SEA Rule 17a-4(f)(1)(ii) that meet the conditions set forth in SEA Rule 17a-4(f) and be maintained and preserved for the required time in that form.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

This section describes the procedures for obtaining feedback and how to submit corrections, including different types of feedback messages, data elements, and formats of the correction reports. After data submission, CAT will conduct data validations, provide feedback to CAT Reporting Agents and Industry Members, and allow corrections to be submitted.

+

Feedback will be made available via the Reporter Web Portal, both in the form of a user-centric webpage and a programmable API.

+

For descriptions in this section, the CAT will consider a file to be successfully decrypted if and only if all of the decryption, decompression, and signature validation steps succeed.

+
pubdate: February 28, 2019 effdate: N/A +

7.1. Feedback Files

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Feedback Files + Compliance User: Industry Members + Keywords: + Data file, + JSON, + CSV, + Feedback File, + Reject File, + +

For each data file, there are two types of files generated at different stage of processing and returned to the Industry Member and CAT Reporting Agent as feedback - the feedback file and the reject file.

+

The format of the files will match the format of the original file submission in JSON or CSV.

+

These files will be available as soon as they are generated, and accessible under the corresponding directory on the feedback sftp server for both the CAT Reporting Agent and Industry Member. They will also be made available via the Reporter Web Portal. Note that the IP address of the sftp server where files are uploaded may differ from the IP address of the sftp server where receipts and rejects are placed.

+

• Feedback File

+

Receipts will be available as soon as they are generated in the form of a feedback file, accessible under a subdirectory of download/feedback in both the CAT Reporting Agent’s and Industry Member’s home directory on the feedback sftp server.

+

The exact subdirectory on the sftp server where feedback files may be found is:

+

download/feedback/<YYYYMMDD>/<CATReporterId>/

+

Where YYYYMMDD is the calendar date of the events in the submitted file.

+

Feedback from different stages of processing will have different file extensions. See the following sections for more details.

+

If there are failures or warnings, they will be available in the feedback file. It is possible for a record to have multiple failures, which will be represented by multiple JSON objects or new-line delimited CSV records within the failures array with the same record indexes.

+

• Reject File

+

If any of the ingestion failures correspond to specific records, a reject file (with extension .reject) will also be generated in the download/failures directory in the home directory of both the submitter and reporter. The reject filename will be included with the feedback record under the field rejectFile. The reject file will be populated with Correction Records containing the original rejected records and record index, to make corrections easier to submit (as described in the Corrections section). The record index is the offset from the beginning of the file to the first byte of the record.

+

Feedback files will have the same base name as the submitted file. The file name will be appended with an extension describing the feedback type and .pgp. It will be compressed, encrypted, and signed. Compression will be based on the compression preferences associated with the public keys used to encrypt the feedback file. The keys used will be the CAT Reporting Agent's key, Industry Member’s key (if different), and the CAT public key. It will be signed with the CAT private key. For example, if a file was submitted from CAT Reporter “MYID”, with the following name:

+

MYID_20170101_OrderEvents_000123.csv.gz.pgp

+

The following would be the filename for the acknowledgement feedback file:

+

MYID_20170101_OrderEvents_000123.ack.pgp

+

Filenames are considered unique using the base name of the file (i.e., after removing all suffixes). Thus, trying to upload files that differ only in extension would be considered an error for uploading files with duplicate filenames.

+ +

If multiple files are submitted with the same base name, but with different format or compression extensions, then a _<N> will be applied to the base name of the second and subsequent feedback file names, where N will be the iteration of the feedback file.

+

If multiple files are submitted with the same base name or CAT needs to provide feedback when reprocessing a file feedback, an _<N> will be applied to the base name of the feedback files to avoid overwrite of any feedback files contained at that time in the download directories.

+

Feedback files will be generated as each data file goes through various stages of processing. CAT will have four main processing stages, as described below:

+

1. File Acknowledgement

+

2. Basic File Integrity Check

+

3. Order Events - Ingestion

+

4. Order Events - Linkage Discovery

+

Please see the following sections for details of each stage.

+

Some stages will complete almost immediately, generating feedback shortly after the file has been uploaded (e.g. File Acknowledgement stage); other stages may take significant time, meaning that feedback could be delayed (either due to queuing behind other jobs, or because certain data elements are required to advance). For file acknowledgement, basic file integrity or ingestion stages, feedback will be provided as soon as the processing of each stage is completed. However, the feedback from linkage discovery phase, due to the dependency on other reporters' order events, will not be provided prior to noon on T+1, when all feedback is required to be returned.

+

The minimum retention time for feedback files on the sftp server is 10 business days; after that time they may be removed from the server. Feedback will continue to be available after that time via the Reporter Web Portal.

+

Failure codes are listed in Appendix E.

+
+
pubdate: February 28, 2019 effdate: N/A +

7.2. File Acknowledgement

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, File Acknowledgement + Compliance User: Industry Members + Keywords: + Receipt of Acknowledgment, + +

A receipt of acknowledgement will be generated for each file and metadata pair that appears in the upload/complete directory or uploaded via the Reporter Web Portal.

+

The data and metadata file should be moved into the upload/complete directory within a reasonable timeframe of each other. If a file is rejected (e.g., because the filename is not in the correct format or there is a timeout without seeing the associated data/metadata file), the receipt will contain a status of Failure and one or more failure codes with descriptions.

+

Files will be removed from the upload/complete directory after they are processed, though they may not be removed immediately after processing.

+
pubdate: February 28, 2019 effdate: N/A +

7.2.1. File Acknowledgement Feedback

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, File Acknowledgement, File Acknowledgement Feedback + Compliance User: Industry Members + Keywords: + CAT SUbmtter ID, + CAT Reporter ID, + Timestamp of Receipt, + +

An acknowledgement feedback file will have a .ack extension and will contain the following fields:

+

• CAT Submitter ID (as determined from sftp or web portal username)

+

• CAT Reporter ID (as determined from filename, if available)

+

• Timestamp of Receipt - timestamp file is received and receipt is generated

+

• Date (calendar date as submitted from filename, if available)

+

• File Name

+

• Feedback Version - the version of feedback file schema

+

• Status - Success or Failure

+

• Failures - a repeating group of failure codes and descriptions

+

• Severity - WARNING or ERROR

+

• Failure Code

+

• Failure Description

+

The following is an example JSON object for a successful file acknowledgement:

+ +

CSV presentation of a successful file acknowledgement:

+

Line 0 SUBID,MYID,20170307T153552.000001089,20170307, MYID_20170307_OrderEvents_000123.json.gz.pgp,0.1,Success

+

The following is an example JSON object for an unsuccessful file acknowledgement:

+ +

CSV presentation:

+

Line 0 SUBID,MYID,20170307T153552.000001089, 20170307,MYID_20170307_OrderEvents_000123.json.gz.pgp,0.1,Failure

+

Line 1 ERROR, FILE.TIMEOUT.001, Time out waiting for meta file

+
+
+
pubdate: February 28, 2019 effdate: N/A +

7.3. Basic File Integrity

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity + Compliance User: Industry Members + Keywords: + Metadata File, + +

When all the data file(s) and associated metadata file have been received, basic validation will begin. If the metadata file cannot be decrypted, a failure will be generated, and no further attempt will be made to process the file until a valid metadata file is uploaded. If there is an error for one 'block' of metadata within the file, the 'block' with the failure is dropped from processing but the remaining metadata 'blocks' and associated files will still be processed. The Industry Member can submit another metadata file with the corrected 'block' to complete processing.

+
pubdate: February 28, 2019 effdate: N/A +

7.3.1. Basic File Integrity Checks

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity, Basic File Integrity Checks + Compliance User: Industry Members + Keywords: + Matching Date, + Submitter, + Reporter, + Encrypted Size, + Encrypted Hash, + Decryption, + Compressed Hash, + Data Hash, + +

The values contained in the metadata file will be checked against properties of the corresponding data file. The following properties will be checked:

+

• Matching Date - the date part of the filename must match the metadata Date

+

• Submitter - metadata CAT Submitter ID must be the same as actual submitter (as determined from sftp or web portal username)

+

• Reporter - the CAT Reporter ID part of the filename must match the metadata CAT Reporter ID

+

• Encrypted Size - metadata Encrypted Byte Count must equal size of encrypted, received file

+

• Encrypted Hash - metadata Encrypted Hash must equal computed SHA256 of encrypted, received file

+

• Decryption - the data file must be successfully decrypted

+

• Compressed Hash - computed SHA256 must equal metadata Compressed Hash, if provided

+

• Data Hash - computed SHA256 must equal metadata Raw Hash, if provided

+

One or both of the Compressed Hash and Data Hash must be provided. If neither are provided, then the file will be rejected.

+

Note that all data elements in the metadata file are validated during this stage except Record Count, which will be validated when the file is actually processed.

+
+
pubdate: February 28, 2019 effdate: N/A +

7.3.2. Basic File Integrity Feedback

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity, Basic File Integrity Feedback + Compliance User: Industry Members + Keywords: + CAT SUbmtter ID, + CAT Reporter ID, + Timestamp of Receipt, + Feedback Version, + Status, + +

A basic file integrity feedback file will have a .integrity extension and will contain the following fields:

+

• CAT Submitter ID (as determined from sftp or web portal username)

+

• CAT Reporter ID (as determined from filename)

+

• Timestamp of Receipt - timestamp when receipt was generated

+

• Date

+

• Feedback Version - the version of feedback file schema

+

• Status - Success or Failure

+

• Failures - a repeating group of failure codes and descriptions

+

• Severity - WARNING or ERROR

+

• Failure Code

+

• Failure Description

+

The following is an example JSON object for a successful integrity check:

+ +

CSV conversion

+

Line 0 SUBID,MYID,20170307T153552.000001089,20170307,0.1,Success

+

The following is an example JSON object for an unsuccessful integrity check:

+ +

CSV conversion

+

Line 0 SUBID,MYID,20170307T153552.000001089,20170307,Failure

+

Line 1 ERROR,INT.META.001,Encrypted SHA does not match SHA in meta file.

+
+
+
pubdate: February 28, 2019 effdate: N/A +

7.4. Order Event Files

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Order Event Files + Compliance User: Industry Members + Keywords: + Records, + Order Event File, + +

Order Event files are composed of many different types of records. Any record determined to be malformed or otherwise invalid will be rejected as a failure.

+

• If the number of records in the file does not match the Record Count in the metadata file or metadata block, the entire file will be rejected.

+

• If an Order Event file contains anything other than expected order event messages, the entire file will be rejected.

+

Each field of the order event will be checked and validated, resulting in one of three states for the record: success, error, or warning. An error will prevent the record from being processed. A warning will not prevent the record from being processed, but may indicate that a record will be subject to errors during a later stage or processing. Depending on the type of warning, the record may be processed and ignored, or processed and applied to the data set. A record with only warning(s) but without error(s) do not require corrective action from the Industry Member.

+

For example, there are occasions where symbols are “delisted” late and may already have been referenced by some Industry Members (most likely in stage two). CAT allows incremental uploads throughout the day. Thus, their order event reports may contain opens and/or cancels for those symbols. Instead of rejecting these records, CAT will generate warnings for benign order actions and silently ignore them. Execution events for such symbols, however, will generate errors.

+

The system is backward compatible when there is a change or transition to a new version of reporting specifications. In such cases where the latest/preferred method is detectable, but not detrimental, a warning may be generated to inform the reporter on the details, but the record will still be accepted and processed by the system.

+
pubdate: February 28, 2019 effdate: N/A +

7.4.1. Order Event Feedback

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Order Event Files, Order Event Feedback + Compliance User: Industry Members + Keywords: + Ingestion, + Linkage Discovery, + +

The act of processing order events has multiple stages: ingestion and linkage discovery.

+

During the ingestion phase, each record will be checked for proper formatting (JSON field names and values, CSV values in proper columns, etc) and data contents. The defined JSON schemas for each record type will be used to validate every field of each record. The schema defines the format of each record and the data types and acceptable ranges of each value. In addition, it defines which fields are mandatory.

+

Fields whose value depends on context (and are not defined in the schema) will be validated by explicit rules to make sure that all requirements for their processing are followed.

+

Order events will be checked for both internal consistencies and valid relationships when referencing other orders or events from the same reporter.

+

The full lifecycle will be generated from the full set of order events, and any order that is not fully linked will be flagged as an error.

+

CAT will not completely reject a file at the ingestion or linkage discovery stage (once it passes the record count validation). Any file that passes the basic file integrity check will be fully scanned, and feedback will be provided for each of the records in the file.

+

Receipts will be generated for each phase. The feedback files will have the following extensions for each stage:

+

• INGESTION - .ingestion

+

• LINKAGE DISCOVERY - .linkage

+

The feedback files will contain the following fields:

+

• CAT Submitter ID

+

• CAT Reporter ID

+

• Timestamp of Receipt

+

• Date - Calendar date of the events/file

+

• Stage - INGESTION or LINKAGE_DISCOVERY

+

• Status - Success if all records in the file were accepted, Failure if some or all records were rejected, or Warning if some or all records have warnings

+

• Number of Accepted Records - this stage only

+

• Number of Rejected Records - this stage only

+

• Reject Filename - if present, contains the relative name of the file in the downloads/failures directory containing records that were rejected.

+

• Feedback Version - the version of feedback file schema

+

• Failures - a repeating group, each containing:

+

• Severity - WARNING or ERROR

+

• Failure Code

+

• Failure Description

+

• Original Record Index - if applicable, the 0-based byte index of the record in the submitted file

+

• Reject Record Index - if applicable, the 0-based byte index of the record in the Reject Report

+

• Firm ROEID - the value reported in the firmROEID field in the original Order Event if populated (otherwise blank)

+

The following is an example JSON object for a successful OrderEvents ingestion:

+ +

CSV presentation:

+

Line 0 SUBID,MYID,20170307T153552.000001089,20170307,INGESTION,Success,21 4513134,0,0.1

+

The following is an example JSON object for an unsuccessful OrderEvents normalization:

+ +

CSV presentation:

+

Line 0 SUBID,MYID,20170307T153552.000001089,20170307,INGESTION,Failure,21 4513132,2,MYID_20170307_OrderEvents_000002.rejects.pgp,0.1

+

Line 1 ERROR, OE.INGEST.014,Invalid value for TIF,123456,DESKP123456

+

Line 2 WARNING,OE.INGEST.009,Symbol has been delisted,654321,1234, DESKC56789

+
+
+
pubdate: February 28, 2019 effdate: N/A +

7.5. Co rrectio ns

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections + Compliance User: Industry Members + Keywords: + correction data files, + +

Corrections may be made manually via the web portal or uploading correction data files. If the entire file was rejected, then corrections should be submitted as repair records.

+

Corrections are due by T+3 at 8AM, where T is the CAT Trading Day. However, corrections may be made at any time, even if beyond the error correction timeframe.

+
pubdate: February 28, 2019 effdate: N/A +

7.5.1. Repair Records

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Repair Records + Compliance User: Industry Members + Keywords: + correction data files, + Repair of Data Files, + Reject Files, + +

Repair records may be submitted to correct or delete a previously submitted record. Both records that have been previously rejected and records that have already been accepted may be repaired.

+

Repair records should be submitted in a repair file in the same format (JSON or CSV) as the original file requiring corrections. (Reporters will not be allowed to submit a JSON repair file if the original file was submitted in CSV and vice versa.) The repair file may contain repair records from multiple original files, as long as all repair records for the same calendar date. The repair filename must contain the same Reporter ID, date (calendar date) and marked as "OrderEvents"', with the string "Corrections" appended, as well as the sequence number of the correction file. For example, if the original filenames with errors were MYID_20170101_OrderEvents_000123.[json|csv]and MYID_20170101_OrderEvents_000130.[json|csv] then the repair filename may be MYID_20170101_OrderEvents_Corrections_000001.[json|csv].

+

Metadata for the repair file may be submitted as its own meta file or as a metadata 'block' within a combined metadata file.

+

Metadata for the repair record should be valid for the repair record file, not the original files being repaired. For example, the Encrypted Hash and Encrypted Size should be the hash and size of the repair record file.

+

Each repair record will uniquely identify a record to repair using the 0-based index of the original record, combined with the original file number. If the record to be repaired cannot be identified, the repair record will be rejected. If a feedback file has a failure file associated with it, then the index will be pre-populated on Correction Records in the failure file to ease repair submissions. Otherwise, if correcting or deleting non-rejected records, the submitter will need to populate these fields itself.

+

Reject files (as indicated by the rejectFile field on some feedback records) can be used to submit corrections. Since the files are pre-populated with Correction Records, a file only needs to be downloaded, the appropriate changes to the contents of the record(s) made, and the file submitted with the appropriate file name.

+

Repair record files may contain delete and correction records only. If an invalid record type is detected in the file, then the entire file will be rejected.

+
+
pubdate: February 28, 2019 effdate: N/A +

7.5.2. Submitter Created Repair File Structure

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure + Compliance User: Industry Members + Keywords: + Original Data File, + +

In order to locate the original data file(s) to be corrected, the Reporter must list the original file numbers (of the original data file being corrected) in the metadata of the correction files. For example, if the correction file (correction file name: MYID_20170307_OrderEvents_Corrections_000001.JSON) contains the corrections or deletions for the following original data files:

+

• origFileName:"MYID_20170307_OrderEvents_000123.json"(origFileNumber=000123)

+

• origFileName:"MYID_20170307_OrderEvents_000130.json"(origFileNumber=000124)

+

Then metadata for this correction file must include "origFileNumber": [000123,000124]

+

For example:

+ +

The repairs records in the correction file are organized in a record change list. The repairs should be grouped by original file number.

+ +

In the CSV presentation, origFileNumber will be flattened into the first column of each line, and the repairRecords will be starting from the next columns. For the examples above, the CSV presentation will look like below.

+

Line 0 000123,DEL,456

+

Line 1 000123,DEL,5098

+

Line 2 000124,DEL,9005

+

Line 3 000124,DEL,12345

+
pubdate: February 28, 2019 effdate: N/A +
7.5.2.1. Delete Record
+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Delete Record + Compliance User: Industry Members + Keywords: + Record Type, + Original Record Index, + +

A delete record must contain the following fields:

+

• Record Type - DEL

+

• Original Record Index - the 0-based index of the record in the original file

+

The following is an example delete record:

+ +
+
pubdate: February 28, 2019 effdate: N/A +
7.5.2.2. Correction Record
+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Correction Record + Compliance User: Industry Members + Keywords: + Record Type, + Original Record Index, + Replacement Record, + +

A correction record must contain the following fields:

+

• Record Type - COR

+

• Original Record Index - the 0-based index of the record in the original file

+

• Replacement record - the corrected record

+

The following is an example correction record:

+ +
+
pubdate: February 28, 2019 effdate: N/A +
7.5.2.3. Repair File Sample
+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Repair File Sample + Compliance User: Industry Members + Keywords: + JSON, + +

Please see a sample of a repair file in JSON below:

+ +

CSV presentation:

+

Line 0 000123,DEL,456

+

Line 1 000123,DEL,457

+

Line 2 000124,COR,567,MENO,CORO98765,20170801T143031.123456,false,,, XYZ,O12345,N,O,,Buy,10.01,500,,LMT,DAY,REG,,false,PROP456,O,,, false,N,,,,,,,,,,,

+
+
+
pubdate: February 28, 2019 effdate: N/A +

7.5.3. rejectFile (CAT Provided) Format

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, rejectFile (CAT Provided) Format + Compliance User: Industry Members + Keywords: + CAT Provided Format, + +

The rejectFile that can be accessed in downloads/failures will be pre-populated with Correction Records. Below is an example of the rejectFile:

+ +

In the example above, two correction records are included and pre-populated with the original records as they were submitted. The submitter or reporter may simply modify the erroneous data elements, rename the file and submit it to CAT as the correction file.

+

Below is the CSV format presentation.

+

Line 0 COR,567,MENO,DESK98765,20170801T143031.123456,false,,,XYZ,O12345, N,O,,Buy,10.01,500,,LMT,DAY,REG,,false,PROP456,O,,,false, N,,,,,,,,,,,

+

Line 1 COR,8965,MENO,DESK12345,20170801T143035.123456,false,,,ABC,O56789, N,O,,Buy,100.01,200,,LMT,DAY,REG,,false,PROP456,O,,,false, N,,,,,,,,,,,

+
+
pubdate: February 28, 2019 effdate: N/A +

7.5.4. Repair Record Feedback

+ Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Repair Record Feedback + Compliance User: Industry Members + Keywords: + Record Files, + +

Repair record files will receive the same types of feedback as the file being repaired. Feedback for the repair records will be provided no later than noon T+3.

+

Note that if one record needs to be corrected more than once, all corrections must refer to the original record by the original file number (origFileNumber) and record index (recordIdx). If multiple corrections are submitted for one original record, the most recent correction - the correction file with the highest file number - will be treated as the valid version.

+

For example, if the Reporter submits a correction for original file MYID_20170307_OrderEvents_000123 (fileNumber = 000123, recordInd = 456) in a correction file MYID_20170307_OrderEvents_Corrections_000001. And later the Reporter desires to correct the same record again that overwrites the previous correction. Then the second correction (correction file name: MYID_20170307_OrderEvents_Corrections_000009) must still reference to the original file number and record index - fileNumber 000123 and recordInd 456. Between the two correction files, the one with larger file number (000009) will be treated as the most recent valid version of the record.

+
+
-
pubdate: N/A effdate: March 15, 2017 -

6893. Timely, Accurate and Complete Data

- Topic: FINRA Manual, Rules, 6800, Timely, Accurate and Complete Data - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

8. Testing

+ Topic: CAT Reporting Technical Specifications for Industry Members, Testing + Compliance User: Industry Members Keywords: - Report, - LEIs, - Error Rate, - Compliance Thresholds, + CAT, + Industry Member, + CAT System, -

(a) General

-

Industry Members are required to record and report data to the Central Repository as required by this Rule Series in a manner that ensures the timeliness, accuracy, integrity and completeness of such data.

-

(b) LEIs

-

Without limiting the requirement set forth in paragraph (a), Industry Members are required to accurately provide the LEIs in their records as required by this Rule Series and may not knowingly submit inaccurate LEIs to the Central Repository; provided, however, that this requirement does not impose any additional due diligence obligations on Industry Members with regard to LEIs for CAT purposes.

-

(c) Compliance with Error Rate

-

If an Industry Member reports data to the Central Repository with errors such that the error percentage exceeds the maximum Error Rate established by the Operating Committee pursuant to the CAT NMS Plan, then such Industry Member would not be in compliance with the Rule 6800 Series.

-

(d) Compliance Thresholds

-

Each Industry Member shall be required to meet a separate compliance threshold which will be an Industry Member-specific rate that may be used as the basis for further review or investigation into the Industry Member's performance with regard to the CAT ("Compliance Thresholds"). Compliance Thresholds will compare an Industry Member's error rate to the aggregate Error Rate over a period of time to be defined by the Operating Committee. An Industry Member's performance with respect to its Compliance Threshold will not signify, as a matter of law, that such Industry Member has violated this Rule Series.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+

CAT will provide an environment for testing that mirrors the current functionality of the CAT production environment, as well as including functionality for the next release version of the CAT environment when available. The CAT testing environment will automatically determine which specification version Industry Members and CAT Reporting Agents are using for submissions. If error reporting formats change, Industry Members and CAT Reporting Agents will receive feedback in the current and new specification via ftp, as well as have access to current/new web portal urls for specification changes that impact the web portal. Current/new connectivity changes will also be supported concurrently.

+

The testing environment performs lifecycle linkage, and Industry Members and CAT Reporting Agents are encouraged to coordinate testing with their counterparties so as to test lifecycle linkage with their counterparties. Without simultaneous contra-party reporting in the test environment, Industry Members and CAT Reporting Agents will not be able to test linkage with their counterparties.

+

Industry Members and CAT Reporting Agents should test their submissions using the testing environment before they begin submitting to the production environment.

+

The test environment is available 24 hours a day, 6 days a week. Refer to the CAT website for contact information and hours of operation for support.

+

Industry Members and CAT Reporting Agents connect to the test environment in the same manner they would connect to the production environment. However, for the connection to the test environment, one or more alternate IP/domains may be used.

+

Testing does not relieve an Industry Member of its responsibilities to submit production data to the CAT System.

-
pubdate: N/A effdate: March 15, 2017 -

6895. Compliance Dates

- Topic: FINRA Manual, Rules, 6800, Timely, Compliance Dates - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

9. Additional Information

+ Topic: CAT Reporting Technical Specifications for Industry Members, Additional Information + Compliance User: Industry Members Keywords: - Clock Synchronization, - CAT Data, - Reporting, + Public Website, -

(a) General

-

Except as set forth in paragraphs (b) and (c) of this Rule or otherwise set forth in this Rule Series, the compliance date for this Rule Series is the date of Commission approval.

-

(b) Clock Synchronization

-

(1) Each Industry Member shall comply with Rule 6820 with regard to Business Clocks that capture time in milliseconds commencing on or before March 15, 2017.

-

(2) Each Industry Member shall comply with Rule 6820 with regard to Business Clocks that do not capture time in milliseconds commencing on or before February 19, 2018.

-

(c) CAT Data Reporting

-

(1) Each Industry Member (other than a Small Industry Member) shall record and report the Industry Member Data to the Central Repository by November 15, 2018.

-

(2) Each Industry Member that is a Small Industry Member shall record and report the Industry Member Data to the Central Repository by November 15, 2019.

-

Adopted by SR-FINRA-2017-003 eff. March 15, 2017.

+
pubdate: February 28, 2019 effdate: N/A +

9.1. Public Website

+ Topic: CAT Reporting Technical Specifications for Industry Members, Additional Information, Public Website + Compliance User: Industry Members + Keywords: + www.catnmsplan.com, + +

The CAT Public Website, www.catnmsplan.com, is available via the public internet, and is hosted outside the CAT secure network. The CAT Public Website provides information about the CAT, such as a link to SEC Rule 613, Technical Specifications, FAQs, training materials, and CAT Help Desk contact information.

+

Web announcements will be made available on the public website (www.catnmsplan.com). You can also subscribe to receive email notifications regarding changes to the website. These announcements are used to post information related to the operation of CAT.

+

Please contact CATNMSIO@deloitte.com for any questions and/or feedback regarding this document.

+
-
pubdate: N/A effdate: Dec. 1, 2017 -

6898. Consolidated Audit Trail—Fee Dispute Resolution

- Topic: FINRA Manual, Rules, 6800, Fee Dispute Resolution - Compliance User: bfe292cc-1912-4c19-8cf4-49c80731102b +
pubdate: February 28, 2019 effdate: N/A +

Appendix

+ Topic: CAT Reporting Technical Specifications for Industry Members, Appendix + Compliance User: Industry Members Keywords: - Definitions, - Dispute, - Resolution, - Fee, - NMS Plan, - Procedures, - Submission of, - Application, - Hearing and Decision, - Review, - Petition, - Payment, + Change Release Management Process, + Clock Synchronization Requirement, + Representative Order Linkages, + CAT Date Definitions and Reporting Guidelines, + Failure Codes, -

(a) Definitions

-

(1) For purposes of this Rule, the terms "CAT NMS Plan", "Industry Member", "Operating Committee", and "Participant" are defined as set forth in Rule 6810 (Consolidated Audit Trail—Definitions).

-

(2) "Subcommittee" means a subcommittee designated by the Operating Committee pursuant to the CAT NMS Plan.

-

(3) "CAT Fee" means any fees contemplated by the CAT NMS Plan and imposed on Industry Members pursuant to FINRA Rules.

-

(b) Fee Dispute Resolution

-

Disputes initiated by an Industry Member with respect to CAT Fees charged to such Industry Member, including disputes related to the designated tier and the fee calculated pursuant to such tier, shall be resolved by the Operating Committee, or a Subcommittee designated by the Operating Committee, of the CAT NMS Plan, pursuant to the Fee Dispute Resolution Procedures adopted pursuant to the CAT NMS Plan and set forth in paragraph (c) of this Rule. Decisions on such matters shall be binding on Industry Members, without prejudice to the rights of any such Industry Member to seek redress from the SEC or in any other appropriate forum.

-

(c) Fee Dispute Resolution Procedures under the CAT NMS Plan

-

(1) Scope of Procedures

-

These Fee Dispute Resolution Procedures provide the procedure for Industry Members that dispute CAT Fees charged to such Industry Member, including disputes related to the designated tier and the fee calculated pursuant to such tier, to apply for an opportunity to be heard and to have the CAT Fees charged to such Industry Member reviewed.

-

(2) Submission and Time Limitation on Application to CAT NMS, LLC ("Company")

-

An Industry Member that disputes CAT Fees charged to such Industry Member and that desires to have an opportunity to be heard with respect to such disputed CAT Fees shall file a written application with the Company within 15 business days after being notified of such disputed CAT Fees. The application shall identify the disputed CAT Fees, state the specific reasons why the applicant takes exception to such CAT Fees, and set forth the relief sought. In addition, if the applicant intends to submit any additional documents, statements, arguments or other material in support of the application, the same should be so stated and identified.

-

(3) Procedure Following Applications for Hearing

-

(A) Fee Review Subcommittee

-

The Company will refer applications for hearing and review promptly to the Subcommittee designated by the Operating Committee pursuant to Section 4.12 of the CAT NMS Plan with responsibility for conducting the reviews of CAT Fee disputes pursuant to these Fee Dispute Resolution Procedures. This Subcommittee will be referred to as the Fee Review Subcommittee. The members of the Fee Review Subcommittee will be subject to the provisions of Section 4.3(d) of the CAT NMS Plan regarding recusal and Conflicts of Interest.

-

(B) Record

-

The Fee Review Subcommittee will keep a record of the proceedings.

-

(C) Hearings and Documents

-

The Fee Review Subcommittee will hold hearings promptly. The Fee Review Subcommittee will set a hearing date. The parties to the hearing (as described in paragraph (c)(4)(A) below) shall furnish the Fee Review Subcommittee with all materials relevant to the proceedings at least 72 hours prior to the date of the hearing. Each party shall have the right to inspect and copy the other party's materials prior to the hearing.

-

(4) Hearing and Decision

-

(A) Parties

-

The parties to the hearing shall consist of the applicant and a representative of the Company who shall present the reasons for the action taken by the Company that allegedly aggrieved the applicant.

-

(B) Counsel

-

The applicant is entitled to be accompanied, represented and advised by counsel at all stages of the proceedings.

-

(C) Conduct of Hearing

-

The Fee Review Subcommittee shall determine all questions concerning the admissibility of evidence and shall otherwise regulate the conduct of the hearing. Each of the parties shall be permitted to make an opening statement, present witnesses and documentary evidence, cross examine opposing witnesses and present closing arguments orally or in writing as determined by the Fee Review Subcommittee. The Fee Review Subcommittee also shall have the right to question all parties and witnesses to the proceeding. The Fee Review Subcommittee shall keep a record of the hearing. The formal rules of evidence shall not apply.

-

(D) Decision

-

The Fee Review Subcommittee shall set forth its decision in writing and send the written decision to the parties to the proceeding. Such decisions shall contain the reasons supporting the conclusions of the Fee Review Subcommittee.

-

(5) Review

-

(A) Petition

-

The decision of the Fee Review Subcommittee shall be subject to review by the Operating Committee either on its own motion within 20 business days after issuance of the decision or upon written request submitted by the applicant within 15 business days after issuance of the decision. The applicant's petition shall be in writing and specify the findings and conclusions to which the applicant objects, together with the reasons for such objections. Any objection to a decision not specified in writing shall be considered to have been abandoned and may be disregarded. Parties may petition to submit a written argument to the Operating Committee and may request an opportunity to make an oral argument before the Operating Committee. The Operating Committee shall have sole discretion to grant or deny either request.

-

(B) Conduct of Review

-

The Operating Committee shall conduct the review. The review shall be made upon the record and shall be made after such further proceedings, if any, as the Operating Committee may order. Based upon such record, the Operating Committee may affirm, reverse or modify, in whole or in part, the decision of the Fee Review Subcommittee. The decision of the Operating Committee shall be in writing, shall be sent to the parties to the proceeding and shall be final.

-

(6) Time Limit for Review

-

A final decision regarding the disputed CAT Fees by the Operating Committee, or the Fee Review Subcommittee (if there is no review by the Operating Committee), must be provided within 90 days of the date on which the Industry Member filed a written application regarding disputed CAT Fees with the Company pursuant to paragraph (c)(2) of these Fee Dispute Resolution Procedures. The Operating Committee may extend the 90-day time limit under this paragraph (c)(6) at its discretion.

-

(7) Miscellaneous Provisions

-

(A) Service of Notice

-

Any notices or other documents may be served upon the applicant either personally or by leaving the same at its, his or her place of business or by deposit in the United States post office, postage prepaid, by registered or certified mail, addressed to the applicant at its, his or her last known business or residence address.

-

(B) Extension of Certain Time Limits

-

Any time limits imposed under these Fee Dispute Resolution Procedures for the submission of answers, petitions or other materials may be extended by permission of the Operating Committee. All papers and documents relating to review by the Fee Review Subcommittee or the Operating Committee must be submitted to the Fee Review Subcommittee or Operating Committee, as applicable.

-

(8) Agency Review

-

Decisions on such CAT Fee disputes made pursuant to these Fee Dispute Resolution Procedures shall be binding on Industry Members, without prejudice to the rights of any such Industry Member to seek redress from the SEC or in any other appropriate forum.

-

(9) Payment of Disputed CAT Fees

-

(A) Timing of Fee Payment

-

An Industry Member that files a written application with the Company regarding disputed CAT Fees in accordance with these Fee Dispute Resolution Procedures is not required to pay such disputed CAT Fees until the dispute is resolved in accordance with these Fee Dispute Resolution Procedures, including any review pursuant to paragraph (c)(8). For the purposes of this paragraph (c)(9), the disputed CAT Fees means the amount of the invoiced CAT Fees that the Industry Member has asserted pursuant to these Fee Dispute Resolution Procedures that such Industry Member does not owe to the Company. The Industry Member must pay any invoiced CAT Fees that are not disputed CAT Fees when due as set forth in the original invoice.

-

(B) Interest on Unpaid CAT Fees

-

Once the dispute regarding CAT Fees is resolved pursuant to these Fee Dispute Resolution Procedures, if it is determined that the Industry Member owes any of the disputed CAT Fees, then the Industry Member must pay such disputed CAT Fees that are owed as well as interest on such disputed CAT Fees from the original due date (that is, 30 days after receipt of the original invoice of such CAT Fees) until such disputed CAT Fees are paid at a per annum rate equal to the lesser of (i) the Prime Rate plus 300 basis points, or (ii) the maximum rate permitted by applicable law.

-

Adopted by SR-FINRA-2017-020 eff. Dec. 1, 2017.

-

Selected Notice: 17-39.

+

A. Change Release Management Process

+

Following publication of version 1.0, changes to this Industry Member Technical Specification will be released as follows:

+

• All proposed amendments to the Technical Specifications will be made in accordance with the CAT NMS Plan, including being approved or deemed approved (as applicable) by the CAT NMS, LLC Operating Committee.

+

• Prior to the go-live date for any system changes set forth in the Technical Specifications:

+

o A new Technical Specifications will be posted to the CAT Public Website, www.catnmsplan.com.

+

o A notice will be posted on the CAT NMS Plan Public website with a summary of changes, the go-live date for the changes and links to relevant information.

+

o One or more email alerts will be sent to CAT Reporters with a summary of changes set forth in the revised Technical Specifications, the go-live date for the changes and links to relevant information.

+

o Industry Members will be permitted to perform testing of the revised Technical Specifications in advance of the go-live date for the changes. [Information on such testing will be set forth in the notices and alerts described above.]

+

o As the go-live date approaches, Industry Members will be able to conduct testing and will receive support from the Plan Processor to prepare for production reporting using the revised Technical Specifications format. The revised Technical Specifications will include a summary list of changes as well as a table listing the specific areas of the document where the changes have been made.

+

B. Clock Synchronization Requirement

+

In previous sections, details are described regarding Order Events and data elements. Timestamp, as one of the required data elements for each order event, must be correctly reported by Industry Members at predefined granularity. This section provides an overview of the corresponding clock synchronization requirements applicable to Industry Members.

+

In order to comply with applicable requirements of Clock Synchronization and correctly record the Timestamp fields for order events. Industry Members are required to synchronize Business Clocks at a minimum to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology (NIST) and to maintain such synchronization. Business clocks that are solely used for Manual Order Events or for the time of allocation on Allocation Reports must be synchronized at a minimum to within a one second tolerance.

+

The tolerance includes:

+

• The difference between the NIST standard and a time provider’s clock;

+

• Transmission delay from the source; and

+

• The amount of drift in the Participant's clock.

+

To ensure the accuracy of timestamps for Reportable Events, Industry Members must document and maintain their synchronization procedures for Business Clocks. Industry Members must keep a log of the time when they synchronize their Business Clocks and the results of the synchronization process. This log should include notice of any time a Business Clock drifts more than the applicable tolerances specified above. Such log must include results for a period of time of not less than five years ending on the then current date, or for the entire period for which the Industry Member has been required to comply with this Rule if less than five years. Industry Members must also certify their compliance with these clock synchronization requirements and report violations according to requirements established by the Operating Committee.

+

Any time provider and technology may be used for clock synchronization as long as the Business Clocks are in compliance with the accuracy requirement.

+

If additional details are needed, please refer to the Clock Sync User Guide to be published, or to Participants' applicable rules.

+

Note: The tolerance for clock synchronization does not impact the amount of time allowed for CAT reporting. CAT does NOT require Industry Members to report order information within 50 milliseconds of receiving an order.

+

C. Representative Order Linkages

+

The CAT NMS Plan requires that customer orders be linked to representative orders created in firm accounts for the purpose of facilitating the execution of a customer order. This Appendix outlines reporting requirements for creating linkages between customer and representative orders.

+

Phase 2a Requirements

+

1. Representative Order Reporting

+

In Phase 2a, representative orders must be reported to CAT and marked as a representative order. Representative orders are identified using the representativeInd field on New Order events.

+

Allowed values for this field include:

+

Y Representative order, linkage required

+

YS Representative order, linkage required; details in supplement event

+

YF Representative order, linkage required in future phase

+

YP Representative order, pricing guarantee, linkage not required

+

N Not a representative order

+

O Options Combined Order

+

2. Representative Order Linkages

+

In Phase 2a, linkage is required between the representative street side order and the order being represented when the representative order was originated specifically to represent a single order (received from a customer or another broker-dealer) and there is:

+

1) an existing direct electronic link in the Industry Member's system between the order being represented and the representative order, and

+

2) any resulting executions are immediately and automatically applied to the represented order in the Industry Member's system

+

Linkages are required between the customer/clients order and the representative order for both executed and unexecuted orders. Executed orders must also have a link between the Order Fulfillment Event for the customer/client order and the representative order from which the fill came.

+

The following fields are used in the linkage process:

+

At the Order Level

+

• representativeInd indicates if an order was originated to represent a customer/client order

+

• aggregatedOrders specifies the original order IDs and quantities being consolidated in the representative order

+

At the Order Fulfillment Level

+

• orderID contains the firm side order that was used to fill the customer order

+

• fulfillmentLinkType indicates whether there is order level and trade level linkage, only trade level linkage (e.g., fill from the pre-existing customer order), or why the firm side details are not present

+

Representative Order Marking and Linkage Requirements by Phase

+

Single Order Scenarios

+

The table below details requirements for both linkage and marking of a Representative Order in Single Order scenarios. These requirements are NOT applicable in situations where an electronic link does not exist between the Industry Member's OMS and EMS. Please refer to Data Dictionary for relevant field values. Pease refer to the CAT Industry Member Reporting Scenarios document for further information on how the relevant field values should be populated for each scenario.

+ + +

Aggregated Order Scenarios

+

[Placeholder for Phase 2c. Aggregated Order Reporting will be finalized and included in future version of the specification.]

+

D. CAT Date Definitions and Reporting Guidelines

+

The following key date terms are used throughout the document for reporting instructions:

+

• eventTimestamp: The time of the order handling or execution pursuant to Section 6.8 of the CAT NMS Plan (e.g. origination, receipt, etc., depending on the respective order event). The time is reported as per the calendar date of the order event.

+

• date (Linkage Keys): The date used for linkage keys is the date portion of the eventTimestamp (calendar date)10.

+

• date (File Name): The date used to create file names is the calendar date for all events in the file. The file must only contain records with the same calendar date as the file name.

+

• CAT Trading Day: Trading Day for Industry Members is defined as beginning immediately after 4:15:00PM and no fractions of a second Eastern Time on one trade date and ending at exactly 4:15:00PM and no fractions of a second Eastern Time on the next trading date.

+

• CAT Reporting Due By Date: All events that occurred by 4:15PM on one Trading Day must be reported by 8:00AM the following Trading Day.

+

Order Event Times and Reporting Deadlines

+

The table below illustrates the reporting deadlines for Order Events across multiple calendar days and CAT Trading Days.

+ +

Order IDs must be unique within the same calendar date. In the table above, the orderID in row 1 and 2 are distinct since both orders have a calendar date of 9/12. The Trading Day is not used for determining orderID uniqueness, as illustrated in rows 5 and 6.

+

The Trading Day for Industry Members is defined as starting 1 millisecond after 4:15PM on one trade date and ending 4:15PM on the next trade date. As shown in rows 1 and 2, events with a timestamp after 4:15PM (row 2) are considered to be the following trading date and are not due until T+1 at 8:00AM. Alternatively, Industry Members may submit one file one file per calendar day (the orders on rows 1 and 2 can both be submitted on a 9/12 file). The Trading Day only exists to determine the reporting deadline of an event, it does not impact the date used to create linkage or the file name.

+

Weekends are excluded from Trading Days. Events from 4:15PM on a Friday to 4:15PM the follow Monday are the same Trading day, but files must be separated by the calendar date (see rows 4, 5, and 6).

+

Holidays are also excluded from Trading Days. Hypothetically, if Monday 9/17 were are holiday in the example, the next available Trading Day becomes Tuesday 9/18.

+ +

E. Failure Codes11

+

The failure code is a machine-parseable string of why a file or record was rejected.

+

Each failure code is divided into a failure category, sub-category and value, joined together by a period.

+

<category>.<sub-category>.<value>

+

• Category and sub-category are defined as the table below. Each category corresponds to the stage of processing at which a file or record was rejected.

+

• Value will be an alphanumeric (12) code that represents a specific error or warning. The list of values will be refined and a complete list of codes and descriptions will be provided.

+ +

A failure code may be used for warnings or errors, distinguished by the severity field in the failure report. The failure code itself does not distinguish between a warning (in which a record is accepted but still shows up in the feedback report) and an error (which causes a record to be rejected).

+

A failure description is a human readable field returned with a failure code that informs a user which field failed, the value which was submitted (if applicable to the error), and why it is incorrect. The failure descriptions are specific to the type of field that has a failure and the original value used by the reporter.

+

For example, the following failure code tells the user the severity is an error, the failure was identified on an Order Event file during the ingestion stage, and the field originalOrderID is missing from the record.

+ +

The following failure code example was also identified on an Order Event file during the ingestion stage. The description informs the user that the value submitted is invalid as it was more than 40 characters in length.

+ +

Below is a sample of Failure Codes/Descriptions.

+

Not that this is not the final list nor a complete list. The code values will be refined to lower granularities.

+ +

F. Glossary

+ +

G. Data Dictionary

+ + + + + + + + + + + + + + + + + + + + + + + + + + + + +
+
fn +

1 Customers are defined in SEC Rule 613(j)(3) as: (i) the account holder(s) of the account at a registered broker-dealer originating the order; and (ii) any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

+
+
fn +

2 In order to create the linkage key between Industry Member Order Route Event (potentially Order Modify Route Event in 2c) and Participant Order Modified event, a change is planned for future phases of the Participant reporting - adding routingParty, session and routedOrderID to Participant Order Modified event.

+
+
fn +

3 Please see FAQ G4 (https://www.catnmsplan.com/faq/#faqManOrd) for additional information.

+
+
fn +

4 Note - this document refers to orders received from CAT Reporters as "client orders," and orders received from non-CAT Reporters, including non-US broker-dealers, as "customer orders."

+
+
fn +

5 A representative order is an order originated in a firm owned or controlled account for the purpose of working a customer/client order. Please see FAQ F1 (https://www.catnmsplan.com/faq/#faqRepOrd) for additional information.

+
+
fn +

6 “Simple Electronic Option Orders” mean orders to buy or sell a single option that are not related to or dependent on any other transaction for pricing or timing of execution that are either received or routed electronically by an Industry Member CAT Reporter. “Electronic Paired Option Orders” mean electronic option orders that contain both the buy and sell side that is routed to another Industry Member or exchange for crossing and/or price improvement as a single transaction on an exchange. Further, the events related to Simple Electronic Option Orders subject to reporting in Phase 2b are limited to those events which involve electronic receipt of an order, or electronic routing of an order. Electronic receipt of an order is defined as the initial receipt of an order by an Industry Member in electronic form in standard format directly into an order handling or execution system. Electronic routing of an order is the routing of an order via electronic medium in standard format from one Industry Member’s order handling or execution system to an exchange or another Industry Member.

+

For more details, please refer to the CAT FAQ K2 (https://www.catnmsplan.com/faq/#faqOpt).

+
+
fn +

7 For Industry Members reporting in CSV, the greyed out data elements will take empty columns if not populated.

+
+
fn +

8 Note - this document refers to orders received from CAT Reporters as "client order," and orders received from non-CAT Reporters, including non-US broker-dealers, as "customer orders."

+
+
fn +

9 Note that the Trading Day definition for Participants is different. It starts on 1 millisecond from 12:00AM of T, and ends at 12:00AM of T+1.

+
+
fn +

10 In the scenario when an order event needs to be linked to a prior event on a different date - e.g. modify a GTC order on a prior day - an additional field “priorOrderDate” is reported on the event and will be used in linking. However, it doesn’t impact the eventTimestamp or date in file name of the event itself.

+
+
fn +

11 Note that this section provides the structure of how failure codes are generated and concatenated. A final list of specific values and descriptions will be published when finalized.

+
\ No newline at end of file diff --git a/spider/files/data000003.html b/spider/files/data000003.html index 23e86b0..485ff1f 100644 --- a/spider/files/data000003.html +++ b/spider/files/data000003.html @@ -1,335 +1,27 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Industry Update on the Consolidated Audit Trail (CAT) - source: Industry Update - source_type: Notice + document_title: CAT NMS, LLC Advisory Committee + document_type: Advisory + source: US/SEC/Advisory/LLC Advisory Committee + source_type: LLC Advisory Committee language: English -
pubdate: 2017 effdate: N/A -

Industry Update on the Consolidated Audit Trail (CAT)

- Topic: BATS BZX Industry Update, Consolidated Audit Trail (CAT) - Compliance User: 9c3d20f0-eb09-4a1d-bdef-a2f9b7200102 + citation: N/A +
pubdate: February 28, 2019 effdate: N/A +

CAT NMS, LLC Advisory Committee

+ Topic: CAT NMS Plan, News, CAT NMS, LLC Advisory Committee + Compliance User: Broker-dealers Keywords: - NMS Plan, - LLC, - Rule 613, + SRO, + CAT NMS Plan -Section 4.3, + CAT NMS plan, + Role, + Member, + Organization, -

Overview

-

With the approval of the Consolidated Audit Trail (CAT) National Market System (NMS) Plan in 2016, and the selection of Thesys Technologies as the Plan Processor in early 2017, industry timelines for compliance with the CAT are in effect. The CAT NMS Plan requires exchanges, national securities associations, alternative trading systems, and broker-dealers to submit information on order and trade events for listed and OTC equities and listed options to the CAT on a daily basis, in addition to customer data.

-

On Thursday, September 7, 2017, at 4:15 PM EST, the CAT NMS, LLC Operating Committee will be hosting a Consolidated Audit Trail webcast to discuss current progress on the CAT. Representatives from the CAT NMS, LLC Operating Committee, as well as the CAT Plan Processor, Thesys CAT, will discuss upcoming milestones, requirements, and the timelines and process for development and delivery of the industry technical specifications for compliance with the CAT reporting requirements. The webcast will be recorded and playback will be available on the CAT NMS website (www.catnmsplan.com). Please see the below details for joining the webcast:

-

Toll Free: +1-888-455-5069

-

Passcode: 6495498

-

- Click here to join the virtual webcast (WebEx) -

-

We kindly ask that you share this alert with any interested parties.

-

Additional Information

-

For additional information on SEC Rule 613 and the CAT NMS Plan generally, please refer to www.catnmsplan.com. For additional information on the CAT compliance rules series applicable to Exchange Members, please refer to the following rule filings:

-

- SR-BatsBZX-2017-08 -

-

- SR-BatsBYX-2017-02 -

-

- SR-BatsEDGX-2017-08 -

-

- SR-BatsEDGA-2017-03 -

-

Please also refer to joint BYX, BZX, EDGA and EDGX Regulatory Circular 2017-003. Any questions about the CAT compliance rule series may be referred to the Regulatory Interpretations team at RegInterps@bats.com or (312) 786-8775. Any further questions may be directed to:

-

CBOE Bats Trade Desk

-

913.815.7001

-

tradedesk@bats.com

+

The CAT NMS Plan requires the establishment of an Advisory Committee to advise the SROs on the implementation, operation, and administration of the CAT, including items such as technical specifications, reporting functionality, and the possible expansion of the CAT to other securities.

+

The SROs have selected the following individuals, as per section 4.13 of the CAT NMS Plan, to serve on the Advisory Committee:

+
\ No newline at end of file diff --git a/spider/files/data000004.html b/spider/files/data000004.html index 39da4eb..09f8ee0 100644 --- a/spider/files/data000004.html +++ b/spider/files/data000004.html @@ -1,357 +1,1192 @@ - - jurisdiction: United States - authority: United States Court of Appeals 8th Circuit - content_type: Case - document_title: Brown v. Sandals Resorts Intern - source: Case Law -
pubdate: 2002-03-28T00:00:00 effdate: 2002-03-28T00:00:00 -

Brown v. Sandals Resorts Intern

- Topic: Banking Financial Services Review, Record Retention, Legal Standards - Compliance User: N/A + + jurisdiction: US + regulatory_authority: US/SEC + content_type: periodic + document_title: CAT NMS PLAN Clock Synchronization + document_type: Assessment + source: US/SEC/Assessment/Clock Synchronization Assessment + source_type: Clock Synchronization Assessment + language: English + citation: N/A +
pubdate: May 15, 2017 effdate: N/A +

CAT NMS PLAN Clock Synchronization

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization + Compliance User: Broker-dealers Keywords: - Legal Standards, - Retention Policies, - Statutes of Limitations, + File Number 4-698, + Consolidated Audit trail, -

United States Court of Appeals, Eighth Circuit Mar 28, 2002

-

284 F.3d 949 (8th Cir. 2002)

-

McMILLIAN, Circuit Judge.

-

Bill and Lynette Brown and Jan and Dorothy Anderson ("appellants") appeal from a final judgment entered in the United States District Court for the District of South Dakota upon a jury verdict in favor of Sandals Resorts International, Sandals Negril, Ltd., Unique Vacations, Inc., and Gorstew, Ltd. ("appellees") on appellants' claim of negligence. See Brown v. Sandals Resorts International, No. 99-4026-KES (D.S.D. Dec. 21, 2000) (denying appellants' motion for judgment as a matter of law or for a new trial) (hereinafter "slip op."). For reversal, appellants argue that the district court erred in submitting to the jury an instruction on appellees' act of God defense, and in refusing to instruct the jury about the adverse inference that could be drawn from appellees' alleged destruction of evidence. For the reasons discussed below, we affirm the judgment of the district court.

-

The Honorable Karen E. Schreier, United States District Judge for the District of South Dakota.

-

Jurisdiction

-

Jurisdiction in the district court was proper based on 28 U.S.C. § 1332. Jurisdiction is proper in this Court based upon 28 U.S.C. § 1291.Appellants filed a timely notice of appeal under Fed.R.App.P. 4(a)(1) (A).

-

I. Background

-

On February 3, 1998, appellants were vacationing at a Jamaican resort owned and operated by appellees. Bill Brown and Jan Anderson were sitting in lounge chairs on the beach when a palm tree fell and struck them. As a result of the palm tree falling on them, Anderson suffered a disabling tibial plateau fracture, and Brown suffered at least four broken vertebrae, a broken rib, renal contusion, and deep bruising and a large hematoma on his back. Appellants subsequently brought this negligence action against appellees, alleging that appellees were negligent in failing to care for and inspect the tree, that the tree fell because its root system and base were rotten and inadequate to support its weight, and that appellees failed to warn of the tree's hazardous condition.

-

On several occasions during the pretrial discovery phase, the district court sanctioned appellees for violations of the discovery rules. On July 21, 2000, appellants moved for Rule 37 sanctions against appellees because appellees failed to disclose photographs taken of the fallen tree and an incident report prepared immediately after the accident. On August 11, 2000, the district court granted in part appellants' motion for sanctions, finding that appellees had "engaged in a pattern of discovery abuse, such as failures to meet deadlines regarding discovery, evasive or nonresponsive answers to interrogatories, failure to answer interrogatories, and refusal to produce documents." The district court then prohibited appellees from introducing at trial any testimony or evidence that had not been previously disclosed.

-

The trial was conducted during the week of August 14, 2000. At trial, appellants introduced weather reports suggesting that the wind was not particularly forceful on the day the tree fell, and Brown, Anderson, and their spouses testified that it was not unusually windy. Appellants presented expert testimony from arborist Walter Barrows, who opined that the tree fell because its vascular system was damaged, as evidenced by a large scar on its trunk, and because its root system was inadequate to bear its weight. Barrows concluded that any person using generally accepted inspection principles would have discovered the hazard posed by the tree. Barrows also testified that he was unable to inspect the actual tree because appellees removed and disposed of the tree shortly after it fell, so he relied instead on photographs of the tree taken immediately after it had fallen. Barrows admitted, however, that he did not believe it would have done "any good" for him to conduct an onsite inspection because he was not retained until more than six months after the incident.

-

Appellees presented evidence to support their defense that the tree fell as the result of an act of God, and not due to any negligence on their part. The resort's general manager, Baldwin Powell, testified that it was "extremely windy" the night preceding the incident. Another resort guest, Matthew Bakalars, testified that it was very windy the day before the tree fell, and much windier than on previous days. Bakalars also testified that the tops of all of the trees on the beach were moving, causing debris to fall on the beach.

-

Appellees introduced expert testimony from Diane Clarke, a landscape consultant from Barbados, who testified that, in her opinion, the incident was the result of an act of God. Clarke testified that she visited the site more than two years after the incident, and discovered the tree's root ball where the tree had fallen. Clarke testified that she conducted a series of tests which indicated that no disease or other biological phenomena caused the tree to fall, that her investigation revealed that the wind was gusting the day of the incident, and that she found no evidence that an act of negligence caused the tree to fall. After ruling out biological factors and negligence, and considering the extreme wind, Clarke testified that the tree's falling could only be attributed to an act of God.

-

Clarke testified that she could not preserve the root ball because her business did not operate from Jamaica. She speculated that the resort staff probably would have disposed of it.

-

At the close of evidence, appellants moved for judgment as a matter of law on appellees' defense that the tree fell due to an act of God. The district court denied the motion and subsequently instructed the jury on the act of God defense. Appellants proposed a jury instruction on the adverse inference the jury could draw from appellees' alleged destruction of the tree's root ball. The district court rejected this proposed instruction as well, ruling that its instruction on appellees' failure to produce the evidence was sufficient.

-

With respect to the act of God defense, the district court instructed the jury, in part, that "The defendants have the burden of proving these issues: (1) [t]hat an act of God occurred; and (2) [t]hat such an act of God was the only legal cause of the palm tree's falling." The court also instructed the jury that "[a]n `Act of God' is defined as any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected could have been prevented."

-

Appellants' proposed destruction of evidence instruction stated as follows:

-

If a party or its expert witness destroyed or failed to preserve evidence under its or her control, you may infer that that evidence would not have been favorable to such party if you find that the party or expert witness knew or reasonably should have known of the existence of a dispute between the party and another.

-

With respect to the failure to produce evidence, the district court instructed the jury as follows:

-

If a party has the power to produce a witness or evidence but fails or refuses to produce such a witness or evidence, you may infer that the evidence or the testimony of that witness would not have been favorable to such party. This rule applies if and only if you find the following facts: (1) [t]he relationship between the party and the witness was of a nature whereby with exercise of reasonable diligence such party could have produced such witness, or the party, with the exercise of reasonable diligence, could have produce such evidence; and (2) [a] reasonably prudent person in the same circumstances would have produced such witness or evidence if the party believed the evidence or the testimony of such witness would be favorable; and (3) [n]o reasonable excuse exists for the failure of such party to produce such witness or evidence; and (4) [t]he witness or evidence was not equally available to the adverse party or parties.

-

On August 18, 2000, the jury returned a general verdict in favor of appellees, and the district court entered judgment on August 31, 2000. On September 14, 2000, appellants filed a renewed motion for judgment as a matter of law or for a new trial on the grounds that the district court erred in instructing the jury on the act of God defense and in refusing to instruct the jury on the adverse inference it could draw from appellees' alleged destruction of evidence. On December 21, 2000, the district court denied appellants' motion, holding that there was sufficient evidence to support the act of God instruction and that appellants had not been prejudiced by the instruction. See slip op. at 5-6. The district court also held that appellants' proposed destruction of the evidence instruction would have been repetitious and would have unduly emphasized this aspect of appellants' case, and that, in any event, appellants had not been prejudiced by the failure to give this instruction. See id. at 4-5. This appeal followed.

-

II. Discussion

-

A. Standard of Review

-

We review the jury instructions given by a district court for an abuse of discretion. See, e.g., B B Hardware, Inc. v. Hargis Indus., 252 F.3d 1010, 1012-13 (8th Cir. 2001) (emphasizing that "district court has broad discretion in instructing the jury, and jury instructions do not need to be technically perfect or even a model of clarity").

-

Our review is limited to whether the jury instructions, taken as a whole, "fairly and adequately represent the evidence and applicable law in light of the issues presented to the jury in a particular case." Ford v. GACS, Inc., 265 F.3d 670, 679 (8th Cir. 2001) (citation omitted) (affirming district court's refusal to submit defendant's proposed jury instructions on mitigation because defendant failed to meet initial burden). In a diversity case, the substance of the jury instructions must fairly and adequately represent the law of the forum state. See id. The jury should receive instructions on issues supported by competent evidence in the record; the trial court is not required to instruct on issues that do not find support in the record. See id. at 679-80. Moreover, even where a jury instruction is erroneously given to the jury, reversal is warranted only where the error affects the substantial rights of the parties. See Phillips v. Collings, 256 F.3d 843, 851-52 (8th Cir. 2001) (affirming ruling of district court, holding no reversible error because defendant "suffered no prejudice from the absence of more detailed instructions"); Burry v. Eustis Plumbing Heating, Inc., 243 F.3d 432, 434 (8th Cir. 2001) (Burry).

-

As an initial matter, appellees argued that appellants had failed to preserve their instruction objections for appeal because appellants did not formally object to the instructions at trial. We disagree. Appellants sufficiently made the trial court aware of their position with respect the jury instructions when they moved for judgment as a matter of law at the close of evidence. As this Court has previously stated,

-

[Rule 51 of the Federal Rules of Civil Procedure] does not require formality, and it is not important in what form an objection is made or even that a formal objection is made at all, as long as it is clear that the trial judge understood the party's position; the purpose of the rule is to inform the trial judge of possible errors so that he [or she] may have an opportunity to correct them.

-

Meitz v. Garrison, 413 F.2d 895, 899 (8th Cir. 1969) (citation omitted) (holding that plaintiff did not waive opportunity to assert error in jury instructions where trial court was fully advised of plaintiff's objections to trial court's jury instructions and defendant was not prejudiced by plaintiff's failure to literally comply with Rule 51).

-

B. Act of God Defense Instruction

-

Appellants first argue that the district court erred in instructing the jury on the act of God defense. Under South Dakota law, an act of God is defined as "any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected, could have been prevented." Northwestern Bell Telephone Co. v. Henry Carlson Co., 83 S.D. 664, 165 N.W.2d 346, 349 (S.D. 1969) (holding that whether damage was proximately caused by act of God is question of fact for jury to resolve, and that trial judge erred in taking issue away from jury). "An act of God must be the sole proximate cause of damages without concurrent negligent participation of the defendant before the defendant is entitled to a verdict." Id.

-

Appellants argue that the evidence at trial was insufficient to establish that the wind was so unusual and extraordinary a manifestation of nature as could not under normal conditions have been reasonably anticipated or expected, as is required for an act of God defense. However, because there was conflicting evidence presented at trial with respect to the wind, this argument is actually a challenge to the weight of the evidence presented, and not to its sufficiency as a matter of law. See id.

-

It is axiomatic that "[c]redibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." See Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000) (holding that district court was correct to submit case to jury, and court of appeals erred in reversing jury verdict); see also City of Bridgewater v. Morris, Inc.,594 N.W.2d 712, 715 (S.D. 1999) ("It is the jury's responsibility to judge the credibility of the witnesses and the weight to give to the evidence."). It was within the province of the jury to determine the credibility of the evidence that the unusual wind, and not concurrent negligence on the part of appellees, caused the tree to fall. There was ample evidence in the record from which a jury could reasonably find that an act of God — that is, the unusually strong winds — caused the tree to fall. See slip op. at 952. Resort guest Bakalars testified that it was very windy the day before the tree fell, and much windier than it had been on previous days. Resort manager Powell testified that it had been very windy the night before the incident. Expert witness Clarke testified that her investigation led to her conclude that wind caused the tree to fall. Apparently, the jury believed this evidence, and found that appellees were not negligent. See id. at 953.

-

Because there was sufficient evidence upon which the jury could determine that an act of God caused the tree to fall, we hold that the district court did not abuse its discretion in instructing the jury on the act of God defense.

-

C. Destruction of Evidence Instruction

-

Appellants next contend that the district court erred in refusing to give their proposed instruction on the adverse inference that could be drawn from appellees' alleged destruction of evidence by failing to preserve and produce the tree's root ball. Appellants insist that their proposed instruction would not have been repetitious of the failure to produce instruction, and point out that the most relevant South Dakota Pattern Jury Instruction refers to the failure to produce evidence as well as the destruction of evidence. Appellants also argue that they were entitled to such an adverse inference instruction as a sanction for the prejudicial destruction of evidence because they now cannot examine the root ball in order to refute the conclusions of appellees' expert witness.

-

South Dakota Pattern Jury Instruction 5-01-02, pertaining to the failure of a party to introduce documentary evidence, suggests the following language:

-

If a party has the power to produce evidence but fails or refuses to produce such evidence, you may infer that that evidence would not have been favorable to such party. This rule applies if and only if you find the following facts: (1) [t]he party, with exercise of reasonable diligence, could have produced such evidence; and (2) [a] reasonably prudent person in the same circumstances would have produced such evidence if the party believed that such evidence would be favorable; and (3) [n]o reasonable excuse exists for the failure of such party to produce such evidence; and (4) [t]he evidence was not equally available to the adverse party or parties.

-

If documents were destroyed by Defendants pursuant to a formal document destruction policy, in considering whether this is a reasonable excuse for the failure to produce the destroyed documents, you may consider the following factors: (1) [w]hether the record retention policy is reasonable considering the facts and circumstances surrounding the documents; (2) [w]hether lawsuits concerning customer complaints have been filed, the frequency of customer complaints, and the magnitude of such complaints; and (3) [w]hether Defendant instituted its document retention policy in bad faith in an attempt to limit the availability of damaging evidence to potential plaintiffs.

-

The district court instructed the jury that it could draw a negative inference from appellees' failure to produce the root ball. See op. at 951-52. When viewed in the light of the instructions as a whole, we cannot say that the district court abused its discretion in refusing to also give the proposed instruction regarding the adverse inference that could be drawn from appellees' alleged destruction of the evidence. The very inference that appellants sought to have the jury draw from their proposed instruction — that appellees' destruction of evidence indicated that the evidence was not favorable to appellees — could have been drawn from the failure to produce instruction that was given by the district court. We hold that the district court did not abuse its discretion in concluding that submitting the proposed instruction to the jury would have been overly repetitious and would have placed undue emphasis on this aspect of appellants' case. See id.at 952; see also Dupre v. Fru-Con Eng'g, Inc., 112 F.3d 329, 335 (8th Cir. 1997) ("Repetitious instructions that place undue emphasis on a certain aspect of a party's case so as to prejudice the jury require reversal.").

-

III. Conclusion

-

In sum, we hold that the district court did not abuse its discretion in submitting to the jury an instruction on the act of God defense or in refusing to instruct the jury about the adverse inference that could be drawn from appellees' alleged destruction of evidence. The judgment of the district court is affirmed.

-

BEAM, Circuit Judge, dissenting.

-

In my view, the evidence does not support the act of God affirmative defense instruction given by the district court. Thus, I would remand this case for a new trial. Upon remand, I would strike the answer of Sandals Resorts as a sanction for the contumacious conduct of its lawyer noted by the district court. Thus, I respectfully dissent.

-

This is an issue we review de novo. On questions of fact, we defer to the fact-finder, but the sufficiency of the evidence to create an issue of fact is a question of law. Cox v. Miller County R-I Sch. Dist., 951 F.2d 927, 931 (8th Cir. 1991). Accordingly, the court is wrong when it makes the matter a "weight of the evidence" question.

-

Reports that it was "very windy" the night before the incident, and that it was "very windy" the day before the tree fell, and "much windier than it had been on previous days" are simply insufficient as a matter of law to justify the act of God defense. Coastal resorts can "reasonably expect" very windy conditions on occasion, given the irregularity of coastal winds and weather, thus even the definition of "act of God" provided in the instant case was not satisfied by the evidence. Under South Dakota case law, an act of God is defined as "any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected, could have been prevented." Northwestern Bell Tel. Co. v. Henry Carlson Co., 83 S.D. 664, 165 N.W.2d 346, 349 (S.D. 1969). Mulder v. Tague, 85 S.D. 544, 186 N.W.2d 884, 886 (S.D. 1971), in passing, deals with the sufficiency of unusualness required for an act of God defense by stating that even though rainfalls in excess of four inches in a twenty-four-hour period had occurred only twice before in South Dakota, the third occurrence at issue in that case was not so unprecedented as to constitute a so-called act of God. Id.

-

Other jurisdictions note that "[t]he ordinary force of nature such as winds which are usual at the time and place are conditions which reasonably could have been anticipated and will not relieve from liability the person guilty of the original negligent act." Sky Aviation Corp. v. Colt,475 P.2d 301, 304 (Wyo. 1970). Courts consider whether the natural "occurrence and magnitude should or might have been anticipated, in view of the . . . history of the locality and the existing conditions affecting the likelihood of [the natural occurrence], by a person of reasonable prudence." Keystone Elec. Mfg. Co. v. City of Des Moines, 586 N.W.2d 340, 351 (Ia. 1998) (quotation omitted); see also McCutcheon v. TriCounty Group XV, Inc., 920 S.W.2d 627, 632 n. 2 (Mo.Ct.App. 1996) (holding that act of God defense "is only available where it is `an event in nature so extraordinary that the history of climatic variations in the locality affords no reasonable warning of their coming'" (citation omitted)). The Sandals Resorts, in this case, ought to have been held to a standard of proving that even though the winds were from natural causes, they were of such unusual and extraordinary manifestation of nature that they could not have been anticipated or expected. 1 AmJur 2d, Act of God §§ 2, 5 (1994); Sky Aviation, 475 P.2d at 304.

-

It is the defendants' burden in raising the act of God as a defense, to prove that the plaintiffs' damage was caused solely by an act of God. Northwestern Bell, 165 N.W.2d at 350. "[W]here an act of God and the negligence of a defendant concur and proximately cause damage, the defendant is liable as though his negligence alone had caused the damage. . . ." Id.

-

In their opening brief and in a motion to supplement the record, the appellants presented information supporting a finding that Sandals Resorts and its lawyer deliberately obstructed discovery in this case. It also appears, from affidavits and other filings in other cases, that this is standard operating procedure for Sandals' counsel in litigation involving the resorts. Based upon this additional information, it is clear to me that the sanctions imposed in this case were insufficient. The district court, as noted by the court's opinion today, found that Sandals' attorney had "engaged in a pattern of discovery abuse, such as failures to meet deadlines regarding discovery, evasive or nonresponsive answers to interrogatories, failure to answer interrogatories, and refusal to produce documents." These transgressions are all the more serious when the site of the incident and the location of evidence is several thousand miles away from the forum.

-

At a time when the ethics, civility and professionalism of the bar are under intense scrutiny, the courts cannot permit a "slap on the wrist" to suffice. A more appropriate remedy for this type of conduct would have been to direct liability against the defendants or, at least, to strike the defendants' answer and require trial on a general denial of negligence, causation, liability and damages.

-

I dissent.

+

May 15, 2017

+

Brent J. Fields

+

Secretary

+

Securities and Exchange Commission

+

100 F Street, NE

+

Washington, DC 20549-1090

+

Re: File Number 4-698

+

National Market System Plan Governing the Consolidated Audit Trail Clock Synchronization Assessment

+

Dear Mr. Fields:

+

In accordance with Section 6.6(a)(ii) of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”),1 the Operating Committee2 for CAT NMS, LLC respectfully provides the Securities and Exchange Commission (“SEC” or “Commission”) with this assessment of the clock synchronization standard for the Consolidated Audit Trail (“CAT”), including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and recommendation for appropriate amendments based on this assessment.3 This Assessment is divided into four sections: (1) executive summary; (2) description of current clock synchronization requirements under the CAT NMS Plan; (3) description of the CAT Clock Synchronization Survey (the “Survey”), including responses to the Survey; and (4) an assessment of the current clock synchronization requirements based on the analysis of the data collected in the Survey, including whether the current requirements should be amended.

+
pubdate: May 15, 2017 effdate: N/A +

I. Executive Summary

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Executive Summary + Compliance User: Broker-dealers + Keywords: + CAT NMS Plan - Section 6.6, + Participants, + CAT Reporting, + +

As previously noted, Section 6.6(a)(ii) of the CAT NMS Plan requires that the Participants provide the SEC with an assessment of the clock synchronization standard, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and a recommendation for appropriate amendments based on this assessment. To prepare this assessment, the Participants sought information regarding Industry Members’ clock synchronization practices through the Survey. This assessment provides a summary of the results of this Survey. Based on an analysis of the results of the Survey as well as information about Participant clock synchronization practices, the Participants do not believe that it is necessary or appropriate to amend the Business Clock synchronization requirements set forth in the Plan at this time. The Participants believe this assessment is consistent with the SEC’s finding that the current 50 milliseconds standard for Industry Members “is acceptable for the initial phase of CAT reporting.”4 The Participants will reassess whether the Business Clock synchronization requirements remain consistent with industry standards – or whether it may be necessary to amend such requirements – in the future as part of the annual assessment required by Section 6.8(c) of the Plan; however, the Participants note that the first annual assessment will occur before the initial phase of Industry Member CAT reporting.

+
+
pubdate: May 15, 2017 effdate: N/A +

II. Current Clock Synchronization Requirements

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Current Clock Synchronization Requirements + Compliance User: Broker-dealers + Keywords: + CAT NMS Plan - Section 6.8, + Participants, + CAT Reporting, + Business Clocks, + Industry Member, + SEC, + Clock Synchronization, + +

Section 6.8 of the CAT NMS Plan sets forth the clock synchronization requirements related to the CAT for Participants and Industry Members. With regard to Participants, Section 6.8(a)(i) of the Plan requires each Participant to synchronize its Business Clocks at a minimum to within 100 microseconds of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards, except for Business Clocks used solely for Manual Order Events. Section 6.8(a)(iii) of the Plan requires each Participant to synchronize its Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization.

+

With regard to Industry Members, Section 6.8(a)(ii) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks at a minimum to within 50 milliseconds of the time maintained by NIST, except for Business Clocks used solely for Manual Order Events or the time of allocation on Allocation Reports, and maintain such a synchronization. Section 6.8(a)(iii) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Section 6.8(a)(iv) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Each Participant has adopted rules requiring its Industry Members to comply with these clock synchronization requirements.5

+

In approving the Plan, the SEC noted that the 50 milliseconds standard was reasonable for the initial implementation of the CAT.6 The SEC stated further that it “believes that a standard of 50 milliseconds for Industry Members will allow regulators to sequence orders and events with a level of accuracy that is acceptable for the initial phases of reporting.”7 Nevertheless, the SEC stated further that it:

+

believes that it is appropriate for the Participants to consider the type of CAT Reporter (e.g., Participant, Industry Member), the type of Industry Member (e.g., ATS, small broker-dealer), and type of system (e.g., order handling, post-execution) when establishing appropriate industry standards. The Commission does not believe that one industry standard should apply across all CAT Reporters and systems.8

+

Accordingly, the Commission amended Section 6.8(c) of the Plan to state that industry standards for purposes of clock synchronization should be determined based on the type of CAT Reporter, type of Industry Member and type of system. In recognition of the expectation that narrower clock synchronization thresholds may be appropriate for Industry Members, or certain categories or systems thereof, the Commission amended the Plan to require the Participants to provide this assessment of the clock synchronization standards set forth in the Plan.

+
+
pubdate: May 15, 2017 effdate: N/A +

III. CAT Clock Synchronization Survey

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey + Compliance User: Broker-dealers + Keywords: + Participant, + Business Clock Syncronization Practice, + CAT NMS plan, + +

The Participants determined that the use of a survey was an appropriate method for gaining additional data on Industry Members’ Business Clock synchronization practices to inform this assessment. On April 11, 2017, the Participants released the Survey, which was made available to the public on the CAT NMS Plan’s public website.9 Responses were collected through April 23, 2017. The Participants drafted the Survey in consultation with the Advisory Committee to help ensure that the Survey was designed to seek detailed and meaningful data regarding Business Clock synchronization practices and trends, and industry views regarding potential modifications to the Business Clock synchronization standards set forth in the Plan. When the Survey was posted, the Participants notified their respective members and the Advisory Committee and industry trade associations,10 to encourage a significant and diverse sample size.

+
pubdate: May 15, 2017 effdate: N/A +

A. Overview of CAT Clock Synchronization Survey

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey + Compliance User: Broker-dealers + Keywords: + Syncronization Survey, + Business Clock, + +

The Survey was divided into five main sections: (1) demographic questions; (2) general questions; (3) current clock synchronization practices; (4) changes to Business Clock synchronization practices; and (5) costs. Each of these sections is discussed in greater detail below.

+
pubdate: May 15, 2017 effdate: N/A +

1. Demographic Questions

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Demographic Questions + Compliance User: Broker-dealers + Keywords: + CAT NMS plan, + Vendors, + CAT Reporters, + Broker-dealer, + Sec Rule 613, + Industry Members, + FINRA, + OATS, + +

The first section of the Survey asked that respondents provide their firm name and contact information. The section also asked that respondents, if applicable, identify themselves as a third-party vendor, technology services provider or other entity that is not subject to the CAT NMS Plan, but that provides services to CAT Reporters and maintains synchronized Business Clocks, and to explain their business and systems that contain Business Clocks. To the extent that a respondent was a small broker-dealer, as defined in Rule 613,11 they were asked to identify themselves as such.

+

To help the Participants collect information from Industry Members that currently report to the Financial Industry Regulatory Authority’s (“FINRA”) Order Audit Trail System (“OATS”), the Survey asked respondents to identify whether they currently report to OATS and, if so, to identify approximately how many reportable order events they report each month. For firms that are not subject to OATS, the Survey asked that respondents provide a brief explanation of why they are excluded or exempt from OATS, as applicable. Respondents also were asked to provide estimates of the approximate number of orders for NMS Stocks and OTC Equity Securities, and listed options, that they handled in the past month (including orders given to, received by, or originated by, the respondent). Finally, respondents were asked to provide information concerning their business activities, including identifying the types of business activities in which they participate, identifying whether they are a market maker, identifying whether they are an alternative trading system (“ATS”), and identifying the instruments that they trade.

+
+
pubdate: May 15, 2017 effdate: N/A +

2. General Questions

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, General Questions + Compliance User: Broker-dealers + Keywords: + CAT Reporter, + Business Clock Synchronization Requirements, + Survey questions, + +

The next section of the Survey included general questions requesting views on whether the Business Clock synchronization requirements set forth in the Plan should vary depending on the type of CAT Reporter, the type of Industry Member and/or the type of system. To the extent that a respondent believed that the requirements should vary, the Survey asked that they explain how and why. Next, the Survey asked if respondents believed that firms voluntarily seek to improve Business Clock synchronization requirements, or if they believed that firms typically avoid changing such standards or practices absent a regulatory requirement to do so. Finally, this section asked that the respondents describe the factors that primarily affect costs related to complying with the Business Clock synchronization requirements and whether such factors vary by system or Industry Member.

+
+
pubdate: May 15, 2017 effdate: N/A +

3. Current Clock Synchronization Practices

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Current Clock Synchronization Practices + Compliance User: Broker-dealers + Keywords: + Survey questions, + Survey Information, + Business Clock synchronization, + +

The next section asked that respondents provide information regarding their current Business Clock synchronization practices. To the extent that respondents currently maintain synchronized Business Clocks, they were asked to identify the types of systems in which such Business Clocks are maintained.12 To collect information on Business Clocks used in different systems, respondents also were asked to provide responses to various questions regarding the systems that they operate that contain Business Clocks. Respondents were asked whether they maintain different synchronization tolerances for Business Clocks used for different systems and, if so, for what types of systems the respondents maintain different tolerances and the tolerance of each respective system. The Survey requested information regarding the technologies that respondents use to maintain Business Clock synchronization, such as: PTP; NTP; PPS; GPS; CDMA; or other. Respondents also had the option of indicating that they “do not know” the technologies that they currently use to maintain Business Clock synchronization.

+

Respondents were then asked to provide information regarding their current Business Clock drift tolerances by choosing from the following responses: more than 1 second; 500 milliseconds to 1 second; 50 milliseconds to 499 milliseconds; 1 millisecond to 49 milliseconds; 500 microseconds to 999 microseconds; 1 microsecond to 499 microseconds; and “do not know.” Respondents also were asked if tolerances vary by where a Business Clock is located (e.g., internal broker-dealer data center; third-party data center; exchange co-location). Next, respondents were asked to identify how often they check Business Clock synchronization by choosing from the following responses: once a day; more than once a day, but less than once an hour; once an hour or more, but less than once a minute; once a minute or more, but less than once a second; once a second or more, but less than once a hundredth of a second; more than once a hundredth of a second; or “do not know.” Next, respondents were asked to identify what source they currently use as a “master” clock by identifying: GPS; CDMA; NIST atomic clock; data center-provided time; other vendor or hardware provided time; or “do not know.” To the extent that respondents maintain Business Clock synchronization across geographically disparate systems, they were asked to identify this fact and explain any challenges encountered and costs incurred to maintain such synchronization.

+
+
pubdate: May 15, 2017 effdate: N/A +

4. Changes to Business Clock Synchronization Practices

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Current Clock Synchronization Practices, Changes to Business Clock Synchronization Practices + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Business Clock Practices, + +

Respondents were asked to provide information on how often they assess Business Clock synchronization tolerance and whether this practice varies by the type of Business Clock or system being considered. To collect information regarding changes to synchronization practices, respondents also were asked how often they assess their Business Clock synchronization tolerances and how often they have changed tolerances in the past year. Next, respondents were asked, to the best of their knowledge, how often their Business Clock tolerances are exceeded.

+
+
pubdate: May 15, 2017 effdate: N/A +

5. Costs

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Costs + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Projected Cost, + +

The final section of the Survey sought information regarding the costs to the industry of Business Clock synchronization. This section asked respondents to provide information regarding the initial costs that they incurred (or that they anticipate that they will incur) to comply with the Business Clock synchronization tolerance of 50 milliseconds or 1 second, as applicable. Respondents also were asked to explain any ongoing costs that they will incur to maintain applicable synchronization tolerance and to explain how this response varies by type of Business Clock or system. Respondents also were asked how long it took them (or how long they anticipate that it will take them) to comply with the Business Clock synchronization requirements, and to explain how this response varies by the type of Business Clock or system.

+

The next set of questions sought information on the projected costs of further reducing the Business Clock synchronization tolerance. Respondents were asked to describe the costs (initial and ongoing), if any, that they expect to incur if the Business Clock synchronization tolerance is reduced and how these costs vary by type of Business Clock or system. Respondents also were asked how long they anticipate that it will take them to comply with any new Business Clock synchronization tolerances.

+
+
+
pubdate: May 15, 2017 effdate: N/A +

B. Assessment of Participants’ Business Clock Synchronization Standards

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Assessment of Participants’ Business Clock Synchronization Standards + Compliance User: Broker-dealers + Keywords: + Business Clocks, + Participant, + Industry Member, + +

Although the Participants did not participate in the Survey, which was designed for Industry Members and other firms in the securities industry, the Participants previously assessed their operations and use of Business Clocks to determine an appropriate synchronization threshold to apply to themselves. These assessments occurred in 2015 and 2016.13 Ultimately, the Participants determined that, collectively, they operate pursuant to a Business Clock synchronization of 100 microseconds or less with respect to their electronic systems. The Participants that are exchanges each measured average absolute matching engine clock drift across five business days. The average measured clock drift based on this analysis was approximately 36 microseconds. However, this result was an average and the Participants do not believe that it may be relied upon as a definitive statement that all Participants currently meet a threshold of 36 microseconds. In particular, Participants’ practices vary with respect to the implementation, use and measurement of synchronization. Moreover, Participants’ practices also vary with respect to the frequency with which they check the accuracy of synchronization, so it may be difficult to directly compare the synchronization of one Participant to another. Participants that operate non-electronic systems, such as manual systems operated on trading floors, manual order entry devices and certain other systems, found that they do not operate at a synchronization of 100 microseconds or less. Based on these findings, the Participants proposed, and the Commission adopted, that they be subject to a Business Clock synchronization standard of 100 microseconds of the time maintained by NIST, other than Business Clocks used solely for Manual Order Events (which must comply with a standard of 1 second of the time maintained by NIST). The Participants do not believe that their practices have changed materially since the Plan was adopted.

+
+
pubdate: May 15, 2017 effdate: N/A +

C. Analysis of Data from Clock Synchronization Survey14

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14 + Compliance User: Broker-dealers + Keywords: + broker-dealers, + Business Clock Synchronization Practices, + +
pubdate: May 15, 2017 effdate: N/A +

1. Overview of Respondents and Demographics

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Overview of Respondents and Demographics + Compliance User: Broker-dealers + Keywords: + Participant, + Survey, + CAT Reporters, + OATS, + CAT NMS plan, + FINRA, + +

The Participants received 143 substantially complete responses to the Survey.15 The responses represent the views of a range of firms. Based on the responses, approximately 13% of respondents identified as small broker-dealers that expect to report to the CAT, approximately 60% of respondents identified as large broker-dealers that expect to be CAT reporters, and approximately 27% of respondents indicated that they do not expect to report to the CAT. Of the 143 responses, approximately 23% of respondents indicated that they are an equities market maker and approximately 13% of respondents indicated that they are an options market maker. Approximately 78% of respondents indicated that they currently report to OATS, and approximately 22% indicated that they currently do not report to OATS.16

+

With respect to types of business activities, respondents indicated the following: approximately 20% operate an institutional business; approximately 17% operate a retail business; approximately 17% are introducing brokers; approximately 12% engage in proprietary trading; approximately 8% engage in clearing activities; approximately 7% engage in asset management activities; approximately 8% engage in investment banking; approximately 5% provide prime brokerage services; and approximately 6% indicated that they engage in other activities. Approximately 8% of respondents stated that they operate an ATS. Approximately 18% of respondents indicated that they are a third-party vendor, technology services provider or other entity that is not subject to the CAT NMS Plan, but that provides services to CAT Reporters and maintains synchronized Business Clocks (a “Service Provider”). The approximately 18% of respondents that identified as Service Providers indicated that they provide the following functions: back-office processing (approximately 3%); books and records (approximately 4%); clearing (approximately 1%); settlement (approximately 1%); trade order management systems (approximately 5%); trade reporting (approximately 3%); and other17 (approximately 2%).

+

The approximately 78% of respondents that indicated that they currently report to OATS provided the following information regarding the approximate number of reportable events that they submit to OATS each month: 0 to 9,999 (approximately 30%); 10,000 to 99,999 (approximately 9%); 100,000 to 2,999,999 (approximately 15%); 3,000,000 to 99,999,999 (approximately 12%); and 100,000,000 or more (approximately 12%). As previously noted, approximately 12% of respondents reported that they are not FINRA members and approximately 10% of respondents indicated that they are excluded or exempt from OATS reporting.

+
+
pubdate: May 15, 2017 effdate: N/A +

2. Responses to General Questions

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + +

As discussed in greater detail in this section, generally, over half of respondents did not have a view on whether there should be different Business Clock synchronization requirements applicable to different types of businesses or systems. Focusing on the respondents that did have a view, approximately 64% did not believe that there should be different requirements for different types of businesses or systems, versus approximately 36% that believed that there should be different requirements for different types of businesses or systems. However, a majority of respondents that identified as small broker-dealers believed that there should be different Business Clock synchronization standards that apply to both (1) large broker-dealers vs. small broker-dealers (approximately 83% of small broker-dealer respondents), and (2) different types of systems (100% of small broker-dealer respondents). Large broker-dealers and small broker-dealers split on the question of whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or if firms only change such standards or practices when required to do so by regulation. Large broker-dealer respondents believed that they voluntarily seek to improve such standards or practices, while most small broker-dealer respondents indicated that they change such standards or practices when required to do so. Finally, there is no majority view with respect to how often respondents exceed applicable Business Clock synchronization thresholds, but most firms indicated that they did not know the answer to this question. These findings are discussed in greater detail below.

+
pubdate: May 15, 2017 effdate: N/A +
a. Execution Venues vs. Broker-Dealers
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Execution Venues vs. Broker-Dealers + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Execution Venues, + broker-dealers, + +

Approximately 50% of the respondents indicated that they did not have a view on whether there should be different Business Clock synchronization requirements applicable to Execution Venues and broker-dealers. Out of those respondents that did express a view, approximately 66% stated that they did not believe that there should be different Business Clock synchronization requirements applicable to Execution Venues and broker-dealers and approximately 34% stated that they believe that Execution Venues and broker-dealers should be subject to different requirements. Notably, of the respondents that indicated that they operate an ATS, approximately 50% did not believe that different requirements should apply to Execution Venues. Approximately 33% of respondents operating ATSs believed that there should be different requirements that apply to Execution Venues, and approximately 17% of respondents that operate ATSs did not have a view.18

+
+
pubdate: May 15, 2017 effdate: N/A +
b. Small Broker-Dealers vs. Large Broker-Dealers
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Small Broker-Dealers vs. Large Broker-Dealers + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + broker-dealers, + +

A majority of respondents (approximately 52%) indicated that they did not have a view on whether there should be different Business Clock synchronization requirements for CAT Reporters that are small broker-dealers and large broker-dealers. Focusing on those respondents who did express a view, the majority (approximately 68%) did not believe that there should be different requirements applicable to small broker-dealers and large broker-dealers, and approximately 32% of respondents believed that small broker-dealers and large broker-dealers should be subject to different standards. Notably, the respondents that provided a response to this question mostly identified as large broker-dealers (approximately 60%), while approximately 12% identified as small broker-dealers and approximately 28% identified as non-CAT Reporters.

+
+
pubdate: May 15, 2017 effdate: N/A +
c. Varying Standards by Type of System
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Varying Standards by Type of System + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + broker-dealers, + +

A majority of the respondents (approximately 54%) indicated that they did not have a view on whether there should be different Business Clock synchronization requirements for different types of systems. Focusing on the respondents that did express a view, approximately 60% do not believe that there should be different Business Clock synchronization requirements applicable to different types of systems versus approximately 40% of respondents that believed that different requirements should apply to different types of systems. All small broker-dealer respondents that responded to this question, as well as approximately 60% of respondents that operate a retail business and responded to this question, support there being different Business Clock synchronization requirements applicable to different types of systems.

+
+
pubdate: May 15, 2017 effdate: N/A +
d. Improvements to Business Clock Synchronization Practices
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Improvements to Business Clock Synchronization Practices + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + broker-dealers, + +

Respondents split on whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or avoid changing such standards or practices absent a regulatory requirement to do so. Of the respondents that expressed a view, approximately 27% indicated that firms voluntarily19 seek to improve their Business Clock synchronization standards or practices, approximately 23% indicated that firms did not change their standards or practices absent a regulatory requirement to do so,20 and approximately 18% indicated that other factors cause them to update their Business Clock synchronization standards or practices.21 Approximately 31% of respondents indicated that they did not have a view on whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or avoid changing such standards or practices absent a regulatory requirement to do so.

+

Of the respondents that identified as large broker-dealers, the largest number of responses (approximately 42%) indicated that respondents voluntarily seek to improve their Business Clock synchronization standards or practices. The opposite was true of small broker-dealer respondents, as the majority of such respondents (approximately 75%) indicated that they change their Business Clock synchronization standards or practices when a regulatory obligation requires them to do so.

+
+
pubdate: May 15, 2017 effdate: N/A +
e. Exceeding Required Synchronization Tolerances
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Exceeding Required Synchronization Tolerances + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + broker-dealers, + Business Clock Tolerance, + +

Approximately 46% of respondents that expressed a view indicated that they did not know, on average, how often their Business Clock synchronization tolerances are exceeded. Approximately 3% of respondents stated that their response depends on the type of Business Clock or system being considered. Other respondents indicated that their Business Clock tolerances are exceeded: multiple times per day (approximately 5%); monthly (approximately 15%); semiannually (approximately 16%); and less than annually (approximately 15%).

+

Respondents that identified as large broker-dealers reported that, on average, their Business Clock synchronization tolerances are exceeded: multiple times per day (approximately 8%); monthly (approximately 14%); semiannually (approximately 13%); and less than annually (approximately 27%). Approximately 3% of large broker-dealer respondents indicated that their response depends on the type of Business Clock or system considered and approximately 35% of large broker-dealer respondents did not know how often their synchronization tolerances are exceeded. Small broker-dealer respondents indicated that, on average, their synchronization tolerances are exceeded: monthly (approximately 27%); semiannually (approximately 33%); and less than annually (approximately 7%). No small broker-dealer respondents reported exceeding thresholds multiple times per day or at different times depending on the type of Business Clock or system being considered. Approximately 33% of small broker-dealer respondents did not know how often their synchronization tolerances are exceeded.

+
+
+
pubdate: May 15, 2017 effdate: N/A +

3. Costs

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Costs Requirements, + +

Respondents generally identified software and/or hardware as the primary factors affecting costs for complying with the Business Clock synchronization requirements, with maintenance and compliance as the second and third greatest factors. The majority of respondents who expressed a view believed that such cost drivers vary by type of system. This view was generally consistent regardless of the type or size of respondents, except that small broker-dealer respondents were evenly split (i.e., 50% believed that cost drivers varied by system and 50% believed that cost drivers did not vary by system). Focusing on respondents who knew their initial costs of compliance (i.e., those that did not respond “do not know”), the majority (approximately 70%) stated that their initial costs of complying with the Business Clock synchronization requirements were less than $100,000. All small broker-dealer respondents who knew their initial compliance costs reported that such costs were below $100,000. Conversely, approximately 30% large broker-dealer respondents who knew their initial compliance costs indicated that such costs were over $100,000. Respondents provided a broad range of responses regarding the time it took to comply with the Business Clock synchronization requirements—responses ranged from less than one month to more than six months. These findings are discussed in greater detail below.

+
pubdate: May 15, 2017 effdate: N/A +
a. Factors Affecting Compliance Costs
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Factors Affecting Compliance Costs + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Compliance Costs, + +

Approximately 35% of respondents who expressed a view indicated that software and hardware primarily affect costs related to complying with the Business Clock synchronization requirements. Maintenance and compliance were the second and third largest cost drivers, with approximately 21% and 20% of respondents indicating that these reflected their greatest costs, respectively. When asked whether factors affecting costs of complying with the Business Clock synchronization requirements vary by system, approximately 46% of respondents stated that they did not have a view, 36% of respondents indicated that they thought that such factors did vary by type of system, and approximately 18% of respondents indicated that they thought that such factors did not vary by system.

+
+
pubdate: May 15, 2017 effdate: N/A +
b. Initial Compliance Costs
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Initial Compliance Costs + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Compliance Costs, + Business Clock Synchronization Threshold, + Large Broker-Dealers, + Service Providers, + OATS Reporters, + +

With respect to the costs incurred by respondents to comply with the initial Business Clock synchronization thresholds set forth in the Plan, approximately 35% of respondents did not know their initial compliance costs. Approximately 44% of respondents indicated that their initial compliance costs were less than $100,000, approximately 9% indicated that their initial compliance costs were between $100,000 and $500,000, and approximately 6% indicated that their initial compliance costs were more than $500,000. Approximately 5% of respondents indicated that they incurred other costs22 and approximately 1% indicated that costs depended on the type of Business Clock or system. Notably, no respondents that identified as small broker-dealers indicated that they incurred initial costs more than $100,000.

+

Respondents that identified as large broker-dealers indicated that they incurred the following initial compliance costs: no costs (approximately 5%); less than $100,000 (approximately 45%); $100,000 to $500,000 (approximately 12%); and more than $500,000 (approximately 9%). Approximately 29% of large broker-dealer respondents did not know what costs they incurred. Approximately 53% of respondents that identified as small broker-dealers indicated that they incurred initial compliance costs of less than $100,000. Approximately 6% of small broker-dealer respondents reported that their costs varied depending on the specific Business Clock or system, approximately 6% indicated that they incurred other costs beyond what was listed in the Survey, and approximately 35% did not know what initial compliance costs they incurred.

+

Respondents that identified themselves as Service Providers, OATS reporters and ATSs indicated that they incurred a range of different costs to comply with the initial Business Clock synchronization requirements. Respondents that identified as Service Providers indicated the following initial compliance costs: less than $100,000 (approximately 36%); $100,000 to $500,000 (approximately 9%); and more than $500,000 (approximately 9%). Approximately 45% of Service Providers did not know their initial compliance costs. Respondents that identified as OATS reporters indicated the following initial compliance costs: less than $100,000 (approximately 50%); $100,000 to $500,000 (approximately 10%); more than $500,000 (approximately 8%). Approximately 32% of respondents that identified as OATS reporters did not know what initial implementation costs they incurred (or would incur) to comply with the initial thresholds. Finally, respondents that indicated that they operate an ATS provided the following responses regarding initial implementation costs that they incurred (or would incur) to comply with the initial thresholds: less than $100,000 (approximately 25%); $100,000 to $500,000 (approximately 17%); and more than $500,000 (approximately 33%). Approximately 25% of respondents operating ATSs did not know their initial implementation costs.

+
+
pubdate: May 15, 2017 effdate: N/A +
c. Time to Comply with Initial Thresholds
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Time to Comply with Initial Thresholds + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + Time Estimate, + Large Broker-Dealers, + +

Respondents that provided a time estimate indicated that it took (or would take) them the following amount of time to comply with the initial Business Clock synchronization thresholds set forth in the Plan: less than 1 month (approximately 30%); 1 to 2 months (approximately 5%); 2 to 6 months (approximately 12%); and more than 6 months (approximately 9%). Approximately 11% of respondents indicated it would take them some “other” amount of time,23 and approximately 33% of respondents reported that they did not know how long it took (or would take) them to comply with the initial synchronization thresholds.

+

Respondents that identified as large broker-dealers indicated that it took (or would take) them the following amount of time to comply with the initial thresholds: less than 1 month (approximately 34%); 1 to 2 months (approximately 6%); 2 to 6 months (approximately 18%); and more than 6 months (approximately 12%).24 Approximately 18% of large broker-dealer respondents could not provide a time estimate and approximately 11% stated it would take them some other amount of time. Respondents identifying as small broker-dealers provided the following time estimates: less than 1 month (approximately 29%); and 2 to 6 months (approximately 6%). Approximately 6% of small broker-dealer respondents indicated that it would take them some other amount of time. Most small broker-dealer respondents (approximately 59%) could not provide a time estimate.

+
+
+
pubdate: May 15, 2017 effdate: N/A +

4. Changes to Business Clock Synchronization Threshold

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + +

Respondents generally indicated that implementation time, initial costs and ongoing costs, all increased as the Business Clock synchronization threshold became narrower. Responses also indicated that the implementation time, initial costs and ongoing costs to comply with any new threshold would vary greatly across different types or sizes of firms, as well as within firms of the same size or type. These findings are discussed in greater detail below.

+
pubdate: May 15, 2017 effdate: N/A +
a. General Findings
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings + Compliance User: Broker-dealers + Keywords: + Implementation Time, + Business Clock Synchronization Threshold, + Initial Costs, + Ongoing Costs, + Voluntary Assessments, + +
+ i. Implementation Time + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Implementation Time + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Business Clock Synchronization Threshold, + +

Approximately 30% of respondents stated that they could not determine how much time it would take for them to comply with any new Business Clock synchronization requirement (e.g., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds). Approximately 20% of respondents indicated that it would take no time to comply with new thresholds of 5 milliseconds or 1 millisecond, and 13.5% of respondents indicated that it would take them no time to comply with new thresholds of 100 microseconds or 500 microseconds. However, approximately 35% of respondents stated that it would take them between 1 and 11 months to comply with any of the new tolerances noted in the Survey.

+

Notably, the data did not reflect a substantial difference in implementation times if the Business Clock synchronization threshold was changed to 5 milliseconds or 1 millisecond. With respect to a threshold of 5 milliseconds, approximately 92% of respondents indicated that it would take them 1 year or less to implement the change, and approximately 7% indicated that it would take them 1 to 2 years to implement the change. With respect to a threshold of 1 millisecond, approximately 95% of respondents indicated that it would take them 1 year or less to implement the change, and approximately 5% indicated that it would take them 1 to 2 years to implement the change. Approximately 70% of respondents indicated that it would take them 1 year or less to implement a change to a threshold of 100 microseconds, approximately 25% indicated it would take them 1-2 years to implement such change, and approximately 5% indicated it would take them more than 2 years to implement such change.

+
+
+ ii. Initial Costs + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Initial Costs + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + +

The survey sought information concerning the initial costs that respondents would incur should they be required to comply with new Business Clock synchronization thresholds. Approximately 20% of respondents indicated that they would not incur any initial costs to comply with potential new thresholds of 5 milliseconds or 1 millisecond, and approximately 10% of respondents indicated that they would not incur any initial costs to comply with new thresholds of 100 microseconds or 500 microseconds. Approximately 20% of respondents stated that they would incur initial costs between $1,000 and $499,999 to comply with any new threshold (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds). Many respondents (approximately 35%) did not know what initial costs they would incur to comply with any new threshold.

+
+
+ iii. Ongoing Costs + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Ongoing Costs + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + +

With respect to estimated ongoing costs incurred by respondents to maintain new Business Clock synchronization thresholds (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds), respondents provided the following information. Approximately 15% of respondents stated that they would not incur any ongoing costs to comply with any new tolerance. Approximately 25% of respondents indicated that they would incur ongoing annual costs between $1,000 and $99,000 to comply with the new tolerances. Only approximately 2% of respondents indicated that their ongoing annual costs to comply with any of the new tolerances would be prohibitive. Approximately 40% of respondents did not know what ongoing annual costs they would incur to comply with any new tolerances.

+
+
+ iv. Voluntary Assessments and Changes to Tolerances + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Voluntary Assessments and Changes to Tolerances + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Business Clock Synchronization Threshold, + Business Clock Synchronization Practices, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + Business Clock Synchronization Tolerance, + +

Nearly half of respondents (approximately 49%) reported that they assess their Business Clock synchronization practices daily. Other respondents indicated that they assess their synchronization practices: monthly (approximately 1%); weekly (approximately 4%); quarterly (approximately 4%); and yearly (approximately 6%). Approximately 16% of respondents indicated that they assess their synchronization practices at other intervals, and approximately 3% stated that the frequency of their assessments depends on the type of Business Clock or system being considered. Approximately 17% of respondents did not know how often they assess their synchronization practices.

+

Respondents that identified as large broker-dealers stated that they assess their synchronization practices: daily (approximately 53%); weekly (approximately 4%); quarterly (approximately 6%); and annually (approximately 7%). No large broker-dealer respondents reported assessing their practices monthly. Approximately 18% of large broker-dealer respondents stated that they assess their synchronization practices at other intervals, and approximately 1% indicated that their practices depend on the Business Clock or system being considered. Approximately 11% of large broker-dealer respondents did not know how often they assess their synchronization practices. Respondents that identified as small broker-dealers reported that they assess their synchronization practices: daily (approximately 53%); monthly (approximately 12%); and annually (approximately 6%). No small broker-dealer respondents indicated that they assess their practices weekly, quarterly or at different intervals depending on the type of Business Clock or system considered. Approximately 12% of small broker-dealer respondents indicated that they assess their synchronization practices at other intervals. Approximately 18% of small broker-dealer respondents did not know how often they assess their synchronization practices.

+

The Survey also asked respondents how often they changed their Business Clock synchronization tolerances in the past year. Overall, in the past year, approximately 38% of respondents changed their synchronization tolerances 1 time, approximately 7% changed their synchronization tolerances 2 to 5 times, and approximately 1% changed their synchronization tolerances 6 to 10 times. Approximately 19% of respondents stated that they changed their tolerances a different number of times not indicated in the Survey and approximately 1% stated that changes depended on the type of Business Clock or system being considered. Approximately 35% of respondents did not know how often they changed their tolerances in the past year.

+

Trends with respect to changing synchronization tolerances were not consistent across large and small broker-dealers. Large broker-dealer respondents indicated that in the past year they changed tolerances: 1 time (approximately 49%); 2 to 5 times (approximately 6%); and 6 to 10 times (approximately 1%). Approximately 18% of large broker-dealers changed their tolerances a number of times not indicated in the Survey. No large broker-dealer respondents stated that changes to tolerances in the past year depended on the type of Business Clock or system being considered. Approximately 26% of large broker-dealer respondents did not know how often they changed their tolerances in the past year. Small broker-dealer respondents reported that in the past year they changed tolerances: 1 time (approximately 18%); and 2 to 5 times (approximately 18%). No small broker-dealer respondents reported changing their tolerances 6 to 10 times in the past year. Approximately 18% of small broker-dealer respondents stated that changes to tolerances in the past year depended on the type of Business Clock or system, and approximately 18% changed their tolerances a number of times not indicated in the survey. Approximately 41% of small broker-dealer respondents did not know how often they changed their tolerances in the past year.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
b. Findings Related to Specific Thresholds
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + 5 milliseconds, + 1 millisecond, + 500 microseconds, + 100 microseconds, + +

This section provides a more detailed discussion of the results described above in Section III.C.4.a. In particular, this section discusses the implementation time, initial cost and ongoing cost of each potential new threshold noted in the Survey (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds).

+
+ i. 5 milliseconds + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 5 milliseconds + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + 5 milliseconds, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

With respect to a possible 5 milliseconds Business Clock synchronization threshold, respondents provided the following information. In terms of the potential time to comply with a 5 milliseconds threshold, approximately 21% of respondents stated that it would take no time for them to comply with such threshold and approximately 5% of respondents stated it would take less than 1 month. Approximately 14% of respondents indicated that it would take between 1 and 2 months, approximately 4% of respondents indicated it would take between 3 and 5 months and approximately 21% of respondents indicated that it would take between 6 and 11 months, to comply with the lower threshold. Approximately 4% of respondents stated that it would take 1 to 1.5 years to comply with the lower threshold. Approximately 30% of respondents stated that they did not know how long it would take to comply with the threshold.

+

Approximately 29% of large broker-dealers providing a response to this question stated that it would take them 6 to 11 months to comply with the lower threshold and approximately 23% stated that they could comply in no time. Approximately 23% of large broker-dealer respondents did not know how long it would take them to comply. Other large broker-dealer respondents provided responses that were spread across different time periods. With respect to small broker-dealer respondents, approximately 43% could not estimate how long it would take them to comply with a lower threshold. Approximately 29% of small broker-dealer respondents indicated that they could comply in no time, approximately 14% stated that they could comply in 1 to 2 months, and approximately 14% stated that they could comply in 6 to 11 months. Respondents that operate ATSs reported the following estimated initial implementation times: no time (approximately 18%); 3 to 5 months (approximately 17%); and 6 to 11 months (approximately 67%).

+

In terms of initial costs to comply with a 5 milliseconds threshold, approximately 25% of respondents stated that they would incur no initial costs to comply with the threshold; however, the majority of these responses (approximately 71%) were from large broker-dealers. Another approximately 36% of respondents indicated that they did not know what initial costs they would incur to comply with a 5 milliseconds threshold. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 5%); $10,000 and $99,999 (approximately 9%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 5% of respondents—all large broker-dealers); and $1 million to $1.99 million (approximately 5% of respondents—all large broker-dealers). Approximately 2% of respondents indicated that a 5 milliseconds threshold would be cost prohibitive from an initial costs standpoint.

+

The majority of respondents providing information on initial implementation costs identified as large broker-dealers (approximately 63%). Large broker-dealer respondents reported the following costs to comply with the lower threshold: $0 (approximately 29%); $1 to $999 (approximately 3%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 9%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 9%); and $1 million to $1.99 million (approximately 9%). One large broker-dealer respondent said that the initial costs of compliance would be prohibitive. Approximately 31% of large broker-dealer respondents could not estimate their initial costs to comply with a 5 milliseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 14%); $1,000 to $9,999 (approximately 14%); $10,000 to $99,999 (approximately 14%); and $100,000 to $499,999 (approximately 14%). Approximately 43% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents that operate ATSs estimated the following initial implementation costs: $0 (approximately 17%); $100,000 to $499,999 (approximately 17%); $500,000 to $999,999 (approximately 33%); and $1 million to $1.99 million (approximately 17%). Approximately 17% of respondents operating ATSs did not know their initial costs.

+

In terms of ongoing costs to comply with a 5 milliseconds threshold, approximately 17% of respondents reported an estimated cost of $0 and approximately 38% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 10%); $10,000 to $99,999 (approximately 19%); $100,000 to $499,999 (approximately 4%); $500,000 to $999,999 (approximately 4%); and $1 million to $1.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

+

The majority of responses regarding estimated ongoing costs (approximately 63%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 18%); $1,000 to $9,999 (approximately 9%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 3%); $500,000 to $999,999 (approximately 6%); and $1 million to $1.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Half of the small broker-dealers that responded to this question could not estimate ongoing costs of compliance. Other small broker-dealer responses were split as follows: $0 (approximately 17%); $1,000 to $9,999 (approximately 17%); and $10,000 to $99,999 (approximately 17%). Respondents that operate ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 50%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 17%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

+
+
+ ii. 1 millisecond + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 1 millisecond + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + 1 millisecond, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

Approximately 28% of respondents reported that they did not know how long it would take them to comply with a 1 millisecond threshold. Other respondents reported the following time estimates: no time (approximately 21%); less than 1 month (approximately 8%); 1 to 2 months (approximately 6%); 3 to 5 months (approximately 11%); 6 to 11 months (approximately 21%); 1 to 1.5 years (approximately 4%); and 1.5 to 1.99 years (approximately 2%).

+

Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 66% of the respondents). The large broker-dealer respondents provided the following implementation times: no time (approximately 23%); less than 1 month (approximately 8%); 1 to 2 months (approximately 3%); 3 to 5 months (approximately 14%); 6 to 11 months (approximately 23%); 1 to 1.5 years (approximately 6%); and 1.5 to 1.99 years (approximately 3%). Approximately 20% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold and approximately 16% stated that implementation time was unknown. Other small broker-dealer respondents provided the following implementation time estimates: no time (approximately 17%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Respondents operating ATSs indicated the following implementation time estimates: no time (approximately 29%); 3 to 5 months (approximately 14%); and 6 to 11 months (approximately 57%).

+

With respect to initial costs to comply with a 1 millisecond threshold, approximately 20% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 4%); $10,000 and $99,999 (approximately 11%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 11%); and $1 million to $1.99 million (approximately 4%). Approximately 2% of respondents indicated that the initial costs of complying with a 1 millisecond threshold would be prohibitive. Approximately 35% of respondents could not estimate their initial compliance costs.

+

Most of the respondents providing initial cost estimates were large broker-dealers (approximately 67%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 25%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 14%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 14%); and $1 million to $1.99 million (approximately 6%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 31% of large broker-dealer respondents could not estimate their initial costs to comply with a 1 millisecond threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1 to $999 (approximately 17%); $10,000 to $99,999 (approximately 17%); and $100,000 to $499,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $0 (approximately 17%); $100,000 to $499,999 (approximately 17%); $500,000 to $999,999 (approximately 33%); and $1 million to $1.99 million (approximately 17%). Approximately 17% of respondents operating ATSs did not know their initial costs.

+

With respect to estimated ongoing costs to comply with a 1 millisecond threshold, approximately 17% of respondents reported an estimated cost of $0 and approximately 38% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 10%); $10,000 to $99,999 (approximately 17%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 4%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

+

The majority of responses regarding estimated ongoing costs (approximately 67%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 17%); $1,000 to $9,999 (approximately 9%); $10,000 to $99,999 (approximately 23%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 6%); and $2 million to $4.99 million (approximately 2%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Other responses were as follows: $0 (approximately 20%); $1,000 to $9,999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Respondents operating ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 50%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 17%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

+
+
+ iii. 500 microseconds + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 500 microsecond + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + 500 microseconds, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

Approximately 30% of respondents reported that they did not know how long it would take them to comply with a 500 microseconds threshold. Other respondents reported the following time estimates: no time (approximately 15%); less than 1 month (approximately 2%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 8%); 6 to 11 months (approximately 13%); 1 to 1.5 years (approximately 8%); and 1.5 to 1.99 years (approximately 4%).

+

Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 66% of the respondents). The large broker-dealers provided the following implementation times: no time (approximately 14%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 11%); 6 to 11 months (approximately 17%); 1 to 1.5 years (approximately 9%); and 1.5 to 1.99 years (approximately 6%). Approximately 20% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Small broker-dealer respondents provided the following implementation time estimates: no time (approximately 33%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Respondents operating ATSs reported the following estimated initial implementation times: no time (approximately 17%); 3 to 5 months (approximately 17%); and 6 to 11 months (approximately 50%). Approximately 17% of respondents that operate ATSs could not estimate their initial implementation costs.

+

With respect to initial costs to comply with a 500 microseconds threshold, approximately 15% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1,000 to $9,999 (approximately 5%); $10,000 and $99,999 (approximately 7%); $100,000 and $499,999 (approximately 13%); $500,000 and $999,999 (approximately 2%); $1 million to $1.99 million (approximately 9%); $2 million to $4.99 million (approximately 5%); and $5 million or more (approximately 4%). Approximately 2% of respondents indicated that the initial costs of complying with a 500 microseconds threshold would be prohibitive. Approximately 38% of respondents could not estimate their initial compliance costs.

+

Most of the respondents providing initial cost estimates were large broker-dealers (approximately 67%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 16%); $10,000 to $99,999 (approximately 8%); $100,000 to $499,999 (approximately 16%); $500,000 to $999,999 (approximately 3%); $1 million to $1.99 million (approximately 14%); $2 million to $4.99 million (approximately 5%); and $5 million or more (approximately 5%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 27% of large broker-dealer respondents could not estimate their initial costs to comply with a 500 microseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1,000 to $9,999 (approximately 17%); $10,000 to $99,999 (approximately 17%); and $100,000 to $499,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $0 (approximately 14%); $100,000 to $499,999 (approximately 14%); $1 million to $1.99 million (approximately 43%); and $10 million to $20 million (approximately 14%). Approximately 14% of respondents operating ATSs did not know their initial costs.

+

With respect to estimated ongoing costs to comply with a 500 microseconds threshold, approximately 12% of respondents reported an estimated cost of $0 and approximately 45% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 2%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 4%); $500,000 to $999,999 (approximately 4%); $1 million to $1.99 million (approximately 2%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

+

The majority of responses regarding estimated ongoing costs (approximately 67%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 12%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 29%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 6%); $1 million to $1.99 million (approximately 3%); and $2 million to $4.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive and approximately 36% of large broker-dealer respondents stated that ongoing costs were unknown. Small broker-dealer respondents reported the following ongoing costs: $0 (approximately 20%); $1 to $999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Respondents operating ATSs indicated the following estimated ongoing costs: $10,000 to $99,999 (approximately 33%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 33%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

+
+
+ iv. 100 microseconds + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 100 microseconds + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + 100 microseconds, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

Approximately 32% of respondents reported that they did not know how long it would take them to comply with a 100 microseconds threshold. Other respondents reported the following time estimates: no time (approximately 12%); less than 1 month (approximately 2%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 9%); 6 to 11 months (approximately 11%); 1 to 1.5 years (approximately 18%); 1.5 to 1.99 years (approximately 4%); and 2 years or more (approximately 2%).

+

Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 68% of the respondents). The large broker-dealers provided the following implementation times: no time (approximately 13%); 1 to 2 months (approximately 8%); 3 to 5 months (approximately 13%); 6 to 11 months (approximately 13%); 1 to 1.5 years (approximately 23%); and 1.5 to 1.99 years (approximately 5%). Approximately 23% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Small broker-dealer respondents provided the following implementation time estimates: no time (approximately 33%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Respondents operating ATSs reported the following estimated initial implementation times: 3 to 5 months (approximately 17%); 6 to 11 months (approximately 50%); and 1 to 1.5 years (approximately 33%).

+

With respect to initial costs to comply with a 100 microseconds threshold, approximately 9% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 7%); $1,000 to $9,999 (approximately 10%); $10,000 and $99,999 (approximately 10%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 7%); $2 million to $4.99 million (approximately 7%); and $5 million or more (approximately 2%). Approximately 2% of respondents indicated that the initial costs of complying with a 100 microseconds threshold would be prohibitive. Approximately 42% of respondents could not estimate their initial compliance costs.

+

Most of the respondents providing initial cost estimates were large broker-dealers (approximately 69%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 10%); $1 to $999 (approximately 3%); $1,000 to $9,999 (approximately 13%); $10,000 to $99,999 (approximately 13%); $100,000 to $499,999 (approximately 13%); $500,000 to $999,999 (approximately 10%); $2 million to $4.99 million (approximately 8%); and $5 million or more (approximately 3%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 28% of large broker-dealer respondents could not estimate their initial costs to comply with a 100 microseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1 to $999 (approximately 17%); $1,000 to $9,999 (approximately 17%); and $10,000 to $99,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $100,000 to $499,999 (approximately 14%); $500,000 to $999,999 (approximately 14%); $1 million to $1.99 million (approximately 43%); $10 million to $20 million (approximately 14%). Approximately 14% of respondents operating ATSs did not know their initial costs.

+

With respect to estimated ongoing costs to comply with a 100 microseconds threshold, approximately 13% of respondents reported an estimated cost of $0 and approximately 42% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 2%); $1,000 to $9,999 (approximately 4%); $10,000 to $99,999 (approximately 20%); $100,000 to $499,999 (approximately 11%); $500,000 to $999,999 (approximately 4%); $1 million to $1.99 million (approximately 2%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

+

The majority of responses regarding estimated ongoing costs (approximately 69%) were from large broker-dealers. Large broker-dealer respondents indicated the following ongoing costs: $0 (approximately 13%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 16%); $500,000 to $999,999 (approximately 5%); $1 million to $1.99 million (approximately 3%); and $2 million to $4.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Small broker-dealer respondents reported the following ongoing costs: $0 (approximately 20%); $1,000 to $9,999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Respondents operating ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 33%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 33%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
5. Current Business Clock Synchronization Practices
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

A majority of respondents (approximately 64%) indicated that their current Business Clock synchronization threshold is less than 50 milliseconds; however, these responses were skewed toward large broker-dealers, which made up approximately 80% of the responses. Respondents varied as to the particular thresholds that they currently use. In particular, respondents reported the following current thresholds: 1 microsecond to 499 microseconds (approximately 9%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 47%); 50 milliseconds to 499 milliseconds (approximately 13%); 500 milliseconds to 1 second (approximately 4%) and more than one second (approximately 1%). Approximately 19% of respondents did not know their firm’s current Business Clock synchronization thresholds.

+

Focusing on type of respondent, large broker-dealer respondents indicated that they have current thresholds of: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 17% of large broker-dealer respondents did not know their firm’s current threshold. Small broker-dealer respondents reported the following current thresholds: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); 500 milliseconds to 1 second (approximately 11%) and more than one second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their firm’s current threshold.

+

Approximately 55% of respondents indicated that their Business Clock synchronization tolerances did not vary based on whether Business Clocks were located in particular systems. Respondents did not express a clear majority view on the frequency with which they check the synchronization of Business Clocks. Focusing on large and small broker-dealers, the majority of large broker-dealer respondents (approximately 57%) and small broker-dealer respondents (approximately 65%) stated that their synchronization tolerances do not vary based on where a Business Clock is located. Approximately 19% of large broker-dealer respondents indicated that their synchronization tolerances vary based on where Business Clocks are located; by comparison, no small broker-dealer respondents indicated that their tolerances vary based on the location of Business Clocks. Approximately 25% of large broker-dealer respondents and approximately 35% of small broker-dealer respondents did not know if their tolerances vary based on where Business Clocks are located.

+

Generally, respondents reported that NTP was the most common technology used to maintain Business Clock synchronization, although, with respect to co-located systems in particular, PTP was the most common technology used. The most common response among large broker-dealer respondents (approximately 40%) was that they employ multiple technologies to maintain synchronization. Small broker-dealer respondents most commonly (approximately 30%) indicated that they use NTP to maintain synchronization; however, approximately 41% of small broker-dealer respondents did not know what technology they use to maintain synchronization. Overall, the NIST atomic clock was the most common master clock used by respondents.

+

These findings are discussed further below.

+
+
pubdate: May 15, 2017 effdate: N/A +
a. Maintaining Business Clock Synchronization
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + NTP, + GPS, + CDMA, + Large Broker-Dealer, + +

Approximately 15% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Focusing on the respondents that did know what technology their firms use, the most common response (approximately 50% of respondents) was that firms used a combination of different technologies to maintain synchronization—typically, these respondents use a combination of PTP, NTP and GPS. In terms of a single solution, NTP was the most common technology used by respondents with approximately 46% reporting that they use this solution. GPS and PTP were the next most common solutions, with each being used by approximately 22% of respondents.25

+

Large broker-dealer respondents reported using the following solutions to maintain synchronization: multiple technologies (approximately 40%); NTP (approximately 27%); PTP (approximately 6%); GPS (approximately 6%); CDMA (approximately 2%); and other technologies (approximately 3%). Approximately 16% of large broker-dealer respondents did not know what technology they use to maintain synchronization. Small broker-dealer respondents reported using the following solutions to maintain synchronization: NTP (approximately 30%); other technologies (approximately 15%); GPS (approximately 7%); and multiple technologies (approximately 7%). Approximately 41% of small broker-dealer respondents did not know what technology they use to maintain synchronization.

+

Results also varied when analyzed by type of system, as described further below.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Origination Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + +

Respondents operating origination systems indicated that their firms use the following technologies to maintain Business Clock synchronization: PTP was the primary technology used (approximately 46% of respondents) followed by GPS and PTP (each used by approximately 22% of respondents), other technology (approximately 7% of respondents) and CDMA (approximately 3% of respondents). Approximately 25% of respondents did not know what technology their firms use to maintain synchronization.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + NTP, + +

Respondents operating routing systems stated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 43%); GPS (approximately 25%); PTP (approximately 24%); CDMA (approximately 4%); and other solutions (approximately 4%). Approximately 20% of respondents did not know what technology their firms use to maintain synchronization. Based on the Survey results, routing systems appear to have the highest use of CDMA technology of any system based on the number of responses.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Execution Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + NTP, + +

Respondents operating execution systems reported that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 44%); PTP (approximately 25%); GPS (approximately 21%); other solutions (approximately 8%); and CDMA (approximately 1%). Approximately 13% of respondents did not know what technology their firms use to maintain synchronization.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + NTP, + +

Respondents operating co-located systems indicated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 35%); PTP (approximately 33%); GPS (approximately 25%); CDMA (approximately 5%); and other solutions (approximately 2%). Approximately 10% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Based on information provided by the respondents, co-located systems have the lowest use of NTP and the highest use of PTP across any systems addressed in the Survey.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + NTP, + +

Respondents operating internalization systems stated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 42%); GPS (approximately 31%); PTP (approximately 23%); and other technology (approximately 4%). Approximately 17% of respondents indicated that they did not know what technology their firms use to maintain Business Clock synchronization. Based on information provided by respondents, internalization systems have the highest use of GPS technology across any system addressed in the Survey and, along with third-party systems (discussed below) the lowest use of CDMA technology (no respondents reported using GPS technology to maintain synchronization of internalization systems).

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + NTP, + +

Respondents operating back-office systems reported that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 56%); GPS (approximately 19%); PTP (approximately 19%); CDMA (approximately 3%); and other technology (approximately 3%). Approximately 15% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Based on the information provided by respondents, back-office systems have the highest use of NTP and the lowest use of GPS across any of the systems addressed in the Survey.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + CDMA, + NTP, + +

Respondents that use third-party systems indicated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 49%); GPS (approximately 26%); PTP (approximately 17%); and other technology (approximately 9%). No respondents reported using CDMA to maintain Business Clock synchronization in third-party systems. Approximately 15% of respondents indicated that they did not know what technology they use to maintain Business Clock synchronization.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
b. Current Business Clock Synchronization Tolerances
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Tolerance, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

As previously noted, a majority of respondents (approximately 60%) indicated that their current Business Clock synchronization tolerance is better than the standard currently set forth in the Plan. However, this result is not necessarily representative of the industry as a whole since the vast majority of these responses (approximately 80%) were provided by large broker-dealer respondents. Conversely, approximately 20% of respondents stated that their current synchronization tolerance is at or above the current standard set forth in the Plan, and the approximately 20% of respondents indicated that they did not know their current synchronization tolerance.

+

Respondents that identified as large broker-dealers reported that they currently maintain the following Business Clock synchronization tolerances: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 17% of large broker-dealer respondents did not know their current synchronization tolerances. Small broker-dealer respondents reported that they currently maintain the following synchronization tolerances: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); and 500 milliseconds to 1 second (approximately 11%); and more than 1 second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their current synchronization tolerances.

+

These findings are discussed further below, focusing on the types of systems used by respondents.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Origination Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Origination Systems, + +

Approximately 60% of respondents operating origination systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 10%); 500 microseconds to 999 microseconds (approximately 7%); 1 millisecond to 49 milliseconds (approximately 44%); 50 milliseconds to 499 milliseconds (approximately 13%); and 500 milliseconds to 1 second (approximately 3%). Approximately 24% of respondents indicated that they did not know their current synchronization tolerances.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Routing Systems, + +

Approximately 70% of respondents operating routing systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 10%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 53%); 50 milliseconds to 499 milliseconds (approximately 10%); and more than 1 second (approximately 1%). Approximately 18% of respondents did not know their current synchronization tolerances.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Execution Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Execution Systems, + +

Approximately 57% of respondents operating execution systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 9%); 500 microseconds to 999 microseconds (approximately 4%); 1 millisecond to 49 milliseconds (approximately 44%); 50 milliseconds to 499 milliseconds (approximately 16%); 500 milliseconds to 1 second (approximately 7%); and more than 1 second (approximately 2%). Approximately 19% of respondents did not know their current synchronization tolerances.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Co-located Systems, + +

Approximately 82% of respondents operating co-located systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. In particular, respondents reported that they currently use the following tolerances: 1 microsecond to 499 microseconds (approximately 22%); 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 41%); and 50 milliseconds to 499 milliseconds (approximately 14%). Approximately 5% of respondents indicated that they did not know their current synchronization tolerances.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Internalization Systems, + +

Approximately 73% of respondents operating internalization systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 6%); 500 microseconds to 999 microseconds (approximately 11%); 1 millisecond to 49 milliseconds (approximately 56%); 50 milliseconds to 499 milliseconds (approximately 11%); and 500 milliseconds to 1 second (approximately 6%). Approximately 11% of respondents did not know their current synchronization tolerances.

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Back-Office Systems, + +

Approximately 63% of respondents operating back-office systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 4%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 15%); and 500 milliseconds to 1 second (approximately 9%). Approximately 13% of respondents did not know their current synchronization tolerances.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Third-Party Systems, + +

Approximately 44% of respondents using third-party systems stated that they currently use a tolerance that is better than the standard set forth in the Plan. In particular, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 3%); 1 millisecond to 49 milliseconds (approximately 41%); and 50 milliseconds to 499 milliseconds (approximately 16%). Approximately 41% of respondents did not know their current synchronization tolerances.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
c. Business Clock Location
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Tolerance, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

A majority of respondents (approximately 55%) stated that their Business Clock synchronization tolerances did not vary based on where a Business Clock was located. Conversely, approximately 15% of respondents indicated that their tolerances did vary based on where a Business Clocks was located. Approximately 30% of respondents did not know if their tolerances vary based on the location of a Business Clock.

+

The majority of large broker-dealer respondents (approximately 57%) stated that their synchronization tolerances did not vary based on the location of Business Clocks, while approximately 19% reported that tolerances did vary based on location. Approximately 25% of large broker-dealer respondents did not know if tolerances varied by the location of Business Clocks. Similarly, the majority of small broker-dealer respondents (approximately 65%) indicated that their synchronization tolerances did not vary based on the location of Business Clocks, however, no small broker-dealer respondents reported that tolerances varied based on location of Business Clocks. Approximately 35% of small broker-dealer respondents did not know if their synchronization tolerances varied by the location of Business Clocks.

+

These results are described below, focusing on type of system.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Origination Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Origination Systems, + +

Approximately 56% of respondents operating origination systems indicated that their Business Clock synchronization tolerances did not vary based on where Business Clocks were located. Approximately 14% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 30% did not know if their synchronization tolerances varied based on the location of Business Clocks.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Routing Systems, + +

Approximately 55% of respondents operating routing systems stated that their synchronization tolerances did not vary based on where Business Clocks were located, while approximately 15% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 30% of respondents did not know if their tolerances varied based on the system in which Business Clocks were located.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Execution Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Execution Systems, + +

Approximately 56% of respondents operating execution indicated that their Business Clock tolerances did not vary based on where Business Clocks were located, and approximately 15% of respondents indicated that their tolerances did vary based on where Business Clocks were located. Approximately 29% of respondents did not know if their tolerances varied based on the system in which Business Clocks were located.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Co-located Systems, + +

The majority of respondents operating co-located systems (approximately 67%) indicated that their synchronization tolerances did not vary based on where Business Clocks were located, while approximately 19% of respondents indicated that their tolerances did vary based on where Business Clocks were located. Approximately 14% of respondents did not know if their synchronization tolerances varied based on where Business Clocks were located.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Internalization Systems, + +

Respondents operating internalization systems were roughly split, with approximately 39% reporting that their synchronization tolerances did not vary based on where Business Clocks were located and 39% reporting that their tolerances did vary based on where Business Clocks were located. Approximately 22% of respondents did not know if their Business Clock synchronization tolerances varied based on where Business Clocks were located.

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Back-Office Systems, + +

Approximately 68% of respondents operating back-office systems reported that their tolerances did not vary based on the location of Business Clocks. Approximately 10% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 22% of respondents did not know if their tolerances varied based on where Business Clocks were located.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Threshold, + Business Clock Location, + Third-Party Systems, + +

Approximately 41% of respondents using third-party systems indicated that their tolerances did not vary based on where Business Clocks were located, and approximately 18% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 41% of respondents did not know if Business Clock synchronization tolerances varied based on where Business Clocks were located.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
d. Business Clock Synchronization Frequency
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Business Clock Synchronization Frequency, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

With respect to the frequency with which respondents check their Business Clock synchronization accuracy, the most common response (approximately 23%) was that respondents check synchronization accuracy once a minute or more but less than once a second. Other respondents indicated checking synchronization accuracy with the following frequencies: once an hour or more but less than once a minute (approximately 20%); once a second or more but less than once a hundredth of a second (approximately 14%); more than once a day but less than once an hour (approximately 14%); once a day (approximately 12%); and more than once a hundredth of a second (approximately 3%). Only approximately 15% of respondents reported that they did not know how often their firms checked Business Clock synchronization accuracy.

+

Large broker-dealer respondents reported that they check synchronization accuracy at the following frequencies: once a day (approximately 9%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 23%); once a minute or more but less than once a second (approximately 18%); once a second or more but less than once a hundredth of a second (approximately 17%); and more than once a hundredth of a second (approximately 4%). Approximately 14% of large broker-dealer respondents did not know how often they check the accuracy of Business Clock synchronization. Small broker-dealer respondents indicated that they check synchronization accuracy at the following frequencies: once a day (approximately 47%); more than once a day but less than once an hour (approximately 10%); and once a minute or more but less than once a second (approximately 20%). Approximately 23% of small broker-dealer respondents did not know how often they check the accuracy of Business Clock synchronization.

+

These results are discussed further below, focusing on the types of systems that respondents operate.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Originating Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Origination Systems, + +

Respondents operating origination systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 18%); more than once a day but less than once an hour (approximately 14%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 14%); once a second or more but less than once a hundredth of a second (approximately 10%); and more than once a hundredth of a second (approximately 1%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Routing Systems, + +

Respondents operating routing systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 9%); more than once a day but less than once an hour (approximately 13%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 19%); once a second or more but less than once a hundredth of a second (approximately 16%); and more than once a hundredth of a second (approximately 3%). Approximately 16% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Execution Systems, + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Execution Systems, + +

Respondents operating execution systems stated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 16%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 16%); once a minute or more but less than once a second (approximately 18%); once a second or more but less than once a hundredth of a second (approximately 18%); and more than once a hundredth of a second (approximately 4%). Approximately 13% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Co-located Systems, + +

Respondents operating co-located systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 3%); more than once a day but less than once an hour (approximately 8%); once an hour or more but less than once a minute (approximately 22%); once a minute or more but less than once a second (approximately 22%); once a second or more but less than once a hundredth of a second (approximately 31%); and more than once a hundredth of a second (approximately 3%). Approximately 11% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Internalization Systems, + +

Respondents operating internalization systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 11%); more than once a day but less than once an hour (approximately 17%); once a minute or more but less than once a second (approximately 44%); once a second or more but less than once a hundredth of a second (approximately 11%); and more than once a hundredth of a second (approximately 6%). Approximately 11% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Back-Office Systems, + +

Respondents operating back-office systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 13%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 25%); once a minute or more but less than once a second (approximately 21%); once a second or more but less than once a hundredth of a second (approximately 6%); and more than once a hundredth of a second (approximately 4%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Accuracy, + Third-Party Systems, + +

Respondents using third-party systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 13%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 20%); once a second or more but less than once a hundredth of a second (approximately 6%); and more than once a hundredth of a second (approximately 4%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
e. Master Clocks
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks + Compliance User: Broker-dealers + Keywords: + Business Clock synchronization, + PTP, + GPS, + NTP, + CDMA, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

Respondents that provided information regarding the type of master clock that they use for purposes of maintaining Business Clock synchronization most commonly reported using the NIST atomic clock (approximately 45%). The next most popular solutions were: GPS (approximately 20%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 4%); and CDMA (approximately 1%). Approximately 15% of respondents did not know what their firms use as a master clock.

+

Large broker-dealer respondents reported using the following as a master clock: NIST atomic clock (approximately 43%); GPS (approximately 27%); other vendor or hardware-provided time (approximately 11%); data center-provided time (approximately 3%); and CDMA (approximately 3%). Approximately 13% of large broker-dealers did not know what they use as a master clock. The responses from small broker-dealer respondents differed somewhat as they indicated using the following: NIST atomic clock (approximately 37%); other vendor or hardware-provided time (approximately 19%); and data center-provided time (approximately 7%). Approximately 37% of small broker-dealer respondents did not know what they use as a master clock.

+

These results are described further below, based on the types of systems that respondents operate.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Origination Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Origination Systems, + +

Respondents operating origination systems reported that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 4%); and CDMA (approximately 1%). Approximately 15% of respondents did not know what they use as a master clock.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Routing Systems, + NIST, + CDMA, + GPS, + +

Respondents operating routing systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 40%); GPS (approximately 25%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 5%); and CDMA (approximately 5%). Approximately 15% of respondents did not know what they use as a master clock.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Execution Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Execution Systems, + NIST, + CDMA, + GPS, + +

Respondents operating execution systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 15%); data center-provided time (approximately 5%); and CDMA (approximately 2%). Approximately 10% of respondents did not know what they use as a master clock.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Co-located Systems, + NIST, + CDMA, + GPS, + +

Respondents operating co-located systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 40%); GPS (approximately 30%); other vendor or hardware-provided time (approximately 10%); CDMA (approximately 5%); and data center-provided time (approximately 3%). Approximately 15% of respondents did not know what they use as a master clock.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Internalization Systems, + NIST, + CDMA, + GPS, + +

Respondents operating internalization systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: GPS (approximately 40%); NIST atomic clock (approximately 35%); and other vendor or hardware-provided time (approximately 10%). No respondents reported using data center-provided time or CDMA as their master clocks. Approximately 10% of respondents did not know what they use as a master clock.

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Back-Office Systems, + NIST, + CDMA, + GPS, + +

Respondents operating back-office systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 15%). No respondents indicated that they used data center-provided time or CDMA as their master clocks. Approximately 15% of respondents did not know what they use as a master clock.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirement, + Master Clock, + Third-Party Systems, + NIST, + CDMA, + GPS, + +

Respondents using third-party systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); and other vendor or hardware-provided time (approximately 15%). No respondents reported using data center-provided time or CDMA as their master clocks. Approximately 15% of respondents did not know what they use as a master clock.

+
+
+
pubdate: May 15, 2017 effdate: N/A +
f. Synchronization Across Geographically Disparate Systems
+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + +

Approximately 40% of respondents responding to the question on maintaining Business Clock synchronization across geographically disparate systems indicated that they do maintain synchronization across systems that are geographically disparate.26 Approximately 30% of respondents reported that they do not synchronize Business Clocks across geographically disparate systems. Approximately 30% of respondents indicated that this question was not applicable.

+

The most common response from large broker-dealer respondents was that they did maintain Business Clock synchronization across geographically disparate systems (approximately 44%). Approximately 29% of large broker-dealer respondents reported that they did not maintain synchronization across geographically disparate systems, and approximately 27% indicated that this question was not applicable to them. Approximately 38% of small broker-dealer respondents stated that they maintain synchronization across geographically disparate systems, and approximately 28% reported that they do not. Approximately 34% of small broker-dealer respondents indicated that this question was not applicable to them.

+

These results are discussed further below, based on the types of systems that respondents operate.

+
+ i. Origination Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Origination Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Origination Systems, + +

Approximately 30% of respondents operating origination systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 35% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

+
+
+ ii. Routing Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Routing Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Routing Systems, + +

Approximately 35% of respondents operating routing systems reported that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 25% of respondents indicated that this question did not apply to their operations.

+
+
+ iii. Execution Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Execution Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Execution Systems, + +

Approximately 40% of respondents operating execution systems stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 20% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 40% of respondents indicated that this question did not apply to their operations.

+
+
+ iv. Co-located Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Co-located Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Co-located Systems, + +

Approximately 50% of respondents operating co-located systems stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 20% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

+
+
+ v. Internalization Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Internalization Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Internalization Systems, + +

Approximately 50% of respondents operating internalization systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 15% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

+
+
+ vi. Back-Office Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Back-Office Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Back-Office Systems, + +

Approximately 40% of respondents operating back-office systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 20% of respondents indicated that this question did not apply to their operations.

+
+
+ vii. Third-Party Systems + Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Third-Party Systems + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Across Geographically Disparate System, + Third-Party Systems, + +

Approximately 35% of respondents stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 25% of respondents indicated that this question did not apply to their operations.

+
+
+
+
+
+
pubdate: May 15, 2017 effdate: N/A +

VI. Recommendations: Current Clock Synchronization Requirements

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements + Compliance User: Broker-dealers + Keywords: + CAT NMS Plan - Section 6.6, + Business Clock synchronization, + Participants, + CAT Reporter, + Industry Member, + +

As required by Section 6.6(a)(ii) of the CAT NMS Plan, the Participants provide these recommendations with respect to the current Business Clock synchronization requirements based on their analysis of the data collected in the Survey. As discussed further below, the Participants do not believe that it is appropriate to amend the current Business Clock synchronization requirements set forth in the Plan at this time based on the results of the Survey.

+

The Participants note that data collected in the survey is limited in certain ways for general applicability.27 For instance, the data is heavily skewed towards larger broker-dealers (approximately 60% of all respondents), thus making its applicability to small broker-dealers (approximately 13% of all respondents) more questionable. In addition, many respondents indicated in their responses to various questions that they did not know their firm’s current practices and did not know, or cannot estimate, potential costs (i.e., with respect to implementation times and initial and ongoing monetary costs).

+

Moreover, the Participants note that the current Business Clock synchronization standards were only recently implemented, and the Participants believe that the Participants and Industry Members should gain experience with those new standards prior to implementing more stringent or granular standards. In particular, the Participants desire to evaluate the effectiveness of current Business Clock synchronization requirements on the linkage and sequencing of independent events in the CAT, or whether more granular synchronization requirements are important to the accurate linkage and sequencing of the events. After gaining experience with

+

the synchronization standards and their effect on the accuracy of the CAT, the Participants believe that they will be able to analyze whether narrower clock synchronization requirements are necessary to obtain the intended regulatory goals of the CAT and whether any narrower requirements should be applied to certain groups or types of Industry Members consistent with industry standard practices. The Participants also anticipate that Industry Members, Small Industry Members and Service Providers that maintain synchronized Business Clocks will be able to provide more detailed and accurate responses after all CAT Reporters that are Industry Members and Small Industry Members are subject to the synchronization standards set forth in the Plan.

+

Nevertheless, despite these concerns and recognition of the limitations of the Survey results, the Participants provide the following suggestions for consideration at a future date regarding potential amendments related to the type of CAT Reporter, type of Industry Member and type of system.

+
pubdate: May 15, 2017 effdate: N/A +

A. Type of CAT Reporter

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of CAT Reporter + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirements, + Participants, + CAT Reporter, + Industry Member, + +

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of CAT Reporter – Participant and Industry Members. The current clock synchronization standards impose different standards on Participants and Industry Members. Participants are required to meet a 100 microseconds standard, whereas Industry Members are required to meet a 50 milliseconds standard. The Participants do not recommend changing these standards at this time.

+

As discussed above, the Survey focused on collecting data regarding Industry Members. The Participants, however, have reported that they comply with the 100 microseconds requirement currently set forth in the Plan. Based on prior analysis of the Participants’ clock synchronization practices, the Participants believe that 100 microseconds is an appropriate synchronization standard to apply to the Participants. Moreover, at this time, the Participants do not believe that the same standard should apply to the Participants and to CAT Reporters that are Industry Members and/or Small Industry Members since the Survey results do not reflect a uniformity of synchronization thresholds among all CAT Reporters.

+

With regard to Industry Members, the data collected indicates that many potential CAT Reporters currently synchronize their Business Clocks at thresholds that are better (i.e., narrower) than currently required by the Plan, although not necessarily to the granularity of the Participants. For example, approximately 64% of respondents indicated that their current synchronization threshold is less than 50 milliseconds, with respondents most commonly reporting that they maintain thresholds of between 1 millisecond and 49 milliseconds (approximately 47%). By comparison, relatively few respondents indicated that they currently maintain synchronization thresholds below 1 millisecond (approximately 17%). The Participants, however, do not believe that this supports decreasing the synchronization thresholds applicable to all Industry Members as a group at this time. As discussed in this assessment, the sample set is heavily skewed toward large broker-dealers (approximately 80% of respondents providing data on current synchronization thresholds), and the Participants have not had an opportunity to fully evaluate the extent to which the Survey respondents represent large broker-dealers, so additional information is necessary before the Plan may be amended.

+
+
pubdate: May 15, 2017 effdate: N/A +

B. Type of Industry Member

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of Industry Member + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirements, + broker-dealers, + Large Broker-Dealer, + Small Broker-Dealer, + CAT NMS plan, + CAT Reporting, + +

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of Industry Member (e.g., ATS, small broker-dealer) when establishing appropriate industry standards. Recognizing the limitations of the Survey, the data suggests that many large-broker dealer respondents may already meet or exceed the standard set forth in the Plan. However, as discussed below, the Participants believe that additional analysis is necessary for implementing any narrower thresholds that are generally applicable to Industry Members or applicable to a particular subset thereof.

+

The Survey data preliminarily suggests many large broker-dealers currently synchronize their Business Clocks at thresholds that are better (i.e., narrower) than currently required by the Plan. For example, 69% of the large broker-dealer respondents indicated that they have current thresholds of less than the current 50 millisecond standard. In particular, large broker-dealer respondents reported that they used the following standards: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 16% of large broker-dealer respondents did not know their firm’s current threshold. Moreover, many large broker-dealer respondents indicated that it would take them no time to comply with narrower standards of 5 milliseconds (approximately 23%), 1 millisecond (approximately 23%), 500 microseconds (approximately 14%) and 100 microseconds (approximately 13%). Although these results do not reflect a consensus among large broker-dealer respondents, the Participants believe that future analysis may indicate that compliance implementation times will decrease due to technological advances in the industry and after large broker-dealers gain experience reporting to the Central Repository. However, large broker-dealer respondents, without a majority or consensus view, also indicated that they would incur a range of costs to comply with narrower synchronization thresholds, with some estimating costs of $5 million or more to comply with thresholds below 1 millisecond. Accordingly, the Participants believe that, although large broker-dealers may be able to comply with a narrower synchronization standard without significant costs in terms of implementation time, monetary costs may be significant and possibly prohibitive. The SEC expressed a similar view when it recently approved the Plan. It explained, “[w]hile the Commission believes that regulators’ ability to sequence orders accurately in certain cases could improve if the clock synchronization for Industry Members were finer, the Commission is sensitive to the costs associated with requiring a finer clock synchronization [standard] for Industry Members at this time, and believes that a standard of 50 milliseconds for Industry Members will allow regulators to sequence orders and events with a level of accuracy that is acceptable for the initial phases of CAT reporting.”28

+

The Survey results suggest that it would be premature to lower the clock synchronization standards with regard to small broker-dealers. As noted, the number of respondents that identified as small broker-dealers was limited; only 13% of the respondents identified as small broker-dealers, which does not provide a representative view of small broker-dealers in the industry. Moreover, only approximately 30% of small broker-dealer respondents reported that they used a synchronization threshold less than the 50 milliseconds standard. Specifically, small broker-dealer respondents reported the following current thresholds: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); 500 milliseconds to 1 second (approximately 11%); and more than one second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their firm’s current threshold. Some, but not a majority or a representative sample, of small broker-dealer respondents indicated that it would take them no time to comply with narrower standards of 5 milliseconds (approximately 29%), 1 millisecond (approximately 17%), 500 microseconds (approximately 33%) and 100 microseconds (approximately 33%). However, as discussed throughout this assessment, the number of respondents that identified as small broker-dealers was limited, which suggests that this data may not be representative of small broker-dealers generally. In addition, given that, throughout the development of the CAT NMS Plan, small broker-dealers and industry associations have noted that they believe that small broker-dealers will be disproportionately burdened when it comes to complying with the Plan requirements, the Participants believe that it is necessary to understand the potential impact of any amendment to the Plan on small broker-dealers. For instance, as was the case with large broker-dealer respondents, small broker-dealer respondents indicated a range of potential costs to comply with a narrower synchronization threshold without a clear consensus or majority view. Although many small broker-dealers estimated that they would incur substantial costs to comply with narrower standards, a significant portion of small broker-dealer respondents could not estimate anticipated compliance costs.

+

The Survey results also suggest that it may not be appropriate to subject ATSs to narrower synchronization standards at this time. Few ATS respondents indicated that it would take them no time to comply with narrower thresholds of: 5 milliseconds (approximately 18%); 1 millisecond (approximately 29%); 500 microseconds (approximately 17%); and 100 microseconds (0%). Moreover, many ATSs reported that they would incur significant costs to comply with narrower synchronization thresholds. For instance, for thresholds of 500 microseconds and 100 microseconds, the majority of ATS respondents estimated that they would incur initial compliance costs between $1 million and $20 million (approximately 57% each for thresholds of 500 microseconds and 100 microseconds). However, as is the case with data from small broker-dealer respondents, in some respects the data provided by ATS respondents is limited. For instance, as of May 3, 2017, the SEC reported that there are 83 ATSs with current Forms ATS on file, but only 12 respondents (approximately 8%) indicated that they operate an ATS.29 The Participants believe that it is necessary to better understand the synchronization practices of ATSs, as well as the potential costs that ATSs would incur to comply with narrower synchronization standards.30

+
+
pubdate: May 15, 2017 effdate: N/A +

C. Type of System

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of System + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirements, + Order Origination System, + Order Routing System, + Order Execution System, + Co-located System, + Internalization Systems, + Back-Office Systems, + Third Party Systems, + +

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of system, including: order origination systems; order routing systems; order execution or matching systems; co-located systems; internalization systems; back-office systems; and third-party systems (including vendor systems). Based on the Survey, the Participants do not believe that it is appropriate to apply different synchronization thresholds to different types of systems at this time.

+

The Survey results did not indicate any consistent patterns that would necessarily support implementing a narrower or higher threshold for particular systems. For instance, with the exception of third-party systems, the majority of respondents that submitted system-level responses indicated that Business Clocks in those systems tend to be narrower than required by the Plan. However, given the ranges provided in the Survey, the Participants cannot precisely determine the current synchronization thresholds commonly used in the various systems addressed in the Survey. Moreover, of the respondents that provided information regarding current synchronization thresholds, approximately 55% indicated that their Business Clock synchronization tolerances did not vary based on whether Business Clocks were located in particular systems. Approximately 19% of large broker-dealer respondents indicated that their synchronization tolerances varied based on where Business Clocks were located; by comparison, no small broker-dealer respondents indicated that their tolerances varied based on location of Business Clocks. This further indicates that additional analysis is necessary to better determine whether, if required to do so, CAT Reporters would be capable of complying with synchronization thresholds that vary by type of system, or whether the costs of doing so would be significant or otherwise prohibitive.31

+
+
pubdate: May 15, 2017 effdate: N/A +

D. Conclusion

+ Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Conclusion + Compliance User: Broker-dealers + Keywords: + Business Clock Synchronization Requirements, + Business Clock Synchronization Threshold, + CAT Reporter, + Business Clock Synchronization Practices, + +

As discussed above, the Participants do not believe that it is necessary or appropriate to amend the Business Clock synchronization requirements set forth in the Plan at this time. The Participants will reassess whether the Business Clock synchronization requirements remain consistent with industry standards – or whether it may be necessary to amend such requirements – in the future as part of the annual assessment required by Section 6.8(c) of the Plan. To make such an assessment, the Participants intend to continue working with the Advisory Committee and the industry generally, including CAT Reporters of various sizes and types, to determine whether current Business Clock synchronization practices have changed sufficiently to suggest that narrower synchronization thresholds may be consistent with industry standards. As the Commission noted when it approved the Plan, if the Participants determine based on a future assessment that the clock synchronization requirements in the Plan should be changed, the Participants would need to file a proposed amendment to the Plan with the Commission. Such a submission would enable the Commission, as well as Industry Members and the public, to evaluate the proposed requirements, including anticipated costs, benefits and related implementation time frames.

+ +
+
+
fn +

1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. 84696 (Nov. 23, 2016) (the “Adopting Release”). The full text of the CAT NMS Plan is available at www.catnmsplan.com.

+
+
fn +

2 The Participants to the CAT NMS Plan are Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., Investors’ Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, NYSE National, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. Note that National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 Fed. Reg. 9258 (Feb. 3, 2017). Note further that ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 Fed. Reg. 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 Fed. Reg. 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 Fed. Reg. 16445 (Apr. 4, 2017).

+
+
fn +

3 Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

+
+
fn +

4 Adopting Release at 84785.

+
+
fn +

5 See Bats BYX Exchange, Inc. Rule 4.6; Bats BZX Exchange, Inc. Rule 4.6; Bats EDGA Exchange, Inc. Rule 4.6; Bats EDGX Exchange, Inc. Rule 4.6; BOX Options Exchange LLC Rule 16020; C2 Options Exchange, Incorporated Rulebook Chapter 6, Section F; Chicago Board Options Exchange, Incorporated Rule 6.86; Chicago Stock Exchange, Inc. Rulebook Article 23, Rule 2; Financial Industry Regulatory Authority, Inc. Rule 6820; Investors’ Exchange LLC Rule 11.620; Miami International Securities Exchange, LLC Rule 1702; MIAX PEARL, LLC Rulebook Chapter XVII; NASDAQ BX, Inc. Equity Rule 6820, Option Rulebook Chapter IX, Section 8(b); Nasdaq GEMX, LLC Rule 901; Nasdaq ISE, LLC Rule 901; Nasdaq MRX, LLC Rule 901; NASDAQ PHLX LLC Rule 920A; The NASDAQ Stock Market LLC Equity Rule 6820, Option Rulebook Chapter IX, Section 8(b); NYSE National, Inc. Rule 14.2; New York Stock Exchange LLC Rule 6820; NYSE MKT LLC Rule 6820; and NYSE Arca, Inc. Equity Rule 6.6820, Option Rule 11.6820.

+
+
fn +

6 Adopting Release at 84785 (“For the initial implementation of the CAT, however, the Commission believes a 50 millisecond clock synchronization standard for Industry Members is reasonable at this time.”).

+
+
fn +

7 Id.

+
+
fn +

8 Id.

+
+
fn +

9 The CAT NMS Plan’s public website is available at www.catnmsplan.com.

+
+
fn +

10 The Participants asked the following industry trade associations to notify their respective members about the Survey: Financial Information Forum, the Security Traders Association and the Securities Industry and Financial Markets Association.

+
+
fn +

11 For purposes of this assessment, “small broker-dealer” has the meaning set forth in Rule 613. In particular, Rule 613(a)(3)(v) states that “small broker-dealer” has the meaning set forth in SEC Rule 0-10(c), which defines a “small broker-dealer” as a broker-dealer that:

+

(1) Had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to § 240.17a-5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) Is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this section[.]

+
+
fn +

12 Specifically, the question listed the following options: order origination systems; order routing systems; order execution or matching systems; co-located systems; internalization systems; back-office systems; third-party systems (including vendor systems); and other (in which case a respondent was asked to identify such other system). Respondents also could indicate that they do not know the types of systems in which they currently maintain synchronized Business Clocks.

+
+
fn +

13 See, e.g., Letter from CAT NMS Plan Participants to Brent J. Fields, dated Sept. 23, 2016.

+
+
fn +

14 All figures and data discussed in this assessment are approximate and subject to potential minor rounding errors and assumptions. When discussing responses to specific questions regarding synchronization practices (i.e., the non-demographic questions), percentages focus on those respondents that provided information in response to the relevant questions.

+
+
fn +

15 Survey responses were identified as “substantially complete” using a two-step process: (1) verification of whether a response was submitted as “complete” (even if some responses were blank); and (2) verification of whether a response was at least 50% complete (generally, responses with less than a 50% completion rate provided only demographic information and no meaningful data regarding Business Clock synchronization practices, costs or views).

+
+
fn +

16 Specifically, approximately 12% of respondents stated that they were not FINRA members and approximately 10% stated that they are excluded or exempt from OATS reporting.

+
+
fn +

17 Some respondents provided comments with their responses regarding “other” activities. These respondents noted the following activities: execution services, network services and/or technology provider; market maker; ATS; national securities exchange routing facility; financial technology firm; private placement of securities and mutual fund retailer; and principal underwriter and distributor of affiliate insurers’ registered annuity products.

+
+
fn +

18 Some of the ATS respondents that believed that different requirements should apply to Execution Venues provided comments with their responses. One ATS respondent explained that Execution Venues currently maintain very tight clock synchronization standards, which is not always the case for non-ATS broker-dealer systems. Two respondents believed that Execution Venues should be subject to more stringent tolerances but they did not provide an explanation for this view. One ATS respondent explained that Execution Venues may adhere to tighter clock synchronization standards than broker-dealers and that requiring broker-dealers to meet the same standards as Execution Venues may impose significant costs and burdens on the broker-dealer community.

+
+
fn +

19 Some respondents that indicated that firms voluntarily improve their synchronization tolerances provided additional comments with their responses. One respondent identified itself as a technology firm that can easily adjust its Business Clock synchronization tolerances, so it tries “to be ahead of the curve.” Other respondents generally believe that firms voluntarily work on improving their synchronization tolerances to address customer comments and reduce system latencies (which may provide a competitive advantage).

+
+
fn +

20 Some respondents that indicated that firms only improve their synchronization tolerances when required to do so provided additional comments with their responses. Respondents provided various views. Some respondents believed that firms only update synchronization tolerances when required to do so due to costs or limited resources. Others believed that firms only update tolerances when required to do so in the absence of some sort of business or competitive advantage that could be gained by updating tolerances. Some respondents expressed that they believe that regulators often drive changes to tolerances since the regulatory need for lower tolerances may exceed the business need.

+
+
fn +

21 Respondents listed the following other factors: competitive advantage; efficient and effective client service; latency concerns; algorithmic high frequency trading; as technology and cost permits (i.e., no directing of scarce resources to unnecessary tasks); and reliance on vendors.

+
+
fn +

22 Some respondents provided comments with their responses. Some respondents indicated that they incurred no costs since they already complied with the Business Clock synchronization thresholds required by the Plan. One respondent stated that it achieved a 10 microseconds tolerance at a cost of $1 million to $2 million before the effective date of the Plan. Other respondents reported that they rely on a vendor so they do not incur direct costs or that they do not have any trading activity.

+
+
fn +

23 Generally, these respondents provided comments that indicated that they already comply with the thresholds, rely on vendors or do not have trading activities.

+
+
fn +

24 One large broker-dealer respondent indicated that it took (or would take) it one year to comply with the initial requirements.

+
+
fn +

25 As described in the sections that follow, some respondents provided comments with their responses indicating that they use other solutions. These respondents listed the following as “other” solutions: NIST US time; third-party software/solution; Nagios; and STP.

+
+
fn +

26 These respondents indicated that key challenges with respect to synchronizing Business Clocks in geographically disparate systems generally relate to time, monetary costs and resources. One respondent also indicated that challenges include signal quality (e.g., GPS line of site and GPS jamming), network congestion, protocol and software selection and configuration, and real-time monitoring and alerting. Another respondent indicated that traceability across multiple systems is its primary challenge.

+
+
fn +

27 In connection with future assessments of the Business Clock synchronization standards set forth in the Plan, the Participants will consider how to improve the efficiency and effectiveness of collecting data from CAT Reporters and the securities industry generally. For instance, the Participants may elect to, without limitation: use targeted studies/surveys or small group discussions with particular types of Industry Members; collect data regarding synchronization practices and thresholds from certain types of Industry Members (e.g., those with the lowest synchronization thresholds) and compare the data to the Participants’ practices and thresholds; analyze data recorded in Industry Members’ synchronization logs; or recommend the implementation of pilot programs where certain CAT Reporters would comply with a narrower synchronization threshold for a period of time to give the Participants an opportunity to assess the costs, benefits and general utility of a narrower threshold.

+
+
fn +

28 Adopting Release at 84785.

+
+
fn +

29 Alternative Trading Systems with Forms ATS on File with the SEC as of May 3, 2017, available at https://www.sec.gov/files/data/frequently-requested-foia-documentalternative-trading-system-atslist/atslist0517.pdf. Please note that the 83 ATSs referenced above includes both equity and fixed income ATSs as the SEC’s publicly available list does not differentiate equity versus fixed income ATSs.

+
+
fn +

30 The Participants believe that it may be appropriate for any future assessment of the costs and benefits of imposing a narrower synchronization threshold on ATSs to take into consideration that ATSs often act in a manner similar to exchanges.

+
+
fn +

31 In a future assessment, it may be appropriate to consider whether certain types of Industry Members – such as electronic trading firms using a business model that relies on low latency trading strategies – should be subject to narrower synchronization standards, to the extent that the nature of their business would, in practice, require them to use such narrower standards. The Participants will consider collecting additional data in future assessments to evaluate this question.

+
\ No newline at end of file diff --git a/spider/files/data000005.html b/spider/files/data000005.html index 06e27e5..323966a 100644 --- a/spider/files/data000005.html +++ b/spider/files/data000005.html @@ -1,1578 +1,913 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: compilation - document_title: CAT Industry Member Reporting Scenarios - document_type: Scenarios - source: US/SEC/Scenarios/Member Reporting Scenarios - source_type: Member Reporting Scenarios + content_type: periodic + document_title: CAT NMS Plan Potential Expansion + document_type: Reports + source: US/SEC/Reports/Potential Expansion Report + source_type: Potential Expansion Report language: English citation: N/A -
pubdate: February 28, 2019 effdate: N/A -

CAT Industry Member Reporting Scenarios

- Topic: CAT Industry Member Reporting Scenarios - Compliance User: Industry Member +
pubdate: May 15, 2017 effdate: N/A +

CAT NMS Plan Potential Expansion

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion + Compliance User: Equity Securities Keywords: - Technical Specification, + File Number 4-698, + National Market System Plan Governing the CAT, -

(For IM Technical Specification v1.1)

-

2/28/19 DRAFT Version 1.1

-
pubdate: N/A effdate: N/A -

Executive Summary

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary - Compliance User: Industry Member +

July 19, 2017

+

Brent J. Fields

+

Secretary

+

Securities and Exchange Commission

+

100 F Street, NE

+

Washington, DC 20549-1090

+

Re: File Number 4-698

+

National Market System Plan Governing the Consolidated Audit Trail

+

Dear Mr. Fields:

+

In accordance with Section 6.11 of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”),1 on May 15, 2017, the Operating Committee for CAT NMS, LLC provided the Securities and Exchange Commission with a document outlining how the Participants2 could incorporate into the consolidated audit trail (“CAT”) information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including Primary Market Transactions in securities that are not NMS Securities or OTC Equity Securities and in debt securities (the “Expansion Report”).3 The Participants determined to update the discussion of equity securities other than NMS Securities and OTC Equity securities that appears on pages 63 and 64 of the enclosed amended Expansion Report.

+

Brent J. Fields

+

July 19, 2017

+

Page2

+

Thank you for your attention to this matter. Please contact me at 212-229-2455 if you have any questions or comments.

+ +

cc (via email): The Hon. Jay Clayton, Chairman

+

The Hon. Michael S. Piwowar, Commissioner

+

The Hon. Kara M. Stein, Commissioner

+

Ms. Heather Seidel, Acting Director, Division of Trading and Markets

+

Mr. Gary L. Goldsholle, Deputy Director, Division of Trading and Markets

+

Mr. David S. Shillman, Associate Director, Division of Trading and Markets

+

Mr. David Hsu, Assistant Director, Division of Trading and Markets

+

CAT NMS Plan Participants

+
pubdate: May 15, 2017 effdate: N/A +

DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN + Compliance User: Equity Securities Keywords: - Technical Specifications, - CAT NMS plan, + File Number 4-698, + National Market System Plan Governing the CAT, + Potential Expansion of 6.11, + Sec Rule 613, + CAT NMS Plan - Section 6.11, + Expansion Document, -

This document is a companion document to the CAT Reporting Technical Specifications for Industry Members (“Technical Specifications”) and is provided to assist Industry Members in implementing the reporting requirements laid out in the Technical Specifications. This document illustrates the specific reporting requirements for a variety of order handling execution scenarios for both equities and options Eligible Securities (as defined in the CAT NMS Plan). The scenarios illustrate the reporting requirements for Phases 2a and 2b. Additional scenarios will be added for Phases 2c and 2d when the Technical Specifications are published for those phases.

-

The reporting scenarios are presented in a separated document from the Technical Specifications to provide the greatest flexibility in the ability to modify or add scenarios as new questions are presented and trading practices evolves. It is expected that changes and additions will be necessary for reporting scenarios with greater frequency than changes to the Technical Specifications that would be required when record format, field value changes, etc., occur. By maintaining a separate reporting scenarios document, reporting scenarios may be clarified or added without the need for a new version of the Technical Specifications.

-

This document contains interpretive guidance for Industry Member CAT Reporters with respect to how the Technical Specifications must be implemented. As such, any changes to this document are subject to the same review and approval process by the Operating Committee, pursuant to the CAT NMS Plan, as the Technical Specifications.

-

This document represents a phased approach to industry reporting. Please note that a proposed amendment to the CAT NMS Plan will be filed with the Securities and Exchange Commission ("Commission") to reflect the phased approach for the Industry member CAT reporting described in the Technical Specifications. The proposed amendment will be subject to the approval of the Commission.

-

Revision / Change Process

- -
pubdate: N/A effdate: N/A -

1. Introduction

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Introduction - Compliance User: Industry Member +

PREPARED BY THE PARTICIPANTS TO THE CAT NMS PLAN

+

PREPARED MAY 15, 2017

+

(AMENDED JULY 19, 2017)

+

On July 11, 2012, the Securities and Exchange Commission (“Commission”) adopted Rule 613 of Regulation NMS (“Rule 613”) under the Securities Exchange Act of 1934 (“Exchange Act” or “SEA”)1 to require the national securities exchanges and national securities association to jointly submit a national market system plan to create, implement, and maintain a consolidated audit trail (“CAT”) and central repository.2 On September 30, 2014, the national securities exchanges and the Financial Industry Regulatory Authority (“FINRA”), the sole national securities association (collectively, the “Participants”), filed the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”).3 The Commission unanimously approved the CAT NMS Plan, as amended by the Participants and modified by the Commission, and deemed it effective on November 15, 2016.4

+

Pursuant to Rule 613(i) and Section 6.11 of the CAT NMS Plan, the Participants are required to “jointly provide to the Commission within six months after effectiveness of the [CAT NMS Plan] a document outlining how [the Participants] could incorporate into the [CAT] information with respect to . . . debt securities, . . . and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate” (“Expansion Document”). Specifically, Rule 613(i) requires the Expansion Document to address expanding the CAT to include:

+

1. Equity securities that are not NMS securities,5

+

2. Debt securities, and

+

3. Primary market transactions in NMS securities, equity securities that are not NMS securities and debt securities.

+

In addition, the Expansion Document must include the relevant details for each order and reportable event, identification of the market participants that would be providing the data, an implementation timeline, and a cost estimate for expanding the CAT.6

+
pubdate: May 15, 2017 effdate: N/A +

I. DEBT SECURITIES

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities + Compliance User: Equity Securities Keywords: - Event Reports, + Debt Securities, + CAT NMS plan, + Sec Rule 613, -

This document is organized by product, and then within each product, by general handling scenario, such as order receipt and routing, order execution, etc.

-

For each scenario, a description of the scenario along with a diagram is provided and then is followed by specific Event Reports illustrating the correct values to be populated for each field.

-
-
pubdate: N/A effdate: N/A -

2. Equity Scenarios and Examples

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples - Compliance User: Industry Member - Keywords: -

This section will illustrate sample equity reporting scenarios. Each scenario will include a brief scenario description including the reportable order events, a flow chart, and step-by-step reporting responsibilities.

-
pubdate: N/A effdate: N/A -

2.1. Order Origination and Route Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios - Compliance User: Industry Member +
pubdate: May 15, 2017 effdate: N/A +

A. Debt Securities Market Background

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background + Compliance User: Equity Securities Keywords: - Order, + Debt Securities, + CAT NMS plan, + Sec Rule 613, + CMO, -
pubdate: N/A effdate: N/A -
2.1.1. New Principal Order Routed to Exchange and Executed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, New Principal Order Routed to Exchange and Executed - Compliance User: Industry Member - Keywords: - Industry Member Broker 1, - Route Scenarios, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal order, routes it to an exchange, and then the order is executed on the exchange.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• The creation of a New Order (Principal)

-

• The route to an exchange as an Order Route event

-

Note that the execution will be reported by the exchange, Broker 1 does not need to report the fill received.

- - - -
-
pubdate: N/A effdate: N/A -
2.1.2. Customer Order Routed to Exchange as Agent
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Customer Order Routed to Exchange as Agent - Compliance User: Industry Member - Keywords: - Average Price Bases, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that routes a customer order to an exchange on an agency basis.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• Order Route event for routing the customer order to the exchange

-

In this scenario, since the execution is passed back directly to the customer, no Order Fulfillment event is required to be reported.

- - - -
-
pubdate: N/A effdate: N/A -
2.1.3. Customer Order Fulfilled on Average Price Basis
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Customer Order Fulfilled on Average Price Basis - Compliance User: Industry Member - Keywords: - Two Industry Members, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that works a customer order through an average price account by routing one or more representative orders to the exchange. The Industry Member then fills the customer order on an average price basis.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• New Order event for the representative order created from the average price account

-

• Order Route event for each representative order, or portion of the representative order, routed to the exchange

-

• Order Fulfillment event to report the average price given to the customer

- - - - -
-
pubdate: N/A effdate: N/A -
2.1.4. Order Routed between Two Industry Members and Subsequently Executed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Routed between Two Industry Members and Subsequently Executed - Compliance User: Industry Member - Keywords: - Multiple Industry Members, - -

This scenario illustrates the reporting requirement when an order is routed from one Industry Member to another.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• Order Route event for routing the customer order to Broker 2

-

For this scenario, Industry Member Broker 2 is required to report the following events:

-

• Order Accepted event for the received client order from Broker 1

-

• Order Route event for routing the client order to the exchange

- - - - -
-
pubdate: N/A effdate: N/A -
2.1.5. Order Split and Routed to Multiple Industry Members, Exchange, and Filled
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Split and Routed to Multiple Industry Members, Exchange, and Filled - Compliance User: Industry Member - Keywords: - Routing Broker, - -

This section illustrates the reporting requirement when a customer order is split and each slice is subsequently routed to different parties - external Industry Member and subsequently an exchange and to an ATS.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• Order Route event for the routing of an order slice to Broker 2

-

• Order Route event for the routing of an order slice to ATS 3

-

For this scenario, Industry Member Broker 2 is required to report the following events:

-

• Order Accepted event for the received client order from Broker 1

-

• Order Route event for routing of the order to Exchange 1

-

For this scenario, Industry Member ATS 3 is required to report the following events:

-

• Order Accepted event for the received client order from Broker 1

-

• Trade event when the order is matched

- - - - - -
-
pubdate: N/A effdate: N/A -
2.1.6. Order Routed from an Exchange through a Routing Broker to another Exchange
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Order Routed from an Exchange through a Routing Broker to another Exchange - Compliance User: Industry Member - Keywords: - Broker, - Industry Member Broker 1, - original manual timestamp, - -

This section will show the scenario when one exchange routes an order via a routing broker who is an Industry Member to another exchange.

- -

For this scenario, the exchange that routes the order (Exchange 1) must report:

-

• The route of the order to its routing broker

-

• After the execution, a Fill of the routed order

-

The routing broker (Industry Member Broker 1) must report the following events:

-

• The receipt of the order from the exchange as an Order Accepted event

-

• Order Route event for the route of the order to another exchange

-

The exchange that accepts the routed order (Exchange 2) must report the following events:

-

• The receipt of the order routed from Broker 1; and

-

• Any subsequent order handling events, if applicable

- - -
-
pubdate: N/A effdate: N/A -
2.1.7. Manual Order Route Followed by Electronic Route, Merged Event
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order Route Followed by Electronic Route, Merged Event - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements when an Industry Member manually routes an order to another Industry Member and follows up with an electronic route message.

- -

For this scenario, the sending Industry Member Broker 1 is required to report:

-

• New Order event for the customer order

-

• Order Route event for the electronically routed order (inclusive of routedOrderID) to Broker 2 with both the electronic and original manual timestamp

-

For this scenario, the receiving Industry Member Broker 2 is required to report:

-

• Order Accepted event for the electronically received client order (inclusive of routedOrderID) from Broker 1 with both the electronic and original manual timestamp

- - -
-
pubdate: N/A effdate: N/A -
2.1.8. Manual Order Route, Electronic Duplicate Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order Route, Electronic Duplicate Order - Compliance User: Industry Member - Keywords: - CAT Reporting, - Industry Member Broker, - -

This scenario illustrates the Phase 2a reporting requirements when an Industry Member manually routes an order but is unable to merge the manual and electronic copies of the order into a single message for CAT Reporting. The Industry Member may report a manual order route event without a routedOrderID, followed by an electronic event which must include electronicDupFlag = true.

-

For this scenario, Industry Member Broker 1 is required to report:

-

• New Order event for the receipt of the customer order

-

• Order Route event for the manual route to Broker 2

-

• Order Route event for the electronic route message sent to Broker 2 (marked with electronicDupFlag = true)

-

For this scenario, Industry Member Broker 2 is required to report:

-

• Order Accepted event once agreeing to the route from Broker 1

-

• Order Accepted event for the receipt of the electronic order route from Broker 1 (marked with electronicDupFlag = true)

- - - - - -
-
pubdate: N/A effdate: N/A -
2.1.9. Manual Order, One Side Reports Merged Event
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Origination and Route Scenarios, Manual Order, One Side Reports Merged Event - Compliance User: Industry Member - Keywords: - Manual Order, - -

This scenario illustrates the Phase 2a reporting requirements when an Industry Member manually routes an order to anther Industry Member. The sending Industry Member chooses to report a single merged order event with both a manual and systematized timestamp, but the receiving Industry Member reports the receipt of the order twice - once for the manual receipt of the order followed by an electronic duplicate event which includes the electronicDupFlag = true. Note that in Phase 2a, events with either manualFlag = true or electronicDupFlag = true will not be subject to the standard inter-firm linkage process.

-

For this scenario, the sending Industry Member Broker 1 is required to report:

-

• New Order event for the customer order

-

• Order Route event for the electronically routed order (inclusive of routedOrderID) to Broker 2 with both the electronic and original manual timestamp

-

For this scenario, the receiving Industry Member Broker 2 is required to report:

-

• Order Accepted event for agreeing to the route from Broker 1 (with manualFlag = true)

-

• Order Accepted event for the receipt of the electronic order route from Broker 1 (marked with electronicDupFlag = true)

- - - - -
-
-
pubdate: N/A effdate: N/A -

2.2. Trade Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios - Compliance User: Industry Member - Keywords: -
pubdate: N/A effdate: N/A -
2.2.1. Agency Order Cross
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Agency Order Cross - Compliance User: Industry Member - Keywords: - New Order event, - -

This scenario illustrates the reporting requirements to CAT when an Industry Member (Broker 1) matches a Customer Buy order with a Sell order routed from another Industry Member (Broker 2).

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

1) The receipt of the order from the customer (New Order event)

-

2) The receipt of the order routed from Broker 1 (Order Accepted event)

-

3) The execution (Trade event)

-

Industry Member Broker 2 would report the following events:

-

1) The receipt of customer order (New Order event)

-

2) The route of the order to Broker 1 (Order Route event)

-

The customer Order A at Broker 1 was fully executed, while the routed order from Broker 2 was partially executed.

-

For ATS agency order cross, please refer to Section 2.2.1 step 10 for more details.

- - - - -
-
pubdate: N/A effdate: N/A -
2.2.2. Internalized Trade against Proprietary Account
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Internalized Trade against Proprietary Account - Compliance User: Industry Member - Keywords: - Trade Event, - Industry Member Broker 1, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that executes a customer order against its own proprietary account.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• The receipt of the customer order as a New Order event (New Order event)

-

• The execution as a Trade event

- - -
-
pubdate: N/A effdate: N/A -
2.2.3. ATS Cross with Multiple Orders on One Side
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, ATS Cross with Multiple Orders on One Side - Compliance User: Industry Member - Keywords: - Order, - ATS A, - -

This scenario illustrates the reporting requirement when an ATS performs a cross that has multiple orders on one side. For this case, the ATS must report:

-

• The receipt of the three orders involved in the execution (three Order Accepted events)

-

• Two Trade Events

- - - - - - - -
-
pubdate: N/A effdate: N/A -
2.2.4. Negotiated Trade
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Negotiated Trade - Compliance User: Industry Member - Keywords: - Industry Member, - New Order, - New Order and Trade, - -

This scenario illustrates the reporting requirement when an Industry Member executes a customer order as the result of negotiating a trade with another Industry Member (e.g. through a system such as OTCLink). For this case, Industry Member Broker 1 (initiator) is required to report the following:

-

• The receipt of the customer order in a New Order event

-

• The execution of the order (Trade event)

-

Industry Member Broker 2 (respondent) must report the following to CAT:

-

• A New Order event

-

• The execution of the order (Trade event)

-

All of the New Order and Trade events occurring within the negotiation process must have the negotiatedTradeFlag and negotiatedTradeSide present and marked properly.

- - - - -
-
pubdate: N/A effdate: N/A -
2.2.5. Trade as the Result of a Quote
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Trade Scenarios, Trade as the Result of a Quote - Compliance User: Industry Member - Keywords: - Market Maker, - Industry Member Market Maker, - Industry Member OTCM, - -

This scenario illustrates the reporting requirements to CAT when a Market Maker (and Industry Member Market Maker A) submits a displayed (bid) quote to an inter-dealer quotation system - Industry Member OTCM, another Market Maker (and Industry Member, Market Maker B) wants to trade at the displayed quote, sends a message through the inter-dealer quotation system, consummating in a trade.

-

In Phase 2a, Industry Member Market Maker A is required to report the following event:

-

• A Trade as a Result of a Quote event for execution against Market Maker B

-

For this scenario, Industry Member Market Maker B must report the following event:

-

• A New Order event

-

• A Trade event for execution against Market Maker A

-

For this scenario Industry Member OTCM must report the following event:

-

• Quote Received event for the receipt of the quote from Market Maker A

- - - - +
pubdate: May 15, 2017 effdate: N/A +
1. Scope of the Term “Debt Securities”
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background, Scope of the Term "Debt Securities" + Compliance User: Equity Securities + Keywords: + CAT NMS Plan - Section 6.11, + Debt Securities, + NYSE, + MSRB, + FINRA, + TRACE, + Corporate Bonds, + Asset-Backed Securities, + Agency Debt Securities, + Collateralized Mortgage Obligations, + Small Business Administration, + +

Section 6.11 of the CAT NMS Plan, which implements Rule 613(i), requires that the Expansion Document address the possible expansion of CAT to “debt securities.” Although there is no definition of the term “debt securities” in Rule 613, when proposing Rule 613, the Commission indicated that it intends that the CAT eventually would be expanded to include corporate bonds, asset-backed securities, municipal bonds, and other debt instruments.7

+

Debt securities are issued by many different entities, including the U.S. government, counties, cities, corporations, and financial institutions, as well as international bodies and can take the form of a number of different security types. Debt securities can vary based on factors such as issuer characteristics (e.g., federal government versus private corporations) and issue characteristics (e.g., coupon rate, collateral, maturity), and trading practices in different types of debt securities can also vary (e.g., electronic trading versus voice messaging). Such differences can also lead to different clientele for the instruments. For example, while there is a lot of retail participation in the municipal securities market, mainly due to the tax advantage of interest income for some investors, the corporate bond market has a combination of retail and institutional investors, and securitized products are mainly traded by institutions.

+

There are also differences in regulatory reporting across debt securities. FINRA, the New York Stock Exchange (“NYSE”), and the Municipal Securities Rulemaking Board (“MSRB”)8 each already require reporting of certain information for debt securities. The MSRB’s rules govern the reporting of transactions in municipal securities.9 The NYSE’s rules govern the entry, display and execution of orders and the reporting of transactions in debt securities on the NYSE Bonds® system.10 FINRA rules govern the reporting of trades in most other types of debt securities. The debt securities currently reportable to FINRA’s Trade Reporting and Compliance Engine (“TRACE”) system include:11

+

• Corporate Bonds: Corporate bonds are issued by individual companies to raise money for capital expenditures, operations, and acquisitions. There are many types of corporate bonds with various structures, coupon rates, maturity dates and credit quality, among other characteristics.12

+

• Asset-Backed Securities (“ABSs”): ABSs are certificates that represent an interest in a pool of assets such as credit card receivables, auto loans and leases, home equity loans, and even the future royalties of a musician. This class includes Mortgage-Backed Securities (“MBSs”).13

+

• Agency Debt Securities (“Agencies”): There are two types of Agencies: (1) bonds issued or guaranteed by U.S. federal government agencies; and (2) bonds issued by government-sponsored enterprises (“GSEs”)—corporations created by Congress to foster a public purpose, such as affordable housing. Bonds issued or guaranteed by federal agencies such as the Government National Mortgage Association (Ginnie Mae) are backed by the “full faith and credit of the U.S. government,” like Treasuries. This is an unconditional commitment to pay interest payments and to return the principal investment in full to the security holder when a debt security reaches maturity. Bonds issued by GSEs such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage (Freddie Mac), and the Federal Agricultural Mortgage Corporation (Farmer Mac) are not backed by the same guarantee as federal government agencies.14

+

• Collateralized Mortgage Obligations (“CMOs”): CMOs are debt securities that are backed by mortgage loans or assets derived from MBSs, including Real Estate Mortgage Investment Conduit (“REMICs”).15

+

• Small Business Administration (“SBA”) Backed ABS: An SBA-Backed ABS is a debt instrument issued by a program of the SBA for which the timely payment of principal and interest is guaranteed by the SBA. An SBA-Backed ABS represents an ownership interest in a pool or pools of loans or debentures and structured to “pass through” the principal and interest payment made by the borrowers in such loans or debentures to the holders of the security on a pro rata basis.16

+

In addition to FINRA’s TRACE reporting requirements, the MSRB requires reports of transactions in municipal securities, which are debt securities issued by states, cities, counties and other state or local governmental entities to raise money to fund public projects. Most municipal debt pays a specified amount of interest (usually semiannually) and returns the principal to the security holder on a specific maturity date.17 Because the MSRB is not a Participant in the CAT NMS Plan, it did not participate in preparation of the Expansion Document, and since the MSRB has specific jurisdiction over municipal securities, the Participants recommend that the MSRB be consulted before any analysis regarding the potential expansion of the CAT to municipal securities is undertaken.18 Thus, although some concepts discussed in the Expansion Document may be relevant to municipal securities, it is generally focused on debt securities that are reportable to TRACE or the NYSE as of the date of the Expansion Document.

+
+
pubdate: May 15, 2017 effdate: N/A +
2. Debt Markets v. Equity Markets
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background, Debt Markets v. Equity Markets + Compliance User: Equity Securities + Keywords: + Debt Markets, + Equity Markets, + TRACE, + Daily Trading Volume, + FINRA, + NYSE, + +

The U.S. debt markets and equity markets are vastly different in most material respects. As noted above, the markets vary significantly in types of issuers, issue characteristics, trading, and regulatory regimes such as the level of market transparency on both a pre- and post-trade basis. All of these differences would influence how expanding the CAT to include reporting for debt securities could be efficiently and effectively achieved. Below, we describe some of the key characteristics of the government and corporate debt markets.

+

First, the U.S. debt market is significantly larger than the equities market in terms of both the number of outstanding securities and the amount of capital raised; however, the size of the U.S. debt market is heavily influenced by U.S. Treasury securities.19 Second, there are significantly more issuances of debt securities as compared with equity securities. Many public companies may have only one class of stock, but can issue numerous types of bonds with different yields, maturities, and denominations.20 For example General Electric has only one class of stock, but it has issued over 1,000 unique bonds.21 In addition, daily trading volumes are significantly different for equities than for debt, with the number of trades in equity securities far surpassing trades in debt securities.

+

The following charts highlight some of the more significant differences between the debt markets and the equity markets. Chart 1 compares the monthly value of new issue corporate bonds and public corporate stocks in the United States from January 2015 to January 2017.22

+ +

Chart 2 demonstrates the number of issues in the U.S. debt and equities markets by charting the number of unique CUSIPs reportable to a FINRA facility as of the beginning of the calendar year for each of the last five years.23 As the chart makes clear, there are significantly more CUSIPs for debt securities than for equity securities.24

+ +

Chart 3 displays the average daily trading volume for U.S. corporate debt, all TRACE reported debt, and exchange-listed equity securities for each month from January 2016 to March 2017.25 As the chart makes clear, in any given month the trading volume on equities exchanges is generally over five times that in U.S. corporate debt. However, when compared with all TRACE reported debt, the notional volume of transactions in U.S. debt and exchange-listed equity securities is relatively similar due to the high notional volume of transactions in Agency MBSs.

+ +

Chart 4 shows the combined equity trades on exchanges compared to the TRACE reported trades during each quarter of 2016.26 Despite the fact that there are substantially more bonds in the market and more new bond issuances, the volume of equity trades is higher, and there are significantly more equity transactions on a daily basis than bond transactions. While exchanges had in excess of 1.5 billion trades each quarter, with one quarter over 2.5 billion, TRACE averages only 4.5 million reported trades per quarter.

+ +

Another major difference between the bond and equity markets is the size of the trades. The dollar value of bond transactions typically is greater than stock transactions. The average size of a bond trade exceeds $500,000 whereas the average stock trade is less than $10,000.27 These large transaction sizes are the result of a substantial portion of transactions by institutional investors in the debt markets as compared to the equity markets.28 Chart 5 uses Federal Reserve financial sector data to chart retail investors in different bond types.

+

Chart 5: Presence of Retail Investors in the Bond Market29

+ +

In general, the debt markets have a much higher proportion of institutional market participants than in the equity markets, in which retail investor participation is substantially higher.30 However, for purposes of Chart 5, institutional investors include mutual funds, pension funds, insurance companies, and endowments. When these forms of indirect ownership are factored in, 49% of U.S. households are invested in bonds.31

+

Two other major differences between the debt and equity markets are related. Due to the vast number and variety of debt securities outstanding, most individual debt securities trade much less often than a typical stock, particularly listed stocks. For an equity security that is listed on an exchange, there is an active market for the stock, and, consequently, it is easy to obtain a current price for any particular listed stock. However, bonds and other debt securities tend to actively trade during the period after their initial issue, but, thereafter, trading in a particular debt security may not occur for months or even years.

+

Chart 6: Trading Volume Reduction in Corporate Debt 90 Days After Issuance32

+ +

Because of the relative lack of liquidity in the debt markets compared to the equity markets, there is significantly less pre-trade price transparency for most debt securities compared to equity securities. In addition, because of the relative lack of trading activity in the debt markets compared to the equity markets, it is significantly less difficult to link specific orders in debt securities to resultant trades. For example, an order in an equity security may be split into numerous child orders (or numerous orders can be aggregated into a larger order). By requiring that the parent order and each child order be linked, the equity order audit trail provides insight into these relationships that otherwise would be difficult to ascertain.

+

Along with these fundamental differences in the character of equity versus debt securities, the manner in which orders are handled in the two markets—and even what constitutes an “order”—and how trades are executed, differ substantially. In the debt market, it is common for an investor to contact his or her broker to purchase a bond with certain characteristics (e.g., a specific yield, credit rating or maturity) rather than a particular security, and the broker will reach out to other bond brokers and assess what debt securities that meet those criteria are available. Based on this information, the broker generally provides the investor with options, and the investor can choose a particular debt security to purchase when presented with the options. FINRA requires its members to submit trade reports to TRACE and disseminates some of this information; however, this information is limited to post-trade transparency and is subject to other limitations, such as volume thresholds. By contrast, exchanged-listed stocks always have pre-trade bid and offer prices available, often on multiple trading centers.

+

Finally, unlike most equity securities, most debt securities are traded over-the counter (“OTC”) rather than on an exchange. In 2017, approximately 10,000 of the approximately 61,500 corporate bonds outstanding–approximately 16% were reportable to NYSE’s bond trading platform, which is the largest centralized corporate bond exchange in the U.S..33 The vast majority of transactions in debt securities are executed through informal networks of bond dealers in the OTC market. Further, while there has been significant growth in electronic trading venues for bonds in recent years—the number of corporate bond transactions occurring on ATSs has grown to approximately 20%—much of the activity in this space occurs as a Request for Quote (“RFQ”) or similar format where the terms of a trade are negotiated bilaterally.34

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pubdate: N/A effdate: N/A -

2.3. Fulfillment Scenario s

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s - Compliance User: Industry Member - Keywords: -
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2.3.1. Representative Order Execution
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Representative Order Execution - Compliance User: Industry Member - Keywords: -

This section will illustrate the Phase 2a reporting requirements for the execution of a customer/client order that is not required to be reported for public dissemination purposes and use of an Order Fulfillment, rather than a Trade Event, is required.

-

In this scenario, Industry Member Broker A receives two customer orders to BUY XYZ at 10.01. Industry Member Broker A creates a representative order that will be used to fill two customer orders. The representative order is routed to an exchange where it is executed. Upon execution of the representative order, the Industry Member fills each of the customer orders on an agency basis.

-

For this scenario, Broker A is required to report the following events to CAT for the customer orders:

-

1) New Order events for the customer orders

-

2) An Order Fulfillment for each customer order

-

Broker A is required to report the following events to CAT for the representative order:

-

1) New Order event for the representative order (flagged to indicate it represents customer orders, but no explicit linkage to the underlying orders)

-

2) Routing the representative order to the exchange (Order Route event)

-

Note that execution of the representative order is only reported by the exchange.

-

Because this scenario involves an aggregation of two customer orders that are worked as a single representative order, this is a Phase 2c representative order scenario and linkage between the customer orders and the representative orders is not required. In Phase 2c, the representative order and the underlying customer orders must be linked.

- - - - -
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2.3.2. Fill of a Single Order on a Riskless Principal Basis
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Single Order on a Riskless Principal Basis - Compliance User: Industry Member - Keywords: - Order Route Event, - New Order event, - -

This scenario illustrates the CAT reporting requirements when an Industry Member fills an order as riskless principal.

-

In this example, upon receipt of the customer order, the Industry Member sends a riskless principal or principal order to an exchange for execution, in order to satisfy the customer's order. The representative principal order is linked to the original customer order.

- -

The Industry Member Broker 1 is required to report the following events to CAT:

-

• The creation of the customer order as a New Order event

-

• The creation of a riskless principal order with linkage to the original customer order (New Order event with aggregatedOrders field). As an alternative, the Industry Member may report a New Order event (for the principal order) without linkage to the customer order, and an additional New Order Supplement event

-

• The route of the principal order to the exchange (Order Route event)

-

• After the execution, the flip of the executed shares back to the customer order (an Order Fulfillment Event).

-

The exchange will report the following:

-

• The receipt of the order B routed from the Broker 1

-

• The execution of order

- - - - -
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2.3.3. Customer Order Internally Routed to Another Desk and Subsequently Executed Against a Firm Proprietary Account
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Customer Order Internally Routed to Another Desk and Subsequently Executed Against a Firm Proprietary Account - Compliance User: Industry Member - Keywords: - Order Internal Route event, - Trade Event, - -

This section will illustrate an example of CAT reporting when an Industry Member internally routes a customer order from the sales desk to the trading desk, and subsequently executes against a firm proprietary account. The sales desk and trading desk are separated by information barriers.

- -

In this scenario, Industry Member Broker 1 must report the following events to CAT:

-

• The receipt of the customer order in a New Order event

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• The internal route from the sales desk to the trading desk (Order Internal Route event)

-

• The principal execution (Trade event)

- - -
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2.3.4. Customer Order Internally Routed to Multiple Desks and Subsequently Executed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Customer Order Internally Routed to Multiple Desks and Subsequently Executed - Compliance User: Industry Member - Keywords: - Program Trading Desk, - -

This scenario illustrates the CAT reporting requirements when an Industry Member internally routes a customer order from the sales desk to multiple desks within the Industry Member. Each destination desk subsequently internally fills the order. Each internal route and execution must be reported separately.

- -

For this scenario, Industry Member Broker 1 is required to report the following events for CAT:

-

• At the Sales Desk

-

• New Order event for the customer order

-

• At the Trading Desk

-

• Order Internal Route event from the sales desk to the trading desk

-

• The principal execution as a Trade event

-

• At the Arbitrage Desk

-

• Order Internal Route event from trading desk to the arbitrage desk

-

• The principal execution as a Trade event

-

• At the Program Trading Desk

-

• Order Internal Route event from the trading desk to the program trading desk

-

• The principal execution as a Trade event

- - - - - -
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2.3.5. Internal Route and Execution, Leaves Quantity Routed Externally
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Internal Route and Execution, Leaves Quantity Routed Externally - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements to CAT when an Industry Member internally routes an order to another desk where it is partially executed and the remainder is routed to another Industry Member to execute.

- -

Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• Order Internal Route from the Sales Desk to the Trading Desk

-

• Trade event for the partial execution of the customer order

-

• Order Route of the remaining shares to Broker 2

-

Industry Member Broker 2 is required to report the following events:

-

• Order Accepted event for the order from Broker 1

-

• Trade event for the execution of Broker 1's order

- - - -
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2.3.6. Fill of a Customer Order from a Pre-Existing Principal Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Customer Order from a Pre-Existing Principal Order - Compliance User: Industry Member - Keywords: - Order Fulfillment event, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal order and routes it to an exchange. Before execution of the principal order, the Industry Member receives a customer order. Upon execution of the principal order, the Industry Member fills the customer order on a riskless principal basis.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

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• The creation of a new principal order (New Order event)

-

• Route the principal order to an exchange via an Order Route event

-

• The receipt of a customer order (New Order event)

-

• Fill of the customer order with the executed principal order via an Order Fulfillment event

- - - - -
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2.3.7. Fill of a Customer Order from a Pre-Existing Principal Order with Better Price than the Representative Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Fill of a Customer Order from a Pre-Existing Principal Order with Better Price than the Representative Order - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates and routes a representative order to work a customer order, but ultimately fills the customer order with an existing principal order that executed at a better price.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

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• A New Order event for the creation of the principal order

-

• The route of the principal order to the exchange (Order Route event)

-

• The receipt of the customer order as a New Order event

-

• The creation of the representative order as a New Order event

-

• The route of the representative order to the exchange as an Order Route event

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• An Order Fulfillment event for the fill of the customer order against the principal order

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2.3.8. Route to Foreign Broker
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Route to Foreign Broker - Compliance User: Industry Member - Keywords: - CAT Reporter, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member (Broker 1) that routes an order to a foreign broker-dealer. Because the foreign broker dealer is not a CAT reporter, Broker 1 must report an Order Fulfillment event to represent the outcome of the customer order.

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For this scenario, Industry Member Broker 1 is required to report the following events:

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• A New Order event for the receipt of customer order

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• An Order Route event for the routing of the order to the foreign broker

-

• An Order Fulfillment event to show the executed shares given back to the customer

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2.3.9. Order Fulfillment Amendment
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Fulfillment Scenario s, Order Fulfillment Amendment - Compliance User: Industry Member - Keywords: -

In the following scenario, the Industry Member amends the price of a customer fill that was reported to CAT on a previous day.

-

For this scenario, Industry Member Broker 1 is only required to report an Order Fulfillment Amendment event for T+1.

- -

Note that the amendment reporting is only applicable to Order Fulfillment events, not the events reported to the TRF for media dissemination (which would have originally been reported as Trade events).

- -
-
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2.4. Order Modification Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios - Compliance User: Industry Member - Keywords: -
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2.4.1. Customer Order and Modification
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Order and Modification - Compliance User: Industry Member - Keywords: - Order Modified event, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member for a customer initiated modification on an order.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

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• New Order event for the customer order

-

• Order Modified event upon receipt of customer request

- - -
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2.4.2. Customer Initiated Modification of Order Previously Routed to Exchange
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Initiated Modification of Order Previously Routed to Exchange - Compliance User: Industry Member - Keywords: - Order Modification event, - EXCH1, - -

This scenario illustrates a customer-initiated modification of an order which the Industry Member had previously routed to an exchange.

-

In this scenario, Industry Member Broker 1 is required to report the following events to CAT:

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• A New Order event for the receipt of customer order

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• Order Route event for the route to the exchange

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• An Order Modification event

-

• A second Order Route event for the route of the modified order to the exchange

- - - - -
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2.4.3. Customer Initiated Modification of Order Previously Routed to Another Industry Member
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Customer Initiated Modification of Order Previously Routed to Another Industry Member - Compliance User: Industry Member - Keywords: - EXCH1, - -

This scenario illustrates the reporting requirements to CAT for two Industry Members when a customer of the first Industry Member initiates a modify on an order. The example shown does not illustrate events that would occur following the second Order Route event to account for the New Order and Order Accepted events, such as cancellations, trades, or fulfillments.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

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• New Order event for the customer order

-

• Order Route event for the routing of the order to Broker 2

-

• Order Modified event for customer initiated modification

-

• Order Route event for the routing of the modified order to Broker 2

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For this scenario, Industry Member Broker 2 is required to report the following events:

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• Order Accepted event for the received client order from Broker 1

-

• Order Modified event upon receiving the modify notice from Broker 1

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2.4.4. System Driven Modification of Previously Routed Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, System Driven Modification of Previously Routed Order - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements to CAT for two Industry Members when the Industry Member sending an order uses a programmed algorithmic system, which modifies the order routes. Since the order modification is determined by the algorithm and not by the sending Industry Member, the sending Industry Member does not need to report subsequent Order Route events. The modifications driven by the algorithm are captured by the receiving Industry Member in an Order Modified event.

-

For this scenario, sending Industry Member Broker 1 is required to report the following events:

-

• New Order event for the accept of the customer order

-

• Order Route event for the routing of the order to Broker 2

-

For this scenario, receiving Industry Member Broker 2 is required to report the following events:

-

• Order Accepted event for the received order from Broker 1

-

• Order Modified event upon receiving the modify from Broker 1

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2.4.5. Order Modification of a PEG Order by a Display ATS
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Order Modification of a PEG Order by a Display ATS - Compliance User: Industry Member - Keywords: - Section 6.4(d)(i) of the CAT NMS Plan, - Order Adjusted Event, - CAT NMS plan, - Per CAT FAQ #H1, - Broker 1, - -

This section will show how an Order Adjusted Event is reported when a display ATS reprices a peg order. Per CAT FAQ #H1, each time an Industry Member reprices a peg order based on a market move (i.e., when there is a change in the national best bid or offer or the best bid or offer on a particular exchange, as applicable based on the terms of the order), the Industry Member must report a price modification of the peg order to the CAT pursuant to Section 6.3(d) of the CAT NMS Plan, as applied to Industry Members by Section 6.4(d)(i) of the CAT NMS Plan, if the price is modified. If the Industry Member does not reprice a peg order when the market moves, the Industry Member does not need to report a modification of the peg order to the CAT since the order was not modified by either the customer or the Industry Member. For example, for both displayed and non-displayed alternative trading systems (ATSs), if an ATS’s matching engine reprices a peg order when the market moves, the price modification must be reported to the CAT. If a matching engine does not reprice a peg order when the market moves, there is no requirement to report a price modification to the CAT.

-

In this scenario, Industry Member Broker 1 routes a customer midpoint PEG order to ATS A. ATS A gives the order a working price upon receipt. Then the NBBO changes while the order stays open on the book. The ATS reprices the order which is required to be reported to CAT.

-

Industry Member Broker 1 in this case is required to report:

-

• The receipt of customer order (New Order event)

-

• The route of the order to the ATS in an Order Route event

-

ATS A must report:

-

• An Order Accepted event for the receipt of the PEG order from Broker 1

-

• The modification of the price due to NBBO changes - this should be reported using an Order Adjusted Event with only the price fields restated

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2.4.6. Display Modifications of a Display ATS
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Display Modifications of a Display ATS - Compliance User: Industry Member - Keywords: - Order Adjusted Event, - -

Display modifications can be reported to CAT using the Order Adjusted event. This scenario illustrates the reporting requirements when an order is partially executed on an ATS, and as a result the display size of the order changes.

- -

In this scenario, an order is routed to an ATS for execution. The sending Industry Member Broker 1 is required to report:

-

• Receipt of the order from the customer in a New Order event

-

• An Order Route event of the order route to ATS A

-

ATS A is required to report:

-

• An Order Accepted event for the receipt of the order routed from Broker 1

-

• Partial execution of the order as a Trade Event

-

• Update to the display size post execution as an Order Adjusted event

-

Note that ATS A and Broker 1 may have subsequent order handlings on the order. This example is to illustrate the display modification reporting only, so not all possible steps are shown here.

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2.4.7. Manual Route, Followed by an Electronic Modification
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Order Modification Scenarios, Manual Route, Followed by an Electronic Modification - Compliance User: Industry Member - Keywords: - Industry Member Broker 2, - Order Route Event, - Order Modified event, - -

This scenario illustrates the Phase 2a reporting requirement to CAT when an order is initially routed manually between two Industry Members, and then an electronic message is sent to modify the material terms of the order.

- -

In this scenario, Industry Member Broker 1 must report:

-

• Receipt of the customer order in a New Order event

-

• Manual route of the order to Broker 2 (Order Route event)

-

• Order Modified event for reducing the quantity of the order

-

• Route of the modified order to Broker 2 (Order Route event)

-

The following must be reported by Industry Member Broker 2:

-

• Receipt of the manual route from Broker 1 (Order Accepted event)

-

• An Order Modified event for reducing quantity of the order (Order Modified event)

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pubdate: May 15, 2017 effdate: N/A +

B. Current Audit Trail Requirements for Debt Securities

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities + Compliance User: Equity Securities + Keywords: + TRACE, + Debt Securities, + TRACE-Eligible Securities, + +
pubdate: May 15, 2017 effdate: N/A +
1. TRACE Reporting Requirements
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, TRACE Reporting Requirements + Compliance User: Equity Securities + Keywords: + TRACE, + Debt Securities, + TRACE-Eligible Securities, + FINRA Rule 6730, + TRACE Reporting Timeframes, + Information Reported to TRACE, + Transactions Excepted from TRACE, + Transactions Exempted from TRACE, + +

a. Debt Securities Reportable to TRACE and Reporting Timeframes

+

Pursuant to the FINRA Rule 6700 Series (“TRACE Rules”), broker-dealers that are FINRA members generally are required to report executed transactions in TRACE-Eligible Securities35 to FINRA through the TRACE system, unless an exception or exemption applies.36 FINRA uses the information reported to TRACE for regulatory purposes and disseminates certain transaction information publicly. “TRACE-Eligible Security” includes corporate bonds, Agencies37 and Securitized Product38 (“SP”) sub-types. SPs include ABSs,39 Agency Pass-Through Mortgage-Backed Securities,40 SBA-Backed ABSs,41 and any other SP.

+

FINRA Rule 6730 prescribes the period of time within which a reportable transaction in a TRACE-Eligible Security must be reported to TRACE: (1) corporates, agencies, ABSs, and Agency Pass-Through Mortgage-Backed Securities traded TBA for good delivery generally must be reported within 15 minutes of execution of the transaction; (2) Agency Pass-Through Mortgage-Backed Securities traded TBA not for good delivery, SBA-Backed ABSs traded TBA or in Specified Pool Transactions, and CMOs executed on or after issuance generally must be reported within 60 minutes of the time of execution of the transaction;42 and (3) other SPs generally must be reported by the end of the day of execution.

+ +

TRACE reporting timeframes differ for primary market transactions, specifically, for transactions that meet the definition of “List or Fixed Offering Price Transaction” or “Takedown Transaction.”43 The TRACE Rules provide that transactions that meet either of these two definitions be reported by no later than the next business day during TRACE system hours. TRACE trade reporting obligations, however, generally do not include any primary market transaction that is a sale from an issuer to an underwriter or initial purchaser as part of an offering.44

+

b. Information Reported to TRACE

+

Each FINRA member that is a party to a reportable transaction in a TRACE-Eligible Security generally is required to report the transaction to TRACE, and FINRA Rule 6730(c) (Transaction Information To Be Reported) sets forth the items of information required to be reported to TRACE in connection with the execution of a transaction in a TRACE-Eligible Security. Importantly, the TRACE reporting requirements apply only to transactions; any activity prior to execution is not required to be reported. Each TRACE trade report generally must include the following information:

+

• CUSIP number, similar numeric identifier, or FINRA symbol;

+

• Size (volume) of the transaction;

+

• Price of the transaction (or the elements necessary to calculate price, which are contract amount and accrued interest);

+

• Buy or Sell;

+

• Date of Trade Execution (“as/of” trades only);

+

• Contra-party’s identifier (MPID, customer, or a non-member affiliate, as applicable);

+

• Principal or Agent;

+

• Time of Execution;

+

• Reporting side executing broker as “give-up” (if any);

+

• Contra side Introducing Broker in case of “give-up” trade;

+

• Commission (total dollar amount), if applicable;

+

• Date of settlement;

+

• If the member is reporting a transaction that occurred on an alternative trading system (“ATS”) pursuant to Rule 6732, the ATS’s separate MPID obtained in compliance with Rule 6720(c); and

+

• Modifiers, as applicable.

+

c. Transactions Excepted or Exempt from TRACE

+

The TRACE Rules except or exempt certain transactions and transfers of securities from trade reporting. FINRA Rule 6730(e) (Reporting Requirements for Certain Transactions and Transfers of Securities) generally provides that the following types of transactions not be reported:

+

• Transfers of TRACE-Eligible Securities for the sole purpose of creating or redeeming an instrument that evidences ownership of or otherwise tracks the underlying securities transferred (e.g., an exchange-traded fund);

+

• Transactions resulting from the exercise or settlement of an option or a similar instrument, or the termination or settlement of a credit default swap, other type of swap, or a similar instrument;

+

• Certain transfers of securities made pursuant to an asset purchase agreement in connection with a bankruptcy (subject to conditions);

+

• Transactions where the buyer and the seller have agreed to trade at a price substantially unrelated to the current market for the TRACE-Eligible Security (e.g., to allow the seller to make a gift); and

+

• Transactions in TRACE-Eligible Securities that are listed on a national securities exchange, when such transactions are executed on and reported to the exchange and the transaction information is disseminated publicly, and certain transactions in TRACE-Eligible Securities that are executed on a facility of NYSE and reported to NYSE and disseminated publicly by NYSE (subject to conditions).

+

In addition to the exceptions provided in FINRA Rule 6730(e), exemptions from TRACE reporting may, on a case-by-case basis, be granted to an ATS under FINRA Rule 6731 (Exemption from Trade Reporting Obligation for Certain Alternative Trading Systems) or FINRA Rule 6732 (Exemption from Trade Reporting Obligation for Certain Transactions on an Alternative Trading System). Where an ATS receives an exemption under FINRA Rule 6731 or 6732, it is not required to report some or all transactions to TRACE, as provided for in each rule. However, FINRA continues to receive transaction information on exempt ATS transactions from the other parties to the transaction on the ATS (who report their role in the trades to TRACE), as well as directly from the ATS outside of the TRACE system.

+
+
pubdate: May 15, 2017 effdate: N/A +
2. MSRB Reporting Requirements for Municipal Securities
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, MSRB Reporting Requirements for Municipal Securities + Compliance User: Equity Securities + Keywords: + TRACE, + Securities Reportable to RTRS, + MSRB Rule G-14, + RTRS, + Reporting Timeframe, + Information Reported to RTRS, + Transactions Excepted from TRACE, + +

As noted above, the MSRB is not a Participant, and the following discussion therefore describes the Participants’ understanding of MSRB requirements and MSRB transparency systems.

+

a. Securities Reportable to RTRS

+

MSRB Rule G-14 requires a broker, dealer or municipal securities dealer to report information about each transaction effected in a municipal security45 to the MSRB’s Real-time Transaction Reporting System (“RTRS”). The MSRB collects the information to provide reported prices for transparency purposes and to compile an audit trail for regulatory purposes.

+

Municipal securities required to be reported to RTRS include four municipal security sub-types – fixed rate and zero coupon securities, commercial paper, variable rate demand obligations, and auction rate securities. MSRB rules generally require that these securities be reported to RTRS as follows:

+ +

MSRB also provides for specific reporting timeframes for particular transaction types.

+ +

b. Information Reported to RTRS

+

RTRS collects transaction information for customer and inter-dealer transactions effected in municipal securities. Inter-Dealer Regulatory-Only (IDRO) transactions, which involve instances when an introducing broker effects a trade for a customer against the principal position of its clearing broker, are also reportable to RTRS. For inter-dealer transactions, firms must compare and match their trades through National Securities Clearing Corporation’s (“NSCC”) Real-Time Trade Matching (“RTTM”) system. RTTM allows firms to satisfy their transaction reporting obligations in addition to matching their inter-dealer transactions. Firms are able to submit their municipal securities transactions for both trade matching and regulatory reporting in a single trade message to RTTM. In an IDRO transaction, the transaction between the clearing and introducing broker is not required to be submitted for comparison purposes in RTTM, because it does not result in a movement of a principal position between dealers.46

+

Matched data for inter-dealer transactions includes the following:47

+ +

Inter-dealer trade data used solely for regulatory purposes includes the following:48

+

• Destination

+

• Executing Broker Commission

+

• External Reference

+

• Originator of message

+

• Regulatory Dollar Price

+

• Reversal Control Number

+

• Special Condition Indicator

+

• Trade Time

+

• Trading Capacity – Contra-party

+

• Trading Capacity – Participant

+

• Type of Price – Weighted Price

+

• All fields on Customer and IDRO trades are used for regulatory purposes only If the trade is subject to the following special conditions,49 firms report the appropriate indicator code:

+

• Flat Trades – A security that is traded on terms that do not include accrued interest.

+

• Away From Market Trades – A security that is traded at a price that differs substantially from the market price or involved in one of the following specific scenarios:

+

‧ Customer Repurchase Agreement Transactions

+

‧ UIT-Related Transactions

+

‧ TOB-Related Transactions

+

• Alternative Trading System Transactions – Inter-trade that was executed with or using the services of an alternative trading system with Form ATS on file with the SEC.

+

• Customer Trades Involving Non-Transaction-Based-Compensation (NTBC) Arrangements – A customer trade that did not include a mark-up, markdown or commission.

+

Transaction Fields by Trade Type:50

+ +

c. Transactions Excepted from RTRS

+

Firms are not required to the report the following transactions under MSRB Rule G-14:

+

• Transactions in securities without assigned CUSIP numbers;

+

• Transactions in municipal fund securities (e.g., 529 College Savings Plans);

+

• Inter-dealer transactions for principal movement of securities between dealers that are not inter-dealer transactions eligible for comparison in a clearing agency registered with the Commission;51 and

+

• Sales from issuers to broker-dealers as part of new issues of municipal securities.52

+
+
pubdate: May 15, 2017 effdate: N/A +
3. NYSE Bonds
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, Order Information for Debt Securities, NYSE Bonds + Compliance User: Equity Securities + Keywords: + NYSE Bonds, + Order Information, + Trade Reports, + +

NYSE Bonds is an electronic order-driven matching system through which Exchange members enter and match orders for eligible debt securities on a price and time priority basis. The system provides access to the order book, which displays orders in the time sequence received. Upon execution, trades are submitted for clearing to the Depository Trust Clearing Corporation.

+

a. Order Information

+

NYSE members authorized to access NYSE Bonds may enter buy and sell orders in eligible bonds to the NYSE Bonds system. All orders, modifications and cancellations of such orders, by NYSE members entered on the NYSE Bonds system throughout each trading day, are retained by the Exchange.

+

Each order generally must include the following information:

+

• Entering member’s MPID;

+

• CUSIP number or identifier;

+

• Order type,53 and any modifiers;

+

• Buy or Sell;

+

• Price and Quantity; and

+

• Capacity (Agent or Principal).

+

NYSE Bonds centralizes bond trading and publishes a real-time bond data feed to members authorized to use NYSE Bonds and to subscribers that reflects all orders in time sequence on the NYSE Bonds order book.

+

b. Trade Reports

+

The trade reports of executions on the NYSE Bonds system include the following information:

+

• CUSIP number or identifier;

+

• Price and Quantity of each filled execution;

+

• Average Price of fills for each order;

+

• Total Quantity of fills on open orders;

+

• Buy or Sell;

+

• Time of Execution;

+

• Settlement Type (whether same day, T+1, T+2 or T+3);

+

• Type of Trade Execution (“Partially Filled”, “Filled”);

+

• Type of Instrument (“Corporate Bond”, “Treasury Bill”); and

+

• Contra-party’s MPID identifier, and number of Contra-parties on a fill.

+

In addition, the Exchange retains a record and disseminates trade data and execution reports of trades that were cancelled. Such reports identify trades that were cancelled after the execution was reported and includes identifiers to map any cancelled trade with the original trade.

+
+
pubdate: May 15, 2017 effdate: N/A +
4. Order Information for Debt Securities
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, Order Information for Debt Securities + Compliance User: Equity Securities + Keywords: + FINRA Rules, + MSRB Rules, + SEA Rule 17a-3, + +

As discussed above, FINRA and MSRB rules generally require firms to report transaction information in covered securities within specified periods following the execution of reportable transactions and do not require members to report any order or other pre-trade information.

+

SEA Rule 17a-3(a)(6)54 prescribes recordkeeping requirements for broker-dealers, including recordkeeping requirements for orders in debt securities. Specifically, SEA Rule 17a-3(a)(6), among other things, requires broker-dealers to make and keep a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. The order memorandum must show: (i) the terms and conditions of the order or instructions and of any modification or cancellation thereof; (ii) the account for which entered; (iii) the time the order was received; (iv) the time of entry; (v) the price at which executed; (vi) the identity of each associated person, if any, responsible for the account; (vii) the identity of any other person who entered or accepted the order on behalf of the customer or, if a customer entered the order on an electronic system, a notation of that entry; and (viii) to the extent feasible, the time of execution or cancellation.55

+

Firms also may use various systems to internally manage their order workflow in debt securities. These systems may capture order information such as security information (e.g., CUSIP, side, quantity, coupon and maturity), order details (e.g., date and time of order receipt, the order’s time in force, and any limit price), and may include additional information (e.g., settlement date, whether the order was solicited, the name of the representative who took the order, and account information). Based on discussions with multiple firms, firms’ order workflow management practices differ widely, and the systems firms use may provide varying degrees of linkages with other relevant information, such as executions or order updates/cancellations.

-
pubdate: N/A effdate: N/A -

2.5. Cancellation Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios - Compliance User: Industry Member - Keywords: -
pubdate: N/A effdate: N/A -
2.5.1. Order Canceled
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Order Canceled - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements to CAT for an Industry Member when a customer order is canceled on the same day as the order was created.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Order event for the customer order

-

• Order Canceled event upon receipt of notice by the customer

- -

Note that for illustration purposes, actions taken by the Broker between the receipt of the original order and the customer cancellation are not included.

- - -
-
pubdate: N/A effdate: N/A -
2.5.2. Partial Cancellation of an Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Partial Cancellation of an Order - Compliance User: Industry Member - Keywords: -

The following scenario illustrates the reporting requirements to CAT if the customer partially cancels an order placed with an Industry Member.

-

In this scenario, Industry Member Broker 1 must report:

-

• The receipt of the customer order as a New Order event

-

• Either a Order Canceled event or an Order Modified event for the partial cancellation

- - - -
-
pubdate: N/A effdate: N/A -
2.5.3. Cancellation of a Routed Order
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Cancellation Scenarios, Cancellation of a Routed Order - Compliance User: Industry Member - Keywords: - Order Canceled Event, - -

This scenario illustrates the CAT reporting requirements for an Industry Member when an order that was previously routed to another Industry Member is canceled.

- -

Industry Member Broker 1 must report:

-

• The receipt of the customer's order as a New Order event

-

• The initial route of the order to Broker 2 (an Order Route event)

-

• The cancellation of the order (an Order Canceled event)

-

Industry Member Broker 2 must report:

-

• The receipt of the route from Broker 1 as an Order Accepted event

-

• The cancellation of the order as an Order Canceled event

- - - +
pubdate: May 15, 2017 effdate: N/A +

C. Debt Security Consolidated Audit Trail – Possible Approaches

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach + Compliance User: Equity Securities + Keywords: + CAR Reporting, + Participants, + CUSIP, + +

As noted above, unlike for equity securities, there is no current regulatory requirement for broker-dealers to report order information for orders involving debt securities. Consequently, there is no current order reporting framework on which to base potential CAT reporting. Set forth below are three general frameworks that could be used in considering how the CAT might be expanded to include debt securities, though the Participants do not currently recommend that the CAT be expanded to debt securities. The Participants believe that the CAT should first be fully implemented for equities and listed options, and that the Participants should then have the benefit of having gained experience with CAT operation in the equity space prior to analyzing the potential expansion to debt securities. In addition, the Participants believe that industry outreach and input would be necessary to inform any analysis of the potential expansion of the CAT to debt securities.

+

The possible approaches discussed below by no means are exclusive representations of all frameworks that may warrant discussion. In addition, because current practices related to order taking, sourcing, and agreeing to trades are markedly different for debt securities than for equity securities, the Participants believe that the development of any concept or proposal for CAT expansion (or establishing an order audit trail regime more generally) to debt securities should be carefully considered, including to identify how regulatory objectives may be best met taking these unique characteristics into consideration.

+

The three approaches to a possible audit trail framework for debt securities discussed below are presented in order of the simplest and least-granular—from requiring order-originating firms to report new orders and cancellations/executions (Approach #1), to the most complex and granular, which mirrors more closely the extensive order life cycle-reporting regime for equities and options being implemented for the CAT (Approach #3). The approaches attempt to account for unique order handling processes and features in the market for, or nature of, debt securities. For example, in the market for debt securities, customers may contact their representatives providing only general characteristics regarding the type of debt security they wish to invest in, rather than a particular CUSIP. In these cases, based on the investor’s criteria, a representative may present to the customer several similar debt securities for consideration prior to the customer deciding on, and placing an order for, a particular security. In addition to oral interactions with customers, orders or indications of interest between dealers also may be communicated manually (e.g., a telephone call or message to a broker’s broker).

+

Some debt securities may not be widely quoted and may trade infrequently and, as a result, information on the security’s availability and pricing may be limited or unavailable. Firms have stated that representatives, therefore, often must take the additional step of confirming the final details of a potential transaction with the customer prior to executing the order and, for this reason, in these cases the time of order receipt and time of order execution are essentially simultaneous (because the customer officially places the order only once the specifics of the potential transaction are known). Similarly, quotations on electronic platforms (including ATSs) that trade debt securities may not be firm (e.g., RFQs and IOIs). In such cases, the systems do not automatically execute transactions and, instead, require manual confirmation from subscribers. Special consideration would need to be given to the use of non-firm quotation types in debt securities (e.g., RFQs and IOIs) on electronic systems and how this might impact an order audit trail for debt securities.

+

Thus, the concept of order receipt, order routing, and assessing the market for some debt securities can be very different than for equities or for listed options. Further, firms have represented that, due to the manual nature of order taking in the debt market, creating a new order record electronically and systematically tracking orders through to execution may be a significant departure from current practice for many firms. In addition, industry participants have represented that the lack of full detail on and experience in reporting to the CAT makes it impossible to evaluate or estimate the direct and indirect costs of CAT expansion to debt securities at this time. As such, the Participants do not believe that applying the current CAT framework to debt securities, without significant modification, would be workable. For these reasons and others, as discussed in Section I.D. below,56 the Participants do not recommend expanding the CAT to include debt securities at this time.

+
pubdate: May 15, 2017 effdate: N/A +
1. Originating Firm New Order Report; Execution Reports (Approach #1)
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Originating Firm New Order Report; Execution Reports (Approach #1) + Compliance User: Equity Securities + Keywords: + CAT Framework, + Participant, + CUSIP, + TRACE, + Report Type, + Report Fields, + +

Under Approach #1, originating firms would report the receipt of a new order from a customer (i.e., when an order for a CUSIP/specific security is received), including a customer identifier that would be linkable to a separate database containing the relevant personally identifiable information (“PII”), similar to the CAT framework.57 If a transaction is fully or partially executed, the originating firm would enter an execution report that is linked to its new order report in the audit trail. Likewise, if the order was cancelled in whole or in part, the cancellation would be included in the audit trail, and would be linked to the originating firm’s new order report. The execution report also would include an identifier that would link it to the related TRACE transaction report. The Participants do not assume any changes to current transaction reporting frameworks. Where no customer order is involved, no audit trail requirement would be required as data would be available from the transaction report.

+ +

Approach #1 - Example

+

The below relates to the sell order scenario depicted above. Relevant order audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

+

• 12:10pm – Firm A creates New Order ID #1234 – New Order Report

+ +

• 2:08pm – Order Execution: Firm A executes Order ID #1234 with Firm B – Execution Report by Firm A (linked); Firm B would have no reporting obligation

+ +

• If all or part of the order was cancelled, Firm A would submit a Cancel Report. The Cancel and New Order Reports would be linked

+ +
+
pubdate: May 15, 2017 effdate: N/A +
2. Originating and Route Recipient Firm New Order Reports; Partially Linked; Execution Reports (Approach #2)
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Originating and Route Recipient Firm New Order Reports; Partially Linked; Execution Reports (Approach #2) + Compliance User: Equity Securities + Keywords: + Participant, + CUSIP, + Report Type, + Report Fields, + +

Under Approach #2, originating firms would report the receipt of a new order from a customer (i.e., when an order for a CUSIP/specific security is received), including a customer identifier that would be linkable to a separate database containing the relevant PII. Where the originating firm sends an order to another firm or solicits interest from or through another firm regarding an order, the sending firm would document this activity by submitting a route report. While this approach describes this activity as a “route,” the Participants acknowledge that, because of the differences in the debt markets, typically, the order itself is not truly being routed in the same sense as occurs in the equity markets; rather, the firm is contacting a dealer or market center for indications of interest in the particular bond.

+

Under this approach, the receiving firm would be required to create a new order report only if it further sends the order to another firm (e.g., report a new order and link it to the route report). If a receiving firm executes the order, or if the order is cancelled before any further action is taken by the receiving firm, a new order report would not be required of the receiving firm. Full or partial execution reports would be required of any firm with a related new order. The execution report also would include an identifier that would link it to the related transaction report. Likewise, if the order was cancelled in whole or in part, any firm with a new order report related to the cancellation also would report the cancellation.

+

Approach #2 - Example

+

The below relates to the same sell order scenario depicted above for Approach #1. Relevant order audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

+

• 12:10pm – Firm A creates New Order ID #1234, a reportable event by Firm A – New Order Report

+

• At 12:15pm, 12:16pm and 12:17pm, respectively, Firm A sends Sub-Orders #12341, #12342 and #12343 to Firm B, ATS #1 and ATS #2, respectively. Reportable events by Firm A – Route Reports

+ +

• Firm B, ATS #1, and ATS #2 are required to record items of new order information only if they ultimately route the order

+

• 2:08pm - Order Execution: Firm A executes Order ID #1234 / #12341 with Firm B – Execution Report by Firm A

+

• Firm A cancels Sub-Orders #12342 and #12343 – Cancel Report

+
+
pubdate: May 15, 2017 effdate: N/A +
3. Complete, Linked, Order through Execution Life Cycle (Approach #3)
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Complete, Linked, Order through Execution Life Cycle (Approach #3) + Compliance User: Equity Securities + Keywords: + Participant, + CAT, + +

In the course of considering how the CAT might be expanded to include debt securities, the Participants also have considered whether the submission of a new order report is the earliest life cycle event that might be captured for debt securities. As noted above, one of the unique features of the debt market is the often simultaneous timing of an order and its execution (where the customer does not place an order until all the specifics of the potential transaction are known). Prior to the entry of an order for a particular security, however, customers may provide firms with desired criteria for a debt security and the firm then works on identifying, locating, and presenting specific options for the customer’s consideration.

+

The Participants understand that this process is common in the debt area and, therefore, initially considered whether an audit trail might begin with recording and reporting certain pre-order information obtained by the firm in advance of the entry of an order for a particular security. For example, an approach might be considered where, if a customer provides a minimum number of descriptive elements regarding a debt security — e.g., where a customer provides several of the following: investment dollar amount; issuer; sector; yield; coupon; maturity; rating; or specified additional features — a firm conceivably might be required to submit a pre-order report. Any securities presented by the firm to the customer as satisfying the customer’s criteria also could be entered into a pre-order report and, should an order result, the pre-order report could be linked to the new order report (which would be followed by route, execution or cancellation reports, as applicable). This type of framework would be an attempt to capture in an automated fashion the pre-order events that are likely to be extensive in the debt markets. However, the Participants haven’t included the concept of a pre-order report in Approach #3 due to the possibly numerous manual steps likely necessary to submit and amend such a report to account for each debt security being explored.

+

Under Approach #3, firms (both originating firms and route recipients) would report the receipt of a new order, though only originating firms would be required to report a customer identifier that would be linkable to a separate database containing the relevant PII. As noted above, although typically the order itself is not being truly routed to multiple firms (the originating firm is contacting a dealer or market center for indications of interest in the particular bond), this approach would require new order reports from all receiving firms and any associated executions or cancellations. Where a firm sends an order to another firm, a route report would be added to the audit trail by the sender (linked to the related new order report). If an order is fully or partially executed, any firm with a new order report related to the execution would enter an execution report that is linked to its new order report in the audit trail. The execution report also would include an identifier that would link it to the related transaction report. Likewise, if the order was cancelled in whole or in part, any firm with a new order report related to the cancellation also would report the cancellation.

+

Approach #3 - Example

+ +

The below relates to the sell order scenario depicted above. Relevant audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

+

• 12:10pm – Firm A creates a new order and assigns Internal Order ID #1234, a reportable event by Firm A – New Order Report

+

• 12:15pm, 12:16pm and 12:17pm, Firm A sends Sub-Orders #12341, #12342 and #12343 to Firm B, ATS #1 and ATS #2, respectively. Reportable events by Firm A – Route Reports

+

• 12:15pm - Firm B creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by Firm B – New Order Report

+

• 12:16pm - ATS #1 creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by ATS #1 – New Order Report

+

• 12:17pm - ATS #2 creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by ATS #2 – New Order Report

+

• 2:08pm - Order Execution: Firm A executes Internal Order ID #1234 / #12341 with Firm B. Required reports are as follows:

+

• Firm A reports execution and links it to Order ID #1234 / #12341 – Execution Report

+

• Firm B reports execution and links it to Internal Order ID # (linked to SubOrder #12341) – Execution Report

+

• Related Order/Sub-Order cancellations required:

+

• Firm A cancels Sub-Orders #12342 and #12343 – Cancel Report

+

• ATS #1 cancels Internal Order ID # (linked to Firm A’s Route Report) (Reason Code – cancelled by Firm A) – Cancel Report

+

• ATS #2 cancels Internal Order ID # (linked to Firm A’s Route Report) (Reason Code – cancelled by Firm A) – Cancel Report

+
+
pubdate: May 15, 2017 effdate: N/A +
4. Other Considerations
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Other Considerations + Compliance User: Equity Securities + Keywords: + Participant, + CAT, + Debt Securities, + SEC, + MSRB, + FINRA, + NMS Securities, + TRACE Reporting, + TRACE-Eligible Securities, + +

The Participants believe that a discussion of possible ways that order audit trail information for debt securities might be captured for regulatory purposes should include consideration of an option other than expanding the CAT to capture debt securities. One important factor is that there are fewer regulatory entities that would be primary users of order data for debt securities (SEC, MSRB and FINRA) than the universe of regulators for NMS securities, which also would include all national securities exchanges. Thus, the Participants believe that methods other than integrating order audit trail information on debt securities into the CAT should be considered, both from a short-term and long-term solution perspective. For example, the SEC could ask FINRA to: consider ways to enhance its TRACE reporting requirements to include more granular customer information on TRACE-Eligible Securities, such as a large trader identifier or customer categories; and establish a separate reporting mechanism for reporting order-related information that can be linked to TRACE trade reports.

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2.6. Additional Reporting Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios - Compliance User: Industry Member +
pubdate: May 15, 2017 effdate: N/A +

D. Economic Impact Analysis

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Economic Impact Analysis + Compliance User: Equity Securities Keywords: - Order Accepted Event, + TRACE, + Debt Securities, + SIFMA Reports, + FINRA, + BIS Report, + CAT Reporting, + Participants, -
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2.6.1. Industry Member Utilizes Multiple Systems at One Desk
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Utilizes Multiple Systems at One Desk - Compliance User: Industry Member - Keywords: -

In the following scenario, the Industry Member has multiple trading systems utilized at a single desk. For CAT reporting, the Industry Member is not required to report information regarding an order's movement between two systems within the same desk or department as an internal route.

-

In this scenario, the desk which received the customer's order transfers the order into another internal application in order to route the order to an exchange. Since the desk handling the order does not change, the Industry Member Broker 1 is required to report:

-

• New Order event for the receipt of the customer order

-

• Order Route event for route to the exchange

- - - -
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2.6.2. Industry Member Creates Child Orders and Routes
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Creates Child Orders and Routes - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements should an Industry Member chose to slice an order into multiple child orders before further handling.

-

For this scenario, Industry Member Broker 1 is required to report:

-

• Receipt of the customer order as New Order Event

-

• A Child Order event for each slice of the order created

-

• An Order Route event for each child order

-

Receipt Industry Members Broker 2 and 3 are required to report:

-

• Order Accepted events for receipts of the order from Broker 1 (and any subsequent order handling)

- - - - - -
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2.6.3. Industry Member Creates Multiple Branches of Child Orders
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Industry Member Creates Multiple Branches of Child Orders - Compliance User: Industry Member - Keywords: - Order Internal Route event, - Participant Order Accepted, - Order Route, - Child Order, - -

This scenario illustrates the reporting requirements for an Industry Member where each internal desk has chosen to work an order by splitting the original order into smaller components. The Industry Member has the flexibility to report different events for each desk, should it better reflect the firm's internal systems.

- -

For this scenario, Industry Member Broker 1 must report:

-

• The receipt of the customer order at the Sales Desk as a New Order event

-

• A Child Order event for each slice created at the Sales Desk prior to routing to another desk

-

• An Order Internal Route event for each child order

-

• For the Child Order sent to the Arbitrage Desk, a Child Order event for each new slice created

-

• An Order Route event for each Child Order routed from the Arbitrage Desk

-

• For the Child Order sent to the Trading Desk, an Order Internal Route event for each slice of the order (and any subsequent events not shown)

- - - - - - - -
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2.6.4. Order Received and Routed Manually, Electronically Captured at Subsequent Desk
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Received and Routed Manually, Electronically Captured at Subsequent Desk - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements for an Industry Member when an order is received and then manually internally routed to another department where it is immediately entered into an electronic order management system upon receipt (e.g. the branch receives an order and calls the Trading Desk).

- -

For this scenario, Industry Member Broker 1 must report:

-

• The receipt of the order from the customer (a New Order event with manualFlag = true)

-

• An Order Internal Route event for route of the order to the trading desk which will enter the trade into the Industry Member's electronic system

-

• The route of the order to the exchange (Order Route event)

- - -
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2.6.5. Order Routed and Executed via a Clearing Firm
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routed and Executed via a Clearing Firm - Compliance User: Industry Member - Keywords: -

This example illustrates the reporting requirements when an introducing firm enters the customer order into the clearing firm's system. The clearing firm then executes the order from a proprietary account. Both the introducing firm and clearing firm are Industry Members.

- -

For this scenario, the introducing firm (Broker 1) must report:

-

• The receipt of the order from the customer in a New Order event

-

• The route of the order to the clearing firm in an Order Route event

-

The clearing firm would report the following:

-

• The receipt of the order by the clearing firm in an Order Accepted event

-

• The execution of the order in a Trade event

-

Only the executing entity is required to report executions to CAT. In this scenario only the clearing firm is responsible to report a Trade event.

- - -
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2.6.6. Direct Order Routing via a Clearing Firm's System
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Direct Order Routing via a Clearing Firm's System - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirement when an introducing firm receives a customer order and, using its clearing firm's system, directs the order to an exchange for execution. The clearing firm does not participate in any order routing or handling instructions but only provides the technology to the introducing firm to route the order.

-

The introducing firm, Industry Member Broker 1, must report the following to CAT:

-

• The receipt of the order from the customer in a New Order event

-

• The route of the order to the Exchange 1 in an Order Route event

-

The clearing firm does not have CAT reporting obligations.

-

The exchange follows Participant reporting requirements for subsequent handling.

- - - -
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2.6.7. Order Routing via an Algorithm Provided by the Clearing Firm
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routing via an Algorithm Provided by the Clearing Firm - Compliance User: Industry Member - Keywords: -

This scenario illustrates the reporting requirements to CAT when an introducing firm receives a customer order and enters it into its clearing firm's system. The clearing firm's system automatically determines the routing destination based on pre-defined criteria developed by the clearing firm. The clearing firm makes the determination as to where the order is routed. The introducing firm does not direct the order. Both the introducing firm and the clearing firm are Industry Members. In this case, the following CAT events must be reported:

-

The introducing firm, Broker 1, must report:

-

• The receipt of the customer order in a New Order event

-

• The route of the order to the clearing firm in an Order Route event

-

The clearing firm must report:

-

• The receipt fo the order from the introducing firm in an Order Accepted event

-

• The route of the order to the routing destination as an Order Route event

-

The routing destination (exchange) must report:

-

• The receipt of order routed from the clearing firm

-

• The subsequent order handling actives that are CAT reportable

- - - - -
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2.6.8. Order Routing via Smart Router Provided by another Industry Member
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Order Routing via Smart Router Provided by another Industry Member - Compliance User: Industry Member - Keywords: - Destination Market Center, - SEC Rule 11Ac1-6, - SEC Rule 606, - Handling Instructions, - Trade Event, - -

In this scenario, the introducing firm receives a customer order and enters it directly to a Smart Router provided by another Industry Member to route the order. The Smart Router provided by another industry member does not need to separately report to CAT when all the following conditions apply:

-

1. The Industry Member providing the order routing system has no discretion over the order once it is entered into the Industry Member's order-routing system. The order routing destination ("Destination Market Center") must either be directed by the originating Industry Member or be subject to the pre-determined algorithm of the routing system agreed to by the originating Industry Member. The Industry Member providing the order routing system would have no involvement relating to the routing of the order, other than providing the routing mechanism.

-

2. The originating Industry Member must have established a relationship with the Destination Market Center, including meeting any and all applicable requirements to route orders to that destination. The originating Industry Member understands that the Industry Member providing the order routing system has no involvement with respect to the order in any way, except for providing a routing mechanism. No pre-established relationship between the Industry Member providing the order routing system and the Destination Market Center would be necessary for the originating Industry Member to access the routing destination.

-

3. The Destination Market Center views the order as coming directly from the originating Industry Member, not the Industry Member providing the order routing system, for all purposes, but not limited to, CAT reporting, trade reporting, applicable fees, etc.

-

4. The originating Industry Member, rather than the member providing the order routing system, identifies itself as the routing firm for purposes for the SEC Rule 606 (formerly SEC Rule 11Ac1-6).

- -

The introducing firm, Industry Member Broker 1, is required to report:

-

• The receipt of the customer order in a New Order event

-

• The route of the order through a smart router (Order Route event with handlingInstructions = SMT)

-

The destination, Industry Member Broker 2, is required to report:

-

• The receipt of the order from Broker 1 as an Order Accepted event

-

• Execution of the order (Trade event)

-

The Industry Member providing the order routing system is not required to report to CAT.

- - - -
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2.6.9. GTC Order Routed to Exchange, Modified by Customer
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, GTC Order Routed to Exchange, Modified by Customer - Compliance User: Industry Member - Keywords: - Industry Member Broker 1, - -

The following scenario illustrates the reporting requirements for handling order types that can live across days (e.g. GTC, GTD). Industry Member Broker 1 receives a "GTC" order from a customer. From Broker 1's perspective, the order is reported as GTC as maintained on their book. When Broker 1 routes the order to the exchange for execution, the order is a "DAY" order from the exchange's perspective and should be reported as timeInForce = DAY on the Order Route event as well as relevant Participant events. The Industry Member must submit an Order Route event every day the order is sent to the exchange until the order is executed or canceled.

-

On T+1, the customer modifies the GTC order. Broker 1 must report an Order Modified event with the original order date and an Order Route event for the modification on the exchange.

- -

For this scenario, Industry Member Broker 1 is responsible for reporting:

-

• The receipt of the customer GTC order on T (New Order event)

-

• An Order Route event for the route to the exchange (as a "DAY" order)

-

• Another Order Route event for the route to exchange on T+1 (start of day) as the order was not executed or canceled on T

-

• The modification of the customer order on T+1 (during market hours) in an Order Modified

-

• The route of the modified order to the exchange on T+1 (Order Route event)

- - - - -
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2.6.10. Dividend Reinvestment
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Dividend Reinvestment - Compliance User: Industry Member - Keywords: - dividend reinvestment investment program (DRIP), - Post Trade Allocation events, - New Order event, - Order Route Event, - handlingInstructions = DIV, - -

The following scenario illustrates the reporting requirements for an Industry Member whose customers participate in a dividend reinvestment program. Industry Member Broker 1 aggregates dividend reinvestment investment program (DRIP) orders for participating customers, rounds up to the the next whole share, and creates a new order to purchase shares that need to allocate to customers. This order is routed to the street, executed, and allocated to the participating customers. The remaining fractional share is allocated to the proprietary account of Broker 1. It is not required for Broker 1 to report Post Trade Allocation events for allocations to sub-accounts for dividend repurchase orders until Phase 2c.

- -

For this scenario, Industry Member Broker 1 is responsible for reporting:

-

• A New Order event for a single order to acquire shares for all customers participating in the dividend reinvestment program

-

• An Order Route event for routing the principal purchase to Broker 2

-

Industry Member Broker 2 is responsible for reporting:

-

• An Order Accepted event to confirm receipt of the order from Broker 1

-

• A Trade event confirming execution of the order

-

Once the fractional inventory reaches a whole share threshold, Broker 1 would follow standard procedures for sales from proprietary accounts if actions were taken to flatten fractional share inventory.

- -

Industry Member Broker 1 is responsible for reporting:

-

• A New Order event for the whole share order

-

• An Order Route event for routing the sale order to Broker 3

-

Industry Member Broker 3 is responsible for reporting:

-

• An Order Accepted event for the receipt of the order from Broker 1

-

• A Trade event for the execution of the order

- - - - - -
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2.6.11. Routing of the Equity Leg of a Complex Option to another Industry Member
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, Additional Reporting Scenarios, Routing of the Equity Leg of a Complex Option to another Industry Member - Compliance User: Industry Member - Keywords: - New Order event, - Order route events, - equity leg order (Sell), - equity leg order (Buy), - -

This scenario illustrates the reporting requirements when an Industry Member splits the equity leg of complex options from customers. Upon determining the price at which the equity legs must be executed, the Industry Member routes the equity legs to another Industry Member for execution.

-

Note that the reporting requirement descriptions and flow chart below only show the equity leg handlings. It does not include the complex option orders or option legs.

-

In this scenario, the Industry Member (Broker 1) must report:

-

• The receipt of an equity order from the customer (New Order events)

-

• The route of the equity order to Broker 2 (Order Route events)

-

Industry Member Broker 2 receives the equity leg orders from Broker 1. The orders may come along with an offsetting order to be crossed, or Broker 2 may receive the offsetting order from another Industry Member. Broker 2 then executes as agency cross.

-

In this scenario, Broker 2 must report the following events to CAT:

-

• The receipt of the equity leg order (Sell) from Broker 1 in an Order Accepted event

-

• The receipt of the equity leg order (Buy) from Broker 1 (Or receipt of a Buy order from another Industry Member) in an Order Accepted event

-

• The execution of the orders in a Trade Event

- - - - - - -
+

The debt market consists of multiple segmented markets, each with its own clientele and unique trading and reporting practices and processes. Currently, transactions in debt securities in all of the segments except municipal bonds, debt securities issued by a foreign sovereign, and money market instruments are, or soon will be, reportable to TRACE. However, the economic impacts on firms of expanding the CAT to debt securities likely differ in significant ways across these segments due to the differences in the nature and amount of data that is collected in the pre-trade and trade processes in each segment. Such differences in data collection are attributable, to a large extent, to different trading mechanisms (e.g., telephonic communications versus electronic trading systems) and varying levels of automation that are implemented in the trading process (e.g., algorithmic trading).

+

Trading in most debt securities traditionally occurred OTC via messaging across broker-dealers and large institutions. However, recent advancements in technology, a changing regulatory environment, and market forces are increasing the role of electronic trading in debt securities.58 First, the emergence of ATSs and other electronic trading platforms has provided trading opportunities that do not exist in traditional voice trading. Second, regulatory reform initiatives enacted after the financial crisis have decreased dealers’ incentives to hold inventories and reduced proprietary trading by broker dealers.59 Also, as the SIFMA Report suggests, there has been an increased emphasis on best execution in the debt markets.60 This emphasis has increased the value of pre-trade transparency that may provide valuable information on prevailing market values, as well as the sources and movements of liquidity. Third, as the FINRA Study shows, changes in the supply and demand for primary and secondary market transactions for corporate debt have manifested in greater transaction volume, but smaller average transaction sizes and increased numbers of counterparties among dealers.61

+

The prevalence of electronic trading in some debt markets is relevant to the discussion of a potential order audit trail for debt securities, as electronic trading protocols may already be systematically collecting some of the information that would be requested in the order life-cycle approaches described above. Accordingly, costs associated with CAT reporting may differ for different debt securities based on the level of electronic trading. The SIFMA Report shows that the number of electronic trading platforms has increased from two in 2000, to an estimated 20 in 2016. There are significant differences across platforms with respect to the bond types being traded, the trading protocols employed, and order types. The BIS Report discusses that the use of electronic trading is greater in the most liquid instruments. According to the SIFMA Report, the share of electronic trading of investment grade bonds is estimated to have increased from approximately 8% in 2013 to 20% in 2015 at the time of the study, whereas the shift to electronic trading is relatively slower in municipal bonds.

+

The BIS Report also draws attention to regulators’ lack of access to comprehensive data generated by trading protocols across electronic trading platforms and the lack of comparability across trade information collected in different types of bonds, consistent with the assertion in the SIFMA Report that “stakeholders have limited information to gain a robust understanding of the incumbent and new platforms’ functionality and the evolving price discovery and execution protocols.” These differences can include very basic information, such as whether a bond price is represented as a dollar value, as a yield, or as a basis above a reference security. The fact that the degree of electronic trading varies significantly across different types of debt securities is a relevant factor in considering the challenges that likely would be involved in transitioning from reporting only transaction information to CAT reporting.

+

The Participants have identified three approaches described in Section I.C. as possible audit trail framework alternatives for debt securities. These approaches differ from each other in terms of the granularity of the data items that would need to be collected, what events in the order life cycle would be captured, the firms that would have reporting obligations, and the linkages that need to be built across the reports.

+

As noted in Section I.B, TRACE reporting requirements apply only to transactions, with no pre-trade or route information collected. Each approach described in Section I.C. above progressively introduces additional layers of data collection and reporting in the pre-trade period, and hence is associated with different levels of costs and benefits.

+

Approach #1 requires only order originating firms to report and link new orders, cancellations and executions. This approach still requires the creation of a New Order Report that contains information that is not currently reported to regulators. The information that would be contained in an Execution Report is included today in trade reports to the applicable regulator, so the costs of this approach would mostly arise from generating the New Order Report and Cancel Report, and from creating the linkages across reports and to the database that contains the personally identifiable information (PII). Approach #1 would be relatively less costly to implement and provide additional information to regulators than currently is available. For example, if an electronic audit trail were established for debt securities, regulators would have a more efficient means to observe the time of order receipt, the time from receiving the order to execution, and the extent to which others sought to sell the same security at the same time. But this approach provides the regulators with only a limited picture of an order’s life cycle relative to Approaches #2 and #3, discussed below. Specifically, Approach #1 does not capture the route information that provides a detailed view of the dealers that the order has been exposed to before execution or cancellation.

+

Approach #2 introduces a Route Report that is linked to the New Order Report, to capture the information on the specific dealers that a bond order travels to before it gets executed or cancelled. As noted in the discussion in Section I.C.1 and 2 above, the Participants acknowledge that orders are not “routed” in the debt market as typically occurs in the equity market. However, for purposes of this discussion, a route occurs when a firm sends an order to another firm or solicits interest from or through another firm regarding an order. New Order and Route Reports could enable regulators to have access to a record of the identity, order and timing of dealers contacted as part of a potential purchase or sale of a specific debt security. As with Approach #1, the obligation accrues only once an order for a specific CUSIP or issue has been received. This approach requires the collection of additional information on the life cycle of orders than described in Approach #1, and therefore would be relatively more costly to capture and report. Nevertheless, the route information could provide useful insight regarding routing practices that might potentially be abusive to customers or inconsistent with best execution obligations.

+

Approach #3 requires firms to build a more complete order life-cycle record. This approach resembles the level of granularity required in audit trail reporting for equity securities and potentially provides regulators with the most complete data to conduct markup reviews and surveillance for best execution obligations in debt markets, and enables regulators to compare execution quality across all brokers that orders have been exposed to. Nonetheless, Approach #3 would be the most expensive to implement, as it would require connectivity across firms and collection and reporting of more data. This approach may potentially deter some dealers from accepting orders from other firms because accepting an order from another firm would result in an obligation to create a New Order Report (in addition to Execution and Cancel Reports, as applicable).

+

Reporting of primary market transactions may entail further challenges in CAT reporting, as establishing the linkages between New Order and Execution Reports may require more resources for distributions in the primary market, as order receipt and executions are different in nature.

+

Since there is no current regulatory requirement for broker-dealers to report order information in debt securities and CAT implementation for equities and options has not yet begun, there currently is no framework to base potential costs regarding the expansion of the CAT to incorporate debt securities. Therefore, the Participants solicited industry feedback regarding the viability of expansion along with the potential direct and indirect costs (challenges) to expansion. The Participants solicited feedback from several market participants as well as industry groups62 to collect information on the potential economic impacts of such potential expansion on the industry, third-party providers and customers.

+

The Participants actively sought responses to two sets of questions that were shared with the respondents in advance of the meetings. One set solicited feedback regarding the economic impacts associated with data collection, i.e., the new data fields that would have to be collected for each of the potential reporting scenarios described above. Specifically, the questions sought to address issues such as:

+

• Whether existing Order Management Systems (OMS) and Execution Management Systems (EMS) for trading in debt securities are flexible enough to accommodate new asset classes and have the capability to capture order life cycles, i.e., linking new orders, routes, cancellations and executions as described in the options above;

+

• The challenges and costs associated with collecting the information required in the reports and creating new data fields contained in such reports (e.g., Route ID);

+

• Whether there are limitations to communication / coordination / standardization across trading desks that would hinder the collection of certain items in the reports; and

+

• Characteristics of orders (e.g., orders with special handling instructions) or any order types (such as limit versus market orders, IOC, etc.) for which CAT reporting would potentially require more resources.

+

The second set of questions was intended to gain a better understanding of the potential impacts associated with reporting information under each of the potential scenarios. The Participants requested feedback on potential issues such as:

+

• The nature of the changes that would be necessary to apply CAT reporting obligations to debt securities (e.g., software, hardware, backup, or connectivity);

+

• The impact of CAT reporting on order, trade and execution workflows, and competition for provision of intermediation services in debt securities;

+

• Whether there would be new functionalities (integration across systems, maintaining and establishing connectivity across brokers, automation of reporting, etc.) and new data management tools (capacity, encryption, transfer, etc.) that would be required to be implemented within the front, middle and back offices;

+

• Whether there would be any cost savings provided by potential convergence of platforms and systems across asset classes; and

+

• Whether potential costs vary based on size / business model / characteristics of reporting firms, e.g., introducing vs. clearing firms, large vs. small firms, broker-dealers vs. ATSs.

+

The respondents stated that there were material differences between equity markets and debt markets with respect to order characteristics, order handling and trade execution. The respondents also expressed that order handling and trading is predominantly OTC, where dealers communicate through informal networks.

+

There may be potential benefits associated with a life cycle reporting regime in debt markets, where more granular data, as depicted in Approach #3, may potentially provide regulators with a detailed view of market participants’ decision-making behavior and can provide further insight into relevant regulatory issues such as the cost of liquidity provision or best execution practices in debt markets. As noted above, order receipt and execution are frequently concurrent, as the execution is an outcome of a negotiated process of order details, and an order is placed only once the execution terms are agreed upon. Moreover, the Participants understand that OMSs that automatically capture the details of the order are not utilized at every firm or for every order; therefore, it is likely that the requirement to collect more information that is not currently being collected will impose greater direct costs on firms, which may potentially result in a change in the way they participate in debt markets, and this could eventually impact investors. Respondents voiced concerns that the collection of order details may become so costly that representatives may switch to offering substitute products such as mutual funds and ETFs to their clients. Such a change in behavior potentially could reduce liquidity in the debt markets, reducing the price efficiency in these instruments. The burden of collecting and reporting such data potentially would be more significant for small firms, and the respondents asserted that some of these firms would be more likely to exit the market.

+

The respondents also raised concerns regarding establishing linkages across new order, route and execution reports. Building such linkages necessitates creating connectivity across desks and third-party providers, but, due to the manual process of order receipt and routing orders, using a unique order ID to link the reports would not be feasible for most orders. Such a challenge would be more prominent for certain types of securities. Respondents also indicated that communicating with other broker-dealers regarding an order involves multiple feeds and messages and such messages may contain information regarding multiple orders with varying special conditions. Therefore, building a complete order life cycle for debt securities in a manner similar to equities was not perceived by respondents as a viable option.

+

Respondents commented that order and execution characteristics are generally different for larger-sized orders, where there is more negotiation and communication across brokers, which may potentially result in a large number of route reports that are recorded manually. Collecting and processing such information may result in significant costs that may hinder the ability to trade large amounts in debt markets.

+

Respondents also provided feedback on issues pertaining to reporting such information to CAT. They stated that uniform reporting across all debt securities may potentially create gaps and inconsistencies across different types of debt securities due to the differences in characteristics. However, some respondents believed that a single transaction reporting platform for all types of debt securities may save costs in the long run, provided that a single platform is flexible enough to capture differences across life cycles of different security types (i.e., a single platform for reporting TRACE-Eligible and municipal securities, instead of separately reporting to FINRA, NYSE and MSRB).

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2.7. JSON and CSV Examples

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples - Compliance User: Industry Member - Keywords: -

This provides an illustration of the different reporting formats of JSON and CSV.

-
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2.7.1. JSON Representation
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples, JSON Representation - Compliance User: Industry Member - Keywords: - JSON representation, - Internalized Trade, - -

Below is a JSON representation using the example in section 2.2.2 Internalized Trade Against Proprietary Account.

- - -
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2.7.2. CSV Representation
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Equity Scenarios and Examples, JSON and CSV Examples, CSV Representation - Compliance User: Industry Member - Keywords: - CSV representation, - -

Below is the corresponding CSV representation of the same sample events.

-

Step 2: New Order Event MENO,20180416T153035.234456,E,false,,,XYZ,O12345,N,T,A,,Buy,10.00,,,50 0,,,LMT,,DAY,REG,,,false,INS001,A,,,N,,false,,,,,,,

-

Step 3: New Order Event MENO,20180416T153035.234457,E,false,,,XYZ,P12345,F,T,PR,,Sell,10.00,,, 500,,,LMT,,DAY,REG,,,false,PROP123,P,,,N,,false,,,,,,,

-

Step 4: Trade Event MEOT,20180416T153035.253456,false,,,XYZ,TXYZ555,500,10.00,DN,NA,TERM123,O1234 5, FRMA,Buy,0,Agency,TRF123,P12345,FRMA,Sell,0,Principal,TRF123,,,,,,,

-
+
pubdate: May 15, 2017 effdate: N/A +

E. Recommendations and Projected Implementation Timeframe

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Recommendations and Projected Implementation Timeframe + Compliance User: Equity Securities + Keywords: + Expansion Document, + Reporting Information, + FINRA, + TRACE, + MSRB's RTRS System, + NYSE Bonds System, + Industry Members, + OATS, + +

As of the submission of this Expansion Document to the Commission, no Participants or industry members are reporting information to the CAT, and Technical Specifications detailing required order information for equity securities by broker-dealers are not yet available. Consequently, it is impractical for the Participants to attempt to itemize with any degree of specificity, beyond that described in Section I.C. above, the order details that might be appropriate to report information regarding orders in debt securities. Based on conversations with industry participants and industry trade organizations, the Participants note the following important considerations:

+

• Trade information involving significant portions of the debt markets are already reported to FINRA’s TRACE system, MSRB’s RTRS system, or to the NYSE Bonds system. Consequently, leveraging existing systems could be a more efficient and cost-effective manner to expand the reporting of information concerning debt transactions to include order information.

+

• Among industry members, order handling practices for debt securities vary significantly from those in place for equity security orders, primarily due to the differences in the nature of the markets between the two types of securities. Consequently, attempting to replicate the order reporting paradigm for equity securities onto the debt markets is not advisable.

+

• The obligation to report information concerning debt security orders and transactions to the CAT would fall primarily on broker-dealers as a substantial majority of all debt market activity is conducted OTC rather than on an exchange. Some of these broker-dealers lack the current infrastructure to report order information. For example, 13% of FINRA members that currently report to TRACE do not conduct equity activity and thus do not report to FINRA’s Order Audit Trail System (“OATS”) and would not have CAT reporting requirements under the Plan. Consequently, expanding order reporting obligations to include debt securities would be a costly and time-intensive effort for these firms.

+

As a result of these considerations, the Participants do not currently recommend that the Commission take any steps with respect to requiring the reporting of order information regarding debt securities, including primary market transactions in debt securities,63 to the CAT. The Participants believe such an expansion would be premature at this time and should be considered only after both Participants and industry members are successfully reporting equity securities and listed options information to the CAT so that experience with the operation of the CAT can be used to inform any future expansion. In addition, other alternatives, besides an expansion of CAT, should be considered as a means to collect order data related debt securities. As noted previously, the Participants recommend that the MSRB be consulted before any analysis regarding the potential expansion of the CAT to municipal securities is undertaken. Moreover, a reliable cost/benefit analysis cannot be performed until the Participants and industry members have more details as to the specific information that would be required to be reported and how that information would be reported.

-
pubdate: N/A effdate: N/A -

3. Option Scenarios and Examples

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples - Compliance User: Industry Member - Keywords: -

This section illustrates reporting scenarios for single leg electronic option events in scope for Phase 2b. Each example includes a process flow table and sample reporting values.

-
pubdate: N/A effdate: N/A -

3.1. Option Order Origination and Route Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios - Compliance User: Industry Member - Keywords: -

This section lays out the fundamental and common reporting scenarios. In addition to the scenarios provided below, please also refer to Equity Event Scenarios 2.1.5 (assume split route is two non-ATS Industry Members) and 2.1.6. The guidance also applies to single leg electronic option order reporting.

-
pubdate: N/A effdate: N/A -
3.1.1. New Principal Option Order Routed to Exchange and Executed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, New Principal Option Order Routed to Exchange and Executed - Compliance User: Industry Member - Keywords: - New Option Order (Principal), - Option Order Route event, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that creates a new principal option order electronically, and electronically routes it to an exchange where it is executed.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• The creation of a New Option Order (Principal)

-

• The route to an exchange as an Option Order Route event

- - - -
-
pubdate: N/A effdate: N/A -
3.1.2. Customer Option Order Routed to the Exchange
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Routed to the Exchange - Compliance User: Industry Member - Keywords: - New Option Order event, - Option Order Route event, - -

This scenario illustrates the reporting requirements to CAT for an Industry Member that routes a customer order to an exchange.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the customer order which was received electronically

-

• Option Order Route event for routing the customer order to the exchange

-

In this scenario, the execution is passed back directly to the customer, therefore no Option Order Fulfillment is required to be reported.

- - - -
-
pubdate: N/A effdate: N/A -
3.1.3. Option Order Electronically Routed between Two Industry Members and Subsequently Executed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Option Order Electronically Routed between Two Industry Members and Subsequently Executed - Compliance User: Industry Member - Keywords: - FLEX Percent option, - New Option Order event, - Option Order Route event, - Option Order Accepted event, - Option Order Route event, - -

This scenario illustrates the reporting requirements when an option order is electronically routed from one Industry Member to another.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the customer order which was received electronically

-

• Option Order Route event for routing the customer option order to Broker 2

-

For this scenario, Industry Member Broker 2 is required to report the following events:

-

• Option Order Accepted event for receiving the client order from Broker 1

-

• Option Order Route event for routing the order to the Exchange

- - - -
-
pubdate: N/A effdate: N/A -
3.1.4. Customer Option Order Manually Received, Routed Electronically
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Manually Received, Routed Electronically - Compliance User: Industry Member - Keywords: - CAT Reporting, - priorUnlinked = M, - -

This scenario illustrates the reporting requirements for Phase 2b for a customer order received manually by an Industry Member that is systematized and electronically routed.

-

For this scenario, Industry Member Broker 1 is required to report the following events: • Option Order Route event for the route of the option order to the exchange

-

In Phase 2b, the Option Order Route event must include the priorUnlinked= M, indicating the prior step is a manual handling not reported in Phase 2b.

- - - -
-
pubdate: N/A effdate: N/A -
3.1.5. Customer Option Order Received Electronically, Manually Routed
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Origination and Route Scenarios, Customer Option Order Received Electronically, Manually Routed - Compliance User: Industry Member - Keywords: - Participant Simple Option Order Accepted event, - Exchange reports a Participant Simple Option Trade event, - nextUnlinked flag, - priorUnlinked flag, - -

This scenario illustrates the reporting requirement for Phase 2b for a customer order received electronically by an Industry Member that is manually routed to another Industry Member. The order is then subsequently routed to the exchange.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the customer order which was received electronically (The nextUnlinked flag must be marked as "M" indicating next step is a manual handling so no linkage is available)

-

For this scenario, Industry Member Broker 2 is required to report the following events:

-

• Option Order Route event for the route of the option order to the exchange (The priorUnlinked flag must be marked as "M" indicating prior step is a manual handling so no linkage is available)

- - +
pubdate: May 15, 2017 effdate: N/A +

II. PRIMARY MARKET TRANSACTIONS

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions + Compliance User: Equity Securities + Keywords: + CAT NMS plan, + Primary Market Transactions, + CAT Reporting, + +

As the Participants described in the CAT NMS Plan, an eventual expansion of the CAT to gather complete information on Primary Market Transactions would be beneficial to providing regulators with a comprehensive audit trail that efficiently and accurately tracks all activity in NMS Securities throughout the U.S. markets.64 The Participants received cost and other information regarding the expansion of the CAT to include Primary Market Transactions in NMS Securities during the comment process for the CAT NMS Plan. Based on the Participants’ 2016 analysis, the Participants concluded that it would be appropriate to limit CAT submissions related to allocations in Primary Market Transactions to sub-account allocations.65

+

The Participants believe that any recommendation to expand the CAT to include Primary Market Transactions is premature and should be based on data derived from Participant and Industry Members’ actual experience with CAT reporting. In support of this recommendation, this section discusses our current view of the costs and benefits of the expansion of CAT to include both top-account and sub-account allocations for Primary Market Transactions.66 As required by the Plan, this section also includes details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate associated with incorporating Primary Market Transactions into the CAT.

+
pubdate: May 15, 2017 effdate: N/A +

A. Top-Account Allocations

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations + Compliance User: Equity Securities + Keywords: + CAT, + DAG, + SRO, + +

The Participants, during the course of developing the CAT, received cost estimates regarding inclusion of top account allocation information from members of the Development Advisory Group (“DAG”), a group of industry participants formed to assist the SROs with information to inform the design and implementation of the CAT. Using that data, the SROs concluded that reporting top-account allocation information was not currently justified because of the significant costs likely associated with requiring top-account allocations and the marginal benefit likely derived from reporting top-account information in Primary Market Transactions to the CAT.67 Commenters supported this conclusion, indicating that significant analysis and data modeling are required to implement the inclusion of Primary Market Transactions, and the inclusion of top-account information is less feasible than the inclusion of sub-account allocations.68 Furthermore, given the lack of experience with the CAT, market participants cannot currently provide more definitive cost figures related to such a proposal.

+
pubdate: May 15, 2017 effdate: N/A +
1. Scope
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations, Scope + Compliance User: Equity Securities + Keywords: + CAT, + Primary Market Transactions, + +

The Participants understand that top-account allocations occur during the book-building phase of Primary Market Transactions. During this phase, the underwriter engages in efforts to ascertain indications of interest in purchasing quantities of the underwritten securities at varying prices from potential investors. Based on this information, the underwriter will then decide how to allocate IPO shares to purchasers. Accordingly, the top-account allocation could be defined to include the following: (1) the conditional indications of interest that may fluctuate until the offering syndicate terminates, and (2) the final allocation (that is, the actual allocation of securities to the customers’ accounts).

+

The cost-benefit analysis also depends upon which market participant(s) would be obligated to report the data to the CAT. As the Commission noted, the estimate included in Appendix C of the Plan was sensitive to the number of underwriters.69 In particular, the estimates assumed that all underwriters participating in an offering would need to implement changes if required to submit top-account allocation information. In contrast, however, the Commission suspected that the total number of underwriters that would need to implement changes for top-account information may be lower because lead underwriters could have all of the information necessary to report the top-account allocation information, depending upon the top-account allocation information that was required to be reported. If only the lead underwriters need to implement systems changes to report top-account allocations, the total implementation costs could be lower.

+

In addition, the cost-benefit analysis depends on the data elements that would need to be reported for each Primary Market Transaction. The Participants anticipate that the following top-account allocation data could be reported to the CAT:

+

• the identity of all market participants that receive top-account allocations of NMS Securities in Primary Market Transactions;

+

• the identification of the relevant NMS Security;

+

• the number of such NMS Securities each such market participant is allocated via a top-account;

+

• the identity of the entity making each such allocation; and

+

• the time of the top-account allocation.

+
+
pubdate: May 15, 2017 effdate: N/A +
2. Costs and Benefits
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations, Costs and Benefits + Compliance User: Equity Securities + Keywords: + Benefits, + CAT NMS plan, + Participants, + Costs, + CAT Reporters, + broker-dealers, + DAG, + +

a. Benefits

+

As set forth in the CAT NMS Plan, the Participants believe that most of the potential benefits could be achieved through the collection of sub-account information.70

+

In contrast to the Participants’ conclusions about the value of top-account allocations, the SEC stated that it believes that the inclusion of top-account allocations in the CAT would provide significant regulatory benefits beyond those provided by sub-account allocations.71 The SEC noted that top-account allocation information would be necessary to conduct surveillance for prohibited activities in the book-building process and would improve the efficiency of investigations into such prohibited activities. The SEC also noted that top-account allocation information would provide useful insights into IPO and follow-on allocations in market analysis and that such insights would help inform rulemaking and other policy decisions.72

+

Similarly, in response to the proposal of the CAT NMS Plan, one commenter emphasized that many benefits could only be achieved by requiring the reporting of primary market transactions at both the top-account and the sub-account allocation levels.73 Further, this commenter also stated that top-account information would facilitate analyses of the value of discretionary allocation in book-building for issuers. This commenter also indicated that final top-account allocations should be sufficient to achieve such benefits, while also indicating that information on the indications of interest was crucial for the understanding of the capital formation process and for designing efficient regulations that would facilitate capital formation without compromising investor protection.74

+

However, the Participants maintain that because top account information of conditional and interim allocations for NMS Securities fluctuates throughout the syndicate process and may vary significantly among firms, the marginal benefits of such information over final sub-account allocations are much less.75

+

b. Costs

+

The Participants concluded in the CAT NMS Plan that the inclusion of top-account allocations would likely impose significant costs on CAT Reporters. The Participants understand that broker-dealers generally maintain top-account allocation information in book building systems that are separate from their systems for secondary market transactions and that differ across the industry, including the use of applications provided by third parties, in house systems and spreadsheets for small firms. The Participants also understand that the investment banking divisions of broker-dealers typically use different compliance systems than those used for secondary market transactions.76 In addition, the Participants conclusion is based on the estimate received from the DAG that providing top-account allocations would costs $176.1 million.77

+

One commenter disputed the DAG’s estimate, stating that the cost would be substantially less, approximately $2,400 per offering for providing top-account allocation information,78 although this estimate may measure the ongoing annual costs to maintain reporting, rather than the implementation costs of adding top-account allocation information to the CAT. Similarly, the SEC posited that the cost to add top-account information to the CAT may be lower than estimated, noting that the cost depended on timestamp requirements and the number of underwriters subject to the reporting requirement.79 The Participants note, however, that they currently have no authoritative information indicating that the less stringent timestamp requirement would result in any material reduction on the cost for Industry Members to institute new systems to enable such reporting. The SEC also noted that it is unclear whether the cost estimates cover the inclusion of indications of interest, or the final top-account allocation information.80

+

In light of the varying cost estimates for the inclusion of top-account allocation information in the CAT, the Participants recommend that additional cost analysis be conducted regarding the inclusion of top-account information in the CAT, both for the inclusion of final top-account allocation information and the inclusion of book building indications of interest. Such analysis should be conducted after a period of experience of industry reporting into the CAT. Without the experience of industry reporting into the CAT and without detailed technical analysis by the various industry members who would provide such top-account data, however, the SROs have no ability to improve upon the current cost estimates in this area.

-
pubdate: N/A effdate: N/A -

3.2. Fulfillment Scenario s

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Fulfillment Scenario s - Compliance User: Industry Member - Keywords: -
pubdate: N/A effdate: N/A -
3.2.1. Broker Receives Single-Leg Electronic Orders, Creates Complex Order and Routes to Exchange
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Fulfillment Scenario s, Broker Receives Single-Leg Electronic Orders, Creates Complex Order and Routes to Exchange - Compliance User: Industry Member - Keywords: - nextUnlinked = C, - fulfillmentLinkType = YF, - priorUnlinked = C, - New Option Order events, - Option Order Fulfillment events, - -

This scenario illustrates the Phase 2b reporting requirements for Industry Members when a complex option order is created from multiple single leg option orders. For Phase 2b, there is no linkage required between the single leg option orders and the complex order.

- -

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order events for each single leg customer order electronically received

-

• Option Order Fulfillment events for each single leg customer order post execution of the complex order

-

In Phase 2b, the two New Option Order events must be flagged as nextUnlinked = C, indicating that the orders are represented by a complex order so no linkage to the complex order in Phase 2b.

- - - +
pubdate: May 15, 2017 effdate: N/A +

B. Sub-Account Allocations

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations + Compliance User: Equity Securities + Keywords: + CAT NMS plan, + Participants, + +

As described in the CAT NMS Plan, information related to sub-account allocations is maintained by broker-dealers in a manner that may allow for reporting to the CAT without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations, including a variety of rulemaking and policy decisions.81 Accordingly, the Participants continue to recommend the inclusion of sub-account allocations in the CAT as a future phase in CAT reporting.

+
pubdate: May 15, 2017 effdate: N/A +
1. Scope
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations, Scope + Compliance User: Equity Securities + Keywords: + CAT, + CAT Market, + Primary Market Transactions, + NMS Securities, + +

The costs and benefits of including sub-account allocation information in the CAT depend on the definition of what constitutes a sub-account allocation and what information is to be reported about the sub-account allocations. The Participants understand that sub-account allocations represent the allocation of IPO shares to the actual account receiving the shares. Sub-account allocations occur after top-account allocations and are made by the top-account institutions and broker-dealers prior to settlement.82

+

The cost-benefit analysis also depends upon which market participant(s) would be obligated to report the data to the CAT Market. In addition, the cost-benefit analysis also depends upon the data elements that would need to be reported for each primary market transaction. The Participants anticipate that the following sub-account allocation data may be reported to the CAT:

+

• the identity of all market participants that receive sub-account allocations of NMS Securities in Primary Market Transactions;

+

• the identification of the relevant NMS Security;

+

• the number of such NMS Securities each such market participant is allocated via a sub-account;

+

• the identity of the market participant making each such allocation; and

+

• the time of the sub-account allocation.

+
+
pubdate: May 15, 2017 effdate: N/A +
2. Cost and Benefits
+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations, Scope, Cost and Benefits + Compliance User: Equity Securities + Keywords: + Costs, + Primary Market Transactions, + broker-dealers, + Benefits, + Industry Members, + Participants, + +

a. Benefits

+

As set forth in the CAT NMS Plan, the Participants noted that sub-account allocation information could aid the Commission and the Participants to gain a better understanding of how shares allocated in Primary Market Transactions are sold in the secondary market, or how allocations differ across broker-dealers.83 The Commission agreed that such data could improve compliance monitoring and market analyses by the Commission and the Participants, which, in turn, could help inform rulemaking and other policy decisions.84 For example, such data could enhance the Commission’s understanding of the role of the allocations in the capital formation process, when and how investors receiving allocations sell their Eligible Securities and how allocations differ among broker-dealers.85 Such data also could assist the Commission and Participants in conducting their respective examinations and investigations related to Primary Market Transactions.86

+

b. Costs

+

Based on feedback from Industry Members, the Participants understand that it would be more feasible to gather information relating to sub-account allocations in Primary Market Transactions than top-account allocations.87 The Participants noted their understanding that sub-account allocations are received in a manner and level of detail similar to allocations in secondary market transactions, and that the same middle and back office systems that are used for the processing of sub-account allocations for secondary market transactions generally are also used for the sub-account allocations for Primary Market Transactions. If Industry Members maintain sub-account allocations for Primary Market Transactions in an electronic format that could be converted into a reportable format acceptable for the CAT System, it may be that certain Industry Members could more easily report information about sub-account allocations to the Central Repository. 88 In addition, the Participants’ conclusion was based on the DAG estimate that providing sub-account allocations would cost approximately $58.7 million (as opposed to the much higher $171.6 million for top-account allocations).89

+

This conclusion was further supported by another commenter, which argued that the incremental cost of providing sub-account allocation information would be de minimis.90

-
pubdate: N/A effdate: N/A -

3.3. Option Order Modification Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Modification Scenarios - Compliance User: Industry Member - Keywords: -

This section illustrates the common scenarios of single-leg option modifications and the CAT reporting requirements for Phase 2b. In addition to the scenarios provided below, please refer to Equity Event Scenarios 2.4.1,2.4.3, and 2.4.4. The guidance also applies to single leg electronic option order reporting.

-
pubdate: N/A effdate: N/A -
3.3.1. Customer Initiates Modification of Option Order Previously Routed to the Exchange
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Option Order Modification Scenarios, Customer Initiates Modification of Option Order Previously Routed to the Exchange - Compliance User: Industry Member - Keywords: - New Option Order event, - Option Order Route event, - Option Order Modification event, - second Option Order Route event, - -

This scenario illustrates a customer-initiated modification (electronically) of an option order which the Industry Member had previously routed to an exchange.

-

In this scenario, Industry Member Broker 1 is required to report the following events:

-

• A New Option Order event for the electronic receipt of the customer order

-

• Option Order Route event for the route to the exchange

-

• An Option Order Modification event for the electronic receipt of the order modification

-

• A second Option Order Route event for the route of the modified option order to the exchange

- - - - -
+
pubdate: May 15, 2017 effdate: N/A +

C. Implementation Timeline

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Implementation Timeline + Compliance User: Equity Securities + Keywords: + CAT NMS plan, + CAT Reporting, + Industry Member CAT Reporters, + SIFMA, + SRO, + +

As noted in the CAT NMS Plan, the Participants do not support the inclusion of any Primary Market Transaction information in the initial phase of CAT reporting.91 As one commenter noted, primary market transactions should not be added to the CAT until regulatory and surveillance requirements have been defined.92 As such, the Participants recommend that further analysis regarding the possible inclusion of Primary Market Transaction data occur no sooner than six months after the Industry Member CAT Reporters have gained experience with implementing changes to secondary market transaction systems and have gained experience reporting to the CAT. Such experience will permit more informed cost analyses. Further supporting the SRO’s recommendation, SIFMA explained that the industry is currently absorbing substantial new regulatory costs. Allowing determination whether to require top-account and sub-account data be reported to CAT reporting to benefit from experience with the CAT would allow the industry to better absorb additional cost because of the experience reporting other data to the CAT and because of the longer time horizon that CAT Reporters would have to comply with any added requirement.93

-
pubdate: N/A effdate: N/A -

3.4. Cancellation Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Cancellation Scenarios - Compliance User: Industry Member - Keywords: -

Reporting option order cancellations follow the same guidance as equities. Please refer to Section 2.5 for examples.

+
+
pubdate: May 15, 2017 effdate: N/A +

III. EQUITY SECURITIES OTHER THAN NMS SECURITIES AND OTC EQUITY SECURITIES

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities + Compliance User: Equity Securities + Keywords: + Sec Rule 613, + CAT NMS plan, + NMS Securities, + OTC Equity Securities, + +

Rule 613(i) requires the CAT NMS Plan to include a provision requiring the Participants to include in the Expansion Document how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including primary market transactions in such securities. Section 6.11 of the CAT NMS Plan effectuates this requirement. The CAT NMS Plan submitted to the Commission by the Participants included OTC Equity Securities as Eligible Securities subject to CAT reporting requirements; consequently, OTC Equity Securities are already subject to the same CAT reporting requirements as NMS Securities.94

+

Although the vast majority of securities that trade on Participant exchanges are Eligible Securities, the Participants considered whether two types of transactions that may fall into this category are cabinet trades and trades in Flex options. After reviewing these trades, the Participants determined to include Reportable Events regarding cabinet trades and Flex options in the CAT. This section describes cabinet trades and flex trades.

+
pubdate: May 15, 2017 effdate: N/A +

A. Cabinet Trades

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities, Cabinet Trades + Compliance User: Equity Securities + Keywords: + Trades, + OPRA, + +

Cabinet trades are manual trades that are executed in order to remove worthless options from a member firm’s books for accounting purposes. The trades are permitted by exchange rules and typically execute at a price of $1 per options contract. These relatively rare trades are manual trades that are not reported to OPRA.

-
pubdate: N/A effdate: N/A -

3.5. Additional Reporting Scenarios

- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios - Compliance User: Industry Member - Keywords: -

In addition to the scenarios provided below, please refer to Equity Event Scenarios 2.6.1, 2.6.3, 2.6.6, 2.6.7, 2.6.8, and 2.6.9. The guidance also applies to single leg electronic option order reporting.

-
pubdate: N/A effdate: N/A -
3.5.1. Customer Option Order Internally Routed Electronically
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Customer Option Order Internally Routed Electronically - Compliance User: Industry Member - Keywords: - eventTimestamp, - openCloseIndicator, - -

This scenario illustrates the reporting requirements for CAT when an Industry Member internally routes a customer option order from the sales desk to the trading desk within the same Industry Member firm.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the customer order which was received electronically

-

• Option Order Internal Route event from the sales desk to the trading desk

-

• Option Order Route event for the route of the option order to the exchange

- - - -
-
pubdate: N/A effdate: N/A -
3.5.2. Customer Option Order Internally Routed Electronically, Trading Desk Creates Child Orders Prior to Route
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Customer Option Order Internally Routed Electronically, Trading Desk Creates Child Orders Prior to Route - Compliance User: Industry Member - Keywords: - Child Order events, - Option Order Internal Route event, - orderIDs, - Option Order Route events, - -

This scenario illustrates the reporting requirements for an Industry Member that creates child orders prior to routing the order slices. Child Order events are always electronically created.

-

For this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the customer order which was received electronically

-

• Option Order Internal Route event from the sales desk to the trading desk

-

• Child Order events for slicing the original order into smaller quantities and assigning new orderIDs prior to routing from the Trading Desk

-

• Option Order Route events for the route of each child option order to an exchange

- - - - -
-
pubdate: N/A effdate: N/A -
3.5.3. Industry Member Receives Complex Option Order, Splits into Individual Single Order Legs to be Worked in the Customer's Account
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Receives Complex Option Order, Splits into Individual Single Order Legs to be Worked in the Customer's Account - Compliance User: Industry Member - Keywords: - priorUnlinked = C, - -

This scenario illustrates the reporting requirements for an Industry Member in Phase 2b that receives a complex option order but routes single leg option orders directly from the customer's account to the exchange without creating new single leg option orders. Linkage between the original complex option order and the single leg option order routes is not required in Phase 2b, but reporters must indicate on the Option Order Route event there is no prior step reported since it was a complex order by populating field priorUnlinked = C. Since the single leg orders were routed to the exchange as single legs, linkage to the related single leg exchange order is required.

-

In this scenario, Industry Member Broker 1 is required to report the following events:

-

• Option Order Route events for each single leg option order routed to the exchange

- - - -
-
pubdate: N/A effdate: N/A -
3.5.4. Industry Member Receives Complex Option Order, but Client Sends Multiple Single Leg Option Orders Electronically
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Receives Complex Option Order, but Client Sends Multiple Single Leg Option Orders Electronically - Compliance User: Industry Member - Keywords: - handlingInstruction 'CMPX, - nextUnlinked = 'C, - -

This scenario illustrates the reporting requirements for an Industry Member that receives a complex order that is routed by the Industry Member to an exchange as a complex order but where the client sends single leg electronic messages due to limitations in the client's system.

-

For Phase 2b, reporting this order is out of scope as it was intended to be handled as a complex order. In Phase 2b, the preferred approach is that the Industry Member not report the electronic single leg orders as complex orders are not in scope. However, if Industry Member's elects to report the single legs, they must populate handlingInstruction 'CMPX' and include the nextUnlinked = 'C', to indicate there is no linkage to additional order events as subsequent handling was at the complex order level.

- - - - -
-
pubdate: N/A effdate: N/A -
3.5.5. Industry Member Routes Multiple Single Leg Option Orders to another Industry Member, Calls with Complex Order Instructions
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Routes Multiple Single Leg Option Orders to another Industry Member, Calls with Complex Order Instructions - Compliance User: Industry Member - Keywords: - Option Order Route, - -

This scenario illustrates the reporting requirements for Phase 2b when a complex order is routed manually between two Industry Members, but the related electronic order messages are sent and received as single leg option orders. In Phase 2b, the preferred approach is that the Industry Member not report the electronic single leg orders as complex orders are not in scope. However, if Industry Member's elects to report the single legs, they must include handlingInstruction = 'CMPX'. The sending Industry Member must populate nextUnlinked = C on the Option Order Routes events, as no linkage will be available to the complex order at the receiving broker. Similarly, the receiving Industry Member should populate priorUnlinked = C on the Option Order Accepted events.

-

In this scenario, if suppression of the electronic message is not possible, Industry Member Broker 1 would report the following events:

-

• Four (4) New Option Order events for the electronic single leg orders

-

• Four (4) Option Order Route events for the route of the single leg orders to Broker 2

-

Industry Member Broker 2 would report the following events:

-

• Four (4) Option Order Accepted events for the electronic routes received from Broker 1

- - - - - - - - - -
-
pubdate: N/A effdate: N/A -
3.5.6. Industry Member Solicits Order, Creates Paired Option for Partial Quantity
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Industry Member Solicits Order, Creates Paired Option for Partial Quantity - Compliance User: Industry Member - Keywords: - Industry Member Broker, - -

This scenario illustrates the reporting requirements for an Industry Member that electronically received a single leg order from a customer, solicits another Industry Member to pair the order, but is left with a partial quantity of the single leg order still to work. Only the single leg components of the lifecycle are required for CAT reporting in Phase 2b, as paired option orders are not required until Phase 2d.

-

In this scenario, Industry Member Broker 1 is required to report the following events:

-

• New Option Order event for the receipt of the customer order

-

• Option Order Route for the un-paired quantity of the single leg order

- - - - -
-
pubdate: N/A effdate: N/A -
3.5.7. Response to an Exchange Auction
- Topic: CAT Industry Member Reporting Scenarios, Executive Summary, Option Scenarios and Examples, Additional Reporting Scenarios, Response to an Exchange Auction - Compliance User: Industry Member - Keywords: - Exchange Auction, - -

This scenario illustrates the reporting requirements for a proprietary option order created in response to an Exchange Auction of a simple option or paired order of simple options. Responses to the complex auctions are deferred until 2D. The Industry Member must include the auction details on the handlingInstructions when reporting to CAT.

-

In this scenario, Industry Member Market Maker 1 is required to report the following events:

-

• New Option Order event for the creation of the proprietary order

-

• Option Order Route event for the response to the exchange auction

- - - -
+
pubdate: May 15, 2017 effdate: N/A +

B. Flex Options

+ Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities, Flex Options + Compliance User: Equity Securities + Keywords: + Expiration Date, + Strike Price, + Exercise Style, + +

Flex options are bespoke option contracts where parties to the transaction may choose the expiration date, the strike price and the exercise style. These options are permitted by exchange rules, although the option is not standardized.

+
fn +

1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. (Nov. 23, 2016). The full text of the CAT NMS Plan is available at www.catnmsplan.com.

+
+
fn +

2 The Participants to the CAT NMS Plan are Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., Investors’ Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, NYSE National, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

+
+
fn +

3 See Letter from Michael Simon, CAT NMS Plan Chair, to Brent J. Fields, Secretary, SEC (May 15, 2017). Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

+
+
fn +

1 17 C.F.R. § 242.613.

+
+
fn +

2 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 Fed. Reg. 45722, 45743 (Aug. 1, 2012) (“Rule 613 Adopting Release”).

+
+
fn +

3 A copy of the CAT NMS Plan as filed on September 30, 2014, is available at https://www.sec.gov/divisions/marketreg/cat-nms-agreement.pdf. The cover letter for the CAT NMS Plan is available at https://www.sec.gov/divisions/marketreg/cat-nms-plan-letter.pdf. The Participants submitted an Amended and Restated CAT NMS Plan in February 2015 and several subsequent amendments, available at http://www.catnmsplan.com/catnmsplan/.

+
+
fn +

4 Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. 84696 (Nov. 23, 2016) (“Plan Adopting Release”).

+
+
fn +

5 The Participants, with industry support, included equity securities that are not NMS securities in the definition of “Eligible Securities” under Article 1 of the CAT NMS Plan. See SIFMA Industry Recommendations for the Creation of the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) available at http://www.catnmsplan.com/Source/industryfeedback/p242319.pdf, and discussions with the Development Advisory Group (DAG) on July 24, 2013.

+
+
fn +

6 Rule 613 Adopting Release, supra note 2, at 45743.

+
+
fn +

7 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 Fed. Reg. 32556, at 32569, 32587-88 (June 8, 2010).

+
+
fn +

8 In 1975, Congress established the MSRB to regulate the activities of broker-dealers and banks that buy, sell and underwrite municipal securities.

+
+
fn +

9 Infra Section I.B.2

+
+
fn +

10 NYSE operates the NYSE Bonds® system. Trading in eligible bonds by NYSE members on the NYSE Bonds system is pursuant to NYSE Rules 86-88. FINRA Rule 6730(e)(4) exempts FINRA members from reporting to TRACE transactions in TRACE-Eligible Securities that are executed on a facility of NYSE in accordance with specified NYSE rules and that are reported to NYSE and disseminated publicly, provided that a data sharing agreement between FINRA and NYSE related to transactions covered by FINRA Rule 6730 remains in effect.

+
+
fn +

11 On July 10, 2017, FINRA will begin requiring its members to report transactions in U.S. Treasury Securities (“Treasuries”). See FINRA Regulatory Notice 16-39; see also Securities Exchange Act Release No. 79116 (Oct. 18, 2016), 81 Fed. Reg. 73167 (Oct. 24, 2016) (Order Approving SRFINRA-2016-027). The discussion of debt securities in this document does not include Treasuries.

+
+
fn +

12 See Types of Bonds, available at http://www.finra.org/investors/types-bonds.

+
+
fn +

13 See id.

+
+
fn +

14 See id.

+
+
fn +

15 See FINRA Rule 6710(dd).

+
+
fn +

16 See FINRA Rule 6710(bb).

+
+
fn +

17 See Types of Bonds, available at http://www.finra.org/investors/types-bonds.

+
+
fn +

18 See 15 USC § 78o-4(b).

+
+
fn +

19 For example, at the end of 2016, there was approximately $39.4 trillion in outstanding U.S. bond market debt. Of that total, over one-third (approximately $13.9 trillion) was issued by the U.S. Treasury and another $3.8 trillion represented municipal securities. See U.S. Bond Market Issuance and Outstanding, available at www.sifma.org/research/statistics.aspx.

+
+
fn +

20 Kurt Shrout, “The U.S. Bond Market May Be Much Different Than You Think It Is,” LearnBonds, May 30, 2013. Accessed December 18, 2014, available at: http://www.learnbonds.com/how-big-is-the-bond-market.

+
+
fn +

21 Id.

+
+
fn +

22 Data was compiled from Federal Reserve data available at https://www.federalreserve.gov/data.htm.

+
+
fn +

23 For reporting purposes, FINRA maintains CUSIP information for trades reportable to the Over-the-Counter Reporting Facility (ORF) and FINRA’s Trade Reporting Facilities (TRFs). The ORF is the service provided by FINRA for the reporting of trades in OTC Equity Securities executed other than on or through an exchange and for trades in Restricted Equity Securities effected under Securities Act Rule 144A and dissemination of last sale reports. Each FINRA TRF provides FINRA members with a mechanism for the reporting of transactions effected otherwise than on an exchange. Trades by FINRA members in exchange-listed securities executed otherwise than on an exchange may be reported to a FINRA TRF.

+
+
fn +

24 From January 2015 through March 2017, there were 52,530 requests for CUSIPs for U.S. corporate or municipal bonds and 22,176 requests for CUSIPs for U.S. equities. Data compiled from CUSIP Issuance Trends available at https://www.cusip.com/cusip/insights.htm.

+
+
fn +

25 Data consolidated from SIFMA statistics available at http://www.sifma.org/research/statistics.aspx. TRACE reported debt information includes Agency MBS, Non-Agency MBS, ABS, Corporate Debt and Federal Agency Securities. Equity securities include NYSE, NASDAQ, BATS, Direct Edge, Other and Off-Exchange.

+
+
fn +

26 Information for Chart 4 was compiled from https://www.bats.com/us/equities/market_statistics/historical_market_volume/ (equity transactions) and http://www.finra.org/industry/trace/trace-fact-book (TRACE corporate transactions).

+
+
fn +

27 Supra note 20.

+
+
fn +

28 Id.

+
+
fn +

29 Supra note 20. This chart displays corporate bond market data excluding non-financial sector debt obtained from the Federal Reserve at https://www.federalreserve.gov/apps/fof/FOFTables.aspx.

+
+
fn +

30 Supra note 20.

+
+
fn +

31 See United States, Board of Governors of the Federal Reserve System, “Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances,” Table 3, Federal Reserve Bulletin, September 2014, Vol. 100, No. 4. Accessed February 17, 2016. Available at: http://www.federalreserve.gov/econresdata/scf/scfindex.htm.

+
+
fn +

32 This chart displays the reduction in corporate bond trading in the secondary market 90 days after the issuance. See Bruce Mizrach, “Analysis of Corporate Bond Liquidity,” FINRA Office of the Chief Economist Research Note, December 2015 (“FINRA Study”), available at http://www.finra.org/sites/default/files/OCE_researchnote_liquidity_2015_12.pdf.

+
+
fn +

33 As of 2017, NYSE Bonds had 10,007 corporate debt securities reportable to its system and TRACE had 61,522 corporate debt securities. In 2016, the average number of corporate debt securities transactions reported to TRACE was approximately 54,600 per day and on NYSE Bonds it was 20 per day.

+
+
fn +

34 See Securities Industry and Financial Markets Association, “SIFMA Electronic Bond Trading Report: US Corporate & Municipal Securities,” February 2016 (“SIFMA Report”), available at http://www.sifma.org/issues/item.aspx?id=8589958906.

+
+
fn +

35 FINRA Rule 6710 provides that “TRACE-Eligible Security” means a debt security that is United States (“U.S.”) dollar-denominated and issued by a U.S. or foreign private issuer, and, if a “restricted security” as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an agency or a Government-Sponsored Enterprise (“GSE”). FINRA Rule 6710 also provides that “TRACE-Eligible Security” does not include a debt security that is issued by a foreign sovereign, or a U.S. Treasury Security, or a money market instrument. Effective July 10, 2017, the definition of “TRACE-Eligible Security” will be expanded to include U.S. Treasury Securities. However, as discussed herein, “TRACE-Eligible Security” refers to the definition prior to July 10, 2017, and does not include Treasuries. See supra note 11.

+
+
fn +

36 See also Section I.B.1.c. (Transactions Excepted or Exempt from TRACE).

+
+
fn +

37 FINRA Rule 6710 generally provides that “Agency Debt Security” means a debt security (i) issued or guaranteed by an agency; or (ii) issued or guaranteed by a GSE. The term excludes a U.S. Treasury Security and a Securitized Product (“SP”), where an agency or a GSE is the securitizer or the guarantor of the SP.

+
+
fn +

38 FINRA Rule 6710 generally provides that “Securitized Product” means a security collateralized by any type of financial asset, such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes but is not limited to an asset-backed security as defined in Section 3(a)(79)(A) of the SEA, a synthetic asset-backed security, and any residual tranche or interest.

+
+
fn +

39 FINRA Rule 6710 generally defines ABS as a type of SP where the ABS is collateralized by any type of financial asset, such as a consumer or student loan, a lease, or a secured or unsecured receivable, and excludes: (i) an SP that is backed by residential or commercial mortgage loans, mortgage-backed securities, or other financial assets derivative of mortgage-backed securities; (ii) an SBA-Backed ABS traded To Be Announced (“TBA”) or in a Specified Pool Transaction; and (iii) a collateralized debt obligation.

+

FINRA Rule 6710 generally provides that “To Be Announced” means a transaction in an Agency Pass-Through Mortgage-Backed Security or an SBA-Backed ABS where the parties agree that the seller will deliver to the buyer a pool of a specified face amount and meeting certain other criteria but the specific pool to be delivered at settlement is not specified at the time of execution, and includes TBA transactions “for good delivery” and TBA transactions “not for good delivery.”

+

FINRA Rule 6710 generally provides that “Specified Pool Transaction” means a transaction in an Agency Pass-Through Mortgage-Backed Security or an SBA-Backed ABS requiring the delivery at settlement of a pool that is identified by a unique pool identification number at the time of execution.

+
+
fn +

40 Agency Pass-Through Mortgage-Backed Securities may be traded TBA for good delivery, TBA not for good delivery, or in Specified Pool Transactions. FINRA Rule 6710 generally provides that “Agency Pass-Through Mortgage-Backed Security” means a type of SP issued in conformity with a program of an agency or GSE, for which timely payment (principal and interest) is guaranteed by the agency or GSE representing ownership interest in a pool of mortgage loans structured to “pass through” payments to holders of the security on a pro rata basis.

+
+
fn +

41 FINRA Rule 6710 generally provides that “SBA-Backed ABS” means an SP issued in conformity with a program of the Small Business Administration (“SBA”), for which the timely payment of principal and interest is guaranteed by the SBA, representing ownership interest in a pool of loans or debentures and structured to “pass through” payments by borrowers to the holders of the security on a pro rata basis.

+
+
fn +

42 Transactions in SPs that are CMOs executed before the issuance of the security must be reported no later than the first settlement date of the security. See FINRA Rule 6730(a)(3)(C).

+
+
fn +

43 FINRA Rule 6710 generally provides that a “List or Fixed Offering Price Transaction” is a primary market sale transaction sold on the first day of trading of a security, including an ABS but excluding any other SP: (i) by a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price.

+
+
fn +

44 FINRA Rule 6710 provides that a “Reportable TRACE Transaction” is “any transaction in a TRACE-Eligible Security except: (1) a transaction that is not reported as specified in Rule 6730(e); and (2) a sale from an issuer to an underwriter(s) or initial purchaser(s) as part of an offering, except a sale of an Agency Pass-Through Mortgage-Backed Security as defined in [Rule 6710] paragraph (v) from a Securitizer as defined in paragraph (s) to any purchaser.”

+
+
fn +

45 Municipal securities are included in the definition of “exempted securities” under Exchange Act Section 3(a)(12)(A)(ii), except with respect to Exchange Act Sections 15 and 17A, and are defined in Section 3(a)(29) as “securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond (as defined in section 103(c)(2) of the Internal Revenue Code of 1954) the interest on which is excludable from gross income under section 103(a)(1) of such Code if, by reason of the application of paragraph (4) or (6) of section 103(c) of such Code (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c)), paragraph (1) of such section 103(c) does not apply to such security.”

+
+
fn +

46 MSRB, “Specifications for Real-Time Reporting of Municipal Securities Transactions,” Version 3.0, July 2016, available at http://www.msrb.org/msrb1/RTRS/RTRS-Specifications.pdf.

+
+
fn +

47 Id.

+
+
fn +

48 Id.

+
+
fn +

49 Special Condition Indicator – The code is used to indicate that a trade is eligible for an extended reporting deadline other than the 15-minute requirement; that a trade is subject to a special condition; and/or that a customer trade did not include a mark-up, markdown, or commission or an inter-dealer transaction executed with or using the services of alternative trading system (ATS) with Form ATS on file with the SEC.

+
+
fn +

50 Supra note 46.

+
+
fn +

51 Under MSRB Rule G-12(f)(iv)(A), an “Inter-Dealer Transaction Eligible for Comparison by a Clearing Agency Registered with the Commission” means a contract for purchase and sale between one dealer and another dealer, resulting in a contractual obligation for one such dealer to transfer municipal securities to the other dealer involved in the transaction, and which contract is eligible for comparison under the procedures of an automated comparison system operated by a registered clearing agency.

+
+
fn +

52 MSRB Rule D-9 defines “customer” to mean “any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities.” Since Rule G-14 applies only to inter-dealer and customer trades, new issue transactions between an issuer and a broker-dealer, while not explicitly exempt from the reporting requirements, are not subject to the Rule because in this context an issuer is neither a customer nor a broker-dealer.

+
+
fn +

53 See NYSE Rule 86(b)(2)(B) for types of orders that may be entered on NYSE Bonds.

+
+
fn +

54 17 CFR 240.17a-3(a)(6).

+
+
fn +

55 Id.

+
+
fn +

56 See Section I.E. (Recommendations and Projected Implementation Timeframe).

+
+
fn +

57 See supra note 3, Amended and Restated CAT NMS Plan at Appendix C, A.1(a)(iii) and Appendix D, 9.

+
+
fn +

58 See Bank for International Settlements, “Electronic trading in fixed income markets,” January 2016 (“BIS Report”), available at http://www.bis.org/publ/mktc07.pdf.

+
+
fn +

59 See Jack Bao, et al., “The Volcker Rule and Market-Making in Times of Stress,” December 8, 2016, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2836714.

+
+
fn +

60 Supra note 34.

+
+
fn +

61 Supra note 32.

+
+
fn +

62 FINRA conducted interviews with Securities Industry and Financial Markets Association (SIFMA), Financial Information Forum (FIF), and Bond Dealers of America (BDA).

+
+
fn +

63 Supra note 43.

+
+
fn +

64 See Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

65 Id.

+
+
fn +

66 Plan Adopting Release, supra note 4, at 84779-80.

+
+
fn +

67 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

68 Letter to Brent J. Field, Secretary, SEC, from Mary Lou Kaenel, Managing Director, Financial Information Forum (July 8, 2016) (“FIF Letter”) at 13; Letter to Brent J. Field, Secretary, SEC, from Theodore R. Lazo, Managing Director and Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association (July 18, 2016) (“SIFMA Letter”) at 36.

+
+
fn +

69 Plan Adopting Release, supra note 4, at 84904.

+
+
fn +

70 Amended and Restated CAT NMS Plan, supra note 3 at Appendix C.

+
+
fn +

71 Plan Adopting Release, supra note 4, at 84905.

+
+
fn +

72 Id. at 84904.

+
+
fn +

73 Letter to Brent J. Fields, Secretary, SEC, from Kathleen Weiss Hanley, Bolton-Perella Chair in Finance, Lehigh University, et al., (July 12, 2016) (“Hanley Letter”) at 4.

+
+
fn +

74 Id. at 5-6.

+
+
fn +

75 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

76 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

77 Id.

+
+
fn +

78 Hanley Letter, supra note 73, at 5.

+
+
fn +

79 Plan Adopting Release, supra note 4, at 84904.

+
+
fn +

80 Id. at 84905.

+
+
fn +

81 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

82 Plan Adopting Release, supra note 4, at 84984.

+
+
fn +

83 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
+
fn +

84 Plan Adopting Release, supra note 4, at 84984.

+
+
fn +

85 Id.

+
+
fn +

86 Id.

+
+
fn +

87 See generally Amended and Restated CAT NMS Plan, supra note 3, Appendix C, A.6.

+
+
fn +

88 Id. at Appendix C.

+
+
fn +

89 Id.

+
+
fn +

90 Hanley Letter, supra note 69, at 5.

+
+
fn +

91 Plan Adopting Release, supra note 4, at 84779.

+
+
fn +

92 SIFMA Letter, supra note 68, at 36.

+
+
fn +

93 Id.

+
+
fn +

94 The term “OTC Equity Security” is defined in the CAT NMS Plan as “any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.” This would include all equity securities that are not NMS securities other than Restricted Equity Securities, which are not subject to prompt last sale reporting under FINRA rules, see FINRA Rules 6622(a)(3), 6420(f), and not reportable to FINRA’s Order Audit Trail System, see FINRA Rule 7410(l). Restricted Equity Securities are generally subject to trading restrictions, and the Participants believe inclusion of Restricted Equity Securities in the CAT should be considered only after the CAT is fully implemented.

+
\ No newline at end of file diff --git a/spider/files/data000006.html b/spider/files/data000006.html index 8f0f185..9f89bf5 100644 --- a/spider/files/data000006.html +++ b/spider/files/data000006.html @@ -1,2539 +1,34 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: compilation - document_title: CAT Reporting Technical Specifications for Industry Members - document_type: Specifications - source: US/SEC/Specifications/Technical Specifications - source_type: Technical Specifications + content_type: periodic + document_title: CAT NMS PLAN Rollout Plan (SEC Rule 613 Rollout Plan) + document_type: Plan + source: US/SEC/Plan/Rollout Plan + source_type: Rollout Plan language: English citation: N/A -
pubdate: February 28, 2019 effdate: N/A -

CAT Reporting Technical Specifications for Industry Members

- Topic: CAT Reporting Technical Specifications for Industry Members - Compliance User: Industry Members +
pubdate: N/A effdate: N/A +

CAT NMS PLAN Rollout Plan (SEC Rule 613 Rollout Plan)

+ Topic: CAT NMS, Rollout Plan + Compliance User: SRO/Broker-dealers Keywords: - Technical Specifications, + NMS Plan Participant, + SRO, + Implementation Date, -

2/28/2019

-

DRAFT Version 1.1

-
pubdate: February 28, 2019 effdate: N/A -

Preface

- Topic: CAT Reporting Technical Specifications for Industry Members, Preface - Compliance User: Industry Members - Keywords: - CAT NMS plan, - SRO, - CAT NMS LLC, - -

Rule 613 of the Securities Exchange Act of 1934 requires national securities exchanges and national securities associations (“SROs”) to submit a national market system plan to the Securities and Exchange Commission (“Commission” or “SEC”) to create, implement, and maintain a consolidated audit trail (the “CAT”) that would allow regulators to more efficiently and accurately track all activity in U.S. equity and listed options markets. Pursuant to Rule 613, the SROs filed with the Commission the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”), which was approved by the Commission on November 15, 2016.

-

Under Rule 613(g)(2), each member of a national securities exchange or national securities association is required to comply with all the provisions of the CAT NMS Plan. Relatedly, as mandated under Rule 613, the CAT NMS Plan requires each SRO to adopt rules requiring its members to comply with Rule 613 and the CAT NMS Plan, and to agree to enforce compliance by its members in that regard. Accordingly, each SRO has adopted rules requiring its members to comply with Rule 613 and the CAT NMS Plan. See, e.g., FINRA Rule 6800 Series.

-

The SROs jointly own CAT NMS, LLC, which was formed by the SROs to arrange for and oversee the creation, implementation, and maintenance of the CAT as required under Rule 613. Thus, the CAT is a facility of each SRO.

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This specification represents a phased approach to industry reporting. Key dates are as noted below. Please note that a proposed amendment to the CAT NMS Plan will be filed with the Commission to reflect the phased approach for Industry Member CAT reporting described in these Technical Specifications. The proposed amendment will be subject to the Commission's approval.

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Executive Summary

- Topic: CAT Reporting Technical Specifications for Industry Members, Executive Summary - Compliance User: Industry Members - Keywords: - CAT Industry Member Reporting Scenarios, - -

This document describes the requirements for the reporting of data to CAT by Industry Members, including detailed information about data elements and file formats of each Reportable Event. It also describes how Industry Members should submit files to CAT, including access instructions, network and transport options, and testing requirements.

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A separate companion document containing detailed reporting scenarios entitled CAT Industry Member Reporting Scenarios should be used as a guide for determining how the event types and field values laid out in this document should be applied when reporting various order handling and execution scenarios for both equities and options.

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Revision / Change Process

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1. Introduction

- Topic: CAT Reporting Technical Specifications for Industry Members, Introduction - Compliance User: Industry Members - Keywords: -
pubdate: February 28, 2019 effdate: N/A -

1.1. CAT Overview

- Topic: CAT Reporting Technical Specifications for Industry Members, Introduction, CAT Overview - Compliance User: Industry Members - Keywords: - Sec Rule 613, - CAT NMS plan, - CAT Reporting Agents, - Securities Information Processors (SIPS), - -

The Securities and Exchange Commission (SEC) approved Rule 613 under the Securities Exchange Act of 1934, which requires national securities exchanges and national securities associations (collectively, the Participants) to submit a national market system plan to create, implement, and maintain a consolidated audit trail (CAT NMS Plan) that would capture customer and order event information for orders in NMS Securities and OTC Equity Securities (Eligible Securities), across all markets, from the time of order inception through routing, cancellation, modification, execution, and allocation. The SEC approved the CAT NMS Plan on November 15, 2016.

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In accordance with SEC Rule 613, the CAT NMS Plan requires a Central Repository that will comprehensively track orders throughout their lifecycle and identify the Participants and Industry Members handling them, as well as the account holders and authorized traders for any account that originates an order (Customers1). Specific data elements will be submitted to the Central Repository by Participants, Industry Members, and CAT Reporting Agents. CAT Reporting Agents may be third-party firms reporting on behalf of other entities, or may be outside parties that are not required to submit data to the CAT, but from which the CAT may receive data per the CAT NMS Plan, such as the Securities Information Processors (SIPs).

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The CAT NMS Plan also requires the selection of an entity as the Plan Processor to be responsible for performing the processing functions required by Rule 613 and the Plan. The Operating Committee of CAT NMS LLC, a governing body composed of representatives of the Participants, oversees the operation of the CAT. The duties of the Operating Committee are further described in Article IV of the CAT NMS Plan.

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Refer to SEC Rule 613, available at: https://www.sec.gov/rules/final/2012/34-67457.pdf for more details. Refer also to CAT NMS Plan, available at: https://www.catnmsplan.com/wpcontent/uploads/2018/02/34-79318-exhibit-a.pdf

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2. CAT Reporting Fundamentals

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals - Compliance User: Industry Members - Keywords: - Industry Member, - -
pubdate: February 28, 2019 effdate: N/A -

2.1. Industry Member Perspective

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Industry Member Perspective - Compliance User: Industry Members - Keywords: - Industry Member, - New Order, - Order Accepted, - -

Industry Members should populate fields from their own perspective. For example, for “capacity”, the Industry Member should report based on the capacity in which the Industry Member acted. For a New Order and Order Accepted, reports should indicate the instructions as received; for an Order Route, the fields should include the instructions as sent to the destination.

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2.2. Key Data Elements

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements - Compliance User: Industry Members - Keywords: - Elements of CAT, - -

The sections below describe the key data elements of CAT that may be used in order events and/or metadata files.

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2.2.1. Reporter ID and Submitter ID

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Reporter ID and Submitter ID - Compliance User: Industry Members - Keywords: - Reporter ID, - Submitter ID, - CAT Reporting Agents, - -

Two CAT identifiers, the Reporter ID and the Submitter ID, i.e., CAT Reporting Agent, are used during the CAT file submission process to identify the Industry Member and, if applicable, the party authorized to submit CAT files on behalf of the Industry Member (CAT Reporting Agent).

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Reporter ID

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The CAT Reporter ID is the SRO assigned identifier that an Industry Member used to report order events to CAT. A CAT Reporter may use any SRO assigned identifier that is valid on the CAT Trading Day for which order events are submitted. CAT will use reference data submitted by Participant Reporters each day to identify the Industry Member to which the specific identifier is assigned. Each SRO assigned identifier is linked to the Industry Member's CRD number so that all reporting activity of a single Industry Member CAT reporter can be consolidated at the firm level in CAT.

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Submitter ID

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The Submitter ID is the identifier of the CAT Reporting Agent, the entity authorized to submit the files to CAT on behalf of the Industry Member. CAT Reporters may authorize third-parties (“CAT Reporting Agents”) to submit data to CAT on their behalf. The CAT Reporting Agent must be authorized to submit data on behalf of the Reporter. Each CAT Reporting Agent will be assigned a unique Submitter ID by CAT during onboarding. If an Industry Member submits data on its own behalf, then the Submitter ID assigned to the entity may be the same as the CAT Reporter ID.

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2.2.2. Order ID

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order ID - Compliance User: Industry Members - Keywords: - Order ID, - -

The order ID used in order events, representing the internal order IDs assigned by the Industry Member, must be unique when combined with the date, reporter and symbol (or optionID).

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2.2.3. Timestamps

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Timestamps - Compliance User: Industry Members - Keywords: - Manual Order Events, - Industry Members, - Alternative Trading systems, - Member Data, - -

Each Industry Member must record and report Industry Member Data to the CAT with timestamps in milliseconds. However, to the extent that any Industry Member’s order handling or execution systems utilize timestamps in increments finer than milliseconds, such Industry Member must record and report Industry Member Data to the CAT with timestamps in such finer increments. CAT will accept granularity up to nanoseconds. Each Industry Member may record and report Manual Order Events to the CAT in increments up to and including one second, provided that each Industry Member shall record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Industry Member (“Electronic Capture Time”) in milliseconds. Each Industry Member may record and report the time of Allocation Reports in increments up to and including one second.

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There are two timestamps fields in each event - eventTimestamp and electronicTimestamp. The eventTimestamp is the time of order handling or execution pursuant to Section 6.8 of the CAT NMS Plan (e.g. origination, receipt, etc, depending on the respective order event). For manual order handling, eventTimestamp is the manual handling or execution time, which is required to be reported in increments of at least one second. When the manual order is later captured electronically, the systematized time must be captured in the electronicTimestamp field.

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With respect to sequence numbers, Alternative Trading Systems (ATSs) must provide a sequence number assigned by the ATS’s matching engine on all Reportable Events.

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2.2.4. Order Types

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order Types - Compliance User: Industry Members - Keywords: - Data Dictionary, - -

CAT uses a standardized list of order types for Industry Members that can be found in the Data Dictionary. All events with the field orderType will require one of these standard order types as a value.

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For events reported by ATSs, an additional field (in addition to orderType) - atsOrderType - is used to capture ATS-specific order types. Please see Section 3.1.2 ATS Order Types for more details.

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Please note that brokers routing to ATSs are not required to use the atsOrderType field, nor the ATS specific codes in the standardized orderType field in their Order Route events. The orderType on the Order Route event will not be validated against an atsOrderType.

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2.2.5. Order Handling Instructions

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Key Data Elements, Order Handling Instructions - Compliance User: Industry Members - Keywords: - RAR, - New Order, - Order Accepted, - -

Special handling instructions are reported in the handlingInstructions field using a standardized list of handling instructions based on common exchange order types and codes. Multiple codes and values can be used in combination to describe the special handling instructions.

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In the event an Industry Member routes an order with exactly the same handling instructions received from the customer, they may use handlingInstructions code "RAR" (Routed as Received) on the Order Route event rather than re-stating all handlingInstructions values from the New Order/Order Accepted event.

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2.3. Reference Data

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data - Compliance User: Industry Members - Keywords: - IMID, - -
pubdate: February 28, 2019 effdate: N/A -

2.3.1. Industry Member Identifier (IMID)

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Industry Member Identifier (IMID) - Compliance User: Industry Members - Keywords: - Industry Member Identifier, - CHX Acronyms, - FINRA, - MPIDs, - Nasdaq MPIDs, - SRO, - -

An Industry Member Identifier, IMID, is any identifier assigned by an SRO to one of its members. Examples of SRO assigned identifiers include FINRA MPIDs, Nasdaq MPIDs, NYSE Mnemonics, CBOE User Acronyms, and CHX Acronyms.

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Reportable events will use fields with the Data Type "IMID" to refer to the Industry Member performing the action described by the event, and/or the entity that is the subject of the action described by the event. In other words, an IMID type field will be used in all scenarios where an Industry Member must refer to themselves or another Industry Member in an event.

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This IMID approach allows the Industry Member to use any SRO-Assigned Industry Member Identifier in the Reportable Events. Acknowledging the potential that the same SRO-assigned Industry Member Identifier may be used by different SRO for different entities, CAT will publish a daily file to highlight any conflict among the SRO-assigned Industry Member Identifiers. Such conflicts are detected in the processing of the daily member dictionaries submitted by each SRO. If a conflict is identified for a specific IMID, the Industry Member may choose to use either the SRO-Assigned Industry Member Identifier by another SRO that is not conflicted with other IDs, or the full format of the IMID - the combination of source (issuing SRO) and the SRO-Assigned Industry Member Identifier - to guarantee uniqueness of the IMID. For example, if AAAA is conflicted with another SRO-Assigned Market Participant Identifier in the CAT, the alternative can be to either use a different SRO-Assigned Market Participant Identifier assigned by another SRO (e.g., AAAB, pointing to the same Industry Member), or the full format FINRA:AAAA - a combination of ID and the source SRO.

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2.3.2. Firm Designated ID (FDID)

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Firm Designated ID (FDID) - Compliance User: Industry Members - Keywords: - FDID, - CAT NMS plan, - CAT Interpretative FAQ, - -

FDID is defined in Section 1.1 of the CAT NMS Plan as “a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.”

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FDID represents an account and not a specific customer. For example, John Doe has two accounts at BDA, a regular trading account (account #124) and an IRA account (account #456). BDA would have two different FDIDs in this case, one for John Doe's regular trading account and a second for John Doe's IRA account.

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The FDID for the trading account an order was received or originated for must be reported on all New Order Events.

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Unless a new account or entity identifier is assigned to a client or customer, each FDID must be unique and persistent for each trading account on any given day so that a single account may be tracked across time within a single broker-dealer. For example, if an Industry Member assigns a new account or entity identifier to a client or customer for any reason, such as due to a merger, acquisition or some other corporate action, then a new FDID may be created to identify the new account identifier/entity identifier in use at the Industry Member for the entity

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An actual account may not be used as the FDID for CAT reporting. See CAT Interpretive FAQ M2 for more information on the prohibition on use of actual account numbers.

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2.3.3. Equity Symbols

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Equity Symbols - Compliance User: Industry Members - Keywords: - Reportable Events, - Eligible Securities, - FINRA OTC Symbology, - -

Industry Members must report Reportable Events related to listed equity Eligible Securities to CAT using the symbology of the primary listing exchange and must report Reportable Events related to OTC Equity Securities using FINRA OTC symbology.

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2.3.3.1. CAT Symbol Master
- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Equity Symbols, CAT Symbol Master - Compliance User: Industry Members - Keywords: - Symbol, - -

CAT will provide a start-of-day equity symbol master list at 6:00AM and an end-of-day equity symbol master list each day on www.catnmsplan.com.

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The symbol master file for Industry Members contains the following information:

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• the listing exchange,

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• the symbol in the symbology of the listing exchange, and

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• a flag indicating whether the symbol is a test symbol.

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2.3.4. Option Symbols

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Option Symbols - Compliance User: Industry Members - Keywords: - CAT NMS plan, - CAT Symbology, - -

As stated above, the CAT NMS Plan requires symbols to be reported to CAT in the symbology of the listing exchange. Standard option symbols established across exchanges as the result of the Option Symbology Initiative (OSI) should be used for any single-leg listed options.

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2.3.4.1. Flex Percent Option Symbols
- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Option Symbols, Flex Percent Option Symbols - Compliance User: Industry Members - Keywords: - Flex Percent Options, - CAT System, - -

FLEX Percent options can only be uniquely identified using the OSI once their deterministic prices are known. When reporting the optionID for a FLEX Percent option, Industry Members must append "%" to the beginning of the standard OSI symbol. This will enable the CAT system to differentiate between a strike value that is expressed in percent terms from one that is expressed in dollars and cents.

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Thus, FLEX Percent option symbols expressed with percentage strike values will have 22 characters. For example, an option order with optionID %1AAPL 200131C00095000 indicates it is a Flex Percent option order on OSI symbol 1AAPL 200131C00095000.

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2.3.5. Corporate Actions

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Corporate Actions - Compliance User: Industry Members - Keywords: - Central Repository, - FINRA OTC Equity Symbols, - Data Distribution Service, - Industry Members, - -

The CAT System will maintain a historical symbology in the Central Repository that includes corporate actions.

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CAT will receive daily corporate action files and symbol updates from the various data sources (including equity and options listing exchanges, FINRA OTC Equity Symbols, Data Distribution Services from Options Clearing Corporation, etc.) and publish daily symbol master files to the Industry Members. The symbol changes impacted by corporate actions will be reflected in the daily symbol master files. Industry Members must use the updated symbol in Reportable Events from the effective date of the symbol change. Failure to report in the updated symbol would result in rejects of the record(s).

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Industry Members are not required to report order adjustments due to corporate actions, e.g., price or size changes. However, if an Industry Member chooses to report an adjustment resulting from a corporate action, the adjustment should be reported using the Order Modified event (or Order Adjusted event).

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2.3.5.1. Options Intraday Listing or Delisting
- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Reference Data, Corporate Actions, Options Intraday Listing or Delisting - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - -

CAT accommodates intraday listing of options by exchanges. Industry Members must report the OSI symbol as the optionID, just like for previously listed options.

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CAT will maintain a historical record of option symbols, including symbols that have been delisted.

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Exchanges and the OCC will provide reference data to CAT for option symbols that are listed or delisted intraday.

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2.4. Data Types

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types - Compliance User: Industry Members - Keywords: - CAT, - Data Validation, - Reporter Submitter, - Data Submitted, - Industry Members, - JSON, - CSV, - SRO, - -

CAT will accept two kinds of text-based files: JSON and CSV. The fundamental data types used throughout this document are described below. Other data types are defined in the Data Dictionary provided in Appendix G of this document.

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To support both JSON and CSV submissions, CAT will publish a JSON schema file on the CAT public website that describes each data type with required representation formats and a mapping that defines the position in a CSV representation that the data element would assume. A schema will be provided for each data object that can be reported in both JSON and CSV.

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Data Validation Based on Data Types

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All data submitted to CAT will be validated based on the defined data type of each item, including proper formatting and range checking. Examples of accepted values are detailed in the table below. Valid values for Choice fields are defined in the Data Dictionary for each data element. Valid data values, ranges, and formats will be specified in the record schema files, which will be used to validate submitted data element values. Records and values that fail validation will be marked as a failure and will be reported as feedback to the Reporter and Data Submitter as detailed in Section 7.

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Data Types

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2.4.1. Name/Value Pairs

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types, Name/Value Pairs - Compliance User: Industry Members - Keywords: - Name Part, - Value Part, - JSON, - CSV, - -

Some fields are described as containing Name/Value pairs. This signifies a list of zero or more attributes, where each attribute is either a name with no value, or a name with an accompanying value such that the name and value are separated by a single equal sign (ASCII decimal 61, hex 3D). Multiple attributes, i.e., Name/Value Pairs, are separated by the pipe symbol (ASCII decimal 124, hex 7C). If an attribute is boolean in nature, it can optionally be represented as a name alone, where its value is implied by its presence (true) or absence (false).

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The Name part is the string up to the first pipe symbol or equal sign. Names must not contain commas (ASCII 44, hex 2C), pipes, equal-signs, or double-quotes (ASCII decimal 34, hex 22). If the name terminates with a pipe, it is a boolean value, and its presence indicates true. If the name terminates with an equal sign, the value must follow.

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The Value part is the string starting with the character just after the equal sign, up to either a pipe symbol or the end of the string. Values may contain an equal sign, but must not contain commas, pipes or double-quotes.

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For example, the following JSON represents a hypothetical name/value pair field, with a boolean attribute and a price attribute: { "data": "XYZ|ABC=12.55" }

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The above format works for both JSON and CSV data entry. However, when submitting data in JSON, a more native JSON style can optionally be used by assigning a JSON object as the value for a Name Value Pair attribute. Note, however, that boolean values must be explicitly set. The above example can alternatively be submitted as:

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{ "data": { "XYZ": true, "ABC": 12.55 } }

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2.4.2. Required, Conditional, and Optional Fields

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Data Types, Required, Conditional, and Optional Fields - Compliance User: Industry Members - Keywords: -

Throughout this document, event types and their fields will be defined. Each field will be notated with the abbreviation R, C, O or A to represent whether it is required, conditionally required, optional or required for ATSs only. This codification will appear in the last column of each table describing an event.

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2.5. Linkage Overview

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview - Compliance User: Industry Members - Keywords: - CAT, - -

This section describes the linkage keys that are used to create lifecycles in CAT and explains how the linkage keys are constructed via different data elements in respective Reportable Events.

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2.5.1. CAT Linkage Keys

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, CAT Linkage Keys - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - -

All Reportable Events will be linked in CAT via the daisy chain approach. Below is the list of linkage keys that connect order events within an Industry Member and across Industry Members.

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• Order Key links together the events of the same order, within an Industry Member, e.g. linking an Order Route event to the Order Accepted event. The Order Key is constructed by date, reporter, symbol (or optionID) and orderID.

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• Prior Order Key links together the modified, cancel/replaced or internally routed order to the original order. For example, linking an Order Modified event to the Order Accepted event. Generally, the data elements to construct the Prior Order Key are date, reporter, symbol (or optionID), priorOrderID. However, the field names may vary depending on the order events. Please see each order events sections for more details.

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• Route Linkage Key links the order events by the Industry Member routing an order away and the Industry Member accepting the order. Please see Section 2.5.2 below for more detailed descriptions.

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• Trade Key: Each Trade event has a Trade Key (date, reporter, symbol (or optionID), tradeID), and each side of the trade has an Order Key that links to the order on side.

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• Fulfillment Key: date, reporter, symbol (or optionID), fulfillmentID

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• Prior Fulfillment Key: date, reporter, symbol (or optionID), priorFulfillmentID

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• Quote Key: date, reporter, symbol, quoteID

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Generally, the date used in the linkage key is the calendar date of the event (the date portion of the eventTimestamp). In the scenario when an order event needs to be linked to a prior event on a different date (e.g., modify a GTC order on a prior day), an additional field priorOrderDate is reported on the event and will be used in linking.

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2.5.2. Reporting Responsibilities of Sender/Receiver in Order Route

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, Reporting Responsibilities of Sender/Receiver in Order Route - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - OATS, - -

In Phase 2a, Industry Members are responsible for reporting routes, modifications, and cancellations in line with OATS guidance. Below are a list of sample scenarios and the reporting responsibilities of the sender (Broker A) and the receiver (Broker B).

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2.5.3. Summary of Route Linkage Keys

- Topic: CAT Reporting Technical Specifications for Industry Members, CAT Reporting Fundamentals, Linkage Overview, Summary of Route Linkage Keys - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - -

The table below summarizes the required data elements to construct the route key for linking Route and Order Accepted events reported by different entities in CAT. The combination of the data elements must be unique. Data elements in the same row must always be equal values. Note that only the data elements used to create linkage are listed here.

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For Participant related event details, please refer to the CAT Reporting Technical Specifications for Participants.

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* Not required for manual order route/receipt.

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• session - The session field contains an ID string for the specific session used to route the order. Note that this differs from the trading session (e.g., pre-market, regular, post-market, etc.) Session can constitute an actual protocol session name, IP/port combination, unique login account, or some other means of identifying a particular API session. It must be reported as the same value by both the sending and receiving entities. When routing between two Industry Members, the session must be left blank by both the sending and receiving entities.

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• routedOrderID - When an order is routed away, it may be assigned another ID on the route - this is noted in the Order Route event as the routedOrderID (e.g., the ClOrdID in FIX, ClientOrderID for NYSE UTP direct users, etc). This ID must match the routedOrderID reported by the receiving entity in its Order Accepted event.

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Routing Between Industry Members

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For orders routed between Industry Members, the linkage between sender and receiver is established via a combination of:

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- Date, symbol (or optionID), session (must be blank), destination, senderIMID, and routedOrderID on the Order Route events reported by the sender; and

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- Date, symbol (or optionID), session (must be blank), receiverIMID, routingOrigin, and routedOrderID on Order Accepted event reporter by the receiver.

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• destination - The IMID of the destination receiving this routed order. It must equal the receiverIMID field on the Order Accepted event reported by the destination Industry Member. The sending and receiving firms must mutually agree on the IMID to be used if they have multiple SRO-assigned IMIDs.

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• senderIMID - The IMID of the sender that is routing out the order, known also by the destination. The destination has to report the same value on the routingOrigin field of the Order Accepted event.

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• receiverIMID - The IMID of the Industry Member receiving the routed order. It must match the destination field on the Order Route event reported by the sender.

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• routingOrigin - The IMID of the Industry Member from which the order is routed. It must match senderIMIDin the Order Route event reported by the routing entity.

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Routing to Exchanges

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When routing to exchanges, the destination must be the Exchange ID to which the order is routed. Hence, the linkage will be created by:

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- Date, symbol (or optionID), session, destination (ExchangeID), senderIMID, and routedOrderID on the Order Route event; and

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- Date, symbol (or optionID), session, exchange, routingParty, and routedOrderID on the Participant Order Accepted event to create linkages. See CAT Reporting Technical Specifications for Participants for more details.

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Note that, when using Order Route event to report a modification to an order that was previously routed to an exchange, the linkage key is created via the same set of data elements.2

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Routing to Foreign Destinations

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If the order is routed to a foreign non-CAT-reporting entity, the destinationType must be marked as N (Foreign). However, there is no requirement to report destination or routedOrderID, thus there is no subsequent linkage in CAT.

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Routing from an Exchange to the Exchange's Routing Broker

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When an Industry Member, that is an exchange routing broker, receives an order routed from the exchange, the routingOrigin field must be the Exchange ID from which the order is routed. Hence the linkage will be created by:

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- Date, symbol (or optionID), exchange, routedOrderID, session, routingParty on the Participant Order Route event (See CAT Reporting Technical Specifications for Participants for more details);

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- Date, symbol (or optionID), routingOrigin (Exchange ID), routedOrderID, session, receiverIMID on the Industry Member Order Accepted event.

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3. Special Reporting Requirements

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements - Compliance User: Industry Members - Keywords: -
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3.1. Alternative Trading Systems (“ATSs”) Reporting

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting - Compliance User: Industry Members - Keywords: - ATSs, - -

ATSs are required to submit additional information in applicable order events.

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3.1.1. National Best Bid and Offer (NBBO)

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, National Best Bid and Offer (NBBO) - Compliance User: Industry Members - Keywords: - ATSs, - Industry Members, - CAT, - NBBO, - BBO, - -

ATSs are required to report to CAT NBBO prices, though such information is optional for other Industry Members. The quantities being bid or offered for the NBBO are optional for all Industry Members.

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The NBBO should be reported to CAT from the perspective of the Industry Member. An ATS is required to report, for orders, the NBBO (or relevant reference price) in effect at the time of the order event, and the timestamp of when the ATS captured the effective NBBO (or relevant reference price). In addition, the ATS must identify the market data feed (NBBO Source) it used to obtain the NBBO (or relevant reference price).

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If another reference price, such as the primary market's BBO, is used by the ATS, then the applicable reference price should be reported instead of the NBBO.

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3.1.2. ATS Order Types

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, ATS Order Types - Compliance User: Industry Members - Keywords: - ATSs, - CAT, - -

For events reported by ATSs, an additional field (in addition to orderType) - atsOrderType - is used to report ATS-specific order types. Note that orderType and atsOrderType are not mutually exclusive; ATSs must populate both of these fields with a value where they are present on Reportable Events.

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The field atsOrderType is defined as Name/Value Pairs where "name" must be equal to a unique code that has been provided to CAT by the ATS through the CAT web interface. All codes must be registered before any relevant order events are submitted. Specific instructions for registering atsOrderTypes will be published in a CAT Alert available on catnmsplan.com. All atsOrderTypes must be registered with CAT 20 business days prior to the order type becoming effective.

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3.1.3. Sequence Number

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Alternative Trading Systems (“ATSs”) Reporting, Sequence Number - Compliance User: Industry Members - Keywords: - ATSs, - -

Alternative Trading Systems (ATSs) must also provide a sequence number assigned by the ATS’s matching engine on all reportable events.

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3.2. Manual Orders

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders - Compliance User: Industry Members - Keywords: - CAT, - NMS Plan, - -

The CAT NMS Plan defines a Manual Order Event as “non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.” This version of the Technical Specifications addresses manual equity orders, which are reportable in Phase 2a, while manual option orders will be addressed in the Phase 2d Technical Specifications.

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3.2.1. Manually Received Order Events Immediately Systematized

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders, Manually Received Order Events Immediately Systematized - Compliance User: Industry Members - Keywords: - Industry Members, - -

Orders which are non-electronically communicated but immediately systematized (e.g., a broker received a call and directly enters the order into the order management system) must be marked as a manual event using the manualFlag. In this scenario, the Industry Member is required to report both the manual time of order receipt and the electronic capture time, and the same timestamp should be reported in both fields in milliseconds.3

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3.2.2. Manual Order Events Followed by Separate Electronic Messages

- Topic: CAT Reporting Technical Specifications for Industry Members, Special Reporting Requirements, Manual Orders, Manual Order Events Followed by Separate Electronic Messages - Compliance User: Industry Members - Keywords: - Manual order event, - CAT, - Industry Members, - -

Manual order events must be reported to CAT marked as a manual event using the manualFlag and must include an electronic capture time if the manual event is captured in an order management or execution system.

-

If an Industry Member routes or receives an order manually and then subsequently sends or receives an electronic message to represent the manual instruction, the following reporting requirements apply:

-

• All material terms and conditions of a manually received or routed order, including time of route and receipt, must be reported to CAT on the required manual event, with all relevant timestamps representing when the manual order event occurred.

-

• Additional electronic messages related to a manual order or route that do not change any material term or condition of the original order are not required to be reported to CAT as they represent a duplicate of the original order.

-

• If the duplicate electronic message includes a routed order identifier that could be used to link the sender's route report to the receiver's new order, and the member has the ability to include this electronic information on the manual event (referred to as a "merged" event), the Industry Member should do so.

-

• If the Industry Member is not able to merge the manual and electronic information in a single manual event and elects to report the duplicate electronic message independently, such messages must be reported with the electronicDupFlag = true. Further, the manualOrderID may be populated with the Order ID of the original manual order. This is optional in Phase 2a, but will be mandatory in Phase 2c.

-

No linkage will be attempted for electronic duplicate events in Phase 2a.

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4. Equity Events

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events - Compliance User: Industry Members - Keywords: - Equity Events, - SROs, - Industry Members, - ATS, - Agency Order Crosses, - -

This section describes Reportable Events for equities that are Eligible Securities. The following table lists each equity event type with its corresponding Message Type code.

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Events and data elements that are greyed out do not apply to Phase 2a.

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Equity Events

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4.1. New Order Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Order Event - Compliance User: Industry Members - Keywords: - Industry Members, - CAT, - New customer orders, - Representative orders, - Proprietary orders, - non-reporting foreign broker-dealer, - ATS, - -

An Industry Member must report a New Order event to CAT when an order is received or originated. This includes:

-

• New customer orders4

-

• Representative orders5

-

• Proprietary orders

-

• Order(s) received from a non-reporting foreign broker-dealer or affiliate.

-

Note that an order received from another CAT Reporter (US broker-dealer, ATS or an exchange) must be reported as an Order Accepted event.

-

Phase 2a Representative Orders

-

In Phase 2a, linkage is required between the representative street-side order and the customer order or client order being represented when the representative order was originated specifically to represent a single order and there is:

-

• An existing direct electronic link in the Industry Member’s system between the order being represented and the representative order, and

-

• Any resulting executions are immediately and automatically applied to the represented order in the Industry Member’s system.

-

Phase 2c Representative Orders

-

Any scenario that does not meet the definition of Phase 2a representative order will fall into this category. The Industry Member must report a New Order event for the creation of the representative order in Phase 2a and flag the New Order event properly to indicate that it is a representative order. It is not mandatory to report the linkage to the underlying orders (the aggregatedOrders field) until Phase 2c.

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Appendix C contains detailed descriptions of representative order scenarios and illustrates when marking of the representative order, linkage between the represented order and the representative order, and Order Fulfillment linkage is required in each phase.

-

The representativeInd is used to show whether an order is originated to represent a customer/client order and whether the linkage is present. It is required for all New Order events.

-

Note that all fields and values necessary to support Phase 2c linkages are included in this version of the specification and Industry Member Reporters may voluntarily report these linkages prior to the start of Phase 2c.

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New Order Event Field Specifications

- - - -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, symbol, orderID

-

• Quote Key: date, reporter, symbol, quoteID (if applicable)

-

• Order Key: date, reporter, symbol, aggregatedOrders.Name

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4.2. New Order Supplemental Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Order Supplemental Event - Compliance User: Industry Members - Keywords: - Supplement Event, - Name/Value Pairs, - CAT, - -

The Supplement Event serves as a supplement to the New Order event. This event accommodates reporting in two scenarios:

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1) When the number of Name/Value pairs included under the aggregatedOrders field causes the New Order event to exceed the maximum allowed message length. Generally, this includes scenarios where so many orders are being aggregated together in a New Order that the number of Name/Value Pairs included in the field aggregatedOrders causes the message to exceed the allowed length.

-

2) When there is no explicit linkage to disparate orders when a representative order is generated. This supplement event can be used to capture the relationship of representative and disparate orders and submitted to CAT separately as an addition to the original New Order event.

-

This event can be submitted in the same file as the original New Order event or in a separate file, so long as it is submitted on the same date as the New Order event. One New Order event can have multiple New Order Supplement events. Multiple New Order Supplement events are considered as additions (not replacements or modifications). The aggregatedOrders field in the New Order Supplement event should only contain the additional Name/Value Pairs that have not been captured in the original New Order event (or another Supplement event for the same New Order).

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New Order Supplement Event Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, symbol, orderID

-

• Order Key: date, reporter, symbol, aggregatedOrders.Name

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4.3. Order Route

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route - Compliance User: Industry Members - Keywords: - Industry Member, - foreign broker-dealer, - Exchanges, - FINRA, - SEC Rule 201, - ATS, - -

An Industry Member must report to CAT an Order Route event when:

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• Routing to another Industry Member

-

• Routing to foreign broker-dealers

-

• Routing to exchanges

-

• Routing between two IMIDs (e.g. two different FINRA MPIDs) attributed to the same legal entity (i.e. the same CRD)

-

• Routing partial quantities of an order (assigned using routedOrderID in routing message)

-

In order to maintain order lifecycle linkage, the orderID populated in the Order Route event must reflect any changes made to the orderID internally by the broker before routing the order. If, for example, an order was subject to a Cancel/Replace that changed the Order ID, then the value used for orderID in an Order Route event must reflect those changes - in other words, the most recent orderIDis used to reference the order.

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Handling Instructions on the Order Route

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The handling instructions included in this event should represent those on the routed order. If the handling instructions do not change from the Order Accepted or New Order associated with the order, Industry Members may use the handling instruction code "RAR" - routed as received, instead of repeating each individual handling instruction.

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Notes

-

• Please note that internal routes to another desk or department within an Industry Member are not reported using the Order Route event; instead an Order Internal Route event is used. See the Order Internal Route section for more details.

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Order Route Event Field Specifications

- - - -

Linkage keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, orderID

-

• Order Key: priorOrderDate (when present), reporter, symbol, orderID

-

• Route Link Key: date, senderIMID, destination, symbol, session, routedOrderID

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4.3.1. Order Modify Route (Potential Phase 2c Event)

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route, Order Modify Route (Potential Phase 2c Event) - Compliance User: Industry Members - Keywords: - SRO, - -

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a modified route event after reviewing Phase 2a/2b data and include event in Phase 2c, if necessary.>

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4.3.2. Order Cancel Route (Potential Phase 2c Event)

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Route, Order Cancel Route (Potential Phase 2c Event) - Compliance User: Industry Members - Keywords: - SRO, - -

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a canceled route event after reviewing Phase 2a/2b data and include event in Phase 2c, if necessary.>

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4.4. Order Accepted

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Accepted - Compliance User: Industry Members - Keywords: - CAT Reporter, - Industry Member, - ATS, - CAT, - foreign broker-dealer, - FINRA, - Equity Securities, - FINRA Rule 5320.02, - NBBO, - -

When an Industry Member receives a routed order from another CAT Reporter (i.e., Industry Member, ATS or exchange), then an Order Accepted event must be reported to CAT by the Industry Member receiving the routed order. As described in Order Route event, if an Industry Member accepts a routed order from another IMID belonging to the same Industry Member, i.e., the same CRD, an Order Accepted event must be reported.

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Once all Industry Members are reporting to CAT, in all cases, the order reported with this event should have already been originated by another broker and reported upon origination with a New Order event. A New Order event represents the beginning of the order lifecycle in CAT, therefore a new customer order is represented with a New Order event - not an Order Accepted event. Similarly, orders received by an Industry Member from its non-broker-dealer affiliates or from a non-reporting foreign broker-dealer should be reported as a New Order event - NOT an Order Accepted event. (Note: At the start of Phases 2a and 2b, there will be some lifecycles beginning at Order Accepted event, as small Industry Members will not be required to report until a later phase).

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Order Accepted Field Specifications

- - - -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, symbol, orderID

-

• Route Link Key: date, senderIMID, destination, symbol, session, routedOrderID

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4.5. Order Internal Route

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route - Compliance User: Industry Members - Keywords: - Industry Member, - Order Accepted Event, - New Order event, - Child Order event, - CAT, - -

An Order Internal Route event must be reported when an order is passed to different departments or desks within the reporterIMID.

-

Although multiple reporterIMIDs may be attributed to a single Industry Member, routes between different IMIDs attributed to the same Industry Member are not considered internal routes.

-

Note that an Order Internal Route event does not follow the logic of sending / receiving two-sided reporting followed throughout the rest of these Industry M ember Technical Specifications. It is required to be reported from the perspective of the recipient desk. The Order Internal Route merely shows that an order was received by an internal destination and if a new orderID has been assigned to the order as a result of this Order Internal Route.

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• Order Internal Route may also represent the routing of partial quantities of an order internally, and the practice of assigning those slices new orderIDs. In this case, multiple internal routes may occur on the same original orderID reported in an Order Accepted event or New Order event. Similarly, if an order is routed internally and then subsequently multiple slices are routed to yet another destination internally, this event should represent the receiving desk, quantities, and new orderIDs of those routed slices as received by the subsequent internal destination. This approach will allow CAT to track changes in orderID within an Industry Member as an order is passed between internal entities or partial quantities are routed to internal entities as slices of another order.

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• The major difference between Order Internal Route and Child Order events is that Child Order event can only be used when no desk change or desk route happens. For example, some Industry Members may choose to first generate child orders using the Child Order event to represent slices of a parent order, then to route those slices internally to another desk (Order Internal Route event). This approach is also acceptable for CAT reporting and will not result in unlinked events.

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Order Internal Route Modified and Order Internal Route Canceled are not required to be reported until Phase 2c.

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4.5.1. Order Internal Route

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route - Compliance User: Industry Members - Keywords: - FINRA, - OTC Equity Securities, - FINRA Rule 5320.02, - -

Order Internal Route event is used to report routing within a reporterIMID as described above.

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Internal Route Field Specifications

- - - -

Linkage keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

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• Prior Order Key: date, reporter, symbol, priorOrderID

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pubdate: February 28, 2019 effdate: N/A -

4.5.2. Order Internal Route Modified (Phase 2c)

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route Modified (Phase 2c) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2c>

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4.5.3. Order Internal Route Canceled (Phase 2c)

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Internal Route, Order Internal Route Canceled (Phase 2c) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2c>

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4.6. Child Order

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - Child Order event, - FDID, - -

CAT provides several ways to report parent/child order activity. The Child Order event is provided solely for the convenience of Industry Members to help model scenarios in which an order is split or sliced into smaller "child" orders that are handled independently of their parent order - in a way that best reflects each individual Industry Member’s system(s).

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For example, in the scenario when Industry Members create independent child orders with new orderIDs, if the Child Order event is reported, then the changes of order IDs are captured. Afterwards, the Industry Member can reference each individual child order in any subsequent event by the new order ID. However, if no Child Order event is reported, then the Industry Member can only reference the order at the parent level by the order ID of the parent. There is no scenario in which the use of Child Order event is mandatory.

-

Notes:

-

• Child Order event can only be used when an order is sliced and assigned new order IDs within the same desk. An Order Internal Route event must be reported when routed to another desk.

-

• There is no limit to how many "generations" can be created through Child Order events. The parentOrderID will be the orderID of the most recent order, whether that was a New Order/Order Accepted or a previous Child Order.

-

• Child Orders must belong to the same FDID as the parent orders. Child Orders should not be used to create representative orders. If the FDID changes, a representative New Order event must be used and not a Child Order.

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• Child Orders should not be used for equity legs of a multi-leg option order.

-

• This event only includes the key data elements and fields that may be changed from the parent order or that are required for linkage, i.e., certain key data elements from the parent order may not be changed when creating Child Orders.

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4.6.1. Child Order Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Event - Compliance User: Industry Members - Keywords: - FINRA, - OTC Equity Securities, - NBBO, - -

Child Order Event

- - -

Linakge keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

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• Prior Order Key: date, reporter, symbol, parentOrderID

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4.6.2. Child Order Modified

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Modified - Compliance User: Industry Members - Keywords: - CAT, - FINRA, - OTC Equity Securities, - Industry Members, - -

When the price, quantity or any Material Terms of the child order has been changed, a Child Order Modified event must be reported to CAT. This modification event is only used when the child order creation is reported to CAT in a Child Order event. As such, modifying a partial quantity internal route can not be reported in this event.

-

All attributes and Material Terms of the Order of a modified child order listed on this event should be reported when applicable, including the fields that remain unchanged.

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Child Order Modified Event Field Specifications

- - -

Linkage keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

-

• Prior Order Key: date, reporter, symbol, priorOrderID

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4.6.3. Child Order Canceled

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Child Order, Child Order Canceled - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - -

If a child order is canceled, a Child Order Canceled event must be reported to CAT by the Industry Member.

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Note that a partial cancellation can be reported either with a Child Order Modified event or Child Order Canceled event with leavesQty, depending on how it is handled by the Industry Member. If an actual Cancel message was used, the Industry Member should report a Child Order Canceled event to CAT. If a modify or cancel/replace message was used, a Child Order Modified event should be reported to CAT. This keeps the reported event in line with the action taken by the Industry Member.

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Child Order Canceled Event Field Specifications

- -

Linkage keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

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4.7. Order Modified and Cancel/Replace Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Modified and Cancel/Replace Event - Compliance User: Industry Members - Keywords: - Material Term, - NBBO, - ATS, - -

When the price, quantity or any other Material Term of an order has been changed or when an order is cancel/replaced, an Industry Member must report an Order Modified event to CAT. This Order Modified event concerns both of the following scenarios:

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1) A new order is generated (with a new Order ID) during the modification and completely replaces the prior order. In this case, the orderID field must capture the identifier for the new order. Additionally, the new order must be linked to the prior one through priorOrderID.

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2) If the order ID remains the same during the modification, the priorOrderID must match orderID.

-

Note that in the first scenario, if the order has been modified several times, the priorOrderID must refer to the most recent order ID prior to this modification, which may not always be the original order ID.

-

Side is required to be reported, but side adjustments are only allowed for same-side changes (e.g., changes between short and long sell).

-

All attributes and Material Terms of the modified order listed on this event should be reported when applicable, including the fields that remain unchanged.

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Order Modified and Cancel/Replace Event Field Specifications

- - - - -

Linkage keys for this Reportable Event:

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• Order Key: date (from eventTimestamp), reporter, symbol, orderID

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• Prior Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, priorOrderID

-

• Prior Order Key: priorOrderDate (when present), reporter, symbol, priorOrderID

-

• Route Link Key: date, symbol, receiverIMID, routingOrigin, session, routedOrderID

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• Quote Key: date, reporter, symbol, quoteID

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4.8. Order Modified (Cancel/Replace) Supplement Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Modified (Cancel/Replace) Supplement Event - Compliance User: Industry Members - Keywords: - Order Modified event, - -

The Order Modified Supplement event serves as a supplement to the Order Modified event, just as the Supplement Event serves as a supplement to the New Order event.

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Order Modified Supplement Event Field Specifications

- -

Linkage keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

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• Order Key: date, reporter, symbol, aggregatedOrders.Name

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4.9. Order Adjusted Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Adjusted Event - Compliance User: Industry Members - Keywords: - Order Modified event, - Industry Member, - FINRA, - OTC Equity Securities, - NBBO, - -

The Order Modified event requires the full state of the order be reported to CAT for each modify. However, there are some common cases where only the price or quantity are modified. If such changes are initiated by the Industry Member, which can occur frequently, the Order Adjusted event can be used in these situations. However, Order Adjusted events may not be used if a price or quantity change is initiated by a routing Industry Member.

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The only types of modifications that are allowed to be reported with this event are changes to the side, price or quantity of the order.

-

• Side adjustments are only allowed for same-side changes (e.g., changes between short and long sell). The side only needs to be reported if it changes.

-

• If a price change is reported, then all three price fields (price, displayPrice, and workingPrice) must represent the current state of the order relative to price. The quantity fields can be omitted.

-

• Likewise, if a quantity change is reported, then all three quantity fields must represent the current state of the order relative to quantity. The price fields can be omitted.

-

When the display price or quantity changes as the result of a display ATS matching engine action and not from a customer instruction, an Order Adjusted event must be used (the Order Modified event cannot be used in this scenario).

-

Any modification that cannot be fully represented in this Reportable Event must be reported via the Order Modified event.

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Order Adjusted Event Field Specifications

- - - -

Linkage keys for this Reportable Event:

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• Order Key: date, reporter, symbol, orderID

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• Prior Order Key: date, reporter, symbol, priorOrderID

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4.10. Order Canceled

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Canceled - Compliance User: Industry Members - Keywords: - Broker, - Order Canceled Event, - FINRA, - OTC Equity Securities, - -

The Order Canceled event is used in specific situations when an order is fully or partially canceled. Note:

-

• Partial cancellation of an order may be reported to CAT using either an Order Canceled event or an Order Modified event.

-

• This Order Canceled Event is only reported by the entity that performs the cancellation. Cancellations by away venues are not required to be reported. For example, if Broker B accepts an order from Broker A, and Broker B initiated a cancel on the order, then B is responsible for reporting the order canceled (not Broker A).

-

• Implicit order cancellations are not required to be reported to CAT (e.g., cancellation due to expiration of Time in Force.)

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Order Canceled Event Field Specifications

- -

Linkage keys for this Reportable Event:

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• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, symbol, orderID

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• Order Key: priorOrderDate (when present), reporter, symbol, orderID

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4.11. New Quote

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote - Compliance User: Industry Members - Keywords: - NMS Securities, - OTC Equity Securities, - Industry Member, - NMS Plan, - New Quote Event, - Quote Modify event, - FINRA, - Symbol, - -

In Phase 2a, the following quotations must be reported:

-

• Quotes in NMS Securities sent to an exchange or the ADF

-

• Quotes in OTC Equity Securities received by an Industry Member CAT Reporter operating an inter-dealer quotation system.

-

• Quotes in OTC Equity Securities that meet the definition of bid or offer under the CAT NMS Plan sent by a broker-dealer to a quotation venue not operated by a CAT Reporter.

-

Quotes in OTC equity securities sent to an inter-dealer quotation system operated by an Industry Member CAT Reporter must be reported in Phase 2c.

-

The New Quote Event is used to report quotes in OTC equity securities. Quotes in NMS Securities sent to an exchange must be reported using the New Order and Route Events.

-

For two-sided quotes - bidPrice, bidQty, askPrice, and askQty must all be populated. For one-sided quotes both a quantity and a price field must be populated for either the bid or the ask.

-

Note that there is no Quote Modify event. The field priorQuoteID is used to report modifications to a previously reported New Quote. If the field priorQuoteID is populated with a value in the New Quote event, then this New Quote is considered to replace the quote described in the priorQuoteID field. In the case when quote ID does not change for a modified quote, the priorQuoteID and the quoteID (new) will have the same value.

-

Otherwise, if the field onlyOneQuoteFlag = true, any New Quote event offered by the same reporterIMID to the same destination in the same symbol will be considered canceled by CAT.

-

New Quote Event Field Specifications

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4.11.1. Quote Received

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote, Quote Received - Compliance User: Industry Members - Keywords: - Industry Member, - Order Accepted Event, - -

When Quotes are sent to another Industry Member, that receiving Industry Member must report their receipt of the quote. Note that Industry Members do not have to report the quotes that they do not accept.

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Quote Received Event Field Specifications

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4.11.2. Quote Canceled

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, New Quote, Quote Canceled - Compliance User: Industry Members - Keywords: - Industry Member, - ATS, - Quote Canceled events, - FINRA, - OTC Equity Securities, - - -

Quote Canceled Event Field Specifications

- - -
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pubdate: February 28, 2019 effdate: N/A -

4.12. Trade

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade - Compliance User: Industry Members - Keywords: - Trade Event, - Industry Member, - Reporting Exception Code, - Trade Side Details, - Internalized Trade, - Negotiated Trade, - -

Trade A Trade Event is used when the Industry Member acts as the executing broker and is required to report the trade for public dissemination purposes. When an Industry Member is not required to report the execution of a customer order for public dissemination purposes, an Order Fulfillment event must be used. See Section 4.13 Order Fulfillment for more details.

-

Note there are two circumstances where a Reporting Exception Code (REC) will be required on a Trade Event. The first is when an Industry Member executes a trade between two desks or departments involving two proprietary accounts of the firm, but because there is no change in beneficial ownership, no trade is reported for public dissemination. In this instance a REC of “P” should be used on the Trade Event. The second is when an Industry Member executes a trade and must report the trade via Form T. In this instance a REC of “F” should be used on the Trade Event.

-

Trade Side Details

-

Trade events are generally two-sided, containing information on both sides of the trade (with the exception of negotiated trades and internalized trades). The details of each side are reported in buyDetails and sellDetails respectively. The buyDetails must contain the orderID of the buy side of the trade and the sellDetails must contain the orderIDof the sell side of the trade. Side Details may contain only one orderID per side. If a single order is crossed against multiple orders, a separate Trade Event must be reported for the execution of each individual order.

-

Note that the data type Trade Side Details is described as a list of fields in the table immediately following the Trade event table. These are data elements such as an orderID associated with a side of the trade.

-

Internalized Trade

-

In the scenario where the Industry Member internalizes an order by filling it from a proprietary account, the Industry Member must report the orderID on the customer side and the FDID and the account type of the proprietary account on the firm side. No order ID is required on the firmSideDetails.

-

Negotiated Trade

-

If an execution occurs as the result of a negotiated trade between two Industry Members, both of the Industry Members, for CAT purposes, are considered to have executed the trade and must submit a Trade event with the negotiatedTradeSide marked appropriately. The negotiatedTradeSide indicates whether the Industry Member is performing a negotiated buy or negotiated sell in this execution. The Industry Member must capture the full details for its own side, while only the IMID of the contra-side.

-

Trades that are executed by a market maker as the result of a displayed quotation must be reported using the Trade as Result of Quote Event. See Section 4.12.2 for the reporting requirements for trades executed by a market maker as the result of a quote.

-
pubdate: February 28, 2019 effdate: N/A -

4.12.1. Trade Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade, Trade Event - Compliance User: Industry Members - Keywords: - Data Elements, - FINRA, - OTC Equity Securities, - National Securities Exchange, - NBBO, - Order Accepted Event, - New Order event, - -

The tables below describe the data elements to report agency cross or internalized orders by filling them from a proprietary account.

-

Trade Event Field Specifications

- - -

Trade Side Details

- - -

Linkage Keys for this Reportable Event:

-

• Order Key: date, reporter, symbol, buyDetails.orderID

-

• Order Key: date, reporter, symbol, sellDetails.orderID

-

• Trade Key: date reporter symbol tradeID

-

• TRF Key: date, reporter, symbol, tapeTradeID

-
-
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4.12.2. Trade as the Result of a Quote

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Trade, Trade as the Result of a Quote - Compliance User: Industry Members - Keywords: - FINRA, - Quote event, - OTC Equity Securities, - National Securities Exchange, - -

If a trade is the result of a quote displayed by a market maker on an inter-dealer quotation system where the market maker is the executing broker under FINRA trade reporting rules and required to report the trade to the FINRA ORF, the Trade as the Result of a Quote event must be used to report the trade. The market maker is required to report the Quote ID of the quote from the inter-dealer quotation in order to link the quote to the trade.

-

Trade on a Quote Event Field Specifications

- -

Trade on a Quote Side Details

- - -

Linkage Keys for this Reportable Event:

-

• Order Key: date, reporter, symbol, buyDetails.orderID

-

• Order Key: date, reporter, symbol, sellDetails.orderID

-

• Order Key: date, reporter, symbol, buyDetails.quoteID

-

• Order Key: date reporter symbol sellDetails.quoteID

-

• Trade Key: date reporter symbol tradeID

-

• TRF Key: date, reporter, symbol, tapeTradeID

-
-
-
pubdate: February 28, 2019 effdate: N/A -

4.13. Order Fulfillment

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment - Compliance User: Industry Members - Keywords: - Industry Member, - CAT, - Order Fulfillment event, - -

The Order Fulfillment event is used to report the execution of a customer/client order that is not required to be reported for public dissemination purposes. Order Fulfillment reports are required for scenarios where a representative order was used to facilitate the execution of the customer/client order. Examples include orders executed on a riskless principal basis and orders executed on an agency basis via a representative agency order, such as in aggregation scenarios. An Order Fulfillment is also required when an order is routed to a foreign market and the resulting foreign execution is not captured by CAT. In this scenario, the Order Fulfillment is used to obtain the execution information for the customer order since such information is not otherwise available in CAT.

-

The Order Fulfillment event is designed to capture the customer/client details and the firm side details, which reflect the representative order details for the order used to execute the customer/client order. In Phase 2a, not all scenarios require the firm side details to be populated.

-

The field fulfillmentLinkType is used to indicate if the Industry Member (firm) side details are required. Below are the values allowed:

-

• Y – Representative Order; linkage required

-

• YF – Representative order; linkage required in future phase

-

• YP – Fill from pre-existing Principal order; linkage required

-

• FOR – No linkage required; Fulfillment on an order routed to a foreign destination

-

• O - Options Order Fulfillment

-

Appendix C contains detailed descriptions of representative order scenarios and illustrates when marking of the representative order, linkage between the represented order and the representative order, and Order Fulfillment linkage is required in each phase.

-
pubdate: February 28, 2019 effdate: N/A -

4.13.1. Order Fulfillment Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment, Order Fulfillment Event - Compliance User: Industry Members - Keywords: - Order Fulfillment event, - FINRA, - OTC Equity Securities, - Industry Member, - Order Accepted Event, - -

Order Fulfillment Event Field Specifications

- - -

Fulfillment Side Details

- -

Linkage Keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter, symbol, firmDetails.orderID

-

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter, symbol, clientDetails.orderID

-

• Order Key: firmDetails.priorOrderDate (when present), reporter, symbol, firmDetails.orderID

-

• Order Key: clientDetails.priorOrderDate (when present), reporter, symbol, clientDetails.orderID

-

• Fulfillment: date, reporter, symbol, fulfillmentID

-
-
-
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4.14. Order Fulfillment Amendment

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Order Fulfillment Amendment - Compliance User: Industry Members - Keywords: - Industry Member, - Order Fulfillment, - debit/credit, - FINRA, - OTC Equity Securities, - -

If the order fulfillment is amended, an amendment event must be reported to CAT with required details. This Reportable Event must capture the entire state of the fulfillment after it has been amended, even though some of the data elements may remain unchanged.

-

For example, an Industry Member has a trade correction from the exchange after the customer order has already been fulfilled. Subsequently, the Industry Member decided to amend the executed shares given back to the customer. In this scenario, both the original Order Fulfillment and Order Fulfillment Amendment events must be reported to CAT, even though they may happen on the same day. However, if the trade correction comes before any initial fulfillment has been made, and the Industry Member directly gives the corrected shares to the customer, then only one Order Fulfillment event is necessary to be reported.

-

If an Industry Member makes a correction via a debit/credit to the customer's account instead of modifying the executed shares given back to the customer, then the Industry Member does not need to report an Order Fulfillment Amendment event.

-

Note that the amendment reporting is only applicable to Order Fulfillment events, not the events reported to the TRF for media dissemination (which would have originally been reported as Trade events).

-

Order Fulfillment Amendment Event

- - -

Linkage Keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter symbol firmDetails.orderID

-

, , . • Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter symbol clientDetails.orderID

-

• Order Key: firmDetails.priorOrderDate (when present), reporter, symbol, firmDetails.orderID

-

• Order Key: clientDetails.priorOrderDate (when present), reporter, symbol, clientDetails.orderID

-

• Fulfillment Key: date, reporter, symbol, fulfillmentID

-

• Prior Fulfillment Key: date, reporter, symbol, priorFulfillmentID

-
-
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4.15. Post-trade Allocation (Phase 2c)

- Topic: CAT Reporting Technical Specifications for Industry Members, Equity Events, Post-trade Allocation (Phase 2c) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2c>

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5. Single Leg Option Events

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events - Compliance User: Industry Members - Keywords: - Reportable Event, - Industry Members, - CAT, - SROs, - -

This section describes Reportable Events for single leg option transactions. The following table lists each option Reportable Event type with its corresponding Message Type code.

-

Notes

-

•In Phase 2b, Industry Members are required to report CAT Industry Member Data related to Eligible Securities that are options and meet the definition of Simple Electronic Option Orders6, excluding Electronic Paired Option Orders.

-

Events and data elements that are greyed out do not apply to Phase 2b.

-

• The greyed out order events will not be supported in Phase 2b; any submission on unsupported event types will generate an error.

-

• If data elements are greyed out for Phase 2b on a supported order event, the fields will be supported7 though not required. The Industry Member may voluntarily report the elements in Phase 2b.

-

Linkages in Phase 2b

-

In Phase 2b, the definition of an electronic single option order will result in unlinked events within a single CAT Reporter. To address these expected unlinked events, two fields (priorUnlinked and nextUnlinked) are used as described below. The purpose of these fields is to identify that the immediately preceding or following event is not reportable in Phase 2b and is not present for linkage. An immediately preceding or following event may be a manual event, complex order event, or a paired order. The priorUnlinked and nextUnlinked fields have values to indicate why the immediately preceding or following event is not present.

- -

One or both of these fields will be on all options event types as conditional. If an event does not have this field populated, linkage will be attempted.

-

Special circumstances of a complex order being represented as individual legs in Phase 2b

-

In the special circumstance of an Industry Member sending (receiving) a complex order electronically as individual legs of the complex orders, the preferred method of reporting is to suppress the events associated with these messages. If an Industry Member cannot do this, the Industry Member must populate the handlingInstructions field with 'CMPX' to indicate that the order (route) is part of a complex option order in Phase 2b. In addition, such voluntarily reported single leg orders must include a priorUnlinked or nextUnlinked flag of 'C', as applicable, to indicate they will not link to a related order at the sending (receiving) firm.

-

Summary of Option Order Events

- - -
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5.1. New Option Order Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, New Option Order Event - Compliance User: Industry Members - Keywords: - Industry Members, - CAT, - non-reporting foreign broker-dealer, - CMTA trades, - -

An Industry Member must report a New Option Order event to CAT when an order is received or originated. This includes:

-

• New customer orders8

-

• Representative orders

-

• Proprietary orders

-

• Order(s) received from a non-reporting foreign broker-dealer or affiliate.

-

Note that an order received from another CAT Reporter (US broker-dealer, ATS, or an exchange) must be reported as an Option Order Accepted event.

-

Representative Orders

-

Phase 2b Representative Orders

-

While there are fewer representative order scenarios for options than equities, to the extent they are used, representative orders will be treated the same as equity representative orders, including the phased reporting approach for such orders.

-

Specifically, in Phase 2b, representative orders and linkage to the represented order is required for simple, electronic orders between the representative street-side order and the customer or client order being represented, when the representative order was originated specifically to represent a single customer/client order and there is:

-

• An existing, direct electronic link in the Industry Member's system between the order being represented and the representative order, and

-

• Any resulting executions are immediately and automatically applied to the represented order in the Industry Member's system.

-

Any portion of a specific order handling scenario that involves a complex or paired order is not reportable until Phase 2d.

-

See Appendix C for a detailed description of representative order reporting.

-

Phase 2d Representative Orders

-

Any scenario that does not meet the definition of Phase 2b representative order will fall into this category, including any scenario involving a manual or complex order.

-

See the CAT Industry Member Reporting Scenarios document for detailed examples of how representative order scenarios for options are reported in Phase 2b.

-

New Option Order Event

- - -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-

• ComplexOrderKey: date, reporter, (complexOptionID), complexOrderID (Not applicable in Phase 2b)

-
-
pubdate: February 28, 2019 effdate: N/A -

5.2. Option Order Supplement Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Supplement Event - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
pubdate: February 28, 2019 effdate: N/A -

5.3. Paired Option Order (Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Paired Option Order (Phase 2d) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
pubdate: February 28, 2019 effdate: N/A -

5.4. Option Order Route

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route - Compliance User: Industry Members - Keywords: - Industry Members, - CAT, - -

Industry Members must report Option Order Route events to CAT when reporting the routing of option orders.

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pubdate: February 28, 2019 effdate: N/A -

5.4.1. Option Order Route Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Route Event - Compliance User: Industry Members - Keywords: - CAT, - Industry Members, - foreign broker-dealers, - Exchanges, - FINRA, - Order Accepted Event, - foreign broker-dealer, - -

An Industry Member must report to CAT an Option Order Route Event when:

-

• Routing to other Industry Members

-

• Routing to foreign broker-dealers

-

• Routing to exchanges

-

• Routing between two IMIDs (e.g. two different FINRA MPIDs) attributed to the same legal entity (i.e. the same CRD)

-

• Routing partial quantities of an order (assigned using routedOrderId in routing message)

-

In order for CAT to maintain order lifecycle linkage, the orderID populated in the Option Order Route event must reference the most recent internal ID of the order. For example, if an order was modified before routing out, the Route Event must use the ID assigned on the order modification.

-

Internal routes to another desk or department within an Industry Member are not reported using the Option Order Route event; instead an Option Order Internal Route event is used. See the Option Order Internal Route section for more details.

-

Handling Instructions on the Option Order Route

-

The handling instructions included in this event should represent those on the routed order. If the handling instructions do not change from the Option Order Accepted or New Option Order associated with the order, Industry Members may use the handling instruction code "RAR" - routed as received, instead of repeating each individual handling instruction.

-

Option Order Route Event Field Specifications

- - - -

Linkage keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, orderID

-

• Order Key: priorOrderDate (when present), reporter, optionID, orderID

-

• Route Link Key: date, senderIMID, destination, optionID, session, routedOrderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.4.2. Option Order Modify Route Event (Potential Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Modify Route Event (Potential Phase 2d) - Compliance User: Industry Members - Keywords: - SROs, - -

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a modified route event after reviewing Phase 2a/2b data and include event in Phase 2d, if necessary.>

-
-
pubdate: February 28, 2019 effdate: N/A -

5.4.3. Option Order Cancel Route Event (Potential Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Route, Option Order Cancel Route Event (Potential Phase 2d) - Compliance User: Industry Members - Keywords: - SROs, - -

<Deferred – event not required for Phase 2a or Phase 2b. SROs will evaluate need for a canceled route event after reviewing Phase 2a/2b data and include event in Phase 2d, if necessary.>

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5.5. Option Order Accepted

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Accepted - Compliance User: Industry Members - Keywords: - Industry Members, - CAT, - non-reporting foreign entity, - CMTA trades, - -

When an Industry Member receives a routed option order from another Industry Member or an exchange, then an Option Order Accepted event must be reported to CAT. As described in Options Order Route event, if an Industry Member accepts a routed order from another Industry Member, even though that IMID may attribute to the same Industry Member, i.e., the same CRD, an Order Accepted event must be reported.

-

Once all Industry Member are reporting, in all cases, the order reported with this event should have already been originated by another Industry Member and reported upon origination with a New Option Order event. A New Option Order event represents the beginning of the order lifecycle in CAT, therefore a new customer order is represented with a New Option Order event - not an Option Order Accepted event. At the start of Phase 2b, there will be some lifecycles beginning at Option Order Accepted event, as Small Industry Members are not required to report until a later phase.

-

Orders received from a non-reporting foreign entity or affiliate should be reported as a New Option event instead of an Option Order Accepted event.

-

Option Order Accepted Field Specifications

- - - -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-

• Route Link Key: date, senderIMID, destination, optionID, session, routedOrderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.6. Option Order Internal Route

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route - Compliance User: Industry Members - Keywords: - Industry Members, - CAT, - Child Option Order event, - -

An Option Order Internal Route events must be reported when an order is passed internally to a different department or desk within a reporterIMID.

-

Although multiple reporterIMIDs may be attributed to a single Industry Member, routes between different IMIDs attributed to the same Industry Member are not considered internal routes.

-

Note that an Optional Order Internal Route event does not follow the logic of sending/receiving two-sided reporting followed throughout the rest of these Industry Member Technical Specifications. It is required to be reported from the perspective of the recipient desk. The Option Order Internal Route merely shows that an order was received by an internal destination and if a new orderID has been assigned to the order as a result of the Option Order Internal Route.

-

• An Option Order Internal Route may also represent the routing of partial quantities of an option order internally, and the practice of assigning those slices new orderIDs. In this case, multiple slices are routed to yet another destination internally - this event should represent the receiving desk, quantities, and new orderIDs of those routed slices as received by the subsequent internal destination. This approach will allow CAT to track changes in orderID within an Industry Member as an order is passed between internal entities or partial quantities are routed to internal entities as slices of another order.

-

• The major difference between Option Order Internal Route and Child Option Order events is that the Child Option Order event can only be used when no desk change or desk route happens. For example, some Industry Members may first choose to generate child orders using the Child Option Order event to represent slices of a parent order, then route those slices internally to another desk (Option Order Internal Route event). This approach is also acceptable for CAT reporting and will not result in unlinked events.

-

Option Order Internal Route Modified and Option Order Internal Route Canceled are not required to be reported until Phase 2d.

-
pubdate: February 28, 2019 effdate: N/A -

5.6.1. Option Order Internal Route Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Event - Compliance User: Industry Members - Keywords: - Symbol, - -

Option Order Internal Route event is used to report an order sent internally to another desk.

-

Option Order Internal Route Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.6.2. Option Order Internal Route Modify Event (Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Modify Event (Phase 2d) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
pubdate: February 28, 2019 effdate: N/A -

5.6.3. Option Order Internal Route Canceled Event (Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Internal Route, Option Order Internal Route Canceled Event (Phase 2d) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5.7. Child Option Order

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order - Compliance User: Industry Members - Keywords: - Industry Members, - -

The Child Option Order event is provided solely for the convenience of Industry Members to help model scenarios in which an order is split or sliced into smaller "child" orders that are handled independently of their parent order - in a way that best reflects each individual Industry Member's system(s).

-

For example, in the scenario when Industry Members create independent child orders with new orderIDs, if the Child Option Order event is reported, then the changes of order IDs are captured. Afterwards, the Industry Member can reference each individual child option order in subsequent events by the new order ID. However, if no Child Option Order event is reported, then the Industry Member can only reference the order at the parent level by the order ID of the parent. There is no scenario in which the use of a Child Option Order event is absolutely mandatory.

-

Notes:

-

• Child Option Order events can only be used when an order is sliced and assigned new order IDs within the same desk. An Option Order Internal Route event must be reported when routed to another desk.

-

• There is no limit to how many "generations" can be created using Child Option Order events. The parentOrderID will be the orderID of the most recent order, whether that was a New Option Order/Option Order Accepted or a previous Child Option Order.

-

• Child Option Orders must belong to the same FDID as the parent order.

-

• Child Option Orders should not be used for single legs of a multi-leg option order.

-

• This event only includes the key data elements and fields that may be changed from the parent order or that are required for linkage, i.e., certain key data elements from the parent order may not be changed when creating Child Option Orders.

-
pubdate: February 28, 2019 effdate: N/A -

5.7.1. Child Option Order Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Event - Compliance User: Industry Members - Keywords: - Industry Members, - contracts, - Reportable Event, - -

Child Option Order Event Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-

• Prior Order Key: date, reporter, optionID, parentOrderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.7.2. Child Option Order Modified Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Modified Event - Compliance User: Industry Members - Keywords: - CAT, - Material Terms of the Order, - -

When the price, quantity, or any Material Term of the child option order has been changed, a Child Option Order Modified event must be reported to CAT. This modification event is only used when the child option order creation is reported to CAT in a Child Option Order event. As such, modifying a partial quantity internal route cannot be reported in this event.

-

All attributes and Material Terms of the Order of a modified child option order listed on this event should be reported when applicable, including the fields that remain unchanged.

-

Child Option Order Modified Event Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-

• Prior Order Key: date, reporter, optionID, priorOrderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.7.3. Child Option Order Canceled

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Child Option Order, Child Option Order Canceled - Compliance User: Industry Members - Keywords: - Canceled event, - Industry Member, - -

If a child option order is canceled, a Child Option Order Canceled event must be reported to CAT by the Industry Member.

-

Note that a partial cancellation can be reported either with a Child Option Order Modified event or Child Option Order Canceled event with leavesQty, depending on how it is handled by the Industry Member. If an actual cancel message was used, the Industry Member should report a Child Option Order Canceled event to CAT. If a modify or cancel/replace message was used, a Child Option Order Modified event should be reported to CAT. This keeps the reported event in line with the action taken by the Industry Member.

-

Child Option Order Canceled Event Field Specifications

- -

Linkage Keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5.8. Option Order Modified and Cancel/Replace Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Modified and Cancel/Replace Event - Compliance User: Industry Members - Keywords: - Material Terms of the Order, - Industry Member, - contracts, - CMTA trades, - -

When the price, quantity or any other Material Terms of the Order has been changed or when an order is cancel/replaced, an Industry Member must report an Option Order Modified event to CAT. This Option Order Modified event concerns both of the following scenarios:

-

1) A new order is generated (with a new Order ID) during the modification and completely replaces the prior order. In this case, the orderID field must capture the identifier for the the order. Additionally, the new order must be linked to the prior order through priorOrderID.

-

2) If the Order ID remains the same during the modification, the priorOrderIDmust match the event orderID.

-

Note that in the first scenario, if the order has been modified several times, the priorOrderID must refer to the most recent orderID prior to this modification, which may not always be the original order ID.

-

Side is required to be reported, but side adjustments are only allowed for same-side changes (e.g., changes between short and long sell).

-

All attributes and Material Terms of the modified order listed on this event should be reported when applicable, including the fields that remain unchanged.

-

Option Order Modified and Cancel/Replace Event

- -

Linkage keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp), reporter, optionID, orderID

-

• Prior Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, priorOrderID

-

• Prior Order Key: priorOrderDate (when present), reporter, optionID, priorOrderID

-

• Route Link Key: date, optionID, receiverIMID, routingOrigin, session, routedOrderID

-
pubdate: February 28, 2019 effdate: N/A -

5.8.1. Option Order Modified Supplement Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Modified and Cancel/Replace Event, Option Order Modified Supplement Event - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5.9. Option Order Adjusted Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Adjusted Event - Compliance User: Industry Members - Keywords: - CAT, - Option Order Modified event, - Reportable Event, - -

Industry Members must report to CAT the Option Order Modified event, which records the full state of the order reported to CAT on each modification. However, there are some common scenarios where only the order price and/or quantity of an order are modified. If such changes are initiated by the Industry member, the Option Order Adjusted event can be used. However, Option Order Adjusted events may not be used if a price or quantity change is initiated by a routing Industry Member.

-

• Price change only - the price field and leavesQty must be reported to represent the current state of the order with respect to price. The two conditionally-required quantity fields (quantity, minQty) can be omitted.

-

• Quantity change only - both conditionally-required quantity fields (quantity, minQty) and leavesQty must be reported. The price field can be omitted.

-

• Both price and quantity change - If both price and quantity change, all fields must be reported.

-

Any modification that cannot be fully represented in this Reportable Event must be reported via the Option Order Modified event.

-

Option Order Adjusted Event Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date, reporter, optionID, orderID

-

• Prior Order Key: date, reporter, optionID, priorOrderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.10. Option Order Canceled Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Canceled Event - Compliance User: Industry Members - Keywords: - CAT, - Broker, - Industry Member, - -

The Option Order Canceled event is used in specific situations when an options order is fully or partially canceled. Note:

-

• Partial cancellation of an order may be reported to CAT using either an Option Order Canceled event or an Option Order Modified event.

-

• This Option Order Canceled Event is only reported by the Industry Member that performs the cancellation. Cancellations by away venues are not required to be reported. For example, if Industry Member Broker B accepts an order from Industry Member Broker A, and Broker B initiated a cancel on the order, then B is responsible for reporting the order canceled (not Broker A).

-

• Implicit order cancellations are not required to be reported to CAT (e.g., cancellation due to expiration of Time in Force).

-

Option Order Canceled Field Specifications

- -

Linkage keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if priorOrderDate is not present), reporter, optionID, orderID

-

• Order Key: priorOrderDate (when present), reporter, optionID, orderID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.11. Option Order Fulfillment

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment - Compliance User: Industry Members - Keywords: - Industry Member, - contracts, - foreign non-reporting entity, - -

The Option Order Fulfillment event is designed to show an execution given back to the original option order(s), informing its customer/client of the number of contracts executed and at what price, that is not required to be reported for public dissemination purposes.

-

An Order Fulfillment event must be reported in the following scenarios:

-

• When an aggregated order executes, and the Industry Member gives back executed contracts to each order that was part of the aggregated order. An Option Order Fulfillment event will be reported for each order that was part of an aggregated order.

-

• When an Industry Member creates a “representative" multi-leg complex option order. If the representative order is executed, the Industry Member must report an Option Order Fulfillment event for each of the orders being represented.

-

• When an order is routed to a foreign non-reporting entity, the Industry Member must report an Option Order Fulfillment to represent the outcome of the order.

-

For the first two scenarios above, Phase 2b does not require explicit order linkage between the bunched or representative order and the "underlying" order. Prior to Phase 2d, the Order Fulfillment events only contain the clientDetails. The fulfillmentLinkType must be marked as "YF".

-

In the scenario of routing to a foreign non-reporting destination, the fulfillment event is always one sided (customer order only) and the fulfillmentLinkType must be marked as "FOR".

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pubdate: February 28, 2019 effdate: N/A -

5.11.1. Option Order Fulfillment Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment, Option Order Fulfillment Event - Compliance User: Industry Members - Keywords: - Industry Member, - Option Order Accepted event, - -

Option Order Fulfillment Event Field Specifications

- -

Options Fulfillment Side Details

- -

Linkage Keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter optionID firmDetails.orderID

-

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter optionID clientDetails.orderID

-

• Order Key: firmDetails.priorOrderDate (when present), reporter, optionID, firmDetails.orderID

-

• Order Key: clientDetails.priorOrderDate (when present), reporter, optionID, clientDetails.orderID

-

• Fulfillment: date, reporter, optionID, fulfillmentID

-
-
pubdate: February 28, 2019 effdate: N/A -

5.11.2. Option Order Fulfillment Amendment Event

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Order Fulfillment, Option Order Fulfillment Amendment Event - Compliance User: Industry Members - Keywords: - Industry Member, - CAT, - Option Order Fulfillment event, - -

If an order fulfillment is amended by an Industry Member on or after the trade date, an Option Order Fulfillment Amendment event is used. This Reportable Event must capture the entire state of the fulfillment after it has been amended, even though some of the data elements may remain unchanged.

-

For example, if an Industry Member fulfills its customer's/client's order on an average price basis or work the order through representative or bunched orders. Afterwards, when a trade correction or trade break comes from the exchange and subsequently changes the price or quantity of the fulfilled contracts, both the original Option Order Fulfillment event and the Option Order Fulfillment Amendment event would be reported to CAT.

-

The Option Order Fulfillment Amendment is not used in the following scenarios.

-

• If a customer order is worked directly in an Agency capacity (without any representing or bunching) and filled print-for-print, when a trade break or trade correction occurs, the Industry Member does not need to report a Fulfillment Amendment event.

-

• When a trade correction occurred same-day before the client order was fulfilled, only the Order Fulfillment event would be necessary to report to CAT, presuming it contained the updated (post-correction) average price.

-

• When an Industry Member fulfills an order and receives a trade break from the exchange, it is possible that the Industry Member may choose to take the delta (e.g. using an error account) without amending the manner by which the order was fulfilled.

-

Options Order Fulfillment Amendment Event Field Specifications

- -

Linkage Keys for this Reportable Event:

-

• Order Key: date (from eventTimestamp if firmDetails.priorOrderDate is not present), reporter optionID firmDetails.orderID

-

• Order Key: date (from eventTimestamp if clientDetails.priorOrderDate is not present), reporter, optionID, clientDetails.orderID

-

• Order Key: firmDetails.priorOrderDate (when present), reporter, optionID, firmDetails.orderID

-

• Order Key: clientDetails.priorOrderDate (when present), reporter, optionID, clientDetails.orderID

-

• Fulfillment Key: date reporter optionID, fulfillmentID

-

• Prior Fulfillment Key: date, reporter, optionID, priorFulfillmentID

-
-
-
pubdate: February 28, 2019 effdate: N/A -

5.12. Linked Multi-Leg Option Order Events (Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Linked Multi-Leg Option Order Events (Phase 2d) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
pubdate: February 28, 2019 effdate: N/A -

5.13. Option Post-Trade Allocations (Phase 2d)

- Topic: CAT Reporting Technical Specifications for Industry Members, Single Leg Option Events, Option Post-Trade Allocations (Phase 2d) - Compliance User: Industry Members - Keywords: -

<Deferred - Not Required Until Phase 2d>

-
-
-
pubdate: February 28, 2019 effdate: N/A -

6. Submission Process

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process - Compliance User: Industry Members - Keywords: - CAT, - -

In this section, information is provided regarding how to format submission files, submit to CAT (including a general data flow overview), the registration process, network and transport options, and CAT access and reporting hours.

-
pubdate: February 28, 2019 effdate: N/A -

6.1. File and Data Formats

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats - Compliance User: Industry Members - Keywords: - CAT, - ISO-8859-1, - -

All files sent from the CAT Reporter (or the third-party CAT Reporting Agent for the CAT Reporter) must be compressed, encrypted, and signed. However, the information in this section assumes, for the most part, that the file being described is the raw, unencrypted data (after being verified, decrypted, and uncompressed).

-

All files submitted on a given date must have a unique file name, as defined in 6.1.1. The mechanism used for uploading files will prevent duplicate file names from being accepted into the CAT system.

-

Archive files are not allowed to be submitted into the CAT System. Each set of records must be submitted as an individually compressed, encrypted, and signed file. For example: Do NOT zip, tar, or 7z all of the submitted files into one consolidated file. The files must be individually compressed, encrypted, and submitted.

-

All data elements are submitted using ISO-8859-1 encoding. This is a one-byte-per-character encoding, with possible values in the range of [0, 255]. This encoding has the characteristic that the encoding character definitions are the same as the first 256 code points of UTF-8. However, only fully defined values will be accepted.

-

According to the encoding specification, byte values in the ranges [0, 31] and [127, 159] are undefined. As a result, any record submitted with character values in those ranges will be rejected as invalid. In cases where data is echoed back in feedback files, invalid characters will be translated to a 3-character octal value, preceded by a backslash.

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pubdate: February 28, 2019 effdate: N/A -

6.1.1. File Names

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, File Names - Compliance User: Industry Members - Keywords: - CAT Reported ID, - Encryption Extension, - -

Files are to be named in the following manner:

-

<CAT Reporter ID>_<Date>_[<Group>_]<File Kind>_<File Number>.<Extension>[.<Compression Extension>].<Encryption Extension>

-

• CAT Reporter ID is the unique ID assigned to the reporter by CAT

-

• Date is the calendar date for all events in the file in YYYYMMDD format - not the date the file was generated or reported

-

• Group is an optional reporter-defined string. It must either be missing, or composed of up to 20 alphanumeric characters. The field exists solely for reporters’ convenience. Other than file name validation, it is ignored by the CAT processor

-

• File Kind is “OrderEvents” for Industry Members

-

• File Number is the sequence number of this file, 6-digits long, left-padded with zeros The tuple (CAT Reporter ID, Date, File Kind, File Number) must be unique. The File Number determines the order that a file will be processed within a File Kind.

-

• Extension is the extension, representing the format of the data inside: json, csv

-

• Compression Extension is the extension representing the compression used to compress the data file: gz, bz2, xz, zip. It is only needed if compression is done outside of the encryption process. If your OpenPGP tool handles compression, Compression Extension should be left off

-

• Encryption Extension is the extension indicating that the file is encrypted and must be either .gpg or .pgp.

-
-
pubdate: February 28, 2019 effdate: N/A -

6.1.2. Metadata Files

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Metadata Files - Compliance User: Industry Members - Keywords: - CAT, - Reported ID, - -

For each data file that is uploaded to CAT, associated metadata must also be uploaded. Submitters may pair the metadata file one-to-one with the data file, so that when the "pair" is ready, both files can be moved and processed in a timely manner, or the submitter may choose to package multiple metadata "blocks" for multiple data files into one metadata file. But they must be for the same calendar date, reporter, on the same file version and by the same submitter. Each metadata "block" contains checksum and signing of the files that are submitted, which are needed to verify integrity and track provenance of the submissions.

-

The metadata file must be named in the following manner:

-

<CAT Reporter ID>_<Date>_[<Group>_]<File Kind>_<Metadata File Number>.<Extension>[.<Compression Extension>].<Encryption Extension>

-

• CAT Reporter ID, Date (and Group) must be consistent with the data file(s)

-

• Metadata file number is the sequence number of the metadata file, 6-digits long, left-padded with zeros The combination (CAT Reporter ID, Date, Metadata File Number) must be unique.

-

• Extension is .meta

-

• The metadata file must be first signed in cleartext, then compressed and then encrypted.

-

An Industry Member may use multiple metadata files for a day. If an Industry Member is uploading multiple metadata files, the Industry Member should set the doneForDay flag as false until the last metadata file is submitted for the date with doneForDay = true. Once a metadata file with doneForDay = true is received, this signals that the files submitted by the Industry Member are ready for the linkage discovery processing stage. However, this will not "close" the submission process. If an Industry Member discovers it needs to make additional data submissions, the Industry Member may continue to submit the additional data files with a new metadata file. If no metadata files for a trading day are flagged doneForDay = true, the doneForDay flag(s) those files will be automatically set to true upon submission deadline at 8:00AM.

-

The metadata file does not need to be compressed, but must still be encrypted and signed like the data file. The metadata file is in JSON format, and contains:

-

Metadata Files

- -

The hashes are to be submitted as 64-character hexadecimal string encodings of the hash value.

- -

If a metadata block in the file has an error, the erroneous block will be dropped, and proper corresponding feedback will be returned (see Section 7 for File Acknowledgment Feedback or Basic File Integrity Feedback). The rest of the "blocks" of the metadata file will continue to be processed. The reporter can resubmit the corrected metadata block in another metadata file.

-

Reporters can include the metadata for original data files and for correction files into one metadata file, as long as they are for the same reporter, submitter and calendar day.

-
-
pubdate: February 28, 2019 effdate: N/A -

6.1.3. Data Files

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files - Compliance User: Industry Members - Keywords: - JSON, - CSV Records, - -

All data files are either new-line delimited JSON objects, or new-line delimited CSV records. This means that for JSON, there is no top level object. Instead, the file acts as the top level container for each object. Each object is a normal JSON object, separated with a new-line (ASCII decimal 10, hex 0A). For CSV files, each record’s fields are separated with a comma (ASCII decimal 44, hex 2C).

-

Each JSON object is terminated by a new-line, but the data in the object itself must not include new-lines. Specifically, each line in the file must contain exactly one complete record, no matter whether the submission format is JSON or CSV. In either case, the total maximum length of any line is 4095 bytes. The examples in the document include new-lines between elements for readability.

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pubdate: February 28, 2019 effdate: N/A -
6.1.3.1. JSON Schema
- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files, JSON Schema - Compliance User: Industry Members - Keywords: - JSON, - CAT, - -

JSON schema files for each record type will be provided on the CAT public website. Industry Members will be able to download and use these schemas to format and validate their CSV and JSON data files prior to submission. These schemas will also allow Industry Members to translate their data files from JSON to CSV or from CSV to JSON formats, as desired.

-

The schema files will be maintained by the Plan Processor and will be versioned as the message specifications change. The meta files submitted to CAT will contain a version identifier specifying which version of the schema the associated reference or order data was formatted in accordance with. This will allow the CAT System to perform a basic initial formatting validation of all submitted data.

-

Provided here is an abbreviated example of a JSON schema containing only part of the equity New Order event and a couple definitions for Choice fields:

- - -

Note that the file is not a typical "JSON schema" but a schema describing the Reportable Events in JSON.

-

The field "JSONDataType" indicates the underlying JSON data type.

-

The field "dataType" is the actual type, as indicated in this specification, with some further restrictions over the underlying JSON data type.

-

The field "name" is the JSON field name. The "name" is also used as a lookup key to find valid values for a field of dataType "Choice."

-

Each field of dataType "Choice" will contain a corresponding entry in the "choices" object, which contains the list of valid choices. The key is the value in the name field. If the name field contains a '.' (period), then the value is part of a nested JSON object and the key will be the trailing name. For example, if the field has a Choice field with the name "buyDetails.side" then the field "buyDetails" contains a JSON object with a member named "side" and "side" would be used as the key to lookup the valid choices for the element.

-

The field "position" is the 0-based index where this field would be expected in a CSV version of the data.

-

The field "required" indicates whether the field is "Required," "Conditional," or "Optional." If submitting in JSON, any conditional or optional field that is not provided must be omitted. If submitting in CSV, and conditional or optional field that it not provided must be an empty column (i.e., in the following example position 2 is considered to be omitted: zero,1,,three).

-

Note that the Timestamp data type has two possible representations, so the JSONDataType is an array of choices: String for a formatted string and Number for nanoseconds since the epoch.

-
-
pubdate: February 28, 2019 effdate: N/A -
6.1.3.2. CSV Conversion
- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, File and Data Formats, Data Files, CSV Conversion - Compliance User: Industry Members - Keywords: - JSON Schema, - CAT, - -

The JSON schema defines valid data types, and mappings between JSON and CSV. Note that schemas can change with each specification version, and the authoritative schemas will be available on the CAT website. For this discussion, assume the following schema for an Equity Order Adjusted event. Provided here is an abbreviated example of a JSON schema containing only part of the Order Adjusted event and a couple definitions for Choice fields:

- - -

The corresponding CSV would be:

-

MEOJ,20170901T120201.123456,E,false,,,XYZ,T12346,T12345,Customer,Buy,,,,1100, 100,100,,,,,,,,

-
-
-
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pubdate: February 28, 2019 effdate: N/A -

6.2. Connectivity and Registration

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Connectivity and Registration - Compliance User: Industry Members - Keywords: - Network Access, - Industry Member Onboarding User Guide, - -

CAT supports network access for reporting order events via VPN or direct connections (i.e., cross connects).

-

More detailed information on connectivity and the registration process will be provided in the Industry Member Onboarding User Guide.

-
-
pubdate: February 28, 2019 effdate: N/A -

6.3. Transport Options

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options - Compliance User: Industry Members - Keywords: - Industry Member, - Administrative Information, - -

Industry Members may use different mechanisms (SFTP or the Reporter Web Portal) to send/obtain different types of information to/from CAT.

-

Basic types of CAT information:

-

1) Submissions (e.g. initial submission of files of order events, resubmission of files that were previously rejected, and corrections or deletions to previously accepted records;

-

2) Feedback (e.g. upload status, rejections, and reporting statistics); and

-

3) Administrative information.

- -

SFTP submission allows file(s) only. If the submission is via the Reporter Web Portal, it may be sent by typing the information directly into the Web page or by submitting small files. The file size allowed via Reporter Web Portal is limited to 1GB before compression.

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pubdate: February 28, 2019 effdate: N/A -

6.3.1. File Size, Encryption, and Compression

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options, File Size, Encryption, and Compression - Compliance User: Industry Members - Keywords: - File Compression, - Encrypting, - Metadata File, - -

Any files transmitted via SFTP or Reporter Web Portal must be 1) compressed AND 2) encrypted AND 3) signed, for the purpose of security and efficient network usage. The following compression algorithms will be allowed:

-

• ZIP (extension: zip)

-

• Gzip (extension: gz)

-

• BZip2 (extension: bz2)

-

• LZMA2 (extension: xz)

-

The size of files uploaded via SFTP is limited to 100GB per file, before compression and encryption. Resumable file upload is enabled for SFTP. The size limit for the Reporter Web Portal is 1GB per file, before compression and encryption.

-

Submission of data to CAT requires a number of supporting requirements that include security, confidentiality, authentication, and provenance of the data submitted. To achieve this the standard capabilities of PGP will be utilized and will require encrypting, signing, and secure hashing of data. While these steps must be followed, Submitters have a choice of compression algorithms, passphrase selection and length, as well as what tools they use on their platform. When encrypting a metadata file, the CAT public encryption key must be used. This public key will be made available to reporters. The file may also be encrypted with the public key of the submitter and the public key of the reporter. Encrypted files can only be decrypted by the private key corresponding with the public key used to encrypt the file; including the optional public keys of Submitter and Reporter ensures that private key holders of CAT, Reporter, and Submitter can decrypt the encrypted file.

-

Public/Private keys should be RSA with a bit length of at least 2048 (minimum and recommended), and up to 4096. Interested parties can read more at https://www.gnupg.org/faq/gnupg-faq.html Sections 13.3-4 are directly relevant. The cipher algorithm must be AES-256(recommended) or higher. When encrypting data files, the submitter may also sign the file with their private key. Metadata files must always be signed in cleartext, and then encrypted. All files must be compressed before, or with the encryption process. The digest algorithm used to sign the file must be SHA256. The signature should also be part of the encrypted file (i.e. no detached signatures). Once a file has been encrypted and/or signed, the extensions .pgp, .gpg, or .asc must be appended to the end of the filename; OpenPGP compliant tools will do this for you.

-
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pubdate: February 28, 2019 effdate: N/A -

6.3.2. SFTP Upload Process

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Transport Options, SFTP Upload Process - Compliance User: Industry Members - Keywords: - STFP Upload, - -

Each file that is uploaded must follow these basic steps.

-

1. Upload the data file and the metadata file into the upload/transit directory, which will be at the base of the home directory for each sftp account.

-

2. Upon successful upload of both file types (the metadata file as well as all the data files covered by the metadata file), move all files into the upload/complete directory. Note that all files should be uploaded before moving either to the complete directory.

-

A file should never be directly uploaded into the upload/complete directory, as once a file has appeared there it is assumed to be the desired complete file submission. Only files that have a .pgp or .gpg extension will be processed.

-

The Plan Processor will remove files from the upload/complete directory. The Submitter should never attempt to delete files from the upload/complete directory.

-
-
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pubdate: February 28, 2019 effdate: N/A -

6.4. Accessing Feedback Information

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Accessing Feedback Information - Compliance User: Industry Members - Keywords: - CAT Feedback, - -
pubdate: February 28, 2019 effdate: N/A -

6.4.1. CAT Feedback

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Accessing Feedback Information, CAT Feedback - Compliance User: Industry Members - Keywords: - Receipts, - Failure Reports, - File Submission Status, - Reporting Statistics, - -

Multiple types of feedback will be provided to Industry Members through various mechanisms, dependent upon the type of feedback provided.

-

• Receipts - receipt of a file or the arrival of a file at the next stage of processing is provided in a feedback file. A File Acknowledgement Feedback File will be provided when each file is first received. A separate file will be generated when the file reaches each stage of processing. Processing stages (and thus feedback file types) vary based on the type of file being processed. Feedback files will be available via sftp. Receipt and feedback information will also be available via the Reporter Web Portal.

-

• Failure Reports - if records in a file are rejected, if an entire file is rejected, or if there are warnings generated by a file, the feedback file will detail which records were rejected, why they were rejected, and at which stage of processing they were rejected. Note that CAT will not completely reject a file at the INGESTION stage. (Please refer to Section 7 for more details on various processing stages and feedbacks.)

-

• File submission status - current processing status (whether a file has been received, which stage of processing a file is in, etc.) will be made available via the Reporter Web Portal.

-

• Reporting Statistics - reporting statistics will be made available via the CAT Reporter Web Portal on a daily basis, and are posted when processing for all files has completed. The daily statistics will include, at a minimum, the following information for order events and reference data:

-

• CAT Reporter ID

-

• Date of Submission

-

• Number of files received

-

• Number of files accepted

-

• Number of files rejected

-

• Number of total order events received

-

• Number of order events accepted

-

• Number of order events rejected

-

• Number of each type of report received

-

• Number of each type of report accepted

-

• Number of each type of report rejected

-

• Number of unknown accounts

-

• Number of late submissions

-

• Order-IDs rejected

-

• Reasons(s) for rejection

-

• Number of records attempted to be matched

-

• Number of records matched

-

• Percentage of records matched

-
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pubdate: February 28, 2019 effdate: N/A -

6.5. CAT Reporting Hours

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, CAT Reporting Hours - Compliance User: Industry Members - Keywords: - Sec Rule 613, - CAT NMS plan, - -

Submission of Order Events

-

Pursuant to SEC Rule 613, the CAT NMS Plan requires Industry Members to record order events contemporaneously with the actual transactions themselves. Realtime reporting to CAT is not required. Data may be bulk uploaded at the end of the Trading Day, or may be broken into multiple batches and uploaded in pieces throughout the day. However, all Reportable Events for one Trading Day must be reported to CAT by 8:00 AM Eastern Time on the next Trading Day.

-

Trading Day for Industry Members is defined as:

-

• Start: immediately after 4:15:00PM and no fractions of a second Eastern Time on one trade date

-

• End: exactly 4:15:00PM and no fraction of a second Eastern Time on the next trade date (T=Trading Day, a defined term)9

-

Note that the Trading Day is only used to determine the reporting deadline of order events. It does not impact the date on the file name (calendar day) or the date used to create linkages (date on eventTimestamp). Additional details on reporting dates and deadlines are included in Appendix D.

-

CAT accepts submissions (via SFTP and Reporter Web Portal) 24 hours per day, 7 days per week, other than during announced scheduled maintenance. Events that occurred during a particular Trading Day may be reported anytime between the time the event occurred and the reporting deadline, which is 8:00 AM Eastern Time on the following Trading day. Reports received after the deadline will be marked late by CAT.

-

The table below gives some examples of the reporting deadline.

- -

Deadline of Rejection Repair

-

Rejections willbe provided to Industry Members in the following order:

-

• File Format Validation Error

-

• Syntax and Semantics Error

-

• Context Issues

-

Once rejections are available, repairs can be made immediately.

-

In order to comply with the rule, all rejections that require repair should be repaired before 8AM Eastern Time on T+3 (transaction date + three Trading Days). Repairs received after the standard repair window will be classified as late.

-

If corrections are not received by 8AM Eastern Time T+5 (transaction date + five Trading Days), Participants’ regulatory staff and the SEC will be notified. The Plan Processor shall notify the Participants’ regulatory staff and the SEC as to how corrections submitted after T+5 will be re-processed. The Operating Committee will be involved with decisions on how to re-process the data.

- -

Deadline for Corrections and Deletions

-

Sometimes an Industry Member will have occasion to correct a report that may have passed all data validation and integrity checks. All such corrections must be submitted within the same three day timeframe as provided for record repairs. Specifically, Industry Members will be provided the same T+3 window for submitting timely corrections to data.

-
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pubdate: February 28, 2019 effdate: N/A -

6.6. Security

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Security - Compliance User: Industry Members - Keywords: - CAT, - Industry Member, - Submission or Correction, - -

In recognition of the importance of security, CAT has strict mechanisms for security controls. This section describes the CAT security overview and data security standards, to make sure the data is secured both during in transit and while stored in CAT.

-

Submission to CAT requires a valid user ID and password. Industry Members must obtain a master user ID and password combination during the CAT registration process.

-

Industry Members will also be assigned a multi-factor authentication (MFA) token during the registration process. An MFA token is required for authentication when accessing SFTP and Reporter Web Portal.

-

Order Submission or Correction via SFTP or Reporter Web Portal must be compressed and encrypted. All communication with the web portal is done through secure HTTPS, and all such activity is captured in system logs.

-

Industry Members are not allowed to view or download the actual data files from SFTP or Reporter Web Portal after submission. Data will be deleted from SFTP in a predefined time window, after it has been successfully processed and loaded into CAT data store.

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pubdate: February 28, 2019 effdate: N/A -

6.6.1. Data Security Standard

- Topic: CAT Reporting Technical Specifications for Industry Members, Submission Process, Security, Data Security Standard - Compliance User: Industry Members - Keywords: - CAT, - CAT Private Key, - -

In addition to data transport security provided by TLS and SSH, CAT requires that the data be secure at rest. To achieve this, CAT recommends one of the supported, industry standard tools for encryption to be used. PGP, OpenPGP, and GPG (GNU Privacy Guard), in addition to OpenSSL may be used for both symmetric and asymmetric encryption and decryption.

-

Asymmetric encryption will be accomplished by the Industry Member using the Industry Member's private key and the CAT public key. Upon retrieval by CAT, the CAT private key will be used to decrypt the files. Should the Industry Member desire to be able to decrypt the data at another time, the Industry Member should encrypt with both the Industry Member's public key, as well as the CAT public key.

-

Automated systems are an anticipated component of CAT submission, error retrieval, and status monitoring, and automated access is permitted in limited roles.

-

CAT provides restricted automated (role based) sub-accounts with restricted access. Please note that automated access accounts must be associated with a person. These accounts will be permitted to use public security keys from their registered location. Public security keys will be registered via the Web portal, and associated with the restricted functional account. Should a Participant desire HSM support, most HSM devices allow public key extraction using commonly available tools from OpenSSL and OpenSSH, utilizing the pkcs12, ssh-keygen modules.

-
-
-
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pubdate: February 28, 2019 effdate: N/A -

7. Feedback and Corrections

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections - Compliance User: Industry Members - Keywords: - CAT, - Obtaining Feedback, - -

This section describes the procedures for obtaining feedback and how to submit corrections, including different types of feedback messages, data elements, and formats of the correction reports. After data submission, CAT will conduct data validations, provide feedback to CAT Reporting Agents and Industry Members, and allow corrections to be submitted.

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Feedback will be made available via the Reporter Web Portal, both in the form of a user-centric webpage and a programmable API.

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For descriptions in this section, the CAT will consider a file to be successfully decrypted if and only if all of the decryption, decompression, and signature validation steps succeed.

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7.1. Feedback Files

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Feedback Files - Compliance User: Industry Members - Keywords: - Data file, - JSON, - CSV, - Feedback File, - Reject File, - -

For each data file, there are two types of files generated at different stage of processing and returned to the Industry Member and CAT Reporting Agent as feedback - the feedback file and the reject file.

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The format of the files will match the format of the original file submission in JSON or CSV.

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These files will be available as soon as they are generated, and accessible under the corresponding directory on the feedback sftp server for both the CAT Reporting Agent and Industry Member. They will also be made available via the Reporter Web Portal. Note that the IP address of the sftp server where files are uploaded may differ from the IP address of the sftp server where receipts and rejects are placed.

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• Feedback File

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Receipts will be available as soon as they are generated in the form of a feedback file, accessible under a subdirectory of download/feedback in both the CAT Reporting Agent’s and Industry Member’s home directory on the feedback sftp server.

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The exact subdirectory on the sftp server where feedback files may be found is:

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download/feedback/<YYYYMMDD>/<CATReporterId>/

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Where YYYYMMDD is the calendar date of the events in the submitted file.

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Feedback from different stages of processing will have different file extensions. See the following sections for more details.

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If there are failures or warnings, they will be available in the feedback file. It is possible for a record to have multiple failures, which will be represented by multiple JSON objects or new-line delimited CSV records within the failures array with the same record indexes.

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• Reject File

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If any of the ingestion failures correspond to specific records, a reject file (with extension .reject) will also be generated in the download/failures directory in the home directory of both the submitter and reporter. The reject filename will be included with the feedback record under the field rejectFile. The reject file will be populated with Correction Records containing the original rejected records and record index, to make corrections easier to submit (as described in the Corrections section). The record index is the offset from the beginning of the file to the first byte of the record.

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Feedback files will have the same base name as the submitted file. The file name will be appended with an extension describing the feedback type and .pgp. It will be compressed, encrypted, and signed. Compression will be based on the compression preferences associated with the public keys used to encrypt the feedback file. The keys used will be the CAT Reporting Agent's key, Industry Member’s key (if different), and the CAT public key. It will be signed with the CAT private key. For example, if a file was submitted from CAT Reporter “MYID”, with the following name:

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MYID_20170101_OrderEvents_000123.csv.gz.pgp

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The following would be the filename for the acknowledgement feedback file:

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MYID_20170101_OrderEvents_000123.ack.pgp

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Filenames are considered unique using the base name of the file (i.e., after removing all suffixes). Thus, trying to upload files that differ only in extension would be considered an error for uploading files with duplicate filenames.

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If multiple files are submitted with the same base name, but with different format or compression extensions, then a _<N> will be applied to the base name of the second and subsequent feedback file names, where N will be the iteration of the feedback file.

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If multiple files are submitted with the same base name or CAT needs to provide feedback when reprocessing a file feedback, an _<N> will be applied to the base name of the feedback files to avoid overwrite of any feedback files contained at that time in the download directories.

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Feedback files will be generated as each data file goes through various stages of processing. CAT will have four main processing stages, as described below:

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1. File Acknowledgement

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2. Basic File Integrity Check

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3. Order Events - Ingestion

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4. Order Events - Linkage Discovery

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Please see the following sections for details of each stage.

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Some stages will complete almost immediately, generating feedback shortly after the file has been uploaded (e.g. File Acknowledgement stage); other stages may take significant time, meaning that feedback could be delayed (either due to queuing behind other jobs, or because certain data elements are required to advance). For file acknowledgement, basic file integrity or ingestion stages, feedback will be provided as soon as the processing of each stage is completed. However, the feedback from linkage discovery phase, due to the dependency on other reporters' order events, will not be provided prior to noon on T+1, when all feedback is required to be returned.

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The minimum retention time for feedback files on the sftp server is 10 business days; after that time they may be removed from the server. Feedback will continue to be available after that time via the Reporter Web Portal.

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Failure codes are listed in Appendix E.

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7.2. File Acknowledgement

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, File Acknowledgement - Compliance User: Industry Members - Keywords: - Receipt of Acknowledgment, - -

A receipt of acknowledgement will be generated for each file and metadata pair that appears in the upload/complete directory or uploaded via the Reporter Web Portal.

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The data and metadata file should be moved into the upload/complete directory within a reasonable timeframe of each other. If a file is rejected (e.g., because the filename is not in the correct format or there is a timeout without seeing the associated data/metadata file), the receipt will contain a status of Failure and one or more failure codes with descriptions.

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Files will be removed from the upload/complete directory after they are processed, though they may not be removed immediately after processing.

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7.2.1. File Acknowledgement Feedback

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, File Acknowledgement, File Acknowledgement Feedback - Compliance User: Industry Members - Keywords: - CAT SUbmtter ID, - CAT Reporter ID, - Timestamp of Receipt, - -

An acknowledgement feedback file will have a .ack extension and will contain the following fields:

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• CAT Submitter ID (as determined from sftp or web portal username)

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• CAT Reporter ID (as determined from filename, if available)

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• Timestamp of Receipt - timestamp file is received and receipt is generated

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• Date (calendar date as submitted from filename, if available)

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• File Name

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• Feedback Version - the version of feedback file schema

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• Status - Success or Failure

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• Failures - a repeating group of failure codes and descriptions

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• Severity - WARNING or ERROR

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• Failure Code

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• Failure Description

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The following is an example JSON object for a successful file acknowledgement:

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CSV presentation of a successful file acknowledgement:

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Line 0 SUBID,MYID,20170307T153552.000001089,20170307, MYID_20170307_OrderEvents_000123.json.gz.pgp,0.1,Success

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The following is an example JSON object for an unsuccessful file acknowledgement:

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CSV presentation:

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Line 0 SUBID,MYID,20170307T153552.000001089, 20170307,MYID_20170307_OrderEvents_000123.json.gz.pgp,0.1,Failure

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Line 1 ERROR, FILE.TIMEOUT.001, Time out waiting for meta file

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7.3. Basic File Integrity

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity - Compliance User: Industry Members - Keywords: - Metadata File, - -

When all the data file(s) and associated metadata file have been received, basic validation will begin. If the metadata file cannot be decrypted, a failure will be generated, and no further attempt will be made to process the file until a valid metadata file is uploaded. If there is an error for one 'block' of metadata within the file, the 'block' with the failure is dropped from processing but the remaining metadata 'blocks' and associated files will still be processed. The Industry Member can submit another metadata file with the corrected 'block' to complete processing.

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7.3.1. Basic File Integrity Checks

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity, Basic File Integrity Checks - Compliance User: Industry Members - Keywords: - Matching Date, - Submitter, - Reporter, - Encrypted Size, - Encrypted Hash, - Decryption, - Compressed Hash, - Data Hash, - -

The values contained in the metadata file will be checked against properties of the corresponding data file. The following properties will be checked:

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• Matching Date - the date part of the filename must match the metadata Date

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• Submitter - metadata CAT Submitter ID must be the same as actual submitter (as determined from sftp or web portal username)

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• Reporter - the CAT Reporter ID part of the filename must match the metadata CAT Reporter ID

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• Encrypted Size - metadata Encrypted Byte Count must equal size of encrypted, received file

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• Encrypted Hash - metadata Encrypted Hash must equal computed SHA256 of encrypted, received file

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• Decryption - the data file must be successfully decrypted

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• Compressed Hash - computed SHA256 must equal metadata Compressed Hash, if provided

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• Data Hash - computed SHA256 must equal metadata Raw Hash, if provided

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One or both of the Compressed Hash and Data Hash must be provided. If neither are provided, then the file will be rejected.

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Note that all data elements in the metadata file are validated during this stage except Record Count, which will be validated when the file is actually processed.

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7.3.2. Basic File Integrity Feedback

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Basic File Integrity, Basic File Integrity Feedback - Compliance User: Industry Members - Keywords: - CAT SUbmtter ID, - CAT Reporter ID, - Timestamp of Receipt, - Feedback Version, - Status, - -

A basic file integrity feedback file will have a .integrity extension and will contain the following fields:

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• CAT Submitter ID (as determined from sftp or web portal username)

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• CAT Reporter ID (as determined from filename)

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• Timestamp of Receipt - timestamp when receipt was generated

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• Date

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• Feedback Version - the version of feedback file schema

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• Status - Success or Failure

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• Failures - a repeating group of failure codes and descriptions

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• Severity - WARNING or ERROR

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• Failure Code

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• Failure Description

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The following is an example JSON object for a successful integrity check:

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CSV conversion

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Line 0 SUBID,MYID,20170307T153552.000001089,20170307,0.1,Success

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The following is an example JSON object for an unsuccessful integrity check:

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CSV conversion

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Line 0 SUBID,MYID,20170307T153552.000001089,20170307,Failure

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Line 1 ERROR,INT.META.001,Encrypted SHA does not match SHA in meta file.

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7.4. Order Event Files

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Order Event Files - Compliance User: Industry Members - Keywords: - Records, - Order Event File, - -

Order Event files are composed of many different types of records. Any record determined to be malformed or otherwise invalid will be rejected as a failure.

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• If the number of records in the file does not match the Record Count in the metadata file or metadata block, the entire file will be rejected.

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• If an Order Event file contains anything other than expected order event messages, the entire file will be rejected.

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Each field of the order event will be checked and validated, resulting in one of three states for the record: success, error, or warning. An error will prevent the record from being processed. A warning will not prevent the record from being processed, but may indicate that a record will be subject to errors during a later stage or processing. Depending on the type of warning, the record may be processed and ignored, or processed and applied to the data set. A record with only warning(s) but without error(s) do not require corrective action from the Industry Member.

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For example, there are occasions where symbols are “delisted” late and may already have been referenced by some Industry Members (most likely in stage two). CAT allows incremental uploads throughout the day. Thus, their order event reports may contain opens and/or cancels for those symbols. Instead of rejecting these records, CAT will generate warnings for benign order actions and silently ignore them. Execution events for such symbols, however, will generate errors.

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The system is backward compatible when there is a change or transition to a new version of reporting specifications. In such cases where the latest/preferred method is detectable, but not detrimental, a warning may be generated to inform the reporter on the details, but the record will still be accepted and processed by the system.

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7.4.1. Order Event Feedback

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Order Event Files, Order Event Feedback - Compliance User: Industry Members - Keywords: - Ingestion, - Linkage Discovery, - -

The act of processing order events has multiple stages: ingestion and linkage discovery.

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During the ingestion phase, each record will be checked for proper formatting (JSON field names and values, CSV values in proper columns, etc) and data contents. The defined JSON schemas for each record type will be used to validate every field of each record. The schema defines the format of each record and the data types and acceptable ranges of each value. In addition, it defines which fields are mandatory.

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Fields whose value depends on context (and are not defined in the schema) will be validated by explicit rules to make sure that all requirements for their processing are followed.

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Order events will be checked for both internal consistencies and valid relationships when referencing other orders or events from the same reporter.

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The full lifecycle will be generated from the full set of order events, and any order that is not fully linked will be flagged as an error.

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CAT will not completely reject a file at the ingestion or linkage discovery stage (once it passes the record count validation). Any file that passes the basic file integrity check will be fully scanned, and feedback will be provided for each of the records in the file.

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Receipts will be generated for each phase. The feedback files will have the following extensions for each stage:

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• INGESTION - .ingestion

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• LINKAGE DISCOVERY - .linkage

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The feedback files will contain the following fields:

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• CAT Submitter ID

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• CAT Reporter ID

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• Timestamp of Receipt

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• Date - Calendar date of the events/file

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• Stage - INGESTION or LINKAGE_DISCOVERY

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• Status - Success if all records in the file were accepted, Failure if some or all records were rejected, or Warning if some or all records have warnings

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• Number of Accepted Records - this stage only

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• Number of Rejected Records - this stage only

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• Reject Filename - if present, contains the relative name of the file in the downloads/failures directory containing records that were rejected.

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• Feedback Version - the version of feedback file schema

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• Failures - a repeating group, each containing:

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• Severity - WARNING or ERROR

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• Failure Code

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• Failure Description

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• Original Record Index - if applicable, the 0-based byte index of the record in the submitted file

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• Reject Record Index - if applicable, the 0-based byte index of the record in the Reject Report

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• Firm ROEID - the value reported in the firmROEID field in the original Order Event if populated (otherwise blank)

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The following is an example JSON object for a successful OrderEvents ingestion:

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CSV presentation:

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Line 0 SUBID,MYID,20170307T153552.000001089,20170307,INGESTION,Success,21 4513134,0,0.1

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The following is an example JSON object for an unsuccessful OrderEvents normalization:

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CSV presentation:

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Line 0 SUBID,MYID,20170307T153552.000001089,20170307,INGESTION,Failure,21 4513132,2,MYID_20170307_OrderEvents_000002.rejects.pgp,0.1

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Line 1 ERROR, OE.INGEST.014,Invalid value for TIF,123456,DESKP123456

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Line 2 WARNING,OE.INGEST.009,Symbol has been delisted,654321,1234, DESKC56789

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7.5. Co rrectio ns

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections - Compliance User: Industry Members - Keywords: - correction data files, - -

Corrections may be made manually via the web portal or uploading correction data files. If the entire file was rejected, then corrections should be submitted as repair records.

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Corrections are due by T+3 at 8AM, where T is the CAT Trading Day. However, corrections may be made at any time, even if beyond the error correction timeframe.

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7.5.1. Repair Records

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Repair Records - Compliance User: Industry Members - Keywords: - correction data files, - Repair of Data Files, - Reject Files, - -

Repair records may be submitted to correct or delete a previously submitted record. Both records that have been previously rejected and records that have already been accepted may be repaired.

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Repair records should be submitted in a repair file in the same format (JSON or CSV) as the original file requiring corrections. (Reporters will not be allowed to submit a JSON repair file if the original file was submitted in CSV and vice versa.) The repair file may contain repair records from multiple original files, as long as all repair records for the same calendar date. The repair filename must contain the same Reporter ID, date (calendar date) and marked as "OrderEvents"', with the string "Corrections" appended, as well as the sequence number of the correction file. For example, if the original filenames with errors were MYID_20170101_OrderEvents_000123.[json|csv]and MYID_20170101_OrderEvents_000130.[json|csv] then the repair filename may be MYID_20170101_OrderEvents_Corrections_000001.[json|csv].

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Metadata for the repair file may be submitted as its own meta file or as a metadata 'block' within a combined metadata file.

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Metadata for the repair record should be valid for the repair record file, not the original files being repaired. For example, the Encrypted Hash and Encrypted Size should be the hash and size of the repair record file.

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Each repair record will uniquely identify a record to repair using the 0-based index of the original record, combined with the original file number. If the record to be repaired cannot be identified, the repair record will be rejected. If a feedback file has a failure file associated with it, then the index will be pre-populated on Correction Records in the failure file to ease repair submissions. Otherwise, if correcting or deleting non-rejected records, the submitter will need to populate these fields itself.

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Reject files (as indicated by the rejectFile field on some feedback records) can be used to submit corrections. Since the files are pre-populated with Correction Records, a file only needs to be downloaded, the appropriate changes to the contents of the record(s) made, and the file submitted with the appropriate file name.

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Repair record files may contain delete and correction records only. If an invalid record type is detected in the file, then the entire file will be rejected.

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7.5.2. Submitter Created Repair File Structure

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure - Compliance User: Industry Members - Keywords: - Original Data File, - -

In order to locate the original data file(s) to be corrected, the Reporter must list the original file numbers (of the original data file being corrected) in the metadata of the correction files. For example, if the correction file (correction file name: MYID_20170307_OrderEvents_Corrections_000001.JSON) contains the corrections or deletions for the following original data files:

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• origFileName:"MYID_20170307_OrderEvents_000123.json"(origFileNumber=000123)

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• origFileName:"MYID_20170307_OrderEvents_000130.json"(origFileNumber=000124)

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Then metadata for this correction file must include "origFileNumber": [000123,000124]

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For example:

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The repairs records in the correction file are organized in a record change list. The repairs should be grouped by original file number.

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In the CSV presentation, origFileNumber will be flattened into the first column of each line, and the repairRecords will be starting from the next columns. For the examples above, the CSV presentation will look like below.

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Line 0 000123,DEL,456

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Line 1 000123,DEL,5098

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Line 2 000124,DEL,9005

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Line 3 000124,DEL,12345

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7.5.2.1. Delete Record
- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Delete Record - Compliance User: Industry Members - Keywords: - Record Type, - Original Record Index, - -

A delete record must contain the following fields:

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• Record Type - DEL

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• Original Record Index - the 0-based index of the record in the original file

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The following is an example delete record:

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7.5.2.2. Correction Record
- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Correction Record - Compliance User: Industry Members - Keywords: - Record Type, - Original Record Index, - Replacement Record, - -

A correction record must contain the following fields:

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• Record Type - COR

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• Original Record Index - the 0-based index of the record in the original file

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• Replacement record - the corrected record

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The following is an example correction record:

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7.5.2.3. Repair File Sample
- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Submitter Created Repair File Structure, Repair File Sample - Compliance User: Industry Members - Keywords: - JSON, - -

Please see a sample of a repair file in JSON below:

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CSV presentation:

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Line 0 000123,DEL,456

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Line 1 000123,DEL,457

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Line 2 000124,COR,567,MENO,CORO98765,20170801T143031.123456,false,,, XYZ,O12345,N,O,,Buy,10.01,500,,LMT,DAY,REG,,false,PROP456,O,,, false,N,,,,,,,,,,,

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7.5.3. rejectFile (CAT Provided) Format

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, rejectFile (CAT Provided) Format - Compliance User: Industry Members - Keywords: - CAT Provided Format, - -

The rejectFile that can be accessed in downloads/failures will be pre-populated with Correction Records. Below is an example of the rejectFile:

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In the example above, two correction records are included and pre-populated with the original records as they were submitted. The submitter or reporter may simply modify the erroneous data elements, rename the file and submit it to CAT as the correction file.

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Below is the CSV format presentation.

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Line 0 COR,567,MENO,DESK98765,20170801T143031.123456,false,,,XYZ,O12345, N,O,,Buy,10.01,500,,LMT,DAY,REG,,false,PROP456,O,,,false, N,,,,,,,,,,,

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Line 1 COR,8965,MENO,DESK12345,20170801T143035.123456,false,,,ABC,O56789, N,O,,Buy,100.01,200,,LMT,DAY,REG,,false,PROP456,O,,,false, N,,,,,,,,,,,

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7.5.4. Repair Record Feedback

- Topic: CAT Reporting Technical Specifications for Industry Members, Feedback and Corrections, Corrections, Repair Record Feedback - Compliance User: Industry Members - Keywords: - Record Files, - -

Repair record files will receive the same types of feedback as the file being repaired. Feedback for the repair records will be provided no later than noon T+3.

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Note that if one record needs to be corrected more than once, all corrections must refer to the original record by the original file number (origFileNumber) and record index (recordIdx). If multiple corrections are submitted for one original record, the most recent correction - the correction file with the highest file number - will be treated as the valid version.

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For example, if the Reporter submits a correction for original file MYID_20170307_OrderEvents_000123 (fileNumber = 000123, recordInd = 456) in a correction file MYID_20170307_OrderEvents_Corrections_000001. And later the Reporter desires to correct the same record again that overwrites the previous correction. Then the second correction (correction file name: MYID_20170307_OrderEvents_Corrections_000009) must still reference to the original file number and record index - fileNumber 000123 and recordInd 456. Between the two correction files, the one with larger file number (000009) will be treated as the most recent valid version of the record.

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8. Testing

- Topic: CAT Reporting Technical Specifications for Industry Members, Testing - Compliance User: Industry Members - Keywords: - CAT, - Industry Member, - CAT System, - -

CAT will provide an environment for testing that mirrors the current functionality of the CAT production environment, as well as including functionality for the next release version of the CAT environment when available. The CAT testing environment will automatically determine which specification version Industry Members and CAT Reporting Agents are using for submissions. If error reporting formats change, Industry Members and CAT Reporting Agents will receive feedback in the current and new specification via ftp, as well as have access to current/new web portal urls for specification changes that impact the web portal. Current/new connectivity changes will also be supported concurrently.

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The testing environment performs lifecycle linkage, and Industry Members and CAT Reporting Agents are encouraged to coordinate testing with their counterparties so as to test lifecycle linkage with their counterparties. Without simultaneous contra-party reporting in the test environment, Industry Members and CAT Reporting Agents will not be able to test linkage with their counterparties.

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Industry Members and CAT Reporting Agents should test their submissions using the testing environment before they begin submitting to the production environment.

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The test environment is available 24 hours a day, 6 days a week. Refer to the CAT website for contact information and hours of operation for support.

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Industry Members and CAT Reporting Agents connect to the test environment in the same manner they would connect to the production environment. However, for the connection to the test environment, one or more alternate IP/domains may be used.

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Testing does not relieve an Industry Member of its responsibilities to submit production data to the CAT System.

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9. Additional Information

- Topic: CAT Reporting Technical Specifications for Industry Members, Additional Information - Compliance User: Industry Members - Keywords: - Public Website, - -
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9.1. Public Website

- Topic: CAT Reporting Technical Specifications for Industry Members, Additional Information, Public Website - Compliance User: Industry Members - Keywords: - www.catnmsplan.com, - -

The CAT Public Website, www.catnmsplan.com, is available via the public internet, and is hosted outside the CAT secure network. The CAT Public Website provides information about the CAT, such as a link to SEC Rule 613, Technical Specifications, FAQs, training materials, and CAT Help Desk contact information.

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Web announcements will be made available on the public website (www.catnmsplan.com). You can also subscribe to receive email notifications regarding changes to the website. These announcements are used to post information related to the operation of CAT.

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Please contact CATNMSIO@deloitte.com for any questions and/or feedback regarding this document.

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pubdate: February 28, 2019 effdate: N/A -

Appendix

- Topic: CAT Reporting Technical Specifications for Industry Members, Appendix - Compliance User: Industry Members - Keywords: - Change Release Management Process, - Clock Synchronization Requirement, - Representative Order Linkages, - CAT Date Definitions and Reporting Guidelines, - Failure Codes, - -

A. Change Release Management Process

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Following publication of version 1.0, changes to this Industry Member Technical Specification will be released as follows:

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• All proposed amendments to the Technical Specifications will be made in accordance with the CAT NMS Plan, including being approved or deemed approved (as applicable) by the CAT NMS, LLC Operating Committee.

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• Prior to the go-live date for any system changes set forth in the Technical Specifications:

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o A new Technical Specifications will be posted to the CAT Public Website, www.catnmsplan.com.

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o A notice will be posted on the CAT NMS Plan Public website with a summary of changes, the go-live date for the changes and links to relevant information.

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o One or more email alerts will be sent to CAT Reporters with a summary of changes set forth in the revised Technical Specifications, the go-live date for the changes and links to relevant information.

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o Industry Members will be permitted to perform testing of the revised Technical Specifications in advance of the go-live date for the changes. [Information on such testing will be set forth in the notices and alerts described above.]

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o As the go-live date approaches, Industry Members will be able to conduct testing and will receive support from the Plan Processor to prepare for production reporting using the revised Technical Specifications format. The revised Technical Specifications will include a summary list of changes as well as a table listing the specific areas of the document where the changes have been made.

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B. Clock Synchronization Requirement

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In previous sections, details are described regarding Order Events and data elements. Timestamp, as one of the required data elements for each order event, must be correctly reported by Industry Members at predefined granularity. This section provides an overview of the corresponding clock synchronization requirements applicable to Industry Members.

-

In order to comply with applicable requirements of Clock Synchronization and correctly record the Timestamp fields for order events. Industry Members are required to synchronize Business Clocks at a minimum to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology (NIST) and to maintain such synchronization. Business clocks that are solely used for Manual Order Events or for the time of allocation on Allocation Reports must be synchronized at a minimum to within a one second tolerance.

-

The tolerance includes:

-

• The difference between the NIST standard and a time provider’s clock;

-

• Transmission delay from the source; and

-

• The amount of drift in the Participant's clock.

-

To ensure the accuracy of timestamps for Reportable Events, Industry Members must document and maintain their synchronization procedures for Business Clocks. Industry Members must keep a log of the time when they synchronize their Business Clocks and the results of the synchronization process. This log should include notice of any time a Business Clock drifts more than the applicable tolerances specified above. Such log must include results for a period of time of not less than five years ending on the then current date, or for the entire period for which the Industry Member has been required to comply with this Rule if less than five years. Industry Members must also certify their compliance with these clock synchronization requirements and report violations according to requirements established by the Operating Committee.

-

Any time provider and technology may be used for clock synchronization as long as the Business Clocks are in compliance with the accuracy requirement.

-

If additional details are needed, please refer to the Clock Sync User Guide to be published, or to Participants' applicable rules.

-

Note: The tolerance for clock synchronization does not impact the amount of time allowed for CAT reporting. CAT does NOT require Industry Members to report order information within 50 milliseconds of receiving an order.

-

C. Representative Order Linkages

-

The CAT NMS Plan requires that customer orders be linked to representative orders created in firm accounts for the purpose of facilitating the execution of a customer order. This Appendix outlines reporting requirements for creating linkages between customer and representative orders.

-

Phase 2a Requirements

-

1. Representative Order Reporting

-

In Phase 2a, representative orders must be reported to CAT and marked as a representative order. Representative orders are identified using the representativeInd field on New Order events.

-

Allowed values for this field include:

-

Y Representative order, linkage required

-

YS Representative order, linkage required; details in supplement event

-

YF Representative order, linkage required in future phase

-

YP Representative order, pricing guarantee, linkage not required

-

N Not a representative order

-

O Options Combined Order

-

2. Representative Order Linkages

-

In Phase 2a, linkage is required between the representative street side order and the order being represented when the representative order was originated specifically to represent a single order (received from a customer or another broker-dealer) and there is:

-

1) an existing direct electronic link in the Industry Member's system between the order being represented and the representative order, and

-

2) any resulting executions are immediately and automatically applied to the represented order in the Industry Member's system

-

Linkages are required between the customer/clients order and the representative order for both executed and unexecuted orders. Executed orders must also have a link between the Order Fulfillment Event for the customer/client order and the representative order from which the fill came.

-

The following fields are used in the linkage process:

-

At the Order Level

-

• representativeInd indicates if an order was originated to represent a customer/client order

-

• aggregatedOrders specifies the original order IDs and quantities being consolidated in the representative order

-

At the Order Fulfillment Level

-

• orderID contains the firm side order that was used to fill the customer order

-

• fulfillmentLinkType indicates whether there is order level and trade level linkage, only trade level linkage (e.g., fill from the pre-existing customer order), or why the firm side details are not present

-

Representative Order Marking and Linkage Requirements by Phase

-

Single Order Scenarios

-

The table below details requirements for both linkage and marking of a Representative Order in Single Order scenarios. These requirements are NOT applicable in situations where an electronic link does not exist between the Industry Member's OMS and EMS. Please refer to Data Dictionary for relevant field values. Pease refer to the CAT Industry Member Reporting Scenarios document for further information on how the relevant field values should be populated for each scenario.

- - -

Aggregated Order Scenarios

-

[Placeholder for Phase 2c. Aggregated Order Reporting will be finalized and included in future version of the specification.]

-

D. CAT Date Definitions and Reporting Guidelines

-

The following key date terms are used throughout the document for reporting instructions:

-

• eventTimestamp: The time of the order handling or execution pursuant to Section 6.8 of the CAT NMS Plan (e.g. origination, receipt, etc., depending on the respective order event). The time is reported as per the calendar date of the order event.

-

• date (Linkage Keys): The date used for linkage keys is the date portion of the eventTimestamp (calendar date)10.

-

• date (File Name): The date used to create file names is the calendar date for all events in the file. The file must only contain records with the same calendar date as the file name.

-

• CAT Trading Day: Trading Day for Industry Members is defined as beginning immediately after 4:15:00PM and no fractions of a second Eastern Time on one trade date and ending at exactly 4:15:00PM and no fractions of a second Eastern Time on the next trading date.

-

• CAT Reporting Due By Date: All events that occurred by 4:15PM on one Trading Day must be reported by 8:00AM the following Trading Day.

-

Order Event Times and Reporting Deadlines

-

The table below illustrates the reporting deadlines for Order Events across multiple calendar days and CAT Trading Days.

- -

Order IDs must be unique within the same calendar date. In the table above, the orderID in row 1 and 2 are distinct since both orders have a calendar date of 9/12. The Trading Day is not used for determining orderID uniqueness, as illustrated in rows 5 and 6.

-

The Trading Day for Industry Members is defined as starting 1 millisecond after 4:15PM on one trade date and ending 4:15PM on the next trade date. As shown in rows 1 and 2, events with a timestamp after 4:15PM (row 2) are considered to be the following trading date and are not due until T+1 at 8:00AM. Alternatively, Industry Members may submit one file one file per calendar day (the orders on rows 1 and 2 can both be submitted on a 9/12 file). The Trading Day only exists to determine the reporting deadline of an event, it does not impact the date used to create linkage or the file name.

-

Weekends are excluded from Trading Days. Events from 4:15PM on a Friday to 4:15PM the follow Monday are the same Trading day, but files must be separated by the calendar date (see rows 4, 5, and 6).

-

Holidays are also excluded from Trading Days. Hypothetically, if Monday 9/17 were are holiday in the example, the next available Trading Day becomes Tuesday 9/18.

- -

E. Failure Codes11

-

The failure code is a machine-parseable string of why a file or record was rejected.

-

Each failure code is divided into a failure category, sub-category and value, joined together by a period.

-

<category>.<sub-category>.<value>

-

• Category and sub-category are defined as the table below. Each category corresponds to the stage of processing at which a file or record was rejected.

-

• Value will be an alphanumeric (12) code that represents a specific error or warning. The list of values will be refined and a complete list of codes and descriptions will be provided.

- -

A failure code may be used for warnings or errors, distinguished by the severity field in the failure report. The failure code itself does not distinguish between a warning (in which a record is accepted but still shows up in the feedback report) and an error (which causes a record to be rejected).

-

A failure description is a human readable field returned with a failure code that informs a user which field failed, the value which was submitted (if applicable to the error), and why it is incorrect. The failure descriptions are specific to the type of field that has a failure and the original value used by the reporter.

-

For example, the following failure code tells the user the severity is an error, the failure was identified on an Order Event file during the ingestion stage, and the field originalOrderID is missing from the record.

- -

The following failure code example was also identified on an Order Event file during the ingestion stage. The description informs the user that the value submitted is invalid as it was more than 40 characters in length.

- -

Below is a sample of Failure Codes/Descriptions.

-

Not that this is not the final list nor a complete list. The code values will be refined to lower granularities.

- -

F. Glossary

- -

G. Data Dictionary

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
-
fn -

1 Customers are defined in SEC Rule 613(j)(3) as: (i) the account holder(s) of the account at a registered broker-dealer originating the order; and (ii) any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

-
-
fn -

2 In order to create the linkage key between Industry Member Order Route Event (potentially Order Modify Route Event in 2c) and Participant Order Modified event, a change is planned for future phases of the Participant reporting - adding routingParty, session and routedOrderID to Participant Order Modified event.

-
-
fn -

3 Please see FAQ G4 (https://www.catnmsplan.com/faq/#faqManOrd) for additional information.

-
-
fn -

4 Note - this document refers to orders received from CAT Reporters as "client orders," and orders received from non-CAT Reporters, including non-US broker-dealers, as "customer orders."

-
-
fn -

5 A representative order is an order originated in a firm owned or controlled account for the purpose of working a customer/client order. Please see FAQ F1 (https://www.catnmsplan.com/faq/#faqRepOrd) for additional information.

-
-
fn -

6 “Simple Electronic Option Orders” mean orders to buy or sell a single option that are not related to or dependent on any other transaction for pricing or timing of execution that are either received or routed electronically by an Industry Member CAT Reporter. “Electronic Paired Option Orders” mean electronic option orders that contain both the buy and sell side that is routed to another Industry Member or exchange for crossing and/or price improvement as a single transaction on an exchange. Further, the events related to Simple Electronic Option Orders subject to reporting in Phase 2b are limited to those events which involve electronic receipt of an order, or electronic routing of an order. Electronic receipt of an order is defined as the initial receipt of an order by an Industry Member in electronic form in standard format directly into an order handling or execution system. Electronic routing of an order is the routing of an order via electronic medium in standard format from one Industry Member’s order handling or execution system to an exchange or another Industry Member.

-

For more details, please refer to the CAT FAQ K2 (https://www.catnmsplan.com/faq/#faqOpt).

-
-
fn -

7 For Industry Members reporting in CSV, the greyed out data elements will take empty columns if not populated.

-
-
fn -

8 Note - this document refers to orders received from CAT Reporters as "client order," and orders received from non-CAT Reporters, including non-US broker-dealers, as "customer orders."

-
-
fn -

9 Note that the Trading Day definition for Participants is different. It starts on 1 millisecond from 12:00AM of T, and ends at 12:00AM of T+1.

-
-
fn -

10 In the scenario when an order event needs to be linked to a prior event on a different date - e.g. modify a GTC order on a prior day - an additional field “priorOrderDate” is reported on the event and will be used in linking. However, it doesn’t impact the eventTimestamp or date in file name of the event itself.

-
-
fn -

11 Note that this section provides the structure of how failure codes are generated and concatenated. A final list of specific values and descriptions will be published when finalized.

-
+

SEC RULE 613 ROLLOUT PLAN

+

Event: CAT Processor Selected by NMS Plan Participants

+

Implementation Date: Within two months after effectiveness of the approved NMS Plan (January 17, 2017)

+

Event: Business Clock Synchronization for SROs and Broker-dealers

+

Implementation Date: Within four months after effectiveness of the approved NMS Plan (March 15, 2017)

+

Event: SROs begin submitting data to the central repository

+

Implementation Date: Within one year after the effectiveness of the approved NMS Plan (November 15, 2017)

+

Event: SROs must implement enhanced surveillance using CAT data

+

Implementation Date: Within 14 months after effectiveness of the approved NMS Plan (January 15, 2018)

+

Event: SRO members, except small members, must being submitting data to central repository

+

Implementation Date: Within two years after effectiveness of the approved NMS Plan (November 15, 2018)

+

Event: Small SRO members must begin submitting data to the central repository

+

Implementation Date: Within three years after effectiveness of the approved NMS Plan (November 15, 2019)

\ No newline at end of file diff --git a/spider/files/data000007.html b/spider/files/data000007.html index 3e08c5c..7d9be61 100644 --- a/spider/files/data000007.html +++ b/spider/files/data000007.html @@ -1,316 +1,4570 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: periodic - document_title: CAT NMS, LLC Advisory Committee - document_type: Advisory - source: US/SEC/Advisory/LLC Advisory Committee - source_type: LLC Advisory Committee + content_type: compilation + document_title: CAT Participant Technical Specifications v1.7.1 + document_type: Specifications + source: US/SEC/Specifications/Technical Specifications + source_type: Technical Specifications language: English citation: N/A -
pubdate: February 28, 2019 effdate: N/A -

CAT NMS, LLC Advisory Committee

- Topic: CAT NMS Plan, News, CAT NMS, LLC Advisory Committee - Compliance User: Broker-dealers +
pubdate: September 09, 2018 effdate: N/A +

CAT Participant Technical Specifications v1.7.1

+ Topic: CAT Participant Technical Specifications v1.7.1 + Compliance User: Self-Regulatory Organizations Keywords: - SRO, - CAT NMS Plan -Section 4.3, + Consolidated Audit trail, CAT NMS plan, - Role, - Member, - Organization, + Sec Rule 613, -

The CAT NMS Plan requires the establishment of an Advisory Committee to advise the SROs on the implementation, operation, and administration of the CAT, including items such as technical specifications, reporting functionality, and the possible expansion of the CAT to other securities.

-

The SROs have selected the following individuals, as per section 4.13 of the CAT NMS Plan, to serve on the Advisory Committee:

- +

CAT Reporting Technical

+

Specifications for

+

Participants

+

09/09/2018

+

Version 1.7.1

+
pubdate: September 09, 2018 effdate: N/A +

Executive Summary

+ Topic: CAT Participant Technical Specifications v1.7.1, Executive Summary + Compliance User: Self-Regulatory Organizations + Keywords: + CAT NMS plan, + Sec Rule 613, + +

The CAT is a Consolidated Audit Trail that tracks orders throughout their lifecycle and identifies the exchanges and broker-dealers handling them, thus allowing regulators to more efficiently and accurately track activity in eligible securities — those under the jurisdiction of the Securities and Exchange Commission (the "SEC") — throughout the U.S. markets. The CAT is created by a joint plan (CAT NMS Plan) of the Plan Participants or simply "Participants."

+

Participants are required to report order events into CAT. Reportable order events include, but are not limited to: accepted orders, routes, replaced orders, canceled orders and executions. All Participants are responsible to submit reference information, including the symbols that are active for the exchange on a particular day, and the Participants' member list.

+

This document provides Participants with information to understand their responsibilities to comply with SEC Rule 613 and CAT NMS Plan, and describes the requirements for reporting data to CAT, including detailed information about data elements and file formats of each reportable event. It also describes how Participants should submit files to CAT, including access instructions, network and transport options, and testing requirements.

+

This document does not include information for Industry Members. A separate document, CAT Reporting Technical Specifications for Industry Members, will be published to provide technical specifications for Industry Members.

+

Contents and Structure

+ +

Revision / Change Process

+ +
+
pubdate: September 09, 2018 effdate: N/A +

1. Introduction

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction + Compliance User: Self-Regulatory Organizations + Keywords: + CAT Reporting Technical Specifications, + Industry Members Reporting Order Events, + +

This document provides Participants with the necessary information to fulfill their reporting obligations to CAT in compliance with SEC Rule 613 and the CAT NMS Plan.

+

The document is structured as follows:

+

Section 1 Introduction provides an overview of the document, rules and requirements, compliance dates, and change release management processes. In addition, it provides descriptions of identifiers and data types referenced in this document.

+

Section 2 Reference Data describes details for reporting member information, equity symbols, options symbols and corporate actions.

+

Section 3 Special Data Elements and Common Events provides detailed descriptions of reportable data elements that are common to multiple events, and how linkages and lifecycles are created.

+

Section 4 Events for Stock Exchanges provides details regarding the data which must be reported to CAT by each stock exchange Participant. In particular, it details out the Reportable Order Events, explains what data elements are necessary and how those elements are to be collected and reported to CAT.

+

Section 5 Events for Options Exchange provides details regarding the data which must be reported to CAT by each options exchange Participant. In particular, it details out the Reportable Order Events, explains what data elements are necessary and how those elements are to be collected and reported to CAT.

+

Section 6 Other Reporting provides reporting requirements and data elements for events that are not covered in sections 4 and 5 (e.g., TRF reporting).

+

Section 7 Stock Exchange Examples and Section 8 Option Exchange Event Examples provide a representative sample of reporting scenarios and examples for both stocks and options. In each scenario, a detailed description is provided of the reportable order events, which data elements should be reported in each event and how the files are formatted. These sections are intended to provide reporters with a set of examples regarding reportable data elements and formats.

+

Section 9 CAT Submission Process provides information regarding data formats and how to submit information and files to CAT. It includes a general data flow overview, registration process, network and transport options, and CAT feedback access and reporting hours. Additionally, an overview of CAT data security standards is provided. In this section, reporters can get detailed instructions of how to connect and submit information to CAT.

+

Section 10 Feedback and Corrections describes the procedures for reporters to obtain feedback following data submission, and how to submit corrections if necessary. This section addresses feedback files, file acknowledgement, basic file integrity, and feedback for reference data and order events. It also describes information on how to submit corrections and repairs to CAT.

+

Section 11 Testing describes the technical details of the test environment and testing procedures required of reporters. All reporters are required to test their submissions thoroughly before submitting to the CAT Production environment.

+

Section 12 Additional Information provides descriptions about the CAT public website and how to get help from the Service Desk.

+

Appendix sections provide important supplemental details including:

+

A. Clock Synchronization Requirements provide information on how each Participant is expected to maintain the required granularity and accuracy of the Business Clock.

+

B. Failure Messages will come in the form of a machine-parseable description of why a file or record was rejected

+

C. Corporate Action Formats will be reported by each exchange as-is. Examples from various exchanges are listed in this section.

+

D. FINRA Trade Reporting Facility ("TRF") Fields

+

E. Market Move Scenarios which includes use cases for symbol renames and movement between exchanges

+

F. Encryption Example which provides an example of how to submit encrypted files

+

G. Data Dictionary that includes detailed explanations and definitions of each data reference used throughout the technical specifications.

+
pubdate: September 09, 2018 effdate: N/A +

1.1. Rule Overview / Requirements

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements + Compliance User: Self-Regulatory Organizations + Keywords: + Rule 613, + Securities Exchange Act of 1934, + Self-Regulatory Organizations, + National Market System (‘NMS’) plan, + +

As previously stated, this document does not include information for Industry Member reporting. A separate document - CAT Reporting Technical Specifications - Industry Members Reporting Order Events - will be provided for this purpose.

+
pubdate: September 09, 2018 effdate: N/A +

1.1.1. SEC Rule 613

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements, SEC Rule 613 + Compliance User: Self-Regulatory Organizations + Keywords: + CAT NMS plan, + +

The Securities and Exchange Commission approved to adopt Rule 613 under the Securities Exchange Act of 1934 to require national securities exchanges and national securities associations (Self-Regulatory Organizations or SROs) to submit a national market system (‘NMS’) plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of reportable securities — all NMS securities and over the counter ("OTC") Equity securities under SEC jurisdiction — that would capture customer and order event information for orders in reportable securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

+

Refer to SEC Rule 613, available at: https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483188 for more details.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.1.2. CAT NMS Plan

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements, CAT NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + CAT Public Website, + +

After a series of amendments since the initial CAT NMS Plan was filed on September 30, 2014, the Commission unanimously approved the CAT NMS Plan on November 15, 2016.

+

As per the Plan, Participants must begin reporting to CAT by November 15, 2017.

+

For additional information, please refer to CAT NMS Plan at http://www.catnmsplan.com/.

+
+
+
pubdate: September 09, 2018 effdate: N/A +

1.2. Change Release Management Process

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Change Release Management Process + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + +

Changes to this technical specification will be released as follows:

+

• Prior to the go-live date for system changes

+

- A new specification will be posted to the CAT Public Website

+

- A notice will be posted on the website with a summary of changes and links to relevant information.

+

- One or more email alerts will be sent to reporting firms with a summary of changes and links to relevant information.

+

- In some cases, CAT may accept production reporting using the new specification in advance of the go-live date.

+

- Firms that have not conducted testing or production reporting using the new technical specification format will receive support from CAT as the go-live date approaches.

+

• The new technical specification will include a summary list of changes as well as a table listing the specific areas of the document where the changes have been made.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.3. CAT Identifiers

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers + Compliance User: Self-Regulatory Organizations + Keywords: + CAT Reporter ID, + +

CAT uses a number of identifiers, many of which readily convey their meaning from the context in which they are used. The subsections below include terms associated with the entities that will report data into the CAT and their respective roles. As shown in the diagram below, Exchange ID is a subset of Participant ID, which is a subset of Reporter ID.

+ +
pubdate: September 09, 2018 effdate: N/A +

1.3.1. Reporter ID

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Reporter ID + Compliance User: Self-Regulatory Organizations + Keywords: + Participant ID, + +

Each entity which reports into CAT will be assigned a unique identifier: a CAT Reporter ID. This ID will uniquely identify each reporter, including plan participants, participant members, and associated reporting facilities. The database of CAT Reporter IDs will be made available both as a downloadable file on the CAT website and through the web portal API.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.3.2. Participant ID

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Participant ID + Compliance User: Self-Regulatory Organizations + Keywords: + Exchange ID, + +

+

The Participant ID is an ID assigned by CAT to each plan participant. The value will be the same as the participant's Reporter ID. However, the use of Reporter ID could be any CAT reporter, while the use of Participant ID means the Reporter ID of a plan participant only.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.3.3. Exchange ID

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Exchange ID + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + CAT, + Member Alias, + CAT Reporter ID, + +

The Exchange ID is an ID assigned by CAT to each stock/options exchange. The actual value will be the same as the exchange Participant ID and Reporter ID, but, as indicated in the diagram, Exchange ID is a subset of Participant ID, which is a subset of Reporter ID.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.3.4. Member Alias

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Member Alias + Compliance User: Self-Regulatory Organizations + Keywords: + ASCII decimal 61, hex 3D, + ASCII decimal, + 124, hex 7C, + ASCII 44, hex 2C, + ASCII decimal 34, hex 22, + +

Each SRO will assign unique IDs to its industry members. These IDs are essentially aliases for CAT reporters so that reporting firms can use existing identifiers when reporting market events to CAT. It is important that both the member and SRO are aware of the assigned IDs and when they should be used in various reports to CAT.

+

Each SRO has autonomy in assigning their IDs, and the same ID could possibly be assigned to different industry members across SROs. Furthermore, a particular member may have multiple aliases assigned by the same SRO. Thus, the alias is only valid in combination with the SRO that assigned the ID. Specifically, when an exchange receives a routed order from one of its members, both the routing member and the exchange must report the same Member Alias in their reports to CAT in order to properly link the reports to the same order lifecycle.

+

An industry member can wind up having the same alias value assigned by multiple SROs. This is fine because when an alias is used, it is always used in a manner that identifies the SRO that assigned the alias (either by explicit designation, or implicitly by context).

+

For example, consider three firms (Firm A, Firm B, and Firm C) and three SRO participants (Participant A, Participant B, and Participant C), and the following table of SRO-assigned member IDs.

+ +

Note that Member Alias FRMA is assigned to Firm A by both Participant A and Participant C, and Member Alias FRMB is assigned to two different firms by two different participants. While the same alias is used multiple times, these are valid mappings because the same alias is not assigned multiple times within a participant. Also note that Firm B is not a member of Participant B, and so there is no corresponding mapping.

+

Thus, each firm will have at least one alias for each SRO in which they have membership. The value may or may not be the same across all participants. When Participant A refers to Firm C, it will use the alias FRMC. Likewise, when Firm C refers to itself in relation to Participant A, it will use the alias FRMC.

+

Note that industry members can have multiple Member Aliases, but they will also be assigned a unique CAT Reporter ID. CAT will handle mapping the various SRO-assigned Member Alias values to synchronize them to the same unique CAT Reporter ID assigned to the member firm. Further, note that member dictionary entries apply to data uploaded for the same business date as the member dictionary itself (values do not have to be the same from day to day).

+
+
+
pubdate: September 09, 2018 effdate: N/A +

1.4. Name Value Pairs

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Name Value Pairs + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + JSON, + CSV, + +

Some fields are described as containing name/value pairs. This means a list of zero or more attributes, where each attribute is either a name with no value, or a name with an accompanying value such that the name and value are separated by a single equal sign (ASCII decimal 61, hex 3D). Multiple attributes are separated by the pipe symbol (ASCII decimal 124, hex 7C). If an attribute is boolean in nature, it can optionally be represented as a name alone, where its value is implied by its presence (true) or absence (false).

+

The name part is the string up to the first pipe symbol or equal sign. Names must not contain commas (ASCII 44, hex 2C), pipes, equal-signs, or double-quotes (ASCII decimal 34, hex 22).

+

If the name terminates with a pipe, it is a boolean value, and its presence indicates true. If the name terminates with an equal sign, the value must follow.

+

The value part is the string starting with the character just after the equal sign, up to either a pipe symbol or the end of the string. Values may contain an equal sign, but must not contain commas, pipes or double-quotes.

+

In some cases, the names are free-format, in that they are not defined in the specification. This means that both the name and any value are left up to the discretion of the reporter and the contents are not validated by CAT. Most common, however, is that both the name and the expected values are known, documented in this specification, and validated by CAT.

+

For example, the following JSON represents a hypothetical name/value pair field, with a boolean attribute and a price attribute: { "data": "XYZ|ABC=12.55" }

+

The above format works for both JSON and CSV data entry. However, when submitting data in JSON, a more native JSON style can optionally be used by assigning a JSON object as the value for a Name Value Pair attribute. Note, however, that boolean values must be explicitly set. The above example can alternatively be submitted as:

+

{ "data": { "XYZ": true, "ABC": 12.55 } }.

+
+
pubdate: September 09, 2018 effdate: N/A +

1.5. Fundamental Data Types

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Fundamental Data Types + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + Section 10, + +

CAT will accept two kinds of text-based files: JSON and CSV. The fundamental data types used throughout this document are described below. Other data types are defined in the Data Dictionary.

+

To support both JSON and CSV submissions, CAT will publish a JSON schema file which describes each data type with required representation formats, and a mapping that defines the position in a CSV representation that the data element would assume.

+

A schema will be provided for each data object that can be reported in both JSON and CSV.

+

When a data field is marked as either optional or conditional, some records may not provide values for that field. In such a case, the field is simply not reported as part of the JSON record, or reported as an empty column of a CSV record.

+

Data Types

+ + +
pubdate: September 09, 2018 effdate: N/A +

1.5.1. Data Validation

+ Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Fundamental Data Types, Data Validation + Compliance User: Self-Regulatory Organizations + Keywords: + supplemental data, + +

All data submitted to CAT will be validated based on the defined data type of each item, including proper formatting and range checking. Examples of accepted values are detailed in the above table in section 1.5. Valid values for Choice fields are defined in the Data Dictionary for each data element. Valid data values, ranges, and formats will be specified in the record schema files, which will be used to validate submitted data element values. Records and values which fail validation will be marked as a failure and will be reported as feedback to the Submitting Member as detailed in section 10.

+
+
+
+
pubdate: September 09, 2018 effdate: N/A +

2. Reference Data

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + CAT, + CAT web GUI, + Member Alias, + +

This section describes the various pieces of reference or supplemental data required to be reported by each participant.

+
pubdate: September 09, 2018 effdate: N/A +

2.1. Member Information

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Member Information + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + OTC equities, + FINRA, + JSON, + +

Each SRO must submit to CAT a directory of information for each industry member with which it has a reporting relationship. Each dictionary entry identifies a specific industry member, and assigns one or more IDs to that member. These IDs may be used by the SRO and/or the member when reporting order events to CAT. In general, the industry members listed in the dictionary will also be participant members of the SRO, but this is not always the case. For example, each industry member that submits an order to an exchange must be a registered member of that exchange. However, the exchange may route orders to an industry member that is not a member of that exchange. In either case, the exchange must give at least one Member Alias to each industry member which may appear in any of the order events reported to CAT.

+

Furthermore, certain internal systems or non-industry members may need to be reported to CAT with known identifiers. Such entities will be registered via the CAT web GUI. At the time of registration, a unique ID will be issued for that system, which can be used in the daily membership dictionary.

+

Each member may have multiple aliases, but a specific Member Alias may only be assigned once per SRO. Note that the member dictionary is loaded each day, and the values only apply to that trading day. Thus, Member Aliases could be reassigned on subsequent trading days.

+

The data will be uploaded as a file of newline-delimited JSON objects, one object per member entry. The member dictionary is necessary to process other file uploads, and must be uploaded to CAT no later than 6:00AM Eastern, with entries sufficient to support all reports submitted on that trading day (this is a same-day upload requirement whereas order events are required to be reported by 8:00AM Eastern the following trading day).

+

Member Dictionary Entry

+ + +

The Inactive status can be used if a Participant wants to report a member who may have been temporarily deactivated. If a member is removed, the member may be reported as Inactive or may be not reported at all.

+

The following example shows a potential member dictionary for exchange Exch1 where the first entry represents an industry member that is also a member of the reporting SRO, the second entry represents an industry member that is not a member of the reporting SRO, and the third entry represents the SRO itself, with various facilities that have been given Member Alias values.

+

{

+

"type": "MDE",

+

"reporter": "Exch1",

+

"ID": "1234567",

+

"status": "Active",

+

"memberAliases": [ "FRMA", "FRMA1", "FRMA:U01", "FRMA:U02" ]

+

}

+

{

+

"type": "MDE",

+

"reporter": "Exch1",

+

"ID": "7654321",

+

"status": "NonMember",

+

"memberAliases": [ "FRMB" ]

+

}

+

{

+

"type": "MDE", "reporter": "Exch1", "ID": "123xyz", "status": "Internal", "memberAliases": [ "XXX" ]

+

}

+

{

+

"type": "MDE", "reporter": "Exch1", "ID": "123abc", "status": "Internal", "memberAliases": [ "ZZZ" ]

+

}

+

The next example shows a potential member dictionary for exchange Exch2. Note how the same entities are members of both Exch1 and Exch2, but they may or may not have different Member Alias values with each SRO.

+

{

+

"type": "MDE",

+

"reporter": "Exch2",

+

"ID": "1234567",

+

"memberAliases": [ "FRMZ", "FRMZ:U01", "FRMZ:U02" ],

+

"status": "Active"

+

}

+

{

+

"type": "MDE",

+

"reporter": "Exch2",

+

"ID": "7654321",

+

"memberAliases": [ "FRMB" ],

+

"status": "Active"

+

}

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2. Equity Symbols

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + CAT Symbol ID, + +

CAT will maintain a symbol master for all exchange-listed and OTC equities. Each listing exchange (and FINRA) must provide appropriate updates to the symbol master either through the CAT web user interface, or daily file uploads.

+

Each change to the symbol is persisted as a change event. All normal updates can be accomplished via the file upload mechanism. However, some types of corrections/updates may cause validation conflicts, and must be done via the GUI (and may require a manual override from the help desk). This is done to prevent faulty uploads from erroneously correcting historical events.

+

Note that corporate actions are reported and maintained separately and are not used to maintain the CAT internal symbol master. Thus, the CAT symbol master must be updated explicitly via the web GUI or a daily file upload.

+

The data items for a symbol are represented as a JSON object with the following fields, where the effective range of the date is defined as an inclusive range [beginDate, endDate].

+

Note that the listing symbol upload process applies only to participants responsible for index or listed/OTC equities. See the Market Move Scenarios section in the appendix for discussion about specific examples when an issue is moved from one participant to another.

+
pubdate: September 09, 2018 effdate: N/A +

2.2.1. Adding a New Issue

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Adding a New Issue + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + Symbol Master Restatement, + +

To add a new issue, an Add Symbol Entry record is submitted. Note that this record is for adding a brand new symbol only - one that has never existed in the CAT system.

+

Add Symbol Entry

+ +

This record type is to be submitted when a symbol is assigned to a brand new issue for the very first time. The symbol must not be assigned to any other participant in the beginDate, endDate range. The symbol will be brand new, and will be assigned a new and unique internal CAT Symbol ID. It will not be linked to any other symbol.

+

Once a symbol has been added to the database, it cannot be removed via the API. A request must be made to the CAT support desk to perform such an operation. Even then, a symbol will only be removed if it was a clear error, and the symbol was never activated.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.2. Restating an Issue

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Restating an Issue + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + CAT Symbol ID, + Symbol Master Transfer, + +

An existing symbol can be restated, providing an explicit check that the exchange and CAT have the same information for the symbol. This is accomplished by submitting a Symbol Master Restatement. The fields for a restatement are identical to those for an add. However, it makes explicit the understanding that the symbol is expected to already be present in the system.

+

The values presented in the restatement must exactly match what is in the CAT database, or the record will be rejected.

+

Symbol Master Restatement

+ +
+
pubdate: September 09, 2018 effdate: N/A +

2.2.3. Updating an Issue

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Updating an Issue + Compliance User: Self-Regulatory Organizations + Keywords: + Symbol Master Transfer, + Update Symbol Entry record (USE), + CAT, + +

An issue is updated when any field of an existing issue needs to be changed. Two Symbol Entry objects are passed. The first represents the expected current state of the symbol entry before being updated, and the second represents the new values for the fields that will be updated. The current state of the database must match the expected symbol entry or the update request will be rejected (when comparing name value pairs, the order in which the name/values appear is not considered). If successful, the database will be changed to reflect the updates requested, and the response will contain a complete updated entry.

+

Update Symbol Entry

+ +

The SRO requesting the update must be the current "owner" (i.e., listing participant) of the symbol. All updates are kept, and the history of updates can be queried for a given CAT Symbol ID or a symbol name. Note that an update request will not allow the listing participant to be changed. To change the listing participant of a symbol, submit a Symbol Master Transfer record.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.4. Transferring an Issue

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Transferring an Issue + Compliance User: Self-Regulatory Organizations + Keywords: + daily file upload, + +

To transfer an existing issue from one listing participant to another, the new ownership participant must submit a Symbol Master Transfer request. The request will be validated for data accuracy, and once validated, a transfer will be scheduled inside the system.

+

Symbol Master Transfer

+ +

Transfer requests should be submitted prior to the effectiveDate, in which case the transfer will be scheduled for the night before the effectiveDate. If the effectiveDate is the same date as the record submission, then the request will be applied immediately instead of being scheduled. This use pattern may be necessary at times, but is discouraged as it does not leave much time for review of the changes by all parties and opens a potential race condition window.

+

Current owners are encouraged to release the symbol prior to transfer by submitting an Update Symbol Entry record (USE), and setting the endDate to be the last day they are responsible for the issue. This is especially important if there may be a gap between the time the symbol is delisted and resisted by another exchange.

+

If the current owner has not submitted an update to their endDate when the transfer is applied, then the current owner's endDate will be automatically updated to be one day prior to the effectiveDate in the transfer request.

+

When a transfer is applied, then new endDate will always be 99991231, effectively assigning the symbol to the new listing participant until it is changed.

+

If an optional field is present, that field will be changed to the new value when the transfer has taken place. Otherwise that field will retain its value after the transfer.

+

The submitted record may be rejected when submitted. Among these reasons:

+

• the submitted record contains malformed fields

+

• the listingParticipant is not the participant submitting the request

+

• the combination of ownershipDate, ownershipParticipant, and ownershipSymbol does not reference a valid symbol in the CAT database

+

• the effectiveDate is in the past

+

A report will be available each day, in conjunction with the symbol master report, that contains all activated and pending transfers.

+

If a transfer must take place, but can't be entered into the system for some reason (e.g., the request is being rejected, or it was not submitted in time), then the the resolution can be accomplished by contacting the CAT help desk.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.5. Daily File Uploads

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Daily File Uploads + Compliance User: Self-Regulatory Organizations + Keywords: + symbol master database, + +

Additions, restatements, updates, and transfers can be included in the same file, or they can be submitted in separate files. For an update to be successful, the participant uploading the update must be the owning listing participant, and the "expected" data must exactly match the current state of the system.

+

Order is important within the daily file upload, as each action will be performed in the order in which it appears in the file.

+

For example, a file with the following entries would

+

• Add the brand new listed symbol ABCD

+

• Restate the currently listed symbol BBBB

+

• Change the endDate for symbol CCCC

+

• Transfer ownership of symbol DDDD

+

{

+

"type": "ASE",

+

"listingParticipant": "Exch1",

+

"issueType": "NMS",

+

"symbol": "ABCD",

+

"beginDate": 20170101,

+

"endDate": 99991231,

+

"companyName": "The Absolute Best Company Description",

+

"lotSize": 100,

+

"IPO": false,

+

"test": false,

+

"attributes": "TPG=TG1"

+

}

+

{

+

"type": "SMRST",

+

"listingParticipant": "Exch1",

+

"issueType": "NMS",

+

"symbol": "BBBB",

+

"beginDate": 20170101,

+

"endDate": 99991231,

+

"companyName": "Bob's Big Bad Burgers",

+

"lotSize": 100,

+

"IPO": false, "test": false

+

}

+

{

+

"type": "USE",

+

"expected": {

+

"listingParticipant": "Exch1",

+

"issueType": "NMS",

+

"symbol": "CCCC",

+

"beginDate": 20170101,

+

"endDate": 99991231,

+

"companyName": "Chattanooga Choo Choo Chocolates",

+

"lotSize": 100,

+

"IPO": false,

+

"test": false

+

},

+

"update": {

+

"endDate": 20170515

+

}

+

}

+

{

+

"type": "SMXFR",

+

"ownershipDate": 20170214,

+

"ownershipParticipant": "Exch4",

+

"ownershipSymbol": "D",

+

"listingParticipant": "Exch1",

+

"issueType": "NMS",

+

"symbol": "DDDD",

+

"effectiveDate": 20170525

+

}

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.6. Query the Master List

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Query the Master List + Compliance User: Self-Regulatory Organizations + Keywords: + master symbol list, + CAT, + SRO, + +

After each file upload, the entire contents of the symbol master database will be sent as feedback. Thus, submitting a symbol master file with zero records would result in a feedback file with the current database contents.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.7. CAT Symbol Master

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, CAT Symbol Master + Compliance User: Self-Regulatory Organizations + Keywords: + NYSE, + CAT, + JSON, + +

CAT will provide a start-of-day equity master symbol list at 6:00AM each day. The same master list can be obtained by querying the web API. If modifications to the list are reported during the day (possibly due to corrections or missed additions), the downloadable master list will be updated throughout the day to reflect any such changes. Each file will be named according to the following pattern: EquityMaster_<YYYYMMDDHHMMSS>.json, where YYYYMMDDHHMMSS is the date and time that the file was created. The most recent file for the day will also be accessible via the name EquityMaster_<YYYYMMDD>.json.

+

Each listing participant is expected to have made appropriate updates to the CAT symbol master database by 4:00AM. If such changes have not been made, a ticket must be entered with the CAT help desk so CAT and the SRO can initiate appropriate steps to resolve any issues in time for delivering the master list by 6:00AM.

+

The symbol master file made available to participants will contain all fields for each entry. In particular, it will contain three different record types: Symbol Master Listings, Pending Transfers, and Applied Transfers. Here are examples of each.

+

{

+

"type":"SM", "catSymbolID": 12345,

+

"listingParticipant":"Exch1", "issueType":"NMS",

+

"symbol":"ABCD", "beginDate":"2017-01-01", "endDate":"9999-12-31",

+

"companyName":"The Absolute Best Company Description",

+

"test":false, "lotSize":100, "IPO":false, "attributes":"TPG=TG1"

+

}

+

{

+

"type":"PXFR", "catSymbolID": 11111,

+

"listingParticipant":"Exch1", "ownershipDate": 20170214,

+

"ownershipParticipant": "Exch4", "ownershipSymbol": "X",

+

"listingParticipant": "Exch1", "issueType": "NMS",

+

"symbol": "XXXX", "effectiveDate": 20170525

+

}

+

{

+

"type":"AXFR", "catSymbolID": 22222,

+

"listingParticipant":"Exch1", "ownershipDate": 20170214,

+

"ownershipParticipant": "Exch4", "ownershipSymbol": "Y",

+

"listingParticipant": "Exch1", "issueType": "NMS",

+

"symbol": "YYYY", "effectiveDate": 20170522,

+

"dateApplied": 20170521

+

}

+

The symbol master file made available to industry members will only contain basic information for each symbol in the database: the listing exchange, the symbol in the symbology of the listing exchange, and a flag indicating whether the symbol is a test symbol.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.8. Daily Symbol Dictionary

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Daily Symbol Dictionary + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + unique ID, + +

Most symbols are known universally as the same symbol name. However, some symbols have different kinds of extensions, and are represented differently by different venues. For example, a symbol listed on NYSE as FOO.A could be known elsewhere as FOO/A, FOO A, FOOA, or possibly some other symbology. Different agencies (and CAT reporters) use different symbology formats for internal distribution and generating external reports.

+

CAT processes symbols in the symbology of the listing exchange. Thus, in the previous example, the only symbol accepted by CAT would be FOO.A. If a reporter uses a different symbology internally, each of those symbols will have to be converted to the symbology of the listing exchange.

+

However, to help ease reporting, each reporter can upload a symbol dictionary that allows the reporter to report symbols in whatever symbology is used internally. This means that symbol conversion only has to occur once - in the symbol dictionary - rather than in every reportable event.

+

For example, assume an exchange receives an order for a symbol in the symbology ABC.B, and then routes it to an away exchange, but the away exchange requires the symbol to be represented as ABC B. This exchange would have to process its routing logs to convert each use of ABC B to ABC.B. However, if it loaded a symbol dictionary with a set of aliases, then it could report events with both ABC.B and ABC B and CAT would determine that they meant the same thing.

+

Note that the symbol dictionary is completely optional. If each symbol will be reported in all events in its native symbology, then the reporter would not need to upload a symbol dictionary.

+

Symbol Dictionary Entry

+ +

In the following example, the reporter (MYID)has three internal mappings for the symbol FOO.A: an internal symbol number (345), and two different symbology values (FOO/A and "FOO A").

+

{

+

"type": "SDE",

+

"reporter": "MYID”,

+

"listedSymbol": "FOO.A",

+

"listingParticipant": "Exch2",

+

"symbolAliases": [ "FOO/A", "345", "FOO A" ]

+

}

+

Thus, in reports submitted from this reporter, any events that reported a symbol using symbology FOO.A, 345, FOO A, or FOO/A would all reference the same actual symbol, namely FOO.A, listed by participant Exch2.

+

The symbol dictionary is uploaded as a file of newline delimited JSON objects.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.9. Options Dictionary

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Options Dictionary + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + unique ID, + +

Naming conventions for options can vary among exchanges and trading firms. To reduce confusion and simplify reporting, CAT will allow reporters to submit options reports using a unique ID of type Text(40), as defined by the reporter, for each option. However, this means that each reporter must upload a dictionary every day for which it reports any option quote/ order events. The dictionary is valid only for events reported on the same business day.

+

The options dictionary will include simple option entries and complex option entries, to cover all options utilized in any report submitted to CAT by that reporter on a given date. This file is composed of a series of dictionary entries for each option, with the Option ID that will be used by the reporter for all option reports done on that day.

+

Each Option ID defined in the dictionary must be unique for that reporter on that day, across all simple and complex options. As for reportable order events, Options Dictionary entries can be uploaded throughout the day. When uploaded files are processed, symbol dictionary files and option dictionary files are processed before any order event files for the same uploaded timeframe. Thus, entries can be added dynamically throughout the day.

+

Note that this is not the product definition, but a universal way to reference an options product for the purposes of reporting order events to CAT.

+

The options dictionary is uploaded as a file of newline delimited JSON objects.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.9.1. Option Series Dictionary Entry

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Option Series Dictionary Entry + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + unique ID, + +

The dictionary mapping for an option series (flex or simple) will contain the following information, which allows options events to be reported using the Option ID reported in the dictionary entry.

+

Simple Option Series Dictionary Entries

+ +

For example, the following dictionary entry would be for the January 19, 2018 150.0 Put for BRK class B. Note that the primary deliverable is reported in NYSE symbology because BRK.B is listed on NYSE.

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "12345",

+

"kind": "Standard",

+

"optionsSymbol": "BRKB",

+

"primaryDeliverable": "BRK.B",

+

"underlyingType": "Equity",

+

"expirationDate": 20180119,

+

"strikePrice": 150.00,

+

"putCall": "Put",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.9.2. Option Symbol Changes

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Option Symbol Changes + Compliance User: Self-Regulatory Organizations + Keywords: + Symbols, + +

Changes to symbols stemming from corporate actions can be handled by reporters using Dictionary Entries. Each options exchange should ensure that on the effective date for a corporate action, its Dictionary Entries accurately reflect option symbols with the appropriate numerical suffix when applicable, and it includes any new option symbols created as the result of the corporate action. A detailed corporate action example follows:

+

Stock ABCD undergoes a 2 for 1 stock split on June 1, 2018. All strike prices are halved, the deliverable remains 100 and the symbol is unchanged. On August 1, 2018 stock ABCD spins off company EFGH, 10 shares per 100 ABCD owned. On the market opening at ex-date all open interest in ABCD corp. is moved to symbol ABCD1 delivering 100 shares of ABCD and 10 shares of EFGH. Option symbol ABCD1 = 100 ABCD + 10 EFGH. Subsequently, ABCD and EFGH shares are each listed in the underlying cash market and their prices are used in the valuation of options ABCD1 respectively. The options exchanges list new option contracts for each underlying that deliver 100 shares using symbols ABCD and EFGH (assuming listing criteria is met). Options symbols ABCD and EFGH begin trading (independently) and each delivers 100 shares of the corresponding stock upon exercise. On November 1, 2018 ABCD undergoes a 3 for 2 stock split. Option contracts in ABCD and ABCD1 are affected. Contracts in ABCD become ABCD2 delivering 150 shares of underlying stock ABCD. Option symbol ABCD2 = 150 ABCD. Contracts in ABCD1 remain ABCD1 and deliver 150 shares ABCD and 10 shares EFGH. Option symbol ABCD1 = 150 ABCD + 10 EFGH. The exchange will again list a new ABCD delivering 100 shares of ABCD stock upon exercise.

+

Considering the example above, the two entries below demonstrate the values before and after the first corporate action event:

+

Stock ABCD undergoes a 2 for 1 stock split on June 1, 2018. All strike prices are halved, the deliverable remains 100 and the symbol is unchanged.

+

Before 2:1 Stock Split on June 1, 2018

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Standard",

+

"optionSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 45.00,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

After 2:1 Stock Split on June 1, 2018

+

{

+

"type": "OSDE",

+

}

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Standard",

+

"optionsSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

The next entries demonstrate the impact of the second corporate action event – the spinoff on August 1, 2018.

+

On August 1, 2018 stock ABCD spins off company EFGH, 10 shares per 100 ABCD owned. On the market opening at ex-date all open interest in ABCD corp. is moved to symbol ABCD1 delivering 100 shares of ABCD and 10 shares of EFGH. Option symbol ABCD1 = 100 ABCD + 10 EFGH. Subsequently, ABCD and EFGH shares are each listed in the underlying cash market and their prices are used in the valuation of options ABCD1 respectively. The options exchanges list new option contracts for each underlying that deliver 100 shares using symbols ABCD and EFGH (assuming listing criteria is met). Options symbols ABCD and EFGH begin trading (independently) and each delivers 100 shares of the corresponding stock upon exercise.

+

Before Spinoff - Note that at this time, EFGH is still part of ABCD.

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Standard",

+

"optionSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 45.00,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

After Spinoff – three Dictionary Entries would now be reported as the result of this corporate action:

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Non-Standard",

+

"optionsSymbol": "ABCD1",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "99123",

+

"kind": "Standard",

+

"optionsSymbol": "EFGH",

+

"primaryDeliverable": "EFGH",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 5.00,

+

"type": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": 99124,

+

"kind": "Standard",

+

"optionsSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 17.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

The pre- and post-Spinoff JSON Dictionary Entries shown above are also shown in table format below.

+ + +

A final example demonstrates the impact of the third corporate action event – the stock split on November 1, 2018.

+

On November 1, 2018 ABCD undergoes a 3 for 2 stock split. Option contracts in ABCD and ABCD1 are affected. Contracts in ABCD become ABCD2 delivering 150 shares of underlying stock ABCD. Option symbol ABCD2 = 150 ABCD. Contracts in ABCD1 remain ABCD1 and deliver 150 shares ABCD and 10 shares EFGH. Option symbol ABCD1 = 150 ABCD + 10 EFGH. The exchange will again list a new ABCD delivering 100 shares of ABCD stock upon exercise.

+

Before 3:2 Stock Split -- ABCD delivers 100 shares of ABCD. ABCD1 options deliver 100 shares of ABCD + 10 shares EFGH.

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Non-Standard",

+

"optionsSymbol": "ABCD1",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "99124",

+

"kind": "Standard",

+

"optionsSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

After 3:2 Stock Split - ABCD becomes ABCD2 and delivers 150 shares of ABCD. Symbol ABCD1 remains, though now delivers 150 shares ABCD and 10 shares EFGH. The exchange lists new, standard ABCD options that deliver 100 shares of ABCD.

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "4322",

+

"kind": "Non-Standard",

+

"optionsSymbol": "ABCD1",

+

"primaryDeliverable": "ABCD”,

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": "99124",

+

"kind": "Non-Standard",

+

"optionsSymbol": "ABCD2",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 22.50,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+

{

+

"type": "OSDE",

+

"reporter": "MYID",

+

"optionID": 100501,

+

"kind": "Standard",

+

"optionsSymbol": "ABCD",

+

"primaryDeliverable": "ABCD",

+

"underlyingType": "Equity",

+

"expirationDate": 20181221,

+

"strikePrice": 15.00,

+

"putCall": "Call",

+

"exerciseStyle": "American",

+

"settlement": "PM"

+

}

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.9.3. Complex Option Dictionary Entry

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Complex Option Dictionary Entry + Compliance User: Self-Regulatory Organizations + Keywords: + Dictionary Mapping, + +

The dictionary mapping for a complex option will contain the following information. Each complex option can contain multiple legs, where each leg is either an option leg or a stock leg (stock leg will generically refer to equity/exchange-traded fund "ETF").

+

Complex Option Dictionary Entries

+ +

The Option ID must be unique. Duplicate dictionary entries are ignored. Entries that have the same Option ID, but different details are rejected. Any entry which defines the opposite side of an existing entry will be rejected. For example, a complex option dictionary entry to Buy one (1) contract of option 1234 and Sell two (2) contracts of option 4321 is considered to be the "opposite side" of an entry to Sell one (1) contract of option 1234 and Buy two (2) contracts of 4321. Thus, if both were submitted the second would be rejected.

+

JSON Example

+

{

+

"type": "CODE",

+

"reporter": "MYID",

+

"kind": "Complex",

+

"optionID": "98765",

+

"legs": [

+

{

+

"legType": "Option",

+

"side": "Buy",

+

"ratio": 1,

+

"optionID": "121345"

+

},

+

{

+

"legType": "Equity",

+

"side": "Buy",

+

"ratio": 100,

+

"symbol": "ABCD"

+

}

+

]

+

}

+

JSON Example of reject

+

{

+

"type": "CODE", "reporter": "MYID", "kind": "Complex",

+

"optionID": "98765",

+

"legs": [

+

{ "legType": "Option", "side": "Buy",

+

"ratio": 1, "optionID": "121345"

+

},

+

{ "legType": "Option", "side": "Sell",

+

"ratio": 2, "optionID": "99999"

+

}

+

]

+

}

+

{

+

"type": "CODE", "reporter": "MYID", "kind": "Complex",

+

"optionID": "56789",

+

"legs": [

+

{ "legType": "Option", "side": "Sell",

+

"ratio": 1, "optionID": "121345"

+

},

+

{ "legType": "Option", "side": "Buy",

+

"ratio": 2, "optionID": "99999"

+

}

+

]

+

}

+

In this case, the second entry is being defined from the opposite side of the first entry, and would be rejected as a duplicate.

+
+
pubdate: September 09, 2018 effdate: N/A +

2.2.10. Corporate Actions

+ Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Corporate Actions + Compliance User: Self-Regulatory Organizations + Keywords: + Options Clearing Corporation, + +

Similar to equity symbols or option dictionary entries, corporate actions for equities are reported to CAT on a daily basis. Details for corporate actions impacting listed options will be retrieved from the Options Clearing Corporation ("OCC"). An entry must be uploaded for each known corporate action every day by the listing exchange of the affected symbol. SROs must report an entry for a corporate action every day from its declared date through its effective or payment date. For example, if a dividend is declared on Dec 1, 2016 with a payment date on Aug 8, 2017, then an entry must be uploaded to CAT for that dividend every day within that period. Entries for the current trading day must be submitted everyday before 4:00 AM Eastern. For dually-listed securities, an entry must be uploaded by each of the listing exchanges.

+

CAT will accept corporate action entry reporting in the format of each SRO. SROs may use their existing CSV file formats for uploading corporate actions entries to CAT. CAT considers corporate actions to be reportable daily beginning with their declared date through their effective, payment, or cancel date. Some examples:

+

• Cash Dividend

+

• Stock Dividend

+

• Stock Split

+

• Reverse Stock Split

+

• Rights Issue

+

• Warrants Issue

+

• Spin-Off

+

• Delisting

+

• Name Change

+

• New Listing

+

• Symbol Change

+

• Share Issue

+

In addition to daily corporate actions lists, some exchanges also publish supplementary intraday reports on these corporate actions. CAT only requires that daily entries be uploaded for each known corporate action.

+

Exchanges also publish cancellations of known corporate actions to their daily lists. These entries are reportable as well to CAT and should be reported within the same 4:00AM Eastern deadline for a given trading day.

+

SRO-specific CSV formats for daily corporate action entries are included in this document in Appendix C. These are the CSV formats known to CAT. CAT must be alerted to any change in these formats at least 30 days in advance of the change taking affect, and changes to the CSV format must also be propagated to this document.

+
+
+
+
pubdate: September 09, 2018 effdate: N/A +

3. Special Data Elements and Common Events

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events + Compliance User: Self-Regulatory Organizations + Keywords: + Data Elements, + +

This section describes some data elements that are common to most order events, including timestamps, sequence numbers, symbols, material terms of an order, and elements used during the CAT process of creating order lifecycles.

+

Events that are universal, or common, are also described in this section.

+
pubdate: September 09, 2018 effdate: N/A +

3.1. Timestamps and Sequence Numbers

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers + Compliance User: Self-Regulatory Organizations + Keywords: + Time Stamps, + Sequence Number, + +

All order events from a given reporter contain a timestamp. Timestamps are required to be reported in the greatest granularity in use by the reporter's trading platform, up to nanoseconds. Ideally, that timestamp would uniquely sequence every event. However, if the granularity of the reported timestamp is insufficient, multiple events could have the same timestamp. This means that there is no way to confidently sequence those events by timestamp. Thus, if it is possible for multiple events to have the same timestamp (from the same reporter, on the same day, in the same symbol), then an event sequence number must also be attached to each event. The sequence number is required to be strictly increasing, and must guarantee proper sequencing of events in the order in which they originally occurred (sequence number requirement is by reporter, date, and symbol). Technically, the sequence number is used to break ties when events have the exact same timestamp.

+

The sequence number does not help sequence events across multiple reporters with the same timestamp, but it does assist sequencing events from a given reporter. Note that the sequence number may be globally unique, in which case it provides sequencing unilaterally. However, this is not required. The main requirement of the sequence number is that it can provide sequencing between events from the same reporter, on the same date, in the same symbol, with the same reported timestamp.

+

If the timestamp of a given event provides the ability to order within reporter/date/symbol, the Event Sequence Number does not have to be reported.

+
pubdate: September 09, 2018 effdate: N/A +

3.1.1. Sequence Number Subsystems

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers, Sequence Number Subsystems + Compliance User: Self-Regulatory Organizations + Keywords: + Subsystem IDs, + Sequence Number, + +

The purpose of the sequence number is to allow regulators to break ties when multiple events have the same timestamp. However, reports for the same reporter/date/symbol may originate from multiple systems, and it may be difficult to coordinate a sequence number that is unique among all subsystems.

+

In such cases, a sequence number subsystem (seqNumSub) can be optionally reported along with the sequence number. This value can be examined to better determine ordering characteristics of the events that have the same timestamp value.

+

Note that the only time the sequence number is really important is when multiple events for the same reporter/date/symbol have the same timestamp. If a system guarantees that such reports can't happen, then no sequence number is ever needed. If a system can meet the guarantee without using multiple subsystem IDs, then the subsystem IDs are unnecessary.

+
+
pubdate: September 09, 2018 effdate: N/A +

3.1.2. Time of Order Receipt

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers, Time of Order Receipt + Compliance User: Self-Regulatory Organizations + Keywords: + Order-ID, + +

The time of order receipt means the time which an exchange Participant assigns an Order-ID to an incoming message.

+
+
+
pubdate: September 09, 2018 effdate: N/A +

3.2. Symbology

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Symbology + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + Option ID, + +

When reporting events for equities, the symbol must be reported in the symbology of the listing exchange. Optionally, the reporter can submit their reports using an alternate symbology, provided that a symbol dictionary is uploaded to CAT each day an alternate symbology will be used. Thus, any time a symbol is reported, it is always required to be in the symbology of the listing exchange, or to be a valid symbol dictionary alias.

+

Any reporter who reports options events must submit an option dictionary to CAT. All options are identified using the Option ID, as provided to CAT in the reporter's option dictionary.

+
+
pubdate: September 09, 2018 effdate: N/A +

3.3. NBBO

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, NBBO + Compliance User: Self-Regulatory Organizations + Keywords: + NBBO, + +

The NBBO is provided with each relevant order event (i.e. when available). This is the NBBO from the perspective of the reporter at the time of the event, but not including the effect that the event would have on the NBBO. For example, if the NBBO were 100@10.10 x 100@10.15, and a new order arrived at the exchange to BUY 100@10.10, the reported NBBO would be 100@10.10 x 100@10.15, even though the immediate effect of the order would be to change the best bid to 200@10.10.

+

Note that the bid/ask prices are required, but the quantities being bid or offered are optional.

+

There exist some special cases where the NBBO is unavailable or nonexistent. In those cases, the NBBO values should be reported with a zero price and zero quantity. An entry with both the price and quantity of zero will indicate that the data was either unavailable or not applicable for that particular event. Note that the values can't just be reported as unavailable because it is hard to acquire them. They must truly be unavailable or not applicable to that particular event.

+
+
pubdate: September 09, 2018 effdate: N/A +

3.4. Order Linkage and Lifecycle

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Order Linkage and Lifecycle + Compliance User: Self-Regulatory Organizations + Keywords: + CAT Reporters, + Order Linkages, + Routed Order ID, + +

When all members have submitted their reports to CAT for a given trading day, CAT will link all reportable events in such a way as to create a complete lifecycle of each order. A key part of being able to connect the orders is recognizing and connecting the daisy chain of orders across all CAT reporters. In order to accomplish this, both the reporter routing an order away and the reporter accepting the order must report the exact same details about the order.

+

Of particular interest to reporting participants, the data elements important to creating cross-reporter order linkages are: Exchange ID, Date, Symbol/Option, Routing Party, Routed Order ID, and Session ID.

+

When an order is routed to an exchange, each communication protocol specifies a way to uniquely identify that order (e.g., FIX protocol calls it ClOrdId, OUCH calls it Order Token). However, the uniqueness guarantees differ from protocol to protocol. Some exchanges may assign a unique Member Alias for each account, and require uniqueness based on the account ID and order ID alone. Others may issue special identifiers for each API session that the member uses to connect into the exchange. Since there is no universally accepted method, CAT has decided to use a combination of several different attributes that provide flexibility in ensuring globally unique order IDs across all known supported protocols.

+

Both the routing firm — once industry member reporting has commenced — and the exchange will submit certain pieces of information to CAT in their Order Route and Order Accepted reports. Of particular importance are the Routed Order ID, Routing Party, and Session ID as those fields must match identically between exchange and industry member in order for CAT to accomplish the linkage process.

+

The Routed Order ID is the unique order identifier sent in the API message going from the routing entity to the destination entity.

+

The Routing Party is a text string that the exchange has assigned to the firm routing the order. Complexity arises when a member is assigned multiple values by the exchange. The determination as to which value is used by both parties depends on protocol-specific information. The text string can be a Member Alias, but there is no restriction that it must be a Member Alias. It can be any string, so long as both the sender of the order and the exchange agree on using the same string for their orders.

+

The Session ID is also exchange-assigned, usually a unique login account, an actual protocol session name, IP/port combination, or some other means of identifying a particular API session. The Session ID identifies the specific session used to route the order. Even in cases where there is only one session in use between reporters, the same non-empty value must be reported in the session field by both parties.

+

CAT, in cooperation with each exchange, will determine how the Routing Party, Routed Order ID, and Session ID are derived for each API supported by the exchange. This guidance will be documented and published on the CAT website.

+ +
+
pubdate: September 09, 2018 effdate: N/A +

3.5. Material Terms of an Order

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order + Compliance User: Self-Regulatory Organizations + Keywords: + Material Terms, + CAT, + +

The material terms of an order include several well-known fields: price, quantity, side, order type, open/close indicator (for options), time in force, and any special handling instructions. Each order event includes fields for each of these.

+

However, each exchange offers significant distinguishing features and instructions to describe how orders are to be handled. These differences are captured mainly in the possible values for the order type and any special handling instructions. The CAT system is generally agnostic to these values, and their primary utility is in how they are interpreted and used in surveillance activities.

+

In order to provide utility in using the reported data for surveillance purposes, both the reporters and the users must have well known definitions of the data being reported. In addition, without specific definitions, the submitted data cannot be checked for integrity in those fields that comprise the material terms of an order.

+

Thus, every possible value for each field must be explicitly defined both in this specification and the separate specification document for industry members (since they must also report the material terms of the order on their route reports). While this will serve to make the system more friendly to regulatory users, it places the burden of accuracy on each reporter.

+

First, every value that could possibly be reported must be well-defined in the technical specifications. Second, CAT must maintain the technical specifications for both the participants and industry members to reflect changes to order types and/or handling instructions over time. Third, each exchange must provide guidance to CAT on how these values are determined for each of their system interfaces, with lead time sufficient to allow CAT to update the specifications for both participants and industry members.

+

While the advance notice requirement may represent an incumbrance, it bears noting that exchanges must go through a regulatory approval process in order to make changes to order types, so there is already lead time required before implementing new order types and attributes. Communication to CAT can occur within this lead time to minimize the impact of the advance notice requirement.

+
pubdate: September 09, 2018 effdate: N/A +

3.5.1. Order Types

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order, Order Types + Compliance User: Self-Regulatory Organizations + Keywords: + Order Type, + CAT, + +

The Order Type for each order must be assigned with exactly one value from a predefined set of choices. These choices are documented in the data dictionary entry for Order Type. CAT, in cooperation with each exchange, has defined a list of acceptable values for this field, however additional order types may be added to accommodate future market needs.

+

The CAT website contains guidance on how these choices can be determined for each exchange API.

+
+
pubdate: September 09, 2018 effdate: N/A +

3.5.2. Order Handling Instructions

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order, Order Handling Instructions + Compliance User: Self-Regulatory Organizations + Keywords: + Sec Rule 613, + CAT Processor, + Handling Instructions, + +

The Handling Instructions field defines special instructions as to how the order should be handled by the exchange. Neither SEC Rule 613, nor the CAT NMS Plan dictate the special handling instructions that must be supported. Furthermore, each exchange may use different names and values to describe how orders are handled, and there can be numerous customized special handling instructions. While the CAT processor must be able to support any instructions which are required to be reported, mandating specific instructions is beyond the scope of the CAT processor as that information is only known by the exchanges and the appropriate surveillance and regulatory entities. Thus, the specification of this field aims to be flexible in providing support for a wide array of special handling instructions.

+

Similar to the Order Type field, each possible Order Handling Instructions value must be documented in the data dictionary of this technical specification, and guidance must be provided to CAT by reporters for how these values can be determined based on each exchange API (such guidance will be subsequently posted on the CAT website).

+

However, unlike Order Type, the Handling Instructions field can specify as many special handling instructions as apply for that order (or be empty if no such instructions apply). Thus, the handling instructions field will be a list of name/value pair.

+

Note that the full intent of the order is reportable to CAT. At minimum, every term and/or instruction for an order that is communicated to the exchange must be reported to CAT. It can be reported as part of the standard set of material terms, or via one of the defined name/ value pairs as defined in the Handling Instructions section of the Data Dictionary. Reporters cannot choose which order instructions to report: they must report every instruction applicable to each order.

+

It bears noting that the Order Handling Instructions field is marked as 'conditionally required' in the event definitions, because its existence is not enforced by the system. If the order does not have any characteristics that are reportable to CAT, then the field does not have to be provided. However, if there are any explicit or implied handling instructions for the order, then this effectively becomes a required field, as all instructions must be reported.

+

For example, assume two hypothetical handling instructions: AON and WDS=<percent>; where AON means all-or-none and WDS means a discretion price is allowed to be less than or equal to some percentage of the spread. If an order were to be placed as all-or-none, with a discretion of up to 50 percent of the spread, then the Order Handling Instructions field would contain "AON|WDS=50" as its value.

+

This approach provides flexibility for exchanges enabling them to represent a wide array of handling instructions, while also enabling CAT to validate submitted data and providing regulators a defined structure for interpretation of the data.

+
+
+
pubdate: September 09, 2018 effdate: N/A +

3.6. Optional, Required, and Conditional Fields

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Optional, Required, and Conditional Fields + Compliance User: Self-Regulatory Organizations + Keywords: + Optional, + Required, + Conditional, + +

Subsequent sections describe event types and their fields. Each field will be notated with the abbreviation R, O, C, or r to represent whether it is required, optional, conditional, or required conditionally. This codification will be present in the last column of each table describing an event.

+ +
+
pubdate: September 09, 2018 effdate: N/A +

3.7. Common Events

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events + Compliance User: Self-Regulatory Organizations + Keywords: + Note Event, + Self-Help Declarations, + Supplemental Trade Event, + +
pubdate: September 09, 2018 effdate: N/A +

3.7.1. Note Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Note Event + Compliance User: Self-Regulatory Organizations + Keywords: + Order ID, + Quote ID, + Note Event, + +

The Note Event is a generic event that accommodates reporting for certain events that are not defined with explicit events. For example, there could be certain events that occur in the process of handling an order on the floor of an exchange that may be desired to be included in the trail of events for a particular order, but don't fit into an explicitly defined reportable event. Or, there could be a certain process that the order goes through as part of its handling that does not constitute a change in terms of the order, but may be beneficial as part of the order's audit trail.

+

The Note event requires either an Order ID or a Quote ID (but not both), so that the notation can be appropriately linked by CAT to the associated order/quote. If the note relates to a stock order, then both orderID and symbol are required. If the note relates to an option order/quote then both optionID and orderID/quoteID are required.

+

Note Event

+ +

The Note Type and Defined Note Data fields are well-defined and must conform to the permitted values as described in this specification. The Undefined Note Data can

+

accommodate any attributes, as long as the field conforms to the format for a list of name/ value pairs.

+

Thus, Note Events, while generic in nature, can be parsed and evaluated by both humans and computer programs.

+

Lifecycle keys for this event:

+

• Order Key: date, reporter, symbol, orderID

+

• Order Key: date, reporter, optionID, orderID

+

• Quote Key: date, reporter, optionID, quoteID

+
+
pubdate: September 09, 2018 effdate: N/A +

3.7.2. Self-Help Declarations

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Self-Help Declarations + Compliance User: Self-Regulatory Organizations + Keywords: + Self-Help, + CAT, + +

“Self-help” declarations allow market participants to disregard the protected quotations of trading centers that are experiencing systems problems such as failure, material delay, or malfunction.

+

Participants must report to CAT any self-help declarations they make. If a self-help declaration is carried over to the next day, it must be reported again on that day. The following data is required to be reported for Self-Help declarations:

+

Self-Help Declaration

+ +

Both the declared and revoked timestamps can be reported in one single event by including both declaredTimestamp and revokedTimestamp. Alternatively, the declaration and revocation can be reported independently by just including the relevant timestamp in separate events.

+
+
pubdate: September 09, 2018 effdate: N/A +

3.7.3. Supplemental Trade Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Supplemental Trade Event + Compliance User: Self-Regulatory Organizations + Keywords: + Trade Event, + Stock and Option, + +

Each trade event (stock and option) contains some information which may not be readily available when generating the trade event. Thus, an independent event can be submitted to augment the information in the trade event. These events can be submitted in the same file as other events or in a separate file.

+

These events will not be recorded as separate events in CAT. Rather, the information in these events will be merged with the appropriate trade event to provide data that may have been missing in the original trade event. Currently, only the saleCondition can be reported in this way.

+

This event is used for stock and option trades. If the trade references a stock, then the symbol field must be provided. If the trade references an option, then the optionID field must be provided.

+

The description uses "trade" in a general manner. If the event references a trade, the tradeID field is required. If the event references a fill, the fillID and side are required.

+

Supplemental Trade Event

+ +

Lifecycle keys for this event:

+

• Trade Key: date, exchange, symbol, tradeID

+

• Trade Key: date, exchange, optionID, tradeID

+

• Fill Key: date, exchange, symbol, fillID

+

• Fill Key: date, exchange, optionID, fillID

+
+
+
+
pubdate: September 09, 2018 effdate: N/A +

4. Events for Stock Exchanges

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges + Compliance User: Self-Regulatory Organizations + Keywords: + Technical Specification, + +

Within this Technical Specification, events for stock exchanges, options exchanges, and the trade reporting facilities are documented in separate sections. This section describes reportable events for stock exchanges.

+

Events for Stock Exchanges

+ +
pubdate: September 09, 2018 effdate: N/A +

4.1. Order Accepted Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Accepted Event + Compliance User: Self-Regulatory Organizations + Keywords: + Order Accepted, + Order ID, + +

When an exchange receives and accepts a routed order, an Order Accepted event is reported to CAT. If the order is rejected (i.e., not received and successfully processed by the matching engine), then an event is not reported to CAT.

+

Some systems will outright reject messages if they are malformed or contain a duplicate order ID. Other systems will silently ignore certain malformed messages (e.g., the OUCH protocol specifically states that new orders containing duplicate order tokens are silently ignored). However, all current systems will send some sort of positive acknowledgement when an order has been finally accepted into the system. Some systems will send an acknowledgement from the gateway upon receipt of the request, but the order could still possibly be rejected instead of accepted by the matching engine. Such protocols have a prescribed way of notifying the sender whether or not their order was actually accepted.

+

The basic rule is that orders rejected by the gateway are not reportable, but any order reaching the matching engine is reportable.

+

Note that for the order accepted event, the firm that sends the order to the exchange will be referred to as the routing firm. In the next event, order route event (section 4.2), the routing broker dealer will also be referred to as the routing firm.

+

The Order ID that is used in orders must be globally unique when combined with the date, exchange, symbol and general side, where the general side is either Buy or Sell.

+

Order Accepted

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

+
+
pubdate: September 09, 2018 effdate: N/A +

4.2. Order Route Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Route Event + Compliance User: Self-Regulatory Organizations + Keywords: + Order Route, + Routing Firm, + +

The following Order Route event is used to report when an exchange routes an order through a routing broker dealer.

+

When an order is routed, some exchanges create a derived order (with a different order ID), to represent the order being routed away. Others just route the order (or part of the order) straight to the routing broker without changing the Order ID. In either case, CAT must be able to link the internal order on the exchange with the internal order at the routing BD. Thus, both the report from the exchange and the report from the routing BD must have the same identifiers for the routed order. This is very similar to the process described earlier related to the Accepted event.

+

Note that for an order route event, the routing broker is referred to as the routing firm.

+

The Order Route event reported by the exchange needs three key pieces of information: the Routing Firm receiving the routed order, the Session ID through which the order is being routed, and the Routed Order ID, which is the order ID sent to the routing firm.

+

The Routing Firm must be represented by an entry in the exchange's member dictionary (though not necessarily a member of the exchange). Furthermore, as explained in the linkage section, both the exchange and the Routing Firm must know which Member Alias is to be reported to CAT because both will have to report the same Member Alias (the exchange in their Route event, and the firm in their Accepted event). Either both sides must use a constant value, or there must be some way to derive the value being used (via session configurations or in the message itself).

+

If the exchange creates a derived order, and passes that order ID to the firm via its API, then the Routed Order ID will be the order ID of the derived order. If, however, there is no derived order and the exchange passes its own internal order ID to the routing broker, then the internal order ID will also be assigned as the Routed Order ID. In this case, both the order ID and the routed order ID are populated with the same value.

+

Order Route

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

+
+
pubdate: September 09, 2018 effdate: N/A +

4.3. Internal Order Route Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Internal Order Route Event + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + +

In some cases, an exchange may have multiple internal subsystems involved in handling orders. In such cases, and order may be accepted by one internal system, and then routed to one or more internal systems for processing. Routes within an exchange are not required to be reported to CAT. However, there are cases where it is difficult for an exchange to report the entire status of an order to CAT when its internal processing is handled on multiple systems. Specifically, ensuring that the events contain the same order identifiers would require substantial post processing.

+

Thus, an internal route event may be reported to CAT, indicating that an order is being passed from one internal system to another. This will allow CAT to link events that are related to the same order within an exchange, even if the exchange has changed the identifiers on the order as it moves between internal systems.

+

Internal Order Route

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

+
+
pubdate: September 09, 2018 effdate: N/A +

4.4. Order Modified Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Modified Event + Compliance User: Self-Regulatory Organizations + Keywords: + Original Order ID, + Order Modified, + +

When the material terms of an order have been changed, an Order Modified event must be reported to CAT. For example, the automatic price adjustment of a peg order due to market move is reportable to CAT. However, changes on fields that are not considered material (e.g., change memo field) should not be reported to CAT.

+

Some times, during the course of an order modification, a new internal order is generated (with a new order ID) and completely replaces the previous order (though the new order will be linked to the original order). Both of these cases are handled by the Order Modified event. If the order ID remains the same, then the Original Order ID field will be the same. If the order ID changes, then the Order ID field will contain the new internal ID of the order, and the Original Order ID will contain internal ID of the order prior to being replaced.

+

When a modification is reported, the full state of the order is reported, including those fields which have not changed.

+

Order Modified

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Previous Order Key: date, exchange, symbol, originalOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.5. Order Adjusted Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Adjusted Event + Compliance User: Self-Regulatory Organizations + Keywords: + Order Modified, + Adjustments, + +

The Order Modified event requires the full state of the order be reported to CAT on each modify. However, there are some common cases where the only change is to price, quantity, or side. The Order Adjusted event can be used in these situations.

+

The only types of modifications that are allowed to be reported with this event are changes to the side, price or quantity of the order.

+

Side adjustments are only allowed for same-side changes (e.g., changes between short and long sell). The side only needs to be reported if it changes.

+

For changes in price, both price and workingPrice are required (i.e., either both are reported or neither are reported).

+

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

+

If either the displayPrice or the displayQty change, they both need to be reported. The only exception is if the displayQty changes from non-zero to zero. In such a case, the displayQty would be reported, but the displayPrice would not be reported since there is no display quantity.

+

This event is meant to capture the most common simple adjustments to orders (e.g., reduction in shares, short-to-long sell, price-only changes). Any modification that cannot be fully represented in this event must be reported via the Order Modified event.

+

Order Adjusted

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Previous Order Key: date, exchange, symbol, originalOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.6. Order Canceled Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Canceled Event + Compliance User: Self-Regulatory Organizations + Keywords: + Exchanges, + Cancelled Order, + +

When an exchange cancels an order, in part or in whole, the event must be reported to CAT. Note that an explicit Canceled Event is required for every order that is canceled, even orders that have implicit "execute or cancel" instructions like IOC orders.

+

A Canceled event should be used anytime any part of an order is cancelled. For example, an order can be partially reduced either with a cancel message or a modify (cancel/replace) message. If an actual cancel is processed by the exchange, a Canceled event would be reported. If a modify and/or cancel/replace was sent to the exchange, a Modified event would be reported. This keeps the reported event in line with the original intent.

+

Some protocols only allow full cancels; partial cancels must be accomplished via a cancel/ replace. In such cases, partial cancels would always be reported as Modified events.

+

Order Canceled

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.7. Order Trade Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Trade Event + Compliance User: Self-Regulatory Organizations + Keywords: + Two-sided Transactions, + +

All trade events are reported to CAT as two-sided transactions, with a single event.

+

Each order trade event is represented with the following details. The details in the table Order Trade Side Details must be populated for each side of the trade.

+

Order Trade Event

+ +

Order Trade Side Details

+ + +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, buyDetails.orderID

+

• Order Key: date, exchange, symbol, sellDetails.orderID

+

• Trade Key: date, exchange, symbol, tradeID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.8. Order Fill Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Fill Event + Compliance User: Self-Regulatory Organizations + Keywords: + Order Fill Event, + Identifier, + Description, + Data Type, + Field Name, + +

When a routed order executes, the routing firm acquires the position. The exchange will report the fill with the order on one side, and the routing firm on the other side.

+

Order Fill Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Fill Key: date, exchange, symbol, fillID

+

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

+
+
pubdate: September 09, 2018 effdate: N/A +

4.9. Bulk Print Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Bulk Print Event + Compliance User: Self-Regulatory Organizations + Keywords: + CAT, + Blue Print Event, + Field Name, + Data Type, + Description, + +

Certain types of executions happen in a batch and not as order-to-order trades (e.g., opening and closing cross). The Bulk Print event is designed to enable reporting of those types of matches.

+

Each batch execution needs an identifier (bulkPrintID) which is unique for that set of executions, by date, reporter, and symbol. An event will be reported to CAT for every order that participated in the batch execution.

+

For example, if the opening cross matched 1,000,000 shares of symbol ABCD across 5,000 buy orders and 4,000 sell orders, then there would be 9,000 Bulk Print Event reports sent to CAT for that cross. Each event would contain the same bulkPrintID, which would uniquely identify that particular cross event. The total of all buy-orders execution quantities should be equal to the total total of all sell-orders execution quantities (in this example, 1,000,000 shares).

+

Bulk Print Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.10. Order Cancel Route Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Cancel Route Event + Compliance User: Self-Regulatory Organizations + Keywords: + Cancel Request, + Field Name, + Data Type, + Description, + +

When an exchange initiates a cancel request on an order it has previously routed away, it must report its intent to cancel, using a Cancel Route Event.

+

Order Cancel Route

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

+
+
pubdate: September 09, 2018 effdate: N/A +

4.11. Order Modify Route Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Modify Route Event + Compliance User: Self-Regulatory Organizations + Keywords: + Cancel or Replace Request, + Modify Route Event, + +

When an exchange initiates a modify or cancel/replace request on an order it has previously routed away, it must report its intent to modify the order, using a Modify Route Event.

+

If the request does not change the routed order ID, then both routedOrderID and routedOriginalOrderID must be the same.

+

Modify Route

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

+

• Previous Route Link Key: date, symbol, exchange, routedOriginalOrderID, session, routingParty

+
+
pubdate: September 09, 2018 effdate: N/A +

4.12. Order Restatement Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Restatement Event + Compliance User: Self-Regulatory Organizations + Keywords: + Restated Orders, + Order Key, + Previous Order Key, + +

Orders that persist across business days (e.g., GTC orders) must be restated each day before any other activity is reported for that symbol. The restatement is an explicit confirmation that the order is still active in the reporter’s order book, and also provides an opportunity to use per-day unique order IDs for all orders.

+

The attributes of the order will be restated in terms of the order's current state, after any corporate actions have been processed (e.g., if a 2:1 split occurred, the quantity and price would reflect the resulting change).

+

Order Restatement

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Previous Order Key: originalOrderDate, exchange, symbol, originalOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.13. Trade Break Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Trade Break Event + Compliance User: Self-Regulatory Organizations + Keywords: + Broken Trade, + Trade Key, + +

When a trade is broken, an event is reported to CAT with the appropriate information. Note that CAT adds the event to the history of the order. The broken trade is not removed from the history, as it is something that actually happened and should be recorded.

+

Order Trade Break

+ +

Lifecycle keys for this event:

+

• Trade Key: tradeDate, exchange, symbol, tradeID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.14. Trade Correction Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Trade Correction Event + Compliance User: Self-Regulatory Organizations + Keywords: + Corrected Trade, + Order Key, + Trade Key, + +

If a trade is corrected in any way, a correction event must be reported to CAT with all details of the trade, after having been corrected. This event must capture the entire state of the trade after having been corrected.

+

As with trade breaks, CAT will still keep the original trade, adding the correction to the audit trail of the trade being corrected.

+

Order Trade Correction

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, buyDetails.orderID

+

• Order Key: date, exchange, symbol, sellDetails.orderID

+

• Trade Key: date, exchange, symbol, tradeID

+
+
pubdate: September 09, 2018 effdate: N/A +

4.15. Lifecycle Keys

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Lifecycle Keys + Compliance User: Self-Regulatory Organizations + Keywords: + Lifecycle Keys, + Equity Events, + +

The lifecycle keys for each event are summarized in the following table.

+

Lifecycle Keys for Equity Events

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

5. Events for Options Exchanges

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges + Compliance User: Self-Regulatory Organizations + Keywords: + Options Exchanges, + Modify Option Route, + +

These events are specific for options exchanges.

+

Events for Options Exchanges

+ +
pubdate: September 09, 2018 effdate: N/A +

5.1. Market Maker Quotes

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes + Compliance User: Self-Regulatory Organizations + Keywords: + CAT NMS plan, + CAT, + Quotes, + +

Quotes issued by market makers to options exchanges must be reported to CAT. This section will describe the types of attributes that are used to model quote events, and the types of quote events that should be reported to CAT. CAT supports both one-sided and two-sided quotes.

+

While some exchanges create quotes and orders the same way, CAT considers them distinct from a reporting perspective, and they must be reported distinctly. First, market makers are exempt from reporting their quotes to CAT (Section 6.4(d)(iii) of the CAT NMS Plan). Instead, the exchange is fully responsible for submitting the quotes they receive from market makers. Second, the market makers must inform the exchange of the time that they sent each quote, so the exchange can report it to CAT along with the quote (though the MMs are not required to do so until 2018). Third, quotes require fewer data elements than orders.

+

Each quote must have a unique Quote ID. Specifically, when a trade occurs with a MM quote on one side, the Quote ID in the trade will identify the exact quote. The combination of Exchange ID, Date, Option ID, and Quote ID should be globally unique.

+

Furthermore, each quote update must also have a unique Quote ID (different from the Quote ID for the quote being updated). If the exchange only supports a single quote per market maker, the event can be so noted, and the Quote ID for the quote that is being replaced is not necessary. Otherwise, the update must also include the Quote ID for the quote that is being updated/replaced by the new quote.

+

The exchange must guarantee uniqueness of quote IDs throughout the day.

+

There are two types of quote events in CAT:

+

• Quote Event: Used to report a new quote or a quote replacement. When a quote is replaced, the Original Quote ID will identify the quote being replaced, and the Quote ID will provide the new ID for the updated and replaced quote (or note in the event that the market maker can only have one quote active at any given time).

+

• Quote Cancel: Reported when a quote is canceled.

+

For block quotes, each quote in the block would be reported to CAT as a separate quote, with a separate unique Quote ID. In such a case, the quote Sent Timestamp would be the same for each quote from the same block because they were all sent at the same time by the market maker. However, the combination of Event Timestamp and Event Sequence Number must be unique for each quote.

+

Similarly, when a bulk cancel is requested, a separate quote cancel event is required for each quote that is canceled by such a request.

+

On some exchanges, quotes are allowed to be sent before the trading system is ready to process them. For example, there may be an established protocol where the API documents that quotes sent before a particular time are ignored. Or, a protocol may send a "Now Accepting Quotes" message to market makers, and any quotes sent before that time are ignored. In such cases, those ignored quotes are not processed, so they should not be reported to CAT.

+

Note that all pre-open quotes are still reportable to CAT. This exception is explicitly for those cases where the exchange allows quotes to be sent before they are officially accepted - but those quotes are neither processed, nor entered into the book, nor accepted for participating in the opening nor any other trading session.

+

Once the system has started accepting quotes (either because a set time has arrived, or it has sent out a message indicating that quotes are now being accepted), then all quotes must be reported. CAT does not have rules in place for when exchanges start accepting quotes, but it seems that all exchanges start accepting quotes at least five minutes before the start of trading.

+

For example, in the following diagram, an exchange ignores quotes until they send their "Now Accepting Quotes" message. Thereafter all quotes are processed and reported to CAT.

+ +

Similarly, if a quote is rejected and neither accepted nor booked, then the quote should not be reported to CAT.

+
pubdate: September 09, 2018 effdate: N/A +

5.1.1. Quote Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes, Quote Event + Compliance User: Self-Regulatory Organizations + Keywords: + Quote Events, + Reported Quote Events, + Quote Key, + Previous Quote Key, + +

The following data elements are to be reported with all quote events. For two-sided quotes, all bid/ask/price/qty values are required. For one-sided quotes, both the price and quantity fields are required, but only for one side.

+

Quote Events

+ +

Lifecycle keys for this event:

+

• Quote Key: date, exchange, optionID, quoteID

+

• Previous Quote Key: date, exchange, optionID, originalQuoteID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.1.2. Quote Cancel Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes, Quote Cancel Event + Compliance User: Self-Regulatory Organizations + Keywords: + Quote Cancel Event, + Quote Key, + +

The following data elements are required for cancel quote events.

+

Quote Cancel Event

+ +

Lifecycle keys for this event:

+

• Quote Key: date, exchange, optionID, quoteID

+
+
+
pubdate: September 09, 2018 effdate: N/A +

5.2. Options Orders

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders + Compliance User: Self-Regulatory Organizations + Keywords: + Order Events, + Simple Option Orders, + Complex Option Orders, + CAT, + +

Order events for options are reported in two flavors: simple and complex. Simple option orders are orders for a single option series (including flex options). Complex option orders contain two or more simple option orders, or at least one each of a simple option order and equity order.

+

For CAT, an order for a complex option will be reported at the parent complex level, and additional orders will be reported if/when orders are created for each leg. Some exchanges create leg orders as soon as the parent is created, and other exchanges create leg orders only when an execution is created. CAT supports both reporting scenarios.

+

Each options order routed to (and then accepted by) an exchange must be reported to CAT. Options orders that are routed to an exchange and then rejected by the exchange are not reportable by the exchange. When an exchange accepts an options order, it must report either a single Option Order Accepted event, or a single Complex Option Order Accepted event followed by one Accepted event for each leg of the complex option.

+

The field executionBroker is defined to be the Member Alias of the broker executing the order. For manual/floor trades, this will be the identifier for the physical broker. For quotes, it will be an alias for the market maker behind the quote. For system trades, it will be an alias for the system handling that order.

+
pubdate: September 09, 2018 effdate: N/A +

5.2.1. Order Accepted Events

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Order Accepted Events + Compliance User: Self-Regulatory Organizations + Keywords: + Order Accepted Events, + +

5.2.1.1. Simple Option Order Accepted Event

+

A simple option order can represent either a stand-alone option series, or one leg of a complex parent order. If the order represents a leg of a complex order, then the field Complex Order ID will be set to the Order ID of the parent complex order. If necessary, the event timestamp and sequence number could be the same as those in the parent complex order.

+

Fields marked with a lower-case 'r' are required if the event represents a normal option order, and they are conditional if the event represents a leg of a complex order.

+

Simple Option Order Accepted Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.1.2. Complex Option Order Accepted Event

+

Each complex option order routed to (and accepted by) an exchange must be reported to CAT. CAT requires each leg of a complex order to be reported separately, thus the parent order is relatively small with most order details reported on behalf of each leg. The complex order event includes the following data elements.

+

The number of legs, and description of each leg is encapsulated in the dictionary entry for the Option ID. In addition to the Complex Order Accepted event, at least one Option Order Accepted event must be submitted for each leg of a complex order (Order Accepted for non-option legs).

+

Some systems allow individual legs to carry specific instructions. Thus, order type information is relevant on a per-leg basis, and not reported for the complex parent itself. Furthermore, some exchange don't create leg orders until a trade is imminent. Thus, the model supports both processes, where leg orders can be created upon initial acceptance and at the point of execution.

+

No matter when the leg orders are created, each leg must have a unique internal Order ID. Some reporters already create such derived order representations, so these IDs are easy to acquire. Others do not assign identifiers to legs. However, all reporters will be expected to report individual order events for each leg. One suggested method for creating unique leg Order IDs is to use the Order ID of the parent complex order, combined with the leg number (its ordering in the complex option definition). Another is to combine the Complex Order ID with the Option ID and Side of that leg.

+

Note that the following fields are conditional in this event. If they are present, then they do not have to appear in the individual order events for option legs, unless the value for a leg would be different from the value in the complex order. In other words, these field values apply to all option legs, unless the option leg contains a different value. If these fields are missing, then the data must be present in each option leg.

+

coverage, exchOriginCode, executingFirm, cmtaFirm, mktMkrSubAccount

+

Complex Option Order Accepted Event

+ + +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID (if not isGloballyUnique)

+

Order Key: date, exchange, orderID (if isGloballyUnique)

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

5.2.1.3. Stock Leg Order Event

+

Similar to option legs, stock legs are reported individually, with a link to the parent complex order. If necessary, the event timestamp and sequence number could be the same as those in the parent complex order.

+

Stock Leg Event

+ +

See the explanation about leg Order IDs in the section on complex orders. The same process applies to Order IDs for stock legs.

+

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.2.2. Order Modified Events

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Order Modified Events + Compliance User: Self-Regulatory Organizations + Keywords: + Modified Events, + Order ID, + +

An event must be sent to CAT to report changes to any field of an order. Sometimes these changes are applied to the existing internal order. Other times, the modification involves a replacement of the order, causing the exchange to change its internal Order ID. If such a change is necessary, both IDs are needed to maintain the order lifecycle.

+

5.2.2.1. Option Order Modified Event

+

When an option series or an option leg of a complex option is modified, an instance of this event must be reported, with the following elements. The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

+

Option Order Modified Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Previous Order Key: date, exchange, optionID, originalOrderID

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.2.2. Complex Option Order Modified Event

+

If the price or quantity changes on a complex order, a complex option order modified event needs to be submitted to CAT. If a change to the parent complex order causes attributes in the leg orders to change, then Order Modified events must be reported for each affected leg. (Note that this only applies if a leg order actually exists at the time of the modification to the complex order - for exchanges that create leg orders at execution, only the complex order needs to be modified). However, if a change in net price to the complex order causes the price of the leg orders to change, changes to the leg order prices are not reportable to CAT.

+

If the internal order ID of the complex order changes, then modified reports must be generated for every leg that exists at the time of the modification, referencing the new order ID of the parent complex order.

+

The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

+

Complex Option Order Modified Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Previous Order Key: date, exchange, optionID, originalOrderID

+

5.2.2.3. Stock Leg Modified Event

+

When a stock leg is modified, an event must be reported to CAT with the modified data elements. The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

+

Stock Leg Modified Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Previous Order Key: date, exchange, symbol, originalOrderID

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.2.4. Option Order Adjusted Event

+

When an option series or an option leg of a complex option is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Option Order Modified event.

+

The only types of modifications that are allowed to be reported with this event are changes to the price or quantity of the order.

+

For changes in price, both price and workingPrice are required (i.e., either both are reported or neither are reported).

+

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

+

If either the displayPrice or the displayQty change, they both need to be reported. The only exception is if the displayQty changes from non-zero to zero. In such a case, the displayQty would be reported, but the displayPrice would not be reported since there is no display quantity.

+

Option Order Adjusted Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Previous Order Key: date, exchange, optionID, originalOrderID

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.2.5. Complex Option Order Adjusted Event

+

When a complex option is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Complex Option Order Modified event.

+

The only types of modifications that are allowed to be reported with this event are changes to the price or quantity of the order.

+

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

+

Complex Option Order Adjusted Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Previous Order Key: date, exchange, optionID, originalOrderID

+

5.2.2.6. Stock Leg Adjusted Event

+

When a stock leg is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Stock Leg Adjusted event.

+

Stock Leg Adjusted Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Previous Order Key: date, exchange, symbol, originalOrderID

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.2.3. Options Order Canceled Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Options Order Canceled Event + Compliance User: Self-Regulatory Organizations + Keywords: + Cancelled Event, + Partially Cancelled, + Option Order, + +

An order cancelled event is used to report a cancellation of a simple option order or a complex option order. For complex options orders, if leg-level orders have been opened before a cancelled event, then cancelled events must be reported for each of the leg orders as well.

+

CAT also supports partial cancels. Partial cancelled events for complex orders follow the same rule, if there are open leg-level orders before a cancelled event, partial cancelled events must also be reported for each of the legs.

+

Note that the order cancelled events contains both the fields optionID and symbol. Both of these fields are conditional. If the order cancelled event is for a stock leg order corresponding to a complex option order, then the symbol field is mandatory. If the order cancelled event is for a simple option order, a complex option order, or an option leg order of a complex order, then the field optionID is mandatory.

+

Option Order Canceled

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Order Key: date, exchange, symbol, orderID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.2.4. Routing Orders

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Routing Orders + Compliance User: Self-Regulatory Organizations + Keywords: + Internal Routes, + Execution Codes, + Note Event, + Order ID, + Quote ID, + +

5.2.4.1. Internal Routing and Floor Activity

+

Internal routes on the exchange are different from internal routes in a Broker Dealer. In particular, internal routes at a broker dealer are required to be reported to CAT, but internal routes at an exchange are not.

+

However, there are cases where knowing the system or process of where an order executed is useful, for example when orders are routed through various internal systems on the floor. These processes differ between exchanges and the use cases are incredibly diverse. Furthermore, there is no guidance in the CAT requirements as to what is or is not supposed to be reported in these cases, so we need to be flexible in allowing a diverse set of items to be reported. These somewhat reportable data elements arrive in two forms.

+

First, an order may be executed with some additional information that was not available when it was placed (e.g., as part of an auction, or through some floor trading workstation). Thus, there is an element available on Trade Events (Execution Codes), which provides a way to add special exchange specific codes to an execution. The Execution Codes is a name/value pair field (like order Handling Instructions) and can provide additional execution information, like where a trade may have been executed on the floor, or supplemental execution/clearing information.

+

Second, there is the general Note Event, which contains either an Order ID or a Quote ID to link the note to a specific order or quote.

+

Some systems are composed of multiple subsystems, each having their own reporting and order identification requirements. In such cases, it may be extremely difficult or time consuming to coerce events into a single set of unique order IDs and reporting. Thus, an internal route event is also provided for reporting an order as it progresses between internal subsystems, and possibly changes internal order ID.

+

5.2.4.2. Option Route Event

+

External routes from an options exchange come in three basic forms: routing all or part of a simple option series order to an away market, routing two stock legs to be crossed, and routing a stock leg for execution. All of these events require certain pieces of information to enable linkage creation that can track the entire order lifecycle.

+

The following Option Route Event is used to report when an exchange routes a simple option order, or any leg of a complex option order. A complex order will never be routed away.

+

Option Route Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.4.3. Internal Option Route Event

+

This event provides a means by which options (and legs of complex options) can be routed between internal systems.

+

Internal Option Route Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

+

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

+

5.2.4.4. Internal Complex Option Route Event

+

While complex orders are not routed between exchanges, they may be routed internally. This event provides a means by which complex options can be routed between internal systems.

+

Internal Complex Option Route Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

5.2.4.5. Modify Option Route Event

+

When an exchange initiates a modify or cancel/replace request on an option or stock leg order it has previously routed away, it must report its intent to modify the order, using a Modify Option Route Event.

+

If the request does not change the routed order ID, then both routedOrderID and routedOriginalOrderID must be the same.

+

Note that the Modify Option Route event contains both the fields optionID and symbol. Both of these fields are conditional. If the Modify Option Route event is for a stock leg order, then the symbol field is mandatory and optionID field is not necessary. If the Modify Option Route event is for a simple option order, or an option leg order of a complex order, then the field optionID is mandatory.

+

Modify Option Route Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

+

• Previous Route Link Key: date, optionID, routingParty, routedOriginalOrderID, session, exchange

+

• Previous Route Link Key: date, symbol, routingParty, routedOriginalOrderID, session, exchange

+

5.2.4.6. Option Cancel Route Event

+

When an exchange initiates a cancel request on an order that has been previously routed away, it must report the intent to cancel, using a Option Cancel Route Event.

+

Note that the Option Cancel Route event contains both the fields optionID and symbol. Both of these fields are conditional. If the Option Cancel Route event is for a stock leg order, then the symbol field is mandatory and optionID field is not necessary. If the Option Cancel Route event is for a simple option order, or an option leg order of a complex order, then the field optionID is mandatory.

+

Option Cancel Route

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Order Key: date, exchange, symbol, orderID

+

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

+

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

+
+
pubdate: September 09, 2018 effdate: N/A +

5.2.5. Trades and Fills

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Trades and Fills + Compliance User: Self-Regulatory Organizations + Keywords: + Two-sided Trades, + Simple Option Trade Event, + Side Trade Details, + Stock Leg Fill Event, + +

All trades on an options exchange involving options are reported as two sided trades, with appropriate clearing information for each side. In the case where an order is routed away, the trade is still reported as a two-sided trade, but without an order on one side (that side will just have clearing information).

+

Trades off-exchange for non-option legs are reported as one-sided pass through fill events. Note the difference between a trade which the exchange transacted and a fill which the exchange is passing on. Both events are reportable, but they will be reported in different ways. The former as a two-sided trade, and the latter as either a one-sided fill.

+

5.2.5.1. Simple Option Trade Event

+

Simple option trade events are two-sided trade reports, providing details about both sides of the trade for an option. The same event is used for both simple options trades and trades for each leg of a complex option.

+

This section will deal only with simple option trades, the following section will demonstrate how the same event type will be used to report trades at the leg level of complex options.

+

Option Trade Event

+

Each option trade contains the following data elements.

+

Option Trade Event

+ +

Side Trade Details

+

Each side of a trade contains information pertinent to the order and/or quote that contributed to the trade. The Side Trade Details captures those data elements.

+

Side Trade Details

+ +

In some cases, an option trade may occur with neither a quoteID nor an orderID for one or both sides of the trade. In these cases, the quoteID/orderID can be omitted. However, the executionCodes must include NOBUYID and/or NOSELLID as appropriate.

+

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, buyDetails.orderID

+

• Order Key: date, exchange, optionID, sellDetails.orderID

+

• Quote Key: date, exchange, optionID, buyDetails.quoteID

+

• Quote Key: date, exchange, optionID, sellDetails.quoteID

+

• Trade Key: date, exchange, optionID, tradeID

+

5.2.5.2. Stock Leg Fill Event

+

When a stock leg executes, it always executes at an away venue, which will report both sides of the trade. The options exchange, while possibly knowing both orders that crossed, did not actually perform the transaction. Thus, all transactions involving stock legs are reported as one-sided pass-along fills of the order, and contain the following data elements.

+

Stock Leg Fill Event

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, symbol, orderID

+

• Fill Key: date, exchange, symbol, fillID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.2.6. Post Trade Allocation Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Post Trade Allocation Event + Compliance User: Self-Regulatory Organizations + Keywords: + Modified Event, + Cancelled Event, + Repalced Post Trade Allocation, + +

In the event of a modified, cancelled, or replaced post trade Allocation, only the final allocation should be reported to CAT.

+

The fields quoteID and orderID must reference the quote/order from the original trade that is being allocated. If the trade has neither a quoteID nor an orderID, then this event will include neither IDs as well (this implies that the executionCodes field from the original trade message contains either NOBUYID or NOSELLID.

+

Post Trade Allocation

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Quote Key: date, exchange, optionID, quoteID

+

• Trade Key: date, exchange, optionID, tradeID

+
+
+
pubdate: September 09, 2018 effdate: N/A +

5.3. Options Order Restatement Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Order Restatement Event + Compliance User: Self-Regulatory Organizations + Keywords: + GTC Orders, + Options Order, + Order Key, + Previous Order Key, + +

Options orders that persist across business days (e.g., GTC orders) must be restated each day before any other activity is reported for that symbol. The restatement is an explicit confirmation that the order is still active in the reporter’s order book, and also provides an opportunity to use per-day unique order IDs for all orders.

+

The attributes of the order will be restated in terms of the order's current state, after any corporate actions have been processed. Pursuant to each exchange’s rule book, some corporate action types dictate that persisted orders will be cancelled or converted. If converted, the order restatement field values should reflect the adjusted values on the effective date (e.g., if a 2:1 split occurred, the quantity and price would reflect the resulting change).

+

The following fields will not be included if restating a complex option order, but are otherwise required: openCloseIndicator, orderType, exchOriginCode, coverage, executingFirm.

+

Options Order Restatement

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, orderID

+

• Previous Order Key: originalOrderDate, exchange, optionID, originalOrderID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.4. Options Trade Break Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Trade Break Event + Compliance User: Self-Regulatory Organizations + Keywords: + Options Trade Break, + Trade Key, + +

When a trade is broken, an event is reported to CAT with the appropriate information. Note that CAT adds the event to the history of the order. The broken trade is not removed from the history, as it is something that actually happened and should be recorded.

+

Options Trade Break

+ +

Lifecycle keys for this event:

+

• Trade Key: tradeDate, exchange, optionID, tradeID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.5. Options Trade Correction Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Trade Correction Event + Compliance User: Self-Regulatory Organizations + Keywords: + Corrected Trade, + +

If a trade is corrected in any way, a correction event must be reported to CAT with all details of the trade, after having been corrected. This event must capture the entire state of the trade after having been corrected.

+

As with trade breaks, CAT will still keep the original trade, adding the correction to the audit trail of the trade being corrected.

+

Options Trade Correction

+ +

Lifecycle keys for this event:

+

• Order Key: date, exchange, optionID, buyDetails.orderID

+

• Order Key: date, exchange, optionID, sellDetails.orderID

+

• Quote Key: date, exchange, optionID, buyDetails.quoteID

+

• Quote Key: date, exchange, optionID, sellDetails.quoteID

+

• Trade Key: date, exchange, optionID, tradeID

+

• Trade Key: date, exchange, optionID, refTradeID

+
+
pubdate: September 09, 2018 effdate: N/A +

5.6. Lifecycle Keys

+ Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Lifecycle Keys + Compliance User: Self-Regulatory Organizations + Keywords: + Lifecycle Keys, + Quote, + +

The lifecycle keys for each event are summarized in the following table.

+

Lifecycle Keys for Option Events

+ + + +
+
+
pubdate: September 09, 2018 effdate: N/A +

6. Other Reporting

+ Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + +
pubdate: September 09, 2018 effdate: N/A +

6.1. FINRA Reporting of TRF/ORF/ADF Transaction Data

+ Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of TRF/ORF/ADF Transaction Data + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + Eligible Securities, + +

Transactions in Eligible Securities reported to a FINRA trade reporting facility must be reported to the CAT by FINRA as a CSV using the fields described in Appendix D: Finra TRF Fields.

+
+
pubdate: September 09, 2018 effdate: N/A +

6.2. FINRA Reporting of OTCBB Quote Data

+ Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of OTCBB Quote Data + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + FINRA Reporting, + +

OTC Bulletin Board quote data must be reported to the CAT by FINRA as a CSV with the following fields:

+

OTC BB Quote Elements

+ + +
+
pubdate: September 09, 2018 effdate: N/A +

6.3. FINRA Reporting of Halt/Resume Data

+ Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of Halt/Resume Data + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + +

Halt/resume data must be reported to the CAT by FINRA as a CSV with the following fields:

+

FINRA Halt/Resume

+ + +
+
+
pubdate: September 09, 2018 effdate: N/A +

7. Stock Exchange Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Stock Exchange, + +
pubdate: September 09, 2018 effdate: N/A +

7.1. Order Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples, Order Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Accepted Event, + Modified Event, + +

This section will illustrate examples for an order accepted event, an order modified event, and an order canceled event using the following scenario: A new order is routed to the exchange, accepted by the exchange, updated by the firm that sent the order, and is finally canceled by the exchange.

+ + + + +
+
pubdate: September 09, 2018 effdate: N/A +

7.1.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Order Accepted Event

+ +

Order Modified Event

+ +

Order Canceled Event

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

7.2. Order Trade Event Example

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example + Compliance User: Self-Regulatory Organizations + Keywords: + Order Accepted Event, + +

This section will demonstrate a trade event example that occurs after a buy and sell order are matched. In this case, a sell order is accepted for a price of 157.20 and quantity of 100. A buy order is then accepted for a price of 157.20 and quantity of 100. The two orders are matched and a trade event is reported.

+

In this scenario, the exchange is required to report the following events to CAT:

+

1) Order Accepted Events from each of the orders; and

+

2) The order trade event

+ + + + +
pubdate: September 09, 2018 effdate: N/A +

7.2.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Order Accepted Event: Sell

+ +

Order Accepted Event: Buy

+ +

Order Trade Event

+ +
+
pubdate: September 09, 2018 effdate: N/A +

7.3. Order Route and Order Fill Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Route and Order Fill Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Order Route, + Order Fill Event Examples, + Order Accepted Event, + Order Route Event, + Order Fill Event, + +

This scenario illustrates the reporting requirements to CAT when an exchange routes an order to a routing broker-dealer for execution on an away exchange, and Exchange 1’s subsequent reporting obligation on fills of the routed order.

+

In this scenario Exchange 1 receives and reports acceptance of an order, then routes the order to their routing broker dealer for execution on an away exchange. When an execution occurs on the away exchange, the routing broker reports the fill back to Exchange 1. The following events are reported:

+

1) Order Accepted Event of the original order,

+

2) The Order Route Event, and

+

3) The Order Fill Event.

+ + + + +

JSON Examples

+

Order Accepted Event

+ +

Order Route Event

+ +

Order Fill Event

+ +
+
pubdate: September 09, 2018 effdate: N/A +

7.4. Order Restatement Example

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Restatement Example + Compliance User: Self-Regulatory Organizations + Keywords: + Restated Event, + +

This series of examples shows a restatement of a GTC order before market open the following day. Also it is assumed that a stock split on the symbol ABCD has taken effect, and that this is reflected in the restatement.

+ + + +
pubdate: September 09, 2018 effdate: N/A +

7.4.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Restatement Example, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Order Accepted Event

+ +

Order Restatement Event

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

7.5. Order Modified Example

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Modified Example + Compliance User: Self-Regulatory Organizations + Keywords: + Modified Event, + +

This section will show how an order modified event is reported when the order type is changed by the initiating member firm from a limit order to a market order. This series of events will follow the submission of a limit order from a member firm to the exchange, that is subsequently modified by the member firm.

+ + + +
pubdate: September 09, 2018 effdate: N/A +

7.5.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Modified Example, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Order Accepted Event

+ +

Order Modified Event

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

7.6. Order Adjusted Example

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Adjusted Example + Compliance User: Self-Regulatory Organizations + Keywords: + Order Adjusted Example, + +

This section will show how an order adjusted event is reported when a change in the NBBO causes the working price of an order to change. This series of events will follow the route of a peg order followed by an adjustment of the price.

+ + + +
pubdate: September 09, 2018 effdate: N/A +

7.6.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Adjusted Example, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Order Accepted Event

+ +

Order Adjusted Event

+ +
+
+
+
pubdate: September 09, 2018 effdate: N/A +

8. Options Exchange Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Exchange Event Examples, + +
pubdate: September 09, 2018 effdate: N/A +

8.1. Quote and Quote Cancel Events

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events + Compliance User: Self-Regulatory Organizations + Keywords: + Quote, + Quote Cancel Events, + +

Some exchanges use the term "order" to cover both quotes and non-quote orders. For the purpose of reporting to CAT, a quote is to be interpreted as an order/quote that qualifies as a market maker quote for the purposes of satisfying Section 6.4(d)(iii) of the CAT NMS Plan.

+

Basically, that is the section which grants relief to market makers from reporting their quotes to CAT, leaving the exchanges themselves with the sole responsibility of reporting quotes to CAT. If such order/quotes received by the exchange would provide the market maker an exemption from reporting the quote, then the order/quote must be reported to CAT as a quote, not an order.

+

CAT accepts both one-sided and two-sided quotes.

+
pubdate: September 09, 2018 effdate: N/A +

8.1.1. Two Sided Quote Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events, Two Sided Quote Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Two Sided Quote Examples, + +

The following section will provide examples of reportable events for a two-sided market maker quote when it is posted as a new quote, updated by the market maker, then canceled by the market maker or the exchange. Both the new quote and the updated quote are expressed by the Quote Event, while the quote cancel is expressed by the Quote Cancel Event.

+ + + + +

8.1.1.1. JSON Examples

+

Quote Event (Step 2)

+ +

Quote Event (Step 4)

+ +

Quote Cancel Event (Step 6a)

+ +

Quote Cancel Event (Step 5b)

+ +
+
pubdate: September 09, 2018 effdate: N/A +

8.1.2. Example One Sided Quotes

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events, Example One Sided Quotes + Compliance User: Self-Regulatory Organizations + Keywords: + Example One-sided, + +

The following section will provide examples of reported events for a one-sided market maker quote when it is posted as a new quote, updated by the market maker, then canceled by the market maker or the exchange. Both the new quote and the update are expressed by the Quote Event, while the quote cancel is expressed by the Quote Cancel Event.

+ + + +

8.1.2.1. JSON Examples

+

Quote Event (Step 2)

+ +

Quote Event (Step 4)

+ +

Quote Cancel Event (Step 6a)

+ +

Quote Cancel Event (Step 5b)

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

8.2. Option Order Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Option Order Event, + +
pubdate: September 09, 2018 effdate: N/A +

8.2.1. Example Simple Option Order Accepted

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, Example Simple Option Order Accepted + Compliance User: Self-Regulatory Organizations + Keywords: + Simple Option Order, + +

This example describes a Simple Option Order Accepted Event in which the exchange receives and accepts an order for a simple option. Note that in this example Complex Order ID is not provided because there is no parent complex order.

+ + + +
+
pubdate: September 09, 2018 effdate: N/A +

8.2.1.1. JSON Example

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, JSON Example + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Simple Option Order Accepted Event

+ +
+
pubdate: September 09, 2018 effdate: N/A +

8.2.2. Example Complex Option Order Accepted Event

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, Example Complex Option Order Accepted Event + Compliance User: Self-Regulatory Organizations + Keywords: + Complex Option Order Accepted, + +

In the example below, the exchange only creates leg orders at the time an order is executed. Thus, an order on the complex option would have a report sent to CAT for an order accepted event at the parent level of the complex order. Any leg reports would wait until the leg orders are actually created when a trade occurs.

+

The examples in this section will use an order on the complex option with optionID 9843. This hypothetical complex option has two option series legs:

+ +

For this example, we suppose at 192411.121456789 on April 20, 2017 an order was accepted for 10 units of complex option 9843 at net price -65 per unit.

+ + + +

8.2.2.1. JSON Examples

+

Complex Order Accepted Event (Step 3)

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

8.3. Simple Option Trade Event Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Simple Option Trade Event Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Simple Option Order, + +

The below section will provide an example of a trade event for an option series where a broker order is executed against an existing market maker quote.

+ + + + +
pubdate: September 09, 2018 effdate: N/A +

8.3.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Simple Option Trade Event Examples, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Quote Event

+ +

Simple Option Order Accepted Event

+ +

Option Trade Event

+ +
+
+
pubdate: September 09, 2018 effdate: N/A +

8.4. Complex Options Trade Events and Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Complex Options Trade Events and Examples + Compliance User: Self-Regulatory Organizations + Keywords: + Complex Options Trade Events, + +

In all cases, complex option trades are reported to CAT only at the leg level. There is no roll-up trade reported at the complex order level. For example, an order on the complex option (ID 9851) below would have had corresponding orders reported to CAT for each of the underlying legs. As the following examples will show, trades on this complex option will report by leg, with each leg trade event corresponding to an order event on the leg that is in turn attached to a parent-level complex order event.

+ +

This section follows a series of trade events on the complex option described above, along with examples of the quotes and orders that would be referenced in those trades.

+

• A new market maker quote is posted for the option leg 1491

+

• A new market maker quote is posted for the option leg 1492

+

• An order is placed for quantity 10 of the complex option 9851

+

• A trade on the first option leg 1491 is reported (10 contracts)

+

• A trade on the second option leg 1492 is reported (10 contracts)

+

• A route on the stock leg XYZZY is reported (1,000 shares)

+ +

• A fill on the stock leg XYZZY is reported (1,000 shares)

+ + + + + + +
pubdate: September 09, 2018 effdate: N/A +

8.4.1. JSON Examples

+ Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Complex Options Trade Events and Examples, JSON Examples + Compliance User: Self-Regulatory Organizations + Keywords: + JSON Examples, + +

Quote Event (Step 2)

+ +

Quote Event (Step 4)

+ +

Complex Option Order Accepted Event (Step 7)

+ +

Simple Option Order Accepted Event (Step 8)

+ +

Simple Option Order Accepted Event (Step 9)

+ +

Stock Leg Order Accepted Event (Step 10)

+ +

Option Trade Event (Step 11)

+ +

Option Trade Event (Step 12)

+ +

Option Route Event (Step 13)

+ +

Stock Leg Fill Event (Step 14)

+ +
+
+
+
pubdate: September 09, 2018 effdate: N/A +

9. Submission Process

+ Topic: CAT Participant Technical Specifications v1.7.1, Submission Process + Compliance User: Self-Regulatory Organizations + Keywords: +

This section is excluded for security purposes.

+
+
pubdate: September 09, 2018 effdate: N/A +

10. Feedback and Corrections

+ Topic: CAT Participant Technical Specifications v1.7.1, Feedback and Corrections + Compliance User: Self-Regulatory Organizations + Keywords: +

This section is excluded for security purposes.

+
+
pubdate: September 09, 2018 effdate: N/A +

11. Testing

+ Topic: CAT Participant Technical Specifications v1.7.1, Testing + Compliance User: Self-Regulatory Organizations + Keywords: +

This section is excluded for security purposes.

+
+
pubdate: September 09, 2018 effdate: N/A +

12. Additional Information

+ Topic: CAT Participant Technical Specifications v1.7.1, Additional Information + Compliance User: Self-Regulatory Organizations + Keywords: + CAT Public Website, + +

Additional information is available from the CAT Public Website or the Service Desk. Details are provided below.

+
pubdate: September 09, 2018 effdate: N/A +

12.1. Public Website

+ Topic: CAT Participant Technical Specifications v1.7.1, Additional Information, Public Website + Compliance User: Self-Regulatory Organizations + Keywords: + Sec Rule 613, + +

Public Website (http://www.catnmsplan.com) is to provide primary information about CAT. The content will include: Link to SEC Rule 613, Press Releases, Technical Specifications, User Manuals, FAQs, Training Materials and Contact info.

+
+
pubdate: September 09, 2018 effdate: N/A +

12.2. CAT Service Desk

+ Topic: CAT Participant Technical Specifications v1.7.1, Additional Information, CAT Service Desk + Compliance User: Self-Regulatory Organizations + Keywords: + Sec Rule 613, + +

The Service Desk is the primary source for answers to questions about interpretation of SEC Rule 613, clock synchronization, reporting responsibilities, technical specifications for reporting to CAT, and more.

+

Meanwhile, the Service Desk is the primary source that provides technical support on data submission, account maintenance, and queries. Strict security controls are applied on this type of support. Additional identification information or web portal access may be required.

+
+
+
pubdate: September 09, 2018 effdate: N/A +

Appendix

+ Topic: CAT Participant Technical Specifications v1.7.1, Appendix + Compliance User: Self-Regulatory Organizations + Keywords: + Clock Synchronization Requirement, + Failure Codes, + Corporate Action Formats, + BATS Specifications, + +

A. Clock Synchronization Requirement

+

In previous sections, details are described regarding the Order Events and data elements. Timestamp, as one of the required data elements for each order event, must be correctly recorded by Participants at predefined granularity. This section provides detailed requirements and a recommended approach to how Participants should manage clock synchronization.

+

In order to comply with CAT NMS Plan requirements of Clock Synchronization and correctly record the Timestamp fields for order events. Participants are required synchronize Business Clocks at a minimum to within 100 microseconds1 of the time maintained by the National Institute of Standards and Technology (NIST).

+

The tolerance includes:

+

• The difference between the NIST standard and a time provider’s clock;

+

• Transmission delay from the source; and

+

• The amount of drift in the Participant's clock.

+

In order to ensure the accuracy of timestamps for Reportable Events, Participants are anticipated to adopt policies and procedures to verify such required synchronization each Trading Day (1) before the market opens, and (2) periodically throughout the Trading Day. Participants are recommended to keep documentation which provides details of their Business Clock synchronization process, and the resulting log files from the implementation of such processes.

+

Any time provider and technology may be used for clock synchronization as long as the Business Clocks are in compliance with the accuracy requirement.

+

If additional details are needed, please refer to the Clock Sync User Guide to be published.

+

Note: The tolerance for clock synchronization does not impact the amount of time allowed for CAT reporting. CAT does NOT require reporters to report order information within 100 microseconds of receiving an order.

+

B. Failure Codes

+

A failure code is a machine-parseable description of why a file or record was rejected. This differs from a failure description, which is intended for human consumption.

+

Each failure code is divided into a failure category, sub-category, and value, joined together by a period. Each category roughly corresponds to the stage of processing at which a file or record was rejected. The following failure categories are defined:

+

• FILE - a problem with file name or permissions, with the following sub-categories:

+

• NAME - a problem with the file name

+

• PERM - a problem with file permissions

+

• TIMEOUT - a timeout waiting for the corresponding data or meta file

+

• INT - a problem with file metadata or hash, with the following sub-categories:

+

• META - an incorrect or mismatched metadata value

+

• MD - a problem with a member dictionary file or record, with the following subcategories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• SD - a problem with a symbol dictionary file or record, with the following subcategories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• OD - a problem with a options dictionary file or record, with the following subcategories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• NASD_D, NYSE_D, BATS_D, FINRA_D - a problem with a daily submission record record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• OE - a problem with an order event file or record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• INGEST - a problem with an individual record encountered in the ingestion stage

+

• NORM - a problem with an individual record encountered in the normalization stage

+

• SYNC - a problem with an individual record encountered in the synchronization stage

+

• LINK - a problem with an individual record encountered in the linkage discovery stage

+

• FT - a problem with a FINRA transaction record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• NT - a problem with a Nasdaq trade record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• OQ - a problem with a OTCBB quote record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• SM - a problem with a symbol master file or record, with the following sub-categories:

+

• COUNT - fewer or more records in the file than specified by the Record Count

+

• REC - a problem with an individual record

+

• ADD - the record parsed fine, but the ADD request failed

+

• UPDATE - the record parsed fine, but the UPDATE request failed

+

A failure code may be used for warnings or errors, distinguished by the severity field in the failure report. The failure code itself does not distinguish between a warning (in which a record is accepted but still shows up in the failure report) and an error (which causes a record to be rejected).

+

C. Corporate Action Formats

+

C.1. NASDAQ Specifications

+

NASDAQ will submit all data for the day using a single file type, similar to all other file submissions, with the base filename NASDDaily. The file will contain any or all record types listed in this section, and shall be submitted in JSON format. Note that each record type is identified by a type field.

+

C.1.1. NASDAQ Equities Daily List - Notes for the Day

+ +

C.1.2. NASDAQ Equities Daily List

+ + + + + + +

C.1.3. NASDAQ Dividends Daily List

+ + + + +

C.1.4. NASDAQ Next Day X-Rates Daily List

+ + + + +

C.2. BATS Specifications

+

Bats will submit all reports using one single file type, with the base filename BATSDaily. Each report will be submitted in CSV format, where the first column designates the type of that record. Each record type may have different numbers of columns, but each record of the same type must have all columns in the definition for that record type.

+

C.2.1. Header Record

+

The very first record of the file must be a header record, which provides general information about the submitted records. There must be exactly one header record, which contains the following fields.

+

Header Record

+ +

C.2.2. Daily Listed Securities Record

+

Daily Listed Securities Record Fields

+ + + +

C.2.3. Daily Distribution Record

+

Daily Distribution Record Fields

+ + + +

C.2.4. Daily Corporate Action Record

+

Daily Corporate Actions Record Fields

+ + + + +

C.3. NYSE Specification

+

The NYSE Group Corporate Actions product is comprised of several reports and provides information for equities listed on the NYSE, NYSE MKT and NYSE Arca market centers, including, but not limited to, new listings (for example IPOs, spin-offs and structured product listings), corporate actions, cash dividends, proxy related matters, and so forth.

+

NYSE will submit all reports using one single file type, with the base filename NYSEDaily. Each report will be submitted in CSV format, where the first column designates the type of that record. Each record type may have different numbers of columns, but each record of the same type must have all columns in the definition for that record type.

+

Data types and formats are consistent with all other CAT reporting data types.

+

C.3.1. NYSE Corporate Actions

+

The NYSE corporate actions and group ex-date corporate actions will be submitted with a record of this type.

+

NYSE Group Daily Corporate Actions & NYSE Group Ex-Date Corporate Actions

+ + +

C.4. FINRA Daily Specification

+ +

C.4.1. FINRA Corporate Actions

+

The layout of the FINRA Corporate Action.

+

FINRA OTC Corporate Action

+ + +

The following table contains the valid choices for the field DAILY_LIST_RSN_CD.

+

Daily List Reason Codes

+ + + +

D. FINRA Trade Reporting Facility (TRF) Fields

+

These message types go into the FinraTransactions file kind.

+

TRF Trade Report Required Fields

+ + + + + + + + + + +

E. Market Move Scenarios

+

This appendix provides guidance on how some common scenarios where a listed symbol can move from one listing participant to another should be handled.

+

E.1. Common Scenarios

+

These are common scenarios, with well established procedures.

+

E.1.1. OTC to Exchange

+

Security ABCD trades OTC on 7/27/2017. Security moves to Exchange A on 7/28/2017 and is assigned new symbol WXY.

+

FINRA: On 7/27/2017, submit update record for ABCD, to change end date to 20170727. This explicit delisting step is the preferred method of operation. However, a transfer can still occur without it.

+

EXCHANGE A: Anytime before 7/28/2017, Exchange A will submit transfer request to change:

+

• Listing Participant to Exchange A

+

• Issue Type to NMS

+

• Symbol to WXY

+

Some time after the market closes on 7/27/2017, and before 2:00AM on 7/28/2017, a scheduled job will automatically run within the CAT system to transfer the symbol to EXCHANGE A. If the symbol is still owned (i.e., the endDate overlaps the new effectiveDate), then endDate will be set to the date the transfer job runs, so that it is released before being transferred. This job will then change the beginDate for the new owner to be the same as the effectiveDate in the transfer request, and will change the endDate for the new owner to 99991231.

+

Trades in symbol WXY that occur on 7/28/2017 should be accepted. If the Exchange adds WXY, rather than submitting a transfer, the link between the two symbols will not exist – so the move should be handled with an update, rather than an add.

+

E.1.2. Exchange to OTC

+

Security ABC trades on Exchange A on 7/27/2017. Security is delisted effective 7/28/2017 and will trade over-the-counter as ABCF.

+

EXCHANGE A: On 7/27/2017, submit update record for ABC, to change end date to 20170727. This explicit delisting step is the preferred method of operation. However, a transfer can still occur without it.

+

FINRA: Anytime before 7/28/2017, FINRA will submit update record to change:

+

• Listing Participant to FINRA

+

• Issue Type to OTC

+

• Symbol to ABCF

+

Some time after the market closes on 7/27/2017, and before 2:00AM on 7/28/2017, a scheduled job will automatically run within the CAT system to transfer the symbol to FINRA. If the symbol is still owned (i.e., the endDate overlaps the new effectiveDate), then endDate will be set to the date the transfer job runs, so that it is released before being transferred. This job will then change the beginDate for the new owner to be the same as the effectiveDate in the transfer request, and will change the endDate for the new owner to 99991231.

+

Trades in symbol ABCF that occur on 7/28/2017 should be accepted. If FINRA adds ABCF, rather than submitting a transfer, the link between the two symbols will not exist – so the move should be handled with an update, rather than an add.

+

E.1.3. Exchange to Exchange

+

The process is the same as the two examples above, with FINRA being replaced by the other listing exchange.

+

E.2. Other Scenarios

+

These scenarios require further discussion to determine the best procedure.

+

E.2.1. No Definitive Destination

+

Security is delisting from exchange, but FINRA does not have definitive indication that security will trade OTC.

+

An Exchange delists a symbol, but FINRA doesn’t plan to add the symbol to OTC immediately, as we’re not sure what the issuer plans to do (company may be defunct, for example). No trades are received in the symbol after delisting.

+

A delisting should submit an Update Symbol Entry record to CAT, delisting the symbol by changing the endDate to the last day that the symbol was listed for that participant. This ensures that the symbol is not listed at all. If/when the symbol is re-listed, a transfer request is submitted by the new listing participant (FINRA). This may result in some number of days where the symbol is not listed. If any events are received for that symbol during that timeframe, those events will be rejected for having an invalid symbol.

+

E.2.2. Trades OTC While Suspended

+

Security is suspended by the exchange, and trades over the counter while suspended

+

Nasdaq may put a security in the “suspended” state prior to formally delisting it. While suspended, it can be added to the OTC master and actively trade for up to 30 days before the exchange ultimately deletes it or the issuer successfully appeals and the security resumes being listed.

+

The exchange should update the endDate for when the security is suspended by submitting an Update Symbol Entry record. If FINRA picks it up for trading, then FINRA can submit a transfer request to transfer the security to FINRA. If the exchange ultimately does not de-list the security, the exchange can submit a transfer request to transfer the security back to themselves.

+

E.2.3. Move From OTC to Exchange with Symbol and CUSIP Change

+

Security is moving from OTC to an exchange, and simultaneously undergoing a symbol and CUSIP change

+

When FINRA knows the symbol is listing, it will process the OTC delete and once the new symbol is known, send an update with the new symbol and exchange information. We do not always know the new symbol until it has actually listed, however – so that security update record will come after the listing occurs.

+

This should follow Scenario A. The exchange will provide the transfer request to move the security with the correct symbol, and, if practical, FINRA will explicitly release the symbol beforehand.

+

E.2.4. Move to OTC Postponed by Exchange

+

The exchange tells FINRA a security will be listing on the next day, so FINRA processes the OTC end date and updates the security to the exchange – and then the listing is postponed by the exchange.

+

FINRA receives an Add from the exchange on their overnight file, and FINRA relinquishes the security as a result. The exchange notifies FINRA manually the next morning that the listing has been postponed. In the event that FINRA has already sent the end date for the security and relinquished it, and now needs to retract that, what should we do?

+

FINRA can submit another update to change the OTC end date back to 99991231 so that the system can continue to accept OTC trades for the security.

+

E.2.5. Move to OTC Intraday

+

FINRA finds out intraday that a symbol is delisting and needs to be added to OTC.

+

Occasionally, FINRA needs to add a symbol intraday when it delists. If that security has already been trading under the prior symbol, in most cases, FINRA will not change the symbol/add the security until the next day. But there are rare cases where the symbol needs to be moved and changed intraday. How will that scenario be handled?

+

This scenario needs further thought/discussion. While not frequent, there are cases where a security may be exchange listed at the start of the day and firms may submit orders, and then after market open, the issuer files for bankruptcy/merges, etc and the symbol is moved to OTC and begins trading there. In this case, the system needs to accommodate the security having the same End Date on the exchange as its Begin Date on OTC.

+

E.2.6. Temporary Deactivation

+

OTC issues can become inactive due to lack of trading or other activity, and can subsequently begin trading again and be re-activated as a result. When FINRA end-dates a security and it subsequently needs to be re-activated, should we submit an update record to provide a new Begin Date and End Date for the new period of trading?

+

As long as no one has used that symbol in the interim, FINRA should just submit an update to the symbol to change the end date to 99991231 when the symbol begins trading OTC again.

+

E.2.7. Trading Outside Listing Dates

+

Trading in securities prior to symbol start date or as-of reporting after the symbol end date.

+

In the OTC space, a security may trade before a firm requests a symbol for the security. When FINRA receives the symbol request and enters the security, the begin date for that security is the date it is set up. However, firms can enter as-of trades in that symbol with execution dates before the begin date. The report date of the trade has to be on or after the start date of the security, but the execution date does not.

+

After an OTC security has been inactivated, a firm can still submit as-of trades on that security with execution dates prior to the inactivation date. In that case, execution date will be the key field, since it will be before the inactivation date of the security, but the report date will be after.

+

This scenario needs further thought/discussion.

+

E.2.8. As-of Trades in Delisted Symbols

+

As-of trades in delisted exchange symbols

+

An exchange delists security ABC, and it begins trading over the counter as ABCF. A firm has trading activity in ABC that it should have reported prior to the delisting. Because symbol ABC has delisted, the exchange will no longer accept trades in that symbol, so the firm must report the trades to ORF as-of, under symbol ABCF – but the execution date of the trades will be before the Start Date of the OTC symbol.

+

This scenario needs further thought/discussion.

+

F. Encryption Example

+

This section is excluded for security purposes.

+

G. Data Dictionary

+

This dictionary contains definitions for each term used throughout the technical specification.

+

askPrice

+

Events: Quote Event

+

The price being asked for the option in a quote.

+

askQty

+

Events: Quote Event

+

The quantity being asked for the option in a quote.

+

attributes

+

Reference Data: Symbol Entry

+

A Name Value Pairs field, containing attributes associated with a symbol that are meaningful, but may not be permanent. For example, the tick pilot group is meaningful now, but may not be so in the near future. In addition, there may be other "pilots" that may require additional information for symbols.

+

This field is a Symbol Entry Pair data type, and allowed values for this field must be defined in the data dictionary entry for Symbol Entry Pairs.

+

awayExchange

+

Events: Self Help Declaration

+

Exchange ID of the exchange affected by the self help event.

+

beginDate

+

Reference Data: Symbol Entry

+

The effective date of the symbol - the first date on which a symbol is an active listing.

+

bidPrice

+

Events: Quote Event

+

The price being bid for the option (can be zero in two-sided quote) in a quote event.

+

bidQty

+

Events: Quote Event

+

The quantity being bid for the option (can be zero in two-sided quote) in a quote event.

+

buyDetails

+

Events: Order Trade Event, Trade Correction Event, Option Trade Event, Options Trade Correction Event

+

Object in a trade event that contains information for the buy side of the trade. Format and element definitions for Buy Details are described in Trade Side Details. For side trade details for equities, please refer to section 4.5. For side trade details for option, please refer to section 5.2.5.1.

+

cancelQty

+

Events: Order Canceled Event, Options Order Canceled Event

+

The quantity being canceled in Order Cancel Event and Options Order Canceled Event. A value of zero means that the cancel was for the full remaining quantity. For example, if an order for 500 shares had partially executed 200 shares, and then the remainder was canceled, the cancelQty could contain either 300 or 0.

+

cancelReason

+

Events: Order Canceled Event, Quote Cancel Event, Options Order Canceled Event

+

Expresses the cancellation reason for a quote or order with one of the below accepted values. Additional values may be added by request.

+

Allowed Values:

+

IOC Immediately canceled

+

EXP Expired

+

REQ Explicit request to cancel the order

+

DIS Session disconnected

+

ALL Market Maker Canceled All Quotes

+

Allowed Values (CBOE):

+

NOTHING_DONE

+

USER

+

SYSTEM

+

LOST_CONNECTION

+

INSUFFICIENT_QUANTITY

+

SPECIAL_ADJUSTMENT

+

QRM_REMOVED

+

INSUFFICIENT_QUANTITY_BUY_SIDE

+

INSUFFICIENT_QUANTITY_SELL_SIDE

+

WASH_TRADE_PREVENTION

+

QUOTE_UPDATE_CONTROL

+

FAILOVER

+

QUOTE_IN_TRIGGER

+

INVALID_SESSION_ID

+

SAL_IN_PROGRESS

+

CROSS_IN_PROGRESS

+

INVALID_NBBO

+

NOT_WITHIN_NBBO

+

TRADE_THROUGH_CBOE

+

INSUFFICIENT_CUSTOMER_ORDER_QUANTITY

+

INSUFFICIENT_CROSS_ORDER_SIZE

+

INSUFFICIENT_CROSS_ORDER_DOLLAR_AMOUNT

+

SELL_SHORT_RULE_VIOLATION

+

CANCEL_ON_RSS

+

CALL_BID_EXCEEDS_UNDERLYING_PRICE

+

PUT_BID_EXCEEDS_STRIKE_PRICE

+

LIMIT/EXECUTION_PRICE_WOULD_BE_DEBIT

+

LIMIT/EXECUTION_PRICE_EXCEEDS_MAX_VALUE

+

NO_USER_ACTIVITY

+

BROKER_OPTION

+

CANCEL_PENDING

+

CROWD_TRADE

+

DUPLICATE_ORDER

+

EXCHANGE_CLOSED

+

GATE_VIOLATION

+

INVALID_ACCOUNT

+

INVALID_AUTOEX_VALUE

+

INVALID_CMTA

+

INVALID_FIRM

+

INVALID_ORIGIN_TYPE

+

INVALID_POSITION_EFFECT

+

INVALID_PRICE

+

INVALID_PRODUCT

+

INVALID_PRODUCT_TYPE

+

INVALID_QUANTITY

+

INVALID_SIDE

+

INVALID_SUBACCOUNT

+

INVALID_TIME_IN_FORCE

+

INVALID_USER

+

LATE_PRINT

+

NOT_FIRM

+

MISSING_EXEC_INFO

+

NO_MATCHING_ORDER

+

NON_BLOCK_TRADE

+

NOT_NBBO

+

COMM_DELAYS

+

ORIGINAL_ORDER_REJECTED

+

OTHER

+

PROCESSING_PROBLEMS

+

PRODUCT_HALTED

+

PRODUCT_IN_ROTATION

+

STALE_EXECUTION

+

STALE_ORDER

+

ORDER_TOO_LATE

+

TRADE_BUSTED

+

TRADE_REJECTED

+

ORDER_TIMEOUT

+

REJECTED_LINKAGE_TRADE

+

SATISFACTION_ORD_REJ_OTHER

+

UNKNOWN_ORDER

+

INVALD_EXCHANGE

+

TRANSACTION_FAILED

+

NOT_ACCEPTED

+

SUSPENDED

+

AWAY_EXCHANGE_CANCEL

+

LINKAGE_CONDITIONAL_FIELD_MISSING

+

LINKAGE_EXCHANGE_UNAVAILABLE

+

LINKAGE_INVALID_MESSAGE

+

LINKAGE_INVALID_DESTINATION

+

LINKAGE_INVALID_PRODUCT

+

LINKAGE_SESSION_REJECT

+

Allowed Values (BATS):

+ +

Allowed Values (BOX):

+

TraderCancelled

+

Eliminated

+

EliminatedByCircuitBreaker

+

EliminatedOnDisconnection

+

EliminatedByMarketControl

+

EliminatedDueToTradingRestriction

+

EliminatedDueToTradeLimitExceeded

+

EliminatedDueToTradeActivityLimitExceeded

+

EliminatedDueToMaximumNbTriggersLimitExceeded

+

EliminatedDueToDrillThroughProtection

+

EliminatedOutOfLimits

+

Allowed Values (MIAX):

+ +

Allowed Values (MIAX Pearl):

+ +

Allowed Values (CHX):

+

A001_02A New SNAP Order Reject - Order Terms are not valid for SNAP

+

A001_02B New SNAP Order Reject - Invalid market condition

+

A001_07 Cancel Order, SNAP auction end

+

A001_11 SNAP Auction - Cancel of Satisfy/Route Order

+

A001_13 SNAP Auction - Reject of Satisfy/Route Order

+

A001_15 Cancel Order on SNAP Auction - Resting

+

U400_01 order reject-invalid content

+

U400_04 order reject-invalid trading session

+

U400_05 order reject-invalid market state

+

U400_06 order reject-invalid market conditions

+

U400_07 order message cannot be parsed

+

U400_08 order from PMM not is registered stock

+

U400_09 order from PMM did not include position

+

U400_10 order from PMM with position/side discrepancy

+

U400_11 IOC Order Reject-No PM LS

+

U400_14 Market IOC orders not allowed during extended sessions

+

U400_17 New AOO reject

+

U415_01 ME DAS Order Cancel on Restart

+

U430_01 satisfy cross reject-not regular-way settlement

+

U430_02 satisfy cross reject-short sale test failure

+

U430_03 satisfy cross reject-NBBO trade through

+

U430_04 satisfy cross reject-insufficient satisfy volume available

+

U430_05 satisfy cross reject-outside crossed NBBO

+

U430_06 satisfy cross reject-crossed market

+

U431_01 yield cross reject-not regular-way settlement

+

U431_02 yield cross reject-short sale test failure

+

U431_03 yield cross reject-NBBO trade through

+

U431_04 yield cross reject-unwilling to yield appropriate side

+

U431_05 yield cross reject-outside crossed NBBO

+

U431_06 yield cross reject-crossed market

+

U432_01 cross reject-too late for cash settlement

+

U432_02 cross reject-short sale test failure

+

U432_03 cross reject-NBBO trade through

+

U432_04 cross reject-outside crossed NBBO U432_05 cross reject-crossed market

+

U432_06 cross reject-CHX trade through

+

U432_07 cross reject-CHX lock-insufficient size out

+

U432_09 Cross Reject - Price is outside the band

+

U432_10 For cross order rejected price at trade-at

+

U433_01 order reject-outside crossed market NBBO

+

U433_02 order reject-crossed market

+

U433_03 order cancel-unable to display remaining volume

+

U433_04 FOK/IOC Cancel-No Match Opportunity

+

U436_01 midpoint cross reject-market crossed

+

U436_02 midpoint cross reject-market halted

+

U437_01 order cancel-TIF expired

+

U441_01A reject incoming order-NBBO trade through

+

U441_01B cancel resting undisplayed order-NBBO trade through

+

U441_02 Post Only Cancel

+

U441_03 Quote Only

+

U441_05 order was cancelled because received reject message from away market

+

U441_06 SSH Violation

+

U441_07 New incoming order get cancelled because of order’s limit price cross price

+

band (reserved, un-displayed order)

+

U441_08 Resting order get cancelled because of order’s limit price cross price band (reserved, un-displayed order)

+

U441_09 Order was canceled because of stale order.

+

U450_01 cancel order activity

+

U450_03 cancel reject-order not found

+

U451_01 cancel change reject-market halted

+

U451_02 cancel change-cancel original order

+

U451_06 cancel change reject-order not open

+

U451_08 cancel change reject-order not found

+

U451_11 Reject cancel replace to MKT of DAY order

+

U480_02 order canceled on halt

+

U482_02 close time expiration-cancel order activity

+

U482_05 manual close-cancel order activity

+

U482_06 Order gets cancelled because of trading pause.

+

U485_05 Manual Open-Cancel Opening Crosses

+

U485_06 Primary Quote Open-Cancel Opening Crosses

+

U490_02 open timer expiration-cancel opening cross order activity

+

U491_02 firm disconnect-cancel order activity

+

U495_01 ME DAS Order Cancel on Disconnect

+

U496_01 ME DAS Order Cancel on DAS Instruction

+

U497_01 Manual Unsolicited Order Cancel

+

U498_01 Unsolicited cancel because of MTP Cancel Incoming (N)

+

U498_02 Unsolicited cancel because of MTP Cancel Resting (O)

+

U498_03 Unsolicited cancel of the incoming order because of MTP Cancel Both (B)

+

U498_04 Unsolicited cancel of the resting order because of MTP Cancel Both (B)

+

U499_01 Unsolicited Cancel or Reject because Kill Switch Flag is ON.

+

U499_02 Unsolicited cancel because of Kill Switch Cancel Request

+

U900_03 ME receives an Order Cancel from ORS

+

U900_05 ME receives an Order Reject from ORS

+

U900_06 ME receives an internal Order Reject from ORS

+

Allowed Values (IEX):

+ +

Allowed Values (Nasdaq - PHLX, NASD, and BX Options exchanges):

+

1 AUTOPURGE

+

2 POD

+

3 FIRM

+

4 REASSIGN

+

5 HALT

+

6 AIQ

+

7 MANUPURGE

+

8 OPENPURGE

+

9 REPRICE

+

10 SUSPEND

+

11 LIQUIDITY TAKER

+

12 RAPID FIRE VOL

+

13 ZAP DELETE

+

14 KILLSWITCH AUTO

+

15 KILLSWITCH CMD LINE

+

16 KILLSWITCH TRADEINFO

+

17 notPermitted

+

18 badStopPrice

+

19 systemClosed

+

20 invalidDisplay

+

21 invalidType

+

22 invalidFirm

+

23 invalidClearing

+

24 halt

+

25 invalidTime

+

26 invalidCross

+

27 invalidMpid

+

28 invalidMinSize

+

29 alreadyOpened

+

30 restrictedSymbol

+

31 closeCross

+

32 invalidSymbol

+

33 testmode

+

34 invalidPrice

+

35 tiedToStockNotAllowed

+

36 invalidSize

+

37 limitTooDeep

+

38 featureNotSupported

+

39 systemError

+

40 invalidAttribute

+

41 suspend

+

42 notFreeTrading

+

43 nbboTooWide

+

44 changeContractsNoOrder

+

45 changeContractsInvalid

+

46 reentry

+

47 killswitch_reentry

+

48 postOnlyReprice

+

49 undLULD

+

50 invalidPreOpenIoc

+

51 userCancel

+

52 ioc

+

53 timeout

+

54 unsolictedOutReentry

+

55 routeRequest

+

56 staleOrder

+

57 sppLimit

+

58 auctionInProgress

+

59 engineCancel

+

60 tooLateToAct

+

61 noAuction

+

62 invalidTIF

+

63 aonNotAllowed

+

64 bboCross

+

65 purge

+

66 orderExpired

+

67 aiq

+

68 cnbboLimit

+

69 noBbo

+

70 mktOrder

+

71 treasuryOptionsNotAllowed

+

72 openingCancel

+

73 executionNotPossible

+

74 badCapacity

+

75 optionNotOpen

+

76 openDelay

+

77 liquidityTaker

+

78 killSwitch

+

79 adminCancel

+

80 systemCancel

+

81 brokerOption

+

82 invalidCrossSurrender

+

83 cod

+

84 eodCancel

+

OTHER Other

+

Allowed Values (Nasdaq - ISE, GEMINI, and Mercury Options exchanges):

+

1 AUTOPURGE

+

2 POD

+

3 FIRM

+

4 REASSIGN

+

5 HALT

+

6 AIQ

+

7 MANUPURGE

+

8 OPENPURGE

+

9 REPRICE

+

10 SUSPEND

+

11 LIQUIDITY TAKER

+

12 RAPID FIRE VOL

+

13 ZAP DELETE

+

14 KILLSWITCH AUTO

+

15 KILLSWITCH CMD LINE

+

16 KILLSWITCH TRADEINFO

+

17 KILLSWITCH USER

+

18 notPermitted

+

19 invalidStopPrice

+

20 systemClosed

+

21 invalidDisplay

+

22 invalidType

+

23 invalidFirm

+

24 invalidClearing

+

25 halt

+

26 invalidTime

+

27 invalidCross

+

28 invalidMpid

+

29 invalidMinSize

+

30 alreadyOpened

+

31 restrictedSymbol

+

32 closeCross

+

33 invalidSymbol

+

34 testmode

+

35 invalidPrice

+

36 tiedToStockNotAllowed

+

37 invalidSize

+

38 limitTooDeep

+

39 featureNotSupported

+

40 systemError

+

41 invalidAttribute

+

42 suspend

+

43 notFreeTrading

+

44 nbboTooWide

+

45 changeContractsNoOrder

+

46 changeContractsInvalid

+

47 reentry

+

48 killswitchReentry

+

49 postOnlyReprice

+

50 undLULD

+

51 invalidPreOpenIoc

+

52 userCancel

+

53 ioc

+

54 timeout

+

55 unsolictedOutReentry

+

56 routeRequest

+

57 staleOrder

+

58 sppLimit

+

59 auctionInProgress

+

60 engineCancel

+

61 tooLateToAct

+

62 noAuction

+

63 invalidTIF

+

64 aonNotAllowed

+

65 bboCross

+

66 purge

+

67 orderExpired

+

68 aiq

+

69 cnbboLimit

+

70 noBbo

+

71 mktOrder

+

72 treasuryOptionNotAllowed

+

73 openingCancel

+

74 executionNotPossible

+

75 invalidCapacity

+

76 optionNotOpen

+

77 openDelay

+

78 liquidityTaker

+

79 killswitchPurge

+

80 adminCancel

+

81 systemCancel

+

82 brokerOption

+

83 invalidSide

+

84 invalidSpread

+

85 invalidAuctionType

+

86 invalidFormat

+

87 frozen

+

88 requestPending

+

89 cancelUp

+

90 cancelDown

+

91 postOnlyTaker

+

92 invalidState

+

93 tooManyAuctions

+

94 invalidAuctionParams

+

95 rejectedReplace

+

96 massCancel

+

97 invalidReprice

+

98 price

+

99 size

+

100 nbboLimit

+

101 impliedExec

+

102 tooManyImplieds

+

103 complexInstrExists

+

104 exceededMaxComplexInstr

+

105 firmExceededMaxComplexInstr

+

106 invalidPtaContracts

+

107 invalidMatchId

+

108 invalidTradeId

+

109 invalidCrossId

+

110 invalidClientId

+

111 dnttNotAllowed

+

112 instrumentClosed

+

113 atrLimitReached

+

114 invalidISO

+

115 invalidStepupPrice

+

116 threeTickLimitReached

+

117 pending

+

118 pennyNbboRestriction

+

119 invalidDntt

+

120 invalidInstrType

+

121 invalidOrderType

+

122 invalidALO

+

123 invalidFlashInst

+

124 invalidPrefParty

+

125 invalidReserveInfo

+

126 invalidPersist

+

127 invalidShortSaleInd

+

128 invalidProduct

+

129 invalidScope

+

130 invalidOpenClose

+

131 invalidToken

+

132 invalidKillAction

+

133 invalidLegCount

+

134 invalidLegType

+

135 invalidLegRatio

+

136 invalidCrossType

+

137 prefNotAllowed

+

138 orderNotFound

+

139 actionNotAllowed

+

140 instrumentState

+

141 qccNotAllowed

+

142 qccWithStockNetPriceNotAllowed

+

143 qccWithMultiOptLegNotAllowed

+

144 invalidDestination

+

145 maxRoutesAttempted

+

146 destinationNotAvailable

+

147 minQtyNotSatisfied

+

148 sorRespTimeout

+

149 invalidAllocSplits

+

150 qccWithStockPriceNotAllowed

+

151 tooManyStockTradeAttempts

+

152 notTob

+

153 cod

+

154 poolExhausted

+

155 eodCancel

+

OTHER OTHER

+

Allowed Values (Nasdaq Equities):

+

1 User requested cancel. Sent in response to a Cancel Order Message or a Replace Order Message

+

2 Immediate or Cancel order.

+

3 Timeout. The Time In Force for this order has expired

+

4 Supervisory.

+

5 This order cannot be executed because of a regulatory restriction

+

6 Self Match Prevention.

+

7 System cancel.

+

8 Cross canceled. Non-bookable cross orders that did not execute in the cross.

+

9 Order cancelled due to insufficient quantity

+

10 This order cannot be executed because of Market Collars

+

11 Halted. The on-open order was canceled because the symbol remained halted after the opening cross completed.

+

12 Open Protection. Orders that are cancelled as a result of the Opening Price Protection Threshold.

+

13 Closed. Any DAY order that was received after the closing cross is complete in a given symbol will receive this cancel reason.

+

14 System cancel. This order was cancelled because it was rejected by an away destination; includes midpoint orders cancelled due to a crossed market.

+

15 Administrative cancel

+

16 Post Only Cancel. This Post Only order was cancelled because it would have been price slid for NMS.

+

17 Post Only Cancel. This Post Only order was cancelled because it would have been price slid due to a contra side displayed order on the book

+

ADMIN for an administrative cancel FEATURE in the service of a customer-requested feature

+

capacity

+

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Trade Event, Order Fill Event, Order Modify Route Event, Order Restatement Event

+

Specifies the capacity of a given order or side of a trade.

+

Allowed Values:

+

Agency

+

Principal

+

RisklessPrincipal

+

clearingFirm

+

Events: Stock Leg Order Event, Stock Leg Fill Event

+

The Member Alias of the clearing firm.

+

clearingNumber

+

Events: Order Trade Event, Order Fill Event, Stock Leg Fill Event

+

DTCC clearing number reported for each side of a stock trade or for the reporting side of a fill event.

+

cmtaFirm

+

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Post Trade Allocation Event, Options Order Restatement Event

+

The OCC number of the CMTA firm (only valid for CMTA trades).

+

companyName

+

Reference Data: Symbol Entry

+

The Name of the Company in free format text.

+

complexOptionID

+

Events: Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event

+

When present in an event, the complexOptionD will contain the same value as the optionID field from the Complex Order Accepted event to which this event is associated.

+

complexOrderID

+

Events: Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event

+

When present in an event, the complexOrderID identifies the complex option order that is the parent order for an leg orders. Note that this will be the same value as the orderID field from the Complex Order Accepted event.

+

contraClearingNumber

+

Events: Order Fill Event

+

DTCC clearing number for contra side of a trade.

+

coverage

+

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

+

Specifies whether an option order is covered or uncovered. Field may also be filled in as unspecified.

+

Allowed Values:

+

Covered

+

Uncovered

+

Unspecified

+

declaredTimestamp

+

Events: Self Help Declaration

+

Date and time self-help was declared.

+

definedNoteData

+

Events: Note Event

+

A list of key/value pairs, providing machine parseable data for the notation. The attributes must be defined in this specification.

+

Allowed Values:

+

CBOE Values

+

SubNoteType Requires a Choice value (e.g SubNoteType=XXX) where XXX must be one of the following choices.

+

SELECTED PAR Order Select Time and NBBO at the time

+

RECEIVED PAR Order Received Time and NBBO at the time

+

TRADED PAR Order Trade Time and NBBO at the time

+

REPRESENT PAR Order represent time and NBBO at the time

+

UID A unique number assigned by the originating system to identify the row in SBT_ORDER_HIST. The value must be Unsigned (e.g. UID=12345).

+

RemQty Quantity remaining after the fill. The value must be Unsigned (e.g., RemQty=700).

+

RouteSrc The source of the route as a text field (Text<40>) of workstation name, PAR broker, etc (e.g., RouteSrc=ABC123).

+

RouteDest The destination of the route as a text field (Text<40>) of workstation name, PAR broker, etc (e.g., RouteSrc=ABC123).

+

RouteSrcType The location type where the order is routed from. The value is one of the following integer values (e.g., RouteSrcType=3):

+

0 - Unspecified

+

1 - CMI

+

3 - TE

+

4 - PAR

+

5 - BOOTH_OMT

+

6 - CROWD_OMT

+

7 - HELP_DESK_OMT

+

8 - OHS

+

9 - LINKAGE

+

10 - DISPLAY

+

11 - Broker Dealer (Stock orders derived from CPS Cross)

+

12 - Broker Dealer (Stock Orders derived from CPS Market Order Split)

+

RouteDestType The location type where the order is routed to. The value is one of the same as described in RouteSrcType.

+

RouteRes Indicates the reason for the route. The value is one of the following integer values (e.g., RouteRes=7)

+

1 = VOLUME_CHECK

+

2 = AUTO_EXECUTION

+

3 = DIRECT_ROUTE

+

4 = ALTERNATE_ROUTE

+

5 = DISCRETIONARY_OR_NH_ORDER

+

6 = ALL_ROUTING_ATTEMPT_FAILED

+

Following are for reroute attempts

+

7 = HAL_REROUTING

+

8 = REROUTING_TO_SENDER

+

9 = REROUTING_TO_DEFAULT_OMT

+

10 = LINKAGE_ROUTE

+

Following are for PAR print requests

+

11 = PAR_PRINT_ORDER_INTRA_DAY

+

12 = PAR_PRINT_ORDER_END_OF_DAY

+

13 = PAR_PRINT_CANCEL

+

14 = PAR_PRINT_CANCEL_REPLACE

+

Following are for PAR order reroute TA and TB

+

15 = MANUAL_REROUTE_ORDER_TA

+

16 = MANUAL_REROUTE_ORDER_TB

+

17 = MANUAL_REROUTE_ORDER_BOOK

+

18 = MANUAL_REROUTE_ORDER_AUCTION

+

19 = CANCEL_FOLLOW_ORDER

+

Following are for PAR order and fill timeouts

+

20 = MANUAL_ORDER_TA_TIMEOUT

+

21 = MANUAL_ORDER_TB_TIMEOUT

+

22 = MANUAL_ORDER_BOOK_TIMEOUT

+

23 = MANUAL_ORDER_AUCTION_TIMEOUT

+

24 = MANUAL_ORDER_LINKAGE_TIMEOUT

+

22 = CABINET_ORDER

+

23 = SIMPLE_FILL_REJECT

+

24 = COMPLEX_FILL_REJECT;

+

25 = MANUAL_FILL_TIMEOUT

+

26 = MANUAL_FILL_LINKAGE_TIMEOUT

+

27 = TRADE_NOTIFICATION_BUNDLE_TIMEOUT

+

28 = TRADE_NOTIFICATION_ACK_TIMEOUT

+

29 = TRADE_NOTIFICATION_REJECT

+

30 = FILL_REPORT_DROP_COPY

+

31 = CANCEL_REPORT_DROP_COPY

+

25 = CANCEL_REQUEST_ON_RSS

+

26 = NBBO_REJECT

+

32 = PREMIUM_EXCEEDS_REASONABILITY

+

33 = VOLUME_DEVIATION_CHECK_FAILED_ALL_LEVELS

+

34 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_1

+

35 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_2

+

36 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_3

+

37 = CANCEL_REQUEST_ON_FALLBACK

+

38 = TOO_MANY_ROUTES

+

39 = PRODUCT_STATE_ROUTE

+

40 = VOLUME_MAINTENANCE_MISMATCH

+

41 = FORCED_LOGOFF_PAR

+

BBOBP BBO bid price; the value is of type Price.

+

BBOBS BBO bid size; the value is of type Unsigned.

+

BBOAP BBO ask price; the value is of type Price.

+

BBOAS BBO ask size; the value is of type Unsigned.

+

NBBOBP NBBO bid price; the value is of type Price.

+

NBBOBV NBBO bid exchange volume; the value is of type Unsigned.

+

NBBOAP NBBO ask price; the value is of type Price.

+

NBBOAV NBBO ask exchange volume; the value is of type Unsigned.

+

DSMBP Derived Spread Market bid price; the value is of type Price

+

DSMBS Derived Spread Market bid size; the value is of type Unsigned

+

DSMAP Derived Spread Market ask price; the value is of type Price

+

DSMAS Derived Spread Market: The (Integer)

+

BBP Book bid price; the value is of type Price.

+

BBS Book bid size; the value is of type Unsigned.

+

BAP Book ask price; he value is of type Price.

+

BAS Book ask size; the value is of type Unsigned.

+

AuctionType The type of auction; the value is one of the following integers

+

0 = Auction Unspecified,

+

1 = AUCTION_INTERNALIZATION (AIM/Complex AIM),

+

2 = AUCTION_STRATEGY,

+

3 = AUCTION_REGULAR_SINGLE,

+

4 = AUCTION_HAL,

+

5 = AUCTION_SAL.

+

8 = AUCTION_DAIM (for Directed AIM).

+

AucTradeQty auction trade quantity; the value will be Unsigned

+

AucEarlyTerm indicates if an auction ended early; the value is Boolean (true or false)

+

AuctionID Optional field of type UNSIGNED

+

ActTime The actual time at which activity happened on PAR or ME; the value will be Timestamp

+

NYSE Options Values

+

FloorTrade

+

FloorTradeNamesLater

+

FloorTradeNamesLaterAllocation

+

desiredLeavesQty

+

Events: Order Cancel Route Event, Option Cancel Route Event

+

The desired number of shares remaining in the order after the cancel request has been issued for a routed order. A value of zero indicates a full cancel.

+

displayPrice

+

Events: Order Accepted Event, Order Modified Event, Order Restatement Event, Simple Option Order Accepted Event, Option Order Modified Event, Options Order Restatement Event

+

The displayed price for an order.

+

displayQty

+

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Modify Route Event, Order Restatement Event, Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

+

The displayed quantity for an order.

+

endDate

+

Reference Data: Symbol Entry

+

The date a symbol will expire. A value must be entered, if unknown, use Dec 31 9999.

+

eventTimestamp

+

Events: All

+

eventTimestamp generally refers to when an event occurred, however this is subjective depending on the event. Refer to the events definitions to see what this timestamp represents within the context of that event.

+

exchange

+

Events: All Stock Exchange Events, All Options Exchange Events

+

The exchange ID of the exchange associated with the event being reported. Refer to each individual event definition for more specific details.

+

exchOriginCode

+

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Options Order Restatement Event, Post Trade Allocation Event

+

Exchange-specific codes that specify the origin of an order. CAT will map all of these exchange-defined codes to either C - Customer, F - Firm, or M - Market Maker internally. Only the exchange specific codes as defined below need to be included in this field.

+

Below are the accepted values for each exchange, with their description, and their mapping to C, F, or M in CAT in parentheses.

+

Note that some values are marked as "C/M," C/M will map to customer unless an order has mktMkrSubAccount, when it will map to M.

+

CBOE/C2 Allowed Values:

+

B Broker Dealer (C)

+

D Customer Floor Broker Workstation (C)

+

E Customer Internal (C)

+

F Firm (F)

+

H Firm Internal (F)

+

I In Crowd Market Maker (M)

+

J Firm Floor Broker Workstation (F)

+

K Broker Dealer Floor Broker Workstation (C)

+

L B/Ds that are billed as ‘Firm’ but clear in the ‘C’ range at OCC (C)

+

N Away Market Maker (M)

+

R Broker Dealer Internal (C)

+

U MM from FBW (C/M)

+

W Broker Dealer Floor Broker Workstation (C/M)

+

X Customer BD (C/M)

+

Y

+

Z N,Y from FBW (C/M)

+

NYSE Options Allowed Values:

+

C Customer (C)

+

F Firm (F)

+

BD Broker Dealer (C/M)

+

M Market Maker (M)

+

P Professional Customer (C)

+

BATS Allowed Values:

+

B Broker Dealer (C)

+

C Customer (C)

+

F Firm (F)

+

J Joint Back Office (F)

+

L Non TPH Affilliate (C)

+

M Market Maker (M)

+

N NonRegMarketMaker (M)

+

U ProCustomer (C)

+

BOX Allowed Values:

+

6 Public Customer (C)

+

7 Broker Dealer (F)

+

8 Market Maker (M)

+

W Broker Customer (C)

+

X Away Affiliated Market Maker (M)

+

T Professional Customer

+

Y Floor Broker (F)

+

Z Floor Market Maker (M)

+

V Floor Broker Customer (C)

+

U Affiliated Broker Customer (F)

+

MIAX Allowed Values:

+

1 Market Maker (M)

+

2 Away MM (M)

+

3 Broker Dealer (F)

+

4 Firm (F)

+

5 Pri Customer (C)

+

6 Non Pri Customer (C)

+

MIAX Pearl Allowed Values:

+

1 Market Maker (M)

+

2 Away MM (M)

+

3 Broker Dealer (F)

+

4 Firm (F)

+

5 Pri Customer (C)

+

6 Non Pri Customer (C)

+

NASDAQ Options Allowed Values:

+

1 Customer (C)

+

2 Firm (F)

+

3 Floor MM (M)

+

4 Off Floor MM (M)

+

5 Broker Dealer (C)

+

6 Professional Customer (C)

+

7 Proprietary Customer (C)

+

8 Retail Customer (C)

+

9 JBO (F)

+

10 Broker Dealer Firm (F)

+

executingFirm

+

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Options Order Restatement Event

+

The OCC number of the executing firm.

+

executionCodes

+

Events: Order Trade Event, Order Fill Event, Trade Correction Event, Option Trade Event, Stock Leg Fill Event, Options Trade Correction Event

+

Codes that provide a way to augment executions with specific information about the execution. The Execution Codes field has the same formatting as Order Handling Instructions, where zero or more codes can be entered to provide additional execution information, like where a trade may have been executed on the floor.

+

Each code is separated by a single pipe symbol (ASCII decimal 124, hex 7C). Codes which require a value will include that value immediately after the code Field Name and a single equal sign (ASCII decimal 61, hex 3D). All instructions that apply to the order are to be included.

+

Allowed Values:

+

AUC If the trade happened as part of an auction, this code identifies the auction by name (e.g., AUC=CROSS)

+

PCTP Executions for FLEXPCT orders are reported, with the price as the final dollar value of the trade. However, the price was determined as a percentage execution. The original trade percentage value is reported using the PCTP execution code, which requires a Numeric(10,8) value, where 94.5% would be reported as PCTP=94.5.

+

PCTO Executions for FLEXPCT trades are reported using the optionID of the percentage product. However, the final execution happens with a different optionID that is not percentage based. This final optionID is a Text<40> field, and is reported in the trade with the PCTO execution code (e.g., PCTO=OPTIONID1234).

+

NOBUYID Indicates that there is neither a quoteID nor an orderID associated with the buy side of the trade.

+

NOSELLID Indicates that there is neither a quoteID nor an orderID associated with the sell side of the trade.

+

ASOF The trade is being reported as- of another date. This option requires a Date value (e.g. ASOF=20171218).

+

Allowed Values (CBOE):

+

TradeType This code requires a choice value (e.g., TradeType=N) where N is one of the following list of values:

+

B Blocktrade

+

R Regular Trade

+

F Intermarket Sweep

+

L No Print Linkage Trade

+

M Manual Trade

+

P Par Trade

+

X Cross Product Leg Trade

+

S Cross Product Cross Trade

+

I Cross Product AIM Cross Trade

+

H Handheld Trade

+

Q Par to Market Maker Trade

+

1 Regular trade reversal

+

2 No Print Linkage Trade Reversal

+

3 No Print Linkage Trade Manual

+

T Two-Day Trade

+

TradeSource This code requires a choice value (e.g., TradeSource=PAR) where the value is one of the three following choices:

+

PAR

+

System

+

Manual

+

FirmTradeRptTime Shows the Firm Trade Report Time (applies to Block trade and manual trades, time the firm/market maker reports the floor trade), requires a timestamp (e.g., FirmTradeRptTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

+

FirmTradeTime Shows the Firm Trade Time - applies to manual trades - Market Makers have an option to specify when they did the trade on the floor. Requires a timestamp (e.g., FirmTradeTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

+

TradeRptTime Shows the Tape Report Time (when the system reports to OPRA i.e. when the GUI user hits the send button) applies to manual and block trades only. Requires a timestamp. (e.g., TradeRptTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

+

BBOBP CBOE BBO Bid Price at the time of the trade. Requires a price value. (e.g., BBOBP=12.25)

+

BBOBS CBOE BBO Bid Size at the time of the trade. Requires an integer value. (e.g., BBOBS=400)

+

BBOAP CBOE BBO ask price at the time of the trade. Requires a price value. (e.g., BBOAP=12.50)

+

BBOAS CBOE BBO ask size at the time of the trade. Requires an integer value. (e.g., BBOAS=200)

+

BDATE Shows the business date. Requires a date value expressed as YYYYMMDD (e.g., BDATE=20170112).

+

INTLIQ Liquidity classification internal to BATS. Requires a choice value (e.g., INTLIQ=X) from the following list

+

A added

+

R removed

+

X routed

+

B both order washed/removed some liquidity then got booked

+

D externally removed

+

c conditionally added

+

C auction

+

Q options wait order

+

SUBLIQ BATS internal subliquidity indicator. This is filled in on executions once the code offering the best price to the member is selected. Requires a choice value (e.g., SUBLIQ=N) from the following list

+

N normal

+

H hidden

+

B SUM (Options only – step up auctions mechanism)

+

R bolt route

+

D dark book

+

S setter

+

J joiner

+

I hidden improved

+

T dark Book IOC

+

O open auction

+

C close auction

+

P IPO auction

+

A halt auction

+

V visible improved

+

E retail price improvement (BYX Equities: Retail Order vs. Retail Price Improving Order)

+

K hidden reserve (hidden portion of a reserve order)

+

b BamAuction (Options only - Bats Auction Mechanism)

+

c Cboe Market Close

+

m hidden midpoint (US Equities: Hidden midpoint execution)

+

o open queued

+

h halt queued

+

q QCC (Options only - Qualified Contingent Cross)

+

r Persisted (GTC restatement)

+

s SAM Auction

+

Allowed Values (BOX):

+

TT Indicates when the trade was done. Requires choice value as one of the following list of values:

+

Opening

+

MarketOperation

+

ContinuousTrading

+

GuaranteedAuction

+

SolicitationAuction

+

FacilitationAuction

+

AwayTrade

+

FloorTrade

+

STI Indicates the trade type. Requires choice value as one of the following list of values:

+

RegularTrade

+

As-of-Trade

+

Block Trade

+

Late Trade

+

Hidden Trade

+

Price Volume Adjustment

+

ImpliedOption

+

ImpliedStrategy

+

IsoInbound

+

GdoTradeThrough

+

PipSweep

+

USContingent

+

Pip

+

Crossed

+

ImpliedStrategy

+

FloorTrade

+

SID Indicate the Strategy id. Value associated will be blank or will contain the Strategy Identification

+

STID Indicate the Strategy Trade Id. Value associated will be blank or will contain the Strategy Identification

+

SV Indicate the Strategy Verb. Value associated will be blank or will contain B or S

+

Allowed Values (MIAX):

+

AUC Indicates an auction. Requires one of the following values:

+

1 Opening

+

2 Reopening

+

3 Closing

+

4 Routing

+

5 LiquidityRefresh

+

6 PairedPrime

+

7 CustomerCrossPrime

+

8 QualifiedContingentCrossPrime

+

C ImmediateUncrossing

+

I IIPOpening

+

P RIPReEvalutionCross

+

R RIPReEvalution

+

U URIPAuctionOnArrival

+

Y IIPOpeningCross

+

Allowed Values (CHX):

+

TradeType Name value pair, which requires value to be one of the following choices:

+

CSP CSS entered correspondent trades

+

AWA Away Market Executions

+

CHX ECHX Trade

+

MAN Manual

+

DRP Drop copy away market execution

+

NAM Recovery required

+

RCV Recovery of NAME/NAME trade

+

AWE Away sent electronically thru CHX systems

+

AWM Away sent manually thru CHX systems

+

RPT Allocation report

+

AWF Away market trades cleared by CHX

+

VEN Away market clearing flip - non-ORS

+

AAW IB Alternative Away Market Execution

+

AOR ORS Away market clearing flip

+

RPS Riskless Principal Second Component Trade

+

SNAP Sub-second Non-displayed Auction Process (SNAP) Trade

+

executionID For OrderFill, this is the execution ID received from the routing vendor. The value is of type Text<40>

+

executionMarket For OrderFill - requires a choice from the following values:

+

XCHI Chicago Stock Exchange

+

XNYS New York Stock Exchange

+

XASE American Stock Exchange

+

ARCX NYSE ARCA

+

XBOS Boston Stock Exchange

+

XPHL Philadelphia Stock Exchange

+

XCIS National Stock Exchange

+

XADF FINRA ADF

+

XCBO Chicago Board Options Exchange

+

XNAS NASDAQ Stock Exchange

+

BATS BATS Stock Exchange

+

BATY BATS Y - Exchange, Inc.

+

EDGA Direct Edge A

+

EDGX Direct Edge X

+

IEXG Investors Exchange

+

Allowed Values (NYSE Options):

+

OpenAuction

+

CUBEAuction

+

Complex

+

Cabinet

+

Flex

+

Man

+

Allowed Values (NYSE Equities):

+

Auction

+

OPEN

+

CLOSE

+

CROSS

+

Allowed Values (IEX):

+

I Continuous Trade on IEX

+

L Traded with Displayed Liquidity

+

S Self Trade on IEX

+

X Opening Match on IEX

+

O Opening Auction on IEX

+

C Closing Auction on IEX

+

H Halt Auction Opening on IEX

+

N IPO Auction Opening on IEX

+

Allowed Values (NASDAQ Options - ISE, GEMINI, Mercury only): liquidityCode Name value pair, requires one of the following values

+

0 None

+

1 Maker

+

2 Taker

+

4 Response

+

5 Hidden

+

6 OpeningRotation

+

7 Cross

+

8 FlashedOrder

+

9 FlashResponse

+

10 RoutedOut

+

11 TradeReport

+

12 ComboMakerAgainstCombo

+

13 ComboTakerAgainstCombo

+

14 ComboResponseAgainstCombo

+

15 ComboHiddenAgainstCombo

+

16 ComboOpeningRotation

+

17 ComboCross

+

18 ComboTakerAgainstRegular

+

19 RegularMakerAgainstCombo

+

20 ComboTakerAgainstIO

+

21 RegularTakerAgainstIO

+

22 IOMakerAgainstCombo

+

23 IOMakerAgainstRegular

+

24 RegularMakerAgainstIOParticipant

+

25 IOParticipantTakerAgainstRegular

+

26 BrokenPriceImprovement

+

27 BrokenFacilitation

+

28 BrokenSolicitation

+

29 ComboBrokenPriceImprovement

+

30 ComboBrokenFacilitation

+

31 ComboBrokenSolicitation

+

32 Block

+

33 BlockResponse

+

34 DirectedResponse

+

35 Facilitation

+

36 FacilitationResponse

+

37 PriceImprovement

+

38 PriceimprovementResponse

+

39 Solicitation

+

40 SolicitationResponse

+

41 QualifiedContingentCross

+

42 CustomerToCustomer

+

43 ComboFacilitation

+

44 ComboFacilitationResponse

+

45 ComboPriceImprovement

+

46 ComboPriceImprovementResponse

+

47 ComboSolicitation

+

48 ComboSolicitationResponse

+

49 ComboQualifiedContingentCross

+

50 ComboCustomerToCustomer

+

51 SweepRoutedOut

+

52 SweepTradeReport

+

OTHER Other

+

BuyMatchId Unsigned value

+

SellMatchId Unsigned value

+

AuctionId Unsigned value

+

TradeSource Name value pair, requires one of the following values

+

0 AUTO_EXECUTION

+

1 OPENING

+

2 FLASH

+

3 EXPOSURE

+

4 BLOCK

+

5 PIM

+

6 PIM_COMBO

+

7 FAC

+

8 FAC_COMBO

+

9 SOL

+

10 SOL_COMBO

+

11 CCC

+

12 CCC_COMBO

+

13 QCC

+

14 QCC_COMBO

+

15 MANUAL

+

16 NOS

+

17 OPENING_UNCROSS

+

18 UNCROSS

+

OTHER OTHER

+

Allowed Values (NASDAQ Options - PHLX, NASD, and BX only):

+

TradeSource Name value pair, requires one of the following values

+

1 AUTOEX

+

2 DET

+

3 EBOOK

+

4 NOS

+

5 FBMS

+

6 SWEEP

+

7 QUOTE_M

+

8 CO_SWEEP

+

9 LEGGING

+

10 COMPLEX

+

11 OPENING

+

12 COLA

+

13 COCRA

+

14 PIXL_AUTO

+

15 PIXL_STOP

+

16 QCC

+

17 QCC_FBMS

+

FLEX FLEX

+

OTHER OTHER

+

Allowed Values (NASDAQ Equities):

+

LIQ Name value pair, requires one of the following values

+

1 Added

+

2 Removed

+

3 Routed

+

4 DOT

+

5 Opening Trade (on NYSE)

+

6 On-Close order (on NYSE)

+

7 Non-displayed adding liquidity

+

8 Open Cross

+

9 Open Cross (imbalance-only)

+

10 Closing Cross

+

11 Closing Cross (imbalance-only)

+

12 Halt/IPO Cross

+

13 Halt Cross

+

14 Re-Routed by NYSE

+

15 Odd Lot Execution (on NYSE)

+

16 Added Liquidity (on NYSE)

+

17 Routed to BX

+

18 NYSE Other

+

19 Routed to PSX

+

20 Executed in Open, Close, or Re-open on ARCA

+

21 Added post-only

+

22 Removed liquidity at a midpoint

+

23 Added liquidity via a midpoint order

+

24 Displayed, liquidity-adding order improves the NBBO

+

25 Displayed, liquidity-adding order sets the QBBO while joining the NBBO

+

26 Retail designated execution that removed liquidity

+

27 Retail designated execution that added displayed liquidity

+

28 Retail designated execution that added non-displayed liquidity

+

29 RPI (Retail Price Improving) order provides liquidity

+

30 Retail Order removes RPI liquidity

+

31 Retail Order removes price improving non-displayed liquidity other than RPI liquidity

+

32 Added displayed liquidity in a Group A symbol

+

33 Added non-displayed liquidity in a Group A symbol

+

34 Removed liquidity in a Group A symbol

+

35 Added non-displayed mid-point liquidity in a Group A symbol

+

36 Added displayed liquidity in a SCIP Symbol

+

37 Displayed, liquidity-adding order improves the NBBO in a SCIP Symbol

+

38 Displayed, liquidity-adding order set the QBBO while joining the NBBO in a SCIP Symbol

+

39 Displayed, liquidity-adding order improves the NBBO in pilot symbol during specified LULD Pricing Pilot timeframe

+

40 Added displayed liquidity in a pilot symbol during specified LULD Pricing Pilot timeframe

+

41 Removed liquidity in a pilot symbol during specified LULD Pricing Pilot timeframe

+

42 Halt Cross, orders entered in pilot symbols during the LULD Trading Pause

+

executionTimestamp

+

Events: Order Trade Correction, Option Trade Correction

+

When a trade is reported, the time of the trade is reported as the eventTimestamp. The executionTimestamp is used in a correction event if the time of the trade needs to be changed.

+

exerciseStyle

+

Reference Data: Simple Option Series Dictionary Entry

+

Specifies the exercise style of the Option Series in Simple Option Series Dictionary Entry.

+

Allowed Values:

+

American

+

European

+

expirationDate

+

Reference Data: Simple Option Series Dictionary Entry

+

The date an options contract will expire, taking the format: YYYYMMDD.

+

fillID

+

Events: Order Fill Event, Stock Leg Fill Event

+

A unique identifier for the transaction. The combination of reporter, date, symbol, side, and fillID should be unique.

+

floorBroker

+

Events: Option Trade Event

+

The Member Alias of the executing floor broker. handlingInstructions

+

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Modify Route Event, Order Restatement Event, Simple Option Order Accepted Event, Complex Option Order Accepted Event, Complex Option Order Modified Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

+

The order handling instructions field is a way to provide multiple instruction codes in a somewhat flexible manner. This field will contain zero or more order instruction codes, each separated by a single pipe symbol (ASCII decimal 124, hex 7C). Codes which require a value will include that value immediately after the code Field Name and a single equal sign (ASCII decimal 61, hex 3D).

+

All instructions that apply to the order are to be included.

+

Allowed Values (Boolean, presence indicates truth):

+

AON All or None

+

AUC Auction Eligible

+

DNR Do Not Route

+

FOK Fill or Kill

+

IOC Immediate or Cancel

+

ISB Intermarket Sweep Book

+

ISO Intermarket Sweep

+

NH Not Held

+

OPG At the Opening

+

PSO Post Only

+

WTP Wash Trade Prevention

+

Note: Some exchanges have special values to indicate handling of ISO orders. All ISO orders must be marked with the boolean ISO value. Thus, if an exchange denotes an ISO order with some custom attribute, it must also be marked with the common ISO value.

+

Some allowed values (are name value pairs and must be accompanied by a value) must be accompanied by further explanation or additional information:

+

Allowed Values (Name Value Pairs):

+

MIN Minimum Quantity - requires an Integer value, representing he minimum quantity allowed to be executed in a single transaction (e.g., MIN=1000).

+

WD With Discretion Price - requires a Numeric value, representing the discretion price (e.g, WD=12.50)

+

STP Stop Price - requires a Numeric value representing the stop price (e.g., STP=17.95)

+

XDATE Expire Date - requires a Date value, representing the date that the order expires. The value must be in Date format (e.g., May 15, 2017 would be XDATE=20170515). The order expires at the close of the specified date.

+

XTIME Expire Time - requires a Time value, representing the time that the order expires. The value must in a valid Timestamp format.

+

R2E Route to Exchange - requires Exchange ID (e.g., R2E=G). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to a specific exchange.

+

R2M Route to Industry Member - requires Member Alias (e.g., R2E=ABC123). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to a specific industry member.

+

R2O Route to Other - requires Text(20) (e.g., R2O=Somebody). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to an entity who is neither an exchange nor an industry member (i.e., the entity does not have a CAT reporting responsibility).

+

Allowed Values (CBOE Name Value Pairs):

+

MIT Market if touched, becomes a market order if the price is touched. Requires a price value (e.g, MIT=20.53).

+

AucResp A response to an auction, the remainder is canceled at the end of the auction. Requires a integer value representing the auction ID being responded to. (e.g., AucResp=1234).

+

Reserve Reserve, only a portion of the order is displayed. Requires an integer value representing quantity. (e.g., Reserve=300).

+

PMM Preferred market maker, requires a text (text, 10) value representing the acronym of the preferred market maker. (e.g., PMM=FRMA)

+

AIM Automated Improvement Mechanism. Requires a choice value (e.g., AIM=AIM) selected from the following list

+

AIM standard AIM

+

AIQ QCC Primary Order

+

AIS Sweep and AIM primary order

+

AIR Re-route if cannot AIM primary order

+

ARE Contra order to AIM. Requires a text (text 20) value representing the primary order ID. (e.g., ARE=AB54321)

+

AREOUT Contra order to AIM where the user can opt out. Requires a text (text 20) value representing the primary order ID. (e.g., ARE=AB54321)

+

Designation Order designation, requires a choice value (e.g., Designation=4) from the following list of values

+

1 Tied Hedge

+

2 SPXCOMBO

+

3 Tied Hedge and Cash Spread

+

4 SPXCOMBO and Cash Spread

+

5 Cash Spread

+

UHI User handling instruction, requires a choice value (e.g., UHI=4) from the following list of values

+

1 Do Not Auction

+

2 Held

+

3 Solicited Order

+

4 Held and Solicited

+

5 Held and no COA

+

6 Electronic Only

+

7 Electronic Only and Solicited

+

8 Electronic Only and no COA

+

Allowed Values (BATS Name Value Pairs):

+

ExecInst Provides additional values for execution instructions that aren't already present in orderType or other handlingInstructions values. Requires a choice value (e.g., ExecInst=U) from the following list

+

N No special instructions

+

s sweep

+

M hidden peg to midpoint

+

L alternative midpoint peg to less aggressive midpoint or 1 tick inside of NBBO

+

m midpoint peg no lock hidden peg to midpoint but duck at or beyond limit

+

d displayed peg order with discretion to the midpoint

+

g AllOrNone

+

I midpoint match (EDGX)

+

Q market maker peg order

+

v Dart dark route before outbound

+

w DoNotDart opt of dart

+

x ImproveOnly BATS only IOC that only matches better than NBBO

+

y TAISO

+

z DarkScan hit scan fast DLPs first

+

t DarkScanWithoutDart

+

r LateAuction late limit on open/close

+

U route peg order

+

u DartOnly route only to a dark venue

+

F FastDart

+

S SuperDart

+

f ISO

+

R PrimaryPeg

+

Reserve Number of shares of a reserve order to display. Requires an UNSIGNED value

+

ExtExecInst Requires a choice from the following values:

+

N None

+

T Retail Price Improving

+

P Retail Order - Price Improvement Only

+

R Retail Order

+

S Retail Order NoFlagCLC

+

MaxRemovePct The max percentage an order is allowed to remove before booking. Requires an Unsigned (e.g., MaxRemovePct=10)

+

AttributedOrder Requires a choice value from the following list

+

N None

+

Y Attributed

+

R Retail

+

DisplayRange This will be of type Unsigned, and is used for a “random replenishment” reserve order. The reload quantity is randomly selected using Reserve +/- displayRange e.g. Reserve of 1000, displayRange of 200, reload quantity will be randomly selected from 800, 900, 1000, 1100, or 1200

+

Allowed Values (BATS Name Value Pairs - Equities Only):

+

TifMod Supplemental time-in-force information. Requires a choice value (e.g., TifMod=1) from the following list

+

1 include early (7 – 8 AM) and pre-market trading sessions (8 AM – 9:30 AM)

+

2 include pre-market session (8 - 9:30 AM)

+

3 include early (7- 8 AM), pre (8 – 9:30 AM), and post-market sessions (4 -5 PM BZX and BYX, 4 – 8 PM for EDGA and EDGX)

+

4 include pre (8 – 9:30 AM), and post-market sessions (4 -5 PM BZX and BYX, 4 – 8 PM for EDGA and EDGX

+

Allowed Values (BATS Name Value Pairs - Options Only):

+

TifMod Supplemental time-in-force information. Requires a choice value (e.g., TifMod=1) from the following list

+

1 include pre-market session (7:30 - 9:30 AM)

+

Allowed Values (BOX Name Value Pairs):

+

EP Directed Order Executing Participant. Requires a BOX Participant ID string value (e.g., EP=XYZ123).

+

IML Indicate the Inter Market Linkage Behavior for the order. Requires a choice value from the following list of values

+

FLASH

+

ROUTING

+

NONE

+

NBBO

+

ISO

+

CONTINGENT

+

NOFLASH

+

PT Indicate BOX Price Term for the order. Requires a choice value from the following list of values

+

PIP

+

SOLICITATION

+

FACILITATION

+

CROSS

+

DIRECTED

+

PREF

+

FLOOR

+

OT Indicate the order type for auction phase. Requires a choice value from the following list of values

+

IMPROVE

+

INITO

+

EXPOSED

+

CROSS

+

CONTINGENT

+

MBF

+

GTD Indicates Date in YYYYMMDD Format

+

QT Requires a choice value from the following list of values

+

MINIMUM

+

SURRENDER

+

MIP

+

AQ Indicate the additional quantity when QT is either MINIMUM or SURRENDER. Requires an unsigned integer value (e.g, AQ=1000)

+

AP This will be field of type Price

+

AT Requires a choice value from the following list of values

+

PIP

+

SOLICITATION

+

FACILITATION

+

CROSS

+

FIXED

+

FLOOR

+

AID This will contain a n UNSIGNED number that will allow BOX to track "Auction Phase Number" (e.g., AID=123456)

+

Allowed Values (CHX):

+

ExecInst Requires a choice value (e.g., ExecInst=f) from the following list:

+

5 Held

+

E DNI - Do not increase

+

F DNR - Do not reduce

+

K Cancel on Trading Halt

+

X TALG - Trade Along

+

y Trade At Intermarket Sweep (TAISO)

+

q Always Quote

+

I Midpoint Cross

+

v Stock-Option (for cross order only)

+

TradeThruExemptReason Requires a choice value (e.g., TradeThruExemptReason=2) from the following list:

+

1 Benchmark

+

2 QCT Qualified Contingent Trade

+

3 Bonafide Error Indicator

+

PriceSliding Requires a choice value (e.g., PriceSliding=L) from the following list:

+

L CHX Only – Slide limit price on lock NBBO

+

S CHX Only – Slide limit price on lock or cross NBBO

+

MatchTradePrevention Requires a choice value (e.g., MatchTradePrevention=N) from the following list:

+

I MTP Inactivate

+

N MTP Cancel Newest

+

O MTP Cancel Oldest

+

B MTP Cancel Both

+

MTPSublevelInd Requires a choice value (e.g., MTPSublevelInd=1) from the following values:

+

[0-9,A-Z,a-z]

+

Allowed Values (NYSE Options):

+

NOW

+

ISO

+

AON

+

PNP

+

PNPLO

+

PNPB

+

ALO

+

FloorTrade

+

FloorTradeNamesLater

+

FloorTradeNamesLaterAllocation

+

ClearTheBook

+

Cabinet

+

Flex

+

CUBEAUCPI

+

CUBEAUCF

+

QCC

+

COA

+

PNP+

+

Stop Requires a Price value (e.g., Stop=42.42)

+

StopLimit Requires a Price value (e.g., StopLimit=42.42)

+

Allowed Values (NYSE Equities):

+

ALO

+

ISO

+

TradeAtISO

+

Non-Routable

+

RoutableIOC

+

Tracking

+

Non-Display

+

RPI

+

Retail

+

MPEG Market Peg

+

PPEG Primary Peg

+

DPO

+

DPP

+

MPL

+

PO

+

945

+

355

+

945-355

+

ImblOffset

+

NonRoutableIOC

+

ClosOffset

+

LPEG

+

DMP

+

DLP

+

NoMPL

+

NoIOI

+

NoMPL-IOI

+

Allowed Values (NASDAQ Options):

+

Boolean Values

+

PostOnly

+

PostOnlyPrice

+

WAIT

+

AllowFlash

+

AllowExposure

+

DNR

+

DNTT (Do not trade through)

+

DNA (Do not Auction)

+

AO (Auction Only)

+

Name Value Pairs

+

DMM STRING; DMM Name

+

DisplayWhen For reserve orders, requires one of the following

+

1 Immediate

+

2 onExhaust

+

RefreshMax UNSIGNED; Contracts

+

RefreshMin UNSIGNED; Contracts

+

InitDispContracts UNSIGNED; Contracts [Initial Display Contracts for reserve orders] RoutingStrategy Must be one of the following

+

SRCH

+

FIND

+

SEEK

+

RespAuctionId UNSIGNED; auctionId

+

MIN UNSIGNED; Contracts

+

OrderSource Must be one of the following

+

FIX

+

OTTO

+

SQF

+

FBMS_FIX

+

FBMS

+

PRECISE_FIX

+

BrokerPct NUMERIC<3,4>; Percentage

+

EffectiveTime TIME

+

StepUpPrice PRICE

+

StepUpPriceType Must be one of the following

+

1 Market

+

2 Limit

+

DMA DMA Name [for route event], where ‘DMA Name’ can have following values:

+

CITI

+

WEX

+

MLGW

+

GSG

+

OTHER

+

DestExch Dest Exch [for route event], where ‘DestExch’ can have following values:

+

11 AMEX

+

12 BOXE

+

13 CBOE

+

14 EDGO

+

15 GMNI

+

16 ISEX

+

17 MCRY

+

18 MIAX

+

19 NYSE

+

20 MPRL

+

21 NSDQ

+

22 NOBO

+

23 CBC2

+

24 PHLX

+

25 BATS

+

1 BNY

+

2 CHBC

+

3 LBKI

+

4 FOGS

+

OTHER OTHER

+

Allowed Values (NASDAQ Options - ISE, GEMINI, and Mercury):

+

CrossType Value must be on of the following

+

1 None

+

2 Close

+

3 Open

+

4 PriceImp

+

5 QCC

+

6 Solicit

+

7 Facilit

+

8 Flash

+

9 Block

+

10 Exposure

+

11 Cust

+

OTHER OTHER

+

Allowed Values (NASDAQ Options - PHLX, NASD, BX):

+

CrossType Value must be on of the following

+

1 None

+

2 Close

+

3 Open

+

4 Complex

+

5 Open Complex

+

6 Close Complex

+

7 PIXL

+

8 QCC

+

9 SOLICIT

+

10 Complex PIXL

+

11 Complex SOLICIT

+

OTHER OTHER

+

Allowed Values (NASDAQ Equities):

+

MELO for a Midpoint ELO order

+

SUPL for a Supplemental order

+

RPI for a Retail Price Improvement Program order

+

ExecBroker Value must be on of the following

+

DOTA

+

DOTD

+

DOTM

+

DOTI

+

MOPP

+

TFTY

+

SCAN

+

SKIP

+

SKNY

+

SAVE

+

QSAV

+

QTFY

+

DOTZ

+

LIST

+

CART

+

SOLV

+

QSLV

+

ESCN

+

MOPB

+

RFTY

+

QRTY

+

INET

+

Display Value must be one of the following

+

1 Attributable-Price to Display

+

2 Anonymous-Price to Comply

+

3 Non-Display

+

4 Post-Only

+

5 Imbalance-Only (for opening and closing cross only)

+

6 Mid-Point

+

7 Mid-Point Post Only

+

8 Post-Only and Attributable – Price to Display

+

9 Retail Order Type 1

+

10 Retail Order Type 2

+

11 Retail Price Improvement Order

+

ExecInst Value must be one of the following

+

1 Midpoint Peg

+

2 No Peg

+

3 Market Peg

+

4 Quoting Peg

+

5 Primary Peg

+

6 INAV pegging

+

7 means Intermarket Sweep Order (ISO)

+

8 means Trade-at Intermarket Sweep Order

+

9 means Reactive Trade Now

+

10 means Reactive Trade Now opt-out

+

initiator

+

Events: Order Modified Event, Order Canceled Event, Quote Cancel Event, Option Order Modified Event, Complex Option Order Modified Event, Stock Leg Modified Event, Option Order Canceled Event

+

Indicates who initiated a cancel or modification request. If an order/quote is implicitly modified or canceled via an unsolicited action (e.g., peg order price change or cancelation due to timeout), then the initiator is the exchange itself.

+

If an order/quote is modified or canceled as a result of an explicit request from the party that sent the order/quote, then the initiator is the firm/market maker that sent the explicit modify/ cancel request.

+

Thus, all explicit modify/cancel requests will have an initiator of either Firm or MarketMaker, as appropriate and all implicit, unsolicited modify/cancel actions will have an initiator of Exchange.

+

Allowed Values:

+

Firm

+

Exchange

+

MarketMaker

+

IPO

+

Reference Data: Symbol Entry

+

Indicates whether the issue is an Initial Public Offering ("IPO"). It will be set to false on the day after the IPO occurs (required for NMS).

+

issueType

+

Reference Data: Symbol Entry

+

Specifies the type of equity being described in the equity symbol entry.

+

Allowed Values:

+

NMS

+

OTC

+

Index

+

ETF

+

kind

+

Reference Data: Option Series Dictionary Entry, Complex Option Dictionary Entry

+

Specifies if an option is a simple, complex, flex, or percentage denominated flex option. For the value FLEXPCT, the strike price and order prices of the option are in percentages.

+

Allowed Values:

+

Complex

+

Standard

+

Non-Standard

+

FLEX

+

FLEXPCT

+

leavesQty

+

Events: Order Canceled Event, Order Trade Event, Order Fill Event, Order Cancel Route Event, Order Restatement Event, Option Order Canceled Event, Option Cancel Route Event, Option Trade Event, Stock Leg Fill Event, Options Order Restatement Event

+

The quantity remaining unfilled after the event. The meaning of this field is subjective depending on the event, refer to each individual event definition for more detail.

+

legType

+

Reference Data: Complex Option Dictionary Entry

+

For a Complex Option Dictionary Entry, this field defines the type of each leg.

+

Allowed Values:

+

Equity

+

Index

+

Option

+

liquidityCode

+

Events: Order Trade Event, Option Trade Event

+

Included in the side trade details for options and equity trade events, represents whether a given side was adding or removing liquidity.

+

Allowed Values:

+

Added

+

Removed

+

RoutedOut

+

Opening-ReopeningAuction

+

ClosingAuction

+

CrossOrderExecution

+

Other

+

listedSymbol

+

Reference Data: Symbol Dictionary Entry

+

The symbol in the symbology of the listing exchange.

+

listingParticipant

+

Reference Data: Symbol Entry, Symbol Dictionary Entry

+

The exchangeID of the listing exchange for the symbol being described in the event where this field is present.

+

lotSize

+

Reference Data: Symbol Entry

+

Used in a symbol definition entry to state the number of shares in a round lot.

+

marketMaker

+

Events: Quote Event, Quote Cancel Event

+

The Member Alias assigned by the SRO to identify the market maker issuing the quote or quote cancel. In the case where a market maker has multiple users (e.g., acronyms used to differentiate users within the same MM), there would be a separate Member Alias given to each user or sub-account.

+

memberAliases

+

Reference Data: Member Dictionary Entry

+

A list of member aliases for an SRO member.

+

mktMkrSubAccount

+

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Option Order Restatement Event, Post Trade Allocation Event

+

The sub-account for the market maker. This is a text field and will be treated as pass through data - not validated. nbbPrice

+

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

+

The national best bid price at the moment the event. If the event changes the NBBO, this is the national best bid price before the change effected by the event, in this sense, this field is always the national best bid price immediately before the event occurs. See this field in context of the event definitions for more info.

+

nbbQty

+

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

+

The national best bid quantity at the moment the event. If the event changes the NBBO, this is the national best bid quantity before the change effected by the event, in this sense, this field is always the national best bid quantity immediately before the event occurs. See this field in context of the event definitions for more info.

+

nboPrice

+

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

+

The national best offer price at the moment the event. If the event changes the NBBO, this is the national best offer price before the change effected by the event, in this sense, this field is always the national best offer price immediately before the event occurs. See this field in context of the event definitions for more info.

+

nboQty

+

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

+

The national best offer quantity at the moment the event. If the event changes the NBBO, this is the national best offer quantity before the change effected by the event, in this sense, this field is always the national best offer quantity immediately before the event occurs. See this field in context of the event definitions for more info.

+

note

+

Events: Note Event

+

Free form text provided by the exchange to describe the notation of the event.

+

noteType

+

Events: Note Event

+

For a note event, classifies the type of note.

+

Allowed Values:

+

MISC

+

CBOE Note Types

+

CBOE:1 Order Route Event (When an order is routed between internal CBOE systems). The source and destination will indicate more details.

+

CBOE:2 Cross Order Route Event

+

CBOE:3 Auction Start

+

CBOE:4 Auction End

+

CBOE:5 PAR_BROKER_USED_MKT_DATA

+

CBOE:6 PAR_BROKER_MKT_DATA

+

CBOE:7 PAR_BROKER_LEG_MKT

+

CBOE:8 PAR_MANUAL_MARKET_DATA

+

NYSE Options Note Types

+

Floor

+

NYSE Equities Note Types

+

CrossingSession

+

onlyOneQuote

+

Events: Quote Event, Quote Cancel Event

+

True if the system allows only one quote for the particular market maker; false otherwise.

+

openCloseIndicator

+

Events: Simple Option Order Accepted, Options Modified, Post Trade Allocation, Options Restatement or sideDetail of Option Trade events. (When this field is present in the sideDetails of an options trade event, it is applicable only when the side of the trade is an order)

+

Indicates the position of the order.

+

Allowed Values:

+

Open

+

Close

+

Unspecified

+

optionID

+

Reference Data: Simple Option Series Dictionary Entries, Complex Option Dictionary Entries Events: All events for Options Exchanges

+

The unique ID assigned to this option by the reporter. None of any two simple/complex/flex options should receive the same ID.

+

orderAttributes

+

Events: Order Accepted, Order Modified, Order Restatement, Simple Option Order Accepted, Complex Option Order Accepted, Complex Option Order Modified, Stock Leg Order, Option Order Modified, Complex Order Modified, Stock Leg Modified, Option Order Restatement

+

The order attributes field is a way to provide attributes of an order that are not necessarily the same as handling instructions.

+

For example, the rank price of an order, or the participant with the best bid.

+

Allowed Values:

+

RNKP Rank Price - requires a Price value, representing the price used to rank the order in the book (e.g., RNKP=10.25).

+

NBBPAR Participant at the best bid - requires a Participant ID, representing the participant at the best bid (e.g, NBBPAR=Par1)

+

NBOPAR Participant at the best offer - requires a Participant ID, representing the participant at the best bid (e.g, NBOPAR=Par1)

+

Allowed Values (CBOE):

+

MPID Market participant ID, requires an alphanumeric(8) value. (e.g., MPID=A12345)

+

MeetExchangeID Meet Exchange ID, requires a text(8) value. (e.g., MeetExchangeID=B76543)

+

Branch Branch ID, requires a alphanumeric(8) value. (e.g., Branch=ABCD5)

+

BranchSeqNbr The branch sequence number, requires an integer(10) value. (e.g., BranchSeqNbr=500321)

+

CorrespFirm The corresponding firm, requires an alphanumeric(8) value. (e.g., CorrespFirm=987765B)

+

UserID The user ID. Requires a text(8) value. (e.g., UserID=4321A)

+

Extensions Order Extensions. Requires a text(256) value.

+

NBBOProtection Specifies if the order is NBBO protected. Requires a choice value from one of the following choices: true, false. (e.g., NBBOProtection=false).

+

Allowed Values (BATS):

+

AckSubLiquidity This is a subset of the SubLiquidity values. Better prices are offered (in some cases) if an order is at the NBBO. This tells the member on order entry if their order did that. Requires a choice value (e.g., AckSubLiquidity=N) from the following list:

+

N Normal

+

S Setter

+

J Joiner

+

r Persisted (GTC restatement)

+

AddLiquidityOnly Values used for "Post Only" orders. Requires a choice value (e.g., AddLiquidityOnly=A) from the following list of values:

+

A Add only, don't remove liquidity

+

B Bypass removing hidden peg

+

R Allow removal

+

L don't remove at limit

+

AllowPriceSlide Describes what to do with an order if it locks/crosses with the NBBO. Requires a choice value (e.g., AllowSidePrice=M) from the following list:

+

S allow slide and nerf

+

R no nerf and no slide

+

L allow slide no nerf

+

P price adjust

+

m multiple price adjust

+

M slide nerf unnerf when possible

+

H hide not slide

+

N don't re-scrape book at limit

+

D Slide Price

+

E Slide Price but no Nerf

+

X Don't Slide Don't Reject

+

C Bold but no Nerf

+

m Multiple Price Adjust

+

K Cancel Back

+

AuctionType Auction type, used for fee purposes. Requires a choice value (e.g., AuctionType=H) from the following list:

+

O open

+

C close

+

H halt

+

I IPO

+

N none

+

c Cboe Market Close

+

Display Display. Requires a choice value (e.g., Display=V) from the following list:

+

V visible

+

I invisible

+

Executable Further describes the status of an order if it is/ is not yet live or executable. Can be updated with a modify event. Requires a choice value (e.g. Executable=W) from the following list:

+

E order is executable

+

P order is route pending

+

W order in a wait state

+

O open auction MOO/LOO/LLOO + pre-open RHO

+

C close auction MOC/LOC/LLOC

+

U queued

+

T order is stop pending

+

S suspended

+

Q non executable visible quote

+

D pending queued

+

I Periodic Auction

+

A Step Up

+

b BAM Auction

+

c COA (Options only - Complex Order Auction - order is not currently executable as auction is not complete)

+

q QCC

+

BookLiquidity Signifies whether the order is being added to the book. Requires a choice from the following values:

+

A Booked

+

R Not Booked

+

X Routed

+

B Booked Remainder

+

Q Wait

+

C Auction

+

MODR Modify reason, requires a choice value (e.g., MODR=+) from the following list. Note that in this list the acceptable values are surrounded by quotes because the list contains non alphanumeric values:

+

'P' peg adjustment

+

'C' Cboe Market Close

+

'+' price was un-slid

+

'L' liquidity flag was changed (resting order routed away or fully delivered)

+

'R' user reduce (no loss of priority)

+

'D' adjustment of discretion price ONLY no loss in priority (midpoint discretionary peg orders)

+

'U' user other

+

'-' an external NBBO change (sip) caused some sort of change in the order

+

'^' Reroute (order lifted from book to reroute)

+

'B' un-bolt OR bolt-expire

+

'W' wash

+

'T' wait order

+

'!' reload of displaySize and loss of priority

+

'K' working price slid back to display price due to another market locking our protected quote

+

‘S’ stop order

+

‘A’ order routed away due to ROOC e.g. a few minutes before an open/close/ipo/halt auction

+

‘E’ sweep SWPA or SWPB order after route plan has been developed

+

'@' Trading At Last

+

'X' Locked In Cross

+

'Y' Recovery

+

PWASH Prevent wash, more information about wash prevention. Requires a choice value (e.g., PWASH=P) from the following list:

+

N do not prevent (none)

+

F prevent same firm match

+

C prevent clearing firm match

+

P prevent port-owner match

+

RTLM Route to listing market, specifies whether the order can be routed to the opening auction, the closing auction, or both on the listing exchange. Requires a choice value (e.g., RTLM=O) from the following list:

+

N none

+

O only on the open

+

C only on the close

+

B both (on the open or close)

+

H Halt

+

ROUTESTRAT The route strategy used internally in the Bats system. Requires a choice value (e.g., ROUTESTRAT=O) from the following list:

+

O default, let the router select the strategy

+

F failover strategy for use when the router has a NoQuote condition

+

L legacy (emulate the behavior of the old router)

+

C cycle (sequentially route walking depth of book)

+

K dark liquidity scan

+

T toggle (causes the router to cycle through various other strategies on a per-order basis)

+

B ParT (Parallel Top)

+

S ParD (Parallel Depth), exhaust price level before proceeding

+

2 Par2D (Parallel Depth including multiple price levels)

+

M Slim (predefined set of markets, DRT and then ALL)

+

m SlimPlus (Slim, but send to BYX before scraping the local book)

+

R Trim, scrape local book on way in (predefined set of markets, DRT, and then another predefined set of markets)

+

r Trim, but don't scrape local book on way in

+

P Trim2

+

p Trim2, but don't scrape local book on way in

+

Q Trim3

+

q Trim 3, but don't scrape local book on way in

+

G MidPoint routing

+

b SWEEPB (Route to market centers to remove least amount of protected quote shares so order can post. No executions occur is order size too small to completely remove all protected quotes)

+

i Book + IOC/(Day effective 10/21/14) Nasdaq

+

t Book + DRT + IOC/(Day effective 10/17/14) NYSE

+

x Book + IOC/(Day effective 10/17/14) NYSE

+

f Book + IOC LavaFlow

+

a ISO Sweep of all protected markets (similar to BATS Parallel T)

+

o ROBB

+

c ROCO

+

l ROUC

+

Z RMPT

+

z IOCM

+

u Dark lit

+

W Lit sweep

+

D Directed

+

A ALLB

+

RESTA Resting action, specifies whether this order will go onto the Bats book or be routed away to post on somebody else’s book. Requires a choice value (e.g., RESTA=I) from the following list:

+

I Integrated, will rest on the BATS book (though may not be resting at the point of the OA if it is a routed order, may never rest if it is a routed IOC)

+

A PostAway, will rest on another exchange’s book, looking like a routed order that hasn’t come back to BATS

+

D Dark

+

E Expose

+

REROUTE Reroute, specifies whether or not we can reroute an order (route it a second time after it has been booked), if the NBBO goes locked or crossed. Requires a choice value (e.g. REROUTE=N) from the following list:

+

N none

+

L onLock

+

C onCross

+

K onLockOddLot

+

REJA Reject action, provides further information on action if the order can't be executed on entry. Requires a choice value (e.g., REJA=W) from the following list:

+

O outbound

+

R reject

+

Z BZX only

+

J BYX only

+

N NASDAQ only

+

A ARCA only

+

C NSX only

+

M CHX only

+

X PHLX only

+

K BEX only

+

E ISE only

+

U AMEX only

+

D EDGA only

+

G EDGX only

+

Y NYSE only

+

T TRACO only

+

L FLOW only

+

W CBSX only

+

V DATA only

+

H CTWO only

+

S NOBX only

+

F MIAX only

+

g GMNI only

+

r Dark Reject

+

a Dark Auto

+

x Dark Self Cross

+

P Periodic

+

t Wait

+

p Primary Only

+

b BXE Only

+

c CXE Only

+

q TRQX Only

+

h XHFT Only

+

l Bats Select

+

e PERL Only

+

m MERC Only

+

i IEX Only

+

Allowed Values (BOX):

+

ST Requires a choice from the following list:

+

InOrderBook

+

Executed

+

Exposed

+

ToOla

+

Directed

+

CancelPending

+

Eliminated

+

TraderCancelled

+

EliminatedOutOfLimit

+

EliminatedByCircuitBreaker

+

EliminatedOnDisconnection

+

EliminatedByMarketControl

+

EliminatedDueToUnpricedLeg

+

EliminatedDueToTradingRestriction

+

CancelledBySupervisor

+

Received

+

EliminatedDueToTradeLimitExceeded

+

EliminatedDueToTradeActivityLimitExceeded

+

EliminatedDueToMaximumNbTriggersLimitExceeded

+

EliminatedDueToDrillThroughProtection

+

Allowed Values (CHX Name Value Pairs):

+

SettlementType Requires a choice value (e.g., SettlementType=0) from the following list:

+

0 REG - Regular Way

+

1 CASH - Cash

+

2 NXT - Next Day

+

3 T+2 - Trade Date + 2

+

4 T+3 - Trade Date + 3

+

5 T+4 - Trade Date + 4

+

6 FUT - Future

+

7 WI - When and If Issued

+

8 SO - Sellers Option

+

9 T+5 - Trade Date + 5

+

S SLR - Settlement Days

+

FutureSettlementDate Requires value (e.g., FutureSettlementDate=YYYYMMDD) when SettlementType is 6 or S. Value is a date in format YYYYMMDD.

+

FutureSettlementDays Requires value (e.g., FutureSettlementDays=4) when settlementType is S. Value is an integer. It is the number of settlement days.

+

ExpireSeconds Requires value (e.g., ExpireSeconds=3) when timeInForce is GFS. Value is an integer. It is the number seconds for the good-till-seconds order.

+

ExpireDate Requires value (e.g., ExpireDate=YYYYMMDD) when timeInForce code is GTD. Value is an integer. It is the date for the good-till-date order.

+

PegDiff Requires value (e.g., PegDiff=2) for SNAP Auction market peg order. Value is an integer. It is the number of ticks for the symbol.

+

CancelOnSNAPAuctionFlag Requires value (e.g., CancelOnSNAPAuctionFlag=Y) for an order.

+

Y When a SNAP Auction is invoked, the order will not participate in the SNAP Auction

+

N When a SNAP Auction is invoked, the order will participate in the SNAP Auction

+

SNAPMinExecRequiredFlag Requires value (e.g., SNAPMinExecRequiredFlag=Y) for a SNAP Auction order.

+

Y Minimum SNAP Auction threshold required

+

N Minimum SNAP Auction threshold not required

+

SNAPConvertToAOOFlag Requires value (e.g., SNAPConvertToAOOFlag=Y) for a SNAP Auction order.

+

Y Convert to SNAP Auction Only Order if a SNAP Auction has already started by another order.

+

N Cancel Order if a SNAP Auction has already started by another order.

+

SNAPAOOOneAndDoneFlag Requires value (e.g., SNAPAOOOneAndDoneFlag=Y) for a SNAP Auction order.

+

Y SNAP Auction Only Order will only participate in one SNAP Auction, then it will be canceled.

+

N SNAP Auction Only Order will participate in every SNAP Auction.

+

CreationTimestamp Requires value (e.g., CreationTimestamp=20180415T143055.123456789) when the eventTimestamp is different from the creation timestamp.

+

SNAPAuctionOrder Requires a choice value (e.g., SNAPAuctionOrder=s) from the following list:

+

s SNAP Auction Order. Order used to potentially initiate a SNAP Auction.

+

Allowed Values (NYSE Options):

+

STP

+

Reserve

+

BOLD

+

Exposed

+

Covered

+

Allowed Values (NYSE Equities):

+

STP

+

Reserve

+

QOrder

+

SOrder

+

BOrder

+

YGOrder

+

RMO

+

BrokerOrder

+

ProactiveIns

+

MinQty Requires Unsigned value (e.g., MinQty=1000)

+

MFS <MinQty>; Requires Unsigned value (e.g., MFS=1000)

+

PriceOffset <Price_offset>; Requires Price value (e.g., PriceOffset=0.01)

+

MinTriggerSize <OppSideMinSizeTriggerValue>; Requires Unsigned value (e.g., MinTriggerSize=1000)

+

MinPegSize <MinPegSize>; Requires Unsigned value (e.g., MinPegSize=1000)

+

MaxDiscVol <MaxDiscVol>; Requires Unsigned value (e.g., MaxDiscVol=1000)

+

CeilingFloorPrice <Peg_Price>; Requires Price value (e.g., CeilingFloorPrice=0.01)

+

DiscPriceRange <disc_price_range>; Requires Price value (e.g., DiscPriceRange=0.01)

+

TypeOfInterest A value from the following list of choices.

+

DOTR

+

CO

+

EQAA

+

EQBB

+

EQDA

+

EQDB

+

EQGA

+

RQGB

+

SQAA

+

SQBB

+

SQDA

+

SQDB

+

DSQCC

+

SQDC

+

Allowed Values (IEX):

+

RoutingStrategy Allowed values from the following list.

+

u Router

+

s Router Basic

+

MinQtyInstruction Allowed values from the following list.

+

C Composite

+

M Minimum Execution Size with Cancel Remaining

+

A Minimum Execution Size with AON Remaining

+

AntiInternalizationGroupId Used for wash trade prevention. Allowed any two alphanumeric characters or the two-character string "--".

+

[A-Za-z0-9][A-Za-z0-9] Depending upon the value used, these will be used to identify orders which have elected to not trade with identically marked orders from the same firm. The lower case and upper case characters are two distinct values. For example, "a1" and "A1" will be two distinct values.

+

-- Represents free to trade with anyone.

+

Allowed Values (NASDAQ Options):

+

Boolean

+

Persist

+

PrimarySide

+

Name Value Pairs

+

PrivateReference Text<20>

+

BrokerText Text<6>

+

BranchSeqNum Text<20>

+

Text Text<64>

+

FloorBrk Text<6>

+

Tag1AcctId Text<32>

+

CrossClOrderId Text<64>

+

CrossOrderId Text<64>

+

StortSaleInd Value must be on of the following

+

1 SHORT SALE

+

2 SHORT SALE EXEMPT

+

StockCapacity Value must be one of the following

+

1 Agent

+

2 Principal

+

3 Riskless Principal

+

Allowed Values (NASDAQ Equities):

+

CrossType Value must be one of the following

+

0 None

+

1 Open

+

2 Halt

+

3 Close

+

4 Pause

+

5 Supplemental

+

6 Retail

+

CustomerType Value must be one of the following

+

1 Retail Designated

+

2 Non Retail Designated

+

orderID

+

Events: Order Accepted, Route, Modified, Canceled, Trade (sideDetails), Fill, Cancel Route, Modify Route and Restatement events, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Route, Option Order Modified, Complex Option Order Modified, Option Order Canceled, Modify Option Route, Option Cancel Route, Simple Option Trade, Stock Leg Fill, Option Order Restatement and Options Post Trade Allocation events

+

The internal order ID assigned to the order by the exchange.

+

orderType

+

Events: Order Accepted, Order Routed, Order Modified, Order Restatement, Order Modify Route, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Option Route, Option Order Restatement, Modify Option Route events

+

The order type defines the type of order being placed, and must be exactly one of the permitted values. Some values are exchange specific. This document details the technical specifications for what is reported in this field, not necessarily how to determine what value to be included in each report. See the CAT website for exchange-specific guidance on how to determine which values to use for reporting specific orders.

+

All Exchanges:

+

AMPEG Alt Midpoint Peg - pegs to less aggressive of midpoint or 1 tick inside the NBBO

+

BLK Block

+

CAB Cabinet

+

FAC Facilitation

+

LEG Leg - Computed Price

+

LMT Limit

+

LOB Limit or Better

+

LOC Limit on Close

+

LOO Limit on Open

+

LW Limit With or With Out

+

MA At Market

+

MIT Market If Touched

+

MKT Market

+

MOC Market on Close

+

MOO Market on Open

+

MDPEG Midpoint Discretionary Peg - a primary peg, but has discretion to the midpoint of the NBBO

+

MPEG Midpoint Peg

+

MMPEG Market Maker Peg - will peg at 8%, 20%, or 28% of the NBBO depending on symbol and time of day (follows the LULD bands). Designed to allow MMs to satisfy their quoting obligations without stub orders

+

OB On Basis

+

PPEG Primary Peg

+

RPEG Market Peg

+

RTPEG Route Peg - Non-displayed primary peg order that only interacts with orders that are about to be routed out with size <= peg order size

+

SIM Simple

+

SOL Solicitation

+

STL Stop Limit

+

STP Stop

+

WW With or Without

+

Allowed Values (NYSE Options):

+

AutoMatch

+

LimitCross

+

Allowed Values (NYSE Equities):

+

Peg

+

LimitCross

+

Allowed Values (IEX):

+

DPEG Discretionary Peg

+

originalOrderDate

+

Events: Order Restatement, Option Order Restatement

+

This field represents the most recent trading day for which the order was active. Note that this may not be the date when the order was originally accepted. If the order has been active for multiple trading days, this field must reference the most recent trading day when the order was active.

+

originalOrderID

+

Events: Order Modified, Order Restatement, Option Order Modified Event, Complex Option Order Modified Event, Stock Leg Modified, Option Order Restatement

+

The most recent internal order ID before the modify / replacement created a new order ID.

+

originalQuoteID

+

Events: Quote Event

+

The most recent quoteID of the existing quote before being updated or replaced.

+

Participant ID

+

Valid Participant ID values. Note that participants will use their Participant ID as their

+

Reporter ID.

+

Allowed Values:

+

BZX Cboe BZX Exchange

+

BYX Cboe BYX Exchange

+

BOX BOX Options Exchange

+

C2 Cboe C2 Exchange

+

CBOE Cboe Exchange

+

CHX Chicago Stock Exchange

+

EDGA Cboe EDGA Exchange

+

EDGX Cboe EDGX Exchange

+

FINRA Financial Industry Regulatory Authority

+

GEMX Nasdaq GEMX

+

MRX Nasdaq MRX

+

ISE Nasdaq ISE

+

IEX Investor’s Exchange

+

MIAMI Miami International Securities Exchange

+

PEARL MIAX PEARL

+

BX Nasdaq BX

+

PHLX Nasdaq PHLX

+

NASD The NASDAQ Stock Market

+

NSX NYSE National

+

NYSE The New York Stock Exchange

+

AMER NYSE American

+

ARCA NYSE ARCA

+

price

+

Events: Order Accepted, Route, Modified, Modify Route or Restatement events, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Option Route, Modify Option Route, Option Order Restatement

+

The limit price of the order. For a complex option, this is the net price of the order, which can be either positive, negative, or zero.

+

Events: Order Trade, Order Fill, Trade Break, Trade Correction

+

Trade/fill price of the trade/fill.

+

Events: Post Trade Allocation

+

The price of the allocation.

+

primaryDeliverable

+

Reference Data: Simple Option Series Dictionary Entries

+

The symbol for the primary deliverable component of the option, in the symbology of the listing exchange for that symbol. Alternatively, if a symbol dictionary is provided, a valid alias could be used.

+

putCall

+

Reference Data: Simple Option Series Dictionary Entries

+

Specifies if this simple option or option leg is a put or call.

+

Allowed Values:

+

Put

+

Call

+

quantity

+

Events: Order Accepted, Route, Modified, Canceled, Trade, Fill, Modify Route, Order Restatement events; Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Stock Leg Modified, Option Route, Option Order Cancelled, Simple Option Trade, Stock Leg Fill, Modify Option Route, Option Order Restatement events

+

The quantity of the order.

+

quoteID

+

Events: Note Event, Options Quote, Quote Cancel, Options Trade (sideDetails) and Stock Leg Fill events

+

The ID assigned to this quote by the exchange to uniquely identify the quote.

+

ratio

+

Reference Data: Complex Option Dictionary Entries

+

The ratio quantity of a complex option leg, relative to other legs. Ratios must already be

+

reduced to the smallest units possible.

+

reason

+

Events: Trade Break, Trade Correction, Option Trade Break, Option Trade Correction, Post Trade

+

Allocation

+

Free format text field, with reason for the trade break or correction.

+

reporter

+

Events: Note event, Self Help Declaration

+

Reference Data: Member Dictionary Entry, Symbol Dictionary Entry and Option Series Dictionary Entry

+

Reporter ID of the entity reporting the events or reference data.

+

result

+

Events: Order Route, Order Cancel Route, Order Modify Route; Option Route, Modify Option Route, Option Cancel Route

+

The result of the Route, Cancel Route or Modify Route request communicated to the exchange.

+

Allowed Values:

+

ACK Acknowledged

+

REJ Rejected

+

NR No Response

+

UNSOL Unsolicited: only valid for an unsolicited cancel route

+

resultTimestamp

+

Events: Order Route, Order Cancel Route, Order Modify Route; Option Route, Modify Option Route, Option Cancel Route

+

The date/time the result of Route, Modify Route, or Cancel Route request was received.

+

revokedTimestamp

+

Events: Self Help Declaration

+

Date and time the self-help was revoked. If self-help is not revoked by the end of the day, this field may be left unreported or can be set to the closing time. However, another self-help event must be reported for the next day.

+

routedOrderID

+

Events: Order Accepted, Order Modified, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Stock Leg Modified

+

The ID assigned to this order by the routing firm when submitting the order to the exchange.

+

Events: Order Route, Modify Route or Cancel Route, Option Route, Modify Option Route, Option Cancel Route

+

The ID assigned to this order by the exchange for sending message to the routing broker.

+

routedOriginalOrderID

+

Events: Order Modified, Option Order Modified, Complex Option Order Modified, Stock Leg Modified

+

The routedOrderID for the order, as sent by the routing broker in the original route message, or the most recent modify message (in FIX OrigClOrdId, in OUCH Existing Order Token).

+

Events: Order Modify Route, Modify Option Route events

+

The routedOrderID as represented in the original or most recent Route/Modify Route message sent to the routing broker.

+

routingParty

+

A string used to identify the entity on the other side of an accepted or route event.

+

Events: Order Accepted, Order Modified, Simple Option Order Accepted, Complex Option Order Accepted

+

In the events above, this is the unique identifier for the firm that sent the order to the exchange.

+

Events: Order Route, Order Fill, Order Modify Route, Order Cancel Route, Option Route, Modify Option Route, Option Cancel Route

+

In the events above, this is the firm to which the exchange routed the order.

+

The routingParty on a ROUTE event must match the routingParty on the other side's ACCEPTED event.

+

saleCondition

+

Events: Order Trade, Order Fill, Trade Correction, Simple Option Trade, Stock Leg Fill, Option Trade Correction

+

Indicates a special condition under which a trade was reported.

+

The first character must be either 'E' or 'O' indicating whether the following characters are to be interpreted as OPRA sale condition codes for options or UTP/CTS sale condition codes for equities. 'E' stands for the UTP/CTS, while 'O' stands for the OPRA.

+

The following characters will use the single-character codes as defined in the OPRA, UTP, and CTS specifications - one character code for as many conditions as apply. Note that the <space> character is a valid code.

+

Second character if first character is O (OPRA Values):

+

blank Indicates that the transaction was a regular sale and was made without stated conditions

+

A Transaction previously reported (other than as the last or opening report for the particular option contract) is not to be cancelled

+

B Transaction is being reported late and is out of sequence, i.e. later transactions have been reported for the particular option contract.

+

C Transaction is the last reported for the particular option contract and is now cancelled.

+

D Transaction is being reported late, but is in the correct sequence, i.e. no later transactions have been reported for the particular option contract.

+

E Transaction was the first one (opening) reported for this day for the particular option contract. Although later transactions have been reported, this transaction is not to be cancelled.

+

F Transaction is a late report of the opening trade and is out of sequence: i.e. other transactions have been reported for the particular option contract.

+

G Transaction was the only one reported this day for the particular option contract and is now to be cancelled

+

H Transaction is a late report of the opening trade, but is in the correct sequence, i.e., no other transactions have been reported for this particular option contract.

+

I Transaction was executed electronically. This prefix appears solely for information; process as a regular transaction.

+

J Transaction is a reopening of an option contract in which trading has been previously halted. This prefix appears solely for information; process as a regular transaction.

+

K Transaction is an option contract for which the terms have been adjusted to reflect a stock dividend, stock split, or similar event. This prefix appears solely for information; process as a regular transaction.

+

L Transaction represents a trade in two options in the same option class (a buy and sell in the same class). This prefix appears solely for information; process as a regular transaction.

+

M Transaction represents a trade in two options in the same option class (a buy and sell in a put and a call). This prefix appears solely for information; process as a regular transaction

+

N Transaction is the execution of a sale at a price agreed upon by the floor personnel involved, where a condition of the trade is that it be reported following a non-stopped trade of the same series at the same price.

+

O Cancel stopped transaction

+

P Transaction represents the option portion of an order involving a single option leg (buy or sell of a call or put) and stock. The prefix appears solely for information; process as a regular transaction.

+

Q Transaction represents the buying of a call and the selling of a put for the same underlying stock or index. This prefix appears solely for information; process as a regular transaction

+

R Transaction was the execution of an order that was ‘stopped’ at a price that did not constitute a Trade-Through on another market at the time of the stop.

+

S Transaction was the execution of an order identified as an Intermarket Sweep Order

+

T Transaction reflects the execution of a ‘benchmark trade’.

+

X Transaction is Trade Through Exempt. The transaction should be treated like a regular sale.

+

Second character if first character is E (UTP and CTS Values):

+

@ Regular Sale

+

blank No Sale Condition required within the category it appears (Long Trade Format Only)

+

A Acquisition

+

B Bunched Trade or Average Price Trade

+

C Cash Sale

+

D Distribution

+

E Automatic Execution

+

F Intermarket Sweep

+

G Bunched Sold Trade

+

H Price Variation Trade

+

I Odd Lot Trade

+

K Rule 155 Trade (AMEX)

+

L Sold Last

+

M Market Center Official Close

+

N Next Day Trade (Next Day Clearing)

+

O Opening Prints / Market Center Opening Trade

+

P Prior Reference Price

+

Q Market Center Official Open

+

R Seller

+

S Split Trade

+

T Form T (Extended Hours Trade)

+

U Extended Trading Hours (Sold Out of Sequence)

+

V Contingent Trade

+

W Average Price Trade

+

X Cross Trade

+

Y Yellow Flag Regular Trade

+

Z Sold (out of Sequence)

+

1 Stopped Stock (Regular Trade)

+

4 Derivatively Priced

+

5 Re-Opening Prints (Market Center Reopening Trade)

+

6 Closing Prints (Market Center Closing Trade)

+

7 Qualified Contingent Trade (QCT)

+

8 Placeholder for 611 Exempt

+

9 Corrected Consolidated Close (per listing market)

+

sellDetails

+

Events: Order Trade, Trade Correction, Simple Option Trade, Option Trade Correction

+

Information for the sell side of the trade. Format and element definitions for sellDetails are described in sideTradeEvent in section 4.5.

+

sentTimestamp

+

Events: Quote Event, Quote Cancel Event

+

The date/time when the market maker sent the quote or quote cancel to the exchange.

+

sequenceNumber

+

Events: All Stock Exchange Events, All Options Exchange Events

+

The sequence number of the event, used to identify the sequence of events when multiple events have the same timestamps.

+

The sequence number is required to be strictly increasing for a given reporter, date, and symbol, and can be used to sort each event in chronological order where multiple events have the same timestamp.

+

For more detail, please refer to section 3.1: Timestamps and Sequence Numbers.

+

session

+

Events: Order Accepted, Order Route, Order Modified, Order Fill, Order Cancel Route, Order Modify Route, Simple Option Order Accepted, Complex Option order Accepted, Option Route, Modify Option Route, Option Cancel Route

+

The name/ID of the session being used to send the order (from the routing firm to the exchange, or from the exchange to the routing broker). If this event represents a leg of a complex order, the Session must be the same as reported in the parent complex order.

+

settlement

+

Reference Data: Simple Option Series Dictionary Entry

+

Specifies the settlement of option in Simple Option Series Dictionary Entries.

+

Supported Values:

+

AM At the open

+

PM At the close

+

Asian European/PM settlement, but the exercise settlement value is the arithmetic average of the closing prices of the underlying index on 12 pre-determined, consecutive monthly observation dates.

+

Cliquet European/PM settlement, but the exercise settlement value is the greater of zero, or [(closing price of the underlying index on the initial trade date) * (sum of the monthly capped returns)] + strike price.

+

side

+

Reference Data: Complex Option Dictionary Entry

+

Events: Order Accepted, Order Route, Order Trade, Order Fill, Order Restatement, Trade Correction, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Route, Option Trade, Stock Leg Fill, Post Trade Allocation

+

Side of the event. Note that AsDirected and Opposite are only used for complex option order accepted events.

+

Supported Values:

+

Buy

+

Sell

+

Short

+

Exempt

+

Cross

+

CrossExempt

+

CrossShort

+

CrossShortExempt

+

AsDirected

+

Opposite

+

status

+

Reference Data: Member Dictionary Entry

+

The status of the member on the reporting date.

+

Supported Values:

+

Active An active member of the SRO (ID must be CRD)

+

Inactive An inactive member of the SRO (ID must be CRD)

+

NonMember An entity that is not a member of the SRO. For example, if the routing broker dealer is not a member of the exchange, it would be listed here (ID must be CRD).

+

Internal Some internal part of the SRO system (a utility or facility) which will be used in reportable events. In this case, the ID must have been a preregistered with CAT via the web GUI.

+

Other Another entity (e.g., foreign firm) without a CRD number. In this case, the ID must have been pre-registered with CAT via the web GUI.

+

strikePrice

+

Reference Data: Simple Option Series Dictionary Entry

+

In Simple Option Series Dictionary Entries, this field is the pre-arranged transaction price if the option is exercised. Note that if option kind = FLEXPCT, this will be the percentage.

+

symbol

+

Events: All Stock Exchange Events, All Options Stock Leg Events

+

Reference Data: Symbol Entry, Complex Option Dictionary Entry

+

The stock symbol. Note that for all events of stock exchange, or options stock leg related events, this field may be in either the symbology of the listing exchange, or the reporter's symbology mapping as appropriate. However, in Symbol Entry, or stock leg of Complex Option Dictionary entry, this must be in the symbology of the listing exchange.

+

symbolAliases

+

Reference Data: Symbol Dictionary Entry

+

A list of symbol aliases for a listed symbol. Using an alias allows a reporter to submit events using the symbol in their own format rather than the symbology of the listed exchange.

+

Symbol Entry Pairs

+

This is a data type. Currently, this data type must be used for the field "attributes" found in the reference data element: Symbol Entry.

+

Allowed values for this data type include the following:

+

Allowed values for Symbol Entry:

+

TPG Tick Pilot Group (Choice) - requires one of the defined values from the list below (e.g., TPG=TG2).

+

CTRL Control Group

+

TG1 Test Group 1

+

TG2 Test Group 2

+

TG3 Test Group 3

+

test

+

Reference Data: Symbol Entry

+

Indicates whether the symbol is a "test" symbol used for testing production systems.

+

timeInForce

+

Events: Order Accepted, Order Route, Order Modified, Order Modify Route, Order Restatement, Simple Option Order Accepted, Complex Option Order Accepted, Complex Option Order Modified, Stock Leg Order, Option Order Modified, Option Route, Modify Option Route, Option Order Restatement

+

Specifies the Time-In-Force for an order. Supported TIF values are listed below.

+

Supported Values:

+

AOK Auction or Kill

+

CLO At the Close

+

DAY A day order

+

IOC Immediate or Cancel

+

GTC Good till Canceled

+

GTT Good till Time (requires XTIME in handlingInstructions)

+

GTD Good till Date

+

GTX Good till Crossing

+

FOK Fill or Kill

+

OPG At the Open

+

REG Regular Hours Only

+

WCO While Connected

+

Additional Values Allowed (BATS):

+

EXT Extended Day

+

Additional Values Allowed (CHX):

+

AOO Auction-only order

+

GFS Good for Seconds

+

Additional Values Allowed (IEX):

+

SYS System Hours

+

EXT Day + Extended Hours

+

Additional Values Allowed (NASDAQ Equities):

+

EXT Extended Days

+

OPG On Open

+

CLO On Close

+

Additional Values Allowed (MIAX):

+

AOC Auction or Cancel

+

Additional Values Allowed (MIAX) Pearl:

+

AOC Auction or Cancel

+

tradeDate

+

The date on which a trade occurred.

+

tradeID

+

Events: Order Trade, Trade Break, Trade Correction, Option Trade, Post Trade Allocation, Option Trade Break, Option Trade Correction

+

An identifier for the trade, unique for the given exchange, date, and Symbol/OptionID.

+

type

+

Specifies the event type.

+

General Events:

+

NOTE Note

+

SHD Self Help Declaration

+

STE Supplemental Trade Event

+

Stock Exchange Events:

+

EOA Order Accepted

+

EOR Order Route

+

EIR

+

Internal Order Route

+

EOM Order Modified

+

EOJ Order Adjusted

+

EOC Order Canceled

+

EOT Order Trade

+

EOF Order Fill

+

EBP Bulk Print

+

ECR Order Cancel Route

+

EMR Order Modify Route

+

EORS Order Restatement

+

ETB Trade Break

+

ETC Trade Correction

+

Options Exchange Events:

+

OQ Quote

+

OQC Quote Cancel

+

OOA Simple Option Order Accepted

+

OCOA Complex Option Order Accepted

+

OSL Stock Leg Order

+

OOM Option Order Modified

+

OCOM Complex Option Order Modified

+

OSLM Stock Leg Modified

+

OOJ Option Order Adjusted

+

OCOJ Complex Option Order Adjusted

+

OSLJ Stock Leg Adjusted

+

OOC Option Order Canceled

+

OOR Option Route

+

OIR Internal Option Route

+

OCIR Internal Complex Option Route

+

OOMR Modify Option Route

+

OOCR Option Cancel Route

+

OT Simple Option Trade

+

OSLF Stock Leg Fill

+

OPTA Post Trade Allocation

+

OORS Option Order Restatement

+

OTB Option Trade Break

+

OTC Option Trade Correction

+

undefinedNoteData

+

Events: Note Event

+

A list of key/value pairs, providing machine parseable data for the notation in a Note Event. The attributes are not defined in the specs, and can be any values as long as they conform to the format for a list of name/value pairs.

+

underlyingType

+

Reference Data: Option Series Dictionary Entry

+

This field specifies whether a simple option series has an equity or index as its underlying. The underlying type mapping is consistent with the same mapping used at OCC (e.g., ETF is treated as Equity and WCO is treated as Index).

+

Allowed Values:

+

Equity

+

Index

+

version

+

This is a data type, not a field. Digits and decimals are the only allowed characters. The first character must be a digit group followed by any number of optional pairs of decimals and digit groups.

+

workingPrice

+

Events: Order Accepted, Order Restatement, Simple Option Order Accepted, Option Order Modified, Option Order Restatement

+

The working price of the order.

+
+
fn +

1 Industry Members are required to maintain the accuracy to within 50 milliseconds of the time maintained by NIST. 100 microseconds requirement is for Participants only.

+
\ No newline at end of file diff --git a/spider/files/data000008.html b/spider/files/data000008.html index a49a370..1f90ec1 100644 --- a/spider/files/data000008.html +++ b/spider/files/data000008.html @@ -1,1481 +1,310 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: CAT NMS PLAN Clock Synchronization - document_type: Assessment - source: US/SEC/Assessment/Clock Synchronization Assessment - source_type: Clock Synchronization Assessment + document_title: Joint Industry Plan (Notice of Plan Amendment No. 1 Release 34-74223) + document_type: Notices + source: US/SEC/Notices/Notice of Plan Amendment + source_type: Notice of Plan Amendment language: English - citation: N/A -
pubdate: May 15, 2017 effdate: N/A -

CAT NMS PLAN Clock Synchronization

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization - Compliance User: Broker-dealers + citation: Notice of Plan Amendment No. 1 Release 34-74223 +
pubdate: February 06, 2015 effdate: N/A +

Joint Industry Plan (Notice of Plan Amendment No. 1 Release 34-74223)

+ Topic: SEC Release, Release No. 34-74223, Release No. 34-74223, Joint Industry Plan; Notice of Amendment + Compliance User: Self-Regulatory Organization Keywords: - File Number 4-698, - Consolidated Audit trail, + Joint Industry Plan, + Selection Plan, -

May 15, 2017

-

Brent J. Fields

-

Secretary

-

Securities and Exchange Commission

-

100 F Street, NE

-

Washington, DC 20549-1090

-

Re: File Number 4-698

-

National Market System Plan Governing the Consolidated Audit Trail Clock Synchronization Assessment

-

Dear Mr. Fields:

-

In accordance with Section 6.6(a)(ii) of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”),1 the Operating Committee2 for CAT NMS, LLC respectfully provides the Securities and Exchange Commission (“SEC” or “Commission”) with this assessment of the clock synchronization standard for the Consolidated Audit Trail (“CAT”), including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and recommendation for appropriate amendments based on this assessment.3 This Assessment is divided into four sections: (1) executive summary; (2) description of current clock synchronization requirements under the CAT NMS Plan; (3) description of the CAT Clock Synchronization Survey (the “Survey”), including responses to the Survey; and (4) an assessment of the current clock synchronization requirements based on the analysis of the data collected in the Survey, including whether the current requirements should be amended.

-
pubdate: May 15, 2017 effdate: N/A -

I. Executive Summary

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Executive Summary - Compliance User: Broker-dealers +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-74223; File No. 4-668)

+

February 6, 2015

+

Joint Industry Plan; Notice of Amendment to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, and NYSE MKT LLC, NYSE Arca, Inc.

+
pubdate: February 07, 2015 effdate: N/A +

I. Introduction

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Introduction + Compliance User: Self-Regulatory Organization Keywords: - CAT NMS Plan - Section 6.6, - Participants, - CAT Reporting, + Securities Exchange Act of 1934, + SEC Rule 608, + National Market System Plan, + Developing a Plan for the Consolidated Audit Trail, -

As previously noted, Section 6.6(a)(ii) of the CAT NMS Plan requires that the Participants provide the SEC with an assessment of the clock synchronization standard, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and a recommendation for appropriate amendments based on this assessment. To prepare this assessment, the Participants sought information regarding Industry Members’ clock synchronization practices through the Survey. This assessment provides a summary of the results of this Survey. Based on an analysis of the results of the Survey as well as information about Participant clock synchronization practices, the Participants do not believe that it is necessary or appropriate to amend the Business Clock synchronization requirements set forth in the Plan at this time. The Participants believe this assessment is consistent with the SEC’s finding that the current 50 milliseconds standard for Industry Members “is acceptable for the initial phase of CAT reporting.”4 The Participants will reassess whether the Business Clock synchronization requirements remain consistent with industry standards – or whether it may be necessary to amend such requirements – in the future as part of the annual assessment required by Section 6.8(c) of the Plan; however, the Participants note that the first annual assessment will occur before the initial phase of Industry Member CAT reporting.

+

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 thereunder2, notice is hereby given that, on December 12, 2014, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”), filed with the Securities and Exchange Commission (the “Commission”) a proposal to amend the Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”).

-
pubdate: May 15, 2017 effdate: N/A -

II. Current Clock Synchronization Requirements

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Current Clock Synchronization Requirements - Compliance User: Broker-dealers +
pubdate: February 08, 2015 effdate: N/A +

II. Background

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Background + Compliance User: Self-Regulatory Organization Keywords: - CAT NMS Plan - Section 6.8, - Participants, - CAT Reporting, - Business Clocks, - Industry Member, - SEC, - Clock Synchronization, + Sec Rule 613, + CAT NMS plan, + SRO, + Selection Plan, -

Section 6.8 of the CAT NMS Plan sets forth the clock synchronization requirements related to the CAT for Participants and Industry Members. With regard to Participants, Section 6.8(a)(i) of the Plan requires each Participant to synchronize its Business Clocks at a minimum to within 100 microseconds of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards, except for Business Clocks used solely for Manual Order Events. Section 6.8(a)(iii) of the Plan requires each Participant to synchronize its Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization.

-

With regard to Industry Members, Section 6.8(a)(ii) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks at a minimum to within 50 milliseconds of the time maintained by NIST, except for Business Clocks used solely for Manual Order Events or the time of allocation on Allocation Reports, and maintain such a synchronization. Section 6.8(a)(iii) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Section 6.8(a)(iv) of the Plan requires each Participant to require its Industry Members to synchronize their Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Each Participant has adopted rules requiring its Industry Members to comply with these clock synchronization requirements.5

-

In approving the Plan, the SEC noted that the 50 milliseconds standard was reasonable for the initial implementation of the CAT.6 The SEC stated further that it “believes that a standard of 50 milliseconds for Industry Members will allow regulators to sequence orders and events with a level of accuracy that is acceptable for the initial phases of reporting.”7 Nevertheless, the SEC stated further that it:

-

believes that it is appropriate for the Participants to consider the type of CAT Reporter (e.g., Participant, Industry Member), the type of Industry Member (e.g., ATS, small broker-dealer), and type of system (e.g., order handling, post-execution) when establishing appropriate industry standards. The Commission does not believe that one industry standard should apply across all CAT Reporters and systems.8

-

Accordingly, the Commission amended Section 6.8(c) of the Plan to state that industry standards for purposes of clock synchronization should be determined based on the type of CAT Reporter, type of Industry Member and type of system. In recognition of the expectation that narrower clock synchronization thresholds may be appropriate for Industry Members, or certain categories or systems thereof, the Commission amended the Plan to require the Participants to provide this assessment of the clock synchronization standards set forth in the Plan.

+

On July 11, 2012, the Commission adopted Rule 613 to require the SROs to jointly submit a national market system (“NMS”) plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).3 To facilitate the development of the consolidated audit trail, following the adoption of Rule 613, the SROs created a working group consisting of representatives from each SRO. The SROs also decided to engage in a request for proposal (“RFP”) process to help them develop the CAT NMS Plan and to solicit bids (“Bids4”) for the role of Plan Processor to build, operate, administer, and maintain the consolidated audit trail.5 In addition, on September 3, 2013, the SROs filed, for approval, the Selection Plan to govern how the SROs would proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how the SROs would review, evaluate, and narrow down the Bids submitted in response to the RFP—and ultimately selecting the Plan Processor.6 The Selection Plan was approved on February 21, 2014.7

+

The SROs propose to amend the Selection Plan in two ways. First, the SROs propose to provide opportunities to accept revised Bids prior to approval of the CAT NMS Plan, and second, to allow the list of Shortlisted Bids to be narrowed prior to Commission approval of the CAT NMS Plan. A copy of the proposed amendment to the Selection Plan is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments from interested persons on the proposed amendment to the Selection Plan.

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pubdate: May 15, 2017 effdate: N/A -

III. CAT Clock Synchronization Survey

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey - Compliance User: Broker-dealers +
pubdate: February 09, 2015 effdate: N/A +

III. Description of the Plan

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan + Compliance User: Self-Regulatory Organization Keywords: - Participant, - Business Clock Syncronization Practice, - CAT NMS plan, + Selection Plan, + Rule 608, + SRO, -

The Participants determined that the use of a survey was an appropriate method for gaining additional data on Industry Members’ Business Clock synchronization practices to inform this assessment. On April 11, 2017, the Participants released the Survey, which was made available to the public on the CAT NMS Plan’s public website.9 Responses were collected through April 23, 2017. The Participants drafted the Survey in consultation with the Advisory Committee to help ensure that the Survey was designed to seek detailed and meaningful data regarding Business Clock synchronization practices and trends, and industry views regarding potential modifications to the Business Clock synchronization standards set forth in the Plan. When the Survey was posted, the Participants notified their respective members and the Advisory Committee and industry trade associations,10 to encourage a significant and diverse sample size.

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pubdate: May 15, 2017 effdate: N/A -

A. Overview of CAT Clock Synchronization Survey

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey - Compliance User: Broker-dealers +

Set forth in this Section II is the statement of the purpose of the Selection Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,8 prepared and submitted by the SROs to the Commission.9

+
pubdate: February 10, 2015 effdate: N/A +

A. Background

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background + Compliance User: Self-Regulatory Organization Keywords: - Syncronization Survey, - Business Clock, + Selection Plan, + CAT NMS plan, + Sec Rule 613, -

The Survey was divided into five main sections: (1) demographic questions; (2) general questions; (3) current clock synchronization practices; (4) changes to Business Clock synchronization practices; and (5) costs. Each of these sections is discussed in greater detail below.

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pubdate: May 15, 2017 effdate: N/A -

1. Demographic Questions

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Demographic Questions - Compliance User: Broker-dealers +

The Selection Plan governs the process for Participant review of Bids for the role of Plan Processor for the CAT NMS Plan, the procedures for evaluating the Bids, and ultimately, until approval of the CAT NMS Plan, the selection of the Plan Processor. The CAT NMS Plan was filed with the Commission for approval on September 30, 2014.

+

After gaining experience with the development process for the CAT NMS Plan, the Participants believe it is necessary to amend the Selection Plan to ensure that the Participants will be able to choose a Plan Processor within the timeframe provided in the Selection Plan and Rule 613. The Participants propose amending the Selection Plan to (1) provide for additional opportunities to accept revised Bids and (2) allow the set of Shortlisted Bids to be narrowed prior to Commission approval of the CAT NMS Plan.

+
pubdate: February 11, 2015 effdate: N/A +

1. The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background, The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids + Compliance User: Self-Regulatory Organization Keywords: + Selection Plan, + Shortlisted Bidders, CAT NMS plan, - Vendors, - CAT Reporters, - Broker-dealer, - Sec Rule 613, - Industry Members, - FINRA, - OATS, + Plan Processor, + Selection Plan Section VI(B), -

The first section of the Survey asked that respondents provide their firm name and contact information. The section also asked that respondents, if applicable, identify themselves as a third-party vendor, technology services provider or other entity that is not subject to the CAT NMS Plan, but that provides services to CAT Reporters and maintains synchronized Business Clocks, and to explain their business and systems that contain Business Clocks. To the extent that a respondent was a small broker-dealer, as defined in Rule 613,11 they were asked to identify themselves as such.

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To help the Participants collect information from Industry Members that currently report to the Financial Industry Regulatory Authority’s (“FINRA”) Order Audit Trail System (“OATS”), the Survey asked respondents to identify whether they currently report to OATS and, if so, to identify approximately how many reportable order events they report each month. For firms that are not subject to OATS, the Survey asked that respondents provide a brief explanation of why they are excluded or exempt from OATS, as applicable. Respondents also were asked to provide estimates of the approximate number of orders for NMS Stocks and OTC Equity Securities, and listed options, that they handled in the past month (including orders given to, received by, or originated by, the respondent). Finally, respondents were asked to provide information concerning their business activities, including identifying the types of business activities in which they participate, identifying whether they are a market maker, identifying whether they are an alternative trading system (“ATS”), and identifying the instruments that they trade.

+

Under the Selection Plan, Shortlisted Bidders are only eligible to revise Bids following Commission approval of the CAT NMS Plan. The Selection Plan specifies that, following approval of the CAT NMS Plan by the SEC, Shortlisted Bidders for the role of Plan Processor may be permitted to revise their Bids based on the provisions in the approved CAT NMS Plan, including further discussions if determined to be necessary by the Selection Committee described in the Selection Plan.10 The Selection Plan provides that a Shortlisted Bidder will be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to certain recusal provisions in the Selection Plan, that revisions are necessary or appropriate in the light of the content of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan.11

+

The Selection Plan also requires that selection of the Plan Processor occur from among the initial set of Shortlisted Bids.12 Under the current Selection Plan, the Participants are not permitted to narrow the list of Shortlisted Bids determined pursuant to Section VI(B) of the Selection Plan.

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pubdate: May 15, 2017 effdate: N/A -

2. General Questions

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, General Questions - Compliance User: Broker-dealers +
pubdate: February 12, 2015 effdate: N/A +

2. Allowing Revision(s) of Bids In Light of Additional Information Available to Shortlisted Bidders and Providing for Narrowing the Set of Shortlisted Bidders Will Allow the Participants to Select the Plan Processor More Effectively and Efficiently Within the Rule 613 Timeframe

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background, The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids + Compliance User: Self-Regulatory Organization Keywords: - CAT Reporter, - Business Clock Synchronization Requirements, - Survey questions, - -

The next section of the Survey included general questions requesting views on whether the Business Clock synchronization requirements set forth in the Plan should vary depending on the type of CAT Reporter, the type of Industry Member and/or the type of system. To the extent that a respondent believed that the requirements should vary, the Survey asked that they explain how and why. Next, the Survey asked if respondents believed that firms voluntarily seek to improve Business Clock synchronization requirements, or if they believed that firms typically avoid changing such standards or practices absent a regulatory requirement to do so. Finally, this section asked that the respondents describe the factors that primarily affect costs related to complying with the Business Clock synchronization requirements and whether such factors vary by system or Industry Member.

-
-
pubdate: May 15, 2017 effdate: N/A -

3. Current Clock Synchronization Practices

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Current Clock Synchronization Practices - Compliance User: Broker-dealers - Keywords: - Survey questions, - Survey Information, - Business Clock synchronization, - -

The next section asked that respondents provide information regarding their current Business Clock synchronization practices. To the extent that respondents currently maintain synchronized Business Clocks, they were asked to identify the types of systems in which such Business Clocks are maintained.12 To collect information on Business Clocks used in different systems, respondents also were asked to provide responses to various questions regarding the systems that they operate that contain Business Clocks. Respondents were asked whether they maintain different synchronization tolerances for Business Clocks used for different systems and, if so, for what types of systems the respondents maintain different tolerances and the tolerance of each respective system. The Survey requested information regarding the technologies that respondents use to maintain Business Clock synchronization, such as: PTP; NTP; PPS; GPS; CDMA; or other. Respondents also had the option of indicating that they “do not know” the technologies that they currently use to maintain Business Clock synchronization.

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Respondents were then asked to provide information regarding their current Business Clock drift tolerances by choosing from the following responses: more than 1 second; 500 milliseconds to 1 second; 50 milliseconds to 499 milliseconds; 1 millisecond to 49 milliseconds; 500 microseconds to 999 microseconds; 1 microsecond to 499 microseconds; and “do not know.” Respondents also were asked if tolerances vary by where a Business Clock is located (e.g., internal broker-dealer data center; third-party data center; exchange co-location). Next, respondents were asked to identify how often they check Business Clock synchronization by choosing from the following responses: once a day; more than once a day, but less than once an hour; once an hour or more, but less than once a minute; once a minute or more, but less than once a second; once a second or more, but less than once a hundredth of a second; more than once a hundredth of a second; or “do not know.” Next, respondents were asked to identify what source they currently use as a “master” clock by identifying: GPS; CDMA; NIST atomic clock; data center-provided time; other vendor or hardware provided time; or “do not know.” To the extent that respondents maintain Business Clock synchronization across geographically disparate systems, they were asked to identify this fact and explain any challenges encountered and costs incurred to maintain such synchronization.

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-
pubdate: May 15, 2017 effdate: N/A -

4. Changes to Business Clock Synchronization Practices

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Current Clock Synchronization Practices, Changes to Business Clock Synchronization Practices - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Business Clock Practices, - -

Respondents were asked to provide information on how often they assess Business Clock synchronization tolerance and whether this practice varies by the type of Business Clock or system being considered. To collect information regarding changes to synchronization practices, respondents also were asked how often they assess their Business Clock synchronization tolerances and how often they have changed tolerances in the past year. Next, respondents were asked, to the best of their knowledge, how often their Business Clock tolerances are exceeded.

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-
pubdate: May 15, 2017 effdate: N/A -

5. Costs

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Overview of CAT Clock Synchronization Survey, Costs - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Projected Cost, + Shortlisted Bidders, + CAT NMS plan, + Plan Processor, + Sec Rule 613, + Selection Plan Section VI(D), -

The final section of the Survey sought information regarding the costs to the industry of Business Clock synchronization. This section asked respondents to provide information regarding the initial costs that they incurred (or that they anticipate that they will incur) to comply with the Business Clock synchronization tolerance of 50 milliseconds or 1 second, as applicable. Respondents also were asked to explain any ongoing costs that they will incur to maintain applicable synchronization tolerance and to explain how this response varies by type of Business Clock or system. Respondents also were asked how long it took them (or how long they anticipate that it will take them) to comply with the Business Clock synchronization requirements, and to explain how this response varies by the type of Business Clock or system.

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The next set of questions sought information on the projected costs of further reducing the Business Clock synchronization tolerance. Respondents were asked to describe the costs (initial and ongoing), if any, that they expect to incur if the Business Clock synchronization tolerance is reduced and how these costs vary by type of Business Clock or system. Respondents also were asked how long they anticipate that it will take them to comply with any new Business Clock synchronization tolerances.

+

The Participants believe that providing the Shortlisted Bidders with an additional opportunity or opportunities to revise their Bids prior to the approval of the CAT NMS Plan is critical to the timely and considered selection of the Plan Processor. Since the Bidders submitted their Bids, the Participants have expended substantial effort in analyzing potential solutions for the consolidated audit trail (“CAT”) by gathering and evaluating data and information from a variety of market participants, including Bidders, broker-dealers, vendors, regulators and others. As a result, since the original Bid date, the Participants have made substantial strides in identifying characteristics of an optimal solution and formalizing these determinations in the proposed CAT NMS Plan and related technical documents. Given the development of the requirements for an optimal solution for the CAT, the Participants believe that waiting until after the approval of the CAT NMS Plan to permit the Shortlisted Bidders to revise their Bids will shortchange the Bid process to the detriment of the final plan. Moreover, given the passage of time since the original Bids, Bidders have indicated that new technological and other beneficial solutions are now available that may further improve the Bids, and, ultimately, the proposed solutions.

+

In addition, the Participants believe that delaying the Bid revision process until after the approval of the CAT NMS Plan will prevent Bidders from submitting, and the Participants from adequately reviewing the most relevant, informative and fulsome Bids before selecting a Plan Processor. Specifically, Rule 613(a)(2)(i) requires the Participants to select the Plan Processor within two months after effectiveness of the CAT NMS Plan. The Participants anticipate permitting the Shortlisted Bidders to revise their Bids, pursuant to Section VI(D) of the Selection Plan, after approval of the CAT NMS Plan, if there are substantial changes to the CAT NMS Plan before the CAT NMS Plan is approved by the Commission. Therefore, the Participants will have only a short time period of two months to analyze the Shortlisted Bids – Bids that are likely to have substantial revisions after the approval of the CAT NMS Plan for the reasons discussed above. Given the very large amount of information to digest in the revised Bids and the importance of appropriately analyzing such information, the Participants do not believe that two months will be sufficient to select the Plan Processor given the limitations of the current Selection Plan. However, if the Shortlisted Bidders are able to revise their Bids to reflect the provisions of the proposed CAT NMS Plan and any draft technical materials, as well as any new technology or other relevant developments, prior to the approval of the CAT NMS Plan, then the Participants believe that they will be able to select the Plan Processor within the time limits imposed by Rule 613 in a more thoughtful and deliberative manner.

+

In addition, the Participants believe that providing the Selection Committee the discretion to further reduce the number of Shortlisted Bids, either before or after any revisions to Shortlisted Bids are accepted, would also facilitate the selection of the Plan Processor within the time limits imposed by Rule 613. Allowing the Selection Committee to reduce the number of Shortlisted Bids before approval of the CAT NMS Plan could allow the Participants to more efficiently select the Plan Processor by focusing attention on a more refined set of options during the limited two month time period for selection following approval of the CAT NMS Plan.

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pubdate: May 15, 2017 effdate: N/A -

B. Assessment of Participants’ Business Clock Synchronization Standards

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Assessment of Participants’ Business Clock Synchronization Standards - Compliance User: Broker-dealers - Keywords: - Business Clocks, - Participant, - Industry Member, - -

Although the Participants did not participate in the Survey, which was designed for Industry Members and other firms in the securities industry, the Participants previously assessed their operations and use of Business Clocks to determine an appropriate synchronization threshold to apply to themselves. These assessments occurred in 2015 and 2016.13 Ultimately, the Participants determined that, collectively, they operate pursuant to a Business Clock synchronization of 100 microseconds or less with respect to their electronic systems. The Participants that are exchanges each measured average absolute matching engine clock drift across five business days. The average measured clock drift based on this analysis was approximately 36 microseconds. However, this result was an average and the Participants do not believe that it may be relied upon as a definitive statement that all Participants currently meet a threshold of 36 microseconds. In particular, Participants’ practices vary with respect to the implementation, use and measurement of synchronization. Moreover, Participants’ practices also vary with respect to the frequency with which they check the accuracy of synchronization, so it may be difficult to directly compare the synchronization of one Participant to another. Participants that operate non-electronic systems, such as manual systems operated on trading floors, manual order entry devices and certain other systems, found that they do not operate at a synchronization of 100 microseconds or less. Based on these findings, the Participants proposed, and the Commission adopted, that they be subject to a Business Clock synchronization standard of 100 microseconds of the time maintained by NIST, other than Business Clocks used solely for Manual Order Events (which must comply with a standard of 1 second of the time maintained by NIST). The Participants do not believe that their practices have changed materially since the Plan was adopted.

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-
pubdate: May 15, 2017 effdate: N/A -

C. Analysis of Data from Clock Synchronization Survey14

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14 - Compliance User: Broker-dealers +
pubdate: February 13, 2015 effdate: N/A +

B. Requirements Pursuant to Rule 608(a)

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization Keywords: - broker-dealers, - Business Clock Synchronization Practices, + Rule 608, -
pubdate: May 15, 2017 effdate: N/A -

1. Overview of Respondents and Demographics

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Overview of Respondents and Demographics - Compliance User: Broker-dealers +
pubdate: February 14, 2015 effdate: N/A +

1. Description of the Amendments to the Selection Plan

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Description of the Amendments to the Selection Plan + Compliance User: Self-Regulatory Organization Keywords: - Participant, - Survey, - CAT Reporters, - OATS, + Selection Plan, CAT NMS plan, - FINRA, + Selection Plan Section VI(D), + Shortlisted Bids, -

The Participants received 143 substantially complete responses to the Survey.15 The responses represent the views of a range of firms. Based on the responses, approximately 13% of respondents identified as small broker-dealers that expect to report to the CAT, approximately 60% of respondents identified as large broker-dealers that expect to be CAT reporters, and approximately 27% of respondents indicated that they do not expect to report to the CAT. Of the 143 responses, approximately 23% of respondents indicated that they are an equities market maker and approximately 13% of respondents indicated that they are an options market maker. Approximately 78% of respondents indicated that they currently report to OATS, and approximately 22% indicated that they currently do not report to OATS.16

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With respect to types of business activities, respondents indicated the following: approximately 20% operate an institutional business; approximately 17% operate a retail business; approximately 17% are introducing brokers; approximately 12% engage in proprietary trading; approximately 8% engage in clearing activities; approximately 7% engage in asset management activities; approximately 8% engage in investment banking; approximately 5% provide prime brokerage services; and approximately 6% indicated that they engage in other activities. Approximately 8% of respondents stated that they operate an ATS. Approximately 18% of respondents indicated that they are a third-party vendor, technology services provider or other entity that is not subject to the CAT NMS Plan, but that provides services to CAT Reporters and maintains synchronized Business Clocks (a “Service Provider”). The approximately 18% of respondents that identified as Service Providers indicated that they provide the following functions: back-office processing (approximately 3%); books and records (approximately 4%); clearing (approximately 1%); settlement (approximately 1%); trade order management systems (approximately 5%); trade reporting (approximately 3%); and other17 (approximately 2%).

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The approximately 78% of respondents that indicated that they currently report to OATS provided the following information regarding the approximate number of reportable events that they submit to OATS each month: 0 to 9,999 (approximately 30%); 10,000 to 99,999 (approximately 9%); 100,000 to 2,999,999 (approximately 15%); 3,000,000 to 99,999,999 (approximately 12%); and 100,000,000 or more (approximately 12%). As previously noted, approximately 12% of respondents reported that they are not FINRA members and approximately 10% of respondents indicated that they are excluded or exempt from OATS reporting.

+

The Participants propose amending the Selection Plan to permit the Shortlisted Bidders to revise their Bids one or more times prior to approval of the CAT NMS Plan if the Selection Committee determines, by majority vote, subject to the applicable recusal provisions, that such revisions are necessary and appropriate. The proposed amendment would not affect Section VI(D) of the Selection Plan, which allows for revisions to Shortlisted Bids following Commission approval of the CAT NMS Plan.

+

The Participants also propose amending the Selection Plan to provide the Selection Committee discretion to narrow the set of Shortlisted Bids prior to approval of the CAT NMS Plan. Specifically, the proposed amendment would authorize another round of voting to narrow the set of Shortlisted Bids. This round of voting, which could occur either before or after any revisions to Shortlisted Bids are accepted, would be commenced upon at least a two-thirds vote of the Selection Committee, and would proceed in a manner similar to the initial round for voting for the Shortlisted Bids. Each Voting Senior Officer would choose a first, second, and third choice Shortlisted Bid, with each choice receiving a weight of, respectively, three points, two points, and one point. The three bids receiving the highest cumulative number of points would constitute the new set of Shortlisted Bids. In the event of a tie that would result in more than three final Shortlisted Bids, the votes would be recounted, excluding each Voting Senior Officer’s third choice. The three Shortlisted Bids receiving the largest number of cumulative votes in this recount would be the new Shortlisted Bids. If this recount were to result in a tie leading to a larger or equal number of final Shortlisted Bids than the initial count, the results of the initial count would constitute the new set of Shortlisted Bids. The proposed amendment also includes, for the sake of clarity, a provision ensuring that at least one Non-SRO Bid is included in the narrowed set of Shortlisted Bids. The individual scores and rankings under any vote to narrow the list of Shortlisted Bids shall be kept confidential.

+

Finally, the proposed amendment includes provisions with respect to the recusal of Participants that also are Shortlisted Bidders. Under this proposed provision, no Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders, if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+
+
pubdate: February 15, 2015 effdate: N/A +

2. Governing or Constituent Documents

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Governing or Constituent Documents + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

-
pubdate: May 15, 2017 effdate: N/A -

2. Responses to General Questions

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions - Compliance User: Broker-dealers +
pubdate: February 16, 2015 effdate: N/A +

3. Implementation of Amendment

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Implementation of Amendment + Compliance User: Self-Regulatory Organization Keywords: - Business Clock synchronization, + Amendment approval, -

As discussed in greater detail in this section, generally, over half of respondents did not have a view on whether there should be different Business Clock synchronization requirements applicable to different types of businesses or systems. Focusing on the respondents that did have a view, approximately 64% did not believe that there should be different requirements for different types of businesses or systems, versus approximately 36% that believed that there should be different requirements for different types of businesses or systems. However, a majority of respondents that identified as small broker-dealers believed that there should be different Business Clock synchronization standards that apply to both (1) large broker-dealers vs. small broker-dealers (approximately 83% of small broker-dealer respondents), and (2) different types of systems (100% of small broker-dealer respondents). Large broker-dealers and small broker-dealers split on the question of whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or if firms only change such standards or practices when required to do so by regulation. Large broker-dealer respondents believed that they voluntarily seek to improve such standards or practices, while most small broker-dealer respondents indicated that they change such standards or practices when required to do so. Finally, there is no majority view with respect to how often respondents exceed applicable Business Clock synchronization thresholds, but most firms indicated that they did not know the answer to this question. These findings are discussed in greater detail below.

-
pubdate: May 15, 2017 effdate: N/A -
a. Execution Venues vs. Broker-Dealers
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Execution Venues vs. Broker-Dealers - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Execution Venues, - broker-dealers, - -

Approximately 50% of the respondents indicated that they did not have a view on whether there should be different Business Clock synchronization requirements applicable to Execution Venues and broker-dealers. Out of those respondents that did express a view, approximately 66% stated that they did not believe that there should be different Business Clock synchronization requirements applicable to Execution Venues and broker-dealers and approximately 34% stated that they believe that Execution Venues and broker-dealers should be subject to different requirements. Notably, of the respondents that indicated that they operate an ATS, approximately 50% did not believe that different requirements should apply to Execution Venues. Approximately 33% of respondents operating ATSs believed that there should be different requirements that apply to Execution Venues, and approximately 17% of respondents that operate ATSs did not have a view.18

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-
pubdate: May 15, 2017 effdate: N/A -
b. Small Broker-Dealers vs. Large Broker-Dealers
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Small Broker-Dealers vs. Large Broker-Dealers - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - broker-dealers, - -

A majority of respondents (approximately 52%) indicated that they did not have a view on whether there should be different Business Clock synchronization requirements for CAT Reporters that are small broker-dealers and large broker-dealers. Focusing on those respondents who did express a view, the majority (approximately 68%) did not believe that there should be different requirements applicable to small broker-dealers and large broker-dealers, and approximately 32% of respondents believed that small broker-dealers and large broker-dealers should be subject to different standards. Notably, the respondents that provided a response to this question mostly identified as large broker-dealers (approximately 60%), while approximately 12% identified as small broker-dealers and approximately 28% identified as non-CAT Reporters.

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-
pubdate: May 15, 2017 effdate: N/A -
c. Varying Standards by Type of System
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Varying Standards by Type of System - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - broker-dealers, - -

A majority of the respondents (approximately 54%) indicated that they did not have a view on whether there should be different Business Clock synchronization requirements for different types of systems. Focusing on the respondents that did express a view, approximately 60% do not believe that there should be different Business Clock synchronization requirements applicable to different types of systems versus approximately 40% of respondents that believed that different requirements should apply to different types of systems. All small broker-dealer respondents that responded to this question, as well as approximately 60% of respondents that operate a retail business and responded to this question, support there being different Business Clock synchronization requirements applicable to different types of systems.

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-
pubdate: May 15, 2017 effdate: N/A -
d. Improvements to Business Clock Synchronization Practices
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Improvements to Business Clock Synchronization Practices - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - broker-dealers, - -

Respondents split on whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or avoid changing such standards or practices absent a regulatory requirement to do so. Of the respondents that expressed a view, approximately 27% indicated that firms voluntarily19 seek to improve their Business Clock synchronization standards or practices, approximately 23% indicated that firms did not change their standards or practices absent a regulatory requirement to do so,20 and approximately 18% indicated that other factors cause them to update their Business Clock synchronization standards or practices.21 Approximately 31% of respondents indicated that they did not have a view on whether firms voluntarily seek to improve their Business Clock synchronization standards or practices, or avoid changing such standards or practices absent a regulatory requirement to do so.

-

Of the respondents that identified as large broker-dealers, the largest number of responses (approximately 42%) indicated that respondents voluntarily seek to improve their Business Clock synchronization standards or practices. The opposite was true of small broker-dealer respondents, as the majority of such respondents (approximately 75%) indicated that they change their Business Clock synchronization standards or practices when a regulatory obligation requires them to do so.

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-
pubdate: May 15, 2017 effdate: N/A -
e. Exceeding Required Synchronization Tolerances
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Responses to General Questions, Exceeding Required Synchronization Tolerances - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - broker-dealers, - Business Clock Tolerance, - -

Approximately 46% of respondents that expressed a view indicated that they did not know, on average, how often their Business Clock synchronization tolerances are exceeded. Approximately 3% of respondents stated that their response depends on the type of Business Clock or system being considered. Other respondents indicated that their Business Clock tolerances are exceeded: multiple times per day (approximately 5%); monthly (approximately 15%); semiannually (approximately 16%); and less than annually (approximately 15%).

-

Respondents that identified as large broker-dealers reported that, on average, their Business Clock synchronization tolerances are exceeded: multiple times per day (approximately 8%); monthly (approximately 14%); semiannually (approximately 13%); and less than annually (approximately 27%). Approximately 3% of large broker-dealer respondents indicated that their response depends on the type of Business Clock or system considered and approximately 35% of large broker-dealer respondents did not know how often their synchronization tolerances are exceeded. Small broker-dealer respondents indicated that, on average, their synchronization tolerances are exceeded: monthly (approximately 27%); semiannually (approximately 33%); and less than annually (approximately 7%). No small broker-dealer respondents reported exceeding thresholds multiple times per day or at different times depending on the type of Business Clock or system being considered. Approximately 33% of small broker-dealer respondents did not know how often their synchronization tolerances are exceeded.

-
+

The terms of the proposed amendments will be operative immediately upon approval of the amendments by the Commission.

+
+
pubdate: February 17, 2015 effdate: N/A +

4. Development and Implementation Phases

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Development and Implementation Phases + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

-
pubdate: May 15, 2017 effdate: N/A -

3. Costs

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs - Compliance User: Broker-dealers +
pubdate: February 18, 2015 effdate: N/A +

5. Analysis of Impact on Competition

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Analysis of Impact on Competition + Compliance User: Self-Regulatory Organization Keywords: - Business Clock synchronization, - Costs Requirements, + Exchange Act, + SRO, + CAT NMS plan, + Sec Rule 613, -

Respondents generally identified software and/or hardware as the primary factors affecting costs for complying with the Business Clock synchronization requirements, with maintenance and compliance as the second and third greatest factors. The majority of respondents who expressed a view believed that such cost drivers vary by type of system. This view was generally consistent regardless of the type or size of respondents, except that small broker-dealer respondents were evenly split (i.e., 50% believed that cost drivers varied by system and 50% believed that cost drivers did not vary by system). Focusing on respondents who knew their initial costs of compliance (i.e., those that did not respond “do not know”), the majority (approximately 70%) stated that their initial costs of complying with the Business Clock synchronization requirements were less than $100,000. All small broker-dealer respondents who knew their initial compliance costs reported that such costs were below $100,000. Conversely, approximately 30% large broker-dealer respondents who knew their initial compliance costs indicated that such costs were over $100,000. Respondents provided a broad range of responses regarding the time it took to comply with the Business Clock synchronization requirements—responses ranged from less than one month to more than six months. These findings are discussed in greater detail below.

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pubdate: May 15, 2017 effdate: N/A -
a. Factors Affecting Compliance Costs
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Factors Affecting Compliance Costs - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Compliance Costs, - -

Approximately 35% of respondents who expressed a view indicated that software and hardware primarily affect costs related to complying with the Business Clock synchronization requirements. Maintenance and compliance were the second and third largest cost drivers, with approximately 21% and 20% of respondents indicating that these reflected their greatest costs, respectively. When asked whether factors affecting costs of complying with the Business Clock synchronization requirements vary by system, approximately 46% of respondents stated that they did not have a view, 36% of respondents indicated that they thought that such factors did vary by type of system, and approximately 18% of respondents indicated that they thought that such factors did not vary by system.

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-
pubdate: May 15, 2017 effdate: N/A -
b. Initial Compliance Costs
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Initial Compliance Costs - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Compliance Costs, - Business Clock Synchronization Threshold, - Large Broker-Dealers, - Service Providers, - OATS Reporters, - -

With respect to the costs incurred by respondents to comply with the initial Business Clock synchronization thresholds set forth in the Plan, approximately 35% of respondents did not know their initial compliance costs. Approximately 44% of respondents indicated that their initial compliance costs were less than $100,000, approximately 9% indicated that their initial compliance costs were between $100,000 and $500,000, and approximately 6% indicated that their initial compliance costs were more than $500,000. Approximately 5% of respondents indicated that they incurred other costs22 and approximately 1% indicated that costs depended on the type of Business Clock or system. Notably, no respondents that identified as small broker-dealers indicated that they incurred initial costs more than $100,000.

-

Respondents that identified as large broker-dealers indicated that they incurred the following initial compliance costs: no costs (approximately 5%); less than $100,000 (approximately 45%); $100,000 to $500,000 (approximately 12%); and more than $500,000 (approximately 9%). Approximately 29% of large broker-dealer respondents did not know what costs they incurred. Approximately 53% of respondents that identified as small broker-dealers indicated that they incurred initial compliance costs of less than $100,000. Approximately 6% of small broker-dealer respondents reported that their costs varied depending on the specific Business Clock or system, approximately 6% indicated that they incurred other costs beyond what was listed in the Survey, and approximately 35% did not know what initial compliance costs they incurred.

-

Respondents that identified themselves as Service Providers, OATS reporters and ATSs indicated that they incurred a range of different costs to comply with the initial Business Clock synchronization requirements. Respondents that identified as Service Providers indicated the following initial compliance costs: less than $100,000 (approximately 36%); $100,000 to $500,000 (approximately 9%); and more than $500,000 (approximately 9%). Approximately 45% of Service Providers did not know their initial compliance costs. Respondents that identified as OATS reporters indicated the following initial compliance costs: less than $100,000 (approximately 50%); $100,000 to $500,000 (approximately 10%); more than $500,000 (approximately 8%). Approximately 32% of respondents that identified as OATS reporters did not know what initial implementation costs they incurred (or would incur) to comply with the initial thresholds. Finally, respondents that indicated that they operate an ATS provided the following responses regarding initial implementation costs that they incurred (or would incur) to comply with the initial thresholds: less than $100,000 (approximately 25%); $100,000 to $500,000 (approximately 17%); and more than $500,000 (approximately 33%). Approximately 25% of respondents operating ATSs did not know their initial implementation costs.

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-
pubdate: May 15, 2017 effdate: N/A -
c. Time to Comply with Initial Thresholds
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Costs, Time to Comply with Initial Thresholds - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - Time Estimate, - Large Broker-Dealers, - -

Respondents that provided a time estimate indicated that it took (or would take) them the following amount of time to comply with the initial Business Clock synchronization thresholds set forth in the Plan: less than 1 month (approximately 30%); 1 to 2 months (approximately 5%); 2 to 6 months (approximately 12%); and more than 6 months (approximately 9%). Approximately 11% of respondents indicated it would take them some “other” amount of time,23 and approximately 33% of respondents reported that they did not know how long it took (or would take) them to comply with the initial synchronization thresholds.

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Respondents that identified as large broker-dealers indicated that it took (or would take) them the following amount of time to comply with the initial thresholds: less than 1 month (approximately 34%); 1 to 2 months (approximately 6%); 2 to 6 months (approximately 18%); and more than 6 months (approximately 12%).24 Approximately 18% of large broker-dealer respondents could not provide a time estimate and approximately 11% stated it would take them some other amount of time. Respondents identifying as small broker-dealers provided the following time estimates: less than 1 month (approximately 29%); and 2 to 6 months (approximately 6%). Approximately 6% of small broker-dealer respondents indicated that it would take them some other amount of time. Most small broker-dealer respondents (approximately 59%) could not provide a time estimate.

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+

The proposed amendments do not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The SROs believe that the amendments are reasonably designed to help assure that the SROs receive more updated and informed submissions from Shortlisted Bidders before the CAT NMS Plan is finalized, thereby helping to assure that the selection of the Plan Processor for the CAT NMS Plan proceeds efficiently within the timeframe provided by Rule 613. Moreover, the SROs believe that the amended process will facilitate the development of an audit trail that maximizes its regulatory utility while minimizing unnecessary costs, to the benefit of all market participants. Furthermore, providing the ability to narrow the list of Bidders at an earlier stage will prevent Bidders whose Bids are unlikely to be selected from misallocating their resources toward the further development of their Bid.

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pubdate: May 15, 2017 effdate: N/A -

4. Changes to Business Clock Synchronization Threshold

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold - Compliance User: Broker-dealers +
pubdate: February 19, 2015 effdate: N/A +

6. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan.

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: February 20, 2015 effdate: N/A +

7. Statement that the Amendments Have Been Approved by the Plan Sponsors

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Statement that the Amendments Have Been Approved by the Plan Sponsors + Compliance User: Self-Regulatory Organization Keywords: - Business Clock Synchronization Threshold, + Selection Plan, + Rule 608, -

Respondents generally indicated that implementation time, initial costs and ongoing costs, all increased as the Business Clock synchronization threshold became narrower. Responses also indicated that the implementation time, initial costs and ongoing costs to comply with any new threshold would vary greatly across different types or sizes of firms, as well as within firms of the same size or type. These findings are discussed in greater detail below.

-
pubdate: May 15, 2017 effdate: N/A -
a. General Findings
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings - Compliance User: Broker-dealers - Keywords: - Implementation Time, - Business Clock Synchronization Threshold, - Initial Costs, - Ongoing Costs, - Voluntary Assessments, - -
- i. Implementation Time - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Implementation Time - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Business Clock Synchronization Threshold, - -

Approximately 30% of respondents stated that they could not determine how much time it would take for them to comply with any new Business Clock synchronization requirement (e.g., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds). Approximately 20% of respondents indicated that it would take no time to comply with new thresholds of 5 milliseconds or 1 millisecond, and 13.5% of respondents indicated that it would take them no time to comply with new thresholds of 100 microseconds or 500 microseconds. However, approximately 35% of respondents stated that it would take them between 1 and 11 months to comply with any of the new tolerances noted in the Survey.

-

Notably, the data did not reflect a substantial difference in implementation times if the Business Clock synchronization threshold was changed to 5 milliseconds or 1 millisecond. With respect to a threshold of 5 milliseconds, approximately 92% of respondents indicated that it would take them 1 year or less to implement the change, and approximately 7% indicated that it would take them 1 to 2 years to implement the change. With respect to a threshold of 1 millisecond, approximately 95% of respondents indicated that it would take them 1 year or less to implement the change, and approximately 5% indicated that it would take them 1 to 2 years to implement the change. Approximately 70% of respondents indicated that it would take them 1 year or less to implement a change to a threshold of 100 microseconds, approximately 25% indicated it would take them 1-2 years to implement such change, and approximately 5% indicated it would take them more than 2 years to implement such change.

-
-
- ii. Initial Costs - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Initial Costs - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - -

The survey sought information concerning the initial costs that respondents would incur should they be required to comply with new Business Clock synchronization thresholds. Approximately 20% of respondents indicated that they would not incur any initial costs to comply with potential new thresholds of 5 milliseconds or 1 millisecond, and approximately 10% of respondents indicated that they would not incur any initial costs to comply with new thresholds of 100 microseconds or 500 microseconds. Approximately 20% of respondents stated that they would incur initial costs between $1,000 and $499,999 to comply with any new threshold (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds). Many respondents (approximately 35%) did not know what initial costs they would incur to comply with any new threshold.

-
-
- iii. Ongoing Costs - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Ongoing Costs - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - -

With respect to estimated ongoing costs incurred by respondents to maintain new Business Clock synchronization thresholds (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds), respondents provided the following information. Approximately 15% of respondents stated that they would not incur any ongoing costs to comply with any new tolerance. Approximately 25% of respondents indicated that they would incur ongoing annual costs between $1,000 and $99,000 to comply with the new tolerances. Only approximately 2% of respondents indicated that their ongoing annual costs to comply with any of the new tolerances would be prohibitive. Approximately 40% of respondents did not know what ongoing annual costs they would incur to comply with any new tolerances.

-
-
- iv. Voluntary Assessments and Changes to Tolerances - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, General Findings, Voluntary Assessments and Changes to Tolerances - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Business Clock Synchronization Threshold, - Business Clock Synchronization Practices, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - Business Clock Synchronization Tolerance, - -

Nearly half of respondents (approximately 49%) reported that they assess their Business Clock synchronization practices daily. Other respondents indicated that they assess their synchronization practices: monthly (approximately 1%); weekly (approximately 4%); quarterly (approximately 4%); and yearly (approximately 6%). Approximately 16% of respondents indicated that they assess their synchronization practices at other intervals, and approximately 3% stated that the frequency of their assessments depends on the type of Business Clock or system being considered. Approximately 17% of respondents did not know how often they assess their synchronization practices.

-

Respondents that identified as large broker-dealers stated that they assess their synchronization practices: daily (approximately 53%); weekly (approximately 4%); quarterly (approximately 6%); and annually (approximately 7%). No large broker-dealer respondents reported assessing their practices monthly. Approximately 18% of large broker-dealer respondents stated that they assess their synchronization practices at other intervals, and approximately 1% indicated that their practices depend on the Business Clock or system being considered. Approximately 11% of large broker-dealer respondents did not know how often they assess their synchronization practices. Respondents that identified as small broker-dealers reported that they assess their synchronization practices: daily (approximately 53%); monthly (approximately 12%); and annually (approximately 6%). No small broker-dealer respondents indicated that they assess their practices weekly, quarterly or at different intervals depending on the type of Business Clock or system considered. Approximately 12% of small broker-dealer respondents indicated that they assess their synchronization practices at other intervals. Approximately 18% of small broker-dealer respondents did not know how often they assess their synchronization practices.

-

The Survey also asked respondents how often they changed their Business Clock synchronization tolerances in the past year. Overall, in the past year, approximately 38% of respondents changed their synchronization tolerances 1 time, approximately 7% changed their synchronization tolerances 2 to 5 times, and approximately 1% changed their synchronization tolerances 6 to 10 times. Approximately 19% of respondents stated that they changed their tolerances a different number of times not indicated in the Survey and approximately 1% stated that changes depended on the type of Business Clock or system being considered. Approximately 35% of respondents did not know how often they changed their tolerances in the past year.

-

Trends with respect to changing synchronization tolerances were not consistent across large and small broker-dealers. Large broker-dealer respondents indicated that in the past year they changed tolerances: 1 time (approximately 49%); 2 to 5 times (approximately 6%); and 6 to 10 times (approximately 1%). Approximately 18% of large broker-dealers changed their tolerances a number of times not indicated in the Survey. No large broker-dealer respondents stated that changes to tolerances in the past year depended on the type of Business Clock or system being considered. Approximately 26% of large broker-dealer respondents did not know how often they changed their tolerances in the past year. Small broker-dealer respondents reported that in the past year they changed tolerances: 1 time (approximately 18%); and 2 to 5 times (approximately 18%). No small broker-dealer respondents reported changing their tolerances 6 to 10 times in the past year. Approximately 18% of small broker-dealer respondents stated that changes to tolerances in the past year depended on the type of Business Clock or system, and approximately 18% changed their tolerances a number of times not indicated in the survey. Approximately 41% of small broker-dealer respondents did not know how often they changed their tolerances in the past year.

-
-
-
pubdate: May 15, 2017 effdate: N/A -
b. Findings Related to Specific Thresholds
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - 5 milliseconds, - 1 millisecond, - 500 microseconds, - 100 microseconds, - -

This section provides a more detailed discussion of the results described above in Section III.C.4.a. In particular, this section discusses the implementation time, initial cost and ongoing cost of each potential new threshold noted in the Survey (i.e., 5 milliseconds, 1 millisecond, 100 microseconds or 500 microseconds).

-
- i. 5 milliseconds - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 5 milliseconds - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - 5 milliseconds, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

With respect to a possible 5 milliseconds Business Clock synchronization threshold, respondents provided the following information. In terms of the potential time to comply with a 5 milliseconds threshold, approximately 21% of respondents stated that it would take no time for them to comply with such threshold and approximately 5% of respondents stated it would take less than 1 month. Approximately 14% of respondents indicated that it would take between 1 and 2 months, approximately 4% of respondents indicated it would take between 3 and 5 months and approximately 21% of respondents indicated that it would take between 6 and 11 months, to comply with the lower threshold. Approximately 4% of respondents stated that it would take 1 to 1.5 years to comply with the lower threshold. Approximately 30% of respondents stated that they did not know how long it would take to comply with the threshold.

-

Approximately 29% of large broker-dealers providing a response to this question stated that it would take them 6 to 11 months to comply with the lower threshold and approximately 23% stated that they could comply in no time. Approximately 23% of large broker-dealer respondents did not know how long it would take them to comply. Other large broker-dealer respondents provided responses that were spread across different time periods. With respect to small broker-dealer respondents, approximately 43% could not estimate how long it would take them to comply with a lower threshold. Approximately 29% of small broker-dealer respondents indicated that they could comply in no time, approximately 14% stated that they could comply in 1 to 2 months, and approximately 14% stated that they could comply in 6 to 11 months. Respondents that operate ATSs reported the following estimated initial implementation times: no time (approximately 18%); 3 to 5 months (approximately 17%); and 6 to 11 months (approximately 67%).

-

In terms of initial costs to comply with a 5 milliseconds threshold, approximately 25% of respondents stated that they would incur no initial costs to comply with the threshold; however, the majority of these responses (approximately 71%) were from large broker-dealers. Another approximately 36% of respondents indicated that they did not know what initial costs they would incur to comply with a 5 milliseconds threshold. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 5%); $10,000 and $99,999 (approximately 9%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 5% of respondents—all large broker-dealers); and $1 million to $1.99 million (approximately 5% of respondents—all large broker-dealers). Approximately 2% of respondents indicated that a 5 milliseconds threshold would be cost prohibitive from an initial costs standpoint.

-

The majority of respondents providing information on initial implementation costs identified as large broker-dealers (approximately 63%). Large broker-dealer respondents reported the following costs to comply with the lower threshold: $0 (approximately 29%); $1 to $999 (approximately 3%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 9%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 9%); and $1 million to $1.99 million (approximately 9%). One large broker-dealer respondent said that the initial costs of compliance would be prohibitive. Approximately 31% of large broker-dealer respondents could not estimate their initial costs to comply with a 5 milliseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 14%); $1,000 to $9,999 (approximately 14%); $10,000 to $99,999 (approximately 14%); and $100,000 to $499,999 (approximately 14%). Approximately 43% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents that operate ATSs estimated the following initial implementation costs: $0 (approximately 17%); $100,000 to $499,999 (approximately 17%); $500,000 to $999,999 (approximately 33%); and $1 million to $1.99 million (approximately 17%). Approximately 17% of respondents operating ATSs did not know their initial costs.

-

In terms of ongoing costs to comply with a 5 milliseconds threshold, approximately 17% of respondents reported an estimated cost of $0 and approximately 38% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 10%); $10,000 to $99,999 (approximately 19%); $100,000 to $499,999 (approximately 4%); $500,000 to $999,999 (approximately 4%); and $1 million to $1.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

-

The majority of responses regarding estimated ongoing costs (approximately 63%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 18%); $1,000 to $9,999 (approximately 9%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 3%); $500,000 to $999,999 (approximately 6%); and $1 million to $1.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Half of the small broker-dealers that responded to this question could not estimate ongoing costs of compliance. Other small broker-dealer responses were split as follows: $0 (approximately 17%); $1,000 to $9,999 (approximately 17%); and $10,000 to $99,999 (approximately 17%). Respondents that operate ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 50%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 17%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

-
-
- ii. 1 millisecond - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 1 millisecond - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - 1 millisecond, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

Approximately 28% of respondents reported that they did not know how long it would take them to comply with a 1 millisecond threshold. Other respondents reported the following time estimates: no time (approximately 21%); less than 1 month (approximately 8%); 1 to 2 months (approximately 6%); 3 to 5 months (approximately 11%); 6 to 11 months (approximately 21%); 1 to 1.5 years (approximately 4%); and 1.5 to 1.99 years (approximately 2%).

-

Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 66% of the respondents). The large broker-dealer respondents provided the following implementation times: no time (approximately 23%); less than 1 month (approximately 8%); 1 to 2 months (approximately 3%); 3 to 5 months (approximately 14%); 6 to 11 months (approximately 23%); 1 to 1.5 years (approximately 6%); and 1.5 to 1.99 years (approximately 3%). Approximately 20% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold and approximately 16% stated that implementation time was unknown. Other small broker-dealer respondents provided the following implementation time estimates: no time (approximately 17%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Respondents operating ATSs indicated the following implementation time estimates: no time (approximately 29%); 3 to 5 months (approximately 14%); and 6 to 11 months (approximately 57%).

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With respect to initial costs to comply with a 1 millisecond threshold, approximately 20% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 4%); $10,000 and $99,999 (approximately 11%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 11%); and $1 million to $1.99 million (approximately 4%). Approximately 2% of respondents indicated that the initial costs of complying with a 1 millisecond threshold would be prohibitive. Approximately 35% of respondents could not estimate their initial compliance costs.

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Most of the respondents providing initial cost estimates were large broker-dealers (approximately 67%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 25%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 14%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 14%); and $1 million to $1.99 million (approximately 6%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 31% of large broker-dealer respondents could not estimate their initial costs to comply with a 1 millisecond threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1 to $999 (approximately 17%); $10,000 to $99,999 (approximately 17%); and $100,000 to $499,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $0 (approximately 17%); $100,000 to $499,999 (approximately 17%); $500,000 to $999,999 (approximately 33%); and $1 million to $1.99 million (approximately 17%). Approximately 17% of respondents operating ATSs did not know their initial costs.

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With respect to estimated ongoing costs to comply with a 1 millisecond threshold, approximately 17% of respondents reported an estimated cost of $0 and approximately 38% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 10%); $10,000 to $99,999 (approximately 17%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 4%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

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The majority of responses regarding estimated ongoing costs (approximately 67%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 17%); $1,000 to $9,999 (approximately 9%); $10,000 to $99,999 (approximately 23%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 6%); and $2 million to $4.99 million (approximately 2%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Other responses were as follows: $0 (approximately 20%); $1,000 to $9,999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Respondents operating ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 50%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 17%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

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- iii. 500 microseconds - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 500 microsecond - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - 500 microseconds, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

Approximately 30% of respondents reported that they did not know how long it would take them to comply with a 500 microseconds threshold. Other respondents reported the following time estimates: no time (approximately 15%); less than 1 month (approximately 2%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 8%); 6 to 11 months (approximately 13%); 1 to 1.5 years (approximately 8%); and 1.5 to 1.99 years (approximately 4%).

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Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 66% of the respondents). The large broker-dealers provided the following implementation times: no time (approximately 14%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 11%); 6 to 11 months (approximately 17%); 1 to 1.5 years (approximately 9%); and 1.5 to 1.99 years (approximately 6%). Approximately 20% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Small broker-dealer respondents provided the following implementation time estimates: no time (approximately 33%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Respondents operating ATSs reported the following estimated initial implementation times: no time (approximately 17%); 3 to 5 months (approximately 17%); and 6 to 11 months (approximately 50%). Approximately 17% of respondents that operate ATSs could not estimate their initial implementation costs.

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With respect to initial costs to comply with a 500 microseconds threshold, approximately 15% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1,000 to $9,999 (approximately 5%); $10,000 and $99,999 (approximately 7%); $100,000 and $499,999 (approximately 13%); $500,000 and $999,999 (approximately 2%); $1 million to $1.99 million (approximately 9%); $2 million to $4.99 million (approximately 5%); and $5 million or more (approximately 4%). Approximately 2% of respondents indicated that the initial costs of complying with a 500 microseconds threshold would be prohibitive. Approximately 38% of respondents could not estimate their initial compliance costs.

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Most of the respondents providing initial cost estimates were large broker-dealers (approximately 67%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 16%); $10,000 to $99,999 (approximately 8%); $100,000 to $499,999 (approximately 16%); $500,000 to $999,999 (approximately 3%); $1 million to $1.99 million (approximately 14%); $2 million to $4.99 million (approximately 5%); and $5 million or more (approximately 5%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 27% of large broker-dealer respondents could not estimate their initial costs to comply with a 500 microseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1,000 to $9,999 (approximately 17%); $10,000 to $99,999 (approximately 17%); and $100,000 to $499,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $0 (approximately 14%); $100,000 to $499,999 (approximately 14%); $1 million to $1.99 million (approximately 43%); and $10 million to $20 million (approximately 14%). Approximately 14% of respondents operating ATSs did not know their initial costs.

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With respect to estimated ongoing costs to comply with a 500 microseconds threshold, approximately 12% of respondents reported an estimated cost of $0 and approximately 45% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 4%); $1,000 to $9,999 (approximately 2%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 4%); $500,000 to $999,999 (approximately 4%); $1 million to $1.99 million (approximately 2%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

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The majority of responses regarding estimated ongoing costs (approximately 67%) were from large broker-dealers. Large broker-dealers indicated the following ongoing costs: $0 (approximately 12%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 29%); $100,000 to $499,999 (approximately 6%); $500,000 to $999,999 (approximately 6%); $1 million to $1.99 million (approximately 3%); and $2 million to $4.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive and approximately 36% of large broker-dealer respondents stated that ongoing costs were unknown. Small broker-dealer respondents reported the following ongoing costs: $0 (approximately 20%); $1 to $999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Respondents operating ATSs indicated the following estimated ongoing costs: $10,000 to $99,999 (approximately 33%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 33%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

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- iv. 100 microseconds - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Changes to Business Clock Synchronization Threshold, Findings Related to Specific Thresholds, 100 microseconds - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - 100 microseconds, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

Approximately 32% of respondents reported that they did not know how long it would take them to comply with a 100 microseconds threshold. Other respondents reported the following time estimates: no time (approximately 12%); less than 1 month (approximately 2%); 1 to 2 months (approximately 11%); 3 to 5 months (approximately 9%); 6 to 11 months (approximately 11%); 1 to 1.5 years (approximately 18%); 1.5 to 1.99 years (approximately 4%); and 2 years or more (approximately 2%).

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Most of the respondents providing implementation time estimates identified as large broker-dealers (approximately 68% of the respondents). The large broker-dealers provided the following implementation times: no time (approximately 13%); 1 to 2 months (approximately 8%); 3 to 5 months (approximately 13%); 6 to 11 months (approximately 13%); 1 to 1.5 years (approximately 23%); and 1.5 to 1.99 years (approximately 5%). Approximately 23% of large broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Small broker-dealer respondents provided the following implementation time estimates: no time (approximately 33%); 1 to 2 months (approximately 17%); and 6 to 11 months (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate an implementation time to comply with the lower threshold. Respondents operating ATSs reported the following estimated initial implementation times: 3 to 5 months (approximately 17%); 6 to 11 months (approximately 50%); and 1 to 1.5 years (approximately 33%).

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With respect to initial costs to comply with a 100 microseconds threshold, approximately 9% of respondents stated that they would incur no initial costs. Other respondents indicated the following estimated initial compliance costs: $1 to $999 (approximately 7%); $1,000 to $9,999 (approximately 10%); $10,000 and $99,999 (approximately 10%); $100,000 and $499,999 (approximately 9%); $500,000 and $999,999 (approximately 7%); $2 million to $4.99 million (approximately 7%); and $5 million or more (approximately 2%). Approximately 2% of respondents indicated that the initial costs of complying with a 100 microseconds threshold would be prohibitive. Approximately 42% of respondents could not estimate their initial compliance costs.

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Most of the respondents providing initial cost estimates were large broker-dealers (approximately 69%). Large broker-dealer respondents indicated the following initial costs of compliance: $0 (approximately 10%); $1 to $999 (approximately 3%); $1,000 to $9,999 (approximately 13%); $10,000 to $99,999 (approximately 13%); $100,000 to $499,999 (approximately 13%); $500,000 to $999,999 (approximately 10%); $2 million to $4.99 million (approximately 8%); and $5 million or more (approximately 3%). One large broker-dealer said that the initial costs of compliance would be prohibitive. Approximately 28% of large broker-dealer respondents could not estimate their initial costs to comply with a 100 microseconds threshold. Small broker-dealer respondents reported the following initial costs to comply with the lower threshold: $0 (approximately 17%); $1 to $999 (approximately 17%); $1,000 to $9,999 (approximately 17%); and $10,000 to $99,999 (approximately 17%). Approximately 33% of small broker-dealer respondents could not estimate their initial costs to comply with the lower threshold. Respondents operating ATSs estimated the following initial implementation costs: $100,000 to $499,999 (approximately 14%); $500,000 to $999,999 (approximately 14%); $1 million to $1.99 million (approximately 43%); $10 million to $20 million (approximately 14%). Approximately 14% of respondents operating ATSs did not know their initial costs.

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With respect to estimated ongoing costs to comply with a 100 microseconds threshold, approximately 13% of respondents reported an estimated cost of $0 and approximately 42% of respondents could not estimate ongoing costs. Other respondents reported the following costs: $1 to $999 (approximately 2%); $1,000 to $9,999 (approximately 4%); $10,000 to $99,999 (approximately 20%); $100,000 to $499,999 (approximately 11%); $500,000 to $999,999 (approximately 4%); $1 million to $1.99 million (approximately 2%); and $2 million to $4.99 million (approximately 2%). Approximately 2% of respondents stated that ongoing costs would be prohibitive.

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The majority of responses regarding estimated ongoing costs (approximately 69%) were from large broker-dealers. Large broker-dealer respondents indicated the following ongoing costs: $0 (approximately 13%); $1,000 to $9,999 (approximately 3%); $10,000 to $99,999 (approximately 24%); $100,000 to $499,999 (approximately 16%); $500,000 to $999,999 (approximately 5%); $1 million to $1.99 million (approximately 3%); and $2 million to $4.99 million (approximately 3%). Approximately 3% of large broker-dealer respondents stated that ongoing costs to comply with the lower threshold would be prohibitive. Small broker-dealer respondents reported the following ongoing costs: $0 (approximately 20%); $1,000 to $9,999 (approximately 20%); and $10,000 to $99,999 (approximately 20%). Approximately 40% of small broker-dealer respondents could not estimate ongoing costs of compliance. Respondents operating ATSs reported the following estimated ongoing costs: $10,000 to $99,999 (approximately 33%); $100,000 to $499,999 (approximately 17%); and $500,000 to $999,999 (approximately 33%). Approximately 17% of respondents operating ATSs could not estimate ongoing costs of compliance.

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pubdate: May 15, 2017 effdate: N/A -
5. Current Business Clock Synchronization Practices
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

A majority of respondents (approximately 64%) indicated that their current Business Clock synchronization threshold is less than 50 milliseconds; however, these responses were skewed toward large broker-dealers, which made up approximately 80% of the responses. Respondents varied as to the particular thresholds that they currently use. In particular, respondents reported the following current thresholds: 1 microsecond to 499 microseconds (approximately 9%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 47%); 50 milliseconds to 499 milliseconds (approximately 13%); 500 milliseconds to 1 second (approximately 4%) and more than one second (approximately 1%). Approximately 19% of respondents did not know their firm’s current Business Clock synchronization thresholds.

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Focusing on type of respondent, large broker-dealer respondents indicated that they have current thresholds of: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 17% of large broker-dealer respondents did not know their firm’s current threshold. Small broker-dealer respondents reported the following current thresholds: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); 500 milliseconds to 1 second (approximately 11%) and more than one second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their firm’s current threshold.

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Approximately 55% of respondents indicated that their Business Clock synchronization tolerances did not vary based on whether Business Clocks were located in particular systems. Respondents did not express a clear majority view on the frequency with which they check the synchronization of Business Clocks. Focusing on large and small broker-dealers, the majority of large broker-dealer respondents (approximately 57%) and small broker-dealer respondents (approximately 65%) stated that their synchronization tolerances do not vary based on where a Business Clock is located. Approximately 19% of large broker-dealer respondents indicated that their synchronization tolerances vary based on where Business Clocks are located; by comparison, no small broker-dealer respondents indicated that their tolerances vary based on the location of Business Clocks. Approximately 25% of large broker-dealer respondents and approximately 35% of small broker-dealer respondents did not know if their tolerances vary based on where Business Clocks are located.

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Generally, respondents reported that NTP was the most common technology used to maintain Business Clock synchronization, although, with respect to co-located systems in particular, PTP was the most common technology used. The most common response among large broker-dealer respondents (approximately 40%) was that they employ multiple technologies to maintain synchronization. Small broker-dealer respondents most commonly (approximately 30%) indicated that they use NTP to maintain synchronization; however, approximately 41% of small broker-dealer respondents did not know what technology they use to maintain synchronization. Overall, the NIST atomic clock was the most common master clock used by respondents.

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These findings are discussed further below.

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pubdate: May 15, 2017 effdate: N/A -
a. Maintaining Business Clock Synchronization
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - NTP, - GPS, - CDMA, - Large Broker-Dealer, - -

Approximately 15% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Focusing on the respondents that did know what technology their firms use, the most common response (approximately 50% of respondents) was that firms used a combination of different technologies to maintain synchronization—typically, these respondents use a combination of PTP, NTP and GPS. In terms of a single solution, NTP was the most common technology used by respondents with approximately 46% reporting that they use this solution. GPS and PTP were the next most common solutions, with each being used by approximately 22% of respondents.25

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Large broker-dealer respondents reported using the following solutions to maintain synchronization: multiple technologies (approximately 40%); NTP (approximately 27%); PTP (approximately 6%); GPS (approximately 6%); CDMA (approximately 2%); and other technologies (approximately 3%). Approximately 16% of large broker-dealer respondents did not know what technology they use to maintain synchronization. Small broker-dealer respondents reported using the following solutions to maintain synchronization: NTP (approximately 30%); other technologies (approximately 15%); GPS (approximately 7%); and multiple technologies (approximately 7%). Approximately 41% of small broker-dealer respondents did not know what technology they use to maintain synchronization.

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Results also varied when analyzed by type of system, as described further below.

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- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Origination Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - -

Respondents operating origination systems indicated that their firms use the following technologies to maintain Business Clock synchronization: PTP was the primary technology used (approximately 46% of respondents) followed by GPS and PTP (each used by approximately 22% of respondents), other technology (approximately 7% of respondents) and CDMA (approximately 3% of respondents). Approximately 25% of respondents did not know what technology their firms use to maintain synchronization.

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- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - NTP, - -

Respondents operating routing systems stated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 43%); GPS (approximately 25%); PTP (approximately 24%); CDMA (approximately 4%); and other solutions (approximately 4%). Approximately 20% of respondents did not know what technology their firms use to maintain synchronization. Based on the Survey results, routing systems appear to have the highest use of CDMA technology of any system based on the number of responses.

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- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Execution Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - NTP, - -

Respondents operating execution systems reported that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 44%); PTP (approximately 25%); GPS (approximately 21%); other solutions (approximately 8%); and CDMA (approximately 1%). Approximately 13% of respondents did not know what technology their firms use to maintain synchronization.

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- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - NTP, - -

Respondents operating co-located systems indicated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 35%); PTP (approximately 33%); GPS (approximately 25%); CDMA (approximately 5%); and other solutions (approximately 2%). Approximately 10% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Based on information provided by the respondents, co-located systems have the lowest use of NTP and the highest use of PTP across any systems addressed in the Survey.

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- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - NTP, - -

Respondents operating internalization systems stated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 42%); GPS (approximately 31%); PTP (approximately 23%); and other technology (approximately 4%). Approximately 17% of respondents indicated that they did not know what technology their firms use to maintain Business Clock synchronization. Based on information provided by respondents, internalization systems have the highest use of GPS technology across any system addressed in the Survey and, along with third-party systems (discussed below) the lowest use of CDMA technology (no respondents reported using GPS technology to maintain synchronization of internalization systems).

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- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - NTP, - -

Respondents operating back-office systems reported that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 56%); GPS (approximately 19%); PTP (approximately 19%); CDMA (approximately 3%); and other technology (approximately 3%). Approximately 15% of respondents did not know what technology their firms use to maintain Business Clock synchronization. Based on the information provided by respondents, back-office systems have the highest use of NTP and the lowest use of GPS across any of the systems addressed in the Survey.

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- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Maintaining Business Clock Synchronization, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - CDMA, - NTP, - -

Respondents that use third-party systems indicated that their firms use the following technologies to maintain Business Clock synchronization: NTP (approximately 49%); GPS (approximately 26%); PTP (approximately 17%); and other technology (approximately 9%). No respondents reported using CDMA to maintain Business Clock synchronization in third-party systems. Approximately 15% of respondents indicated that they did not know what technology they use to maintain Business Clock synchronization.

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pubdate: May 15, 2017 effdate: N/A -
b. Current Business Clock Synchronization Tolerances
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Tolerance, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

As previously noted, a majority of respondents (approximately 60%) indicated that their current Business Clock synchronization tolerance is better than the standard currently set forth in the Plan. However, this result is not necessarily representative of the industry as a whole since the vast majority of these responses (approximately 80%) were provided by large broker-dealer respondents. Conversely, approximately 20% of respondents stated that their current synchronization tolerance is at or above the current standard set forth in the Plan, and the approximately 20% of respondents indicated that they did not know their current synchronization tolerance.

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Respondents that identified as large broker-dealers reported that they currently maintain the following Business Clock synchronization tolerances: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 17% of large broker-dealer respondents did not know their current synchronization tolerances. Small broker-dealer respondents reported that they currently maintain the following synchronization tolerances: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); and 500 milliseconds to 1 second (approximately 11%); and more than 1 second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their current synchronization tolerances.

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These findings are discussed further below, focusing on the types of systems used by respondents.

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- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Origination Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Origination Systems, - -

Approximately 60% of respondents operating origination systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 10%); 500 microseconds to 999 microseconds (approximately 7%); 1 millisecond to 49 milliseconds (approximately 44%); 50 milliseconds to 499 milliseconds (approximately 13%); and 500 milliseconds to 1 second (approximately 3%). Approximately 24% of respondents indicated that they did not know their current synchronization tolerances.

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- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Routing Systems, - -

Approximately 70% of respondents operating routing systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 10%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 53%); 50 milliseconds to 499 milliseconds (approximately 10%); and more than 1 second (approximately 1%). Approximately 18% of respondents did not know their current synchronization tolerances.

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- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Execution Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Execution Systems, - -

Approximately 57% of respondents operating execution systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 9%); 500 microseconds to 999 microseconds (approximately 4%); 1 millisecond to 49 milliseconds (approximately 44%); 50 milliseconds to 499 milliseconds (approximately 16%); 500 milliseconds to 1 second (approximately 7%); and more than 1 second (approximately 2%). Approximately 19% of respondents did not know their current synchronization tolerances.

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- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Co-located Systems, - -

Approximately 82% of respondents operating co-located systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. In particular, respondents reported that they currently use the following tolerances: 1 microsecond to 499 microseconds (approximately 22%); 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 41%); and 50 milliseconds to 499 milliseconds (approximately 14%). Approximately 5% of respondents indicated that they did not know their current synchronization tolerances.

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- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Internalization Systems, - -

Approximately 73% of respondents operating internalization systems reported that they currently use a synchronization tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following current tolerances: 1 microsecond to 499 microseconds (approximately 6%); 500 microseconds to 999 microseconds (approximately 11%); 1 millisecond to 49 milliseconds (approximately 56%); 50 milliseconds to 499 milliseconds (approximately 11%); and 500 milliseconds to 1 second (approximately 6%). Approximately 11% of respondents did not know their current synchronization tolerances.

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- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Back-Office Systems, - -

Approximately 63% of respondents operating back-office systems reported that they currently use a tolerance that is better than the standard set forth in the Plan. Specifically, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 4%); 500 microseconds to 999 microseconds (approximately 8%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 15%); and 500 milliseconds to 1 second (approximately 9%). Approximately 13% of respondents did not know their current synchronization tolerances.

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- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Current Business Clock Synchronization Tolerances, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Third-Party Systems, - -

Approximately 44% of respondents using third-party systems stated that they currently use a tolerance that is better than the standard set forth in the Plan. In particular, respondents reported the following tolerances: 1 microsecond to 499 microseconds (approximately 3%); 1 millisecond to 49 milliseconds (approximately 41%); and 50 milliseconds to 499 milliseconds (approximately 16%). Approximately 41% of respondents did not know their current synchronization tolerances.

-
-
-
pubdate: May 15, 2017 effdate: N/A -
c. Business Clock Location
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Tolerance, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

A majority of respondents (approximately 55%) stated that their Business Clock synchronization tolerances did not vary based on where a Business Clock was located. Conversely, approximately 15% of respondents indicated that their tolerances did vary based on where a Business Clocks was located. Approximately 30% of respondents did not know if their tolerances vary based on the location of a Business Clock.

-

The majority of large broker-dealer respondents (approximately 57%) stated that their synchronization tolerances did not vary based on the location of Business Clocks, while approximately 19% reported that tolerances did vary based on location. Approximately 25% of large broker-dealer respondents did not know if tolerances varied by the location of Business Clocks. Similarly, the majority of small broker-dealer respondents (approximately 65%) indicated that their synchronization tolerances did not vary based on the location of Business Clocks, however, no small broker-dealer respondents reported that tolerances varied based on location of Business Clocks. Approximately 35% of small broker-dealer respondents did not know if their synchronization tolerances varied by the location of Business Clocks.

-

These results are described below, focusing on type of system.

-
- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Origination Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Origination Systems, - -

Approximately 56% of respondents operating origination systems indicated that their Business Clock synchronization tolerances did not vary based on where Business Clocks were located. Approximately 14% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 30% did not know if their synchronization tolerances varied based on the location of Business Clocks.

-
-
- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Routing Systems, - -

Approximately 55% of respondents operating routing systems stated that their synchronization tolerances did not vary based on where Business Clocks were located, while approximately 15% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 30% of respondents did not know if their tolerances varied based on the system in which Business Clocks were located.

-
-
- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Execution Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Execution Systems, - -

Approximately 56% of respondents operating execution indicated that their Business Clock tolerances did not vary based on where Business Clocks were located, and approximately 15% of respondents indicated that their tolerances did vary based on where Business Clocks were located. Approximately 29% of respondents did not know if their tolerances varied based on the system in which Business Clocks were located.

-
-
- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Co-located Systems, - -

The majority of respondents operating co-located systems (approximately 67%) indicated that their synchronization tolerances did not vary based on where Business Clocks were located, while approximately 19% of respondents indicated that their tolerances did vary based on where Business Clocks were located. Approximately 14% of respondents did not know if their synchronization tolerances varied based on where Business Clocks were located.

-
-
- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Internalization Systems, - -

Respondents operating internalization systems were roughly split, with approximately 39% reporting that their synchronization tolerances did not vary based on where Business Clocks were located and 39% reporting that their tolerances did vary based on where Business Clocks were located. Approximately 22% of respondents did not know if their Business Clock synchronization tolerances varied based on where Business Clocks were located.

-
-
- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Back-Office Systems, - -

Approximately 68% of respondents operating back-office systems reported that their tolerances did not vary based on the location of Business Clocks. Approximately 10% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 22% of respondents did not know if their tolerances varied based on where Business Clocks were located.

-
-
- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Location, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Threshold, - Business Clock Location, - Third-Party Systems, - -

Approximately 41% of respondents using third-party systems indicated that their tolerances did not vary based on where Business Clocks were located, and approximately 18% of respondents stated that their tolerances did vary based on where Business Clocks were located. Approximately 41% of respondents did not know if Business Clock synchronization tolerances varied based on where Business Clocks were located.

-
-
-
pubdate: May 15, 2017 effdate: N/A -
d. Business Clock Synchronization Frequency
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Business Clock Synchronization Frequency, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

With respect to the frequency with which respondents check their Business Clock synchronization accuracy, the most common response (approximately 23%) was that respondents check synchronization accuracy once a minute or more but less than once a second. Other respondents indicated checking synchronization accuracy with the following frequencies: once an hour or more but less than once a minute (approximately 20%); once a second or more but less than once a hundredth of a second (approximately 14%); more than once a day but less than once an hour (approximately 14%); once a day (approximately 12%); and more than once a hundredth of a second (approximately 3%). Only approximately 15% of respondents reported that they did not know how often their firms checked Business Clock synchronization accuracy.

-

Large broker-dealer respondents reported that they check synchronization accuracy at the following frequencies: once a day (approximately 9%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 23%); once a minute or more but less than once a second (approximately 18%); once a second or more but less than once a hundredth of a second (approximately 17%); and more than once a hundredth of a second (approximately 4%). Approximately 14% of large broker-dealer respondents did not know how often they check the accuracy of Business Clock synchronization. Small broker-dealer respondents indicated that they check synchronization accuracy at the following frequencies: once a day (approximately 47%); more than once a day but less than once an hour (approximately 10%); and once a minute or more but less than once a second (approximately 20%). Approximately 23% of small broker-dealer respondents did not know how often they check the accuracy of Business Clock synchronization.

-

These results are discussed further below, focusing on the types of systems that respondents operate.

-
- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Originating Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Origination Systems, - -

Respondents operating origination systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 18%); more than once a day but less than once an hour (approximately 14%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 14%); once a second or more but less than once a hundredth of a second (approximately 10%); and more than once a hundredth of a second (approximately 1%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Routing Systems, - -

Respondents operating routing systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 9%); more than once a day but less than once an hour (approximately 13%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 19%); once a second or more but less than once a hundredth of a second (approximately 16%); and more than once a hundredth of a second (approximately 3%). Approximately 16% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Execution Systems, - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Execution Systems, - -

Respondents operating execution systems stated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 16%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 16%); once a minute or more but less than once a second (approximately 18%); once a second or more but less than once a hundredth of a second (approximately 18%); and more than once a hundredth of a second (approximately 4%). Approximately 13% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Co-located Systems, - -

Respondents operating co-located systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 3%); more than once a day but less than once an hour (approximately 8%); once an hour or more but less than once a minute (approximately 22%); once a minute or more but less than once a second (approximately 22%); once a second or more but less than once a hundredth of a second (approximately 31%); and more than once a hundredth of a second (approximately 3%). Approximately 11% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Internalization Systems, - -

Respondents operating internalization systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 11%); more than once a day but less than once an hour (approximately 17%); once a minute or more but less than once a second (approximately 44%); once a second or more but less than once a hundredth of a second (approximately 11%); and more than once a hundredth of a second (approximately 6%). Approximately 11% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Back-Office Systems, - -

Respondents operating back-office systems indicated that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 13%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 25%); once a minute or more but less than once a second (approximately 21%); once a second or more but less than once a hundredth of a second (approximately 6%); and more than once a hundredth of a second (approximately 4%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Business Clock Synchronization Frequency, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Accuracy, - Third-Party Systems, - -

Respondents using third-party systems reported that they check Business Clock synchronization accuracy at the following frequencies: once a day (approximately 13%); more than once a day but less than once an hour (approximately 15%); once an hour or more but less than once a minute (approximately 26%); once a minute or more but less than once a second (approximately 20%); once a second or more but less than once a hundredth of a second (approximately 6%); and more than once a hundredth of a second (approximately 4%). Approximately 17% of respondents did not know how often they check the accuracy of their Business Clock synchronization.

-
-
-
pubdate: May 15, 2017 effdate: N/A -
e. Master Clocks
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks - Compliance User: Broker-dealers - Keywords: - Business Clock synchronization, - PTP, - GPS, - NTP, - CDMA, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

Respondents that provided information regarding the type of master clock that they use for purposes of maintaining Business Clock synchronization most commonly reported using the NIST atomic clock (approximately 45%). The next most popular solutions were: GPS (approximately 20%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 4%); and CDMA (approximately 1%). Approximately 15% of respondents did not know what their firms use as a master clock.

-

Large broker-dealer respondents reported using the following as a master clock: NIST atomic clock (approximately 43%); GPS (approximately 27%); other vendor or hardware-provided time (approximately 11%); data center-provided time (approximately 3%); and CDMA (approximately 3%). Approximately 13% of large broker-dealers did not know what they use as a master clock. The responses from small broker-dealer respondents differed somewhat as they indicated using the following: NIST atomic clock (approximately 37%); other vendor or hardware-provided time (approximately 19%); and data center-provided time (approximately 7%). Approximately 37% of small broker-dealer respondents did not know what they use as a master clock.

-

These results are described further below, based on the types of systems that respondents operate.

-
- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Origination Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Origination Systems, - -

Respondents operating origination systems reported that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 4%); and CDMA (approximately 1%). Approximately 15% of respondents did not know what they use as a master clock.

-
-
- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Routing Systems, - NIST, - CDMA, - GPS, - -

Respondents operating routing systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 40%); GPS (approximately 25%); other vendor or hardware-provided time (approximately 10%); data center-provided time (approximately 5%); and CDMA (approximately 5%). Approximately 15% of respondents did not know what they use as a master clock.

-
-
- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Execution Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Execution Systems, - NIST, - CDMA, - GPS, - -

Respondents operating execution systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 15%); data center-provided time (approximately 5%); and CDMA (approximately 2%). Approximately 10% of respondents did not know what they use as a master clock.

-
-
- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Co-located Systems, - NIST, - CDMA, - GPS, - -

Respondents operating co-located systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 40%); GPS (approximately 30%); other vendor or hardware-provided time (approximately 10%); CDMA (approximately 5%); and data center-provided time (approximately 3%). Approximately 15% of respondents did not know what they use as a master clock.

-
-
- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Internalization Systems, - NIST, - CDMA, - GPS, - -

Respondents operating internalization systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: GPS (approximately 40%); NIST atomic clock (approximately 35%); and other vendor or hardware-provided time (approximately 10%). No respondents reported using data center-provided time or CDMA as their master clocks. Approximately 10% of respondents did not know what they use as a master clock.

-
-
- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Back-Office Systems, - NIST, - CDMA, - GPS, - -

Respondents operating back-office systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); other vendor or hardware-provided time (approximately 15%). No respondents indicated that they used data center-provided time or CDMA as their master clocks. Approximately 15% of respondents did not know what they use as a master clock.

-
-
- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Master Clocks, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirement, - Master Clock, - Third-Party Systems, - NIST, - CDMA, - GPS, - -

Respondents using third-party systems stated that they use the following as a master clock for purposes of complying with the Business Clock synchronization requirement: NIST atomic clock (approximately 50%); GPS (approximately 20%); and other vendor or hardware-provided time (approximately 15%). No respondents reported using data center-provided time or CDMA as their master clocks. Approximately 15% of respondents did not know what they use as a master clock.

-
-
-
pubdate: May 15, 2017 effdate: N/A -
f. Synchronization Across Geographically Disparate Systems
- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - -

Approximately 40% of respondents responding to the question on maintaining Business Clock synchronization across geographically disparate systems indicated that they do maintain synchronization across systems that are geographically disparate.26 Approximately 30% of respondents reported that they do not synchronize Business Clocks across geographically disparate systems. Approximately 30% of respondents indicated that this question was not applicable.

-

The most common response from large broker-dealer respondents was that they did maintain Business Clock synchronization across geographically disparate systems (approximately 44%). Approximately 29% of large broker-dealer respondents reported that they did not maintain synchronization across geographically disparate systems, and approximately 27% indicated that this question was not applicable to them. Approximately 38% of small broker-dealer respondents stated that they maintain synchronization across geographically disparate systems, and approximately 28% reported that they do not. Approximately 34% of small broker-dealer respondents indicated that this question was not applicable to them.

-

These results are discussed further below, based on the types of systems that respondents operate.

-
- i. Origination Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Origination Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Origination Systems, - -

Approximately 30% of respondents operating origination systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 35% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

-
-
- ii. Routing Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Routing Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Routing Systems, - -

Approximately 35% of respondents operating routing systems reported that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 25% of respondents indicated that this question did not apply to their operations.

-
-
- iii. Execution Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Execution Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Execution Systems, - -

Approximately 40% of respondents operating execution systems stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 20% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 40% of respondents indicated that this question did not apply to their operations.

-
-
- iv. Co-located Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Co-located Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Co-located Systems, - -

Approximately 50% of respondents operating co-located systems stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 20% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

-
-
- v. Internalization Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Internalization Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Internalization Systems, - -

Approximately 50% of respondents operating internalization systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 15% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 30% of respondents indicated that this question did not apply to their operations.

-
-
- vi. Back-Office Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Back-Office Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Back-Office Systems, - -

Approximately 40% of respondents operating back-office systems indicated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents stated that they did not maintain synchronization across geographically disparate systems. Approximately 20% of respondents indicated that this question did not apply to their operations.

-
-
- vii. Third-Party Systems - Topic: SEC Reports, CAT NMS Plan Clock Synchronization, CAT Clock Synchronization Survey, Analysis of Data from Clock Synchronization Survey14, Current Business Clock Synchronization Practices, Synchronization Across Geographically Disparate Systems, Third-Party Systems - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Across Geographically Disparate System, - Third-Party Systems, - -

Approximately 35% of respondents stated that they maintained Business Clock synchronization across geographically disparate systems. Approximately 40% of respondents indicated that they did not maintain synchronization across geographically disparate systems. Approximately 25% of respondents indicated that this question did not apply to their operations.

-
-
+

The Selection Plan provides that amendments to the Selection Plan shall be effected by means of a written amendment that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to Rule 608, or otherwise becomes effective under Rule 608.13

+

The proposed amendments have been executed by eighteen of the Participants, and have consequently been approved by the SROs. One Participant which is also a Shortlisted Bidder, abstained from the decision whether to adopt these amendments to avoid potential conflicts of interest.

+
+
pubdate: February 21, 2015 effdate: N/A +

8. Terms and Conditions of Access

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Terms and Conditions of Access + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: February 22, 2015 effdate: N/A +

9. Method of Determination and Imposition, and Amount of, Fees and Charges

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: February 23, 2015 effdate: N/A +

10. Method and Frequency of Processor Evaluation

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: February 24, 2015 effdate: N/A +

11. Dispute Resolution

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

-
pubdate: May 15, 2017 effdate: N/A -

VI. Recommendations: Current Clock Synchronization Requirements

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements - Compliance User: Broker-dealers +
pubdate: February 25, 2015 effdate: N/A +

IV. Solicitation of Comments

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Solicitation of Comments + Compliance User: Self-Regulatory Organization Keywords: - CAT NMS Plan - Section 6.6, - Business Clock synchronization, - Participants, - CAT Reporter, - Industry Member, + Submission of Comments, + Electronic Comments, + Paper Comments, + File Number 4-668, + 5 U.S.C. 552, -

As required by Section 6.6(a)(ii) of the CAT NMS Plan, the Participants provide these recommendations with respect to the current Business Clock synchronization requirements based on their analysis of the data collected in the Survey. As discussed further below, the Participants do not believe that it is appropriate to amend the current Business Clock synchronization requirements set forth in the Plan at this time based on the results of the Survey.

-

The Participants note that data collected in the survey is limited in certain ways for general applicability.27 For instance, the data is heavily skewed towards larger broker-dealers (approximately 60% of all respondents), thus making its applicability to small broker-dealers (approximately 13% of all respondents) more questionable. In addition, many respondents indicated in their responses to various questions that they did not know their firm’s current practices and did not know, or cannot estimate, potential costs (i.e., with respect to implementation times and initial and ongoing monetary costs).

-

Moreover, the Participants note that the current Business Clock synchronization standards were only recently implemented, and the Participants believe that the Participants and Industry Members should gain experience with those new standards prior to implementing more stringent or granular standards. In particular, the Participants desire to evaluate the effectiveness of current Business Clock synchronization requirements on the linkage and sequencing of independent events in the CAT, or whether more granular synchronization requirements are important to the accurate linkage and sequencing of the events. After gaining experience with

-

the synchronization standards and their effect on the accuracy of the CAT, the Participants believe that they will be able to analyze whether narrower clock synchronization requirements are necessary to obtain the intended regulatory goals of the CAT and whether any narrower requirements should be applied to certain groups or types of Industry Members consistent with industry standard practices. The Participants also anticipate that Industry Members, Small Industry Members and Service Providers that maintain synchronized Business Clocks will be able to provide more detailed and accurate responses after all CAT Reporters that are Industry Members and Small Industry Members are subject to the synchronization standards set forth in the Plan.

-

Nevertheless, despite these concerns and recognition of the limitations of the Survey results, the Participants provide the following suggestions for consideration at a future date regarding potential amendments related to the type of CAT Reporter, type of Industry Member and type of system.

-
pubdate: May 15, 2017 effdate: N/A -

A. Type of CAT Reporter

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of CAT Reporter - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirements, - Participants, - CAT Reporter, - Industry Member, - -

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of CAT Reporter – Participant and Industry Members. The current clock synchronization standards impose different standards on Participants and Industry Members. Participants are required to meet a 100 microseconds standard, whereas Industry Members are required to meet a 50 milliseconds standard. The Participants do not recommend changing these standards at this time.

-

As discussed above, the Survey focused on collecting data regarding Industry Members. The Participants, however, have reported that they comply with the 100 microseconds requirement currently set forth in the Plan. Based on prior analysis of the Participants’ clock synchronization practices, the Participants believe that 100 microseconds is an appropriate synchronization standard to apply to the Participants. Moreover, at this time, the Participants do not believe that the same standard should apply to the Participants and to CAT Reporters that are Industry Members and/or Small Industry Members since the Survey results do not reflect a uniformity of synchronization thresholds among all CAT Reporters.

-

With regard to Industry Members, the data collected indicates that many potential CAT Reporters currently synchronize their Business Clocks at thresholds that are better (i.e., narrower) than currently required by the Plan, although not necessarily to the granularity of the Participants. For example, approximately 64% of respondents indicated that their current synchronization threshold is less than 50 milliseconds, with respondents most commonly reporting that they maintain thresholds of between 1 millisecond and 49 milliseconds (approximately 47%). By comparison, relatively few respondents indicated that they currently maintain synchronization thresholds below 1 millisecond (approximately 17%). The Participants, however, do not believe that this supports decreasing the synchronization thresholds applicable to all Industry Members as a group at this time. As discussed in this assessment, the sample set is heavily skewed toward large broker-dealers (approximately 80% of respondents providing data on current synchronization thresholds), and the Participants have not had an opportunity to fully evaluate the extent to which the Survey respondents represent large broker-dealers, so additional information is necessary before the Plan may be amended.

-
-
pubdate: May 15, 2017 effdate: N/A -

B. Type of Industry Member

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of Industry Member - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirements, - broker-dealers, - Large Broker-Dealer, - Small Broker-Dealer, - CAT NMS plan, - CAT Reporting, - -

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of Industry Member (e.g., ATS, small broker-dealer) when establishing appropriate industry standards. Recognizing the limitations of the Survey, the data suggests that many large-broker dealer respondents may already meet or exceed the standard set forth in the Plan. However, as discussed below, the Participants believe that additional analysis is necessary for implementing any narrower thresholds that are generally applicable to Industry Members or applicable to a particular subset thereof.

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The Survey data preliminarily suggests many large broker-dealers currently synchronize their Business Clocks at thresholds that are better (i.e., narrower) than currently required by the Plan. For example, 69% of the large broker-dealer respondents indicated that they have current thresholds of less than the current 50 millisecond standard. In particular, large broker-dealer respondents reported that they used the following standards: 1 microsecond to 499 microseconds (approximately 12%); 500 microseconds to 999 microseconds (approximately 6%); 1 millisecond to 49 milliseconds (approximately 51%); 50 milliseconds to 499 milliseconds (approximately 12%); and 500 milliseconds to 1 second (approximately 3%). Approximately 16% of large broker-dealer respondents did not know their firm’s current threshold. Moreover, many large broker-dealer respondents indicated that it would take them no time to comply with narrower standards of 5 milliseconds (approximately 23%), 1 millisecond (approximately 23%), 500 microseconds (approximately 14%) and 100 microseconds (approximately 13%). Although these results do not reflect a consensus among large broker-dealer respondents, the Participants believe that future analysis may indicate that compliance implementation times will decrease due to technological advances in the industry and after large broker-dealers gain experience reporting to the Central Repository. However, large broker-dealer respondents, without a majority or consensus view, also indicated that they would incur a range of costs to comply with narrower synchronization thresholds, with some estimating costs of $5 million or more to comply with thresholds below 1 millisecond. Accordingly, the Participants believe that, although large broker-dealers may be able to comply with a narrower synchronization standard without significant costs in terms of implementation time, monetary costs may be significant and possibly prohibitive. The SEC expressed a similar view when it recently approved the Plan. It explained, “[w]hile the Commission believes that regulators’ ability to sequence orders accurately in certain cases could improve if the clock synchronization for Industry Members were finer, the Commission is sensitive to the costs associated with requiring a finer clock synchronization [standard] for Industry Members at this time, and believes that a standard of 50 milliseconds for Industry Members will allow regulators to sequence orders and events with a level of accuracy that is acceptable for the initial phases of CAT reporting.”28

-

The Survey results suggest that it would be premature to lower the clock synchronization standards with regard to small broker-dealers. As noted, the number of respondents that identified as small broker-dealers was limited; only 13% of the respondents identified as small broker-dealers, which does not provide a representative view of small broker-dealers in the industry. Moreover, only approximately 30% of small broker-dealer respondents reported that they used a synchronization threshold less than the 50 milliseconds standard. Specifically, small broker-dealer respondents reported the following current thresholds: 500 microseconds to 999 microseconds (approximately 19%); 1 millisecond to 49 milliseconds (approximately 11%); 50 milliseconds to 499 milliseconds (approximately 26%); 500 milliseconds to 1 second (approximately 11%); and more than one second (approximately 7%). Approximately 26% of small broker-dealer respondents did not know their firm’s current threshold. Some, but not a majority or a representative sample, of small broker-dealer respondents indicated that it would take them no time to comply with narrower standards of 5 milliseconds (approximately 29%), 1 millisecond (approximately 17%), 500 microseconds (approximately 33%) and 100 microseconds (approximately 33%). However, as discussed throughout this assessment, the number of respondents that identified as small broker-dealers was limited, which suggests that this data may not be representative of small broker-dealers generally. In addition, given that, throughout the development of the CAT NMS Plan, small broker-dealers and industry associations have noted that they believe that small broker-dealers will be disproportionately burdened when it comes to complying with the Plan requirements, the Participants believe that it is necessary to understand the potential impact of any amendment to the Plan on small broker-dealers. For instance, as was the case with large broker-dealer respondents, small broker-dealer respondents indicated a range of potential costs to comply with a narrower synchronization threshold without a clear consensus or majority view. Although many small broker-dealers estimated that they would incur substantial costs to comply with narrower standards, a significant portion of small broker-dealer respondents could not estimate anticipated compliance costs.

-

The Survey results also suggest that it may not be appropriate to subject ATSs to narrower synchronization standards at this time. Few ATS respondents indicated that it would take them no time to comply with narrower thresholds of: 5 milliseconds (approximately 18%); 1 millisecond (approximately 29%); 500 microseconds (approximately 17%); and 100 microseconds (0%). Moreover, many ATSs reported that they would incur significant costs to comply with narrower synchronization thresholds. For instance, for thresholds of 500 microseconds and 100 microseconds, the majority of ATS respondents estimated that they would incur initial compliance costs between $1 million and $20 million (approximately 57% each for thresholds of 500 microseconds and 100 microseconds). However, as is the case with data from small broker-dealer respondents, in some respects the data provided by ATS respondents is limited. For instance, as of May 3, 2017, the SEC reported that there are 83 ATSs with current Forms ATS on file, but only 12 respondents (approximately 8%) indicated that they operate an ATS.29 The Participants believe that it is necessary to better understand the synchronization practices of ATSs, as well as the potential costs that ATSs would incur to comply with narrower synchronization standards.30

-
-
pubdate: May 15, 2017 effdate: N/A -

C. Type of System

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Type of System - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirements, - Order Origination System, - Order Routing System, - Order Execution System, - Co-located System, - Internalization Systems, - Back-Office Systems, - Third Party Systems, - -

The Participants evaluated whether it is appropriate to amend the Business Clock synchronization requirements in the Plan based on the type of system, including: order origination systems; order routing systems; order execution or matching systems; co-located systems; internalization systems; back-office systems; and third-party systems (including vendor systems). Based on the Survey, the Participants do not believe that it is appropriate to apply different synchronization thresholds to different types of systems at this time.

-

The Survey results did not indicate any consistent patterns that would necessarily support implementing a narrower or higher threshold for particular systems. For instance, with the exception of third-party systems, the majority of respondents that submitted system-level responses indicated that Business Clocks in those systems tend to be narrower than required by the Plan. However, given the ranges provided in the Survey, the Participants cannot precisely determine the current synchronization thresholds commonly used in the various systems addressed in the Survey. Moreover, of the respondents that provided information regarding current synchronization thresholds, approximately 55% indicated that their Business Clock synchronization tolerances did not vary based on whether Business Clocks were located in particular systems. Approximately 19% of large broker-dealer respondents indicated that their synchronization tolerances varied based on where Business Clocks were located; by comparison, no small broker-dealer respondents indicated that their tolerances varied based on location of Business Clocks. This further indicates that additional analysis is necessary to better determine whether, if required to do so, CAT Reporters would be capable of complying with synchronization thresholds that vary by type of system, or whether the costs of doing so would be significant or otherwise prohibitive.31

-
-
pubdate: May 15, 2017 effdate: N/A -

D. Conclusion

- Topic: SEC Reports, CAT NMS Plan Clock Synchronization, Recommendations: Current Clock Synchronization Requirements, Conclusion - Compliance User: Broker-dealers - Keywords: - Business Clock Synchronization Requirements, - Business Clock Synchronization Threshold, - CAT Reporter, - Business Clock Synchronization Practices, - -

As discussed above, the Participants do not believe that it is necessary or appropriate to amend the Business Clock synchronization requirements set forth in the Plan at this time. The Participants will reassess whether the Business Clock synchronization requirements remain consistent with industry standards – or whether it may be necessary to amend such requirements – in the future as part of the annual assessment required by Section 6.8(c) of the Plan. To make such an assessment, the Participants intend to continue working with the Advisory Committee and the industry generally, including CAT Reporters of various sizes and types, to determine whether current Business Clock synchronization practices have changed sufficiently to suggest that narrower synchronization thresholds may be consistent with industry standards. As the Commission noted when it approved the Plan, if the Participants determine based on a future assessment that the clock synchronization requirements in the Plan should be changed, the Participants would need to file a proposed amendment to the Plan with the Commission. Such a submission would enable the Commission, as well as Industry Members and the public, to evaluate the proposed requirements, including anticipated costs, benefits and related implementation time frames.

- -
+

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Amendment to the Plan is consistent with the Act. Comments may be submitted by any of the following methods: Electronic comments:

+

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

+

• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the

+

subject line.

+

Paper comments:

+

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

+

All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Amendment to the Plan that are filed with the Commission, and all written communications relating to the Amendment to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

+

By the Commission.

+

Brent J. Fields

+

Secretary

-
fn -

1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. 84696 (Nov. 23, 2016) (the “Adopting Release”). The full text of the CAT NMS Plan is available at www.catnmsplan.com.

-
-
fn -

2 The Participants to the CAT NMS Plan are Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., Investors’ Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, NYSE National, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. Note that National Stock Exchange, Inc. has been renamed NYSE National, Inc. See Securities Exchange Act Rel. No. 79902 (Jan. 30, 2017), 82 Fed. Reg. 9258 (Feb. 3, 2017). Note further that ISE Gemini, LLC, ISE Mercury, LLC and International Securities Exchange, LLC have been renamed Nasdaq GEMX, LLC, Nasdaq MRX, LLC, and Nasdaq ISE, LLC, respectively. See Securities Exchange Act Rel. No. 80248 (Mar. 15, 2017), 82 Fed. Reg. 14547 (Mar. 21, 2017); Securities Exchange Act Rel. No. 80326 (Mar. 29, 2017), 82 Fed. Reg. 16460 (Apr. 4, 2017); and Securities Exchange Act Rel. No. 80325 (Mar. 29, 2017), 82 Fed. Reg. 16445 (Apr. 4, 2017).

-
-
fn -

3 Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

-
-
fn -

4 Adopting Release at 84785.

-
-
fn -

5 See Bats BYX Exchange, Inc. Rule 4.6; Bats BZX Exchange, Inc. Rule 4.6; Bats EDGA Exchange, Inc. Rule 4.6; Bats EDGX Exchange, Inc. Rule 4.6; BOX Options Exchange LLC Rule 16020; C2 Options Exchange, Incorporated Rulebook Chapter 6, Section F; Chicago Board Options Exchange, Incorporated Rule 6.86; Chicago Stock Exchange, Inc. Rulebook Article 23, Rule 2; Financial Industry Regulatory Authority, Inc. Rule 6820; Investors’ Exchange LLC Rule 11.620; Miami International Securities Exchange, LLC Rule 1702; MIAX PEARL, LLC Rulebook Chapter XVII; NASDAQ BX, Inc. Equity Rule 6820, Option Rulebook Chapter IX, Section 8(b); Nasdaq GEMX, LLC Rule 901; Nasdaq ISE, LLC Rule 901; Nasdaq MRX, LLC Rule 901; NASDAQ PHLX LLC Rule 920A; The NASDAQ Stock Market LLC Equity Rule 6820, Option Rulebook Chapter IX, Section 8(b); NYSE National, Inc. Rule 14.2; New York Stock Exchange LLC Rule 6820; NYSE MKT LLC Rule 6820; and NYSE Arca, Inc. Equity Rule 6.6820, Option Rule 11.6820.

+
pubdate: February 26, 2015 effdate: N/A +

Exhibit A

+ Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan + Compliance User: Self-Regulatory Organization + Keywords: + Proposed Amendments, + +

Proposed new language is italicized; proposed deletions are in [brackets].

+

PROPOSED AMENDMENT TEXT

+

Plan Processor Evaluation and Selection Plan

+

I. Definitions

+

* * * * *

+

(X) “Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section VI(B) and, if applicable, pursuant to Section VI(C)(3) of the Plan.

+

* * * * *

+

III. Operating Committee

+

* * * * *

+

(E) Conflicts and Recusals

+

A Participant may recuse itself from voting on any matter under consideration by the Operating Committee if the Participant determines that voting on such matter raises a conflict of interest. Except as provided in Sections V(B)(2), and V(B)(3), and V(B)(4) of the Plan, no Participant is automatically recused from voting on any matter.

+

* * * * *

+

V. Selection Committee

+

* * * * *

+

(B) Voting

+

* * * * *

+

(2) No Bidding Participant shall vote on whether a Shortlisted Bidder will be permitted to revise its Bid pursuant to Section VI(C)(2) or Section VI(D)(1) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+

(3) No Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders as set forth in Section VI(C)(3) if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+

(4) No Bidding Participant shall vote in the second round set forth in Section VI(E)(4) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is part of the second round.

+

(5) All votes by the Selection Committee shall be confidential and non-public. All such votes will be tabulated by an independent third party approved by the Operating Committee, and a Participant's individual votes will not be disclosed to other Participants or to the public.

+

* * * * *

+

VI. RFP Bid Evaluation and Plan Processor Selection

+

* * * * *

+

(C) Formulation of the CAT NMS Plan

+

(1) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the consolidated audit trail and provide descriptions of such proposed solutions for inclusion in the CAT NMS Plan. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

+

(2) Prior to the approval of the CAT NMS Plan, all Shortlisted Bidders will be permitted to revise their Bids one or more times if the Selection Committee determines, by majority vote, that such revision(s) are necessary or appropriate.

+

(3) Prior to approval of the CAT NMS Plan, and either before or after any revisions to Shortlisted Bids are accepted, the Selection Committee may determine, by at least a two-thirds vote, to narrow the number of Shortlisted Bids to three Bids, in accordance with the process in this Paragraph (C)(3).

+

(a) Each Voting Senior Officer shall select a first, second, and third choice from among the Shortlisted Bids.

+

(b) A weighted score shall be assigned to each choice as follows:

+

• First—3 points

+

• Second—2 points

+

• Third—1 point

+

(c) The three Shortlisted Bids receiving the highest cumulative scores will be the new set of Shortlisted Bids.

+

(d) In the event of a tie that would result in more than three final Shortlisted Bids, the votes shall be recounted, omitting each Voting Senior Officer’s third choice, in order to break the tie. If this recount produces a tie that would result in a number of final Shortlisted Bids larger than or equal to that from the initial count, the results of the initial count shall constitute the final set of Shortlisted Bids.

+

(e) To the extent there are Non-SRO Bids that are Shortlisted Bids, the final Shortlisted Bids selected pursuant to this Section VI(C)(3) must, if possible, include at least one Non-SRO Bid. If following the vote set forth in this Section VI(C)(3), no Non-SRO Bid was selected as a final Shortlisted Bid, the Non-SRO Bid receiving the highest cumulative votes shall be retained as a Shortlisted Bid.

+

(f) The third party tabulating votes, as specified in Section V(B)(5), shall identify to the Selection Committee the new set of Shortlisted Bids, but shall keep confidential the individual scores and rankings of the Shortlisted Bids from the process in this Paragraph (C)(3).

+

(4) The Participants shall incorporate information on optimal proposed solutions in the CAT NMS Plan, including cost-benefit information as required by SEC Rule 613.

+
+
fn +

1 15 U.S.C. 78k-1.

-
fn -

6 Adopting Release at 84785 (“For the initial implementation of the CAT, however, the Commission believes a 50 millisecond clock synchronization standard for Industry Members is reasonable at this time.”).

+
fn +

2 17 CFR 242.608.

-
fn -

7 Id.

+
fn +

3 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012).

-
fn -

8 Id.

+
fn +

4 Pursuant to Section I(C) of the Selection NMS Plan, a “Bid” is a proposal submitted by a Bidder in response to the RFP.

-
fn -

9 The CAT NMS Plan’s public website is available at www.catnmsplan.com.

+
fn +

5 See Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013)(Notice of Selection NMS Plan).

-
fn -

10 The Participants asked the following industry trade associations to notify their respective members about the Survey: Financial Information Forum, the Security Traders Association and the Securities Industry and Financial Markets Association.

+
fn +

6 Id.

-
fn -

11 For purposes of this assessment, “small broker-dealer” has the meaning set forth in Rule 613. In particular, Rule 613(a)(3)(v) states that “small broker-dealer” has the meaning set forth in SEC Rule 0-10(c), which defines a “small broker-dealer” as a broker-dealer that:

-

(1) Had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to § 240.17a-5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) Is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this section[.]

+
fn +

7 See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014)(Approval Order).

-
fn -

12 Specifically, the question listed the following options: order origination systems; order routing systems; order execution or matching systems; co-located systems; internalization systems; back-office systems; third-party systems (including vendor systems); and other (in which case a respondent was asked to identify such other system). Respondents also could indicate that they do not know the types of systems in which they currently maintain synchronized Business Clocks.

+
fn +

8 See 17 CFR 242.608(a)(4) and (a)(5).

-
fn -

13 See, e.g., Letter from CAT NMS Plan Participants to Brent J. Fields, dated Sept. 23, 2016.

+
fn +

9 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated December 12, 2014.

-
fn -

14 All figures and data discussed in this assessment are approximate and subject to potential minor rounding errors and assumptions. When discussing responses to specific questions regarding synchronization practices (i.e., the non-demographic questions), percentages focus on those respondents that provided information in response to the relevant questions.

+
fn +

10 See 78 FR 69910 at 69917.

-
fn -

15 Survey responses were identified as “substantially complete” using a two-step process: (1) verification of whether a response was submitted as “complete” (even if some responses were blank); and (2) verification of whether a response was at least 50% complete (generally, responses with less than a 50% completion rate provided only demographic information and no meaningful data regarding Business Clock synchronization practices, costs or views).

+
fn +

11 Id.

-
fn -

16 Specifically, approximately 12% of respondents stated that they were not FINRA members and approximately 10% stated that they are excluded or exempt from OATS reporting.

+
fn +

12 Id. at 69917-18.

fn -

17 Some respondents provided comments with their responses regarding “other” activities. These respondents noted the following activities: execution services, network services and/or technology provider; market maker; ATS; national securities exchange routing facility; financial technology firm; private placement of securities and mutual fund retailer; and principal underwriter and distributor of affiliate insurers’ registered annuity products.

-
-
fn -

18 Some of the ATS respondents that believed that different requirements should apply to Execution Venues provided comments with their responses. One ATS respondent explained that Execution Venues currently maintain very tight clock synchronization standards, which is not always the case for non-ATS broker-dealer systems. Two respondents believed that Execution Venues should be subject to more stringent tolerances but they did not provide an explanation for this view. One ATS respondent explained that Execution Venues may adhere to tighter clock synchronization standards than broker-dealers and that requiring broker-dealers to meet the same standards as Execution Venues may impose significant costs and burdens on the broker-dealer community.

-
-
fn -

19 Some respondents that indicated that firms voluntarily improve their synchronization tolerances provided additional comments with their responses. One respondent identified itself as a technology firm that can easily adjust its Business Clock synchronization tolerances, so it tries “to be ahead of the curve.” Other respondents generally believe that firms voluntarily work on improving their synchronization tolerances to address customer comments and reduce system latencies (which may provide a competitive advantage).

-
-
fn -

20 Some respondents that indicated that firms only improve their synchronization tolerances when required to do so provided additional comments with their responses. Respondents provided various views. Some respondents believed that firms only update synchronization tolerances when required to do so due to costs or limited resources. Others believed that firms only update tolerances when required to do so in the absence of some sort of business or competitive advantage that could be gained by updating tolerances. Some respondents expressed that they believe that regulators often drive changes to tolerances since the regulatory need for lower tolerances may exceed the business need.

-
-
fn -

21 Respondents listed the following other factors: competitive advantage; efficient and effective client service; latency concerns; algorithmic high frequency trading; as technology and cost permits (i.e., no directing of scarce resources to unnecessary tasks); and reliance on vendors.

-
-
fn -

22 Some respondents provided comments with their responses. Some respondents indicated that they incurred no costs since they already complied with the Business Clock synchronization thresholds required by the Plan. One respondent stated that it achieved a 10 microseconds tolerance at a cost of $1 million to $2 million before the effective date of the Plan. Other respondents reported that they rely on a vendor so they do not incur direct costs or that they do not have any trading activity.

-
-
fn -

23 Generally, these respondents provided comments that indicated that they already comply with the thresholds, rely on vendors or do not have trading activities.

-
-
fn -

24 One large broker-dealer respondent indicated that it took (or would take) it one year to comply with the initial requirements.

-
-
fn -

25 As described in the sections that follow, some respondents provided comments with their responses indicating that they use other solutions. These respondents listed the following as “other” solutions: NIST US time; third-party software/solution; Nagios; and STP.

-
-
fn -

26 These respondents indicated that key challenges with respect to synchronizing Business Clocks in geographically disparate systems generally relate to time, monetary costs and resources. One respondent also indicated that challenges include signal quality (e.g., GPS line of site and GPS jamming), network congestion, protocol and software selection and configuration, and real-time monitoring and alerting. Another respondent indicated that traceability across multiple systems is its primary challenge.

-
-
fn -

27 In connection with future assessments of the Business Clock synchronization standards set forth in the Plan, the Participants will consider how to improve the efficiency and effectiveness of collecting data from CAT Reporters and the securities industry generally. For instance, the Participants may elect to, without limitation: use targeted studies/surveys or small group discussions with particular types of Industry Members; collect data regarding synchronization practices and thresholds from certain types of Industry Members (e.g., those with the lowest synchronization thresholds) and compare the data to the Participants’ practices and thresholds; analyze data recorded in Industry Members’ synchronization logs; or recommend the implementation of pilot programs where certain CAT Reporters would comply with a narrower synchronization threshold for a period of time to give the Participants an opportunity to assess the costs, benefits and general utility of a narrower threshold.

-
-
fn -

28 Adopting Release at 84785.

-
-
fn -

29 Alternative Trading Systems with Forms ATS on File with the SEC as of May 3, 2017, available at https://www.sec.gov/files/data/frequently-requested-foia-documentalternative-trading-system-atslist/atslist0517.pdf. Please note that the 83 ATSs referenced above includes both equity and fixed income ATSs as the SEC’s publicly available list does not differentiate equity versus fixed income ATSs.

-
-
fn -

30 The Participants believe that it may be appropriate for any future assessment of the costs and benefits of imposing a narrower synchronization threshold on ATSs to take into consideration that ATSs often act in a manner similar to exchanges.

-
-
fn -

31 In a future assessment, it may be appropriate to consider whether certain types of Industry Members – such as electronic trading firms using a business model that relies on low latency trading strategies – should be subject to narrower synchronization standards, to the extent that the nature of their business would, in practice, require them to use such narrower standards. The Participants will consider collecting additional data in future assessments to evaluate this question.

+

13 17 CFR 242.608.

\ No newline at end of file diff --git a/spider/files/data000009.html b/spider/files/data000009.html index 61c1735..c73ced6 100644 --- a/spider/files/data000009.html +++ b/spider/files/data000009.html @@ -1,4124 +1,283 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: compilation - document_title: LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company - source: CAT NMS Plan - source_type: Guide + content_type: periodic + document_title: Joint Industry Plan (Notice of Plan Amendment No. 2 Release 34-75193) + document_type: Notices + source: US/SEC/Notices/Notice of Plan Amendment + source_type: Notice of Plan Amendment language: English -
pubdate: May 17, 2016 effdate: January 10, 2018 -

LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company

- Topic: CAT NMS Plan - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 + citation: Notice of Plan Amendment No. 2 Release 34-75193 +
pubdate: June 17, 2015 effdate: N/A +

Joint Industry Plan (Notice of Plan Amendment No. 2 Release 34-75193)

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment + Compliance User: Self-Regulatory Organization Keywords: - National Securities Exchanges, - National Securities Associations, + Joint Industry Plan, + Selection Plan, -

This Limited Liability Company Agreement (including its Recitals and the Exhibits, Appendices, Attachments, and Schedules identified herein, this “Agreement”) of CAT NMS, LLC, a Delaware limited liability company (the “Company”), dated as of the __ day of ______, ____, is made and entered into by and among the Participants.

-

RECITALS

-

A. Prior to the formation of the Company, in response to SEC Rule 613 requiring national securities exchanges and national securities associations to submit a national market system plan to the Securities and Exchange Commission (“Commission” or “SEC”) to create, implement and maintain a consolidated audit trail, such national securities exchanges and national securities associations, pursuant to SEC Rule 608(a)(3), which authorizes them to act jointly in preparing, filing and implementing national market system plans, developed the National Market System Plan Governing the Process for Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”). The Selection Plan was approved by the Commission on February 21, 2014, amended on June 17, 2015 and September 24, 2015, and, by its terms, shall automatically terminate upon the Commission’s approval of this Agreement.

-

B. The Participants have now determined that it is advantageous and desirable to conduct in a limited liability company the activities they have heretofore conducted as parties to the Selection Plan, and have formed the Company for this purpose. This Agreement, which takes the place of the Selection Plan, is a National Market System Plan as defined in SEC Rule 600(b)(43), and serves as the National Market System Plan required by SEC Rule 613. The Participants shall jointly own the Company, which shall create, implement, and maintain the CAT and the Central Repository pursuant to SEC Rule 608 and SEC Rule 613.

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C. This Agreement incorporates the exemptive relief from certain provisions of SEC Rule 613 requested in the original and supplemental request letters submitted by the Participants to the Commission, as described further in Appendix C (“Exemptive Request Letters”).

-
pubdate: N/A effdate: N/A -

ARTICLE I DEFINITIONS

- Topic: CAT NMS Plan, Article I - Definitions - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-75193; File No. 4-668)

+

June 17, 2015

+

Joint Industry Plan; Notice of Filing of Amendment No. 2 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

+
pubdate: June 18, 2015 effdate: N/A +

I. Introduction

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Introduction + Compliance User: Self-Regulatory Organization Keywords: - Definition, + Section 11A of Securities Exchange Act, + SRO, + Selection Plan, -
pubdate: N/A effdate: N/A -

Section 1.1. Definitions.

- Topic: CAT NMS Plan, Article I - Definitions, Definitions - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Definition, - CAT, - CAT NMS plan, - -

As used throughout this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement):

-

“Account Effective Date” means: (a) with regard to those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, (i) when the trading relationship was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), either (A) the date the relationship identifier was established within the Industry Member, (B) the date when trading began (i.e., the date the first order was received) using the relevant relationship identifier, or (C) if both dates are available, the earlier date will be used to the extent that the dates differ; or (ii) when the trading relationship was established on or after the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date the Industry Member established the relationship identifier, which would be no later than the date the first order was received; (b) where an Industry Member changes back office providers or clearing firms prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (c) where an Industry Member acquires another Industry Member prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (d) where there are multiple dates associated with an account established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the earliest available date; (e) with regard to Industry Member proprietary accounts established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), (i) the date established for the account in the Industry Member or in a system of the Industry Member or (ii) the date when proprietary trading began in the account (i.e., the date on which the first orders were submitted from the account). With regard to paragraphs (b) – (e), the Account Effective Date will be no later than the date trading occurs at the Industry Member or in the Industry Member’s system.

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“Active Accounts” means an account that has had activity in Eligible Securities within the last six months.

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“Advisory Committee” has the meaning set forth in Section 4.13(a).

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“Affiliate” of a Person means any Person controlling, controlled by, or under common control with such Person.

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“Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant.

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“Agreement” has the meaning set forth in the preamble to this Agreement.

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“Allocation Report” means a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation; provided, for the avoidance of doubt, any such Allocation Report shall not be required to be linked to particular orders or executions.

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“Bid” means a proposal submitted by a Bidder in response to the RFP or subsequent request for proposal (or similar request).

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“Bidder” means any entity, or any combination of separate entities, submitting a Bid.

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“Bidding Participant” means a Participant that: (a) submits a Bid; (b) is an Affiliate of an entity that submits a Bid; or (c) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid.

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“Business Clock” means a clock used to record the date and time of any Reportable Event required to be reported under SEC Rule 613.

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“CAT” means the consolidated audit trail contemplated by SEC Rule 613.

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“CAT Data” means data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as “CAT Data” from time to time.

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“CAT NMS Plan” means the plan set forth in this Agreement, as amended from time to time.

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“CAT-Order-ID” has the same meaning provided in SEC Rule 613(j)(1).

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“CAT Reporter” means each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).

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“CAT-Reporter-ID” has the same meaning provided in SEC Rule 613(j)(2).

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“CAT System” means all data processing equipment, communications facilities, and other facilities, including equipment, utilized by the Company or any third parties acting on the Company’s behalf in connection with operation of the CAT and any related information or relevant systems pursuant to this Agreement.

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“Central Repository” means the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT pursuant to SEC Rule 613 and this Agreement.

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“Certificate” has the meaning set forth in Section 2.2.

-

“Chair” has the meaning set forth in Section 4.2(b).

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“Chief Compliance Officer” means the individual then serving (even on a temporary basis) as the Chief Compliance Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(a).

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“Chief Information Security Officer” means the individual then serving (even on a temporary basis) as the Chief Information Security Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(b).

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“Code” means the Internal Revenue Code of 1986.

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“Company” has the meaning set forth in the preamble to this Agreement.

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“Company Interest” means any membership interest in the Company at any particular time, including the right to any and all benefits to which a Participant may be entitled under this Agreement and the Delaware Act, together with the obligations of such Participant to comply with this Agreement.

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“Commission” or “SEC” means the United States Securities and Exchange Commission.

-

“Compliance Rule” means, with respect to a Participant, the rule(s) promulgated by such Participant as contemplated by Section 3.11.

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“Compliance Subcommittee” has the meaning set forth in Section 4.12(b).

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“Compliance Threshold” has the meaning set forth in Appendix C.

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“Conflict of Interest” means that the interest of a Participant (e.g., commercial, reputational, regulatory or otherwise) in the matter that is subject to a vote: (a) interferes, or would be reasonably likely to interfere, with that Participant’s objective consideration of the matter; or (b) is, or would be reasonably likely to be, inconsistent with the purpose and objectives of the Company and the CAT, taking into account all relevant considerations including whether a Participant that may otherwise have a conflict of interest has established appropriate safeguards to eliminate such conflict of interest and taking into account the other guiding principles set forth in this Agreement. If a Participant has a “Conflict of Interest” in a particular matter, then each of its Affiliated Participants shall be deemed to have a “Conflict of Interest” in such matter. A “Conflict of Interest” with respect to a Participant includes the situations set forth in Sections 4.3(b)(iv), 4.3(d)(i) and 4.3(d)(ii).

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“Customer” has the same meaning provided in SEC Rule 613(j)(3).

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“Customer Account Information” shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable); except, however, that (a) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will (i) provide the Account Effective Date in lieu of the “date account opened”; (ii) provide the relationship identifier in lieu of the “account number”; and (iii) identify the “account type” as a “relationship”; (b) in those circumstances in which the relevant account was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), and no “date account opened” is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances: (i) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system; (ii) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system; (iii) where there are multiple dates associated with an account in an Industry Member’s system, and the parameters of each date are determined by the individual Industry Member; and (iv) where the relevant account is an Industry Member proprietary account.

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“Customer-ID” has the same meaning provided in SEC Rule 613(j)(5).

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“Customer Identifying Information” means information of sufficient detail to identify a Customer, including, but not limited to, (a) with respect to individuals: name, address, date of birth, individual tax payer identification number (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney); and (b) with respect to legal entities: name, address, Employer Identification Number (“EIN”)/Legal Entity Identifier (“LEI”) or other comparable common entity identifier, if applicable; provided, however, that an Industry Member that has an LEI for a Customer must submit the Customer’s LEI in addition to other information of sufficient detail to identify a Customer.

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“Delaware Act” means the Delaware Limited Liability Company Act.

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“Disclosing Party” has the meaning set forth in Section 9.6(a).

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“Effective Date” means the date of approval of this Agreement by the Commission.

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“Eligible Security” includes (a) all NMS Securities and (b) all OTC Equity Securities.

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“Error Rate” has the meaning provided in SEC Rule 613(j)(6).

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“Exchange Act” means the Securities Exchange Act of 1934.

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“Execution Venue” means a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).

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“Exemptive Request Letters” has the meaning set forth in Recital C.

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“FINRA” means Financial Industry Regulatory Authority, Inc.

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“Firm Designated ID” means a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.

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“Fiscal Year” means the fiscal year of the Company determined pursuant to Section 9.2(a).

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“FS-ISAC” has the meaning set forth in Section 6.2(b)(vi).

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“GAAP” means United States generally accepted accounting principles.

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“Independent Auditor” has the meaning set forth in Section 6.2(a)(v)(B).

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“Industry Member” means a member of a national securities exchange or a member of a national securities association.

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“Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

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“Information” has the meaning set forth in Section 9.6(a).

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“Initial Plan Processor” means the first Plan Processor selected by the Operating Committee in accordance with SEC Rule 613, Section 6.1 and the Selection Plan.

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“Last Sale Report” means any last sale report reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the SEC pursuant to, and meeting the requirements of, SEC Rule 608.

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“Latency” means the delay between input into a system and the outcome based upon that input. In computer networks, latency refers to the delay between a source system sending a packet or message, and the destination system receiving such packet or message.

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“Listed Option” or “Option” have the meaning set forth in Rule 600(b)(35) of Regulation NMS.

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“Majority Vote” means the affirmative vote of at least a majority of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)).

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“Manual Order Event” means a non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.

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“Material Amendment” has the meaning set forth in Section 6.9(c).

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“Material Contract” means any: (a) contract between the Company and the Plan Processor; (b) contract between the Company and any Officer; (c) contract, or group of related contracts, resulting in a total cost or liability to the Company of more than $900,000; (d) contract between the Company, on the one hand, and a Participant or an Affiliate of a Participant, on the other; (e) contract containing other than reasonable arms-length terms; (f) contract imposing, or purporting to impose, non-customary restrictions (including non-competition, non-solicitation or confidentiality (other than customary confidentiality agreements entered into in the ordinary course of business that do not restrict, or purport to restrict, any Participant or any Affiliate of any Participant)) or obligations (including indemnity, most-favored nation requirements, exclusivity, or guaranteed minimum purchase commitments) on the Company or any Participant or any Affiliate of a Participant; (g) contract containing terms that would reasonably be expected to unduly interfere with or negatively impact the ability of the Company, any Participant or any Affiliate of any Participant to perform its regulatory functions (including disciplinary matters), to carry out its responsibilities under the Exchange Act or to perform its obligations under this Agreement; (h) contract providing for a term longer than twelve (12) months or the termination of which would reasonably be expected to materially and adversely affect the Company, any Participant or any Affiliate of a Participant; (i) contract for indebtedness, the disposition or acquisition of assets or equity, or the lease or license of assets or properties; or (j) joint venture or similar contract for cost or profit sharing.

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“Material Subcontractor” means any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC: (a) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (b) accounts for 5% or more of the total estimated annual cost of the Bid for any given year. An entity shall not be considered a “Material Subcontractor” solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.

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“Material Systems Change” means any change or update to the CAT System made by the Plan Processor which will cause a significant change to the functionality of the Central Repository.

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“Material Terms of the Order” includes: the NMS Security or OTC Equity Security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator (except on transactions in equities); time in force (if applicable); if the order is for a Listed Option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close (except on market maker quotations); and any special handling instructions.

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“National Best Bid” and “National Best Offer” have the same meaning provided in SEC Rule 600(b)(42).

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“NMS Plan” has the same meaning as “National Market System Plan” provided in SEC Rule 613(a)(1) and SEC Rule 600(b)(43).

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“NMS Security” means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.

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“Non-SRO Bid” means a Bid that does not include a Bidding Participant.

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“Officer” means an officer of the Company, in his or her capacity as such, as set forth in Section 4.6.

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“Operating Committee” means the governing body of the Company designated as such and described in Article IV.

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“Options Exchange” means a registered national securities exchange or automated trading facility of a registered securities association that trades Listed Options.

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“Options Market Maker” means a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.

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“Order” or “order” has, with respect to Eligible Securities, the meaning set forth in SEC Rule 613(j)(8).

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“OTC Equity Security” means any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.

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“Other SLAs” has the meaning set forth in Section 6.1(h).

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“Participant” means each Person identified as such on Exhibit A hereto, and any Person that becomes a Participant as permitted by this Agreement, in such Person’s capacity as a Participant in the Company (it being understood that the Participants shall comprise the “members” of the Company (as the term “member” is defined in Section 18-101(11) of the Delaware Act)).

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“Participant Data” has the meaning set forth in Section 6.3(d).

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“Participation Fee” has the meaning set forth in Section 3.3(a).

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“Payment Date” has the meaning set forth in Section 3.7(b).

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“Permitted Legal Basis” means the Participant has become exempt from, or otherwise has ceased to be subject to, SEC Rule 613 or has arranged to comply with SEC Rule 613 in some manner other than through participation in this Agreement, in each instance subject to the approval of the Commission.

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“Permitted Person” has the meaning set forth in Section 4.9.

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“Permitted Transferee” has the meaning set forth in Section 3.4(c).

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“Person” means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

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“PII” means personally identifiable information, including a social security number or tax identifier number or similar information; Customer Identifying Information and Customer Account Information.

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“Plan Processor” means the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan Processor, the Selection Plan, to perform the CAT processing functions required by SEC Rule 613 and set forth in this Agreement.

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“Pledge” and any grammatical variation thereof means, with respect to an interest, asset, or right, any pledge, security interest, hypothecation, deed of trust, lien or other similar encumbrance granted with respect to the affected interest, asset or right to secure payment or performance of an obligation.

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“Primary Market Transaction” means any transaction other than a secondary market transaction and refers to any transaction where a Person purchases securities in an offering.

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“Prime Rate” means the prime rate published in The Wall Street Journal (or any successor publication) on the last day of each month (or, if not a publication day, the prime rate last published prior to such last day).

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“Proceeding” has the meaning set forth in Section 4.8(b).

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“Qualified Bid” means a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain the CAT so that such Bid can be effectively evaluated by the Selection Committee. When evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment. The determination of whether a Bid is a Qualified Bid shall be determined pursuant to the process set forth in Section 5.2.

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“Qualified Bidder” means a Bidder that has submitted a Qualified Bid.

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“Quotation Information” means all bids (as defined under SEC Rule 600(b)(8)), offers (as defined under SEC Rule 600(b)(8)), all bids and offers of OTC Equity Securities, displayed quotation sizes in Eligible Securities, market center identifiers (including, in the case of FINRA, the FINRA member that is registered as a market maker or electronic communications network or otherwise utilizes the facilities of FINRA pursuant to applicable FINRA rules, that entered the quotation), withdrawals and other information pertaining to quotations in Eligible Securities required to be reported to the Plan Processor pursuant to this Agreement and SEC Rule 613.

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“Raw Data” means Participant Data and Industry Member Data that has not been through any validation or otherwise checked by the CAT System.

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“Received Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

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“Receiving Party” has the meaning set forth in Section 9.6(a).

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“Recorded Industry Member Data” has the meaning set forth in Section 6.4(d)(i).

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“Registered Person” means any member, principal, executive, registered representative, or other person registered or required to be registered under a Participant’s rules.

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“Reportable Event” includes, but is not limited to, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.

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“Representatives” has the meaning set forth in Section 9.6(a).

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“RFP” means the “Consolidated Audit Trail National Market System Plan Request for Proposal” published by the Participants on February 26, 2013 attached as Appendix A, as amended from time to time.

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“Securities Information Processor” or “SIP” has the same meaning provided in Section 3(a)(22)(A) of the Exchange Act.

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“Selection Committee” means the committee formed pursuant to Section 5.1.

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“Selection Plan” has the meaning set forth in Recital A.

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“Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section 5.2(b) and, if applicable, pursuant to Section 5.2(c)(iii).

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“Shortlisted Bidder” means a Qualified Bidder that has submitted a Bid selected as a Shortlisted Bid.

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“SIP Data” has the meaning set forth in Section 6.5(a)(ii).

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“SLA” has the meaning set forth in Section 6.1(h).

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“Small Industry Member” means an Industry Member that qualifies as a small broker-dealer as defined in SEC Rule 613.

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“SRO” means any self-regulatory organization within the meaning of Section 3(a)(26) of the Exchange Act.

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“SRO-Assigned Market Participant Identifier” means an identifier assigned to an Industry Member by an SRO or an identifier used by a Participant.

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“Subcommittee” has the meaning set forth in Section 4.12(a).

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“Supermajority Vote” means the affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)); provided that if two-thirds of all of such members authorized to cast a vote is not a whole number then that number shall be rounded up to the nearest whole number.

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“Tax Matters Partner” has the meaning set forth in Section 9.5(a).

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“Transfer” and any grammatical variation thereof means any sale, exchange, issuance, redemption, assignment, distribution or other transfer, disposition or alienation in any way (whether voluntarily, involuntarily or by operation of law). Transfer shall specifically include any: (a) assignment or distribution resulting from bankruptcy, liquidation, or dissolution; or (b) Pledge.

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“Technical Specifications” has the meaning set forth in Section 6.9(a).

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“Trading Day” shall have such meaning as is determined by the Operating Committee. For the avoidance of doubt, the Operating Committee may establish different Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time.

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“Voting Senior Officer” has the meaning set forth in Section 5.1(a).

-
-
pubdate: N/A effdate: N/A -

Section 1.2. Principles of Interpretation.

- Topic: CAT NMS Plan, Article I - Definitions, Principles of Interpretation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Interpretation, - Reference, - -

In this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement), unless the context otherwise requires:

-

(a) words denoting the singular include the plural and vice versa;

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(b) words denoting a gender include all genders;

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(c) all exhibits, appendices, attachments, recitals, and schedules to the document in which the reference thereto is contained shall, unless the context otherwise requires, constitute an integral part of such document for all purposes;

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(d) a reference to a particular clause, section, article, exhibit, appendix, attachment, recital, or schedule shall be a reference to a clause, section or article of, or an exhibit, appendix, attachment, recital, or schedule to, this Agreement;

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(e) a reference to any statute, regulation, amendment, ordinance or law includes all statutes, regulations, proclamations, amendments or laws varying, consolidating or replacing the same from time to time, and a reference to a statute includes all regulations, policies, protocols, codes, proclamations, interpretations and ordinances issued or otherwise applicable under that statute unless, in any such case, otherwise expressly provided in any such statute or in the document in which the reference is contained;

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(f) a reference to a “SEC Rule” refers to the correspondingly numbered Rule promulgated under the Exchange Act;

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(g) a definition of or reference to any document, instrument or agreement includes an amendment or supplement to, or restatement, replacement, modification or novation of, any such document, instrument or agreement unless otherwise specified in such definition or in the context in which such reference is used;

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(h) a reference to any Person includes such Person’s permitted successors and assigns in that designated capacity;

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(i) a reference to “$”, “Dollars” or “US $” refers to currency of the United States of America;

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(j) unless otherwise expressly provided in this Agreement, wherever the consent of any Person is required or permitted herein, such consent may be withheld in such Person’s sole and absolute discretion;

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(k) words such as “hereunder”, “hereto”, “hereof” and “herein” and other words of similar import shall refer to the whole of the applicable document and not to any particular article, section, subsection or clause thereof; and

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(l) a reference to “including” (and grammatical variations thereof) means “including without limitation” (and grammatical variations thereof).

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ARTICLE II EFFECTIVENESS OF AGREEMENT; ORGANIZATION

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Effectivity, - LLC, - Delaware Act, - CAT NMS LLC, - Offices, - Filings, - Requirements, - Powers, - Delaware Act, - Term of the Company, - -
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Section 2.1. Effectiveness.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Effectiveness - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Effectivity, - -

This Agreement shall become effective upon approval by the Commission and execution by all Participants identified on Exhibit A and shall continue until terminated. Notwithstanding any provision in this Agreement to the contrary and without the consent of any Person being required, the Company’s execution, delivery and performance of this Agreement are hereby authorized, approved and ratified in all respects.

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Section 2.2. Formation.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Formation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - LLC, - Delaware Act, - -

The Company was formed as a limited liability company under the Delaware Act by filing a certificate of formation (the “Certificate”) with the Delaware Secretary of State.

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Section 2.3. Name.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Name - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - CAT NMS LLC, - -

The name of the Company is “CAT NMS, LLC.” The name of the Company may be changed at any time or from time to time with the approval of the Operating Committee. All Company business shall be conducted in that name or such other names that comply with applicable law as the Operating Committee may select from time to time.

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Section 2.4. Registered Office; Registered Agent; Principal Office; Other Offices.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Registered Office; Registered Agent; Principal Office; Other Offices - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Offices, - -

The registered office of the Company required by the Delaware Act to be maintained in the State of Delaware shall be the office of the initial registered agent named in the Certificate or such other office (which need not be a place of business of the Company) as the Operating Committee may designate from time to time in the manner provided by law. The registered agent of the Company in the State of Delaware shall be the initial registered agent named in the Certificate or such other Person or Persons as the Operating Committee may designate from time to time in the manner provided by law. The principal office of the Company shall be at such place as the Operating Committee may designate from time to time, which need not be in the State of Delaware. The Company may have such other offices as the Operating Committee may designate from time to time.

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Section 2.5. Certain Filings.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Certain Filings - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Filings, - Requirements, - -

The Company shall cause to be filed such certificates and documents as may be necessary or appropriate to comply with the Delaware Act and any other applicable requirements for the organization, continuation and operation of a limited liability company in accordance with the laws of the State of Delaware and any other jurisdiction in which the Company shall conduct business, and shall continue to do so for so long as the Company conducts business therein. Each member of the Operating Committee is hereby designated as an “authorized person” within the meaning of the Delaware Act.

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Section 2.6. Purposes and Powers.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Purposes and Powers - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Powers, - Delaware Act, - -

The Company may engage in: (a) the creation, implementation, and maintenance of the CAT pursuant to SEC Rule 608 and SEC Rule 613; and (b) any other business or activity that now or hereafter may be necessary, incidental, proper, advisable or convenient to accomplish the foregoing purpose and that is not prohibited by the Delaware Act, the Exchange Act or other applicable law and is consistent with tax exempt status under Section 501(c)(6) of the Code. The Company shall have and may exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Delaware Act.

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Section 2.7. Term.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Term - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Term of the Company, - -

The term of the Company commenced on the date the Certificate was filed with the office of the Secretary of State of Delaware, and shall be perpetual unless dissolved as provided in this Agreement.

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ARTICLE III PARTICIPATION

- Topic: CAT NMS Plan, Article III - Participation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
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Section 3.1. Participants.

- Topic: CAT NMS Plan, Article III - Participation, Participants - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Rights of a participant, - -

The name and address of each Participant are set forth on Exhibit A. New Participants may only be admitted to the Company in accordance with Section 3.5. No Participant shall have the right or power to resign or withdraw from the Company, except: (a) upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4; or (b) as permitted by Section 3.6. No Participant may be expelled or required to resign or withdraw from the Company except upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4, or as provided by Section 3.7(a)(ii) or Section 3.7(a)(iii).

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Section 3.2. Company Interests Generally.

- Topic: CAT NMS Plan, Article III - Participation, Company Interests Generally - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Company Interests, - Participant, - -

(a) All Company Interests shall have the same rights, powers, preferences and privileges, and shall be subject to the same restrictions, qualifications and limitations. Additional Company Interests may be issued only as permitted by Section 3.3.

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(b) Without limiting Section 3.2(a), each Participant shall be entitled to one vote on any matter presented to the Participants for their consideration at any meeting of the Participants (or by written action of the Participants in lieu of a meeting).

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(c) Company Interests shall not be evidenced by certificates.

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(d) Each Participant shall have an equal Company Interest as each other Participant.

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Section 3.3. New Participants.

- Topic: CAT NMS Plan, Article III - Participation, New Participants - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - National Securities Exchange, - National Securities Association, - Participant, - Requirements, - Participation Fee, - -

(a) Any Person approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the Effective Date may become a Participant by submitting to the Company a completed application in the form provided by the Company. As a condition to admission as a Participant, said Person shall: (i) execute a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Person as a Participant (including said Person’s address for purposes of notices delivered pursuant to this Agreement); and (ii) pay a fee to the Company in an amount determined by a Majority Vote of the Operating Committee as fairly and reasonably compensating the Company and the Participants for costs incurred in creating, implementing, and maintaining the CAT, including such costs incurred in evaluating and selecting the Initial Plan Processor and any subsequent Plan Processor and for costs the Company incurs in providing for the prospective Participant’s participation in the Company, including after consideration of the factors identified in Section 3.3(b) (the “Participation Fee”). The amendment to this Agreement reflecting the admission of a new Participant shall be effective only when: (x) it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608; and (y) the prospective Participant pays the Participation Fee. Neither a prospective Participant nor any Affiliate of such prospective Participant that is already a Participant shall vote on the determination of the amount of the Participation Fee to be paid by such prospective Participant. Participation Fees paid to the Company shall be added to the general revenues of the Company.

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(b) In determining the amount of the Participation Fee to be paid by any prospective Participant, the Operating Committee shall consider the following factors:

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(i) the portion of costs previously paid by the Company for the development, expansion and maintenance of the CAT which, under GAAP, would have been treated as capital expenditures and would have been amortized over the five (5) years preceding the admission of the prospective Participant;

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(ii) an assessment of costs incurred and to be incurred by the Company for modifying the CAT or any part thereof to accommodate the prospective Participant, which are not otherwise required to be paid or reimbursed by the prospective Participant;

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(iii) Participation Fees paid by other Participants admitted as such after the Effective Date;

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(iv) elapsed time from the Effective Date to the anticipated date of admittance of the prospective Participant; and

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(v) such other reasonable, equitable and not unfairly discriminatory factors, if any, as may be determined to be appropriate by the Operating Committee and approved by the Commission.

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In the event the Company (following the vote of the Operating Committee contemplated by Section 3.3(a)) and a prospective Participant do not agree on the amount of the Participation Fee, such amount shall be subject to review by the Commission pursuant to Rule 608 of the Exchange Act.

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(c) An applicant for participation in the Company may apply for limited access to the CAT System for planning and testing purposes pending its admission as a Participant by submitting to the Company a completed Application for Limited Access to the CAT System in a form provided by the Company, accompanied by payment of a deposit in the amount established by the Company, which shall be applied or refunded as described in such application. To be eligible to apply for such limited access, the applicant must have been approved by the SEC as a national securities exchange or national securities association under the Exchange Act but the applicant has not yet become a Participant, or the SEC must have published such applicant’s Form 1 application or Form X-15AA-1 application to become a national securities exchange or a national securities association, respectively.

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Section 3.4. Transfer of Company Interest.

- Topic: CAT NMS Plan, Article III - Participation, Transfer of Company Interest - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Company Interest, - Exception, - Transfer, - -

(a) No Participant may Transfer any Company Interest except in compliance with this Section 3.4. Any Transfer or attempted Transfer in contravention of the foregoing sentence or any other provision of this Agreement shall be null and void ab initio and ineffective to Transfer any Company Interest and shall not bind or be recognized by or on the books of the Company, and any transferee in such transaction shall not, to the maximum extent permitted by applicable law, be or be treated as or deemed to be a Participant (or an assignee within the meaning of § 18-702 of the Delaware Act) for any purpose.

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(b) No Participant may Transfer any Company Interest except to a national securities exchange or national securities association that succeeds to the business of such Participant as a result of a merger or consolidation with such Participant or the Transfer of all or substantially all of the assets or equity of such Participant.

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(c) Notwithstanding anything to the contrary contained in this Agreement, no Participant may Transfer any Company Interest to any transferee as permitted by Section 3.4(b) (a “Permitted Transferee”) unless: (i) such Permitted Transferee executes a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Permitted Transferee as a Participant (including said Permitted Transferee’s address for purposes of notices delivered pursuant to this Agreement); and (ii) the amendment to this Agreement reflecting the Transfer of a Company Interest to a Permitted Transferee is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608. Subject to compliance with this Section 3.4, such amendment and such Transfer shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608, as applicable.

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(d) The Company shall not be required to recognize any Transfer of any Company Interest until the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been delivered to the Company at its principal office for recordation on the books of the Company and the transferring Participant or Permitted Transferee has paid all costs and expenses of the Company in connection with such Transfer. The Company shall be entitled to treat the record owner of any Company Interest as the absolute owner thereof in all respects, and neither the Company nor any Participant shall incur liability for distributions of cash or other property made in good faith to such owner until such time as the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been received and accepted by the Company and recorded on the books of the Company.

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(e) Notwithstanding anything to the contrary contained in this Agreement, without prior approval thereof by the Operating Committee, no Transfer of any Company Interest shall be made if the Company is advised by its counsel that such Transfer: (i) may not be effected without registration under the Securities Act of 1933; (ii) would result in the violation of any applicable state securities laws; (iii) would require the Company to register as an investment company under the Investment Company Act of 1940 or modify the exemption from such registration upon which the Company has chosen to rely; or (iv) would require the Company to register as an investment adviser under state or federal securities laws.

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Section 3.5. Admission of New Participants.

- Topic: CAT NMS Plan, Article III - Participation, Admission of New Participants - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Company Interest, - Compliance, - Admission, - -

Any Person acquiring a Company Interest pursuant to Section 3.3, or any Permitted Transferee acquiring a Participant’s Company Interest pursuant to Section 3.4, shall, unless such acquiring Permitted Transferee is a Participant as of immediately prior to such acquisition, be deemed to have been admitted to the Company as a Participant, automatically and with no further action being necessary by the Operating Committee, the Participants or any other Person, by virtue of, and upon the consummation of, such acquisition of a Company Interest and compliance with Section 3.3 or Section 3.4, as applicable.

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Section 3.6. Voluntary Resignation from Participation.

- Topic: CAT NMS Plan, Article III - Participation, Voluntary Resignation from Participation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Voluntary Resignation, - Withdrawing Participant, - -

Any Participant may voluntarily resign from the Company, and thereby withdraw from and terminate its right to any Company Interest, only if (a) a Permitted Legal Basis for such action exists and (b) such Participant provides to the Company and each other Participant no less than thirty (30) days prior to the effective date of such action written notice specifying such Permitted Legal Basis, including appropriate documentation evidencing the existence of such Permitted Legal Basis, and, to the extent applicable, evidence reasonably satisfactory to the Company and other Participants that any orders or approvals required from the Commission in connection with such action have been obtained. A validly withdrawing Participant shall have the rights and obligations provided in Section 3.7.

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Section 3.7. Termination of Participation.

- Topic: CAT NMS Plan, Article III - Participation, Termination of Participation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Termination, - Fee, - Bankruptcy, - -

(a) The participation in the Company of a Participant, and its right to any Company Interest, shall terminate as of the earliest of: (i) the effective date specified in a valid notice delivered pursuant to Section 3.6 (which date, for the avoidance of doubt, shall be no earlier than the date that is thirty (30) days after the delivery of such notice); (ii) such time as such Participant is no longer registered as a national securities exchange or national securities association; or (iii) the date of termination pursuant to Section 3.7(b).

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(b) Each Participant shall pay all fees or other amounts required to be paid under this Agreement within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated) (the “Payment Date”). The Participant shall pay interest on the outstanding balance from the Payment Date until such fee or amount is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. If any such remaining outstanding balance is not paid within thirty (30) days after the Payment Date, the Participants shall file an amendment to this Agreement requesting the termination of the participation in the Company of such Participant, and its right to any Company Interest, with the SEC. Such amendment shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

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(c) In the event a Participant becomes subject to one or more of the events of bankruptcy enumerated in § 18-304 of the Delaware Act, that event by itself shall not cause the termination of the participation in the Company of the Participant so long as the Participant continues to be registered as a national securities exchange or national securities association. A terminated Participant shall remain liable for its proportionate share of costs and expenses allocated to it for the period during which it was a Participant, for obligations under Section 3.8(c), for its indemnification obligations pursuant to Section 4.1, and for obligations under Section 9.6, but it shall have no other obligations under this Agreement following the effective date of termination. This Agreement shall be amended to reflect any termination of participation in the Company of a Participant pursuant to this Section 3.7; provided that such amendment shall be effective only when it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

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Section 3.8. Obligations and Liability of Participants.

- Topic: CAT NMS Plan, Article III - Participation, Obligations and Liability of Participants - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Contributions, - Company Interest, - Delaware Act, - Limited Liability Company, - Liability, - -

(a) Except as may be determined by the unanimous vote of all the Participants or as may be required by applicable law, no Participant shall be obligated to contribute capital or make loans to the Company. No Participant shall have the right to withdraw or to be repaid any capital contributed by it or to receive any other payment in respect of any Company Interest, including as a result of the withdrawal or resignation of such Participant from the Company, except as specifically provided in this Agreement.

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(b) Except as provided in this Agreement and except as otherwise required by applicable law, no Participant shall have any personal liability whatsoever in its capacity as a Participant, whether to the Company, to any Participant or any Affiliate of any Participant, to the creditors of the Company or to any other Person, for the debts, liabilities, commitments or any other obligations of the Company or for any losses of the Company. Without limiting the foregoing, the failure of the Company to observe any formalities or requirements relating to exercise of its powers or management of its business or affairs under this Agreement or the Delaware Act shall not be grounds for imposing personal liability on any Participant or any Affiliate of a Participant for any liability of the Company.

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(c) In accordance with the Delaware Act, a member of a limited liability company may, under certain circumstances, be required to return amounts previously distributed to such member. It is the intent of the Participants that no distribution to any Participant shall be deemed a return of money or other property paid or distributed in violation of the Delaware Act. The payment of any such money or distribution of any such property to a Participant shall be deemed to be a compromise within the meaning of the Delaware Act, and the Participant receiving any such money or property shall not be required to return any such money or property to any Person. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Participant is obligated to make any such payment, such obligation shall be the obligation of such Participant and not of the Operating Committee, the Company or any other Participant.

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Section 3.9. Loans.

- Topic: CAT NMS Plan, Article III - Participation, Loans - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Loans, - Additional Funds, - -

If the Company requires additional funds to carry out its purposes, to conduct its business, to meet its obligations, or to make any expenditure authorized by this Agreement, the Company may borrow funds from such one or more of the Participants, or from such third party lender(s), and on such terms and conditions, as may be approved by a Supermajority Vote of the Operating Committee.

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Section 3.10. No Partnership.

- Topic: CAT NMS Plan, Article III - Participation, No Partnership - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Partnership, - Joint venturer, - -

The Company is not intended to be a general partnership, limited partnership or joint venture for any purpose, and no Participant shall be considered to be a partner or joint venturer of any other Participant, for any purpose, and this Agreement shall not be construed to suggest otherwise.

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Section 3.11. Compliance Undertaking.

- Topic: CAT NMS Plan, Article III - Participation, Compliance Undertaking - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Compliance, - Sec Rule 613, - Participant, - -

Each Participant shall comply with and enforce compliance, as required by SEC Rule 608(c), by its Industry Members with the provisions of SEC Rule 613 and of this Agreement, as applicable, to the Participant and its Industry Members. The Participants shall endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of SEC Rule 613 and this Agreement.

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ARTICLE IV MANAGEMENT OF THE COMPANY

- Topic: CAT NMS Plan, Article IV - Management of the Company - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
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Section 4.1. Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Operating Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committee, - Duties of Operating Committee, - -

Except for situations in which the approval of the Participants is required by this Agreement or by non-waivable provisions of applicable law, the Company shall be managed by the Operating Committee, which shall have general charge and supervision of the business of the Company and shall be constituted as provided in Section 4.2. The Operating Committee: (a) acting collectively in accordance with this Agreement, shall be the sole “manager” of the Company within the meaning of § 18-101(10) of the Delaware Act (and no individual member of the Operating Committee shall (i) be a “manager” of the Company within the meaning of Section 18-101(10) of the Delaware Act or (ii) have any right, power or authority to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company); (b) shall have the right, power and authority to exercise all of the powers of the Company except as otherwise provided by applicable law or this Agreement; and (c) except as otherwise expressly provided herein, shall make all decisions and authorize or otherwise approve all actions taken or to be taken by the Company. Decisions or actions relating to the Company that are made or approved by the Operating Committee, or by any Subcommittee within the scope of authority granted to such Subcommittee in accordance with this Agreement (or, with respect to matters requiring a vote, approval, consent or other action of the Participants hereunder or pursuant to non-waivable provisions of applicable law, by the Participants) in accordance with this Agreement shall constitute decisions or actions by the Company and shall be binding on the Company and each Participant. Except to the extent otherwise expressly provided to the contrary in this Agreement, no Participant shall have authority to act for, or to assume any obligation or responsibility on behalf of, the Company, without the prior approval of the Operating Committee, and each Participant shall indemnify and hold harmless the Company and each other Participant for any breach of the provisions of this sentence by such breaching Participant. Without limiting the generality of the foregoing, except as otherwise expressly provided in this Agreement, the Operating Committee shall make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and under this Agreement. Notwithstanding anything to the contrary, the Operating Committee may delegate all or part of its administrative functions under this Agreement, but not its policy making (except to the extent determinations are delegated as specifically set forth in this Agreement) authority, to one or more Subcommittees, and any other Person. A Person to which administrative functions are so delegated shall perform the same as agent for the Company, in the name of the Company. Each Person who performs administrative functions on behalf of the Company (including the Plan Processor) shall be required to: (i) agree to be bound by the confidentiality obligations in Section 9.6(a) as a “Receiving Party”; and (ii) agree that any nonpublic business information pertaining to any Participant or any Affiliate of such Participant that becomes known to such Person shall be held in confidence and not shared with the other Participants or any other Person, except for information that may be shared in connection with joint activities permitted under this Agreement.

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Section 4.2. Composition and Selection of Operating Committee; Chair.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Composition and Selection of Operating Committee; Chair - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committee, - Voting, - Representation, - Participant, - CAT System, - Majority Vote, - -

(a) The Operating Committee shall consist of one voting member representing each Participant and one alternate voting member representing each Participant who shall have a right to vote only in the absence of that Participant’s voting member of the Operating Committee. Each of the voting and alternate voting members of the Operating Committee shall be appointed by the Participant that he or she represents, shall serve at the will of the Participant appointing such member and shall be subject to the confidentiality obligations of the Participant that he or she represents as set forth in Section 9.6. One individual may serve as the voting member of the Operating Committee for multiple Affiliated Participants, and such individual shall have the right to vote on behalf of each such Affiliated Participant.

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(b) No later than the date the CAT System commences operations, the Operating Committee shall elect, by Majority Vote, one member thereof to act as the initial chair of the Operating Committee (the “Chair”). Such initial Chair, and each successor thereto, shall serve in such capacity for a two (2)-year term or until the earliest of his death, resignation or removal in accordance with the provisions of this Agreement. The Operating Committee shall elect, from the members thereof, a successor to the then serving Chair (which successor, subject to the last sentence of this Section 4.2(b), may be the Person then serving in such capacity) no later than three (3) months prior to the expiration of the then current term of the Person then serving as Chair. The Operating Committee, by Supermajority Vote, may remove the Chair from such position. In the case of any death, removal, resignation, or other vacancy of the Chair, a successor Chair shall be promptly elected by the Operating Committee, by Majority Vote, from among the members thereof who shall serve until the end of the then current term. The Chair shall preside at all meetings of the Operating Committee, shall designate a Person to act as Secretary to record the minutes of each such meeting, and shall perform such other duties and possess such other powers as the Operating Committee may from time to time prescribe. The Chair shall not be entitled to a tie-breaking vote at any meeting of the Operating Committee. Notwithstanding anything in this Agreement to the contrary: (i) no Person shall serve as Chair for more than two successive full terms; and (ii) no Person then appointed to the Operating Committee by a Participant that then serves, or whose Affiliate then serves, as the Plan Processor shall be eligible to serve as the Chair.

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Section 4.3. Action of Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Action of Operating Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Vote, - Representation, - Operating Committee, - Majority Vote, - -

(a) Except as otherwise provided herein, each of the members of the Operating Committee, including the Chair, shall be authorized to cast one (1) vote for each Participant that he or she represents on all matters voted upon by the Operating Committee, and action of the Operating Committee shall be authorized by Majority Vote, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder. Action of the Operating Committee authorized in accordance with this Agreement shall be without prejudice to the rights of any Participant to present contrary views to any regulatory body or in any other appropriate forum. Without limiting the generality of the foregoing, the Company shall not take any of the following actions unless the Operating Committee, by Majority Vote, authorizes such action:

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(i) select the Chair pursuant to Section 4.2(b);

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(ii) select the members of the Advisory Committee pursuant to Section 4.13;

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(iii) interpret this Agreement (unless otherwise noted herein);

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(iv) approve any recommendation by the Chief Compliance Officer pursuant to Section 6.2(a)(v)(A);

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(v) determine to hold an Executive Session of the Operating Committee pursuant to Section 4.4(a);

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(vi) determine the appropriate funding-related policies, procedures and practices consistent with Article XI; or

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(vii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee (other than those matters expressly requiring a Supermajority Vote or a different vote of the Operating Committee).

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(b) Notwithstanding Section 4.3(a) or anything else to the contrary in this Agreement, the Company shall not take any of the following actions unless such action shall have been authorized by the Supermajority Vote of the Operating Committee, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder:

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(i) select a Plan Processor, other than the Initial Plan Processor selected in accordance with Article V;

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(ii) terminate a Plan Processor without cause in accordance with Section 6.1(q);

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(iii) approve the Plan Processor’s appointment or removal of the Chief Information Security Officer, the Chief Compliance Officer, or any Independent Auditor in accordance with Section 6.1(b);

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(iv) enter into, modify or terminate any Material Contract (if the Material Contract is with a Participant or an Affiliate of a Participant, such Participant and Affiliated Participant shall be recused from any vote under this Section 4.3(b)(iv));

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(v) make any Material Systems Change;

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(vi) approve the initial Technical Specifications pursuant to Section 6.9 or any Material Amendment to the Technical Specifications proposed by the Plan Processor in accordance with Section 6.9;

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(vii) amend the Technical Specifications on its own motion; or

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(viii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee by a Supermajority Vote.

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(c) Any action required or permitted to be taken at any meeting of the Operating Committee or any Subcommittee may be taken without a meeting, if all of the members of the Operating Committee or Subcommittee, as the case may be, then serving consent to the action in writing or by electronic transmission. Such written consents and hard copies of the electronic transmissions shall be filed with the minutes of proceedings of the Operating Committee or Subcommittee, as applicable.

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(d) If a member of the Operating Committee or any Subcommittee determines that voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall recuse himself or herself from voting on such matter. If the members of the Operating Committee or any Subcommittee (excluding the member thereof proposed to be recused) determine by Supermajority Vote that any member voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall be recused from voting on such matter. No member of the Operating Committee or any Subcommittee shall be automatically recused from voting on any matter, except as provided in Section 4.3(b)(iv) or as otherwise specified elsewhere in this Agreement, and except as provided below:

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(i) if a Participant is a Bidding Participant whose Bid remains under consideration, members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (A) whether another Bidder may revise its Bid; (B) the selection of a Bidder; or (C) any contract to which such Participant or any of its Affiliates would be a party in its capacity as Plan Processor; and

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(ii) if a Participant is (A) then serving as Plan Processor, (B) is an Affiliate of the Person then serving as Plan Processor, or (C) is an Affiliate of an entity that is a Material Subcontractor to the Plan Processor, then in each case members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (1) the proposed removal of such Plan Processor; or (2) any contract between the Company and such Plan Processor.

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Section 4.4. Meetings of the Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Meetings of the Operating Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Meetings, - Participant, - Representatives, - Advisory Committee, - SEC, - -

(a) Meetings of the Operating Committee may be attended by each Participant’s voting Representative and its alternate voting Representative and by a maximum of two (2) nonvoting Representatives of each Participant, by members of the Advisory Committee, by the Chief Compliance Officer, by other Representatives of the Company and the Plan Processor, by Representatives of the SEC, and by such other Persons that the Operating Committee may invite to attend; provided that the Operating Committee may, where appropriate, determine to meet in an Executive Session, during which only voting members of the Operating Committee and Representatives of the SEC shall be present; provided, that the Operating Committee may invite other Representatives of the Participants, of the Company, of the Plan Processor (including the Chief Compliance Officer and the Chief Information Security Officer), or such other Persons that the Operating Committee may invite to attend, to be present during an Executive Session. Any determination of the Operating Committee to meet in an Executive Session shall be made upon a Majority Vote and shall be reflected in the minutes of the meeting. Regular meetings of the Operating Committee shall be held not less than once each calendar quarter at such times as shall from time to time be determined by the Operating Committee, on not less than ten (10) days’ notice. Special meetings of the Operating Committee may be called upon the request of two or more Participants on not less than two (2) days’ notice; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. Emergency meetings of the Operating Committee may be called upon the request of two (2) or more Participants and may occur as soon as practical after calling for such meeting; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. In the case of an emergency meeting of the Operating Committee, in addition to those Persons otherwise entitled to attend such meeting: (i) each Participant shall have the right to designate a reasonable number of its employees or other Representatives with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; and (ii) each Participant shall use commercially reasonable efforts to designate an employee or other Representative of such Participant with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; provided, for the avoidance of doubt, that no Person attending any such meeting solely by virtue of this sentence shall have the right to vote on any matter submitted for a vote at any such meeting. The Chair, or in his or her absence, a member of the Operating Committee designated by the Chair or by members of the Operating Committee in attendance, shall preside at each meeting of the Operating Committee, and a Person in attendance designated by the Chair (or the member of the Operating Committee presiding in the Chair’s absence) shall act as Secretary to record the minutes thereof. The location of the regular and special meetings of the Operating Committee shall be fixed by the Operating Committee, provided that in general the location of meetings shall be rotated among the locations of the principal offices of the Participants. Members of the Operating Committee may be present at a meeting by conference telephone or other electronic means that enables each of them to hear and be heard by all others present at the meeting. Whenever notice of any meeting of the Operating Committee is required to be given by law or this Agreement, a written waiver, signed by the Person entitled to notice, or a waiver by electronic transmission by the Person entitled to notice, whether before, at or after the time stated in such notice, shall be deemed equivalent to notice. Attendance at a meeting of the Operating Committee by a member thereof shall constitute a waiver of notice of such meeting, except when such member of the Operating Committee attends any such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

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(b) Any Person that is not a Participant, but for which the SEC has published a Form 1 Application or Form X-15AA-1 Application to become a national securities exchange or a national securities association, respectively, shall be permitted to appoint one primary Representative and one alternate Representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer but shall not be permitted to have any Representative attend a special meeting, emergency meeting or meeting held in Executive Session of the Operating Committee. If such Person’s Form 1 Application or Form X-15AA-1 Application is withdrawn or returned for any reason, then such Person shall no longer be eligible to be represented in regularly scheduled Operating Committee meetings. The Operating Committee shall have the discretion, in limited instances, to deviate from this policy if it determines, by Majority Vote, that circumstances so warrant; provided, however, that the exercise of such discretion is reasonable and does not impose any unnecessary or inappropriate burden on competition.

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Section 4.5. Interpretation of Other Regulations.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Other Regulations - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Interpretive questions, - Operating Committee, - -

Interpretive questions arising during the operation or maintenance of the Central Repository with respect to applicable laws, rules or regulations shall be presented to the Operating Committee, which shall determine whether to seek interpretive guidance from the SEC or other appropriate regulatory body and, if so, in what form.

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Section 4.6. Officers of the Company.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Officers of the Company - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Chief Compliance Officer, - Chief Information Security Officer, - Duties, - Plan Processor, - -

(a) Each of the Chief Compliance Officer and the Chief Information Security Officer (each of whom shall be employed solely by the Plan Processor and neither of whom shall be deemed or construed in any way to be an employee of the Company) shall be an Officer with the same respective title, as applicable, as the Chief Compliance Officer of the Company and the Chief Information Security Officer of the Company. Neither such Officer shall receive or be entitled to any compensation from the Company or any Participant by virtue of his or her service in such capacity (other than, if a Participant is then serving as the Plan Processor, compensation paid to such Officer as an employee of such Participant). Each such Officer shall report directly to the Operating Committee. The Chief Compliance Officer shall work on a regular and frequent basis with the Compliance Subcommittee and/or other Subcommittees as may be determined by the Operating Committee. Except to the extent otherwise provided herein, including Section 6.2, each such Officer shall have such fiduciary and other duties with regard to the Plan Processor as imposed by the Plan Processor on such individual by virtue of his or her employment by the Plan Processor. Notwithstanding the foregoing, the Company shall require the Plan Processor, in a written agreement with the Company, to acknowledge that the Officers of the Company owe fiduciary duties to the Company (set forth in Section 4.7(c) of this Agreement), and that, to the extent that the duties owed to the Company by the Officers of the Company, including the Chief Compliance Officer or Chief Information Security Officer, conflict with any duties owed to the Plan Processor, the duties to the Company will control.

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(b) The Plan Processor shall inform the Operating Committee of the individual who has direct management responsibility for the Plan Processor’s performance of its obligations with respect to the CAT. Subject to approval by the Operating Committee of such individual, the Operating Committee shall appoint such individual as an Officer. In addition, the Operating Committee by Supermajority Vote may appoint other Officers as it shall from time to time deem necessary, and may assign any title to any such Officer as it deems appropriate. Any Officer appointed pursuant to this Section 4.6(b) shall have only such duties and responsibilities as set forth in this Agreement or as the Operating Committee shall from time to time expressly determine, but no such Officer shall have any authority to bind the Company (which authority is vested solely in the Operating Committee) or be an employee of the Company, unless in each case the Operating Committee, by Supermajority Vote, expressly determines otherwise. No person subject to a “statutory disqualification” (as defined in Section 3(a)(39) of the Exchange Act) may serve as an Officer. It is the intent of the Participants that the Company have no employees.

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Section 4.7. Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Obligations of the Participants, - Operating Committee, - Duties, - -

To the fullest extent permitted by the Delaware Act and other applicable law:

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(a) the respective obligations of the Participants, Officers, and the members of the Operating Committee, to each other and to the Company are limited to the express obligations set forth in this Agreement;

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(b) the Participants hereby expressly acknowledge and agree that each member of the Operating Committee, individually, is serving hereunder solely as, and shall act in all respects hereunder solely as, an agent of the Participant appointing such member of the Operating Committee;

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(c) no Participant or member of the Operating Committee, in such Person’s capacity as such, shall have any fiduciary or similar duties or obligations to the Company or any other Participant or member of the Operating Committee, whether express or implied by the Delaware Act or any other law, in each case subject only to the implied contractual covenant of good faith and fair dealing, and each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Participant or member of the Operating Committee that might otherwise arise in respect of any such fiduciary duty or similar duty or obligation; provided, however, that the provisions of this Section 4.7(c) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member of the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor. Each Officer shall have the same fiduciary duties and obligations to the Company as a comparable officer of a Delaware corporation and in all cases shall conduct the business of the Company and execute his or her duties and obligations in good faith and in the manner that the Officer reasonably believes to be in the best interests of the Company;

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(d) subject to Section 4.7(c), each Participant and each member of the Operating Committee may, with respect to any vote, consent or approval that such Person is entitled to grant or withhold pursuant to this Agreement, grant or withhold such vote, consent or approval in its sole and absolute discretion, with or without cause; and

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(e) for the avoidance of doubt, no Participant shall be entitled to appraisal or dissenter rights for any reason with respect to any Company Interest.

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Section 4.8. Exculpation and Indemnification.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Exculpation and Indemnification - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Participant's Liability, - Exceptions, - Operating Committee, - -

(a) Except for the indemnification obligations of Participants under Section 4.1, no Participant or member of the Operating Committee shall be liable to the Company or to any Participant for any loss suffered by the Company or by any other Participant unless such loss is caused by: (i) the fraud, gross negligence, willful misconduct or willful violation of law on the part of such Participant or member of the Operating Committee; or (ii) in the case of a Participant, a material breach of this Agreement by such Participant. The provisions of this Section 4.8(a) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member to the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

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(b) Subject to the limitations and conditions as provided in this Section 4.8(b), the Company shall indemnify any Participant and any member of the Operating Committee (and may, upon approval of the Operating Committee, indemnify any employee or agent of the Company) who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative (hereinafter a “Proceeding”), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that such Person is or was a Participant, a member of the Operating Committee or any Subcommittee, or an employee or agent of the Company against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys’ fees) actually incurred by such Person in connection with such Proceeding, if and only if the Person seeking indemnification is entitled to exculpation pursuant to Section 4.8(a). Indemnification under this Section 4.8(b) shall continue as to a Person who has ceased to serve in the capacity which initially entitled such Person to indemnification hereunder. As a condition precedent to an indemnified Person’s right to be indemnified pursuant to this Section 4.8(b), such indemnified Person must notify the Company in writing as soon as practicable of any Proceeding for which such indemnified Person will or could seek indemnification. With respect to any Proceeding of which the Company is so notified, the Company shall be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the indemnified Person. If the Company does not assume the defense of any such Proceeding of which the Company receives notice under this Section 4.8(b), reasonable expenses incurred by an indemnified Person in connection with any such Proceeding shall be paid or reimbursed by the Company in advance of the final disposition of such Proceeding upon receipt by the Company of: (i) written affirmation by the indemnified Person of such Person’s good faith belief that such Person has met the standard of conduct necessary for such Person to be entitled to indemnification by the Company (which, in the case of a Person other than a Participant or a member of the Operating Committee, shall be, unless otherwise determined by the Operating Committee, that (A) such Person determined, in good faith, that such conduct was in, or was not opposed to, the best interests of the Company and (B) such conduct did not constitute gross negligence or willful misconduct); and (ii) a written undertaking by such Person to repay such expenses if it shall ultimately be determined by a court of competent jurisdiction that such Person has not met such standard of conduct or is otherwise not entitled to indemnification by the Company. The Company shall not indemnify an indemnified Person to the extent such Person is reimbursed from the proceeds of insurance, and in the event the Company makes any indemnification payments to an indemnified Person and such Person is subsequently reimbursed from the proceeds of insurance, such Person shall promptly refund such indemnification payments to the Company to the extent of such insurance reimbursement. The rights granted pursuant to this Section 4.8(b) shall be deemed contract rights, and no amendment, modification or repeal of this Section 4.8(b) shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any amendment, modification or repeal. It is expressly acknowledged that the indemnification provided in this Section 4.8(b) could involve indemnification for negligence or under theories of strict liability. For Persons other than Participants or members of the Operating Committee, indemnification shall only be made upon the approval of the Operating Committee. Notwithstanding anything to the contrary in this Section 4.8 or elsewhere in this Agreement, no Person shall be indemnified hereunder for any losses, liabilities or expenses arising from or out of a violation of federal or state securities laws or any other intentional or criminal wrongdoing. Any indemnification under this Section 4.8 shall be paid from, and only to the extent of, Company assets, and no Participant shall have any personal liability on account thereof in the absence of a separate written agreement to the contrary.

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Section 4.9. Freedom of Action.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Freedom of Action - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Premitted Persons, - -

Each Participant and such Participant’s Affiliates, and their respective Representatives (individually, “Permitted Person” and collectively, the “Permitted Persons”) may have other business interests and may engage in any business or trade, profession, employment, or activity whatsoever (regardless of whether any such activity competes, directly or indirectly, with the Company’s business or activities), for its own account, or in partnership with, or as a Representative of, any other Person. No Permitted Person (other than, if a Participant is then serving as the Plan Processor, any Officer then employed by the Plan Processor) shall be required to devote its entire time (business or otherwise), or any particular portion of its time (business or otherwise) to the business of the Company. Neither the Company nor any Participant nor any Affiliate thereof, by virtue of this Agreement, shall have any rights in and to any such independent venture or the income or profits derived therefrom, regardless of whether or not such venture was initially presented to a Permitted Person as a direct or indirect result of such Permitted Person’s relationship with the Company. No Permitted Person shall have any obligation hereunder to present any business opportunity to the Company, even if the opportunity is one that the Company might reasonably have pursued or had the ability or desire to pursue, in each case, if granted the opportunity to do so, and no Permitted Person shall be liable to the Company or any Participant (or any Affiliate thereof) for breach of any fiduciary or other duty relating to the Company (whether imposed by applicable law or otherwise), by reason of the fact that the Permitted Person pursues or acquires such business opportunity, directs such business opportunity to another Person or fails to present such business opportunity, or information regarding such business opportunity, to the Company. Each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Permitted Person for breach of any fiduciary duty or other duty (contractual or otherwise) by reason of the fact that the Permitted Person pursues or acquires any opportunity for itself, directs such opportunity to another Person, or does not present such opportunity to the Company. This Section 4.9 shall have no effect on the terms of any relationship, agreement or arrangement between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

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Section 4.10. Arrangements with Participants and Members of the Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Arrangements with Participants and Members of the Operating Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Participant, - Limitations, - -

Subject to the terms of this Agreement, including Section 4.3(b)(iv) and Section 4.3(d), and any limitations imposed on the Company and the Participants under applicable law, rules, or regulations, the Company may engage in business with, or enter into one or more agreements, leases, contracts or other arrangements for the furnishing to or by it of goods, services, technology or space with, any Participant, any member of the Operating Committee or any Affiliate of any Participant or member of the Operating Committee, and may pay compensation in connection with such business, goods, services, technology or space.

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Section 4.11. Participant Action Without a Meeting.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Participant Action Without a Meeting - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Without meeting, - Consent, - Participant, - -

Any action required or permitted to be taken by Participants pursuant to this Agreement (including pursuant to any provision of this Agreement that requires the consent or approval of Participants) may be taken without a meeting, by unanimous consent in writing, setting forth the action so taken, which consent shall be signed by all Participants entitled to consent.

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Section 4.12. Subcommittees.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Subcommittees - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Majority Vote, - Operating Committee, - Compliance, - Confidentiality, - Timeliness, - -

(a) The Operating Committee may, by Majority Vote, designate by resolution one (1) or more subcommittees (each, a “Subcommittee”) it deems necessary or desirable in furtherance of the management of the business and affairs of the Company. For any Subcommittee, any member of the Operating Committee who wants to serve thereon may so serve, and if Affiliated Participants have collectively appointed one member to the Operating Committee to represent them, then such Affiliated Participants may have only that member serve on the Subcommittee or may decide not to have only that collectively appointed member serve on the Subcommittee. Such member may designate an individual other than himself or herself who is also an employee of the Participant or Affiliated Participants that appointed such member to serve on a Subcommittee in lieu of the particular member. Any Subcommittee, to the extent provided in the resolution of the Operating Committee designating it and subject to Section 4.1 and non-waivable provisions of the Delaware Act, shall have and may exercise all the powers and authority of the Operating Committee in the management of the business and affairs of the Company as so specified in the resolution of the Operating Committee. Each Subcommittee shall keep minutes and make such reports as the Operating Committee may from time to time request. Except as the Operating Committee may otherwise determine, any Subcommittee may make rules for the conduct of its business, but unless otherwise provided by the Operating Committee or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in this Agreement for the Operating Committee.

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(b) The Operating Committee shall maintain a compliance Subcommittee (the “Compliance Subcommittee”). The Compliance Subcommittee’s purpose shall be to aid the Chief Compliance Officer (who shall directly report to the Operating Committee in accordance with Section 6.2(a)(iii)) as necessary, including with respect to issues involving:

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(i) the maintenance of the confidentiality of information submitted to the Plan Processor or Central Repository pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members;

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(ii) the timeliness, accuracy, and completeness of information submitted pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members; and

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(iii) the manner in and extent to which each Participant is meeting its obligations under SEC Rule 613, Section 3.11, and as set forth elsewhere in this Agreement and ensuring the consistency of this Agreement’s enforcement as to all Participants.

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Section 4.13. Advisory Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Advisory Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Broker-dealer, - Affiliates, - Participant, - Advisory Committee, - Central Repository, - -

(a) An advisory committee to the Company (the “Advisory Committee”) shall be formed and shall function in accordance with SEC Rule 613(b)(7) and this Section 4.13.

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(b) No member of the Advisory Committee may be employed by or affiliated with any Participant or any of its Affiliates or facilities. A Representative of the SEC shall serve as an observer of the Advisory Committee (but shall not be a member thereof). The Operating Committee shall select one (1) member to serve on the Advisory Committee from representatives of each category identified in Sections 4.13(b)(i) through 4.13(b)(xii) to serve on the Advisory Committee on behalf of himself or herself individually and not on behalf of the entity for which the individual is then currently employed; provided that the members so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) must include, in the aggregate, representatives of no fewer than three (3) broker-dealers that are active in the options business and representatives of no fewer than three (3) broker-dealers that are active in the equities business; and provided further that upon a change in employment of any such member so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) a Majority Vote of the Operating Committee shall be required for such member to be eligible to continue to serve on the Advisory Committee:

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(i) a broker-dealer with no more than 150 Registered Persons;

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(ii) a broker-dealer with at least 151 and no more than 499 Registered Persons;

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(iii) a broker-dealer with 500 or more Registered Persons;

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(iv) a broker-dealer with a substantial wholesale customer base;

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(v) a broker-dealer that is approved by a national securities exchange (A) to effect transactions on an exchange as a specialist, market maker, or floor broker; or (B) to act as an institutional broker on an exchange;

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(vi) a proprietary-trading broker-dealer;

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(vii) a clearing firm;

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(viii) an individual who maintains a securities account with a registered broker or dealer but who otherwise has no material business relationship with a broker or dealer or with a Participant;

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(ix) a member of academia who is a financial economist;

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(x) three institutional investors, including an individual trading on behalf of an investment company or group of investment companies registered pursuant to the Investment Company Act of 1940;

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(xi) an individual with significant and reputable regulatory expertise; and

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(xii) a service bureau that provides reporting services to one or more CAT Reporters.

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(c) Four of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of one (1) year. Five of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of two (2) years. All other members of the Advisory Committee shall have a term of three (3) years. No member of the Advisory Committee may serve thereon for more than two consecutive terms.

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(d) The Advisory Committee shall advise the Participants on the implementation, operation, and administration of the Central Repository, including possible expansion of the Central Repository to other securities and other types of transactions. Members of the Advisory Committee shall have the right to attend meetings of the Operating Committee or any Subcommittee, to receive information concerning the operation of the Central Repository (subject to Section 4.13(e)), and to submit their views to the Operating Committee or any Subcommittee on matters pursuant to this Agreement prior to a decision by the Operating Committee on such matters; provided that members of the Advisory Committee shall have no right to vote on any matter considered by the Operating Committee or any Subcommittee and that the Operating Committee or any Subcommittee may meet in Executive Session if, by Majority Vote, the Operating Committee or Subcommittee determines that such an Executive Session is advisable. The Advisory Committee may provide the Operating Committee with recommendations of one or more candidates for the Operating Committee to consider when selecting members of the Advisory Committee pursuant to Section 4.3(a)(ii); provided, however, that the Operating Committee, at its sole discretion, will select the members of the Advisory Committee pursuant to Section 4.3(a)(ii) from the candidates recommended to the Operating Committee by the Advisory Committee, the Operating Committee itself, Participants or other persons. The Operating Committee may solicit and consider views on the operation of the Central Repository in addition to those of the Advisory Committee.

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(e) Members of the Advisory Committee shall receive the same information concerning the operation of the Central Repository as the Operating Committee; provided, however, that the Operating Committee may withhold information it reasonably determines requires confidential treatment. Any information received by members of the Advisory Committee in furtherance of the performance of their functions pursuant to this Agreement shall remain confidential unless otherwise specified by the Operating Committee.

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ARTICLE V INITIAL PLAN PROCESSOR SELECTION

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
pubdate: N/A effdate: N/A -

Section 5.1. Selection Committee.

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Selection Committee - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Participants, - Selection, - Composition, - Voting, - Quorum, - Qualifications, - Bidding Participants, - -

The Participants shall establish a Selection Committee in accordance with this Article V to evaluate and review Bids and select the Initial Plan Processor.

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(a) Composition. Each Participant shall select from its staff one (1) senior officer (“Voting Senior Officer”) to represent the Participant as a member of the Selection Committee. In the case of Affiliated Participants, one (1) individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one (1) individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual shall have the right to vote on behalf of each such Affiliated Participant.

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(b) Voting.

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(i) Unless recused pursuant to Sections 5.1(b)(ii), 5.1(b)(iii), or 5.1(b)(iv), each Participant shall have one vote on all matters considered by the Selection Committee.

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(ii) No Bidding Participant shall vote on whether a Shortlisted Bidder shall be permitted to revise its Bid pursuant to Section 5.2(c)(ii) or 5.2(d)(i) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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(iii) No Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders as set forth in Section 5.2(c)(iii) if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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(iv) No Bidding Participant shall vote in any round if a Bid submitted by or including the Participant or an Affiliate of the Participant is a part of such round.

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(v) All votes by the Selection Committee shall be confidential and non-public. All such votes shall be tabulated by an independent third party approved by the Operating Committee, and a Participant’s individual votes shall not be disclosed to other Participants or to the public.

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(c) Quorum.

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(i) Any action requiring a vote by the Selection Committee can only be taken at a meeting in which all Participants entitled to vote are present. Meetings of the Selection Committee shall be held as needed at such times and locations as shall from time to time be determined by the Selection Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Selection Committee deems acceptable.

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(ii) For purposes of establishing a quorum, a Participant is considered present at a meeting only if the Participant’s Voting Senior Officer is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

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(iii) Any Participant recused from voting on a particular action pursuant to Section 5.1(b) above shall not be considered “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

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(d) Qualifications for Voting Senior Officer of Bidding Participants. The following criteria must be met before a Voting Senior Officer is eligible to represent a Bidding Participant and serve on the Selection Committee:

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(i) the Voting Senior Officer is not responsible for the Bidding Participant’s market operations, and is responsible primarily for the Bidding Participant’s legal and/or regulatory functions, including functions related to the formulation and implementation of the Bidding Participant’s legal and/or regulatory program;

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(ii) the Bidding Participant has established functional separation of its legal and/or regulatory functions from its market operations and other business or commercial objectives;

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(iii) the Voting Senior Officer ultimately reports (including through the Bidding Participant’s CEO or Chief Legal Officer/General Counsel) to an independent governing body that determines or oversees the Voting Senior Officer’s compensation, and the Voting Senior Officer does not receive any compensation (other than what is determined or overseen by the independent governing body) that is based on achieving business or commercial objectives;

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(iv) the Voting Senior Officer does not have responsibility for any non-regulatory functions of the Bidding Participant, other than the legal aspects of the organization performed by the Chief Legal Officer/General Counsel or the Office of the General Counsel;

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(v) the ultimate decision making of the Voting Senior Officer position is tied to the regulatory effectiveness of the Bidding Participant, as opposed to other business or commercial objectives;

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(vi) promotion or termination of the Voting Senior Officer is not based on achieving business or commercial objectives;

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(vii) the Voting Senior Officer has no decision-making authority with respect to the development or formulation of the Bid submitted by or including the Participant or an Affiliate of the Participant; however, the staff assigned to developing and formulating such Bid may consult with the Voting Senior Officer, provided such staff members cannot share information concerning the Bid with the Voting Senior Officer;

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(viii) the Voting Senior Officer does not report to any senior officers responsible for the development or formulation of the Bid submitted by or including the Participant or by an Affiliate of the Participant; however, joint reporting to the Bidding Participant’s CEO or similar executive officer by the Voting Senior Officer and senior staff developing and formulating such Bid is permissible, but the Bidding Participant’s CEO or similar executive officer cannot share information concerning such Bid with the Voting Senior Officer;

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(ix) the compensation of the Voting Senior Officer is not separately tied to income earned if the Bid submitted by or including the Participant or an Affiliate of the Participant is selected; and

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(x) the Voting Senior Officer, any staff advising the Voting Senior Officer, and any similar executive officer or member of an independent governing body to which the Voting Senior Officer reports may not disclose to any Person any non-public information gained during the review of Bids, presentation by Qualified Bidders, and selection process. Staff advising the Voting Senior Officer during the Bid review, presentation, and selection process may not include the staff, contractors, or subcontractors that are developing or formulating the Bid submitted by or including a Participant or an Affiliate of the Participant.

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pubdate: N/A effdate: N/A -

Section 5.2. Bid Evaluation and Initial Plan Processor Selection.

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Bid Evaluation and Initial Plan Processor Selection - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Initial Bid Review, - Selection of Shortlisted, - Review of Shortlisted, - Selection of Plan, - -

(a) Initial Bid Review to Determine Qualified Bids.

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(i) The Selection Committee shall review all Bids in accordance with the process developed by the Selection Committee.

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(ii) After review, the Selection Committee shall vote on each Bid to determine whether such Bid is a Qualified Bid. A Bid that is deemed unqualified by at least a two-thirds (2/3rds) vote of the Selection Committee shall not be deemed a Qualified Bid and shall be eliminated individually from further consideration.

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(b) Selection of Shortlisted Bids.

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(i) Each Qualified Bidder shall be given the opportunity to present its Bid to the Selection Committee. Following the presentations by Qualified Bidders, the Selection Committee shall review and evaluate the Qualified Bids to select the Shortlisted Bids in accordance with the process in this Section 5.1(b).

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(ii) If there are six (6) or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.

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(iii) If there are more than six (6) Qualified Bids but fewer than eleven (11) Qualified Bids, the Selection Committee shall select five (5) Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. Each Voting Senior Officer shall select a first, second, third, fourth, and fifth choice from among the Qualified Bids.

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(A) A weighted score shall be assigned to each choice as follows:

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(1) First choice receives five (5) points;

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(2) Second choice receives four (4) points;

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(3) Third choice receives three (3) points;

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(4) Fourth choice receives two (2) points; and

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(5) Fifth choice receives one (1) point.

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(B) The five (5) Qualified Bids receiving the highest cumulative scores shall be Shortlisted Bids.

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(C) In the event of a tie to select the five Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

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(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iii) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iii), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

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(iv) If there are eleven (11) or more Qualified Bids, the Selection Committee shall select fifty percent (50%) of the Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. If there is an odd number of Qualified Bids, the number of Shortlisted Bids chosen shall be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, then seven Shortlisted Bids shall be selected). Each Voting Senior Officer shall select as many choices as Shortlisted Bids to be chosen.

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(A) A weighted score shall be assigned to each choice in single point increments as follows:

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(1) Last receives one (1) point;

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(2) Next-to-last choice receives two (2) points;

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(3) Second-from-last choice receives three (3) points;

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(4) Third-from-last choice receives four (4) points;

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(5) Fourth-from-last choice receives five (5) points; and

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(6) Fifth-from-last choice receives six (6) points.

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For each additional Shortlisted Bid that must be chosen, the points assigned shall increase in single point increments.

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(B) The fifty percent (50%) of Qualified Bids (or, if there is an odd number of Qualified Bids, the next whole number above fifty percent (50%) of Qualified Bids) receiving the highest cumulative scores shall be Shortlisted Bids.

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(C) In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

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(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iv) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iv), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

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(c) Formulation of the CAT NMS Plan.

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(i) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the CAT and provide descriptions of such proposed solutions for inclusion in this Agreement. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

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(ii) Prior to the approval of the CAT NMS Plan, all Shortlisted Bidders will be permitted to revise their Bids one or more times if the Selection Committee determines, by majority vote, that such revision(s) are necessary or appropriate.

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(iii) Prior to approval of the CAT NMS Plan, and either before or after any revisions to Shortlisted Bids are accepted, the Selection Committee may determine, by at least a two-thirds vote, to narrow the number of Shortlisted Bids to three Bids, in accordance with the process in this Section 5.2(c)(iii).

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(A) Each Voting Senior Officer shall select a first, second, and third choice from among the Shortlisted Bids.

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(B) A weighted score shall be assigned to each choice as follows:

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(1) First receives three (3) points;

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(2) Second receives two (2) points; and

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(3) Third receives one (1) point.

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(C) The three Shortlisted Bids receiving the highest cumulative scores will be the new set of Shortlisted Bids.

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(D) In the event of a tie that would result in more than three final Shortlisted Bids, the votes shall be recounted, omitting each Voting Senior Officer’s third choice, in order to break the tie. If this recount produces a tie that would result in a number of final Shortlisted Bids larger than or equal to that from the initial count, the results of the initial count shall constitute the final set of Shortlisted Bids.

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(E) To the extent there are Non-SRO Bids that are Shortlisted Bids, the final Shortlisted Bids selected pursuant to this Section 5.2(c)(iii) must, if possible, include at least one Non-SRO Bid. If following the vote set forth in this Section 5.2(c)(iii), no Non-SRO Bid was selected as a final Shortlisted Bid, the Non-SRO Bid receiving the highest cumulative votes shall be retained as a Shortlisted Bid.

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(F) The third party tabulating votes, as specified in Section 5.1(b)(5), shall identify to the Selection Committee the new set of Shortlisted Bids, but shall keep confidential the individual scores and rankings of the Shortlisted Bids from the process in this Section 5.2(c)(iii).

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(iv) The Participants shall incorporate information on optimal proposed solutions in this Agreement, including cost-benefit information as required by SEC Rule 613.

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(d) Review of Shortlisted Bids Under the CAT NMS Plan.

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(i) A Shortlisted Bidder shall be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to the recusal provision in Section 5.1(b)(ii) above, that revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions in this Agreement. A Shortlisted Bidder may not revise its Bid unless approved to do so by the Selection Committee pursuant to this Section 5.2(d)(i).

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(ii) The Selection Committee shall review and evaluate all Shortlisted Bids, including any permitted revisions thereto submitted by Shortlisted Bidders. In performing the review and evaluation, the Selection Committee may consult with the Advisory Committee established pursuant to paragraph (b)(7) of SEC Rule 613 and Section 4.13, and such other Persons as the Selection Committee deems appropriate.

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(e) Selection of Plan Processor Under this Agreement.

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(i) There shall be two rounds of voting by the Selection Committee to select the Initial Plan Processor from among the Shortlisted Bidders. Each round shall be scored independently of prior rounds of voting, including the scoring to determine the Shortlisted Bids under Section 5.2(b).

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(ii) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in any round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such round.

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(iii) First Round Voting by the Selection Committee.

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(A) In the first round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii), shall select a first and second choice from among the Shortlisted Bids.

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(B) A weighted score shall be assigned to each choice as follows:

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(1) First choice receives two (2) points; and

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(2) Second choice receives one (1) point.

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(C) The two Shortlisted Bids receiving the highest cumulative scores in the first round shall advance to the second round.

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(D) In the event of a tie that would result in more than two Shortlisted Bids advancing to the second round, the tie shall be broken by assigning one point per vote, with the Shortlisted Bid(s) receiving the highest number of votes advancing to the second round. If, at this point, the Shortlisted Bids remain tied, a revote shall be taken with each vote receiving one point. If the revote results in a tie, the Participants shall identify areas for further discussion and, following any such discussion, voting shall continue until two Shortlisted Bids are selected to advance to the second round.

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(iv) Second Round Voting by the Selection Committee.

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(A) In the second round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii) above, shall vote for one Shortlisted Bid.

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(B) The Shortlisted Bid receiving the most votes in the second round shall be selected, and the proposed entity included in the Shortlisted Bid to serve as the Plan Processor shall be selected as the Plan Processor.

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(C) In the event of a tie, a revote shall be taken. If the revote results in a tie, the Participants shall identify areas for further discussions with the two Shortlisted Bidders. Following any such discussions, voting shall continue until one Shortlisted Bid is selected.

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pubdate: N/A effdate: N/A -

ARTICLE VI FUNCTIONS AND ACTIVITIES OF CAT SYSTEM

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
pubdate: N/A effdate: N/A -

Section 6.1. Plan Processor.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Plan Processor - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Duties, - Appointment of officers, - Operating Committee, - SLA, - Voting, - Resignation, - -

(a) The Initial Plan Processor shall be selected in accordance with Article V and shall serve as the Plan Processor until its resignation or removal from such position in accordance with this Section 6.1. The Company, under the direction of the Operating Committee shall enter into one or more agreements with the Plan Processor obligating the Plan Processor to perform the functions and duties contemplated by this Agreement to be performed by the Plan Processor, as well as such other functions and duties the Operating Committee deems necessary or appropriate.

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(b) The Plan Processor may appoint such officers of the Plan Processor as it deems necessary and appropriate to perform its functions under this Agreement and SEC Rule 613; provided that the Plan Processor shall, at a minimum, appoint, in accordance with Section 6.2: (i) the Chief Compliance Officer; (ii) the Chief Information Security Officer; and (iii) the Independent Auditor. Notwithstanding anything to the contrary, the Operating Committee, by Supermajority Vote, shall approve any appointment or removal of the Chief Compliance Officer, the Chief Information Security Officer, or the Independent Auditor.

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(c) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement policies, procedures, and control structures related to the CAT System that are consistent with SEC Rule 613(e)(4), Appendix C, and Appendix D.

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(d) The Plan Processor shall:

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(i) comply with applicable provisions of 15 U.S.C. § 78u-6 (Securities Whistleblower Incentives and Protection) and the recordkeeping requirements of SEC Rule 613(e)(8);

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(ii) consistent with Appendix D, Central Repository Requirements, ensure the effective management and operation of the Central Repository;

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(iii) consistent with Appendix D, Data Management, ensure the accuracy of the consolidation of the CAT Data reported to the Central Repository pursuant to Section 6.3 and Section 6.4; and

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(iv) consistent with Appendix D, Upgrade Process and Development of New Functionality, design and implement appropriate policies and procedures governing the determination to develop new functionality for the CAT including, among other requirements, a mechanism by which changes can be suggested by Advisory Committee members, Participants, or the SEC. Such policies and procedures also shall: (A) provide for the escalation of reviews of proposed technological changes and upgrades (including as required by Section 6.1(i) and Section 6.1(j) or as otherwise appropriate) to the Operating Committee; and (B) address the handling of surveillance, including coordinated, SEC Rule 17d-2 or Regulatory Service Agreement(s) (“RSA”) surveillance queries and requests for data.

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(e) Any policy, procedure or standard (and any material modification or amendment thereto) applicable primarily to the performance of the Plan Processor’s duties as the Plan Processor (excluding, for the avoidance of doubt, any policies, procedures or standards generally applicable to the Plan Processor’s operations and employees) shall become effective only upon approval thereof by the Operating Committee.

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(f) The Plan Processor shall, subject to the prior approval of the Operating Committee, establish appropriate procedures for escalation of matters to the Operating Committee.

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(g) In addition to other policies, procedures and standards generally applicable to the Plan Processor’s employees and contractors, the Plan Processor shall have hiring standards and shall conduct and enforce background checks (e.g., fingerprint-based) for all of its employees and contractors to ensure the protection, safeguarding and security of the facilities, systems, networks, equipment and data of the CAT System, and shall have an insider and external threat policy to detect, monitor and remedy cyber and other threats. Each Participant will also conduct background checks of its employees and contractors that will use the CAT System.

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(h) The Plan Processor shall enter into appropriate Service Level Agreements (“SLAs”) governing the performance of the Central Repository, as generally described in Appendix D, Functionality of the CAT System, with the prior approval of the Operating Committee. The Plan Processor in conjunction with the Operating Committee shall regularly review and, as necessary, update the SLAs, in accordance with the terms of the SLAs. As further contemplated in Appendix C, System Service Level Agreements (SLAs), and in Appendix D, System SLAs, the Plan Processor may enter into appropriate service level agreements with third parties applicable to the Plan Processor’s functions related to the CAT System (“Other SLAs”), with the prior approval of the Operating Committee. The Chief Compliance Officer and/or the Independent Auditor shall, in conjunction with the Plan Processor and, as necessary, the Operating Committee, regularly review and, as necessary, update the Other SLAs, in accordance with the terms of the applicable Other SLA.

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(i) The Plan Processor shall, on an ongoing basis and consistent with any applicable policies and procedures, evaluate and implement potential system changes and upgrades to maintain and improve the normal day-to-day operating function of the CAT System.

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(j) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis and consistent with any applicable operational and escalation policies and procedures, implement such material system changes and upgrades as may be required to ensure effective functioning of the CAT System (i.e., those system changes and upgrades beyond the scope contemplated by Section 6.1(i)).

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(k) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis, implement system changes and upgrades to the CAT System to ensure compliance with any applicable laws, regulations or rules (including those promulgated by the SEC or any Participant).

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(l) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a securities trading policy, as well as necessary procedures, control structures and tools to enforce this policy. The securities trading policy shall include:

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(i) the category(ies) of employees, and as appropriate, contractors, of the Plan Processor to whom the policy will apply;

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(ii) the scope of securities that are allowed or not allowed for trading;

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(iii) the creation and maintenance of restricted trading lists;

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(iv) a mechanism for declaring new or open account activity;

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(v) a comprehensive list of any exclusions to the policy (e.g., blind trust, non-discretionary accounts);

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(vi) requirements for duplicative records to be received by the Plan Processor for periodic review; and

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(vii) a mechanism to review employee trading accounts.

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(m) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a training program that addresses the security and confidentiality of all information accessible from the CAT, as well as the operational risks associated with accessing the Central Repository. The training program will be made available to all individuals who have access to the Central Repository on behalf of the Participants or the SEC, prior to such individuals being granted access to the Central Repository.

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(n) The Operating Committee will review the Plan Processor’s performance under this Agreement at least once each year, or more often than once each year upon the request of two Participants that are not Affiliated Participants. The Operating Committee shall notify the SEC of any determination made by the Operating Committee concerning the continuing engagement of the Plan Processor as a result of the Operating Committee’s review of the Plan Processor and shall provide the SEC with a copy of any reports that may be prepared in connection therewith.

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(o) The Plan Processor shall provide the Operating Committee regular reports on the CAT System’s operation and maintenance. The reports shall address:

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(i) operational performance management information regarding the capacity and performance of the CAT System as specified by the Operating Committee. Such reports shall at a minimum address:

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(A) the capacity and performance of the Central Repository, including at a minimum the requirements set forth in Appendix D, Central Repository Requirements;

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(B) the basic functionality of the CAT System, including the functions set forth in Appendix D, Functionality of the CAT System.

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(ii) data security issues for the Plan Processor and the Central Repository taking into account the data security requirements set forth in Appendix D, Data Security;

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(iii) Participant usage statistics for the Plan Processor and the Central Repository, including capacity planning studies and daily reports called for by Appendix D, Capacity Requirements, as well as business continuity planning and disaster recovery issues for the Plan Processor and the Central Repository, taking into account the business continuity planning and disaster recovery requirements set forth in Appendix D, BCP / DR Process;

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(iv) system improvement issues with the Plan Processor and the Central Repository as contemplated by Appendix D, Upgrade Process and Development of New Functionality;

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(v) Error Rates relating to the Central Repository,1 including, in each case to the extent the Operating Committee determines necessary or advisable, Error Rates by day and by delta over time, and Compliance Thresholds by CAT Reporter, by Reportable Event, by age before resolution, by symbol, by symbol type (e.g., ETF and Index) and by event time (by hour and cumulative on the hour) as set forth in Appendix C, Error Communication, Correction, and Processing;

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(vi) financial statements of the Plan Processor prepared in accordance with GAAP (A) audited by an independent public accounting firm or (B) certified by the Plan Processor’s Chief Financial Officer (which financial statements contemplated by this Section 6.1(o)(vi) shall be provided no later than 180 days after the Plan Processor’s fiscal year end);

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(vii) continued solvency of the Plan Processor;

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(viii) budgetary status of any items subject to Section 6.2(a)(ii);

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(ix) internal audit analysis and the status of any internal audit related deliverables; and

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(x) additional items as requested by the Operating Committee, any Officer of the Company, or the Independent Auditor.

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(p) Upon the request of the Operating Committee or any Subcommittee, the Plan Processor shall attend any meeting of the Operating Committee or such Subcommittee.

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(q) The Operating Committee, by Supermajority Vote, may remove the Plan Processor from such position at any time.

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(r) The Operating Committee may, by Majority Vote, remove the Plan Processor from such position at any time if it determines that the Plan Processor has failed to perform its functions in a reasonably acceptable manner in accordance with the provisions of this Agreement or that the Plan Processor’s expenses have become excessive and are not justified. In making such determination, the Operating Committee shall consider, among other factors: (i) the reasonableness of the Plan Processor’s response to requests from Participants or the Company for technological changes or enhancements; (ii) results of any assessments performed pursuant to Section 6.6; (iii) the timeliness of conducting preventative and corrective information technology system maintenance for reliable and secure operations; (iv) compliance with requirements of Appendix D; and (v) such other factors related to experience, technological capability, quality and reliability of service, costs, back-up facilities, failure to meet service level agreement(s) and regulatory considerations as the Operating Committee may determine to be appropriate.

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(s) The Plan Processor may resign from such position; provided that no such resignation shall be effective earlier than two (2) years (or such other shorter period as may be determined by the Operating Committee by Supermajority Vote) after the Plan Processor provides written notice of such resignation to the Company.

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(t) The Operating Committee, by Supermajority Vote, shall fill any vacancy in the Plan Processor position, and shall establish a Plan Processor Selection Subcommittee in accordance with Section 4.12 to evaluate and review Bids and make a recommendation to the Operating Committee with respect to the selection of the successor Plan Processor. Any successor Plan Processor appointed pursuant to this Section 6.1(t) shall be subject to all the terms and conditions of this Agreement applicable to the Plan Processor commencing from such appointment effective date.

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(u) The Plan Processor shall afford to Participants and the Commission such access to the Representatives of the Plan Processor as any Participant or the Commission may request solely for the purpose of performing such Person’s regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations or any contractual obligations, and shall direct such Representatives to cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of any Participant or the Commission related to such purpose.

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pubdate: N/A effdate: N/A -

Section 6.2. Chief Compliance Officer and Chief Information Security Officer.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Chief Compliance Officer and Chief Information Security Officer - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Duties, - Compensation, - -

(a) Chief Compliance Officer.

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(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Compliance Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Compliance Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Compliance Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Compliance Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Compliance Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Compliance Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Compliance Officer if the Chief Compliance Officer’s employment with the Plan Processor terminates or the Chief Compliance Officer is otherwise unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(a)(i) to the SEC.

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(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Compliance Officer has appropriate resources to fulfill the obligations of the Chief Compliance Officer set forth in SEC Rule 613 and in this Agreement.

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(iii) In respect of all duties and responsibilities of the Chief Compliance Officer in such capacity (including those set forth in this Agreement), the Chief Compliance Officer shall be directly responsible and shall directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

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(iv) The compensation (including base salary and bonus) of the Chief Compliance Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Compliance Officer’s annual performance review.

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(v) The Chief Compliance Officer shall:

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(A) regularly review the operation of the Central Repository to ensure its continued effectiveness based on market and technological developments and consistent with Appendix D, Upgrade Process and Development of New Functionality, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed;

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(B) identify and assist the Company in retaining an appropriately qualified independent auditor of national recognition (subject to the approval of the Operating Committee by Supermajority Vote, the “Independent Auditor”) and, in collaboration with such Independent Auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee) which shall at a minimum include a review of all Plan Processor policies, procedures and control structures;

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(C) in collaboration with the Chief Information Security Officer, and consistent with Appendix D, Data Security, and any other applicable requirements related to data security, Customer Account Information and Customer Identifying Information, identify and assist the Company in retaining an appropriately qualified independent auditor (based on specialized technical expertise, which may be the Independent Auditor or subject to the approval of the Operating Company by Supermajority Vote, another appropriately qualified independent auditor), and in collaboration with such independent auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee), which shall at a minimum include a review of all Plan Processor policies, procedures and control structures, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository;

-

(D) have the ability to hire or retain adequate resources as needed (e.g., advisors and counsel) to fulfill its obligations;

-

(E) perform reviews with respect to the matters referenced in Section 4.12(b) and report periodically, and on an as needed basis, to the Operating Committee concerning the findings of any such reviews;

-

(F) report to the Operating Committee and conduct any relevant review of the Plan Processor or the Central Repository requested by the Operating Committee, including directing internal or external auditors, as appropriate, to support any such review;

-

(G) perform and provide the regular written assessment to the SEC required by Section 6.6 and SEC Rule 613;

-

(H) regularly review the information security program developed and maintained by the Plan Processor pursuant to Section 6.12 and determine the frequency of such reviews;

-

(I) report in a timely manner to the Operating Committee any instances of non-compliance by the Plan Processor with any of the Central Repository’s policies or procedures with respect to information security;

-

(J) conduct regular monitoring of the CAT System for compliance by each Participant and each Industry Member with SEC Rule 613, this Agreement and Appendix D, Reporting and Linkage Requirements, and provide the results: (1) with regard to Industry Members, to each Participant with oversight of such Industry Member or to such Participant’s agent pursuant to a regulatory services agreement, or to the Participant responsible for enforcing compliance by such Industry Member pursuant to an agreement entered into by the applicable Participant pursuant to SEC Rule 17d-2; and (2) with regard to each Participant, to the chief regulatory officer or equivalent of such Participant;

-

(K) develop a mechanism to conduct regular monitoring of the CAT System for compliance by each Participant with SEC Rule 613, this Agreement, and Appendix D, Reporting and Linkage Requirements;

-

(L) develop and implement a notification and escalation process to resolve and remediate any alleged noncompliance by a Participant or Industry Member with the rules of the CAT, which process will include appropriate notification and order of escalation to a Participant, the Operating Committee, or the Commission;

-

(M) develop and conduct an annual assessment of Business Clock synchronization as specified in Section 6.8(c);

-

(N) have access to Plan Processor staff and documentation as appropriate to fulfill its obligations;

-

(O) have access to the Operating Committee, including attending all regular, special and emergency meetings of the Operating Committee as a non-voting observer; provided, however, that the Chief Compliance Officer shall not have the right to attend any Executive Session that the Operating Committee may hold;

-

(P) work on a more regular and frequent basis with the Compliance Subcommittee or other Subcommittee as may be determined by the Operating Committee; and

-

(Q) oversee the Plan Processor’s compliance with applicable laws, rules and regulations related to the CAT System, in its capacity as Plan Processor.

-

(b) Chief Information Security Officer.

-

(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Information Security Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Information Security Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Information Security Officer if the employee then serving as the Chief Information Security Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Information Security Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Information Security Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Information Security Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Information Security Officer if the employee then serving as Chief Information Security Officer becomes unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Information Security Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Information Security Officer if the Chief Information Security Officer’s employment with the Plan Processor terminates or the Chief Information Security Officer is otherwise unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(b)(i) to the SEC.

-

(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Information Security Officer has appropriate resources to fulfill the obligations of the Chief Information Security Officer set forth in SEC Rule 613 and in this Agreement, including providing appropriate responses to questions posed by the Participants and the SEC.

-

(iii) In respect of all duties and responsibilities of the Chief Information Security Officer in such capacity (including those set forth in this Agreement), the Chief Information Security Officer shall be directly responsible and directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

-

(iv) The compensation (including base salary and bonus) of the Chief Information Security Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Information Security Officer’s annual performance review.

-

(v) Consistent with Appendices C and D, the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, and control structures to monitor and address data security issues for the Plan Processor and the Central Repository including:

-

(A) data security, including the standards set forth in Appendix D, Data Security;

-

(B) connectivity and data transfer, including the standards set forth in Appendix D, Connectivity and Data Transfer;

-

(C) data encryption, including the standards set forth in Appendix D, Data Encryption;

-

(D) data storage and environment, including the standards set forth in Appendix D, Data Storage and Environment;

-

(E) data access and breach management, including the standards set forth in Appendix D, Data Access, and Appendix D, Breach Management;

-

(F) PII data requirements, including the standards set forth in Appendix D, PII Data Requirements;

-

(G) industry standards, including the standards set forth in Appendix D, Industry Standards; and

-

(H) penetration test reviews, which shall occur at least every year or earlier, or at the request of the Operating Committee, set forth in Appendix D, Data Storage and Environment.

-

(vi) At regular intervals, to the extent that such information is available to the Company, the Chief Information Security Officer shall report to the Operating Committee the activities of the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) or other comparable body.

-

(vii) The Chief Information Security Officer shall review the information security policies and procedures of the Participants that are related to the CAT to ensure that such policies and procedures are comparable to the information security policies and procedures applicable to the Central Repository. If the Chief Information Security Officer, in consultation with the Chief Compliance Officer, finds that any such policies and procedures are not comparable to the policies and procedures applicable to the CAT System, and the issue is not promptly addressed by the applicable Participant, the Chief Information Security Officer, in consultation with the Chief Compliance Officer, will be required to notify the Operating Committee of such deficiencies.

-
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pubdate: N/A effdate: N/A -

Section 6.3. Data Recording and Reporting by Participants.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Recording and Reporting by Participants - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Format, - Recording, - Reporting, - Applicable Securities, - Participant Data, - CAT-Reporter-ID, - Transmission, - -

This Section 6.3 shall become effective on the first anniversary of the Effective Date and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

-

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall report Participant Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

-

(b) Timing of Recording and Reporting.

-

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall record Participant Data contemporaneously with the applicable Reportable Event.

-

(ii) Each Participant shall report Participant Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Participant records such Participant Data. A Participant may voluntarily report Participant Data prior to the 8:00 a.m. Eastern Time deadline.

-

(c) Applicable Securities.

-

(i) Each Participant that is a national securities exchange shall report Participant Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

-

(ii) Each Participant that is a national securities association shall report Participant Data for each Eligible Security for which transaction reports are required to be submitted to such association.

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(d) Participant Data. Subject to Section 6.3(c), and Appendix D, Reporting and Linkage Requirements, and in accordance with the Technical Specifications, each Participant shall record and electronically report to the Central Repository the following details for each order and each Reportable Event, as applicable (“Participant Data”):

-

(i) for original receipt or origination of an order:

-

(A) Firm Designated ID(s) for each Customer;

-

(B) CAT-Order-ID;

-

(C) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order;

-

(D) date of order receipt or origination;

-

(E) time of order receipt or origination (using timestamps pursuant to Section 6.8); and

-

(F) Material Terms of the Order;

-

(ii) for the routing of an order:

-

(A) CAT-Order-ID;

-

(B) date on which the order is routed;

-

(C) time at which the order is routed (using timestamps pursuant to Section 6.8);

-

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order;

-

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed;

-

(F) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed; and

-

(G) Material Terms of the Order;

-

(iii) for the receipt of an order that has been routed, the following information:

-

(A) CAT-Order-ID;

-

(B) date on which the order is received;

-

(C) time at which the order is received (using timestamps pursuant to Section 6.8);

-

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant receiving the order;

-

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; and

-

(F) Material Terms of the Order;

-

(iv) if the order is modified or cancelled:

-

(A) CAT-Order-ID;

-

(B) date the modification or cancellation is received or originated;

-

(C) time at which the modification or cancellation is received or originated (using timestamps pursuant to Section 6.8);

-

(D) price and remaining size of the order, if modified;

-

(E) other changes in the Material Terms of the Order, if modified; and

-

(F) whether the modification or cancellation instruction was given by the Customer or was initiated by the Industry Member or Participant;

-

(v) if the order is executed, in whole or in part:

-

(A) CAT-Order-ID;

-

(B) date of execution;

-

(C) time of execution (using timestamps pursuant to Section 6.8);

-

(D) execution capacity (principal, agency or riskless principal);

-

(E) execution price and size;

-

(F) SRO-Assigned Market Participant Identifier of the Participant or Industry Member executing the order;

-

(G) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information; and

-

(vi) other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

-

(e) CAT-Reporter-ID.

-

(i) Each Participant must submit to the Central Repository, on a daily basis,

-

(A) all SRO-Assigned Market Participant Identifiers used by its Industry Members or itself; and

-

(B) information to identify (1) each such Industry Member, including CRD number and LEI if such LEI has been obtained, and itself, including LEI, if such LEI has been obtained.

-

(ii) The Plan Processor will use the SRO-Assigned Market Participant Identifiers and identifying information to assign a CAT-Reporter-ID to each Industry Member or Participant for internal use across all CAT Data in the Central Repository.

-

(f) Means of Transmission. As contemplated in Appendix D, each Participant may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Participant Data to the Central Repository.

-
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pubdate: N/A effdate: N/A -

Section 6.4. Data Reporting and Recording by Industry Members.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Reporting and Recording by Industry Members - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Format, - Recording, - Reporting, - Applicable Securities, - Industry Member Data, - Transmission, - -

The requirements for Industry Members under this Section 6.4 shall become effective on the second anniversary of the Effective Date in the case of Industry Members other than Small Industry Members, or the third anniversary of the Effective Date in the case of Small Industry Members, and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

-

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall, through its Compliance Rule, require its Industry Members to report Industry Member Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

-

(b) Timing of Recording and Reporting.

-

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to record Recorded Industry Member Data contemporaneously with the applicable Reportable Event.

-

(ii) Consistent with Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to report: (A) Recorded Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member records such Recorded Industry Member Data; and (B) Received Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such Received Industry Member Data. Each Participant shall, through its Compliance Rule, permit its Industry Members to voluntarily report Industry Member Data prior to the applicable 8:00 a.m. Eastern Time deadline.

-

(c) Applicable Securities.

-

(i) Each Participant that is a national securities exchange shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

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(ii) Each Participant that is a national securities association shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each Eligible Security for which transaction reports are required to be submitted to such association.

-

(d) Required Industry Member Data.

-

(i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and electronically report to the Central Repository for each order and each Reportable Event the information referred to in Section 6.3(d), as applicable (“Recorded Industry Member Data”).

-

(ii) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository the following, as applicable (“Received Industry Member Data” and collectively with the information referred to in Section 6.4(d)(i) “Industry Member Data”):

-

(A) if the order is executed, in whole or in part:

-

(1) An Allocation Report;

-

(2) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and

-

(3) CAT-Order-ID of any contra-side order(s);

-

(B) if the trade is cancelled, a cancelled trade indicator; and

-

(C) for original receipt or origination of an order, the Firm Designated ID for the relevant Customer, and in accordance with Section 6.4(d)(iv), Customer Account Information and Customer Identifying Information for the relevant Customer.

-

(iii) With respect to the reporting obligations of an Options Market Maker with regard to its quotes in Listed Options, Reportable Events required pursuant to Section 6.3(d)(ii) and (iv) shall be reported to the Central Repository by an Options Exchange in lieu of the reporting of such information by the Options Market Maker. Each Participant that is an Options Exchange shall, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, any subsequent quote modifications and/or cancellation time when such modification or cancellation is originated by the Options Market Maker). Such time information also shall be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.

-

(iv) Each Industry Member must submit an initial set of the Customer information required in Section 6.4(d)(ii)(C) for Active Accounts to the Central Repository upon the Industry Member’s commencement of reporting to the Central Repository. Each Industry Member must submit to the Central Repository any updates, additions or other changes to the Customer information required in Section 6.4(d)(ii)(C) on a daily basis for all Active Accounts. In addition, on a periodic basis as designated by the Plan Processor and approved by the Operating Committee, each Industry Member will be required to submit to the Central Repository a complete set of all Customer information required in Section 6.4(d)(ii)(C). The Plan Processor will correlate such Customer information across all Industry Members, use it to assign a Customer-ID for each Customer, and use the Customer-ID to link all Reportable Events associated with an order for a Customer.

-

(v) Each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

-

(vi) Each Industry Member must submit to the Central Repository information sufficient to identify such Industry Member, including CRD number and LEI, if such LEI has been obtained.

-

(e) Means of Transmission. As contemplated in Appendix D, Data Types and Sources, each Industry Member may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Industry Member Data to the Central Repository.

-
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pubdate: N/A effdate: N/A -

Section 6.5. Central Repository.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Central Repository - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Collection, - Retention, - Access, - Accuracy, - Confidentiality, - Confidentiality Policies, - -

(a) Collection of Data.

-

(i) The Central Repository, under the oversight of the Plan Processor, and consistent with Appendix D, Central Repository Requirements, shall receive, consolidate, and retain all CAT Data.

-

(ii) The Central Repository shall collect (from a SIP or pursuant to an NMS Plan) and retain on a current and continuing basis, in a format compatible with the Participant Data and Industry Member Data, all data, including the following (collectively, “SIP Data”):

-

(A) information, including the size and quote condition, on quotes including the National Best Bid and National Best Offer for each NMS Security;

-

(B) Last Sale Reports and transaction reports reported pursuant to an effective transaction reporting plan filed with the SEC pursuant to, and meeting the requirements of, SEC Rules 601 and 608;

-

(C) trading halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down indicators; and

-

(D) summary data or reports described in the specifications for each of the SIPs and disseminated by the respective SIP.

-

(b) Retention of Data.

-

(i) Consistent with Appendix D, Data Retention Requirements, the Central Repository shall retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of SEC Rule 613 in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six (6) years. Such data when available to the Participant regulatory staff and the SEC shall be linked.

-

(ii) The Plan Processor shall implement and comply with the records retention policy contemplated by Section 6.1(d)(i) (as such policy is reviewed and updated periodically in accordance with Section 6.1(d)(i)).

-

(c) Access to the Central Repository

-

(i) Consistent with Appendix D, Data Access, the Plan Processor shall provide Participants and the SEC access to the Central Repository (including all systems operated by the Central Repository), and access to and use of the CAT Data stored in the Central Repository, solely for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules and regulations or any contractual obligations.

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(ii) The Plan Processor shall create and maintain a method of access to CAT Data stored in the Central Repository that includes the ability to run searches and generate reports. The method in which the CAT Data is stored in the Central Repository shall allow the ability to return results of queries that are complex in nature, including market reconstruction and the status of order books at varying time intervals.

-

(iii) The Plan Processor shall, at least annually and at such earlier time promptly following a request by the Operating Committee, certify to the Operating Committee that only Participants and the SEC have access to the Central Repository (other than access provided to any Industry Member for the purpose of correcting CAT Data previously reported to the Central Repository by such Industry Member).

-

(iv) Appendix C, The Security and Confidentiality of Information Reported to the Central Repository, and Appendix D, Data Security, describes the security and confidentiality of the CAT Data, including how access to the Central Repository is controlled.

-

(d) Data Accuracy

-

(i) The Operating Committee shall set and periodically review a maximum Error Rate for data reported to the Central Repository. The initial maximum Error Rate shall be set to 5%.

-

(ii) Consistent with Appendix D, Reporting and Linkage Requirements and Data Security, the Operating Committee shall adopt policies and procedures, including standards, requiring CAT Data reported to the Central Repository be timely, accurate, and complete, and to ensure the integrity of such CAT Data (e.g., that such CAT Data has not been altered and remains reliable). The Plan Processor shall be responsible for implementing such policies and procedures.

-

(iii) Appendix D, Receipt of Data from Reporters, describes the mechanisms and protocols for Participant Data and Industry Member Data submission for all key phases, including:

-

(A) file transmission and receipt validation;

-

(B) validation of CAT Data; and

-

(C) validation of linkages.

-

(e) Appendix D, Receipt of Data from Reporters, also describes the mechanisms and protocols for managing and handling corrections of CAT Data. The Plan Processor shall require an audit trail for corrected CAT Data in accordance with mechanisms and protocols approved by the Operating Committee.

-

(f) Data Confidentiality

-

(i) The Plan Processor shall, without limiting the obligations imposed on Participants by this Agreement and in accordance with the framework set forth in, Appendix D, Data Security, and Functionality of the CAT System, be responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository. Without limiting the foregoing, the Plan Processor shall:

-

(A) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to agree: (1) to use appropriate safeguards to ensure the confidentiality of CAT Data stored in the Central Repository; and (2) not to use CAT Data stored in the Central Repository for purposes other than surveillance and regulation in accordance with such individual’s employment duties; provided that a Participant will be permitted to use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as permitted by applicable law, rule, or regulation;

-

(B) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to execute a personal “Safeguard of Information Affidavit” in a form approved by the Operating Committee providing for personal liability for misuse of data;

-

(C) develop and maintain a comprehensive information security program with a dedicated staff for the Central Repository, consistent with Appendix D, Data Security, that employs state of the art technology, which program will be regularly reviewed by the Chief Compliance Officer and Chief Information Security Officer;

-

(D) implement and maintain a mechanism to confirm the identity of all individuals permitted to access the CAT Data stored in the Central Repository and maintain a record of all instances where such CAT Data was accessed; and

-

(E) implement and maintain appropriate policies regarding limitations on trading activities of its employees and independent contractors involved with all CAT Data consistent with Section 6.1(n).

-

(ii) Each Participant shall adopt and enforce policies and procedures that:

-

(A) implement effective information barriers between such Participant’s regulatory and non-regulatory staff with regard to access and use of CAT Data stored in the Central Repository;

-

(B) permit only persons designated by Participants to have access to the CAT Data stored in the Central Repository; and

-

(C) impose penalties for staff non-compliance with any of its or the Plan Processor’s policies or procedures with respect to information security.

-

(iii) Each Participant shall as promptly as reasonably practicable, and in any event within 24 hours, report to the Chief Compliance Officer, in accordance with the guidance provided by the Operating Committee, any instance of which such Participant becomes aware of: (A) noncompliance with the policies and procedures adopted by such Participant pursuant to Section 6.5(e)(ii); or (B) a breach of the security of the CAT.

-

(iv) The Plan Processor shall:

-

(A) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository and data maintenance by the Central Repository;

-

(B) require the establishment of secure controls for data retrieval and query reports by Participant regulatory staff; and

-

(C) otherwise provide appropriate database security for the Central Repository.

-

(v) The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine.

-

(g) Participants Confidentiality Policies and Procedures. The Participants shall establish, maintain and enforce written policies and procedures reasonably designed to (1) ensure the confidentiality of the CAT Data obtained from the Central Repository; and (2) limit the use of CAT Data obtained from the Central Repository solely for surveillance and regulatory purposes. Each Participant shall periodically review the effectiveness of the policies and procedures required by this paragraph, and take prompt action to remedy deficiencies in such policies and procedures.

-

(h) A Participant may use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as otherwise not prohibited by applicable law, rule or regulation.

-
-
pubdate: N/A effdate: N/A -

Section 6.6. Written Assessments, Audits and Reports.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Written Assessments, Audits and Reports - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Written Assessments, - Reports, - Requirement, - Content, - -

(a) One-Time Written Assessments and Reports. The Participants shall provide the SEC with the following written assessments, audits and reports:

-

(i) at least one (1) month prior to submitting a rule filing to establish initial fees for CAT Reporters, an independent audit of fees, costs, and expenses incurred by the Participants on behalf of the Company prior to the Effective Date of the Plan that will be publicly available;

-

(ii) within six (6) months of effectiveness of the Plan, an assessment of the clock synchronization standard, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and propose any appropriate amendment based on this assessment;

-

(iii) within twelve (12) months of effectiveness of the Plan, a report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into 17d-2 agreements or regulatory services agreements);

-

(iv) within 24 months of effectiveness of the Plan, a report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository;

-

(v) within 36 months of effectiveness of the Plan, an assessment of errors in the customer information submitted to the Central Repository and whether to prioritize the correction of certain data fields over others;

-

(vi) within 36 months of effectiveness of the Plan, a report on the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity; and

-

(vii) prior to the implementation of any Material Systems Change, an assessment of the projected impact of such Material Systems Change on the maximum Error Rate.

-

(b) Regular Written Assessment of the Plan Processor’s Performance.

-

(i) Requirement.

-

(A) Annually, or more frequently in connection with any review of the Plan Processor’s performance under this Agreement pursuant to Section 6.1(n), the Participants shall provide the SEC with a written assessment of the operation of the CAT that meets the requirements of SEC Rule 613, Appendix D, and this Agreement.

-

(B) The Chief Compliance Officer shall oversee the assessment contemplated by Section 6.6(b)(i)(A) and shall provide the Participants a reasonable time to review and comment upon such assessment prior to its submission to the SEC. In no case shall the written assessment be changed or amended in response to a comment by a Participant; rather, any comment by a Participant shall be provided to the SEC at the same time as the written assessment.

-

(ii) Contents of Written Assessment. The annual written assessment required by this Section 6.6 shall include:

-

(A) an evaluation of the performance of the CAT, including the items specified in SEC Rule 613(b)(6)(i) and other performance metrics identified by the Chief Compliance Officer, and a description of such metrics;

-

(B) a detailed plan, based on the evaluation conducted pursuant to Section 6.6(b)(i), for any potential improvements to the performance of the CAT with respect to the items specified in SEC Rule 613(b)(6)(ii), as well as:

-

(1) an evaluation of potential technology upgrades based on a review of technological advancements over the preceding year, drawing on technological expertise whether internal or external;

-

(2) an evaluation of the time necessary to restore and recover CAT Data at a back-up site;

-

(3) an evaluation of the information security program to ensure that the program is consistent with the highest industry standards for the protection of data;

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(4) an evaluation of how the Plan Processor and the Participants are monitoring Error Rates and to explore the imposition of Error Rates based on product, data elements or other criteria;

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(5) a copy of the evaluation required by Section 6.8(c) as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments;

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(6) an assessment of whether any data elements should be added, deleted or changed; and

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(7) any other items identified and described by the Chief Compliance Officer;

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(C) an estimate of the costs and benefits associated with any potential improvements to the performance of the CAT, including an assessment of the potential impact on competition, efficiency, capital formation, and investor protection; and

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(D) an estimated implementation timeline for any potential improvements to the performance of the CAT, if applicable.

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pubdate: N/A effdate: N/A -

Section 6.7. Implementation.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Implementation - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Effectivity, - -

(a) Unless otherwise ordered by the SEC:

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(i) within two (2) months after the Effective Date, the Participants shall jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Article V. Following the selection of the Initial Plan Processor, the Participants shall file with the Commission a statement identifying the Plan Processor and including the information required by SEC Rule 608;

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(ii) within four (4) months after the Effective Date, each Participant shall, and through its Compliance Rule shall require its Industry Members to, synchronize its or their Business Clocks as required by Section 6.8 and certify to the Chief Compliance Officer (in the case of Participants) or the applicable Participant (in the case of Industry Members) that such Participant has met this requirement;

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(iii) within one (1) year after the Effective Date, each Participant shall report to the Central Repository Participant Data;

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(iv) within fourteen (14) months after the Effective Date, each Participant shall implement a new or enhanced surveillance system(s) in accordance with Section 6.10;

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(v) within two (2) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Industry Members (other than Small Industry Members) to report to the Central Repository Industry Member Data; and

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(vi) within three (3) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Small Industry Members to report to the Central Repository Industry Member Data.

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(b) The Chief Compliance Officer shall appropriately document objective milestones to assess progress toward the implementation of this Agreement.

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(c) Industry Members and Participants shall be required to participate in testing with the Central Repository on a schedule to be determined by the Operating Committee.

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(d) Appendix C, A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth additional implementation details concerning the elimination of rules and systems.

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Section 6.8. Timestamps and Synchronization of Business Clocks.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Timestamps and Synchronization of Business Clocks - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Business Clock, - Compliance Rule, - -

(a) Each Participant shall:

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(i) other than such Business Clocks used solely for Manual Order Events, synchronize its Business Clocks at a minimum to within 100 microseconds of the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

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(ii) other than such Business Clocks used solely for Manual Order Events or the time of allocation on Allocation Reports, through its Compliance Rule, require its Industry Members to:

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(A) synchronize their respective Business Clocks at a minimum to within fifty (50) milliseconds of the time maintained by the National Institute of Standards and Technology, and maintain such a synchronization;

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(B) certify periodically (according to a schedule to be defined by the Operating Committee) that their Business Clocks meet the requirements of the Compliance Rule;

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(C) and report to the Plan Processor and the Participant any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee; and

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(iii) synchronize its Business Clocks and, through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for Manual Order Events meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for Manual Order Events to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

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(iv) through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for the time of allocation on Allocation Reports meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for the time of allocation on Allocation Reports to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

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(b) Each Participant shall, and through its Compliance Rule shall require its Industry Members to, report information required by SEC Rule 613 and this Agreement to the Central Repository in milliseconds. To the extent that any Participant’s order handling or execution systems utilize timestamps in increments finer than the minimum required in this Agreement, such Participant shall utilize such finer increment when reporting CAT Data to the Central Repository so that all Reportable Events reported to the Central Repository can be adequately sequenced. Each Participant shall, through its Compliance Rule: (i) require that, to the extent that its Industry Members utilize timestamps in increments finer than the minimum required in this Agreement in their order handling or execution systems, such Industry Members shall utilize such finer increment when reporting CAT Data to the Central Repository; and (ii) provide that a pattern or practice of reporting events outside of the required clock synchronization time period without reasonable justification or exceptional circumstances may be considered a violation of SEC Rule 613 and the CAT NMS Plan. Notwithstanding the preceding sentences, each Participant and Industry Member shall be permitted to record and report: (i) Manual Order Events to the Central Repository in increments up to and including one second, provided that Participants and Industry Members shall be required to record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Participant or Industry Member (“Electronic Capture Time”) in milliseconds; and (ii) the time of allocation on Allocation Reports in increments up to and including one second.

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(c) In conjunction with Participants’ and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate and make a recommendation to the Operating Committee as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments. Industry standards should be determined based on the type of CAT Reporter, Industry Member and type of system.

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pubdate: N/A effdate: N/A -

Section 6.9. Technical Specifications.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Technical Specifications - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Publication, - Content, - Amendments, - -

(a) Publication. The Plan Processor shall publish technical specifications that are at a minimum consistent with Appendices C and D, and updates thereto as needed, providing detailed instructions regarding the submission of CAT Data by Participants and Industry Members to the Plan Processor for entry into the Central Repository (collectively, the “Technical Specifications”). The Technical Specifications shall be made available on a publicly available web site to be developed and maintained by the Plan Processor. The initial Technical Specifications and any Material Amendments thereto shall be provided to the Operating Committee for approval by Supermajority Vote.

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(b) Content. The Technical Specifications shall include a detailed description of the following:

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(i) the specifications for the layout of files and records submitted to the Central Repository;

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(ii) the process for the release of new data format specification changes;

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(iii) the process for industry testing for any changes to data format specifications;

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(iv) the procedures for obtaining feedback about and submitting corrections to information submitted to the Central Repository;

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(v) each data element, including permitted values, in any type of report submitted to the Central Repository;

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(vi) any error messages generated by the Plan Processor in the course of validating the data;

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(vii) the process for file submissions (and re-submissions for corrected files);

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(viii) the storage and access requirements for all files submitted;

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(ix) metadata requirements for all files submitted to the CAT System;

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(x) any required secure network connectivity;

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(xi) data security standards, which shall, at a minimum: (A) satisfy all applicable regulations regarding database security, including provisions of Regulation Systems Compliance and Integrity under the Exchange Act (“Reg SCI”); (B) to the extent not otherwise provided for under this Agreement (including Appendix C hereto), set forth such provisions as may be necessary or appropriate to comply with SEC Rule 613(e)(4); and (C) comply with industry best practices; and

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(xii) any other items reasonably deemed appropriate by the Plan Processor and approved by the Operating Committee.

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(c) Amendments. Amendments to the Technical Specifications may be made only in accordance with this Section 6.9(c). For purposes of this Section 6.9(c), an amendment to the Technical Specifications shall be deemed “material” if it would require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to this Agreement or if it is required to safeguard the security or confidentiality of the CAT Data (“Material Amendment”).

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(i) Except for Material Amendments to the Technical Specifications, the Plan Processor shall have the sole discretion to amend and publish interpretations regarding the Technical Specifications as needed in furtherance of the purposes and requirements of this Agreement. All non-Material Amendments made to the Technical Specifications and all published interpretations shall be provided to the Operating Committee in writing at least ten (10) days before being published. Such non-Material Amendments and published interpretations shall be deemed approved ten (10) days following provision to the Operating Committee unless two (2) unaffiliated Participants call for a vote to be taken on the proposed amendment or interpretation. If an amendment or interpretation is called out for a vote by two or more unaffiliated Participants, the proposed amendment must be approved by Majority Vote of the Operating Committee. Once a non-Material amendment has been approved, or deemed approved, by the Operating Committee, the Plan Processor shall be responsible for determining the specific changes to the Central Repository and providing technical documentation of those changes, including an implementation timeline.

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(ii) The Operating Committee, by Supermajority Vote, shall approve any Material Amendments to the Technical Specifications.

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(iii) The Operating Committee, by Supermajority Vote, may amend the Technical Specifications on its own motion.

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pubdate: N/A effdate: N/A -

Section 6.10. Surveillance.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Surveillance - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - System, - Appendix D, - Coordinated Surveillance, - CAT Data, - -

(a) Surveillance Systems. Using the tools provided for in Appendix D, Functionality of the CAT System, each Participant shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the Central Repository. Unless otherwise ordered by the SEC, within fourteen (14) months after the Effective Date, each Participant shall initially implement a new or enhanced surveillance system(s) as required by SEC Rule 613 and the preceding sentence.

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(b) Coordinated Surveillance. Participants may, but are not required to, coordinate or share surveillance efforts through the use of regulatory services agreements and agreements adopted pursuant to SEC Rule 17d-2.

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(c) Use of CAT Data by Regulators.

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(i) Consistent with Appendix D, Functionality of the CAT System, the Plan Processor shall provide Participants and the SEC with access to all CAT Data stored in the Central Repository. Regulators will have access to processed CAT Data through two different methods; an online targeted query tool, and user-defined direct queries and bulk extracts.

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(A) The online targeted query tool will provide authorized users with the ability to retrieve CAT Data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields.

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(B) The user-defined direct queries and bulk extracts will provide authorized users with the ability to retrieve CAT Data via a query tool or language that allows users to query all available attributes and data sources.

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(ii) Extraction of CAT Data shall be consistent with all permission rights granted by the Plan Processor. All CAT Data returned shall be encrypted, and PII data shall be masked unless users have permission to view the CAT Data that has been requested.

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(iii) The Plan Processor shall implement an automated mechanism to monitor direct query usage. Such monitoring shall include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or CAT Data extractions. The Plan Processor shall provide the Operating Committee or its designee(s) details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

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(iv) The Plan Processor shall reasonably assist regulatory staff (including those of Participants) with creating queries.

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(v) Without limiting the manner in which regulatory staff (including those of Participants) may submit queries, the Plan Processor shall submit queries on behalf of a regulatory staff (including those of Participants) as reasonably requested.

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(vi) The Plan Processor shall staff a CAT help desk, as described in Appendix D, CAT Help Desk, to provide technical expertise to assist regulatory staff (including those of Participants) with questions about the content and structure of the CAT Data.

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pubdate: N/A effdate: N/A -

Section 6.11. Debt Securities and Primary Market Transactions.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Debt Securities and Primary Market Transactions - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Market Transactions, - Reportable Event, - -

Unless otherwise ordered by the Commission, within six (6) months after the Effective Date, the Participants shall jointly provide to the SEC a document outlining how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including Primary Market Transactions in securities that are not NMS Securities or OTC Equity Securities and in debt securities, which document shall include details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate.

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pubdate: N/A effdate: N/A -

Section 6.12. Information Security Program.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Information Security Program - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Program, - Central Repository, - -

The Plan Processor shall develop and maintain a comprehensive information security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee, and which contains at a minimum the specific requirements detailed in Appendix D, Data Security.

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pubdate: N/A effdate: N/A -

ARTICLE VII INTENTIONALLY OMITTED

- Topic: CAT NMS Plan, Article VII - Intentionally Omitted - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
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pubdate: N/A effdate: N/A -

ARTICLE VIII TAX STATUS

- Topic: CAT NMS Plan, Article VIII - Tax Status - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Internal Revenue Service, - Filing, - Business League, - -

The Company intends to operate in a manner such that it qualifies as a “business league” within the meaning of Section 501(c)(6) of the Code. The Operating Committee shall cause the Company to: (i) make an election to be treated as a corporation for U.S. federal income tax purposes by filing Form 8832 with the Internal Revenue Service effective as of the date of formation and (ii) file with the Internal Revenue Service, Form 1024, Application for Recognition of Exemption under Section 501(a) to be treated as a “business league” as described in Section 501(c)(6) of the Code.

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pubdate: N/A effdate: N/A -

ARTICLE IX RECORDS AND ACCOUNTING; REPORTS

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
pubdate: N/A effdate: N/A -

Section 9.1. Books and Records.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Books and Records - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Records, - Information, - Ownership of Records, - -

The Company shall maintain complete and accurate books and records of the Company in accordance with SEC Rule 17a-1, which shall be maintained and be available, in addition to any documents and information required to be furnished to the Participants under the Act, at the office of the Plan Processor and/or such other location(s) as may be designated by the Company for examination and copying by any Participant or its duly authorized representative, at such Participant’s reasonable request and at its expense during ordinary business hours for any purpose reasonably related to such Participant’s involvement with the CAT NMS Plan, including for compliance and other regulatory purposes, and in compliance with such other conditions as may be reasonably established by the Operating Committee. For the avoidance of doubt, all CAT Data and other books and records of the Company shall be the property of the Company, rather than the Plan Processor, and, to the extent in the possession or control of the Plan Processor, shall be made available by the Plan Processor to the Commission upon request. Except as provided in this Section 9.1 or required by non-waivable provisions of applicable law, no Participant shall have any right to examine or copy any of the books and records of the Company.

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pubdate: N/A effdate: N/A -

Section 9.2. Accounting.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Accounting - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - GAAP, - Financial Statement, - Fiscal year, - -

(a) Except as provided in Section 9.3, the Operating Committee shall maintain a system of accounting established and administered in accordance with GAAP, and all financial statements or information that may be supplied to the Participants shall be prepared in accordance with GAAP (except that unaudited statements shall be subject to year-end adjustments and need not include footnotes). The Company shall prepare and provide to each Participant (1) within 30 days after the end of each calendar month, an unaudited balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, (x) such month and (y) the portion of the then current Fiscal Year ending at the end of such month; and (2) as soon as practicable after the end of each Fiscal Year, a balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, such year, audited by an independent public accounting firm (which audited balance sheet, income statement, statement of cash flows and statement of changes in equity contemplated by this Section 9.2(a) shall be made publicly available). The Fiscal Year shall be the calendar year unless otherwise determined by the Operating Committee.

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(b) In all other respects, matters concerning accounting procedures shall be determined by the Operating Committee.

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pubdate: N/A effdate: N/A -

Section 9.3. Tax Returns.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Tax Returns - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Tax, - -

The Operating Committee shall cause federal, state, provincial, and local income tax returns for the Company to be prepared and timely filed with the appropriate authorities.

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pubdate: N/A effdate: N/A -

Section 9.4. Company Funds.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Company Funds - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Funds, - Investment Policy, - -

Pending use in the business of the Company or distribution to the Participants, the funds of the Company shall be held and/or invested in accordance with the then effective cash management and investment policy adopted by the Operating Committee.

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pubdate: N/A effdate: N/A -

Section 9.5 Intentionally Omitted.

- Topic: dummy - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
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pubdate: N/A effdate: N/A -

Section 9.6. Confidentiality.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Confidentiality - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Information, - Disclosing Party, - Receiving Party, - -

(a) For purposes of this Agreement, “Information” means information disclosed by or on behalf of the Company or a Participant (the “Disclosing Party”) to the Company or any other Participant (the “Receiving Party”) in connection with this Agreement or the CAT System, but excludes any CAT Data or information otherwise disclosed pursuant to the requirements of SEC Rule 613. The Receiving Party agrees to maintain the Information in confidence with the same degree of care it holds its own confidential information (but in any event not less than reasonable care). A Receiving Party may only disclose Information to its Representatives (as defined below) on a need-to-know basis, and only to those of such Representatives whom shall have agreed to abide by the non-disclosure and non-use provisions in this Section 9.6. Each Receiving Party that is a Participant agrees that he, she or it shall not use for any purpose, other than in connection with the operation of the Company, and the Company agrees not to use for any purpose not expressly authorized by the Disclosing Party, any Information. The “Representatives” of a Person are such Person’s Affiliates and the respective directors, managers, officers, employees, consultants, advisors and agents of such Person and such Person’s Affiliates; provided, however, that a Participant is not a Representative of the Company. The obligations set forth in this Section 9.6(a) shall survive indefinitely (including after a Participant ceases to hold any Company Interest) but shall not apply to: (i) any Information that was already lawfully in the Receiving Party’s possession and, to the knowledge of the Receiving Party, free from any confidentiality obligation to the Disclosing Party at the time of receipt from the Disclosing Party; (ii) any Information that is, now or in the future, public knowledge through no act or omission in breach of this Agreement by the Receiving Party; (iii) any Information that was lawfully obtained from a third party having, to the knowledge of the Receiving Party, the right to disclose it free from any obligation of confidentiality; or (iv) any Information that was independently developed by the Receiving Party prior to disclosure to it pursuant hereto and without recourse to or reliance upon Information disclosed to it pursuant hereto as established by its written records or other competent evidence. The obligations set forth in this Section 9.6(a) shall not restrict: (x) disclosures that are, in the opinion of the Receiving Party after consultation with counsel; required to be made by applicable laws and regulations, stock market or exchange requirements or the rules of any self-regulatory organization having jurisdiction; (y) disclosures required to be made pursuant to an order, subpoena or legal process; or (z) disclosures reasonably necessary for the conduct of any litigation or arbitral proceeding among the Participants (and their respective Representatives) and/or the Company; provided that the Receiving Party shall, to the extent not prohibited by applicable law, notify the Disclosing Party prior to making any disclosure permitted by the foregoing clause (x) or clause (y), and, in the case of a disclosure permitted by the foregoing clause (y), shall consult with the Disclosing Party with respect to such disclosure, and prior to making such disclosure, to the extent not prohibited by applicable law, shall permit the Disclosing Party, at such Disclosing Party’s cost and expense, to seek a protective order or similar relief protecting the confidentiality of such Information.

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(b) The Company shall not, and shall cause its Representatives not to, disclose any Information of a Participant to any other Participant without the prior written approval of the disclosing Participant.

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(c) A Participant shall be free, in its own discretion, to share Information of such Participant to other Participants without the approval of the Company.

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ARTICLE X DISSOLUTION AND TERMINATION

- Topic: CAT NMS Plan, Article X - Dissolution and Termination - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - N/A, - -
pubdate: N/A effdate: N/A -

Section 10.1. Dissolution of Company.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Dissolution - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Dissolution, - Winding-up, - Assets, - -

The Company shall, subject to the SEC’s approval, dissolve and its assets and business shall be wound up upon the occurrence of any of the following events:

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(a) unanimous written consent of the Participants to dissolve the Company;

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(b) an event that makes it unlawful or impossible for the Company business to be continued;

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(c) the termination of one or more Participants such that there is only one remaining Participant; or

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(d) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act.

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Section 10.2. Liquidation and Distribution.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Liquidation and Distribution - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committee, - Winding-up, - Liquidation, - Assets, - Liabilities, - Obligations, - -

Following the occurrence of an event described in Section 10.1, the Operating Committee shall act as liquidating trustee and shall wind up the affairs of the Company by: (a) selling its assets in an orderly manner (so as to avoid the loss normally associated with forced sales); and (b) applying and distributing the proceeds of such sale, together with other funds held by the Company: (i) first, to the payment of all debts and liabilities of the Company; (ii) second, to the establishments of any reserves reasonably necessary to provide for any contingent recourse liabilities and obligations; and (iii) third, to such persons or institutions as is consistent with the purposes of the Company and consistent with Section 501(c)(6) of the Code.

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pubdate: N/A effdate: N/A -

Section 10.3. Termination.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Termination - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Liquidation, - Distribution of Assets, - Net profit, - Net loss, - Cessation of Participants, - -

Each of the Participants shall be furnished with a statement prepared by the Company’s independent accountants, which shall set forth the assets and liabilities of the Company as of the date of the final distribution of the Company’s assets under Section 10.2 and the net profit or net loss for the fiscal period ending on such date. Upon compliance with the distribution plan set forth in Section 10.2, the Participants shall cease to be such, and the liquidating trustee shall execute, acknowledge, and cause to be filed a certificate of cancellation of the Company. Upon completion of the dissolution, winding up, liquidation and distribution of the liquidation proceeds, the Company shall terminate.

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+

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 Thereunder,2 notice is hereby given that, on March 6, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”), filed with the Securities and Exchange Commission (the “Commission”) a proposal to amend the Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”).

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pubdate: N/A effdate: N/A -

ARTICLE XI FUNDING OF THE COMPANY

- Topic: CAT NMS Plan, Article XI - Funding of the Company - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +
pubdate: June 19, 2015 effdate: N/A +

II. Background

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Background + Compliance User: Self-Regulatory Organization Keywords: - N/A, + SRO, + Selection Plan, + CAT NMS plan, -
pubdate: N/A effdate: N/A -

Section 11.1. Funding Authority.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Authority - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Budget, - Funding, - Operating Committeee, - -

(a) On an annual basis the Operating Committee shall approve an operating budget for the Company. The budget shall include the projected costs of the Company, including the costs of developing and operating the CAT for the upcoming year, and the sources of all revenues to cover such costs, as well as the funding of any reserve that the Operating Committee reasonably deems appropriate for prudent operation of the Company.

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(b) Subject to Section 11.2, the Operating Committee shall have discretion to establish funding for the Company, including: (i) establishing fees that the Participants shall pay; and (ii) establishing fees for Industry Members that shall be implemented by Participants. The Participants shall file with the SEC under Section 19(b) of the Exchange Act any such fees on Industry Members that the Operating Committee approves, and such fees shall be labeled as “Consolidated Audit Trail Funding Fees.”

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(c) To fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. In determining fees on Participants and Industry Members the Operating Committee shall take into account fees, costs and expenses (including legal and consulting fees and expenses) incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT, and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members. Any surplus of the Company’s revenues over its expenses shall be treated as an operational reserve to offset future fees.

-

(d) Consistent with this Article XI, the Operating Committee shall adopt policies, procedures, and practices regarding the budget and budgeting process, assignment of tiers, resolution of disputes, billing and collection of fees, and other related matters. For the avoidance of doubt, as part of its regular review of fees for the CAT, the Operating Committee shall have the right to change the tier assigned to any particular Person in accordance with fee schedules previously filed with the Commission that are reasonable, equitable and not unfairly discriminatory and subject to public notice and comment, pursuant to this Article XI. Any such changes will be effective upon reasonable notice to such Person.

-
-
pubdate: N/A effdate: N/A -

Section 11.2. Funding Principles.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Principles - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committeee, - Principles, - -

In establishing the funding of the Company, the Operating Committee shall seek:

-

(a) to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company;

-

(b) to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations;

-

(c) to establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members’ non-ATS activities are based upon message traffic; and (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).

-

(d) to provide for ease of billing and other administrative functions;

-

(e) to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and

-

(f) to build financial stability to support the Company as a going concern.

-
-
pubdate: N/A effdate: N/A -

Section 11.3. Recovery.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Recovery - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committeee, - Execution Venue, - Fees, - -

(a) The Operating Committee will establish fixed fees to be payable by Execution Venues as provided in this Section 11.3(a):

-

(i) Each Execution Venue that: (A) executes transactions; or (B) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association’s market share.

-

(ii) Each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s Listed Options market share. For these purposes, market share will be calculated by contract volume.

-

(b) The Operating Committee will establish fixed fees to be payable by Industry Members, based on the message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers of fixed fees, based on message traffic. For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member.

-

(c) The Operating Committee may establish any other fees ancillary to the operation of the CAT that it reasonably determines appropriate, including fees: (i) for the late or inaccurate reporting of information to the CAT; (ii) for correcting submitted information; and (iii) based on access and use of the CAT for regulatory and oversight purposes (and not including any reporting obligations).

-

(d) The Company shall make publicly available a schedule of effective fees and charges adopted pursuant to this Agreement as in effect from time to time. The Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.

-
-
pubdate: N/A effdate: N/A -

Section 11.4. Collection of Fees.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Collection of Fees - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committeee, - Fees, - Failure to pay, - -

The Operating Committee shall establish a system for the collection of fees authorized under this Article XI. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. Alternatively, the Operating Committee may use the facilities of a clearing agency registered under Section 17A of the Exchange Act to provide for the collection of such fees. Participants shall require each Industry Member to pay all applicable fees authorized under this Article XI within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due (as determined in accordance with the preceding sentence), such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (a) the Prime Rate plus 300 basis points; or (b) the maximum rate permitted by applicable law. Each Participant shall pay all applicable fees authorized under this Article XI as required by Section 3.7(b).

-
-
pubdate: N/A effdate: N/A -

Section 11.5. Fee Disputes.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Fee Disputes - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Operating Committeee, - SEC Rule 608, - -

Disputes with respect to fees the Company charges Participants pursuant to this Article XI shall be determined by the Operating Committee or a Subcommittee designated by the Operating Committee. Decisions by the Operating Committee or such designated Subcommittee on such matters shall be binding on Participants, without prejudice to the rights of any Participant to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum. The Participants shall adopt rules requiring that disputes with respect to fees charged to Industry Members pursuant to this Article XI be determined by the Operating Committee or a Subcommittee. Decisions by the Operating Committee or Subcommittee on such matters shall be binding on Industry Members, without prejudice to the rights of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

-
+

On September 3, 2013, the SROs filed for approval the Selection Plan3 to govern how the SROs would proceed with formulating and submitting a national market system (“NMS”) plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).4 The Selection Plan sets forth the process for the SROs to review, evaluate, and narrow down the Bids submitted in response to the SROs’ request for proposals (“RFP”) for a Plan Processor to build, operate, administer, and maintain the consolidated audit trail, and ultimately for the SROs to select the Plan Processor.5 The Selection Plan was approved on February 21, 2014.6

+

The SROs now propose to amend the Selection Plan to require an SRO that is a Bidding Participant7 to be recused from voting in any round by the Selection Committee to select the Plan Processor in which a Bid from or including such Bidding Participant or its Affiliate is being considered. A copy of the proposed amendment to the Selection Plan (“Amendment No. 2”) is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments from interested persons on proposed Amendment No. 2 to the Selection Plan.

-
pubdate: N/A effdate: N/A -

ARTICLE XII MISCELLANEOUS

- Topic: CAT NMS Plan, Article XII - Miscellaneous - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +
pubdate: June 20, 2015 effdate: N/A +

III. Description of the Plan

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan + Compliance User: Self-Regulatory Organization Keywords: - N/A, + SRO, + Rule 608, + Amendment No. 2, -
pubdate: N/A effdate: N/A -

Section 12.1. Notices and Addresses.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Notices and Addresses - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Written notices, - Delivery, - Effectivity, - -

All notices required to be given under this Agreement shall be in writing and may be delivered by certified or registered mail, postage prepaid, by hand, or by any private overnight courier service. Such notices shall be mailed or delivered to the Participants at the addresses set forth on Exhibit A to this Agreement or such other address as a Participant may notify the other Participants of in writing. Any notices to be sent to the Company shall be delivered to the principal place of business of the Company or at such other address as the Operating Committee may specify in a notice sent to all of the Participants. Notices shall be effective: (i) if mailed, on the date three (3) days after the date of mailing; or (ii) if hand delivered or delivered by private courier, on the date of delivery.

-
-
pubdate: N/A effdate: N/A -

Section 12.2. Governing Law; Submission to Jurisdiction.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Governing Law; Submission to Jurisdiction - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Delaware Act, - Jurisdiction, - Rights of Participants, - -

This Agreement shall be governed by and construed in accordance with the Delaware Act and internal laws and decisions of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware; provided that the rights and obligations of the Participants, Industry Members and other Persons contracting with the Company in respect of the matters covered by this Agreement shall at all times also be subject to any applicable provisions of the Exchange Act and any rules and regulations promulgated thereunder. Each of the Company and the Participants: (a) consents to submit itself to the exclusive personal jurisdiction of the Court of Chancery of the State of Delaware, New Castle County, or, if that court does not have jurisdiction, a federal court sitting in Wilmington, Delaware in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement; (b) agrees that all claims in respect of such action or proceeding shall be heard and determined only in any such court; (c) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or any of the transaction contemplated by this Agreement in any other court. Each of the Company and the Participants waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Person with respect thereto. The Company or any Participant may make service on the Company or any other Participant by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 12.1. Nothing in this Section 12.2, however, shall affect the right of any Person to serve legal process in any other manner permitted by law.

-
-
pubdate: N/A effdate: N/A -

Section 12.3. Amendments.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Amendments - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Written Amendment, - Vote, - -

Except as provided by Section 3.3, Section 3.4, Section 3.7, and Section 5.3, this Agreement may be amended from time to time only by a written amendment authorized by the affirmative vote of not less than two-thirds of all of the Participants or with respect to Section 3.8 by the affirmative vote of all of the Participants, in each case that has been approved by the SEC pursuant to SEC Rule 608 or has otherwise become effective under SEC Rule 608. Notwithstanding the foregoing or anything else to the contrary, to the extent the SEC grants exemptive relief applicable to any provision of this Agreement, Participants and Industry Members shall be entitled to comply with such provision pursuant to the terms of the exemptive relief so granted at the time such relief is granted irrespective of whether this Agreement has been amended.

-
-
pubdate: N/A effdate: N/A -

Section 12.4. Successors and Assigns.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Successors and Assigns - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Transfer of Interest, - -

Subject to the restrictions on Transfers set forth herein, this Agreement: (a) shall be binding upon, and inure to the benefit of, the Company and the Participants, and their respective successors and permitted assigns; and (b) may not be assigned except in connection with a Transfer of Company Interests permitted hereunder.

-
-
pubdate: N/A effdate: N/A -

Section 12.5. Counterparts.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Counterparts - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Agreement, - Transmission, - -

This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. Any counterpart may be delivered by facsimile transmission or by electronic communication in portable document format (.pdf) or tagged image format (.tif), and the parties hereto agree that their electronically transmitted signatures shall have the same effect as manually transmitted signatures.

-
-
pubdate: N/A effdate: N/A -

Section 12.6. Modifications to be in Writing; Waivers.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Modifications to be in Writing; Waivers - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Written, - Adopted, - Waiver, - -

This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, and no amendment, modification or alteration shall be binding unless the same is in writing and adopted in accordance with Section 12.3. No waiver of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Person granting the waiver. No waiver by any Person of any default or breach hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default or breach or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

-
-
pubdate: N/A effdate: N/A -

Section 12.7. Captions.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Captions - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Caption, - -

The captions are inserted for convenience of reference only and shall not affect the construction of this Agreement.

-
-
pubdate: N/A effdate: N/A -

Section 12.8. Validity and Severability.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Validity and Severability - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Provisions, - Effectivity, - Enforceability, - -

If any provision of this Agreement shall be held invalid or unenforceable, that shall not affect the validity or enforceability of any other provisions of this Agreement, all of which shall remain in full force and effect. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, each of the Company and the Participants agrees that the body making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified.

-
-
pubdate: N/A effdate: N/A -

Section 12.9. Third Party Beneficiaries.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Third Party Beneficiaries - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Creditor, - Liabilities, - Rights, - -

Except to the extent provided in any separate written agreement between the Company and another Person, the provisions of this Agreement are not intended to be for the benefit of any creditor or other Person (other than a Participant in its capacity as such) to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Company or any Participants. Moreover, notwithstanding anything contained in this Agreement (but subject to the immediately following sentence), no such creditor or other Person shall obtain any rights under this Agreement or shall, by reason of this Agreement, make any claim in respect of any debt, liability or obligation (or otherwise) against the Company or any Participant. Notwithstanding the foregoing provisions of this Section 12.9, each Person entitled to indemnification under Section 4.8 that is not a party to this Agreement shall be deemed to be an express third party beneficiary of this Agreement for all purposes relating to such Person’s indemnification and exculpation rights hereunder.

-
-
pubdate: N/A effdate: N/A -

Section 12.10. Expenses.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Expenses - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Cost, - Expenses, - -

Except as may be otherwise specifically provided to the contrary in this Agreement, including in Article XI, or as may be otherwise determined by the Operating Committee, each of the Company and the Participants shall bear its own internal costs and expenses incurred in connection with this Agreement, including those incurred in connection with all periodic meetings of the Participants or the Operating Committee, and the transactions contemplated hereby.

-
-
pubdate: N/A effdate: N/A -

Section 12.11. Specific Performance.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Specific Performance - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Breach, - Court Action, - -

Each of the Company and the Participants acknowledges and agrees that one or more of them would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each such Person agrees that each other such Person may be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having jurisdiction over the Parties and the matter, in each case with no need to post bond or other security.

-
-
pubdate: N/A effdate: N/A -

Section 12.12. Waiver of Partition.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Waiver of Partition - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Properties, - Partition, - Appraisal, - -

Each Participant agrees that irreparable damage would be done to the Company if any Participant brought an action in court to partition the assets or properties of the Company. Accordingly, each Participant agrees that such Person shall not, either directly or indirectly, take any action to require partition or appraisal of the Company or of any of the assets or properties of the Company, and notwithstanding any provisions of this Agreement to the contrary, each Participant (and such Participant’s successors and permitted assigns) accepts the provisions of this Agreement as such Person’s sole entitlement on termination, dissolution and/or liquidation of the Company and hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale or other liquidation with respect to such Person’s interest, in or with respect to, any assets or properties of the Company. Each Participant agrees not to petition a court for the dissolution, termination or liquidation of the Company.

-
-
pubdate: N/A effdate: N/A -

Section 12.13. Construction.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Construction - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Interpretation, - Participants, - -

The Company and all Participants have participated jointly in negotiating and drafting this Agreement. If an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Company and all Participants, and no presumption or burden of proof shall arise favoring or disfavoring any Person by virtue of the authorship of any provision of this Agreement.

-
-
pubdate: N/A effdate: N/A -

Section 12.14. Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +

Set forth in this Section III is the statement of the purpose of Amendment No. 2 to the Selection Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,8 prepared and submitted by the SROs to the Commission.9

+
pubdate: June 21, 2015 effdate: N/A +

A. Background

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background + Compliance User: Self-Regulatory Organization Keywords: - Exhibits, - Appendices, - Attachments, - Recitals, - Schedules, - -

The Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

+ Selection Plan, + CAT NMS plan, + Bidding, + +

The Selection Plan, filed with the Commission on September 3, 2013,10 and approved on February 21, 2014,11 governs the process for Participant review and vote for Bids for the role of Plan Processor for the CAT NMS Plan.12

+

After gaining experience with the development process for the CAT NMS Plan, the Participants believe it is advisable to amend the Selection Plan to ensure that the Participants will be able to choose a Plan Processor without any potential conflict of interest raised by having a Participant vote in any round in the selection process where that Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round. The Participants propose amending the Selection Plan to require recusal of that Bidding Participant in any of those situations.

+
pubdate: June 22, 2015 effdate: N/A +

1. The Selection Plan Currently Requires Recusal on a Vote Only in the Second Round of the Selection Process

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background, The Selection Plan Currently Requires Recusal on a Vote Only in the Second Round of the Selection Process + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + Bidding Participant, + Section VI(E) Selection Plan, + +

Under the Selection Plan, a Bidding Participant is recused from a vote only in the second round of voting by the Selection Committee to select the Plan Processor (as set forth in Section VI(E)(4) of the Selection Plan) where that Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round.

+
+
pubdate: June 23, 2015 effdate: N/A +

2. Requiring Recusal on a Vote in all Rounds of the Selection Will Ensure that all Participants Voting on the Plan Processor Do Not Have any Conflict of Interest

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background, Requiring Recusal on a Vote in all Rounds of the Selection Will Ensure that all Participants Voting on the Plan Processor Do Not Have any Conflict of Interest + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + CAT NMS plan, + Participants, + +

As noted in the Selection Plan Approval Order, the Selection Plan as currently drafted balances the competing goals of ensuring all Participants participate meaningfully in the process of developing the CAT NMS Plan and mitigating potential conflicts of interest related to the involvement of Bidding Participants through information barriers and the voting limitations.13 Based on their experience with these measures as currently set forth in the Plan, the Participants believe that the Plan has adequately addressed the potential conflicts of interest related to Bidding Participants. Nonetheless, the Participants believe that requiring recusal in all rounds of the selection process will further the Participants’ goal of ensuring the fair and impartial consideration and selection of the Plan Processor.

+
+
+
pubdate: June 24, 2015 effdate: N/A +

B. Requirements Pursuant to Rule 608(a)

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization + Keywords: + Rule 608(a), + +
pubdate: June 25, 2015 effdate: N/A +

1. Description of the Amendments to the Selection Plan

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a) + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + Bidding Participant, + Shortlisted Bidders, + +

The Participants propose amending the Selection Plan to prohibit a Bidding Participant from voting in any round to select the Plan Processor from among the Shortlisted Bidders where that Bidding Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Bidding Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round.

+
+
pubdate: June 26, 2015 effdate: N/A +

2. Governing or Constituent Documents

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Governing or Constituent Documents + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: June 27, 2015 effdate: N/A +

3. Implementation of Amendment

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Implementation of Amendment + Compliance User: Self-Regulatory Organization + Keywords: + Approval of Amendment, + +

The terms of the proposed amendment will be operative immediately upon approval of the amendment by the Commission.

+
+
pubdate: June 28, 2015 effdate: N/A +

4. Development and Implementation Phases

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Development and Implementation Phases + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: June 29, 2015 effdate: N/A +

5. Analysis of Impact on Competition

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Analysis of Impact on Competition + Compliance User: Self-Regulatory Organization + Keywords: + Exchange Act, + CAT NMS plan, + +

The proposed amendment does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The SROs believe that the amendment further helps assure the fair and impartial consideration and selection of the Plan Processor for the CAT NMS Plan.

+
+
pubdate: June 30, 2015 effdate: N/A +

6. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan.

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: July 01, 2015 effdate: N/A +

7. Statement that the Amendments Have Been Approved by the Plan Sponsors

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Statement that the Amendments Have Been Approved by the Plan Sponsors + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + +

The Selection Plan provides that amendments to the Selection Plan shall be effected by means of a written amendment that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to Rule 608, or otherwise becomes effective under Rule 608.14

+

The proposed amendment has been executed by all of the Participants, and has consequently been approved by the SROs.

+
+
pubdate: July 02, 2015 effdate: N/A +

8. Terms and Conditions of Access

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Terms and Conditions of Access + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: July 03, 2015 effdate: N/A +

9. Method of Determination and Imposition, and Amount of, Fees and Charges

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Method of Determination and Imposition, and Amount of, Fees and Charges + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: July 04, 2015 effdate: N/A +

10. Method and Frequency of Processor Evaluation

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Method and Frequency of Processor Evaluation + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: July 05, 2015 effdate: N/A +

11. Dispute Resolution

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Dispute Resolution + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
-

[SIGNATURE PAGE FOLLOWS]

-

IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

-

PARTICIPANTS:

-

BATS BZX EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

BATS BYX EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

BOX OPTIONS EXCHANGE LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

C2 OPTIONS EXCHANGE, INCORPORATED

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

CHICAGO STOCK EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

BATS EDGA EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

BATS EDGX EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

ISE GEMINI, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

ISE MERCURY, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

INTERNATIONAL SECURITIES EXCHANGE, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

INVESTORS’ EXCHANGE, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

MIAMI INTERNATIONAL SECURITIES EXCHANGE LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

MIAX PEARL, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NASDAQ BX, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NASDAQ PHLX LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

THE NASDAQ STOCK MARKET LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NATIONAL STOCK EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NEW YORK STOCK EXCHANGE LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NYSE MKT LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

NYSE ARCA, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

EXHIBIT A

-

PARTICIPANTS IN CAT NMS, LLC

- -
pubdate: N/A effdate: N/A -

APPENDIX A

- Topic: CAT NMS Plan, Appendix A - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +
pubdate: July 06, 2015 effdate: N/A +

IV. Solicitation of Comments

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Solicitation of Comments + Compliance User: Self-Regulatory Organization Keywords: - Request for Proposal, + Selection Plan, + Submission of Comments, + Electronic Comments, + Paper Comments, + File Number 4-668, + 5 U.S.C. 552, -

Consolidated Audit Trail National Market System Plan Request for Proposal, issued February 26, 2013, version 3.0 updated March 3, 2014

-

(The Request for Proposal is available at Securities Exchange Act Release No. 77724 (CAT NMS Plan published for comment on May 17, 2016))

-

Certain provisions of Articles I-XII have been modified as noted on the cover page of this CAT NMS Plan. To the extent text in the following Appendices conflicts with any such modifications, the modified language of Articles I-XII shall control

+

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Amendment No. 2 to the Selection Plan is consistent with the Act. Comments may be submitted by any of the following methods:

+

Electronic comments:

+

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

+

• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the subject line.

+

Paper comments:

+

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

+

All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Amendment to the Plan that are filed with the Commission, and all written communications relating to the Amendment to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies of the submission will also be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

+

By the Commission.

+

Brent J. Fields

+

Secretary

-
pubdate: N/A effdate: N/A -

APPENDIX B

- Topic: CAT NMS Plan, Appendix B - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 +
pubdate: July 07, 2015 effdate: N/A +

Exhibit A

+ Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Exhibit A + Compliance User: Self-Regulatory Organization Keywords: - N/A, + Proposed Amendments, -

[Reserved]

+

Proposed new language is italicized; proposed deletions are in [brackets].

+

PROPOSED AMENDMENT TEXT

+

Additions underlined; deletions bracketed15

+

Plan Processor Evaluation and Selection Plan

+

V. Selection Committee

+

***

+

(B) Voting

+

***

+

(3) No Bidding Participant shall vote in any [the second] round set forth [in Section VI(E)(4)] below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a part of such [the second] round.

+

***

+

VI. RFP Bid Evaluation and Plan Processor Selection

+

***

+

(E) Selection of Plan Processor Under the CAT NMS Plan

+

***

+

(2) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in any [the second] round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such [the second] round. [Until the second round, Bidding Participants may vote for any Shortlisted Bid.]

+

(3) First Round Voting by the Selection Committee

+

(a) In the first round of voting, each Voting Senior Officer, subject to the recusal provisions in Paragraph (E)(2) above, shall select a first and second choice from among the Shortlisted Bids.

+

***

-
pubdate: N/A effdate: N/A -

APPENDIX C

- Topic: CAT NMS Plan, Appendix C - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Features, - Consideration, - Background, - Reporting, - Sec Rule 613, - Sources of Data, - Submission, - Analysis, - Implementation, - Objective, - Process, - Reporting, - -

DISCUSSION OF CONSIDERATIONS

-

SEC Rule 613(a)(1) CONSIDERATIONS

-

SEC Rule 613(a) requires the Participants to discuss various “considerations” related to how the Participants propose to implement the requirements of the CAT NMS Plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.2 This Appendix C discusses the considerations identified in SEC Rule 613(a). The first section below provides a background of the process the Participants have undertaken to develop and draft the CAT NMS Plan. Section A below addresses the requirements, set forth in SEC Rule 613(a)(1)(i) through (a)(1)(vi), that the “Participants specify and explain the choices they made to meet the requirements specified in [SEC Rule 613] for the [CAT].”3 In many instances, details of the requirements (i.e., the specific technical requirements that the Plan Processor must meet) will be set forth in the Plan Processor Requirements document (“PPR”). Relevant portions of the PPR are outlined and described throughout this Appendix C, as well as included as Appendix D.

-

Section B below discusses the requirements in SEC Rule 613(a)(1)(vii) and SEC Rule 613(a)(1)(viii) that the CAT NMS Plan include detailed estimates of the costs, and the impact on competition, efficiency, and capital formation, for creating, implementing, and maintaining the CAT. The information in Section B below is intended to aid the Commission in its economic analysis of the CAT and the CAT NMS Plan.4

-

Section C below, in accordance with SEC Rule 613(a)(1)(x), establishes objective milestones to assess the Participants’ progress toward the implementation of the CAT in accordance with the CAT NMS Plan. This section includes a plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the CAT, as required by SEC Rule 613(a)(1)(ix).

-

Section D below addresses how the Participants solicited the input of their Industry Members and other appropriate parties in designing the CAT NMS Plan as required by SEC Rule 613(a)(1)(xi).

-

Capitalized terms used and not otherwise defined in this Appendix C have the respective meanings ascribed to such terms in the Agreement to which this Appendix C is attached.

-

BACKGROUND

-

SEC Rule 613 requires the Participants to jointly file a national market system plan to govern the creation, implementation, and maintenance of the CAT, and the Central Repository. Early in the process, the Participants concluded that the publication of a request for proposal soliciting Bids from interested parties to serve as the Plan Processor for the CAT was necessary prior to filing the CAT NMS Plan to ensure that potential alternative solutions to creating the CAT could be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis could be performed, both of which are required considerations to be addressed in the CAT NMS Plan. To that end, the Participants published the RFP on February 26, 2013,5 and 31 firms formally notified the Participants of their intent to bid.

-

On September 3, 2013, the Participants filed with the Commission the Selection Plan, a national market system plan to govern the process for Participant review of the Bids submitted in response to the RFP, the procedure for evaluating the Bids, and, ultimately, selection of the Plan Processor. Several critical components of the Participants’ process for formulating and drafting the CAT NMS Plan were contingent upon approval of the Selection Plan, which occurred on February 21, 2014.6 Bids in response to the RFP were due four weeks following approval of the Selection Plan, on March 21, 2014. Ten Bids were submitted in response to the RFP.

-

The Participants considered each Bid in great detail to ensure that the Participants can address the considerations enumerated in SEC Rule 613, including analysis of the costs and benefits of the proposed solution(s), as well as alternative solutions considered but not proposed, so that the Commission and the public will have sufficiently detailed information to carefully consider all aspects of the CAT NMS Plan the Participants ultimately submit. Soon after receiving the Bids, and pursuant to the Selection Plan, the Participants determined that all ten Bids were “qualified” pursuant to the Selection Plan.7 On July 1, 2014, after the Participants had hosted Bidder presentations to learn additional details regarding the Bids and conducted an analysis and comparison of the Bids, the Participants voted to select six Shortlisted Bidders.

-

Under the terms of the Selection Plan, and as incorporated into the CAT NMS Plan, the Plan Processor for the CAT has not been selected and will not be selected until after approval of the CAT NMS Plan.8 Any one of the six remaining Shortlisted Bidders could be selected as the Plan Processor, and because each Shortlisted Bidder has proposed different approaches to various issues, the CAT NMS Plan does not generally mandate specific technical approaches; rather, it mandates specific requirements that the Plan Processor must meet, regardless of approach. Where possible, this Appendix C discusses specific technical requirements the Participants have deemed necessary for the CAT; however, in some instances, provided the Plan Processor meets certain general obligations, the specific approach taken in implementing aspects of the CAT NMS Plan will be dependent upon the Bidder ultimately selected as the Plan Processor.

-

SEC Rule 613 also includes provisions to facilitate input on the implementation, operation, and administration of the Central Repository from the broker-dealer industry.9 To this end, the Participants formed a Development Advisory Group (“DAG”) to solicit industry feedback. Following multiple discussions between the Participants and both the DAG and the Bidders, as well as among the Participants themselves, the Participants recognized that some provisions of SEC Rule 613 would not permit certain solutions to be included in the CAT NMS Plan that the Participants determined advisable to effectuate the most efficient and cost-effective CAT. Consequently, the Participants submitted their original Exemptive Request Letter seeking exemptive relief from the Commission with respect to certain provisions of SEC Rule 613 regarding (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking of executions to specific subaccount allocations on allocation reports; and (5) timestamp granularity for Manual Order Events.10 Specifically, the Participants requested that the Commission grant an exemption from:

-

Rule 613(c)(7)(ii) and (iv) for options market makers with regard to their options quotes.

-

Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B) and (c)(8) which relate to the requirements for Customer-IDs.11

-

Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E), (c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F), (c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-Reporter-IDs.

-

Rule 613(c)(7)(vi)(A), which requires CAT Reporters to record and report the account number of any subaccounts to which the execution is allocated.

-

• The millisecond timestamp granularity requirement in Rule 613(d)(3) for certain Manual Order Events subject to timestamp reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).

-

The Participants supplemented their original Exemptive Request Letter with a supplemental Exemptive Request Letter (together, the “Exemptive Request Letters”), clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).12 The Participants believe that the requested relief is critical to the development of a cost-effective approach to the CAT.

-

The Participants also will seek to comply with their obligations related to the CAT under Reg SCI as efficiently as possible. When it adopted Reg SCI, the Commission expressed its belief that the CAT “will be an SCI system of each SCI SRO that is a member of an approved NMS plan under Rule 613, because it will be a facility of each SCI SRO that is a member of such plan.”13 The Participants intend to work together and with the Plan Processor, in consultation with the Commission, to determine a way to effectively and efficiently meet the requirements of Reg SCI without unnecessarily duplicating efforts.

-

A. Features and Details of the CAT NMS Plan

-

1. Reporting Data to the CAT

-

As required by SEC Rule 613(a)(1)(i), this section describes the reporting of data to the Central Repository, including the sources of such data and the manner in which the Central Repository will receive, extract, transform, load, and retain such data. As a general matter, the data reported to the Central Repository is of two distinct types: (1) reference data (e.g., data concerning CAT Reporters and customer information, issue symbology information, and data from the SIPs); and (2) order and trade data submitted by CAT Reporters, including national securities exchanges, national securities associations and broker-dealers. Each of these types of data is discussed separately below.

-

(a) Sources of Data

-

In general, data will be reported to the Central Repository by national securities exchanges, national securities associations, broker-dealers, the SIPs for the CQS, CTA, UTP and Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information(“OPRA”) Plans, and certain other vendors or appropriate third parties (“Data Submitters”).14 Specifically, in accordance with SEC Rule 613(c)(5) and Sections 6.3 and 6.4 of the CAT NMS Plan, each national securities exchange and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileged on such exchange (subject to relief pursuant to the Exemptive Request Letters).15 Similarly, in accordance with SEC Rule 613(c)(6), each national securities association and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security for which transaction reports are required to be submitted to the association (subject to relief pursuant to the Exemptive Request Letters). Additionally, the Participants, in consultation with the DAG and with industry support, have determined to include OTC Equity Securities in the initial phase-in of the CAT; thus, CAT Reporters must also include order and trade information regarding orders for OTC Equity Securities in addition to those involving NMS Securities.16

-

In addition to order and execution data, SEC Rule 613 requires Industry Members to report customer information, including Customer-IDs, to the CAT so that order and execution data can be associated with particular Customers. However, in the Exemptive Request Letters, the Participants request relief that would permit CAT Reporters to provide information to the Central Repository using Firm Designated IDs instead of Customer-IDs. In addition, Industry Members are permitted to use Data Submitters that are not national securities exchanges, national securities associations, or members thereof to report the required data to the Central Repository on their behalf. The approach proposed in the Exemptive Request Letters also would permit Data Submitters to provide information to the Central Repository using Firm Designated ID for purposes of reporting information to the CAT.

-

The Central Repository also is required to collect National Best Bid and National Best Offer information, transaction reports reported to an effective transaction reporting plan filed with the SEC pursuant to SEC Rule 601, and Last Sale Reports reported pursuant to the OPRA Plan.17 Consequently, the Plan Processor must receive information from the SIPs for those plans and incorporate that information into the CAT. Lastly, as set forth in Appendix D, the Plan Processor must maintain a complete symbology database, including historical symbology. CAT Reporters will submit data to the CAT with the listing exchange symbology format, and the CAT must use the listing exchange symbology format in the display of linked data. The Participants will be responsible for providing the Plan Processor with issue symbol information, and issue symbol validation must be included in the processing of data submitted by CAT Reporters.

-

After reviewing the Bids and receiving industry input, the Participants do not believe there is a need to dictate that the Plan Processor adopt a particular format for the submission of data to the Central Repository. Rather, regardless of the format(s) adopted, the CAT must be able to monitor incoming and outgoing data feeds and be capable of performing the following functions:

-

• Support daily files from each CAT Reporter;

-

• Support files that cover multiple days (for re-transmission);

-

• Support error correction files;

-

• Capture operational logs of transmissions, success, failure reasons, etc.; and

-

• Support real-time and batch feeds.

-

The Plan Processor will be required to ensure that each CAT Reporter is able to access its submissions for error correction purposes and transmit their data to the Central Repository on a daily basis. The Plan Processer must have a robust file management tool that is commercially available, including key management. In addition, at a minimum, the Plan Processor must be able to accept data from CAT Reporters and other Data Submitters via automated means (e.g., Secure File Transfer Protocol (“SFTP”)) as well as manual entry means (e.g., GUI interface).

-

The Plan Processor will be required to ensure that all file processing stages are handled correctly. This will include the start and stop of data reception, the recovery of data that is transmitted, the retransmission of data from CAT Reporters, and the resynchronization of data after any data loss. At a minimum, this will require the Plan Processor to have logic that identifies duplication of files. If transmission is interrupted, the Plan Processor must specify:

-

• data recovery process for partial submissions;

-

• operational logs/reporting;

-

• operational controls for receipt of data; and

-

• managing/handling failures.

-

The Plan Processor is required to establish a method for developing an audit trail of data submitted to and received by the Central Repository. This must include a validation of files to identify file corruption and incomplete transmissions. As discussed more fully below, an acknowledgement of data receipt and information on rejected data must be transmitted to CAT Reporters.

-

(i) Data Submission for Orders and Reportable Events, including Manual Submission

-

Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to provide details for each order and each Reportable Event to the Central Repository.18 In the RFP, the Participants requested that the Bidders describe the following:

-

• system interfaces, including data submission, data access and user interfaces;19

-

• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);20

-

• the process and associated protocols for accepting batch submissions; 21 and

-

• the process and any associated protocols for supporting manual data submissions.22

-

(ii) The Timing of Reporting Data

-

Pursuant to SEC Rule 613(c)(3), Sections 6.3 and 6.4 of the CAT NMS Plan require that CAT Reporters report certain order and transaction information recorded pursuant to SEC Rule 613 or the CAT NMS Plan to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day such information is recorded.23 SEC Rule 613(c)(3) notes, however, that the CAT NMS Plan “may accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not impose an earlier deadline on the reporting parties.” Sections 6.3 and 6.4 of the CAT NMS Plan explicitly permit, but do not require, CAT Reporters to submit information to the CAT throughout the day. Because of the amount of data that will ultimately be reported to the CAT, the Participants have decided to permit Data Submitters to report data to the CAT as end of day files (submitted by 8:00 a.m. Eastern Time the following Trading Day) or throughout the day. The Participants believe that permitting Data Submitters to report data throughout the day may reduce the total amount of bandwidth used by the Plan Processor to receive data files and will allow CAT Reporters and other Data Submitters to determine which method is most efficient and cost-effective for them. However, the Plan Processor will still be required to have the capacity to handle two times the historical peak daily volume to ensure that, if CAT Reporters choose to submit data on an end-of-day basis, the Plan Processor can handle the influx of data.24

-

(iii) Customer and Customer Account Information

-

In addition to the submission of order and trade data, broker-dealer CAT Reporters must also submit customer information to the CAT so that the order and trade data can be matched to the specific customer.25 SEC Rule 613(c)(7) sets forth data recording and reporting requirements that must be included in the CAT NMS Plan. Under SEC Rule 613(c)(7)(i)(A), the CAT NMS Plan must require each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting to the CAT order receipt or origination information.26 When reporting the modification or cancellation of an order, the rule further requires the reporting of “the Customer-ID of the Person giving the modification or cancellation instruction.”27 In addition, SEC Rule 613(c)(8) mandates that all CAT Reporters “use the same Customer-ID . . . for each customer and broker-dealer.”28 For purposes of SEC Rule 613, “Customer-ID” means, “with respect to a customer, a code that uniquely identifies such customer for purposes of providing data to the central repository.”29 Also, SEC Rule 613(c)(7)(viii) requires that, for original receipt or origination of an order, CAT Reporters report “customer account information,” which is defined as including “account number, account type, customer type, date account opened, and large trader identifier (if applicable).”30

-

After considering the requirements of SEC Rule 613 with respect to recording and reporting Customer-IDs, Customer Account Information, and information of sufficient detail to identify the Customer as well as industry input and the Commission’s reasons for adopting these requirements, the Participants requested that Industry Members and other industry participants provide ideas on implementing the Customer-ID requirement. After careful consideration, including numerous discussions with the DAG, the Participants concluded that the CAT NMS Plan should use a reporting model that requires broker-dealers to provide detailed account and Customer information to the Central Repository, including the specific identities of all Customers associated with each account, and have the Central Repository correlate the Customer information across broker-dealers, assign a unique customer identifier to each Customer (i.e., the Customer-ID), and use that unique customer identifier consistently across all CAT Data (hereinafter, the “Customer Information Approach”).

-

Under the Customer Information Approach, the CAT NMS Plan would require each broker-dealer to assign a unique Firm Designated ID to each customer, as that term is defined in SEC Rule 613. For the Firm Designated ID, broker-dealers would be permitted to use an account number or any other identifier defined by the firm, provided each identifier is unique across the firm for each business date (i.e., a single firm may not have multiple separate customers with the same identifier on any given date). Under the Customer Information Approach, broker-dealers must submit an initial set of customer information to the Central Repository, including, as applicable, the Firm Designated ID for the customer, name, address, date of birth, Individual Tax ID (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney) and Legal Entity Identifier (“LEI”),31 and/or Large Trader ID (“LTID”), if applicable.32 Under the Customer Information Approach, broker-dealers would be required to submit to the Central Repository daily updates for reactivated accounts, newly established or revised Firm Designated IDs, or associated reportable Customer information.33

-

Within the Central Repository, each Customer would be uniquely identified by identifiers or a combination of identifiers such as TIN/SSN, date of birth, and, as applicable, LEI and LTID. The Plan Processor would be required to use these unique identifiers to map orders to specific customers across all broker-dealers. Broker-dealers would therefore be required to report only Firm Designated ID information on each new order submitted to the Central Repository rather than the “Customer-ID” as set forth in SEC Rule 613(c)(7), and the Plan Processor would associate specific customers and their Customer-IDs with individual order events based on the reported Firm Designated ID.

-

The Customer-ID approach is strongly supported by the industry as it believes that to do otherwise would interfere with existing business practices and risk leaking proprietary order and customer information into the market.34 To adopt such an approach, however, requires certain exemptions from the requirements of SEC Rule 613. Therefore, the Participants included the Customer Information Approach in the Exemptive Request Letters so that this approach could be included in the CAT NMS Plan.

-

In addition to the approach described above, the CAT NMS Plan details a number of requirements which the Plan Processor must meet regarding Customer and Customer Account Information.

-

The Plan Processor must maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The Plan Processor must document and publish, with the approval of the Operating Committee, the minimum list of attributes to be captured to maintain this association.

-

The CAT Processor must maintain valid Customer and Customer Account Information for each Trading Day and provide a method for Participants and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes).

-

The CAT Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information.

-

The Plan Processor must be able to link accounts that move from one CAT Reporter to another due to mergers and acquisitions, divestitures, and other events. Under the approach proposed by the Participants, broker-dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis.35 In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database.

-

In the RFP, the Participants asked for a description of how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each Customer.36 All Bidders anticipated Customer and Customer Account Information to be captured in an initial download of data. The precise method(s) by which CAT Reporters submit Customer data to the Central Repository will be set out in the Technical Specifications provided by the Plan Processor in accordance with Section 6.9 of the CAT NMS Plan. Data capture would occur using both file-based and entry screen methods. Data validation would check for potential duplicates with error messages being generated for follow-up by CAT Reporters. Data Reporters can update data as needed or on a predetermined schedule.

-

(iv) Error Reporting

-

SEC Rule 613(e)(6) requires the prompt correction of errors in data submitted to the Central Repository. As discussed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, initial validation, lifecycle linkages, and communications of errors to CAT Reporters will be required to occur by 12:00 p.m. Eastern Time T+1 and corrected data will be required to be resubmitted to the Central Repository by 8:00 a.m. Eastern Time on T+3. Each of the Bidders indicated that it was able to meet these timeframes.

-

However, the industry expressed concern that reducing the error repair window will constitute a significant burden to Data Submitters and also question whether the proposed error correction timeframe is possible.37 Financial Information Forum (“FIF”) supports maintaining the current OATS Error Handling timelines, which allows for error correction within five OATS business days from the date of original submission.38 Securities Industry and Financial Markets Association (“SIFMA”) also recommends a five-day window for error correction.39 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible and recommend the three-day window for corrections to balance the need for regulators to access corrected data in a timely manner while considering the industry’s concerns.

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(b) The Manner in which the Central Repository will Receive, Extract, Transform, Load, and Retain Data

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The Central Repository must receive, extract, transform, load, and retain the data submitted by CAT Reporters and other Data Submitters. In addition, the Plan Processor is responsible for ensuring that the CAT contains all versions of data submitted by a CAT Reporter or other Data Submitter (i.e., the Central Repository must include different versions of the same information, including such things as errors and corrected data).40

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In the RFP, the Participants requested that each Bidder perform a detailed analysis of current industry systems and interface specifications to propose and develop their own format for collecting data from the various data sources relevant under SEC Rule 613, as outlined in the RFP. Bidders also were requested to perform an analysis on their ability to develop, test and integrate this interface with the CAT.41 In addition, the Participants sought input from the industry regarding different data submission mechanisms and whether there needs to be a method to allow broker-dealers with very small order volumes to submit their data in a non-automated manner.42

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As noted above, since the Central Repository is required to collect and transform customer, order and trade information from multiple sources, the RFP requested that Bidders describe:

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• how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each customer;43

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• the system interfaces, including data submission, data access and user interfaces;44

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• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);45

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• the process and associated protocols for accepting batch submissions;46 and

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• the process and any associated protocols for supporting manual data submissions.47

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Various Bidders proposed multiple methods by which Data Reporters could report information to the Central Repository. Bidders proposed secure VPN, direct line access through TCP/IP or at co-location centers, and web-based manual data entry.

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The RFP also requested that Bidders describe:

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• the overall technical architecture;48 and

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• the network architecture and describe how the solution will handle the necessary throughput, processing timeline and resubmissions.49

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There are two general approaches by which the Central Repository could receive information. Approach 1 described a scenario in which broker-dealers would submit relevant data to the Central Repository using their choice of existing industry messaging protocols, such as the Financial Information eXchange (“FIX”) protocol. Approach 2 provided a scenario in which broker-dealers would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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Following receipt of data files, the Plan Processor will be required to send an acknowledgement of data received to CAT Reporters and third party Data Submitters. This acknowledgement will enable CAT Reporters to create an audit trail of their data submissions and allow for tracing of data breakdowns if data is not received. The minimum requirements for receipt acknowledgement are detailed in Appendix D, Receipt of Data from Reporters.

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Once the Central Repository has received the data from the CAT Reporters, it will extract individual records from the data, and validate the data through a review process that must be described in the Technical Specifications involving context, syntax, and matching validations. The Plan Processor will need to validate data and report back to any CAT Reporter any data that has not passed validation checks according to the requirements in Appendix D, Receipt of Data from Reporters. To ensure the accuracy and integrity of the data in the Central Repository, data that does not pass the basic validation checks performed by the Plan Processor must be rejected until it has been corrected by the CAT Reporter responsible for submitting the data/file. After the Plan Processor has processed the data, it must provide daily statistics regarding the number of records accepted and rejected to each CAT Reporter.

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The Plan Processor also will be required to capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format, and the rejections and daily statistics must also be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend records that contain exceptions. The Plan Processor must also support bulk error correction so that rejected records can be resubmitted as a new file with appropriate indicators for rejection repairs. The Plan Processor must, in these instances, reprocess repaired records. In addition, a web GUI must be available for CAT Reporters to make updates, including corrections, to individual records or attributes. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

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The Plan Processor must provide CAT Reporters with documentation that details how to amend/upload records that fail the required validations, and if a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can be repaired and resubmitted.50 In order for regulators to have access to accurate and complete data as expeditiously as practicable, the Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics must be provided after data has been uploaded and validated. The reports will include descriptive details as to why each data record was rejected by the Plan Processor.

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In addition, on a monthly basis, the Plan Processor should produce and publish reports detailing CAT Reporter performance and comparison statistics, similar to the report cards published for OATS presently. These reports should include data to enable CAT Reporters to assess their performance in comparison to the rest of their industry peers and to help them assess the risk related to their reporting of transmitted data.

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CAT Reporters will report data to the Central Repository either in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format, for consolidation and storage. The Technical Specifications will describe the required format for data reported to the Central Repository. Results of a study conducted of broker-dealers showed average implementation and maintenance costs for use of a new file format to be lower than those for use of an existing file format (e.g., FIX)51, although an FIF “Response to Proposed RFP Concepts Document” dated January 18, 2013 did indicate a preference among its members for use of the FIX protocol.

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As noted above, the specific formats of data submission and loading will depend upon the Bidder chosen as the Plan Processor. Regardless of the ultimate Plan Processor, however, data submitted to the CAT will be loaded into the Central Repository in accordance with procedures that are subject to approval by the Operating Committee.52 The Central Repository will retain data, including the Raw Data, linked data, and corrected data, for at least six years. Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the Data Submitter (e.g., whether the Data Submitter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

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SEC Rule 613 reflects the fact that the Participants can choose from alternative methods to link order information to create an order lifecycle from origination or receipt to cancellation or execution.53 After review of the Bids and discussions with Industry Members, the CAT NMS Plan reflects the fact that the Participants have determined that the “daisy chain” approach to CAT-Order-ID that requires linking of order events rather than the repeated transmission of an order ID throughout an order’s lifecycle is appropriate. This approach is widely supported by the industry, and using the daisy chain approach should minimize impact on existing OATS reporters, since OATS already uses this type of linking.54 The RFP asked Bidders to propose any additional alternatives to order lifecycle creation; however, all of the Bidders indicated that they would use the daisy chain approach to link order events.55

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In the daisy chain approach, a series of unique order identifiers assigned by CAT Reporters to individual order events are linked together by the CAT and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order. Under this approach, each CAT Reporter generates its own unique order ID but can pass a different identifier as the order is routed to another CAT Reporter, and the CAT will link related order events from all CAT Reporters involved in the life of the order.56

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The Participants believe that the daisy chain approach can handle anticipated order handling scenarios, including aggregation and disaggregation, and generally apply to both equities and options. The Participants created a subcommittee of DAG members and Participants to walk through multiple complex order-handling scenarios to ensure that the daisy chain approach can handle even the most complex of order handling methods.57

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Additionally, the daisy chain approach can handle representative order reporting scenarios58 and order handling scenarios sometimes referred to as “complex orders” that are specific to options and may include an equity component and multiple option components (e.g., buy-write, straddle, strangle, ratio spread, butterfly and qualified contingent transactions). Typically, these orders are referenced by exchange systems on a net credit/debit basis, which can cover between two and twelve different components. Such “complex orders” must also be handled and referenced within the CAT. The Bidder must develop, in close consultation with Industry Members, a linking mechanism that will allow the CAT to link the option leg(s) to the related equity leg or the individual options components to each other in a multi-leg strategy scenario.

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Once a lifecycle is assembled by the CAT, individual lifecycle events must be stored so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, and routed through multiple broker-dealers before being sent to the exchange for execution.

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The Plan Processor must transform and load the data in a way that provides the Participants with the ability to build and generate targeted queries against data in the Central Repository across product classes submitted to the Central Repository. The Participants’ regulatory staff and the SEC must be able to create, adjust, and save ad-hoc queries to provide data to the regulators that can then be used for their market surveillance purposes. All data fields may be included in the result set from targeted queries. Because of the size of the Central Repository and its use by multiple parties simultaneously, online queries will require a minimum set of criteria, including data or time range as well as one or more of the parameters specified in Appendix D, Functionality of the CAT System.59

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Because of the potential size of the possible result sets, the Plan Processor must have functionality to create an intermediate result count of records before running the full query so that the query can be refined if warranted. The Plan Processor must include a notification process that informs users when reports are available, and there should be multiple methods by which query results can be obtained (e.g., web download, batch feed). Regulatory staff also must have the ability to create interim tables for access / further investigation. In addition, the Plan Processor must provide a way to limit the number of rows from a result set on screen with full results being created as a file to be delivered via a file transfer protocol.

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The Plan Processor will be reasonably required to work with the regulatory staff at the Participants and other regulators60 to design report generation screens that will allow them to request on-demand pre-determined report queries. These would be standard queries that would enable regulators quick access to frequently-used information and could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader reporting.

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The Central Repository must, at a minimum, be able to support approximately 3,000 active users, including Participants’ regulatory staff and the SEC, authorized to access data representing market activity (excluding the PII associated with customers and accounts).61

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2. Time and Method by which CAT Data will be Available to Regulators (SEC Rule 613(a)(1)(ii))

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SEC Rule 613(a)(1)(ii) requires the Participants to discuss the “time and method by which the data in the Central Repository will be made available to regulators to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities.”62 As the Commission noted, “[t]he time and method by which data will be available to regulators are fundamental to the utility of the Central Repository because the purpose of the repository is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.”63

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(a) Time Data will be Made Available to Regulators

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At any point after data is received by the Central Repository and passes basic format validations, it will be available to the Participants and the SEC. The Plan Processor must ensure that regulators have access to corrected and linked order and Customer data by 8:00 a.m. Eastern Time on T+5.

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As noted above, SEC Rule 613(e)(6) requires the prompt correction of data reported to the Central Repository, and the Participants believe that the timeframes established in Appendix D, Data Availability, meet this requirement. Additionally, each of the Bidders indicated that it would be able to process the reported data within these timeframes. However, the FIF, an industry trade group, expressed concern that the error repair window will constitute a significant burden to CAT Reporters and questioned whether the error repair window “can be reasonably met.”64 FIF supports maintaining the current OATS Error Handling timelines, which allow for error correction within five OATS-business days from the date of original submission.65 SIFMA also recommends a five-day window for error correction.66 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible, and therefore the Participants do not support adopting the five-day repair window permitted under OATS, but instead are providing a three-day repair window for the Central Repository.67

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(b) Method by which Data will be Available to Regulators

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As required by SEC Rule 613(a)(1)(ii), this section describes the ability of regulators to use data stored in the Central Repository for investigations, examinations and surveillance, including the ability to search and extract such data.68 The utility of the Central Repository is dependent on regulators being able to have access to data for use in market reconstruction, market analysis, surveillance and investigations.69 The Participants anticipate that the Plan Processor will adopt policies and procedures with respect to the handling of surveillance (including coordinated, SEC Rule 17d-2 or RSA surveillance) queries and requests for data. In the RFP, the Participants asked that the Bidders describe:

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• the tools and reports that would allow for the extraction of data search criteria;70

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• how the system will accommodate simultaneous users from Participants and the SEC submitting queries;71

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• the expected response time for query results, the manner in which simultaneous queries will be managed and the maximum number of concurrent queries and users that can be supported by the system;72

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• the format in which the results of targeted queries will be provided to users;73

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• the methods of data delivery that would be made available to Participant regulatory staff and the Commission;74

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• any limitations on the size of data that can be delivered at one time, such as number of days or number of terabytes;75 and

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• how simultaneous bulk data requests will be managed to ensure fair and equitable access.76

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All Bidders provide means for off-line analysis77 and dynamic search and extraction. The Bids described a variety of tools that could be used for providing access and reports to the Participants and the SEC, including: Oracle Business Intelligence Experience Edition, SAS Enterprises Business Intelligence, and IBM Cognos. The Bids proposed data access via direct access portals and via web-based applications. In addition, the Bids proposed various options for addressing concurrent users and ensuring fair access to the data, including: processing queries on a first in, first out (FIFO) basis; monitoring to determine if any particular user is using more systems resources than others and prioritizing other users’ queries; or evaluating each users’ demands on the systems over a predetermined timeframe and, if there is an imbalance, working with users to provide more resources needed to operate the system more efficiently.

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The Bids included a multitude of options for formatting the data provided to regulators in response to their queries, including but not limited to FIX, Excel, Binary, SAS data sets, PDF, XML, XBRL, CSV, and .TXT. Some Bidders would provide Participants and the SEC with a “sandbox” in which the user could store data and upload its own analytical tools and software to analyze the data within the Central Repository, in lieu of performing off-line analyses.

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The Participants anticipate that they will be able to utilize Central Repository data to enhance their existing regulatory schemes. The Participants do not endorse any particular technology or approach, but rather set forth standards which the Plan Processor must meet. By doing so, the Participants are seeking to maximize the utility of the data from the Central Repository without burdening the Plan Processor to comply with specific format or application requirements which will need to be updated over time. In addition, the Participants wanted to ensure that the Bidders have the ability to put forth the ideas they believe are the most effective.

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(c) Report Building – Analysis Related to Usage of Data by Regulators

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It is anticipated that the Central Repository will provide regulators with the ability to, for example, more efficiently conduct investigations, examinations, conduct market analyses, and to inform policy-making decisions. The Participants’ regulatory staff and the SEC will frequently need to be able to perform queries on large amounts of data. The Plan Processor must provide the Participants and other regulators the access to build and generate targeted queries against data in the Central Repository. The Plan Processor must provide the regulatory staff at the Participants and regulators with the ability to create, adjust, and save any ad-hoc queries they run for their surveillance purposes via online or direct access to the Central Repository.78 Queries will require a minimum set of criteria that are detailed in Appendix D.79 The Plan Processor will have controls to manage load, cancel queries, if needed, and create a request process for complex queries to be run.80 The Plan Processor must have a notification process to inform users when reports are available, provide such reports in multiple formats, and have the ability to schedule when queries are run.81

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In addition, the Plan Processor will be required to reasonably work with the regulatory staff at the Participants and other regulators to design report generation screens that will allow them to request on-demand pre-determined report queries.82 These would be standard queries that would enable regulators quick access to frequently-used information. This could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader.83

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The Plan Processor should meet the following response times for different query types. For targeted search criteria, the minimum acceptable response times would be measured in time increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time should generally be available within 24 hours of the submission of the request.

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The Central Repository will support a permission mechanism to assign data access rights to all users so that CAT Reporters will only have access to their own reported data, the regulatory staff at the Participants and other regulators will have access to data; except for PII.84 Regulators that are authorized to access PII will be required to complete additional authentications. The Central Repository will be able to provide access to the data at the working locations of both the Participants’ and SEC’s regulatory staff as well as other non-office locations. The Central Repository must be built with operational controls to control access to make requests and to track data requests to support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated.

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In addition to targeted analysis of data from the Central Repository, regulators will also need access to bulk data for analysis. The Participants and other regulators will need the ability to do bulk extraction and download of data, based on a specified date or time range, market, security, and Customer-ID. The size of the resulting data set may require the ability to feed data from the Central Repository into analytical “alert” programs designed to detect potentially illegal activity.85 “For example, the Commission is likely to use data from the Central Repository to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform Participant and SEC rulemaking.”86

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The Plan Processor must provide for bulk extraction and download of data in industry standard formats. In addition, the Plan Processor is required to generate data sets based on market event data to the Participants and other regulators. The Central Repository must provide the ability to define the logic, frequency, format, and distribution method of the data. It must be built with operational controls to track data requests to oversee the bulk usage environment and support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated. Extracted data should be encrypted, and PII data should be masked unless users have permission to view the data that has been requested.

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The Plan Processor must have the capability and capacity to provide bulk data necessary for the Participants and the other regulators to run and operate their surveillance processing. Such data requests can be very large; therefore, the Plan Processor must have the ability to split large requests into smaller data sets for data processing and handling. All reports should be generated by a configurable workload manager that is cost based, while also ensuring that no single user is using a disproportionate amount of resources for query generation.

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(d) System Service Level Agreements (SLAs)

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As further described in Appendix D, Functionality of CAT Systems, the Participants and the Plan Processor will enter into appropriate SLAs in order to establish system and operational performance requirements for the Plan Processor and help ensure timely Regulator access to Central Repository data. Among the items to be included in the SLA(s) will be specific requirements regarding query performance, linkage and order event processing performance of the Central Repository (e.g., linkage and data availability timelines, linkage errors not related to invalid data, and data retention) as well as system availability requirements (e.g., system uptime and DR/BCP performance). The Operating Committee will periodically review the SLAs according to the terms to be established in negotiation with the Plan Processor.

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3. The Reliability and Accuracy of the Data (SEC Rule 613(a)(1)(iii))

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As required by SEC Rule 613(a)(1)(iii), this section discusses the reliability and accuracy of the data reported to and maintained by the Central Repository throughout its lifecycle, including: transmission and receipt from CAT Reporters; data extraction, transformation and loading at the Central Repository; data maintenance at the Central Repository; and data access by the Participants and other regulators. In the Adopting Release, the Commission noted that the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate and as such, the Commission requested that the Participants discuss in detail how the Central Repository will be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained in it.87

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(a) Transmission, Receipt, and Transformation

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The initial step in ensuring the reliability and accuracy of data in the Central Repository is the validation checks made by the Plan Processor when data is received and before it is accepted into the Central Repository. In the RFP, the Participants stated that validations must include checks to ensure that data is submitted in the required formats and that lifecycle events can be accurately linked by 12:00 p.m. Eastern Time on T+1, four hours following the submission deadline for CAT Reporters.88 Once errors are identified, they must be efficiently and effectively communicated to CAT Reporters on a daily basis. CAT Reporters will be required to correct and resubmit identified errors within established timeframes (as discussed in Appendix D, Data Availability).

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The Plan Processor must develop specific data validations in conjunction with development of the Central Repository which must be published in the Technical Specifications. The objective of the data validation process is to ensure that data is accurate, timely and complete at or near the time of submission, rather than to identify submission errors at a later time after data has been processed and made available to regulators. To achieve this objective, a comprehensive set of data validations must be developed that addresses both data quality and completeness. For any data that fails to pass these validations, the Plan Processor will be required to handle data correction and resubmission within established timeframes both in a batch process format and via manual web-based entry.

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To assess different validation mechanisms and integrity checks, the RFP required Bidders to provide information on the following:

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• how data format and context validations for order and quote events submitted by CAT Reporters will be performed and how rejections or errors will be communicated to CAT Reporters;89

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• a system flow diagram reflecting the overall data format, syntax and context validation process that includes when each types of validation will be completed and errors communicated to CAT Reporters, highlighting any dependencies between the different validations and impacts of such dependencies on providing errors back to CAT Reporters;90

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• how related order lifecycle events submitted by separate CAT Reporters will be linked and how unlinked events will be identified and communicated to CAT Reporters for correction and resubmission, including a description of how unlinked records will be provided to CAT Reporters for correction (e.g., specific transmission methods and/or web-based downloads);91

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• how Customer and Customer Account Information submitted by broker-dealers will be validated and how rejections or errors will be communicated to CAT Reporters;92 and

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• the mechanisms that will be provided to CAT Reporters for the correction of both market data (e.g., order, quotes, and trades) errors, and Customer and account data errors, including batch resubmissions and manual web-based submissions.93

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Most Bidders indicated that Customer Account Information including SSN, TIN or LEI will be validated in the initial onboarding processing. Additional validation of Customer Account Information, such as full name, street address, etc., would occur across CAT Reporters and potential duplications or other errors would be flagged for follow-up by the CAT Reporters.

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All Bidders recommended that order data validation be performed via rules engines, which allow rules to be created and modified over time in order to meet future market data needs. Additionally, all Bidders indicated that data validations will be real-time and begin in the data ingestion component of the system. Standard data validation techniques include format checks, data type checks, consistency checks, limit and logic checks, or data validity checks. Some Bidders mentioned the ability to schedule the data validation at a time other than submission, because there may be a need to have rules engines perform validation in a batch mode or customized schedule during a different time. All Bidders indicated that when errors are found, the Raw Data will be stored in an error database and notifications would be sent to the CAT Reporters. Most Bidders permitted error correction to be submitted by CAT Reporters at any time.

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Section 6.3(b) of the CAT NMS Plan sets forth the policies and procedures for ensuring the timeliness, accuracy and completeness of the data provided to the Central Repository as required by SEC Rule 613(e)(4)(ii) and the accuracy of the data consolidated by the Plan Processor pursuant to SEC Rule 613(e)(4)(iii).94 It also mandates that each Participant and its Industry Members that are CAT Reporters must ensure that its data reported to the Central Repository is accurate, timely, and complete. Each Participant and its Industry Members that are CAT Reporters must correct and resubmit such errors within established timeframes. In furtherance thereof, data related to a particular order will be reported accurately and sequenced from receipt or origination, to routing, modification, cancellation and/or execution. Additionally each Participant and its Industry Members that are CAT Reporters must test their reporting systems thoroughly before beginning to report data to the Central Repository and Appendix D sets forth that the Plan Processor must make testing facilities available for such testing.

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Pursuant to SEC Rule 613(e)(4)(iii), the Plan Processor will design, implement and maintain (1) data accuracy and reliability controls for data reported to the Central Repository and (2) procedures for testing data accuracy and reliability during any system release or upgrade affecting the Central Repository and the CAT Reporters.95 The Operating Committee will, as needed, but at least annually, review policies and procedures to ensure the timeliness, accuracy, and completeness of data reported to the Central Repository.

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In order to validate data receipt, the Plan Processor will be required to send an acknowledgement to each CAT Reporter notifying them of receipt of data submitted to the Central Repository to enable CAT Reporters to create an audit trail of their own submissions and allow for tracking of data breakdowns when data is not received. The data received by the Plan Processor must be validated at both the file and individual record level if appropriate. The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. Records that do not pass basic validations, such as syntax rejections, will be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit the data.

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(b) Error Communication, Correction, and Processing

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The Plan Processor will define and design a process to efficiently and effectively communicate to CAT Reporters identified errors. All identified errors will be reported back to the CAT Reporter and other Data Submitters who submitted the data to the Central Repository on behalf of the CAT Reporter, if necessary. The Central Repository must be able to receive error corrections and process them at any time, including timeframes after the standard repair window. The industry supports a continuous validation process for the Central Repository, continuous feedback to CAT Reporters on error identification and the ability to provide error correction at any time even if beyond the error correction timeframe.96 The industry believes that this will better align with the reporting of complex transactions and allocations and is more efficient for CAT Reporters.97 CAT Reporters will be able to submit error corrections through a web-interface or via bulk uploads or file submissions. The Plan Processor must support bulk replacement of records, subject to approval by the Operating Committee, and reprocess such replaced records. A GUI must be available for CAT Reporters to make updates to individual records or attributes. Additionally, the Plan Processor will provide a mechanism to provide auto-correction of identified errors and be able to support group repairs (i.e., the wrong issue symbol affecting multiple reports).

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SEC Rule 613(e)(6) also requires the Participants to specify a maximum Error Rate for data reported to the Central Repository pursuant to SEC Rule 613(c)(3) and (4).98 The Participants understand that the Central Repository will require new reporting elements and methods for CAT Reporters and there will be a learning curve when CAT Reporters begin to submit data to the Central Repository.99 However, the utility of the CAT is dependent on it providing a timely, accurate and complete audit trail for the Participants and other regulators.100 Therefore, the Participants are proposing an initial maximum Error Rate of 5%, subject to quality assurance testing performed prior to launch, and it is anticipated that it will be reset when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and again when Small Industry Members begin to report to the Central Repository. The Participants believe that this rate strikes the balance of making allowances for adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction. Periodically, the Plan Processor will analyze reporting statistics and Error Rates and make recommendations to the Operating Committee for proposed changes to the maximum Error Rate. Changes to the maximum Error Rate will be approved by the Operating Committee. The maximum Error Rate will be reviewed and reset at least on an annual basis.

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In order to help reduce the maximum Error Rate, the Plan Processor will measure the Error Rate on each business day and must take the following steps in connection with error reporting: (1) the Plan Processor will provide CAT Reporters with their error reports as they become available and daily statistics will be provided after data has been uploaded and validated by the Central Repository; (2) error reports provided to CAT Reporters will include descriptive details as to why each data record was rejected by the Central Repository; and (3) on a monthly basis, the Plan Processor will produce and publish reports detailing performance and comparison statistics, similar to the Report Cards published for OATS presently, which will enable CAT Reporters to identify how they compare to the rest of their industry peers and help them assess the risk related to their reporting of transmitted data.

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All CAT Reporters exceeding the Error Rate will be notified each time that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections). Upon request from the Participants or other regulators, the Plan Processor will produce and provide reports containing Error Rates and other metrics as needed on each CAT Reporter’s Compliance Thresholds so that the Participants as Participants or the SEC may take appropriate action for failing to comply with the reporting obligations under the CAT NMS Plan and SEC Rule 613.

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SEC Rule 613(e)(6) requires the prompt correction of data to the Central Repository. As discussed in the NMS Plan, there are a minimum of three validation processes that will be performed on data submitted to the Central Repository. The Plan Processor will be required to identify specific validations and metrics to define the Data Quality Governance requirements, as defined in Appendix D, Receipt of Data from Reporters.

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The Plan Processor will identify errors on CAT file submissions that do not pass the defined validation checks above and conform to the Data Quality Governance requirements. Error Rates will be calculated during the CAT Data and linkage validation processes. As a result, the Participants propose an initial maximum overall Error Rate of 5%101 on initially submitted data, subject to quality assurance testing period performed prior to launch.102 It is anticipated that this Error Rate will be evaluated when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and then again when Small Industry Members begin to report to the Central Repository.

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In determining the initial maximum Error Rate of 5%, the Participants have considered the current and historical OATS Error Rates, the magnitude of new reporting requirements on the CAT Reporters and the fact that many CAT Reporters may have never been obligated to report data to an audit trail.

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The Participants considered industry experience with FINRA’s OATS system over the last 10 years. During that timeframe there have been three major industry impacting releases. These three releases are known as (1) OATS Phase III, which required manual orders to be reported to OATS;103 (2) OATS for OTC Securities which required OTC equity securities to be reported to OATS;104 and (3) OATS for NMS which required all NMS stocks to be reported to OATS.105 Each of these releases was accompanied by significant updates to the required formats which required OATS reporters to update and test their reporting systems and infrastructure.

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The combined average error rates for the time periods immediately following release across five significant categories for these three releases follow. The average rejection percentage rate, representing order events that did not pass systemic validations, was 2.42%. The average late percentage rate, representing order events not submitted in a timely manner, was 0.36%. The average order / trade matching error rate, representing OATS Execution Reports unsuccessfully matched to a TRF trade report was 0.86%. The average Exchange/Route matching error rate, representing OATS Route Reports unsuccessfully matched to an exchange order was 3.12%. Finally, the average Interfirm Route matching error rate, representing OATS Route Reports unsuccessfully matched to a report representing the receipt of the route by another reporting entity was 2.44%. Although the error rates for the 1999 initial OATS implementation were significantly higher than those laid out above, the Participants believe that technical innovation and institutional knowledge of audit trail creation over the past 15 years makes the more recent statistics a better standard for the initial Error Rate.106 Based upon these historical error rates, and given that reporting to the Central Repository will involve reporting on new products (i.e., options) and reporting by new reporters (including both broker-dealers and Participants who have not previously been required to report to OATS), the Participants believe that the initial Error Rate will be higher than the recent rates associated with OATS releases and that an initial Error Rate of 5% is an appropriate standard.

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The Participants believe that to achieve this Error Rate, however, the Participants and the industry must be provided with ample resources, including a stand-alone test environment functionally equivalent to the production environment, and time to test their reporting systems and infrastructure. Additionally, the Technical Specifications must be well written and effectively communicated to the reporting community with sufficient time to allow proper technical updates, as necessary. The Participants believe that the Error Rate strikes the balance of adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction, as well as having a sufficient level of accuracy to facilitate the retirement of existing regulatory reports and systems where possible.

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The Participants are proposing a phased approach to lowering the maximum Error Rate. Under the proposed approach, one year after a CAT Reporter’s respective filing obligation has begun, their maximum Error Rate would become 1%.107 Maximum Error Rates under the proposed approach would thus be as follows:

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In addition to the above mentioned daily Error Rate, CAT Reporters will be required to meet separate Compliance Thresholds,109 which rather than the Error Rate, will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance. Although Compliance Thresholds will not be calculated on a daily basis, this does not: (1) relieve CAT Reporters from their obligation to meet daily reporting requirements set forth in SEC Rule 613; or (2) prohibit disciplinary action against a CAT Reporter for failure to meet its daily reporting requirements set forth in SEC Rule 613. The Operating Committee may consider other exceptions to this reporting obligation based on demonstrated legal or regulatory requirements or other mitigating circumstances.

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In order to reduce the maximum Error Rate and help CAT Reporters to meet their Compliance Thresholds, the Plan Processor must provide support for CAT Reporter “go-live” dates, as specified in Appendix D, User Support.

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(c) Sequencing Orders and Clock Synchronization

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SEC Rule 613(c)(1) requires the Central Repository to provide “an accurate, time-sequenced record of orders,” and SEC Rule 613(d)(1) requires the CAT NMS Plan to require each CAT Reporter “to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event . . . to the time maintained by the National Institute of Standards and Technology (NIST), consistent with industry standards.” As an initial matter, because of the drift between clocks, an accurately-sequenced record of orders cannot be based solely on the time stamps provided by CAT Reporters. As discussed above, the CAT NMS Plan requires that CAT Reporters synchronize their clocks to within 50 milliseconds of the NIST. Because of this permitted drift, any two separate clocks can vary by 100 milliseconds: one clock can drift forward 50 milliseconds while another can drift back 50 milliseconds. Thus, it is possible to have, for example, one firm report the route of an order at 10:40:00.005 while the firm receiving the routed order reports a receipt time of 10:39:59.983 (i.e., the time stamps alone indicate that the routed order was received before it was sent). For this reason, the Participants plan to require that the Plan Processor develop a way to accurately track the sequence of order events without relying entirely on time stamps.110

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There were several different approaches suggested by the Bidders to accomplish the accurate sequencing of order events. Some Bidders suggested using time stamp-based sequencing; however, most Bidders recognized that, while all CAT Reporters should have their time stamp clocks synchronized, in practice this synchronization cannot be wholly relied upon due to variations in computer systems. These Bidders rely on linkage logic to derive the event sequencing chain, such as parent/child orders. To help resolve time stamp issues, one Bidder proposed adding unique sequence ID numbers as well to the event information to help with time clock issues and a few others would analyze the variations on clock time and notify those CAT Reporters that need to resynchronize their clocks.

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The Participants believe that using a linking logic not dependent on time stamps would enable proper sequencing of an order. This decision is supported by the industry since time stamps across disparate systems cannot be guaranteed and are likely to be error-prone.111 The Participants believe that this type of sequencing can be successfully used for both simple and complex orders that will be reported to the Central Repository. The industry supports using event sequencing that is already built into the exchange protocols, which imposes sequencing and determines the true market environment.112

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As required by Section 6.8(a) of the CAT NMS Plan, each Participant will synchronize its Business Clocks (other than Business Clocks used solely for Manual Order Events, which will be required to be synchronized to within one second of the time maintained by the NIST) used for the purposes of recording the date and time of any Reportable Event that must be reported under SEC Rule 613 to within 50 milliseconds of the time maintained by the NIST, and will adopt a Compliance Rule requiring its Industry Members to do the same. Furthermore, in order to ensure the accuracy of time stamps for Reportable Events, the Participants anticipate that Participants and Industry Members will adopt policies and procedures to verify such required synchronization each Trading Day (1) before the market opens and (2) periodically throughout the Trading Day.

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As noted above, Rule 613(d)(1) requires the CAT NMS Plan to impose a clock synchronization requirement “consistent with industry standards.” The Participants believe that the 50 millisecond clock synchronization drift tolerance included in Section 6.8(a) represents the current industry clock synchronization standard and therefore satisfies the Rule. To determine the current industry standard, the Participants relied on survey feedback provided by industry members, as further discussed in Appendix C, D.12.

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Importantly, Section 6.8 requires, pursuant to Rule 613(c)(2), that Participants, together with the Plan Processor’s Chief Compliance Officer, evaluate the clock synchronization standard on an annual basis to reflect changes in industry standards. Accordingly, to the extent existing technology that synchronizes business clocks with a lower tolerance (i.e., within less than 50 milliseconds drift from NIST) becomes widespread enough throughout the industry to constitute a new standard, the clock synchronization requirement of the CAT NMS Plan would be revised to take account of the new standard.

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In accordance with SEC Rule 613(d), Section 6.8(c) of the CAT NMS Plan states that “[i]n conjunction with Participants and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments.”

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The Participants anticipate that compliance with this provision will require Participants and Industry Members to perform the following or comparable procedures. The Participants and their Industry Members will document their clock synchronization procedures and maintain a log recording the time of each clock synchronization performed, and the result of such synchronization, specifically identifying any synchronization revealing that the discrepancy between its Business Clock and the time maintained by the NIST exceeded 50 milliseconds. At all times such log will include results for a period of not less than five years ending on the then current date.

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In addition to clock synchronization requirements, the Participants considered the appropriate level of time granularity to be required in the CAT NMS Plan. Although millisecond increments are generally the industry standard for trading systems, there is a wide range of time stamp granularity across the industry commonly ranging from seconds to milliseconds to micro-seconds for Latency sensitive applications.113 The disparity is largely attributed to the age of the system being utilized for reporting, as older systems cannot cost effectively support, finer time stamp granularity.114 To comply with a millisecond time stamp requirement, the Participants understand that firms may face significant costs in both time and resources to implement a consistent time stamp across multiple systems.115 This may include a need to upgrade databases, internal messaging applications/protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository.116 Because of this, FIF recommended to the Participants a two year grace period for time stamp compliance.117 FIF and SIFMA also supported an exception for millisecond reporting for order events that are manually processed, which is discussed below.118

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To the extent that any CAT Reporter uses time stamps in increments finer than the minimum required by the CAT NMS Plan, each Participant will, and will adopt a rule requiring its Industry Members that are CAT Reporters to, use such finer increments when providing data to the Central Repository.

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With respect to the requirement under SEC Rule 613(c) and (d)(3) that time stamps “reflect current industry standards and be at least to the millisecond,” the Participants believe that time stamp granularity to the millisecond reflects current industry standards. However, after careful consideration, including numerous discussions with the DAG, the Participants have determined that time stamp granularity at the level of a millisecond is not practical for order events that involve non-electronic communication of information (“Manual Order Events”). In particular, it is the Participants’ understanding that recording Manual Order Events to the millisecond would be both very costly, requiring specialized software configurations and expensive hardware, and inherently imprecise due to the manner in which human interaction is required. The industry feedback that the Participants received through the DAG suggests that the established business practice with respect to Manual Order Events is to manually capture time stamps with granularity at the level of a second because finer increments cannot be accurately captured when dealing with manual processes which, by their nature, take longer to perform than a time increment of under one second. The Participants agree that, due to the nature of transactions originated over the phone, it is not practical to attempt granularity finer than one second, as any such finer increment would be inherently unreliable. Further, the Participants do not believe that recording Manual Order Events to the second will hinder the ability of regulators to determine the sequence in which Reportable Events occur.

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As a result of these discussions, the Exemptive Request Letter requested exemptive relief from the Commission to allow the CAT NMS Plan to require Manual Order Events to be captured with granularity of up to and including one second or better, but also require CAT Reporters to report the time stamp of when a Manual Order Event was captured electronically in the relevant order handling and execution system of the party to the event. Granularity of the Electronic Capture Time will be consistent with the SEC Rule 613(d)(3) requirement that time stamps be at least to the millisecond.

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Thus, the Participants have determined that adding the Electronic Capture Time would be beneficial for successful reconstruction of the order handling process and would add important information about how the Manual Order Events are processed once they are entered into an electronic system. Additionally, Manual Order Events, when reported, must be clearly identified as such.

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(d) Data Maintenance and Management

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Data Maintenance and Management of the Central Repository “refers to the process for storing data at the [C]entral [R]epository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.”119

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The Plan Processor must create a formal records retention policy to be approved by the Operating Committee. All of the data (including both corrected and uncorrected or rejected data) in the Central Repository must be kept online for a rolling six year period, which would create a six year historical audit trail. This data must be directly available and searchable by regulators electronically without any manual intervention. Additionally, the Plan Processor is required to create and maintain for a minimum of six years a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC.

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Assembled lifecycles of order events must be stored in a linked manner so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, or routed through multiple broker-dealers before being sent to the exchange for execution.

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Most Bidders recommended dividing data in the Central Repository into nodes based on symbol, date or a combination thereof in order to speed query response times. The Participants are not specifying how the data is divided, but will require that it be partitioned in a logical manner in order to optimize access and retrieval.

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All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site. The Participants are requiring that the Plan Processor implement a disaster recover capability that will ensure no loss of data and will support the data availability requirements for the Central Repository and a secondary processing site will need to be capable of recovery and restoration of services at the secondary site within 48 hours of a disaster event.

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(e) Data Access by Regulators

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As detailed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, the Participants and other regulators will have access to raw unprocessed data that has been ingested by the Central Repository prior to Noon Eastern Time on T +1.120 Between Noon Eastern Time on T +1 and T+5, the Participants and other regulators should have access to all iterations of processed data.121 At T+5, the Participants and other regulators should have access to corrected data.122 The Plan Processor must adopt policies and procedures to reasonably inform Participants and the SEC of material data corrections made after T+5. The Participants and other regulators will be able to build and generate targeted queries against data in the Central Repository. More information about the report, query, and extraction capabilities can be found in Appendix D, Functionality of the CAT System.

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(f) Data Recovery and Business Continuity

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As noted above, in addition to describing data security and confidentiality, all of the Bidders were required to set forth an approach to data loss recovery and business continuity in the event of data loss. All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site.

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The Plan Processor must comply with industry best practices for disaster recovery and business continuity planning, including the standards and requirements set forth in Appendix D, BCP / DR Process.

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With respect to business continuity, the Participants have developed the following requirements that the Plan Processor must meet. In general, the Plan Processor will implement efficient and cost-effective backup and disaster recovery capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the Central Repository. The disaster recovery site must have the same level of availability / capacity / throughput and data as the primary site. In addition, the Plan Processor will be required to design a Business Continuity Plan that is inclusive of the technical and business activities of the Central Repository, including the items specified in Appendix D, BCP / DR Process (e.g., bi-annual DR testing and an annual Business Continuity Audit).

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4. The Security and Confidentiality of the Information Reported to the Central Repository (SEC Rule 613(a)(1)(iv))

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As required by SEC Rule 613(a)(1)(iv), this section describes the security and confidentiality of the information reported to the Central Repository. As the Commission noted in the Adopting Release, keeping the data secure and confidential is critical to the efficacy of the Central Repository and the confidence of market participants. There are two separate categories for purposes of treating data security and confidentiality: (1) PII; and (2) other data related to orders and trades reported to the CAT.123

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Because of the importance of data security, the Participants included in the RFP numerous questions to Bidders requesting detailed information on their data security approaches. In the RFP, the Participants requested general information regarding the following:

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• how the Bidder’s solution protects data during transmission, processing, and at rest (i.e., when stored in the Central Repository);124

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• the specific security governance/compliance methodologies utilized in the proposed solution;125

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• how access to the data is controlled and how the system(s) confirms the identity of persons (e.g., username/password), monitors who is permitted to access the data and logs every instance of user access;126

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• what system controls for users are in place to grant different levels of access depending on their role or function;127

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• the strategy, tools and techniques, and operational and management practices that will be used to maintain security of the system;128

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• the proposed system controls and operational practices;129

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• the organization’s security auditing practices, including internal audit, external audit, third-party independent penetration testing, and all other forms of audit and testing;130

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• how security practices may differ across system development lifecycles and environments that support them (e.g., development, testing, and production);131

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• experiences in developing policies and procedures for a robust security environment, including the protection of PII;132

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• the use of monitoring and incident handling tools to log and manage the incident handling lifecycle;133

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• the approach(es) to secure user access, including security features that will prevent unauthorized users from accessing the system;134

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• the processes/procedures followed if security is breached;135

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• the infrastructure security architecture, including network, firewalls, authentication, encryption, and protocols; and136

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• the physical security controls for corporate, data center and leased data center locations.137

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All Bidders acknowledged the importance of data security; however, the proposals varied in the details about security policies, data access management, proactive monitoring and intrusion prevention, and how data security will be implemented. Some Bidders intend to leverage their experience in financial services and adopt their policies and technologies to control data, and many Bidders supported such measures as role-based access controls, two factor authentication, detailed system logs, and segmentation of sensitive data that is isolated in both logical and physical layers. Other Bidders indicated that they would use role-based security policies, data and file encryption, and redundant and layered controls to prevent unauthorized access. Additionally, Bidders noted that the physical locations at which data is stored need security measures to ensure data is not compromised. Some Bidders indicated that physical controls would include background checks for employees working with the system; physical building security measures (e.g., locks, alarms, key control programs, CCTV monitoring for all critical areas, and computer controlled access systems with ID badges).

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The RFP also requested additional information specific to the treatment and control over PII. The RFP required Bidders to specifically address:

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• how PII will be stored;138 and

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• how PII access will be controlled and tracked.139

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All of the Bidders proposed segregating PII from the other data in the Central Repository. Additionally, all of the Bidders recommended limiting access to PII to only those regulators who need to have access to such information, and requiring additional validations to access PII. Although all Bidders proposed to keep a log of access to the Central Repository by user, the Bidders suggested different methods of authentication and utilized varying security policies, including the use of VPNs or HTTPS.

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The RFP also requested information from Bidders on data loss prevention (“DLP”) and business continuity to ensure the continued security and availability of the data in the Central Repository. Specifically, the RFP asked Bidders to describe:

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• their DLP program;140 and

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• the process of data classification and how it relates to the DLP architecture and strategy.141

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Based upon the RFP responses, as well as input from the Participants’ information security teams and discussions with the DAG, information security requirements were developed and are defined in Appendix D, Data Security. These requirements are further explained below.

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(a) General Security Requirements

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SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the Central Repository in accordance with the policies, procedures, and standards in the CAT NMS Plan.142 Based on the numerous options and proposals identified by the Bidders, the Participants have outlined multiple security requirements the Plan Processor will be required to meet to ensure the security and confidentiality of data reported to the Central Repository. The Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing as well as data at rest.

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The Plan Processor must provide a solution addressing physical security controls for corporate, data center and any leased facilities where any of the above data is transmitted or stored. In addition to physical security, the Plan Processor must provide for data security for electronic access by outside parties, including Participants and the SEC and, as permitted, CAT Reporters or Data Submitters. Specific requirements are detailed in Appendix D, Data Security, and include requirements such as role-based user access controls, audit trails for data access, and additional levels of protection for PII.

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Pursuant to SEC Rule 613(i)(C), the Plan Processor has to develop and maintain a comprehensive security program for the Central Repository with dedicated staff: (1) that is subject to regular reviews by the Chief Compliance Officer; (2) that has a mechanism to confirm the identity of all persons permitted to access the data; and (3) that maintains a record of all such instances where such persons access the data. In furtherance of this obligation, the CAT NMS Plan requires the Plan Processor to designate a Chief Compliance Officer and a Chief Information Security Officer, each subject to approval by the Operating Committee. Each position must be a full-time position. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer must develop a comprehensive compliance program covering all CAT Reporters, including the Participants and Industry Members.143 Section 6.2(b) of the CAT NMS Plan provides that the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, standards and control structures to monitor and address data security issues for the Plan Process and the CAT System as detailed in Appendix D, Data Security.

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Section 6.12 of the CAT NMS Plan requires that the Plan Processor develop and maintain a comprehensive information technology security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee. To effectuate these requirements, Appendix D sets forth certain provisions designed to (1) limit access to data stored in the Central Repository to only authorized personnel and only for permitted purposes; (2) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository, and data maintenance by the Central Repository; (3) require the establishment of secure controls for data retrieval and query reports by Participants’ regulatory staff and the SEC; and (4) otherwise provide appropriate database security for the Central Repository. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer, in collaboration with the Chief Information Security Officer, will retain independent third parties with appropriate data security expertise to review and audit on an annual basis the policies, procedures, standards, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository.144

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The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and the CAT System, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the system. The solution must also address secure controls for data retrieval and query reports by Participant regulatory staff and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for different components of the system, such as access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter calculated Error Rates.

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In addition, pursuant to SEC Rule 613(e)(4)(i)(C)(2), the Plan Processor will develop and maintain a mechanism to confirm the identity of all persons permitted to access the data. The Plan Processor is responsible for defining, assigning and monitoring CAT Reporter entitlements. Similarly, pursuant to SEC Rule 613(e)(4)(i)(C)(3), the Plan Processor will record all instances where a person accesses the data.

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Pursuant to SEC Rule 613(e)(4)(i)(B), Section 6.5(e)(ii) of the CAT NMS Plan requires each Participant to adopt and enforce rules that require information barriers between its regulatory staff and non-regulatory staff with regard to access to and use of data in the Central Repository, and permit only persons designated by such Participants to have access to and use of the data in the Central Repository.

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The Plan Processor will also develop a formal cyber incident response plan to provide guidance and direction during security incidents, and will also document all information relevant to any security incidents, as detailed in Appendix D, Data Security.

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(b) PII

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As noted above, because of the sensitivity of PII, the Participants have determined PII should be subject to more stringent standards and requirements than other order and trading data. In response to the RFP questions, many Bidders mentioned that a range of techniques were required to ensure safety of PII. These techniques included development of PII policies and managerial processes for use by Plan Processor as well as Participants’ staff and the SEC, physical data center considerations and strong automated levels, such as application, mid-tier, database, and operating systems levels, and use of role-based access and other parameters such as time-limited, case-restricted, and compartmentalized privilege. Most Bidders advocated for separate storage of PII in a dedicated repository to reduce the ability for hacking events to occur.

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In accordance with SEC Rule 613(e)(4)(i)(A), all Participants and their employees, as well as all employees of the Plan Processor, will be required to use appropriate safeguards to ensure the confidentiality of data reported to the Central Repository and not to use such data for any purpose other than surveillance and regulatory purposes. A Participant, however, may use the data that it reports to the Central Repository for regulatory, surveillance, commercial, or other purposes.

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The Participants anticipate that access to PII will be limited to a “need-to-know” basis. Therefore, it is expected that access to PII associated with customers and accounts will have a much lower number of registered users, and access to this data will be limited to Participants’ staff and the SEC who need to know the specific identity of an individual. For this reason, PII such as SSN and TIN will not be made available in the general query tools, reports, or bulk data extraction.145 The Participants will require that the Plan Processor provide for a separate workflow granting access to PII (including an audit trail of such requests) that allows this information to be retrieved only when required by specific regulatory staff of a Participant or the SEC, including additional security requirements for this sensitive data. Specifically, the Plan Processor must take steps to protect PII as defined in Appendix D, Data Security and including items such as storage of PII separately from order and transaction data, multi-factor authentication for access to PII data, and a full audit trail of all PII data access.

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It is anticipated that the Technical Specifications will set forth additional policies and procedures concerning the security of data reported to the Central Repository; however, any such policies and procedures must, at a minimum, meet the requirements set forth in the CAT NMS Plan and Appendix D.

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5. The Flexibility and Scalability of the CAT (SEC Rule 613(a)(1)(v))

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(a) Overview

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As required by SEC Rule 613(a)(1)(v), this section discusses the flexibility and scalability of the systems used by the Central Repository to collect, consolidate and store CAT Data, including the capacity of the Central Repository to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional Eligible Securities or transactions, changes in regulatory requirements, and other developments.

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The Plan Processor will ensure that the Central Repository’s technical infrastructure is scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture. The technical infrastructure should be designed so that in the event of a capacity upgrade or hardware replacement, the Central Repository can continue to receive data from CAT Reporters with no unexpected issues.

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The Plan Processor will perform assessments of the Central Repository’s technical infrastructure to ensure the technology employed therein continues to meet the functional requirements established by the Participants. The Plan Processor will provide such assessments to, and review such assessments with, the Operating Committee within one month of completion. The Operating Committee will set forth the frequency with which the Plan Processor is required to perform such assessments. The Operating Committee must approve all material changes / upgrades proposed by the Plan Processor before they can be acted upon. The Operating Committee may solicit feedback from the Advisory Committee for additional comments and/or suggestions on changes to the capacity study as the Operating Committee determines necessary.

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The Central Repository will employ optimal technology for supporting (1) scalability to increase capacity to handle a significant increase in the volume of data reported, (2) adaptability to support future technology developments and new requirements and (3) maintenance and upgrades to ensure that technology is kept current, supported and operational.

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Participants will provide metrics and forecasted growth to facilitate Central Repository capacity planning. The Plan Processor will maintain records of usage statistics to identify trends and processing peaks. The Central Repository’s capacity levels will be determined by the Operating Committee and used to monitor resources, including CPU power, memory, storage, and network capacity.

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The Plan Processor will ensure the Central Repository’s compliance with all applicable service level agreements concerning flexibility and scalability of the Central Repository, including those specified in the CAT NMS Plan and by the Operating Committee.

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(b) Approaches proposed by Bidders

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Information received from Shortlisted Bidders indicated that all six Shortlisted Bidders considered incoming transaction volumes to be one of their most significant drivers of cost across hardware, software, and full-time employees (“FTEs”), with the expected rate of increase in transaction volumes and retention requirements also being prominent drivers of cost. The approaches described above will facilitate effective management of these factors to provide for a cost-effective and flexible Central Repository.

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As noted in the RFP, the Bidders were required to provide comments on how the Central Repository would be scalable for growth in the following aspects: number of issues accepted by the CAT, types of messages accepted by the CAT, addition of fields stored on individual data records or increases in any data type due to market growth. The Bidders were also requested to describe how the system can be scaled up for peak periods and scaled down as needed.

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Bidders using a network infrastructure of data collection hubs noted the use of Ethernet links throughout a single hub as a method of handling additional throughput and capacity. Other Bidders note access points will be load balanced, allowing for additional capacity. Some Bidders note the need for continued monitoring to facilitate timely addition of capacity or other upgrades. Other Bidders highlighted the ability to scale processing horizontally by adding nodes to the database structure which will allow for additional capacity. In this instance, adding nodes to an existing clustered environment allows for the preservation of processing speed in the existing processing environment. In a cloud solution, Bidders note the systems will scale automatically. That is, the processing load or capacity is determined at the instance the tool is ‘run’ by the processer.146 Some Bidders broadly note that the selection of platform components or features of their proposed solution infrastructure was the key in developing a scalable system. It is further noted that the selection of these elements allows for technological upgrades to incorporate newer technologies without a system replacement. Bidders identify the use of additional server and storage capacity as a key proponent of providing a scalable system.

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6. The Feasibility, Benefits, and Costs for Broker-Dealers Reporting Allocations in Primary Market Transactions to the Consolidated Audit Trail (SEC Rule 613(a)(1)(vi))

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SEC Rule 613(a)(1)(vi) requires the Participants to assess the feasibility, benefits and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

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• The identity of all market participants (including broker-dealers and customers) that are allocated NMS Securities, directly or indirectly, in a Primary Market Transaction;147

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• The number of such NMS Securities each such market participant is allocated; and

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• The identity of the broker-dealer making each such allocation.148

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The objective of this CAT NMS Plan is to provide a comprehensive audit trail that “allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets.” The Participants believe that an eventual expansion of the CAT to gather complete information on Primary Market Transactions would be beneficial to achieving that objective. However, based on the analysis directed to be completed as part of this plan, the Participants have concluded that it is appropriate to limit CAT submissions related to allocations in Primary Market Transactions to sub-account allocations, as described below.

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Specifically, based on comments received by the Participants on this and other topics related to the consolidated audit trail,149 the Participants believe that information related to sub-account allocations – the allocation of shares in a primary market offering to the accounts that ultimately will own them – currently is maintained by broker-dealers in a manner that would allow for reporting to the Central Repository without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations, including a variety of rulemaking and policy decisions. By contrast, the reporting of so-called “top account” information in Primary Market Transactions to the Central Repository would involve significantly more costs which, when balanced against the marginal benefit, is not justified at this time. These issues are discussed further below.

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As a preliminary matter, the analysis required pursuant to this section is limited to Primary Market Transactions in NMS Securities that involve allocations. As the Commission has noted, “‘a primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering.’”150 The Participants understand that Primary Market Transactions generally involve two phases that implicate the allocation of shares. The “book building” phase involves the process “by which underwriters gather and assess investor demand for an offering of securities and seek information important to their determination as to the size and pricing of an issue.”151 This process may involve road shows to market an offering to potential investors, typically institutional investors, including the discussion of the prospective issuer, and its management and prospects. The book building phase also involves efforts by the underwriter to ascertain indications of interest in purchasing quantities of the underwritten securities at varying prices from potential investors.152 Using this and other information, the underwriter will then decide how to allocate IPO shares to purchasers. The Participants understand that these are so-called “top account” allocations – allocations to institutional clients or retail broker-dealers, and that such allocations are conditional and may fluctuate until the offering syndicate terminates. Sub-account allocations occur subsequently, and are made by top account institutions and broker-dealers prior to settlement. Sub-account allocations represent the allocation of IPO shares to the actual account receiving the shares and are based on an allocation process that is similar to secondary market transactions.153

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(a) Feasibility

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In the April 2013 Request for Comment, the Participants requested information on how firms handle Primary Market Transactions. In response to the request, FIF, SIFMA and Thomson Reuters submitted comments explaining current industry practice with respect to Primary Market Transactions.154 Both SIFMA and FIF noted that broker-dealers generally maintain top account allocation information in book building systems that are separate from their systems for secondary market transactions and that differ across the industry, including the use of applications provided by third parties, in house systems and spreadsheets for small firms.155 The Participants also understand that the investment banking divisions of broker-dealers typically use different compliance systems than those used for secondary market transactions.156 The DAG also provided feedback157 indicating that the impacted systems differ across the industry, given differing processes for Primary Market Transactions depending upon the structure of the deal, and that initial allocations are stored in book-building systems with varying levels of sophistication across the industry, including third-party systems, custom-built systems, and spreadsheets. The Participants thus believe that capturing indications of interest and other information about top account allocations in an accurate and consistent manner across the industry would be challenging.

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By contrast, the Participants believe that it would be more feasible to gather information relating to sub-account allocations in Primary Market Transactions. The Participants understand that sub-account allocations are received in a manner and level of detail similar to allocations in secondary market transactions,158 and that the same middle and back office systems that are used for the processing of sub-account allocations for secondary market transactions generally are also used for the sub-account allocations for Primary Market Transactions.159 Similarly, sub-account allocations for Primary Market Transactions generally are maintained in an electronic format that could be converted into a reportable format acceptable for the CAT System. Therefore, these systems could more easily report information about sub-account allocations to the Central Repository than systems containing information regarding top-account allocations.

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(b) Benefits

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As the Commission notes, data about the final allocations of NMS Securities in Primary Market Transactions could improve compliance monitoring and market analyses by the Commission and the Participants, which, in turn, could help inform rulemaking and other policy decisions.160 For example, such data could enhance the Commission’s understanding of the role of the allocations in the capital formation process, when and how investors receiving allocations sell their Eligible Securities and how allocations differ among broker-dealers.161 Such data also could assist the Commission and Participants in conducting their respective examinations and investigations related to Primary Market Transactions.162

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The Participants believe that most of these potential benefits could be achieved through the gathering of information relating to sub-account allocations rather than top account information. For example, sub-account allocation information would aid the Commission and the Participants in gaining a better understanding of how shares allocated in Primary Market Transactions are sold in the secondary market, or how allocations differ across broker-dealers. By contrast, because top account information of conditional and interim allocations for NMS Securities fluctuates throughout the syndicate process and may vary significantly among firms, the marginal benefits of such information over final sub-account allocations are much less clear.

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(c) Costs

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The cost of reporting Primary Market Transaction information will depend on the scope of allocation information subject to the rule, as well as the related technology upgrades that would be necessary to report such information to the Central Repository. Based on the response of commenters, the Participants believe that reporting top account information about conditional allocations to the Central Repository would require significant technology enhancements. As noted above, current market practices capture top account allocations using systems and data sources that are different and separate from those used in secondary market transactions. Commenters also noted that there may be significant variability among underwriters in terms of the systems and applications used to gather such data.

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The DAG provided cost estimates associated with the reporting of Primary Market Transactions.163 These estimates indicated that to report both initial and sub-account allocations would cost the industry as a whole at least $234.8 million164 and require approximately 36 person-months per firm to implement. The DAG’s estimate to report sub-account allocations only was approximately $58.7 million165 for the industry and would require approximately 12 person-months per firm to implement. The DAG commented that given the higher costs associated with reporting initial allocations, if Primary Market Transactions are required to be reported to the Central Repository, that only reporting final sub-account allocations be required.

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Based upon this analysis, the Participants are supportive of considering the reporting of Primary Market Transactions, but only at the sub-account level, and will incorporate analysis of this requirement, including how and when to implement such a requirement, into their document outlining how additional Eligible Securities could be reported to the Central Repository, in accordance with SEC Rule 613(i) and Section 6.11 of the Plan.

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B. ANALYSIS OF THE CAT NMS PLAN: These considerations are intended to help inform the Commission about the cost for development, implementation and maintenance of the CAT and to help determine if such plan is in the public interest.

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7. Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii))

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The analysis of expected benefits and estimated costs presented here is informed by the Commission’s public guidance on conducting economic analysis in conjunction with SEC rulemaking.166 The analysis begins with a statement of the need for regulatory action, describes the sources of information used in the analysis, and provides a description of the economic baseline used to evaluate the impacts associated with the CAT NMS Plan. The analysis then provides estimates of the costs to build, implement, and maintain the CAT, as contemplated, and ends with a description of the alternatives considered.

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(a) Need for Regulatory Action

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SEC Rule 613 further requires the Participants to consider and discuss in the CAT NMS Plan detailed estimated costs for creating, implementing, and maintaining the CAT as contemplated by the CAT NMS Plan. Specifically, SEC Rule 613 requires that the estimated costs should specify: (1) an estimate of the costs to the Participants in establishing and maintaining the Central Repository; (2) an estimate of the costs to broker-dealers, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants and broker-dealers. Set forth below is a discussion of cost estimates, including the studies undertaken to obtain relevant data, as well as the proposed funding model.

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(b) Economic Analysis

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(i) Sources of Cost Information

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Participants relied on two primary sources of information to estimate current audit trail costs (i.e., costs associated with the economic baseline), the costs incurred to meet the requirements of SEC Rule 613 for both the Participants and other CAT Reporters and the costs associated with the creation, implementation and maintenance of the CAT. First, to assess the costs associated with Participant and CAT Reporter obligations, Participants solicited study responses from Participants, broker-dealers and third party vendors. These three constituencies are the primary parties with direct costs arising from SEC Rule 613, as discussed further below. Second, to assess the costs associated with creating, implementing and maintaining the CAT, this analysis relies on estimated costs submitted by the Bidders as part of the bidding process.

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(A) Studies

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(1) Costs to Participants Study

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The first study undertaken collected information from the Participants about current audit trail reporting costs under the existing regulatory reporting framework and the potential costs of reporting to the Central Repository (the “Costs to Participants Study”). Respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. The study also requested information about costs associated with retiring current regulatory systems that would be rendered redundant by the CAT.

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The Costs to Participants Study was distributed to the 19 Participants on August 11, 2014. The initial due date for responses was August 25, 2014; however due to the complexity of the data collection effort, the due date for the study was extended to September 24, 2014. Discussions with respondents suggested that at least some of the costs were more appropriate to measure at the level of the group of Affiliated Participants that hold multiple licenses (“Affiliated Participants Group”). Based on this approach, study results are presented for four Participants holding a single exchange registration and FINRA, which also is a Participant but is a registered securities association, and another five Affiliated Participants Groups representing the remaining fourteen registered exchanges. Subsequent to the filing of the CAT NMS Plan, the Participants determined that additional detail about anticipated costs could be provided to enhance the data collected as part of the Costs to Participants Study and a second data collection was conducted.

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(2) Costs to CAT Reporters Study

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The study sent to broker-dealers (the “Costs to CAT Reporters Study”) was distributed to 4,406 broker-dealers,167 and requested estimates for current costs under the existing regulatory reporting framework as well as future costs for reporting to the Central Repository. Broker-dealer respondents were asked to estimate the future costs to report to the Central Repository under two separate scenarios.168 Approach 1 described a scenario in which broker-dealers would submit data to the Central Repository using their choice of existing industry messaging protocols, such as the FIX protocol. Approach 2 provided a scenario in which broker-dealers would submit data to the Central Repository using a defined or specified format, such as an augmented version of OATS. For each approach, respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. Finally, broker-dealers were requested to provide the cost of retirement of existing systems to be replaced by the CAT.

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The development of the Costs to CAT Reporters Study took place over two months, starting in May 2014, and included detailed discussions with the DAG. The Participants developed an initial outline of questions based on the requirements in SEC Rule 613, as well as a detailed assumptions document. To make the Costs to CAT Reporters Study effective and informative, the Participants spent two months formulating the Costs to CAT Reporters Study with detailed input from the DAG. The initial draft of the Costs to CAT Reporters Study was presented to the DAG in May 2014, and was discussed in two additional meetings with the DAG until mid-June 2014. In addition, on June 4, 2014, the Participants received and subsequently incorporated detailed written feedback from DAG members on the Costs to CAT Reporters Study and associated assumptions document.169

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The study link was sent on June 23, 2014, to the compliance contact at each recipient CAT Reporter identified by the applicable designated examining authority or designated options examining authority to receive regulatory update and information requests. The initial due date for the study was August 6, 2014. On June 25, 2014 and July 9, 2014, the Participants hosted a webinar170 to review the materials associated with the Costs to CAT Reporters Study, and to answer any questions from the CAT Reporters. On July 17, 2014, July 30, 2014, and August 4, 2014, reminders were sent to the CAT Reporters to submit their final responses to the Costs to CAT Reporters Study by August 6, 2014. In addition, the Participants requested that industry associations that are part of the DAG encourage their members to respond to the Costs to CAT Reporters Study.

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On August 6, 2014, the first extension was granted for the Costs to CAT Reporters Study, extending the due date to August 20, 2014. On August 20, 2014, an additional extension was granted, extending the due date to September 3, 2014.

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During the process of collecting responses to the Costs to CAT Reporters Study, CAT Reporters were informed that all responses were captured on an anonymous basis and would only be reported to the Participants in an aggregated, anonymous format. The third party facilitator of the Costs to CAT Reporters Study reviewed all responses received through the study portal. Study respondents had the option of identifying their firm should additional follow-up be required; any such follow-up was undertaken by the third-party facilitator, as necessary, to enhance the overall quality of responses received.

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The Participants received 422 responses. Of those responses, 180 were deemed to be materially incomplete171 and, thus, they were considered effectively nonresponsive. An additional 75 responses were determined to be clearly erroneous; for example the responses had repeating values that could not be used in analysis, or the magnitude of reported FTEs or other costs was so high as to be considered an outlier172. As a result, the Participants excluded these incomplete and clearly erroneous responses from the data set, resulting in a population of 167 responses that was used for purposes of conducting the cost analysis described herein.

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(3) Costs to Vendors Study

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A study requested information from various service providers and vendors about the potential costs of reporting to the Central Repository (the “Costs to Vendors Study”). The Participants developed the content of the Costs to Vendors Study, based on the structure and content of the Costs to CAT Reporters Study. The distribution list for the Costs to Vendors Study was provided by the DAG, and was distributed to 13 service bureaus and technology vendors on August 13, 2014. The initial due date for responses was September 1, 2014; however, due to the complexity of the data collection effort, the due date for the study was extended to September 12, 2014. The Participants received five completed responses to the Costs to Vendors Study.

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(B) Bidder Estimates

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To estimate the costs to Participants for creating, implementing and maintaining the CAT, Bidders were asked to provide in their Bid documents total one-year and annual recurring cost estimates. As part of the RFP process, the Bidders were asked to provide a schedule of the anticipated total cost of creating, implementing and maintaining the CAT. As noted above in the Background Section of Appendix C, any one of the six Shortlisted Bidders could be selected as the Plan Processor and each Shortlisted Bidder173 has proposed different approaches to various issues. The Bidder selected as the Plan Processor must meet the specific requirements set forth in the Plan and Appendix D and may be given the opportunity to revise its Bid prior to the final selection of a Plan Processor. Accordingly, the Participants anticipate that the cost estimates to create, implement and maintain the CAT may differ from what is set forth below.174

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In its final rule for the Consolidated Audit Trail, the Commission amended its proposal to include enhanced security and privacy requirements. Specifically, SEC Rule 613(e)(4) requires the NMS Plan to include policies and procedures, including standards, to be used by the Plan Processor to ensure the security and confidentiality of all information reported to the Central Repository. Participants did not ask Bidders to separately assess the costs associated with the enhanced security requirements in SEC Rule 613; rather these costs were embedded in the Bids as a component of the total costs.

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The RFP requested that Bidders provide an estimate of the total one-time cost to build the CAT, including technological, operational, administrative, and any other material costs. The six Shortlisted Bidders provided estimates ranging from a low of $30,000,000 to a high of $91,600,000, with an average one-time cost of $53,000,000.175

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The RFP also requested that Bidders provide an estimate of annual recurring operating and maintenance costs for the five year period following the selection of the Plan Processor, and an estimate of the annual peak year costs (i.e., cost for the year during which it will cost the most to operate the CAT). The six Shortlisted Bidders provided estimates ranging from a low of $135,000,000 to a high of $465,100,000 over the course of the first five years of operation, with an average five-year cost of $255,600,000 and an average annual cost of $51,100,000. Estimates of peak year recurring costs range from a low of $27,000,000 to a high of $109,800,000, with an average of $59,400,000. The table presented below reports the low, median, average, and maximum expected costs for the build, maintenance, and peak year maintenance of the Central Repository arising from the Shortlisted Bids. These figures are subject to change as Bidders may update their cost estimates.

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The Participants note, however, that there may be a relation between the initial construction costs and maintenance costs based on technological choices, among other factors. To better compare estimates, the Participants are providing a range based on the reported combined build and annual recurring costs for the five year period following Plan Processor selection, discounted by a factor of 2%.176 Estimates of total costs range from $159,800,000 to $538,700,000.

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Participants sought insight into the economic drivers of the cost estimates from the Shortlisted Bidders. Specifically, Participants asked each Shortlisted Bidder to identify the factors, such as the amount of message traffic, complexity of order life cycles, number and complexity of Participant and Commission data requests and administration and support costs that were material to its Bid. Bidders identified the following as primary drivers of their Bid costs: (1) reportable volumes of data ingested into the Central Repository; (2) number of technical environments that would be have to be built to report to the Central Repository; (3) likely future rate of increase of reportable volumes; (4) data archival requirements; and (5) user support and/or help desk resource requirements.177

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(ii) Economic Baseline

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In publishing SEC Rule 613, the Commission stated that it “believes that the regulatory infrastructure on which the Participants and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system.”178 The purpose of the CAT NMS Plan is to develop, build and maintain a system that provides an infrastructure to appropriately monitor, surveil and oversee the national market system in its current state and provide sufficient flexibility to reasonably adjust for future financial market innovations.

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Such a system will necessarily impact the Commission, Participants, potential future Participant entrants, broker-dealers and other market participants, issuers and investors. Each party may derive costs, benefits and other economic impacts, depending upon plan implementation, the relevant economic activities of each entity and the allocation of costs and responsibilities across those entities. These estimated costs, benefits, and other economic impacts must be assessed against the current economic baseline, capturing the existing state of regulatory audit trail activity in the markets. The economic baseline for different affected parties is described in greater detail below.

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(A) Description of Current Audit Trail Reporting

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Currently, separate audit trails exist within each exchange in addition to the audit trail requirements for FINRA members to report to OATS.179 For equities, all broker-dealers that are members of FINRA must report their orders in NMS Stocks and OTC Equity Securities, including executions or cancellations, to OATS. Accordingly, for FINRA members, it is possible to match OATS reports to related exchange audit trail entries, provided that the related exchange has a regulatory services agreement with FINRA such that FINRA has access to the exchange data. Broker-dealers that are not FINRA members do not have a regular equity audit trail reporting requirement, although NYSE and NASDAQ member proprietary firms that are not FINRA members have an obligation to record OATS data and report to FINRA upon request. Additionally, each exchange creates its own audit trail for each order received that it receives and processes.

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For options, the options exchanges utilize the Consolidated Options Audit Trail System (“COATS”) to obtain and review information on options transactions. COATS data includes trades, the National Best Bid and National Best Offer at the time of the trade and clearing information for customers at the clearing firm level. It also identifies clearing firm proprietary trading and individual marker maker transactions if they are reported correctly at the time of the trade. However, COATS does not include adjustment data from the Options Clearing Corporation; these adjustments include changes to either the account type or size of the position. Additionally, order information is only available to the Commission upon request from the options exchanges. Currently reports need to be constructed based on order information received from the various options exchanges. As previously noted, only the National Best Bid and National Best Offer at the time of the trade is included in the COATS data; however, this is optional data that the exchanges may or may not provide. The options exchanges utilize their independent quote information to build their reports.

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In sum, each equities and options exchange is built on its own unique platform, utilizes unique entry protocols and requirements and thus creates uniquely formatted audit trails.

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The existence of multiple non-integrated audit trails has direct consequences on the accuracy and efficiency of regulatory oversight. The Commission has stated that:

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…there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, re-routed, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.180

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In addition, the Intermarket Surveillance Group’s (“ISG”) consolidated equity audit trail combines transaction data from all exchanges and is used by all Participants for surveillance purposes. However, the ISG audit trail is limited because it contains clearing member and executing broker’s CRD numbers, but does not contain information about the beneficial owner to a trade. It also does not contain order detail information such as a complete order entry time or routing history.

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COATS and the ISG equity audit trails are utilized to generate various option cross market/cross product exception reports, such as front-running and anticipatory hedges. Since the current data is unable to drill down to beneficial owner or order information, these reports are less effective and produce a large number of false positives.

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(B) Costs, Benefits, and Other Economic Impacts of Audit Trail Reporting on Regulators and Market Participants

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(1) Participants

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There are 19 Participants of varying sizes that have established audit trail reporting requirements for NMS Securities. Of these, one is a registered securities association. The other 18 Participants are exchanges. Fourteen of these exchanges permit quotation and transactions in NMS Securities and 12 permit transactions and quotations in Listed Options.

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Participants expend resources currently to maintain and update their audit trail reporting systems. Costs for current surveillance programs as indicated by Participants responding to the Costs to Participants Study vary significantly, reflecting the various sizes of Participants: total annual costs associated with meeting current regulatory requirements are estimated to be $6,900,000. Total annual costs for current surveillance programs for all Participants are $147,200,000.

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(2) Broker-Dealers

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Broker-dealers benefit from the current regime of audit trail reporting to the extent that reporting today permits the Commission and Participants to monitor for rule compliance. Effective regulatory and compliance oversight ensures increased market integrity and supports investor confidence in participating in financial markets. Conversely, if investors believe that regulators are unable to adequately and effectively monitor activities in a complex market (through current audit trail reporting), broker-dealers bear some of the cost in the form of lower market activity.

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Broker-dealers that are FINRA members must have systems and processes in place to provide FINRA with the reportable data in the required format. These systems also require resources to ensure that data quality and consistency and timeliness of reporting are maintained, and record-keeping obligations are fulfilled.181 Additionally, firm trading and order routing systems send orders and quotations to each exchange in the format required by such exchange. In turn, each exchange must store and convert the data for the purposes of creating internal exchange audit trails. Broker-dealers also commit staff to respond to Participant and Commission requests for additional data and related information based upon surveillance.

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Broker-dealers may take varied approaches to fulfilling their regulatory reporting obligations. For instance, many broker-dealers develop internal systems for the purpose of compiling order and trading data into a reportable format. In these instances, the firms may need to centralize varied and disparate systems. Other broker-dealers typically use third parties to help them comply with their reporting obligations. These third parties may include service bureaus that provide the firms with order management systems. Firms may also contract with their clearing firms to package and submit order data files on their behalf.

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Some broker-dealers that are FINRA members may be exempt from OATS reporting, or are excluded under FINRA rules from OATS requirements. Exempt firms go through a formal exemption request process through which they certify that they meet the exemption criteria which includes: (1) the member firm has total annual revenue of less than $2,000,000; (2) the member firm and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last 10 years to any disciplinary action involving fraud; (3) the member does not conduct any clearing or carrying activities for other firms; (4) the member does not conduct any market making activities in NMS Stocks and OTC Equity Securities; and (5) the member does not execute principal transactions with its customers.182 FINRA also excludes some members from the definition of a reporting member. The criteria to receive this exclusion include: (1) the member must engage in a non-discretionary order routing process where the firm immediately routes all of its orders to a single receiving reporting member; (2) the member cannot direct or maintain control over subsequent routing or execution by the receiving reporting member; (3) the receiving reporting member must record and report all information under applicable FINRA rules; and (4) the member must have a written agreement with the receiving reporting member specifying the respective functions and responsibilities of each party.183 Approximately 660 broker-dealers are either exempt or excluded from OATS requirements, but will be required to report to the Central Repository. These broker-dealers are included in the estimate of broker-dealers currently quoting or executing trades in NMS Securities and/or Listed Options.

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Additionally, the OATS rules do not require that proprietary orders generated in the normal course of market-making be reported.184 While some firms have chosen to voluntarily report such orders, there may be current gaps in the audit trail.

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Broker-dealers that are members of other Participants must also have systems and processes in place to provide the necessary reportable data in the required format. These systems also require resources to ensure data quality and consistency, timeliness of reporting, and record-keeping obligations.185 Broker-dealers that are members of more than one Participant must maintain and manage systems that provide the relevant audit trail data to each Participant for which they have an obligation to report such data, in the manner and by the rules proscribed by each Participant, as applicable.

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Upon request, broker-dealers must submit Electronic Blue Sheet (“EBS”) data to the requesting Participant by the specified due date, which is generally ten business days after receipt of the initial request. An EBS request is made by product and trade date range, with the data providing detailed information about the underlying accounts that transacted in the requested security. EBS requests can only be made for settled transactions in equity, option, or fixed income products, and they include information on allocations and executions of the requested product and may cover a time period of up to seven years from the date requested. Large Trader Reports are similar to EBS reports, except they are requested only by the Commission. Large trader requests may only be requested for NMS Securities, which may include unsettled transactions. In addition to requests being made by security and trade date range, a Large Trader request may be made by a LTID and trade date range. An LTID is an SEC identifier used to identify related entities under the same beneficial ownership structure. Broker-dealers must have systems and processes in place to provide EBS or large trader reportable data in the required format. These systems require resources to ensure that the data quality and timeliness of reporting are maintained, and record-keeping obligations are met. As with OATS, broker-dealers must commit staff to respond to requests for EBS or large trader data and may take varied approaches to fulfilling their regulatory reporting obligations.

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PHLX Rule 1022 initially required members to submit specified data to PHLX for all accounts, however this rule was amended in May 2014 to more closely mirror NYSE Rule 757, ARCA Rule 6.39, and CBOE Rule 8.9, and to only require broker-dealers to report data for all of the accounts for which they engage in trading activities or which they exercise investment discretion upon request, rather than on a continuing basis. PHLX Rule 1022 was in place prior to the existence of the compliance data files from ISG (COATS and ECAT) and OCC (position). The remaining requirement for members to provide data upon request is to enable a review if required for regulatory purposes. PHLX Rule 1022 is anticipated to be retired once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT, rather than from Industry Members.

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CBOE Rule 8.9(b) requires clearing firms to submit, on a daily basis and in a manner prescribed by CBOE, every executed order entered by market makers for securities underlying options traded on CBOE or convertible into such securities or for securities traded on CBOE, as well as for opening and closing positions in all such securities held in each market maker account. To the extent that clearing firms do not report such orders and information, the market maker who entered the order is responsible for reporting the order information. These data files are commonly known as Market Maker Equity Trade (MMET) and Market Maker Stock Position (MMSTK) files. The CBOE daily reporting requirement for market makers is comparable to other option exchange reporting requirements. CBOE Rule 8.9(b) is anticipated to be amended once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT rather than from Industry Members.

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As of June 30, 2014, there were 4,406 registered broker-dealers that were members of at least one Participant. The Participants determined that, as of July 31, 2014, approximately 1,800 of these registered broker-dealers quoted or executed transactions in NMS Securities, Listed Options or OTC Equity Securities. Of these 1,800 broker-dealers, approximately 1,700 are FINRA members and are either reporting to OATS or were identified as routing firms in OATS reports submitted by other OATS reporting broker-dealers, but are otherwise excluded from the definition of an OATS reporting member or exempt from the OATS rules. In addition, there are an estimated 100 broker-dealers that reported transactions to another SRO, but that are not FINRA members. This determination was made through a review of the number of broker-dealers that transmitted order information to OATS, reported transaction information or quoted messages to a Participant for each month, over the previous 18 months. The Participants also reviewed message traffic data in the same month in the prior year and found that July 2014 was a reasonable representation of such activity.

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Cost components considered in this process included technology costs (hardware / software costs), FTE costs (including, technology, operational, and compliance staffing requirements), and any outsourcing costs.186 The study also contained questions related to current costs that are intended to capture the baseline costs to broker-dealers for regulatory reporting, including costs related to compliance with OATS, the EBS and Large Trader reporting, and other reporting requirements, such as NYSE Rule 410B, PHLX Rule 1022, FESC/NYSE Rule123(e)/(f), and CBOE Rule 8.9.

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(C) Description of Costs to CAT Reporters Study Results

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Of the 167 responses to the Costs to CAT Reporters Study used in the analysis of costs associated with reporting to the Central Repository, 49 were from large firms and 118 were from small firms.187 Fifty-one respondents indicated that they have OATS reporting obligations and 116 respondents188 stated that they do not currently have OATS reporting obligations.189 Of these 51 OATS reporters, 21 were large and 30 were small broker-dealers, with one firm completing al reporting using in-house staffing, 26% using a combination of in-house staffing and outsourcing, 44% of firms outsourcing to clearing firms, and the remaining 26% outsourcing their reporting to service bureaus. Of the remaining 116 broker-dealers, self-identified as non-OATS reporters,190 28 were large and 88 were small. Figures for each respondent category have been provided for reference to support the cost analysis and include the average, median, minimum, maximum, and number of responses received equal to zero (0) or blank.191

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In analyzing responses to the Costs to CAT Reporters Study, Participants found responses to specific questions to be outliers. However, if the overall response from that respondent was otherwise deemed to be reasonably complete, the response was included in the analysis. As a result, in some cases, this may result in averages or medians being higher or lower than may be expected. In addition, a significant number of firms, in particular large firms, indicated that their current cost for regulatory obligations is $0. It is the Participants’ understanding that this is likely due to current operational practices among broker-dealers that do not differentiate between technology and headcount costs that support business functionality and regulatory reporting.

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Tables 1 and 2 describe the costs associated with current regulatory reporting requirements. Current costs for study respondents consisted of hardware / software costs, FTE costs consisting of development / maintenance, operational, and compliance staffing as well as third party outsourcing costs. Current average (median) hardware / software costs for the 49 large firms were equal to $310,000 ($0) and the 118 small firms were equal to $130,000 ($0).

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Large firms reported that they employ an average (median) of 9.56 (0.00) FTEs for OATS, EBS and other regulatory reporting requirements, while small firms employed 2.36 (0.00) FTEs for the same reporting requirements. Participants estimate the dollar costs associated with these FTEs by applying an annual expenditure of $401,440 per FTE192 to determine cost. The resulting average (median) FTE costs were equal to $3,800,000 ($0) for the 49 large firms and $950,000 ($0) for the 118 small firms.

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Third party / outsourcing costs were also varied by firm size. Average (median) third party / outsourcing costs for large firms was $180,000 ($0) and $130,000 ($0) for small firms.193

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Based on the costs associated with current regulatory reporting requirements, large firms provided an average cost of $4,290,000, and small firms reported an average cost of $1,210,000 for current reporting costs, with a median estimate of $0 for both large and small firms.

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Tables 3 to 6 describe the current regulatory costs for respondents who identified themselves as having OATS reporting obligations versus those that do not (referred to as non-OATS). For the 21 large OATS reporters, current hardware / software costs averaged $720,000, with a median cost of $10,000, while the 28 large non-OATS reporters reported an average hardware / software cost of $2,600, with a median cost of $0. For the 30 small OATS reporters, current hardware / software costs averaged $490,000, with a median value of $3,000, with the 88 small non-OATS reporters reporting an average hardware / software cost of $900 and a median cost of $0.

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Large OATS reporters stated they required, on average, 17.88 FTEs, with a median value of 7.00 FTEs. Applying the FTE rate described above, this translates into an average FTE cost of $7,200,000, and a median value of $2,800,000. Large non-OATS reporters indicated an average FTE requirement of 3.32 and a median requirement of 0.00, translating into an average cost of $1,300,000 and a median cost of $0. On the other side of the spectrum, small OATS reporters stated they required, on average, 6.11 FTEs, with a median value of 3.50 FTEs. Applying the FTE rate described previously, this translates into an average FTE cost of $2,500,000, and a median value of $1,400,000. Small non-OATS reporters indicated average FTE requirements of 1.08 and a median requirement of 0.00, translating into an average cost of $430,000 and median cost of $0.

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Third party / outsourcing costs for Large OATS reporters averaged $400,000, with a median value of $0; large non-OATS reporters indicated average third party / outsourcing costs of $22,000, with a median value of $0. For small OATS reporters, third party / outsourcing costs averaged $510,000 with a median value of $3,000; small non-OATS reporters provided average costs of $2,900, with median costs of $0.

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Based on the cost estimates above, large OATS reporters estimated an average (median) cost equal to $8,320,000 ($2,810,000) while large non-OATS respondents estimated an average (median) cost equal to $1,324,600 ($0). Small OATS reporters estimated an average (median) cost equal to $3,500,000 ($1,406,000) while small non-OATS respondents estimated an average (median) cost equal to $433,800 ($0).

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To understand the current costs associated with regulatory reporting and estimate the direct costs associated with the CAT NMS Plan, the Participants also conducted the Costs to Vendors Study. CAT Reporters may currently rely on third-parties to provide key services necessary to meet the reporting obligations. Smaller broker-dealers may rely wholly or in part on third-party providers for the infrastructure to manage and maintain their electronic records, including all of the data required for audit trail reporting. Larger broker-dealers and Participants may augment their own internal IT capacity and capabilities by purchasing the services of one or more third-party vendor. As a result, it is important to understand the current reporting cost as well as the likely impact of SEC Rule 613 on these vendors and to include them in the estimate of aggregate economic impacts.

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The Participants received five completed responses to the Costs to Vendors Study. One of the respondents indicated that the vendor did not currently have any reporting expenses on behalf of its clients and did not expect to face any costs under the CAT. Of the remaining responses, three respondents supported more than 100 clients, and one supported between 50 and 99 clients. Two of the respondents supported up to 25 million accounts, and two supported up to 50 million accounts. Two of the respondents serviced clients with institutional and retail businesses, while the remaining two supported clients with institutional businesses only.

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For equity order reporting, two respondents indicated that they process up to 1 million equity orders per day on behalf of their clients, and two respondents indicated that they process up to 2 million equity orders per day on behalf of their clients. For options order reporting, three respondents indicated that they report up to 1 million options orders per day on behalf of their clients, and one respondent indicated that it reports up to 2 million options orders per day on behalf of its clients. All four respondents indicated that they report between 3 million and 100 million OATS reportable order events194 per day on behalf of their clients. Three of the four respondents submitted EBS reports for their clients, with two submitting up to 200 responses per month and one submitting up to 400 responses per month.

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Reported costs for current regulatory reporting for vendors varied widely across both dollar costs and FTE requirements. Each respondent provided an FTE rate associated with their FTE requirements; therefore, FTE costs for the vendors are reported using rates provided by each respondent. Dollar costs for hardware and software ranged from $50,000 to $15,000,000, and FTE requirements (cost) ranged from 11 ($2,700,000) to 92 ($8,600,000). While the respondent with the largest number of clients reported the highest costs, costs did not always correlate uniformly with the number of clients for other firms.

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(iii) Estimated Costs, Benefits, and Other Economic Impacts of the CAT NMS Plan on Affected Parties

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As required by SEC Rule 613(a)(1)(vii), this section provides detailed estimated costs for creating, implementing, and maintaining the CAT, specifying (1) an estimate of the costs to Participants for establishing and maintaining the CAT; (2) an estimate of the costs to members of the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants, and between the Participants and members of the Participants. The Participants are sensitive to the economic impacts of SEC Rule 613. Throughout the development of the CAT NMS Plan, the Participants have continued to focus on minimizing the costs associated with the CAT. The Participants note that the figures presented in this analysis are estimates based on research completed and currently available data and are inherently subject to uncertainties.

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Through the RFP, review of proposals received, and interaction with industry, the Participants have identified the sources of the costs associated with the CAT NMS Plan. These include direct costs associated with creating, implementing and maintaining the CAT necessary to meet the requirements of the CAT NMS Plan. There are also direct costs associated with developing and adapting applicable CAT Reporter systems to meet the requirements of the CAT NMS Plan and comply with the Plan on an ongoing basis. Additionally, Participants and broker-dealers may incur direct costs associated with the retirement of redundant reporting systems, although there may also be significant savings to broker-dealers associated with retiring those systems over time.

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In order to meet the responsibilities outlined in SEC Rule 613, the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process. In addition, the Participants have incurred public relations, legal, and consulting costs in the preparation of the CAT NMS Plan. The Participants estimate the costs of these services to be $8,800,000. These public relations, legal, and consulting costs are considered reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan.

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Given the size and scope of the CAT initiative, estimating the costs of the creation, implementation and maintenance of the CAT is a complex task, and one that necessarily relies on input from parties not directly charged under SEC Rule 613 with the responsibility to create and file the CAT NMS Plan. In light of this, the Participants have used a multi-pronged approach to assess the potential costs of the CAT. Among other things, the Participants have evaluated the many cost-related comments received in response to the Commission’s rule proposal for SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants have considered cost analyses and considerations provided by Bidders as well as the views and related information provided by the DAG and written feedback from the SIFMA and the FIF.

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The economic baseline against which the potential costs and benefits of the CAT must be compared are discussed above in Section B(7)(b)(ii). The potential impacts and estimated costs of the CAT are discussed separately below, presenting study results where applicable.

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(A) Investors

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Approximately 52% of Americans hold individual stocks, stock mutual funds or stocks through their retirement plan,195 and the retail options industry continues to grow.196

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Investors benefit from the protections provided through the use of audit trail data, permitting regulators to adequately and effectively monitor activities in today’s complex securities markets. In SEC Rule 613, the Commission identified several ways that the CAT would enhance the protections to investors. These include: facilitating risk-based examinations, better identification of potentially manipulative trading activity, improved processes for evaluating tips, complaints and referrals of potential misconduct made to regulators, increased efficiency of cross-market and principal order surveillance, improved analysis and reconstruction of broad-based market events, improved ability to monitor and evaluate changes to market structure, and efficiencies from a potential reduction in disparate reporting requirements and data requests.

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For instance, as shown in academic literature, surveillance has been demonstrated to increase investor confidence, by mitigating manipulative behavior and increasing trading activity.197 Academic literature provides support for the notion that investors associate enhanced surveillance with greater investment opportunity across a larger number of listed companies and with higher market capitalizations.198 Cross-market surveillance – an opportunity expected to be improved by CAT – is likely more effective in detecting manipulative behavior than single-market surveillance. A more recent study provides evidence that better surveillance is associated with reduced insider trading, as it would be harder to hide such trades.199

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To the extent that better surveillance leads to more effective rulemaking,200 investors should also benefit from the improvements in market quality that might arise from such rulemaking. For example, one study shows that detailed trading rules are positively correlated with liquidity measures evidenced by lower volatility and bid-ask spreads.201 Similarly, a separate study finds that European Union countries that have more effective rules to prevent market abuse and enhance transparency experience higher market liquidity.202

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Investors may also bear the costs associated with maintaining and enhancing the current audit trail systems. In some cases, broker-dealers may pass on regulatory charges that support Participant supervision, such as with respect to Section 31 fees.203 In other cases, broker-dealers may cover some of their regulatory charges through commissions and other charges. Similarly, broker-dealers may seek to pass on to investors their costs to build and maintain the CAT, which may include their own costs and any costs passed on to them by Participants. This analysis does not measure either the likelihood of these costs being passed through to investors nor the potential dollar impact on investors. The extent to which these costs are passed on to investors depends on the materiality of the costs and the ease with which investors can substitute away from any given broker-dealer.

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(B) Participants

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Participants are expected to benefit from the requirements to report to the Central Repository. To the extent that the CAT enhances comparability of audit trail data – thereby enhancing order lifecycle comparability across different trading venues – Participants may better fulfill their obligations to “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities” as set forth in Section 6 of the Exchange Act.

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Participants would also incur direct costs associated with creating, implementing and maintaining the CAT infrastructure. The full cost associated with the build and maintenance of the CAT would be shared among Participants and Industry Members, consistent with the CAT NMS Plan. Participants would also be subject to costs associated with updating and maintaining their own systems to comply with their obligations to report to the Central Repository.

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(1) Central Repository Build and Maintenance Costs

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The CAT NMS Plan provides that the costs arising from the build and maintenance of the CAT will be collected from all CAT Reporters, which includes Participants. As described in Article XI of the CAT NMS Plan and in Section C(b)(7)(iii)below, Participants will be required to pay their allocated portion of these costs on an annual basis.

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The CAT NMS Plan also contemplates that Participants may impose greater requirements on the Central Repository based on their use of information in the repository for regulatory purposes. These requirements may take the form of frequent and complex analyses of data which may likely require more resources from the Central Repository. It is critical that the Company recover its costs in a manner consistent with the principles articulated in the CAT NMS Plan, which include both the need to allocate costs in a manner consistent with the cost to operations and that the CAT NMS Plan not create significant disincentives to Participants in seeking to meet their regulatory obligations. As such, the CAT NMS Plan permits the Company to assess additional charges to Participants associated with their use of the Central Repository’s data and reporting facilities as it deems necessary.

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(2) Costs to Participants to Meet Reporting Requirements

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The Costs to Participants Study was distributed to the Participants to collect information about the potential costs of the CAT to the Participants. The Costs to Participants Study was designed to provide insight into the current total costs associated with regulatory reporting and surveillance programs discussed above, as well as expected implementation and maintenance costs associated with reporting to and surveillance through the Central Repository.

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The anticipated costs associated with the implementation of regulatory reporting to the Central Repository were estimated to be a total of $17,900,000 across all ten Participants. Included in this cost, Participants reported a total of $770,000 in legal and consulting costs, as well as total FTE costs of $10,300,000 for operational, technical/development and compliance-type functions.

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Maintenance costs associated with regulatory reporting to Central Repository were estimated to be a total of $14,700,000 across all ten Participants. Included in this estimate are legal, consulting, and other costs associated with maintenance, a total of $720,000, and $7,300,000 to FTEs for operational, technical/development, and compliance functions regarding the maintenance of regulatory reporting associated with CAT.

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The Participants were also asked to identify the costs associated with the implementation of surveillance programs within the Central Repository. The estimated total costs across all ten Participants were $23,200,000 including estimated legal, consulting, and other costs of $560,000. Also included in the total, Participants reported that they would allocate a total of $17,500,000 to FTEs to operational, technical/development, and compliance staff to be engaged in the creation of surveillance programs.

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The estimated total costs associated with the maintenance of surveillance programs were $87,700,000, including $1,000,000 for legal, consulting, and other costs. Of the total cost, the Participants estimated that they would allocate a total of $66,700,000 to FTEs to operational, technical/development and compliance staff.

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Retirement costs for current systems were estimated to be $310,000 across all Participants. However, Participants expect that by no longer needing to maintain these legacy systems due to adoption of the CAT, they will realize aggregate savings of $10,600,000, which will partially offset some of the costs expected to be borne by the Participants as described further below. To the extent that the Participants are able to retire legacy systems and replace them with more efficient and cost effective technologies, they may experience additional cost savings. The Costs to Participants Study does not attempt to quantify any such additional cost savings to broker-dealers.

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(C) Broker-Dealers

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The CAT is expected to provide a more resilient audit trail system that may benefit broker-dealers. For instance, as noted above, more effective oversight of market activity may increase investor confidence and help expand the investment opportunity set through increased listings. Broker-dealers may benefit from increased investor confidence, provided that it results in increased trading activity. In addition, broker-dealers may experience less burden, to the extent that, data provided to the Central Repository reduces the number of direct requests by regulators for their surveillance, examination and enforcement programs. For example, after the implementation of CAT, regulators seeking to identify activity for NMS Securities at the customer account level, would access that information from the Central Repository, rather than making a Blue Sheet request.

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More broadly, one benefit identified to broker-dealers of the CAT may arise from consolidating the collection and transmission of audit trail data into a uniform activity, regardless of where the quoting and trading occur. Such a consolidation may permit some broker-dealers to reduce the number of systems they operate to provide audit trail data to Participants and to retire legacy systems, at an appropriate time. Additionally, technological advances may make the operation of the new CAT Systems more efficient than those associated with the legacy systems. The Costs to CAT Reporters Study did not attempt to quantify any such cost savings to firms, an as such, the cost estimates provided here do not include consideration that such cost savings may be low.

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Broker-dealers would also incur costs associated with creating, implementing and maintaining the CAT infrastructure. These costs would arise from building and maintaining the CAT and updating and maintaining their own systems to comply with their reporting obligations.

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(1) CAT Build and Maintenance Costs

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Broker-dealers will also be required to contribute their portion of the direct costs associated with building and maintaining the CAT, as required by SEC Rule 613 and implemented by the CAT NMS Plan. Broker-dealers with CAT reporting obligations will be required to pay their allocated portion of these costs on an annual basis, pursuant to the Funding Model.

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The Funding Model acknowledges that the operating models of broker-dealers and Execution Venues are substantially different. Therefore, the Funding Model imposes different fee structures for broker-dealers and Executions Venues. ATSs that execute orders, which are operated by registered broker-dealers pursuant to Regulation ATS, are considered Execution Venues, for purposes of the CAT NMS Plan.

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(2) CAT Reporters Costs to Meeting Reporting Requirements

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Responses to the Costs to CAT Reporters Study provide estimates of the direct costs to broker-dealers associated with meeting requirements to report to the Central Repository. The Costs to CAT Reporters Study contained questions related to future costs related to both the retirement of existing systems and compliance with requirements of SEC Rule 613.

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Respondents were asked to evaluate the future costs under two separate approaches.204 For each approach, respondents were asked to estimate both for CAT implementation and maintenance: (1) the associated hardware and software costs; (2) the number of required FTEs; and (3) third-party provider costs.

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a. Implementation Phase of Approach 1

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Tables 7 and 8 describe the costs associated with the implementation of Approach 1. Based on the 167 study responses for the implementation of Approach 1, large firms provided an average (medium) hardware / software cost of $580,000 ($0) and small firms provided an average (median) cost estimates of $5,200 ($0).

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Large firms provided an average (median) FTE count of 11.00 (0.00). Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated as $4,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.17, with the median response provided by small respondents equal to 0.00. Participants estimate a dollar cost for the small respondent FTE requirements to be on average $470,000, with a median estimated cost of $0.

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Participants estimate large firms would incur average (median) third party / outsourcing costs of $72,000 ($0) and small firms would incur an estimated average (median) cost of $76,000 ($0).

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Total average (median) costs for Approach 1 Implementation are estimated to be $5,052,000 ($0) for large firms, and $551,200 ($0) for small firms.

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Tables 9 and 10 describe the costs associated with the implementation of Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided an average (median) hardware / software cost estimate of $750,000 ($0), and large non-OATS respondents providing average (median) estimated costs of $450,000 ($0).

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Large OATS reporters provided an average (median) FTE requirement of 14.92 (7.00), translating into estimated costs of $6,000,000 ($2,800,000), while large non-OATS respondents provided an average (median) FTE requirement of 8.05 (0.00), translating into an average (median) estimated cost of $3,200,000 ($0).

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Large OATS respondents estimated an average (median) third party / outsourcing cost of $150,000 ($0), while large non-OATS respondents provided an average (median) estimate of $9,500 ($0).

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Tables 11 and 12 describe the costs associated with the implementation of Approach 1 for small respondents with current OATS and non-OATS reporting obligations, small OATS respondents provided an average (median) hardware / software cost estimate of $21,000 ($1,000), with small non-OATS respondents providing an estimated average (median) cost of $100 ($0).

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Small OATS reporters provided an average (median) FTE requirement of 3.51 (2.00), translating into estimated an average (median) costs of $1,400,000 ($800,000), while small non-OATS respondents provided an average (median) FTE requirement of 0.38 (0.00), translating into an estimated average (median) cost of $150,000 ($0).

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Finally, small OATS respondents estimated an average (median) third party / outsourcing cost of $300,000 ($1,000), while small non-OATS respondents provided an average (median) estimate of $1,100 ($0).

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b. Maintenance Phase of Approach 1

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Tables 13 and 14 describe the costs associated with the maintenance of CAT reporting obligations for the full set of study responses under Approach 1. Based on the 167 study responses for the maintenance of Approach 1, large firms reported an average (median) hardware / software cost estimate of $210,000 ($0), and small firms reported an estimated cost of $1,600 ($0).

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Large firms provided an average FTE count requirement of 8.54, with the median response provided by large firms equaled to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $3,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.12, with the median response provided by small respondents equal to 0.00. Participants estimated the average dollar cost for the small respondent FTE requirement l to be $450,000, and a median cost of $0.

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Large firms estimated that the average (median) third party / outsourcing cost is equal to $52,000 ($0) and small firms estimated average (median) costs to be equal to $24,000 ($0).

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Total average (median) costs for Approach 1 Maintenance are estimated to be $3,662,000 ($0) for large firms and $475,600 ($0) for small firms.

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Tables 15 and 16 show the costs associated with the maintenance of CAT reporting obligations for Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $380,000 ($22,000), with large non-OATS respondents providing estimated average (median) costs of $80,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 10.03 (4.00), translating to estimated costs of $4,000,000 ($1,600,000), while large non-OATS respondents provided average (median) FTE requirements of 7.41 (0.00), translating to estimated costs of $3,000,000 ($0).

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Large OATS respondents estimated average (median) third party / outsourcing costs of $120,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

- - -

Tables 17 and 18 describe the costs associated with the maintenance of CAT reporting obligations for Approach 1 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.52 (2.00), translating to estimated costs of $1,400,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $90,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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c. Implementation Phase of Approach 2

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Tables 19 and 20 show the costs associated with the implementation phase of Approach 2 for the full set of study responses. Based on the 167 study responses for the implementation phase of Approach 2, large firms provided average (median) hardware / software costs of $570,000 ($0), and small firms provided costs estimates of $5,000 ($0).

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Large firms provided average FTE count requirements of 10.15, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $4,100,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.08, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $440,000, and a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs are equal to $68,000 ($0) and small firms estimated average (median) costs to be equal to $16,000 ($0).

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Total average (median) costs for Approach 2 Implementation are estimated to be $4,738,000 ($0) for large firms, and $461,000 ($0) for small firms.

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Tables 21 and 22 show the costs associated with the implementation phase of Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $740,000 ($60,000), with large non-OATS respondents providing estimated average (median) costs of $450,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 14.81 (7.00), translating to estimated costs of $5,900,000 ($2,800,000), while large non-OATS respondents provided average (median) FTE requirements of 6.66 (0.00), translating to estimated costs of $2,700,000 ($0).

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Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $140,000 ($0), while large non-OATS respondents provided estimates of $10,000 ($0).

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Tables 23 and 24 show the costs associated with the implementation of Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $20,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.33 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.32 (0.00), translating to estimated costs of $130,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $60,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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d. Maintenance Phase of Approach 2

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Tables 25 and 26 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for the full set of study responses. Based on the 167 study responses for the maintenance phase of Approach 2, large firms provided average (median) hardware / software costs of $200,000 ($0) and small firms provided costs estimates of $1,500 ($0).

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Large firms provided average FTE count requirements of 7.27, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $2,900,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.06, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $430,000, with a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs are equal to $48,000 ($0) and small firms estimated average (median) costs to be equal to $10,000 ($0).

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Total average (median) costs for Approach 2 Maintenance are estimated to be $3,148,000 ($0) for large firms, and $441,500 ($0) for small firms.

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Tables 27 and 28 provide the costs associated with the maintenance of CAT reporting obligations for Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $370,000 ($14,000), with large non-OATS respondents providing estimated average (median) costs of $79,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 9.79 (5.60), translating to estimated costs of $3,900,000 ($2,200,000), while large non-OATS respondents provided average (median) FTE requirements of 5.38 (0.00), translating to estimated costs of $2,200,000 ($0).

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Finally, large OATS respondents estimated average (maximum) third party / outsourcing costs of $110,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

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Tables 29 and 30 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($500), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.28 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $42,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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e. Implementation and Maintenance Costs for Approach 1 vs. Approach 2

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Participants compared the estimated implementation and maintenance costs for Approach 1 and Approach 2 to determine if one solution would be more cost effective for the industry than the other. In general, respondents indicated that Approach 1 would lead to larger costs than Approach 2. Large firms estimated that it will cost approximately $5,052,000 to implement Approach 1, versus an estimated $4,738,000 for Approach 2, a cost difference of $314,000. From a maintenance perspective, large firms estimated that it would cost $3,662,000 for Approach 1 versus $3,148,000 for Approach 2, a cost difference of $514,000. Small firms also indicated that Approach 1 would be more expensive to implement and maintain than Approach 2. Small firms indicated that it would cost $551,200 to implement Approach 1 versus $475,600 for Approach 2, indicating a cost difference of $90,200. For the maintenance phases, small firms estimated it would cost approximately $475,600 for Approach 1 maintenance, versus $441,500 for Approach 2 maintenance, a cost difference of $34,100 between approaches. However, the cost estimates between these two approaches are not statistically significant and Participants conclude that there would likely be no incremental costs associated with either Approach.205

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f. Retirement of Systems Costs

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Participants recognize that in implementing the anticipated requirements in the CAT NMS Plan, broker-dealers would likely replace some components of their current systems. The costs associated with retiring current systems were considered as part of the impacts associated with the CAT NMS Plan.

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Tables 31 and 32 describe the cost associated with retirement of systems for the full set of study responses. Based on the 167 study responses for the retirement of systems large firms provided average (median) hardware / software costs of $120,000 ($0) and small firms provided cost estimates of $31,000 ($0).

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Large firms provided average FTE count requirements of 6.80, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $2,700,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.92, with the median response provided by a small respondent of 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be an average costs of $770,000, and a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs to be $10,000 ($0) and small firms estimated average (median) costs to be $63,000 ($0).

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Total average (median) costs for the Retirement of Systems are estimated to be $2,830,000 ($0) for large firms and $864,000 ($0) for small firms.

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Tables 33 and 34 describe the costs associated with the retirement of systems for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $270,000 ($0), with large non-OATS respondents providing estimated average (median) costs of $4,300 ($0).

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Large OATS reporters provided average (median) FTE requirements of 4.92 (3.10), translating to estimated costs of $2,000,000 ($1,200,000), while large non-OATS respondents provided average (median) FTE requirements of 8.21 (0.00), translating to estimated costs of $3,300,000 ($0).

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Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $18,000 ($0), while large non-OATS respondents provided estimates of $4,800 ($0).

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Tables 35 and 36 show the costs associated with the retirement of systems for small respondents with current OATS and non-OATS reporting obligations for the full set of study respondents. Small OATS respondents provided estimated average (median) hardware / software requirements of $3,600 ($500), with small non-OATS respondents providing estimated average (median) costs of $40,000 ($0).

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Small OATS reporters provided average (median) FTE requirements of 4.60 (0.00), translating to estimated costs of $1,800,000 ($0), while small non-OATS respondents provided average (median) FTE requirements of 1.00 (0.00), translating to estimated costs of $400,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $240,000 ($1,500), while small non-OATS respondents provided estimates of $3,000 ($0).

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In comparing the two approaches and their costs to the current costs incurred by a broker-dealer for current regulatory reporting, respondents have indicated that they estimate both Approach 1 and Approach 2 to be less expensive than current regulatory reporting requirements. Overall, firms estimated that current costs would be $4,290,000 for large firms versus $1,210,000 for small firms, while maintenance costs of Approach 1 for large firms would cost $3,662,000 and $475,600 for small firms, indicating cost savings of $628,000 for large firms and cost savings of $734,400 for small firms. For maintenance costs related to Approach 2, large firms indicated costs of $3,148,000 with an expected savings of $1,142,000 while small firms estimated maintenance costs of $441,500 with expected savings of $768,500.

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Although there are differences in the current and anticipated maintenance costs discussed above, the Participants conclude that there would be no statistical difference in costs associated with the maintenance of the CAT, compared to maintenance costs for existing regulatory reporting requirements. Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference in costs to broker-dealers between Approach 1 and Approach 2 is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level separately for estimates of hardware / software costs, FTE costs, vendor costs, and total costs across large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

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g. Industry Feedback on Costs to CAT Reporters Study

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Participants’ understanding of broker-dealer costs has been enhanced through frequent dialogue with Industry Members. The DAG has largely provided written feedback on costs through the industry association members. In March 2013, SIFMA provided feedback on industry costs in its Consolidated Audit Trail White Paper.206 The association group stated that the industry is likely to face costs related to upgrading the regulatory reporting infrastructure. SIFMA highlighted that additional costs borne will be distributed across the front office, middle office, customer master data, compliance and risk and data management. Additionally, in February 2012, the FIF conducted a study to assess the costs associated with the implementation of OATS.207 In a summary of the study, FIF highlights that “future estimates of cost should consider the FIF cost model, most importantly the effort expended on business analysis and testing as part of the implementation effort.” One key view presented by the DAG was that retiring legacy systems will likely reduce costs to the industry, given their redundancies with the CAT. However, the FIF highlighted that existing timelines do not take into account costs associated with concurrent reporting for existing regulatory reporting and new regulatory requirements associated with the Central Repository.208 Additional detail around the plan to retire existing regulatory reports can be found in Appendix C, Section C.9.

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(D) Vendors

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The Costs to Vendors Study requested information regarding various third party service provider and vendor costs to comply with the requirements of SEC Rule 613.

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Based upon the responses to the Costs to Vendors Study, the expected dollar costs for implementation and maintenance of the CAT are largely the same for both approaches, and ranged widely between $0 and $20,000,000 for implementation and $50,000 and $6,000,000 for ongoing maintenance. One firm did indicate that Approach 1 would have substantially higher maintenance costs ($400,000 for Approach 1 versus $50,000 for Approach 2). For headcount and costs associated with implementation and maintenance of the CAT, all respondents indicated that Approach 1 would require more FTE resources (costs) to implement (ranging from 14 ($9,600,000) to 170 ($35,900,000) FTEs for Approach 1 and from 4 ($2,700,000) to 45 ($24,200,000) for Approach 2), while Approach 2 would require more FTE resources to maintain (ranging from 4.5 ($4,100,000) to 35 ($9,300,000) for Approach 1 and from 2 ($2,500,000) to 56 ($11,200,000) for Approach 2). As with current regulatory reporting costs, the firm with the largest number of clients reported the highest costs, but number of clients did not always correlate uniformly with higher expected costs for the other firms.

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Three of the four respondents to the vendor study indicated that they would incur costs to retire current regulatory reporting systems, with costs ranging from $500,000 to $5,000,000, with the firm with the highest expected retirement costs also having the highest current reporting costs. FTE requirements ranged from 1.5 ($250,000) to 23 ($7,200,000) FTEs.

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Under Approach 1, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, with the remaining two expecting higher costs. Under Approach 2, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, one expected costs to be the same, and the final firm expected costs to be greater. All firms expected headcount associated with ongoing maintenance of the CAT to be less than under current reporting requirements.

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(E) Issuers

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Issuers also benefit from an effective regulatory regime supported by a reliable and complete audit trail. Specifically, issuers may benefit from enhanced investor confidence associated with better and more efficient oversight. The increase in investor confidence may draw more investors into the market, relative to other investment opportunities that do not provide the same protections. Increasing the pool of investors willing to invest in a primary offering may manifest itself in a lower cost of capital. Increased investor participation in secondary trading may also increase demand in the primary market, as the increased interest would be associated with greater efficiency in pricing and lower adverse selection costs. To the extent that the issuers do not have independent reporting obligations to the Central Repository (i.e., they are not otherwise CAT Reporters), they are not anticipated to incur direct costs associated with the CAT NMS Plan.

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(F) Indirect Costs

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The Participants recognize that in addition to direct costs, there may be indirect costs borne by parties as a result of the implementation of the CAT NMS Plan. As discussed further below, it is not possible for the Participants to quantify these costs, and as such, we present a qualitative discussion.

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The Participants have identified at least three distinct ways for indirect costs to arise as a result of the implementation of the CAT NMS Plan. First, all CAT Reporters are subject to direct fees to pay for the creation, implementation, and maintenance of the CAT along with other direct costs to meet CAT NMS Plan obligations. CAT Reporters may endeavor to shift these fees and other costs to their clients. Where CAT Reporters can do so successfully, the clients bear an indirect cost arising from the CAT NMS Plan. Second, to the extent that the Commission and the Participants amend their surveillance programs in the presence of the Central Repository, the broker-dealers may incur costs to adjust their internal compliance programs. And third, as described more fully in Appendix C, Analysis of the Impact on Competition, Efficiency and Capital Formation, broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Such a reduction in the provision of these services may impose an indirect cost on the public as well.

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The Participants considered the potential for CAT Reporters to shift fees and other costs associated with the CAT NMS Plan. Participants may charge their members to cover the CAT NMS Plan costs either explicitly or subsume those costs in other fees or assessments. Broker-dealers may charge their clients for their own costs, whether incurred directly or indirectly, either through explicit fees associated with CAT or through their existing fee structures. This analysis does not measure either the likelihood of costs being passed from the Participant to the broker-dealers or from the broker-dealers to their clients, or the potential associated dollar impacts. The extent to which these costs may be passed on to clients is related to alternative sources of revenue available to the CAT Reporters, the materiality of those costs, and the ease with which clients can substitute away from any given Participant or broker-dealer. Participants note, however, that Participants and broker-dealers may currently have incentives and opportunity to shift regulatory compliance costs to their customers and that nothing in the CAT NMS Plan alters those incentives or the likelihood of those costs being passed on.

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In addition, indirect costs to broker-dealers may arise as a result of the implementation of the CAT NMS Plan. First, broker-dealers may incur additional costs related to training and professional development, to equip the staff with the necessary knowledge necessary for compliance with the SEC Rule 613. Broker-dealers were specifically asked to consider these costs as part of their study response. Second, the enhanced and standardized data to be captured by the Central Repository is anticipated to increase the effectiveness of surveillance by regulators, which may impact broker-dealer compliance programs.

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(iv) Estimate of Aggregate Direct Costs and the Allocation of Costs across CAT Reporters

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(A) Estimate of Aggregate Costs

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In order to create the regulatory data infrastructure required by SEC Rule 613, this Plan proposes to build and maintain the CAT, along with resources necessary to generate regulatory reports and related analysis. CAT Reporters, including Participants and broker-dealers engaging in trading and quoting activities in Eligible Securities, will be jointly responsible for providing the capital to build and maintain the CAT. Costs eligible to be allocated jointly include any associated liabilities accrued during the planning and building phases of the project that are directly attributable to the CAT NMS Plan, for example, legal and consulting fees, and will be allocated according to the funding model described in Article XI of the CAT NMS Plan.

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In order to calculate to the implementation and annual maintenance costs of the CAT, the Participants considered the relevant cost factors for the following entities: Plan Processor, Participants, broker-dealers (large and small) and vendors. All implementation costs reflected below are in dollar costs for the year they are expected to be incurred, while all maintenance costs are estimated for the fifth year after the approval of the CAT NMS Plan, when all CAT Reporters are expected to be live.

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(1) Plan Processor

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Implementation Costs. For implementation costs associated with the Plan Processor, the Participants reviewed the build costs received from the Shortlisted Bidders and identified the high and low costs to use as a component of the overall industry cost. The lowest cost received was $30,000,000 and the highest estimate received was $91,600,000.

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Maintenance Costs. For maintenance costs associated with the Plan Processor, the Participants also reviewed the cost schedules received from the Shortlisted Bidders to build the range. To define the range of maintenance costs, the Participants reviewed the peak year maintenance costs from the Shortlisted Bidders. In addition to the costs received from the Shortlisted Bidders associated with the maintenance of operating and running the CAT, the Participants also included a yearly technical upgrade estimate to conservatively take into account changes in technology that may take place during the maintenance of the CAT. These additional costs begin at approximately 20% in year one, and slowly decrease to 5% during year five of operation. As such, the annual maintenance costs are estimated to range from $35,200,000 to $134,900,000.

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Retirement of Systems Costs. The Plan Processor is not expected to incur costs related to the retirement of systems.

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(2) Participants

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Upon review of the requirements associated with Approach 1 and Approach 2, the Participants identified that they do not favor one approach over the other.

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Implementation Costs. To estimate implementation costs for the Participants, the Participants used the aggregated results from the Costs to Participants Study. Based on the responses received from the Participants, the implementation of regulatory reporting is expected to cost $17,900,000 and the implementation of surveillance functions is estimated to cost $23,200,000.

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Maintenance Costs. To estimate the maintenance costs for the Participants, the Participants reviewed the results from the Costs to Participants Study for regulatory reporting and surveillance costs. The Participants estimated that annual aggregate regulatory reporting costs would be equal to $14,700,000 and that annual aggregate surveillance maintenance costs would cost $87,700,000.

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Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the Participants, the Participants reviewed the results from the Costs to Participants Study for retirement of systems costs. The Participants estimated that costs associated with retirement of systems would be equal to $310,000.

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(3) Broker-Dealers

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Implementation and maintenance costs related to the CAT for broker-dealers were extrapolated from the results of the Costs to CAT Reporters Study. As described above, the Participants believe there to be approximately 1,800 broker-dealers that would be CAT Reporters. Of the 167 respondents to the Costs to CAT Reporters Study, 49 were large firms, and 118 were small firms, indicating a large to small firm ratio in the overall population of 29% to 71%. Applying this ratio to the total population of 1,800 broker-dealers, results in 522 large firms and 1,278 small firms. In comparing the costs between the two approaches, the Participants have identified that Approach 1 is more expensive than the Approach 2, which causes Approach 1 to form the upper bound of the broker-dealer cost range, and Approach 2 to form the lower bound of the broker-dealer cost range.

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Implementation Costs. For Approach 1, large firm respondents estimated that implementation costs would be equal to $5,052,000 per firm, for a total estimated implementation cost of approximately $2.6 billion. Small firm respondents estimated that implementation costs for Approach 1 would be equal to $551,200 per firm, for a total estimated implementation cost of $740 million.209 For Approach 2, large firm respondents estimated that implementation costs would be equal to $4,738,000 per firm, for a total estimated implementation cost of approximately $2.5 billion, while small firms estimated implementation costs for Approach 2 to be equal to $461,000 per firm, for a total cost of $619 million.210 This results in a cost range of $2.5 billion to $2.6 billion for large firms, and a cost range of $619 million to $740 million for small firms for the implementation of the CAT.

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Maintenance Costs. For Approach 1, large firm respondents estimated that maintenance costs would be equal to $3,662,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.3 billion.211 Small firm respondents estimated that maintenance costs for Approach 1 would be equal to $475,600 per firm per year, for a total estimated annual maintenance cost of approximately $739 million.212 For Approach 2, large firm respondents estimated that maintenance costs would be equal to $3,148,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.0 billion,213 while small firms estimated maintenance costs for Approach 2 to be equal to $441,500 per firm per year, for a total annual cost of approximately $686 million.214 This implies an annual cost range of approximately $2.0 billion to $2.3 billion for large firms, and an annual cost range of approximately $686 million to $739 million for small firms for maintenance of reporting to the Central Repository. These maintenance costs are discrete costs for the maintenance of CAT reporting, and are not intended to show incremental costs against current regulatory reporting requirements. Based on the Costs to CAT Reporters Study, Participants estimate these incremental costs to be negligible.

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Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the broker dealers, the Participants reviewed the results from the Costs to CAT Reporters Study for retirement of systems costs. Large firm respondents estimated costs to be equal to $2,830,000, for a total retirement of systems cost equal to approximately $1.47 billion. Small firms estimated that costs related to the retirement of systems would cost $864,000, for a total retirement of systems cost of approximately $1.10 billion.

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(4) Vendors

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Implementation Costs. For implementation costs associated with Vendors, the Participants reviewed the aggregate build costs received from the Costs to Vendors Study and identified that Approach 1 would cost $118,200,000 to implement, while it would cost $51,600,000 to implement Approach 2.215

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Maintenance Costs. For maintenance costs associated with Vendors, the Participants also reviewed the cost schedules received from the Costs to Vendors Study. Vendors indicated an aggregate estimated annual cost of $38,600,000 for maintenance of Approach 1, and annual estimated maintenance costs of $48,700,000 for Approach 2.216

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Retirement of Systems Costs. Vendors indicated an aggregate cost of $21,300,000 for the retirement of existing regulatory reporting systems.

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(5) Total Aggregate Costs

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Based on the analysis of responses to the studies described above, and cost estimates provided by the Shortlisted Bidders, the Participants estimate the initial aggregate cost to the industry related to building and implementing the CAT would range from $3.2 billion to $3.6 billion. Estimated annual aggregate costs for the maintenance and enhancement of the CAT would range from $2.8 billion and $3.4 billion. Additionally, costs to retire existing systems would be approximately $2.6 billion.

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(B) Impacts of Not Receiving Requested Exemptions

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On January 30, 2015, the Participants submitted a letter to request that the Commission grant exemptions, pursuant to its authority under Section 36 of the Exchange Act, from the requirement to submit a national market system plan that meets certain reporting requirements specified in SEC Rule 613(c) and (d). Specifically, the Participants requested exemptive relief related to: (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking executions to specific subaccount allocations on Allocation Reports; and (5) time stamp granularity. On September 2, 2015, the Participants supplemented their request with a supplemental request, clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).

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First, SEC Rule 613(c)(7) requires both options market makers and the options exchanges to record and report the details of options market maker quotes received by the options exchanges to the Central Repository. The Participants requested that the Commission provide the Participants with an exemption so that only options exchanges would record and report details for each options market maker quote and related Reportable Event to the Central Repository, while options market makers would be relieved of their obligation to record and report their quotes and related Reportable Events to the Central Repository. The Participants estimated that having both parties report options market maker quotes to the CAT would impose significant costs on the Plan Processor due to increased data storage and technical infrastructure, and on the options market makers due to a higher volume of reporting obligations. The Participants estimated that having both parties report options market maker quotes to the CAT would increase the size of data submitted to the CAT by approximately 18 billion records each day. Bidders estimated that requiring dual reporting of options market maker quotes would, over a five year period, lead to additional costs of between $2 million and $16 million for data storage and technical infrastructure for the Plan Processor. In addition, according to the results of a cost study conducted by three industry associations,217 the cost to options market makers to meet their quote reporting obligations ranges from $307 million to $382 million over a five year period.

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Second, Rule 613(c)(7) requires each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting order receipt or origination information to the Central Repository. The Commission noted that including a unique customer identifier could enhance the efficiency of surveillance and regulatory oversight. The Participants, however, favor the Customer Information Approach, that would require broker-dealers to provide detailed account and Customer information to the CAT, and have the Plan Processor correlate the Customer information across broker-dealers, assign a unique Customer identifier to each Customer and use that unique Customer identifier consistently across all CAT Data. The Participants believe that the Customer-ID approach imposes a significant cost burden on market participants and on the Plan Processor. According to cost estimates provided by the DAG,218 the cost for the top 250 CAT reporters to implement the Customer-ID as required in SEC Rule 613 would be at least $195 million. The Participants believe that this cost estimate is conservative, since it only represents the cost estimate for 11% of the total broker-dealers that are expected to be CAT Reporters.

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Third, SEC Rule 613(c)(7) requires that a CAT-Reporter-ID be reported to the Central Repository for each order and Reportable Event, so that regulators can determine which market participant took action with respect to an order at each Reportable Event. The Participants, however, have proposed to leverage existing business practices and identifiers (“Existing Identifier Approach”), rather than requiring new identifiers be established, as the former is deemed more efficient and cost-effective in implementing the CAT-Reporter-ID. The Participants believe that the CAT-Reporter-ID approach would impose a material cost burden on broker-dealers and Participants, as compared to the Existing Identifier Approach, since it would require major changes to broker-dealer systems. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to implement the CAT-Reporter-ID as required by SEC Rule 613 would be $78 million.

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Fourth, Rule 613(c)(7) requires each CAT Reporter to record and report the “the account number for any subaccounts to which the execution is allocated (in whole or part)” if an order is executed. The Participants acknowledge that this information is useful to regulators to fulfill their obligations to protect investors. However, the Participants estimate that meeting the obligations of the Rule would be unduly burdensome and costly to achieve given the existing allocation practices. As an alternative, the Participants proposed that allocations will be reported by CAT Reporters via a tool described as an Allocation Report. To create linkages from the order execution to the allocation process by means of an order identifier, the broker-dealers would be required to perform extensive re-engineering of their front, middle, and back office systems, and thus incur significant costs. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to link allocations to executions would be $525 million.

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Finally, Rule 613(d) requires the recording and reporting of the time of certain Reportable Events to the Central Repository with time stamps at least to the millisecond. The Participants understand that time stamp granularity to the millisecond reflects current industry standards with respect to electronically-processed events in the order lifecycle. However, due to the lack of precision, the industry practice with respect to manual orders is to capture manual time stamps with granularity at the level of one second. The Participants believe that compliance with the time stamp granularity requirements of the Plan for Manual Order Events would result in added costs to the industry as there may be a need to upgrade databases, internal messaging applications/ protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository. The Participants estimate that the total minimum cost to the industry to comply with a singular time stamp requirement for all CAT reporting would be approximately $10.5 million. This estimate is based on a current cost of $1,050 per manual timestamp clock which stamps to the second, with approximately 10,000 clocks requiring replacement across the industry. Upgrading this to millisecond granularity would likely add to the cost to the industry.

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(C) Allocation of Costs Across CAT Reporters

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Article XI of the CAT NMS Plan provides the process for determining the funding of the Company. In general, the Participants’ approach to funding of the Company is: (A) to operate the Company on a break-even basis, which means having fees imposed and collected that cover the Company’s costs and an appropriate reserve; and (B) to establish a fee structure that is equitable based on funding principles.219 Such equitable funding principles include: (1) to create transparent, predictable revenue streams aligned with anticipated costs; (2) to allocate costs among Participants and Industry Members taking into account the timeline for implementation of the CAT and the distinctions in the securities trading operations of Participants and Industry Members and their impact on the Company’s resources and operations; (3) to establish a tiered fee structure in which there is general comparability in the level of fees charged to CAT Reporters with the most CAT-related activity as measured by market share for Execution Venues, including ATSs, and by message traffic for non-ATS activities of Industry Members, where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members; (4) to provide ease of administrative functions; (5) to avoid disincentives such as burdens on competition and reduction in market quality; and (6) to build financial stability for the Company as a going concern.220

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Based on these principles, the Operating Committee will establish the Company’s funding, which is expected to arise primarily from fees charged to Participants and Industry Members. The Participants have sought input from the DAG as to the specific types of fees. Accordingly, the Participants propose to include the following fee types: (i) fixed fees payable by each Execution Venue that trades NMS Securities and OTC Equity Securities based on its market share (establishing two to five tiers of fixed fees); (ii) fixed fees payable by each Execution Venue that trades Listed Options (as defined in Rule 600(b)(35) of Regulation NMS) based on its market share (establishing two to five tiers of fixed fees); (iii) fixed fees payable by each Industry Member based on message traffic generated by such Industry Member (for the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; (ii) routing orders to and from any ATS sponsored by such Industry Member); and (iii) ancillary fees (e.g., fees for late or inaccurate reporting, corrections, and access and use of the CAT for regulatory and oversight purposes).221

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The Operating Committee will use two different criteria to establish fees – market share222 for Execution Venues, including ATSs, and message traffic for Industry Members’ non-ATS activities – due to the fundamental differences between the two types of entities. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, Bidders stated during workshops and in response to specific questions posed by the Participants that processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT. Thus, the Participants believe that basing fees on message traffic for non-Execution Venue Industry Members is consistent with an equitable allocation of the costs of the CAT. On the other hand, message traffic would not provide the same degree of differentiation between Participants that it does for Industry Members. Because the majority of message traffic at the Participants consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. In contrast, execution volume more accurately delineates the different levels of trading activity of the Participants. For these reasons, the Participants believe that market share is the appropriate metric to use in establishing fees for Participants. Moreover, given the similarity between the activity of exchange Participants and ATSs, both of which meet the definition of an “exchange” as set forth in the Exchange Act, the Participants believe that ATSs should be treated in the same manner as the exchange Participants for the purposes of determining the level of fees associated with the CAT.

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Costs are allocated across the different types of CAT Reporters (broker-dealers, Execution Venues) on a tiered basis, in order to equitably allocate costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT. The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic from firms in each tier. Therefore, larger broker-dealers, generating the majority of message traffic, will be in the higher tiers, and therefore be charged a higher fee. Smaller broker-dealers with low levels of message traffic will be in lower tiers and will be assessed a minimal fee for the CAT. The Participants estimate that up to 75% of broker-dealers will be in the lower tiers of the Funding Model.

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All fees under Article XI charged directly to Participants and indirectly to Industry Members will be reviewed by the Operating Committee at least annually.223 All proposed fees to be charged to Industry Members by Participants will be filed with the Commission pursuant to Section 19(b) of the Exchange Act.224 In addition, all disputes with respect to the fees the Company charges Participants will be resolved by the Operating Committee or a Subcommittee designated by the Operating Committee, subject to the right of Participants to seek redress from the Commission pursuant to SEC Rule 608 or in any other appropriate forum.225 The Participants will adopt rules requiring that disputes with respect to fees charged to Industry Members will be resolved by the Operating Committee or a Subcommittee, subject to the right of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.226

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The CAT NMS Plan contemplates that the Plan Processor will be responsible for developing and executing administrative processes and procedures to effectuate the smooth functioning of the CAT, consistent with the principles articulated in Article XI. These processes and procedures would include, but are not limited to, establishing budget, notice, billing and collection cycles that provide transparency, predictability and ease of administrative functions to CAT reporters. Criteria and schedules for ancillary fees that might be collected pursuant to Article XI are also anticipated to be published by the Operating Committee.

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In articulating the funding principles of the CAT NMS Plan, Participants have established the need for the CAT NMS Plan to, among other things: (1) create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate, and administer the CAT and the other costs of the Company; and (2) provide for ease of billing and other administrative functions. The funding principles articulated in Article XI should also inform the policies and procedures adopted by the Operating Committee in executing the associated functions. To that end, to promote fairness and transparency with respect to fees, the Participants expect that the Operating Committee will adopt policies, procedures, and practices around budgeting, assignment of tiers, adjudicating disputes, billing, and collection of fees that provide appropriate transparency to all CAT Reporters. Participants expect that policies or procedures adopted to implement the administration of fee allocation and collection among CAT Reporters would be subject to comment by impacted parties before adoption.

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(v) Alternatives Considered

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(A) Technical Solution

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SEC Rule 613(a)(1)(xii) directs Participants to discuss reasonable alternative approaches to creating, implementing and maintaining the CAT. As part of the development of the CAT NMS Plan, the Participants considered a variety of alternatives with respect to technical and user support considerations. The technical considerations include: primary storage, data ingestion format, development process, quality assurance staffing and user support staffing. The analysis presented in Appendix C, D.12, below, describes alternative approaches considered for each technical consideration and the ultimate choice of the CAT NMS Plan based on factors that consider feasibility, cost and efficiency.

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In addition, the questions included in the Costs to CAT Reporters Study described above permitted the Participants to evaluate cost considerations to Industry Members associated with two different technical formats for reporting audit trail data to the Central Repository. One approach might permit broker-dealers to submit information data to the Central Repository using their choice among existing industry protocols, such as FIX. The second approach provided a scenario where CAT Reporters would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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(B) Funding Model

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As discussed above, Article XI of the CAT NMS Plan sets forth the provisions for establishing the funding of the Company and recovering the costs of operating the CAT. The Participants recognize that there are a number of different approaches to funding the CAT and have considered a variety of different funding and cost allocation models. Each model has its potential advantages and disadvantages. For example, a structure in which all CAT Reporters are charged a fixed fee regardless of reportable activity would provide CAT Reporters greater certainty regarding their fee obligations, but may place undue burden on small CAT Reporters. A variable fee structure focused on specific reportable information may make it easier for Industry Members to pass fees to their customers. However, such fees would be more complex and difficult to administer. Participants were particularly sensitive to the possibility that the fee structure might create distortions to the economic activities of CAT Reporters if not set appropriately.

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The Participants considered alternatives to cost allocation ranging from a strict pro-rata distribution, regardless of the type or size of the CAT Reporters, to a distribution based purely on CAT Reporter activity. Participants also considered a variety of ways to measure activity, including notional value of trading (as currently used for purposes of Section 31 fees), number of trades or quotations, and all message traffic sent. Further, Participants considered the comparability of audit trail activity across different Eligible Securities. The Participants discussed the potential approaches to funding, including the principles articulated in Article XI and an illustrative funding model, with the DAG multiple times, beginning on September 3, 2014.

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After extensive analysis and taking into consideration feedback from the DAG, the Participants determined that a tiered fixed fee structure would be fair and relatively uncomplicated. The Participants discussed several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. For example, a review of OATS data for a recent month shows the wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders for the month and other broker-dealers submitting millions and even billions of orders in the same period. The Participants also considered a tiered model where CAT Reporters would be charged different variable fees based on tier assignment. However, the Participants believe a tiered fixed fee model is preferable to a variable model because a variable model would lack the transparency, predictability, and ease of calculation afforded by fixed fees. Such factors are crucial to estimating a reliable revenue stream for the Company and to permitting CAT Reporters to reasonably predict their obligations. Moreover, the Participants believe that the tiered approach would help ensure that fees are equitably allocated among similarly situated CAT Reporters and would further the goal of the Participants to lessen the impact on smaller firms. Irrespective of the approach taken with fees, the Participants believe that revenues generated should be aligned to the costs of building, implementing and maintaining the CAT, and if revenues collected are in excess of costs for any given year, such excess should be considered in setting fees for the following year.

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Finally, the Participants believe that it is important to establish a simple fee structure that is easy to understand and administer. The Participants are committed to establishing and billing fees so that Industry Members will have certainty and the ability to budget for them. In that regard, the CAT NMS Plan expressly provides that the Operating Committee shall not make any changes to any fees on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.227

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8. An Analysis of the Impact on Competition, Efficiency, and Capital Formation (SEC Rule 613(a)(1)(viii))

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As required by SEC Rule 613(a)(1)(viii), this section provides an analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining the CAT NMS Plan. In recognition of the complexity of this analysis, the Participants have evaluated a variety of sources of information to assist in the analysis of the impact of the CAT NMS Plan on competition, efficiency and capital formation. Specifically, the Participants have evaluated the many comments related to competition, efficiency and capital formation received in response to the Commission’s proposal of SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants considered the input of the DAG. Finally, the Participants used information derived from three cost studies described in the prior section on costs. Based on a review and analysis of these materials, the Participants believe that the CAT NMS Plan, as submitted, is justified given its estimated impacts on competition, efficiency and capital formation.

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(a) Impact on Competition

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Through an analysis of the data and information described above, the Participants have evaluated the potential impact of the CAT NMS Plan on competition, including the competitive impact on the market generally and the competitive impact on each type of Person playing a role in the market (e.g., Participants, broker-dealers, vendors, investors). Potential negative impacts on competition could arise if the CAT NMS Plan were to burden a group or class of CAT Reporters in a way that would harm the public’s ability to access their services, either through increasing costs or decreased provision of those services. These impacts may be direct, as in the provision of brokerage services to individual investors, or indirect, as in the aggregate costs of managing, trading and maintaining a securities holding. These impacts should be measured relative to the economic baseline, described above.

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The Participants have identified a series of potential impacts on competition that may arise as a result of the terms and conditions of the CAT NMS Plan. These potential impacts may be related to: (1) the technology ultimately used by the CAT and differences across CAT Reporters in their efforts necessary to meet the CAT NMS Plan’s requirements; (2) the method of cost allocation across CAT Reporters; and (3) changes in regulatory reporting requirements, and their attendant costs, particularly to smaller entities, who may previously have benefited from regulatory exemptions.

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In general, the Participants believe that the CAT NMS Plan will avoid disincentives such as placing an inappropriate burden on competition in the U.S. securities markets. The discussion below focuses on competition in the Participant and broker-dealer communities, where the Participants believe there is the greatest potential for impact on competition.

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(i) Participants

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The Participants already incur significant costs to maintain and surveil an audit trail of activity for which they are responsible. Each Participant bears these costs whether it expends internal resources to monitor relevant activity itself, or whether it contracts with others to perform these services on its behalf. The CAT NMS Plan, through the funding principles it sets forth in Section 11.2, seeks to distribute the regulatory costs associated with the development and maintenance of a meaningful and comprehensive audit trail in a principled manner. By calibrating the CAT NMS Plan’s funding according to these principles, the Participants sought to avoid placing undue burden on exchanges relative to their core characteristics, including market share and volume of message traffic. Thus, the Participants do not believe that any particular exchange in either the equities or options markets would be placed at a competitive disadvantage in a way that would materially impact the respective Execution Venue marketplaces for either type of security.

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In addition, because the CAT NMS Plan seeks to allocate costs in a manner consistent with the Participants’ activities, the Participants do not believe that it would discourage potential new entrants. For instance, an equity ATS – which would already incur costs under the CAT NMS Plan as a reporting broker-dealer – should not be discouraged from becoming a national securities exchanges because of the costs it would incur as a Participant based on its business model or pricing structure. As proposed here, the entity would be assessed exactly the same amount for a given level of activity whether it acted as an ATS or as an exchange. Accordingly, the Participants do not believe that adoption of the CAT NMS Plan would favor existing exchanges or types of exchanges vis-à-vis potential new competitors in a way that would degrade available Execution Venue services or pricing. For similar reasons, the Participants also do not believe that the costs of the CAT NMS Plan would distort the marketplace for existing or potential registered securities associations.

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(ii) Broker-Dealers

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Broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Further, competition may be harmed if a particular class or group of broker-dealers bears the costs disproportionately, and as a result, investors have more limited choices or increased costs for certain types of broker-dealer services.

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For larger broker-dealers, the Participants rely on the information obtained from the Costs to CAT Reporters Study and discussions with the industry to preliminarily conclude that the CAT NMS Plan will not likely have an adverse impact on competition. Under the CAT NMS Plan, broker-dealers would be assessed charges, as determined by the Operating Committee, for the build and maintenance of the CAT. They would also incur costs to build and maintain systems and processes necessary to submit and retain their own information to the Central Repository. The Participants’ efforts to align costs with market activity leads to an outcome where dollar costs are borne significantly more by larger entities.

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Additionally, large broker-dealers may view themselves as direct competitors to large Participants, in that they may provide similar execution services. The CAT NMS Plan seeks to mitigate competitive impacts by aligning the cost allocation in a manner that seeks comparability among the largest CAT Reporters regardless of their regulatory status.228

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According to the Costs to CAT Reporters Study, for large broker-dealers, the average decrease in maintenance costs associated with the CAT (i.e., the cost that CAT would impose on firms beyond the current economic baseline) would be $651,924, and the average decrease in maintenance costs for small firms would be $726,216 using Approach 1. For Approach 2, large broker-dealers would see a decrease in maintenance costs associated with the CAT of $1,170,548, and small firms would see a decrease in the same costs of $763,371. These averages could suggest that the decreased costs imposed by the CAT would represent a benefit to both large and small broker-dealers’ regulatory budgets. The Participants believe that the CAT NMS Plan would not materially disadvantage small broker-dealers versus large broker-dealers.

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For small broker-dealers, the Participants considered their contribution to market activity as an important determinant of the amount of the cost of the CAT that they should bear. While this allocation of costs may be significant for some small firms, and may even impact their business models materially, SEC Rule 613 requires these entities to report. The Participants have not identified a way to further minimize the costs to these firms within the context of the funding principles established as part of the CAT NMS Plan.

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The Participants were particularly sensitive during the development of the CAT NMS Plan to the potential burdens it could place on small broker-dealers. These broker-dealers may incur minimal costs under existing audit trail requirements because they are OATS-exempt or excluded broker-dealers or limited purpose broker-dealers. The Participants note that the CAT NMS Plan contemplates steps to diffuse the potential cost differential between large and small firms. For instance, small broker-dealers generally will have an additional year before they are required to start reporting data under the CAT NMS Plan to the Central Repository. This will permit these firms greater time to implement the changes to their own systems necessary to comply with the Plan. Furthermore, the Participants have sought exemptive relief concerning time stamps for recording the time of Manual Order Events.

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact competition. For instance, if the method of cost allocation created disincentives to quoting activity, certain broker-dealer’s business models might be affected more greatly than others. The Participants are unable to determine whether and how changing these incentives may impact competition. Participants intend to monitor changes to overall market activity and market quality and consider appropriate changes to the cost allocation model where merited.

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The Participants note that if the exemption requests that have been submitted to the Commission are not granted, the requirements of SEC Rule 613 may impose significantly greater costs that could potentially cause small broker-dealers to exit the marketplace, discourage new entrants to the small broker-dealer marketplace, or impact the broker-dealer landscape in other ways that may dampen competitive pressures.

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(b) Impact on Efficiency

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Through an analysis of the data and information described above, the Participants have evaluated the impact of the CAT NMS Plan on efficiency, including the impact on the time, resources and effort needed to perform various regulatory and other functions. In general, the Participants believe that the CAT NMS Plan should have a net positive effect on efficiency.

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Overall, the Participants believe that the CAT NMS Plan could improve market efficiency by reducing monitoring costs and increasing efficiency in the enforcement of Participant and Commission rules. Additionally, the Participants believe that the CAT will enable the Participants and the Commission to detect more quickly wrongdoing on a cross-market basis, which may deter some market participants from taking such actions. For example, FINRA’s equity cross-market surveillance patterns have already demonstrated the value of integrating data from multiple markets. FINRA has found that approximately 44 percent of the manipulation-based alerts it generated involved conduct on two or more equity markets and 43 percent of the alerts involved conduct by two or more market participants.229 A reduction in prohibited activity, as well as faster identification of such activity by regulators, would lead to a reduction in losses to investors and increased efficiency.

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The CAT could also create more focused efficiencies for broker-dealers and Participants by reducing the redundant and overlapping systems and requirements identified above. For all CAT Reporters, the standardization of various technology systems will provide, over time, improved process efficiencies, including efficiencies gained through the replacement of outdated processes and technology with cost saving and related staffing reductions. Standardization of systems will improve efficiency, for both Participants and broker-dealers, in the form of resource consolidation, sun-setting of systems, consolidated legacy systems and processes and consolidated data processing. In addition, more sophisticated monitoring may reduce the number of ad hoc information requests, thereby reducing the overall burden and increasing the operational efficiency of CAT Reporters.

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CAT Reporters may also experience various long term efficiencies from the increase in surveillance capabilities, such as greater efficiencies related to administrative functions provided by enhanced regulatory access, superior system speed and reduced system downtime. Moreover, the Commission and the Participants expect to have more fulsome access to unprocessed regulatory data and timely and accurate information on market activity, thus providing the opportunity for improved market surveillance and monitoring.

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Note, however, that uniform reporting of data to the Central Repository may require the development of data mapping and data dictionaries that will impose burdens in the short term. CAT Reporters also may incur additional time and direct costs to comply with new encryption mechanisms in connection with the transmission of PII data (although the quality of the process will improve).

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact efficiency. For instance, if the method of cost allocation created disincentives to the provision of liquidity, there may be an impact on the quality of the markets and an increase in the costs to investors to transact. As a result, the Participants set forth the funding principles that will guide the selection of the cost allocation model. The Participants have also sought out evidence available to best understand how cost allocation models may impact market participation, and more importantly, ultimately market outcomes.230

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The Participants intend to monitor changes to overall market activity and market quality and will consider appropriate changes to the cost allocation model where merited.

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(c) Impact on Capital Formation

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Through an analysis of the data and information described above, the Participants also have assessed the impact of the CAT NMS Plan on capital formation, including the impact on both investments and the formation of additional capital. In general, the Participants believe that the CAT NMS Plan will have no deleterious effect on capital formation.

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In general the Participants believe that the enhanced surveillance of the markets may instill greater investor confidence in the markets, which, in turn, may prompt greater participation in the markets. It is possible that greater investor participation in the markets could bolster capital formation by supporting the environment in which companies raise capital.

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Moreover, the Participants believe that the CAT NMS Plan would not discourage capital formation. As discussed in greater detail above, the Participants have analyzed the degree to which the CAT NMS Plan should cover Primary Market Transactions. Based on this analysis, the Participants believe that the CAT NMS Plan has been appropriately tailored so it does not create an undue burden on the primary issuances that companies may use to raise capital.

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In addition, the Participants do not believe that the costs of the CAT NMS Plan would come to bear on investors in a way that would materially limit their access to or participation in the capital markets.

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Finally, the Participants believe that, given the CAT NMS Plan’s provisions to secure the data collected and stored by the Central Repository, the CAT NMS Plan should not discourage participation by market participants who are worried about data security and data breaches. As described more fully in the CAT NMS Plan and Appendix C, The Security and Confidentiality of the Information Reported to the Central Repository, and Appendix D, Data Security, the Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing, as well as at rest, and for ensuring that the data is used only for permitted purposes. The Plan Processor will be required to provide physical security for facilities where data is transmitted or stored, and must provide for the security of electronic access to data by outside parties, including Participants and the Commission, CAT Reporters, or Data Submitters. The Plan Processor must include in these measures heightened security for populating, storing, and retrieving particularly sensitive data such as PII. Moreover, the Plan Processor must develop and maintain this security program with a dedicated staff including, among others, a Chief Information Security Officer dedicated to monitoring and addressing data security issues for the Plan Processor and Central Repository, subject to regular review by the Chief Compliance Officer. The Plan Processor also will be required to provide regular reports to the Operating Committee on a number of items, including any data security issues for the Plan Processor and Central Repository.

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(d) Impacts of the CAT NMS Plan Governance on Efficiency, Competition, and Capital Formation

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Participants considered the impacts of the CAT NMS Plan governance on efficiency, competition, and capital formation. Participants recognize that without effective governance, it will become harder for the CAT NMS Plan to achieve its intended outcome, namely, enhanced investor protection, in an efficient manner. Participants specifically considered two areas where ineffective governance might lead to economic distortions or inefficiencies: (i) the voting protocols defined in the CAT NMS Plan both for Participants in developing the CAT, and for the Operating Committee after the adoption of the CAT NMS Plan; and (ii) the role of industry advisors within the context of CAT NMS Plan governance.

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Participants understand that there may be detrimental impacts to adopting voting protocols that might impede the effective administration of the CAT System. For instance, too high a threshold for decision making may limit the ability of the body to adopt broadly agreed upon provisions. The extreme form of this would have been for the CAT NMS Plan to require unanimity on all matters. In such case, one dissenting opinion could effectively derail the entire decision-making apparatus. The inability to act in a timely way may create consequences for efficiency, competition, and capital. Conversely, if Participants set a voting threshold that is too low, it might have the impact of not giving sufficient opportunity to be heard or value to dissenting opinions and alternative approaches. As an example, if Participants were to set voting thresholds too low, it might be possible for a set of Participants to adopt provisions that might provide them a competitive advantage over other Participants. Either forms (a too high or too low threshold) could result in negative impacts to efficiency, competition, and capital formation. These issues apply in the context of efforts of the Participants to develop the CAT NMS Plan submitted here or in the context of the Operating Committee’s responsibilities after approval of the CAT NMS Plan.

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To address these concerns, Participants carefully considered which matters should require a Supermajority Vote and which matters should require a Majority Vote.231 The decision required Participants to balance the protection of rights of all parties with the interest of avoiding unnecessary deadlock in the decision making process. As a result, Participants have determined that use of a Supermajority Vote should be for instances considered by the Participants to have a direct and significant impact on the functioning, management, and financing of the CAT System. This formulation, relying on Majority Vote for routine decisions and Supermajority Vote for significant matters, is intended to meet the Commission’s direction for “efficient and fair operation of the NMS plan governing the consolidated audit trail.”232

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Participants also considered the role of industry representation as part of the governance structure. Participants recognize the importance of including industry representation in order to assure that all affected parties have a representative in discussing the building, implementation, and maintenance of the CAT System. Participants actively sought insight and information from the DAG and other industry representatives in developing the CAT NMS Plan. The CAT NMS Plan also contemplates continued industry representation through an Advisory Committee, intended to support the Operating Committee and to promote continuing efficiency in meeting the objective of the CAT.

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C. IMPLEMENTATION AND MILESTONES OF THE CAT

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9. A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix))

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As required by SEC Rule 613(a)(1)(ix), this section sets forth a plan to eliminate rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of, among other things, whether the collection of such information remains appropriate; if still appropriate whether such information should continue to be separately collected or should instead be incorporated into the CAT; or if no longer appropriate, how the collection of such information could be efficiently terminated.

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Order Audit Trail System (“OATS”)

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The OATS Rules impose obligations on FINRA members to record in electronic form and report to FINRA, on a daily basis, certain information with respect to orders originated, received, transmitted, modified, canceled, or executed by members relating to OTC equity securities236 and NMS Securities.237 OATS captures this order information and integrates it with quote and transaction information to create a time-sequenced record of orders, quotes, and transactions. This information is then used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws. In general, the OATS Rules apply to any FINRA member that is a “Reporting Member,” which is defined in Rule 7410 as “a member that receives or originates an order and has an obligation to record and report information under Rules 7440 and 7450.”

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Although FINRA is committed to retiring OATS in as efficient and timely a manner as practicable, its ability to retire OATS is dependent on a number of events. Most importantly, before OATS can be retired, the Central Repository must contain CAT Data sufficient to ensure that FINRA can effectively conduct surveillance and investigations of its members for potential violations of FINRA rules and federal laws and regulations, which includes ensuring that the CAT Data is complete and accurate. Consequently, one of the first steps taken by the Participants to address the elimination of OATS was an analysis of gaps between the informational requirements of SEC Rule 613 and current OATS recording and reporting rules. In particular, SEC Rule 613(c)(5) and (6) require reporting of data only for each NMS Security that is (a) registered or listed for trading on a national securities exchange; (b) or admitted to unlisted trading privileges on such exchange; or (c) for which reports are required to be submitted to the national securities association. SEC Rule 613(i) requires the Participants to provide to the Commission within six months after the Effective Date a document outlining how the Participants could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS Securities (“OTC Equity Securities”) and debt securities (and Primary Market Transactions in such securities). Even though SEC Rule 613 does not require reporting of OTC Equity Securities, the Participants have agreed to expand the reporting requirements to include OTC Equity Securities to facilitate the elimination of OATS.238

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Next, the Participants performed a detailed analysis of the current OATS requirements and the specific reporting obligations under SEC Rule 613 and concluded that there are 42 data elements found in both OATS and SEC Rule 613; however, there are 33 data elements currently captured in OATS that are not specified in SEC Rule 613.239 The Participants believe it is appropriate to incorporate data elements into the Central Repository that are necessary to retire OATS and the OATS Rules. The Participants believe that these additional data elements will increase the likelihood that the Central Repository will include sufficient order information to ensure FINRA can continue to perform its surveillance with CAT Data rather than OATS data and can, thus, more quickly eliminate OATS and the OATS Rules.

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The purpose of OATS is to collect data to be used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws and regulations. SEC Rule 613 requires the Participants to include in the CAT NMS Plan a requirement that all Industry Members report information to the Central Repository within three years after the Effective Date. Consistent with this provision, under the terms of Sections 6.4 and 6.7 of the CAT NMS Plan, some Reporting Members will not be reporting information to the Central Repository until three years after the Effective Date. Because FINRA must continue to perform its surveillance obligations without interruption, OATS cannot be entirely eliminated until all FINRA members who currently report to OATS are reporting CAT Data to the Central Repository. However, FINRA will monitor its ability to integrate CAT Data with OATS data to determine whether it can continue to perform its surveillance obligations. If it is practicable to integrate the data in a way that ensures no interruption in FINRA’s surveillance capabilities, FINRA will consider exempting firms from the OATS Rules provided they report data to the Central Repository pursuant to the CAT NMS Plan and any implementing rules.

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FINRA’s ability to eliminate OATS reporting obligations is dependent upon the ability of the Plan Processor and FINRA to work together to integrate CAT Data with the data collected by OATS. FINRA is committed to working diligently with the Plan Processor to ensure this process occurs in a timely manner; however, it is anticipated that Reporting Members will have to report to both OATS and the Central Repository for some period of time until FINRA can verify that the data into the Central Repository is of sufficient quality for surveillance purposes and that all reporting requirements meet the established steady state Error Rates set forth in Section A.3(b). Once this is verified, FINRA’s goal is to minimize the dual-reporting requirement.

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Finally, the Participants note that, pursuant to Section 19 of the Exchange Act, the amendment or elimination of the OATS Rules can only be done with Commission approval. Approval of any such filings is dependent upon a number of factors, including public notice and comment and required findings by the Commission before it can approve any amendments; therefore, FINRA cannot speculate how long this process may ultimately take.

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10. Objective Milestones to Assess Progress (SEC Rule 613(a)(1)(x))

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As required by SEC Rule 613(a)(1)(x), this section sets forth a series of detailed objective milestones, with required completion dates, toward implementation of the consolidated audit trail.

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(a) Publication and Implementation of the Methods for Providing Information to the Customer-ID Database

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(b) Submission of Order and MM Quote Data to Central Repository

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(c) Linkage of Lifecycle of Order Events

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(d) Access to the Central Repository for Regulators

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(e) Integration of Other Data (“Other Data” includes, but is not limited to, SIP quote and trade data, OCC data, trade and quote information from Participants and reference data)

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D. PROCESS FOLLOWED TO DEVELOP THE NMS PLAN: These considerations require the CAT NMS Plan to discuss: (i) the views of the Participants’ Industry Members and other appropriate parties regarding the creation, implementation, and maintenance of the CAT; and (ii) the alternative approaches to creating, implementing, and maintaining the CAT considered and rejected by the Participants.

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11. Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi))

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(a) Process Used to Solicit Views:

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When the Participants first began creating a CAT pursuant to SEC Rule 613, the Participants developed the following guiding principles (the “Guiding Principles”):

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i. The CAT must meet the specific requirements of SEC Rule 613 and achieve the primary goal of creating a single, comprehensive audit trail to enhance regulators’ ability to surveil the U.S. markets in an effective and efficient way.

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ii. The reporting requirements and technology infrastructure developed must be adaptable to changing market structures and reflective of trading practices, as well as scalable to increasing market volumes.

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iii. The costs of developing, implementing, and operating the CAT should be minimized to the extent possible. To this end, existing reporting structures and technology interfaces will be utilized where practicable.

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iv. Industry input is a critical component in the creation of the CAT. The Participants will consider industry feedback before decisions are made with respect to reporting requirements and cost allocation models.

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The Participants explicitly recognized in the Guiding Principles that meaningful input by the industry was integral to the successful creation and implementation of the CAT, and as outlined below, the Participants have taken numerous steps throughout this process to ensure the industry and the public have a voice in the process.

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(i) General Industry Solicitation

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SEC Rule 613 was published in the Federal Register on August 1, 2012, and the following month, the Participants launched the CAT NMS Plan Website, which includes a dedicated email address for firms or the public to submit views on any aspect of the CAT. The CAT NMS Plan Website has been used as a means to communicate information to the industry and the public at large since that time. Also beginning in September 2012, the Participants hosted several events intended to solicit industry input regarding the CAT NMS Plan. A summary of the events is provided below:241

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• CAT Industry Call (September 19, 2012). The Participants provided an overview of SEC Rule 613, the steps the Participants were taking to develop a CAT NMS Plan as required by SEC Rule 613, and how the Participants planned to solicit industry comments and feedback on key implementation issues.

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• CAT Industry Events (October 2012). The Participants provided an overview of SEC Rule 613 and the steps the Participants were taking to develop an NMS Plan as required by SEC Rule 613. The events included an open Q & A and feedback session so that Industry Members could ask questions of the Participants and share feedback on key implementation issues. Two identical sessions were held on October 15, 2012 from 2:00 p.m. to 4:00 p.m. and on October 16, 2012 from 10:00 a.m. to 12:00 p.m. A total of 89 Industry Members attended the October 15 event in person, and a total of 162 Industry Members attended it by phone. A total of 130 Industry Members attended the October 16 event in person, and a total of 48 Industry Members attended it by phone.

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• CAT Industry Call and WebEx (November 29, 2012). The Participants provided an update on CAT NMS Plan development efforts including the process and timeline for issuing the RFP to solicit Bids to build and operate the CAT.

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• CAT Industry Events (February 27, 2014 and April 9, 2014). During these two events, the Participants provided an overview of the latest progress on the RFP process and the overall development of the NMS Plan. A total of 120 Industry Members attended the February event in person, and a total of 123 Industry Members attended it by phone. A total of 46 Industry Members attended the April event in person, and a total of 76 Industry Members attended it by phone.

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• CAT Cost Study Webinars (June 25, 2014 and July 9, 2014). The Participants hosted two Webinars to review and answer questions related to the Reporter Cost Study. There were approximately 100 to 120 Industry Members on each call.

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• CAT Industry Call and WebEx (December 10, 2014). The Participants provided an update on CAT NMS Plan development efforts, including filing of the CAT NMS Plan on September 30, 2014, the development of a funding model, and the PPR, which documents additional requirements for the CAT.

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For the above events, documentation was developed and presented to attendees, as well as posted publicly on the CAT NMS Plan Website.

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In addition to the above events, some Participants individually attended or participated in additional industry events, such as SIFMA conferences and FIF working groups, where they provided updates on the status of CAT NMS Plan development and discussed areas of expected CAT functionality.

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The Participants received general industry feedback from broker-dealers and software vendors.242 The Participants reviewed such feedback in detail, and addressed as appropriate while developing the RFP.

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The Participants also received industry feedback in response to solicitations by the Participants for industry viewpoints as follows:

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• Proposed RFP Concepts Document (published December 5, 2012, updated January 16, 2013). The Participants published via the CAT NMS Plan Website this document to solicit feedback on the feasibility and cost of implementing the CAT reporting requirements being considered by the Participants. Feedback was received from seven organizations, including software vendors, industry associations and broker-dealers, and the Participants discussed and addressed the feedback as appropriate in the final RFP document.

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• Representative Order Scenarios Solicitation for Feedback (February 1, 2013). The Participants solicited feedback via the CAT NMS Plan Website on potential CAT reporting requirements to facilitate the reporting of representative orders. Approximately 30 responses were received.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (April 22, 2013). The Participants solicited feedback via the CAT NMS Plan Website on four components of the CAT NMS Plan: (1) Primary Market Transactions; (2) Advisory Committee; (3) Time Stamp Requirement; and (4) Clock Synchronization. Approximately 80 Industry Members provided responses. FIF, SIFMA, and Thomson Reuters submitted detailed responses to the request for comments.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (June 2013). The Participants solicited feedback via the CAT NMS Plan Website concerning Customer identifiers, Customer information, CAT-Reporter-IDs, CAT-Order-IDs, CAT intra-firm order linkages, CAT inter-firm order linkages, broker-dealer CAT order-to-exchange order linkages, data transmission, and error correction.

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• CAT Industry Feedback on Clock Drift and Time Stamp Issues (September 2013). The Participants solicited feedback via the DAG concerning the implementation impact associated with a 50 millisecond clock drift requirement for electronic orders and executions.

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• Cost Survey on CAT Reporting of Options Market Maker Quotes (November 2013). The Participants solicited feedback via the DAG concerning the implementation impact and costs associated with reporting of quotes by options market makers to the Central Repository.

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• Cost Estimates for CAT Exemptive Relief (December 2014). The Participants solicited feedback via the DAG regarding minimum additional costs to be expected by Industry Members in the absence of the requested Exemptive Relief.

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• Cost Estimate for Adding Primary Market Transactions in CAT (February 2015). The Participants solicited feedback via the DAG concerning the feasibility and costs of broker-dealers to report to the Central Repository information regarding primary market transactions in NMS securities.

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• Clock Offset Survey (February 2015). The Participants solicited further feedback via the DAG concerning current broker-dealer clock synchronization practices and expected costs associated with complying with a 50ms, 5ms, 1ms, and 100 microsecond clock drift requirement for electronic orders and executions.

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Feedback on these topics was received primarily through discussion during meetings of the DAG.

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(ii) The Development Advisory Group (DAG)

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In furtherance of Guiding Principle (iv) above, the Participants solicited members for the DAG in February 2013 to further facilitate input from the industry regarding various topics that are critical to the success of the CAT NMS Plan. Initially, the DAG consisted of 10 firms that represented large, medium, and small broker-dealers, the Options Clearing Corporation (OCC), a service bureau and three industry associations: the Security Traders Association (STA), SIFMA, and FIF.

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In March 2014, the Participants invited additional firms to join the DAG in an effort to ensure that it reflected a diversity of perspectives. At this time, the Participants increased the membership of the DAG to include 12 additional firms. As of January 2015, the DAG consisted of the Participants and Representatives from 24 firms and industry associations.

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The DAG has had 49 meetings since April 2013. Topics discussed with the DAG have included:

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• CAT Plan Feedback. The Participants shared draft versions of the CAT NMS Plan, including the PPR, as it was being developed with the DAG, who provided feedback to the Participants. The Participants reviewed and discussed this feedback with the DAG, and incorporated portions of it into the CAT NMS Plan.

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• Options Market Maker Quotes. The DAG discussed the impact of options market maker quotes on the industry. A cost analysis was conducted by the industry trade associations to analyze the impact of market maker quote reporting, as well as adding a “quote sent” time stamp to messages sent to exchanges by all options market makers The Participants included in the Exemptive Request Letters a request for exemptive relief related to option market maker quotes given that exchanges will be reporting this data to the CAT.

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• Customer-ID. The DAG discussed the requirements for capturing Customer-ID. The Participants proposed a Customer Information Approach in which broker-dealers assign a unique Firm Designated ID to each Customer and the Plan Processor creates and stores the Customer-ID. This concept was supported by the DAG and the Participants included in the Exemptive Request Letters a request for exemptive relief related to the Customer-ID to reduce the reporting on CAT Reporters.

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• Time Stamp, Clock Synchronization and Clock Drift. The DAG discussed time stamps in regards to potential exemptive relief on the time stamp requirements for allocations and Manual Order Events. In addition, industry clock synchronization processes were discussed as well as the feasibility of specific clock drift requirements (e.g., 50ms), with the DAG and the FIF conducting an industry survey to identify the costs and challenges associated with various levels of clock synchronization requirements.243 The Participants included in the Exemptive Request Letters a request for exemptive relief related to manual time stamps.

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• Exemptive Request Letters. In addition to the specific areas detailed above (Options Market Maker Quotes, Customer-ID, and Time Stamp, Clock Synchronization, and Clock Drift), the DAG provided input and feedback on draft versions of the Exemptive Request Letters prior to their filing with the SEC, including cost estimates to firms and the Industry as a whole should the exemptive requests not be granted. This feedback was discussed by the Participants and the DAG and incorporated into the Exemptive Request Letters. The DAG also provided input and feedback on the Exemptive Request Letters covering Linking Allocations to Executions and Account Effective Date submitted on April 3, 2015 and September 2, 2015 respectively.

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• Primary Markets. At the request of the Participants, the DAG discussed with the Participants the feasibility, costs, and benefits associated with reporting allocations of NMS Securities in Primary Market Transactions. The DAG further provided estimated costs associated with reporting allocations of NMS Securities in Primary Market Transactions at the top-account and sub-account levels, which was incorporated into the CAT NMS Plan.244

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• Order Handling Scenarios. The DAG discussed potential CAT reporting requirements for certain order handling scenarios and additional corresponding sub-scenarios (e.g., riskless principal order and sub-scenarios involving post-execution print-for-print matching, pre-execution one-to-one matching, pre-execution many-to-one matching, complex options and auctions) An Industry Member and Participant working group was established to discuss order handling scenarios in more detail.

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• Error Handling and Correction Process. The DAG discussed error handling and correction process. Industry Members of the DAG provided recommendations for making the CAT error correction processes more efficient. The Participants have reviewed and analyzed these recommended solutions for error correction processes and incorporated them in the requirements for the Plan Processor.

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• Elimination of Systems. The DAG discussed the gaps between CAT and both OATS and EBS. An OATS-EBS-CAT gap analysis was developed and published on the CAT NMS Plan Website to identify commonalities and redundancies between the systems and the functionality of the CAT. Additionally, gaps between LTID and the CAT were also developed. Additional examples of systems and rules being analyzed include, but are not limited to: CBOE Rule 8.9, PHLX Rule 1022, COATS, Equity Cleared Reports, LOPR, and FINRA Rule 4560.

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• Cost and Funding of the CAT. The DAG helped to develop the cost study that was distributed to Industry Members. Additionally, the Participants have discussed with the DAG the funding principles for the CAT and potential funding models.

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In addition, a subgroup of the DAG has met six times to discuss equity and option order handling scenarios, order types, how and whether the orders are currently reported and how linkages could be created for the orders within the CAT.

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(b) Summary of Views Expressed by Members and Other Parties and How Participants Took Those Views Into Account in Preparing the CAT NMS Plan

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The various perspectives of Industry Members and other appropriate parties informed the Participants’ consideration of operational and technical issues during the development of the CAT NMS Plan. In addition to the regular DAG meetings and special industry calls and events noted above, the Participants conducted multiple group working sessions to discuss the industry’s unique perspectives on CAT-related operational and technical issues. These sessions included discussions of options and equity order scenarios and the RFP specifications and requirements.

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Industry feedback was provided to Participants through gap analyses, cost studies, comment letters and active discussion in DAG meetings and industry outreach events. Specific topics on which the industry provided input include:

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Overall Timeline. Industry Members expressed a concern that the original timeline for implementation of the CAT is significantly shorter than the timeline for other large scale requirements such as Large Trader Reporting. The industry requested that, in developing the overall timeline for development and implementation of the CAT NMS Plan, the Participants account for additional industry comment/input on specifications in the official timeline and discussed risk mitigation strategies for implementation of the Central Repository.

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Request for proposal. The Participants provided relevant excerpts of the RFP to DAG members for review and input. These sections were discussed by the Participants, and appropriate feedback was incorporated prior to publishing the RFP.

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Options Market Maker Quotes. Industry Members expressed the view that requiring market makers to provide quote information to the CAT will be duplicative of information already being submitted to the CAT by the exchanges. Participants worked closely with DAG members to develop an alternative approach that will meet the goals of SEC Rule 613, and which is detailed in the Exemptive Request Letter that the Participants submitted to the Commission related to manual time stamps.

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Customer-ID. Extensive DAG discussions reviewed the Customer-ID requirements in SEC Rule 613. The industry expressed significant concern that the complexities of adding a unique CAT customer identifier to order reporting would introduce significant costs and effort related to the system modifications and business process changes broker-dealers would face in order to implement this requirement of SEC Rule 613. Working with Industry Members, the Participants proposed a Customer Information Approach in which broker-dealers would assign a unique Firm Designated ID to each Customer which the Plan Processor would retain. Additional feedback was provided by the DAG for the use of the Legal Entity Identifier (“LEI”) as a valid unique customer identifier as an alternative to Tax Identification Numbers to identify non-natural person accounts. This Customer Information Approach is included in the Exemptive Request Letters that the Participants submitted to the Commission.

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Error Correction. DAG members discussed the criticality of CAT Data quality to market surveillance and reconstruction, as well as the need for a robust process for the timely identification and correction of errors. Industry Members provided feedback on error correction objectives and processes, including the importance of those data errors not causing linkage breaks. This feedback was incorporated into the RFP and relevant portions of the PPR.

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Industry Members also suggested that CAT Reporters be provided access to their submitted data. Participants discussed the data security and cost considerations of this request and determined that it was not a cost-effective requirement for the CAT.

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Governance of the CAT. Industry Members provided detailed recommendation for the integration of Industry Members into the governance of the CAT, including an expansion of the proposed Advisory Committee to include industry associations such as FIF and SIFMA. Industry Members also recommended a three-year term with one-third turnover per year is recommended to provide improved continuity given the complexity of CAT processing.

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The Participants have discussed CAT governance considerations with the DAG at several meetings. The Participants incorporated industry feedback into the CAT NMS Plan to the extent possible in light of the regulatory responsibilities placed solely upon the Participants under the provisions of SEC Rule 613. The proposed structure and composition of the Advisory Committee in Article 4.12 was discussed with the DAG in advance of the submission of this Plan.

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Role of Operating Committee. The Operating Committee, consisting of one voting member representing each Participant, is structured to ensure fair and equal representation of the Participants in furtherance of SEC Rule 613(b)(1). The overarching role of the Operating Committee is to manage the Company and the CAT System similar to the manner in which a board of directors manages the business and affairs of a corporation. The primary and more specific role of the Operating Committee is to make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and the CAT NMS Plan. In connection with its role, the Operating Committee has the right, power and authority to exercise all of the powers of the Company, to make all decisions, and to authorize or otherwise approve all actions by the Company, except as otherwise provided by applicable law or as otherwise provided in the CAT NMS Plan (Section 4.1 of the CAT NMS Plan). The Operating Committee also monitors, supervises and oversees the actions of the Plan Processor, the Chief Compliance Officer and the Chief Information Security Officer, all of whom are involved with the CAT System on a more detailed and day-to-day basis.

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The decisions made by the Operating Committee include matters that are typically considered ordinary course for a governing body like a board of directors (e.g., approval of compensation of the Chief Compliance Officer (Section 6.2(a)(iv) the CAT NMS Plan) and approval to hold an executive session of the Operating Committee (Section 4.3(a)(v) of the CAT NMS Plan)), in addition to matters that are specific to the functioning, management and financing of the CAT System (e.g., changes to Technical Specifications (Sections 4.3(b)(vi)-(vii) of the CAT NMS Plan) and significant changes to the CAT System (Section 4.3(b)(v) of the CAT NMS Plan)).

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The CAT NMS Plan sets forth a structure for decisions that the Operating Committee may make after approval of the CAT NMS Plan by the SEC. These decisions relate to events that may occur in the future as a result of the normal operation of any business (e.g., additional capital contributions (Section 3.8 of the CAT NMS Plan), approval of a loan to the Company (Section 3.9 of the CAT NMS Plan)) or that may occur due to the operation of the CAT System (e.g., the amount of the Participation Fee to be paid by a prospective Participant (Section 3.3(a) of the CAT NMS Plan)). These decisions cannot be made at the time of approval of the CAT NMS Plan because the Operating Committee will need to make its determination based on the facts and circumstances as they exist in the future. For example, in determining the appropriate Participation Fee, the Operating Committee will apply the factors identified in Section 3.3 of the CAT NMS Plan (e.g., costs of the Company and previous fees paid by other new Participants) to the facts existing at the time the prospective Participant is under consideration. Another example is the establishment of funding for the Company and fees for Participants and Industry Members. Section 11.2 of the CAT NMS Plan sets forth factors and principles that the Operating Committee will use in determining the funding of the Company. The Operating Committee then has the ability to review the annual budget and operations and costs of the CAT System to determine the appropriate funding and fees at the relevant future time. This approach, which sets forth standards at the time the CAT NMS Plan is approved that will be applied to future facts and circumstances, provides the Operating Committee with guiding principles to aid its decision-making in the future.

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The Participants also recognize that certain decisions that are fundamental and significant to the operation of the Company and the CAT System must require the prior approval of the SEC, such as the use of new factors in determining a Participation Fee (Section 3.3(b)(v) of the CAT NMS Plan). In addition, any decision that requires an amendment to the CAT NMS Plan, such as termination of a Participant (Section 3.7(b) of the CAT NMS Plan), requires prior approval of the SEC (Section 12.3 of the CAT NMS Plan).

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The Operating Committee has the authority to delegate administrative functions related to the management of the business and affairs of the Company to one or more Subcommittees and other Persons; however, the CAT NMS Plan expressly states that the Operating Committee may not delegate its policy-making functions (except to the extent policy-making determinations are already delegated as set forth in the CAT NMS Plan, which determinations will have been approved by the SEC) (Section 4.1 of the CAT NMS Plan). For example, the CAT NMS Plan provides for the formation of a Compliance Subcommittee to aid the Chief Compliance Officer in performing compliance functions, including (1) the maintenance of confidentiality of information submitted to the CAT; (2) the timeliness, accuracy and completeness of information; and (3) the manner and extent to which each Participant is meeting its compliance obligations under SEC Rule 613 and the CAT NMS Plan (Section 4.12(b) of the CAT NMS Plan). The Operating Committee also has delegated authority to the Plan Processor with respect to the normal day-to-day operating function of the Central Repository (Section 6.1 of the CAT NMS Plan). Nevertheless, decisions made by the Plan Processor that are more significant in nature remain subject to approval by the Operating Committee, such as decisions related to the implementation of policies and procedures (Section 6.1(c) of the CAT NMS Plan), appointment of the Chief Compliance Officer, Chief Information Officer, and Independent Auditor (Section 6.1(b) of the CAT NMS Plan), Material System Changes or any system changes for regulatory compliance (Sections 6.1(i) and 6.1(j) of the CAT NMS Plan). In addition, the Operating Committee will conduct a formal review of the Plan Processor’s performance under the CAT NMS Plan on an annual basis (Section 6.1(n) of the CAT NMS Plan). As to Subcommittees that the Operating Committee may form in the future, the Participants have determined that the Operating Committee will establish a Selection Subcommittee to select a successor Plan Processor when the time arises (Section 6.1(t) of the CAT NMS Plan). In the future, the Operating Committee will take a similar approach when delegating authority by providing Subcommittees or other Persons with discretion with respect to administrative functions and retaining authority to approve decisions related to policy and other significant matters of the Company and the CAT System.

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The role of the Operating Committee, including the delegation of its authority to Subcommittees and other limited Persons, as provided in the CAT NMS Plan is similar to that of other national market system plans, including the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC. It also is based on rules and regulations under the Exchange Act, and general principles with respect to the governance of a limited liability company. All decisions made by the Operating Committee will be governed by the guiding principles of the CAT NMS Plan and SEC Rule 613.

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Voting Criteria of the Operating Committee: This section describes the voting criteria for decisions made by the Operating Committee, which consists of a representative for each Participant, and by any Subcommittee of the Operating Committee in the management and supervision of the business of the Company and the CAT System.

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A Majority Vote (an affirmative vote of at least a majority of all members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is the default standard for decisions that are typically considered ordinary course matters for a governing body like a board of directors or board of managers or that address the general governance and function of the Operating Committee and its Subcommittees. All actions of the Company requiring a vote by the Operating Committee or any Subcommittee requires authorization by a Majority Vote except for matters specified in certain sections of the CAT NMS Plan described below, which matters require either a Supermajority Vote or a unanimous vote. As a general matter, the approach adopted by the Operating Committee is consistent with the voting criteria of the NASDAQ Unlisted Trading Privileges Plan (the “NASDAQ UTP Plan”), the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC, the Consolidated Quotation Plan and the Consolidated Tape Association Plan.

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A Supermajority Vote (an affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is required to authorize decisions on matters that are outside ordinary course of business and are considered by the Participants to have a direct and significant impact on the functioning, management and financing of the CAT System. This approach was informed by similar plans (e.g., the NASDAQ UTP Plan, which requires a unanimous vote in many similar circumstances); however, the CAT NMS Plan has the lower requirement of a Supermajority Vote because overuse of the unanimity requirement makes management and oversight difficult. This approach takes into account concerns expressed by the Participants regarding management of the CAT NMS Plan, an is consistent with suggestions in the Adopting Release for the Participants to take into account t need for efficient and fair operation of the CAT NMS Plan and to consider the appropriateness of unanimity requirement and the possibility of a governance requirement other than unanimity, or even supermajority approval, for all but the most important decisions.

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The Participants believe that certain decisions that may directly impact the functioning and performance of the CAT System should be subject to the heightened standard of a Supermajority Vote, such as: selection and removal of the Plan Processor and key officers; approval of the initial Technical Specifications; approval of Material Amendments to the Technical Specifications proposed by the Plan Processor; and direct amendments to the Technical Specifications by the Operating Committee. In addition, the Participants believe the instances in which the Company enters into or modifies a Material Contract, incurs debt, makes distributions or tax elections or changes fee schedules should be limited, given that the Company is intended to operate on a break-even basis. Accordingly, those matters should also require the heightened standard of a Supermajority Vote.

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A unanimous vote of all Participants is required in only three circumstances. First, a decision to obligate Participants to make a loan or capital contribution to the Company requires a unanimous vote (Section 3.8(a) of the CAT NMS Plan). Requiring Participants to provide additional financing to the Company is an event that imposes an additional and direct financial burden on each Participant, thus it is important that each Participant’s approval is obtained. Second, a decision by the Participants to dissolve the Company requires unanimity (Section 10.1 of the CAT NMS Plan). The dissolution of the Company is an extraordinary event that would have a direct impact on each Participant’s ability to meet its compliance requirements so it is critical that each Participant consents to this decision. Third, a unanimous vote is required if Participants decide to take an action by written consent in lieu of a meeting (Section 4.10 of the CAT NMS Plan). In that case, because Participants will not have the opportunity to discuss and exchange ideas on the matter under consideration, all Participants must sign the written consent. This approach is similar to the unanimity requirement under the Delaware General Corporation Law for decisions made by written consent of the directors of a corporation in lieu of a meeting.

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Voting on Behalf of Affiliated Participants: Each Participant has one vote on the Operating Committee to permit equal representation among all the Participants. Initially, the Operating Committee will have 19 Participants. Of the 19 Participants, there are five Participants that are part of the Affiliated Participants Group and five Participants without any Affiliated Participants. Because of the relationship between the respective Affiliated Participants and given the large number of Participants on the Operating Committee, the Participants believe an efficient and effective way of structuring the Operating Committee in order to have an orderly and well-functioning committee is to permit but not require one individual to serve as a voting member for multiple Affiliated Participants. This approach does not change the standard rule that each Participant has one vote. This approach provides Affiliated Participants with the flexibility to choose whether to have one individual represent one or more of the Affiliated Participants or to have each of them represented by a separate individual. Affiliated Participants may likely vote on a matter similarly, and allowing them to choose the same individual as a voting member would be a convenient and practical way of having the Affiliated Participants’ votes cast. Because there is no requirement that the representative of multiple Affiliated Participants cast the same vote for all represented Participants, there is no practical difference between this approach and an approach that mandates a separate representative for each Participant. In addition, the Participants considered whether this approach would result in less participation because of a reduced number of individuals on the Operating Committee. If each group of Affiliated Participants were to choose one individual to serve as a voting member, there would be still be 10 individuals on the Operating Committee, which the Participants do not believe would cause less active representation or participation or would otherwise lead to unwanted concentration on the Operating Committee.

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Affiliated Participant Groups and Participants without Affiliations:

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1. New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC

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2. The NASDAQ Stock Market LLC; NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX LLC

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3. BATS Exchange, Inc.; BATS Y-Exchange, Inc.; EDGX Exchange, Inc.; EDGA Exchange, Inc.

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4. Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated

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5. International Securities Exchange, LLC; ISE Gemini, LLC

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6. National Stock Exchange, Inc.

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7. Chicago Stock Exchange, Inc.

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8. BOX Options Exchange LLC

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9. Miami International Securities Exchange LLC

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10. Financial Industry Regulatory Authority, Inc.

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Conflicts of Interest Definition: The Participants arrived at the definition of Conflicts of Interest set forth in Article I of the CAT NMS Plan based on a review of existing rules and standards of securities exchanges, other plans, including the Selection Plan as to qualifications of a Voting Senior Officer of a Bidding Participant, and general corporate and governance principles.

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Transparency in the Bidding and Selection Process: DAG members requested input into the bidding and selection process for the Plan Processor, citing the extensive impact of CAT requirements on the industry as well as proposed cost for compliance. Specifically, Industry Members requested that non-proprietary aspects of the responses to the RFP should be available to the public to inform the discussion regarding the costs and benefits of various CAT features and the technological feasibility of different solutions. Participants, working with counsel, determined that such information could be appropriately shared with DAG members pursuant to the provisions of a non-disclosure agreement (“NDA”) that was consistent with the terms of the NDA executed between the Participants and the Bidders. After extensive discussion, DAG members declined to sign such an NDA. The Participants continued to share non-bid specific information and to solicit the views and perspective of DAG members as it developed a Plan approach and related solutions.

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Time Stamp Granularity and Clock Synchronization Requirement: Industry Members recommended a millisecond time stamp for electronic order and execution events and a time stamp in seconds for manual order handling. Industry Members suggested a grace period of two years after the CAT requirements are finalized to allow broker-dealers sufficient time to meet the millisecond time stamp granularity. In addition, Industry Members recommended maintaining the current OATS rule of a one second clock drift tolerance for electronic order and execution events, citing a significant burden to Industry Members to comply with a change to the current one-second clock drift.245 Participants conducted active discussions with Industry Members on this topic, and included in the Exemptive Request Letter a request for exemptive relief related to time stamp granularity for Manual Order Events.

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Equitable Cost and Funding: Industry Members expressed the view that any funding mechanism developed by the Participants should provide for equitable funding among all market participants, including the Participants. The Participants recognized the importance of this viewpoint and have incorporated it within the guiding principles that were discussed with the Industry.

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Order ID/Linkages: The DAG formed an order scenarios working group to discuss approaches to satisfy the order linkage requirements of SEC Rule 613. On the topic of allocations, Industry Members provided feedback that the order and execution processes are handled via front office systems, while allocation processes are conducted in the back office. Industry Members expressed the view that creating linkages between these systems, which currently operate independently, would require extensive reengineering of middle and back office processes not just within a broker-dealer but across broker-dealers, imposing significant additional costs on the industry as a whole. Given the widespread use of average price processing accounts, clearing firms, prime brokers and self-clearing firm cannot always determine which specific order results in a given allocation or allocations. Industry Members worked closely with Participants on a proposed alternative approach which the Participants submitted to the Commission in the Exemptive Request Letters.

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Elimination of Systems and Rules: The elimination of duplicative and redundant systems and rules is a critical aspect of the CAT development process. Industry DAG members including SIFMA and FIF provided broad based and comprehensive insight on the list of existing regulatory systems and Participant rules that they deem to be duplicative, including, among others, OATS, the EBS reporting system, and Large Trader reporting. In addition, FIF provided a gap analysis of CAT requirements against Large Trader transactional reporting obligations.

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The Participants discussed feedback from the industry in a variety of forums: (i) during DAG meetings; (ii) in relevant Subcommittee meetings, depending on the topic; and (iii) at two multi-day offsite meetings where Representatives of each Participant gathered in a series of in-person workshops to discuss the requirements of the Plan Processor, both technical and operational. This was in addition to numerous video-conference meetings when Participants discussed and developed the RFP document incorporating, where appropriate, feedback from the industry.

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12. Discuss Reasonable Alternative Approaches that the Participants Considered to Create, Implement, and Maintain the CAT (SEC Rule 613(a)(1)(xii))

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The Participants, working as a consortium, selected the approach reflected in the Plan through a detailed analysis of alternatives, relying on both internal and external knowledge and expertise to collect and evaluate information related to the CAT. For some of the requirements of SEC Rule 613, the Participants’ analysis indicated that the required approach would be unduly burdensome or complex. In these cases, the Participants have requested exemption from these requirements in the Exemptive Request Letter, which details the analysis performed and alternatives considered for these specific requirements.

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The Participants leveraged their own extensive experience with regulatory, technical and securities issues in formulating, drafting and filing the CAT NMS Plan. Specifically, the nineteen Participants formed various Subcommittees to focus on specific critical issues during the development of the CAT NMS Plan. The Subcommittees included:

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• a Governance Committee, which developed recommendations for decision-making protocols and voting criteria critical to the development of the CAT NMS Plan, in addition to developing formal governance and operating structures for the CAT NMS Plan;

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• a Technical Committee, which developed the technical scope requirements of the CAT, the CAT RFP documents, and the PPR;

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• an Industry Outreach Committee, which provided recommendations on effective methods for soliciting industry input, in addition to facilitating industry involvement in CAT-related public events246 and development of the CAT NMS Plan and the Exemptive Request Letters;

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• a Press Committee as a Subcommittee of the Industry Outreach Committee, which coordinated interactions with the press;

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• a Cost and Funding Committee, which drafted a framework for determining the costs of the CAT, and provided recommendations on revenue/funding of the CAT for both initial development costs and ongoing costs; and

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• an Other Products Committee, which is designed to assist the SEC, as necessary, when the SEC is determining whether and how other products should be added to the CAT.247

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Representatives from all Subcommittees met to discuss the overall progress of the CAT initiative in the Operating Committee.

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To support the Participants’ internal expertise, the Participants also engaged outside experts to assist in formulating the CAT NMS Plan. Specifically, the Participants engaged the consulting firm Deloitte & Touche LLP as a project manager, and engaged the law firm Wilmer Cutler Pickering Hale and Dorr LLP to serve as legal counsel in drafting the CAT NMS Plan, both of which have extensive experience with issues raised by the CAT. Additionally, the Participants engaged the services of the public relations firm Peppercomm to assist with public relations and press engagement in formulating the CAT NMS Plan.

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Furthermore, as discussed in more detail above in Appendix C, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan, the Participants engaged in meaningful dialogue with Industry Members with respect to the development of the CAT through the DAG and other industry outreach events.

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Using this internal and external expertise, the Participants developed a process to identify, evaluate and resolve issues so as to finalize the CAT NMS Plan. As discussed above in Appendix C, the Participants have, among other things, developed the Selection Plan to describe the process for selecting the Plan Processor, created and published an RFP, evaluated Bids, and chosen a shortlist of Bids. Contemporaneously, the Participants have drafted the Plan set forth herein to reflect the recommendations that have resulted from the approach and analysis described above.

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For certain technical considerations for the development and maintenance of the CAT that do not materially impact cost, required functionality or data security, the Participants did not mandate specific approaches, but rather chose to consider solutions proposed by the Bidders.

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(a) Request for Proposal

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The Participants considered multiple alternatives for the best approach to gathering the information necessary to determine how to create, implement and maintain the CAT, including issuance of a Request for Information (“RFI”) and Request for Proposal (“RFP”). After due consideration, with a view to meeting the demanding deadline set forth in SEC Rule 613, the Participants decided to use their expertise to craft an RFP seeking proposals to implement the main requirements to successfully build and operate the CAT. This approach was designed to solicit imaginative and competitive proposals from the private sector as well as to provide an adequate amount of insight into the costs associated with creating, implementing, and maintaining the CAT.

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To design the RFP process, the Participants consulted with their technology subject matter resources to determine technical implications and requirements of the CAT and to develop the RFP. Based on these requirements, the Participants developed the Proposed RFP Concepts Document,248 which identified the high level requirements for which potential Bidders would be expected to design a solution, ahead of publishing the full RFP on February 26, 2013. The Participants received 31 intents to bid, and then hosted a Bidder conference on March 8, 2013 to discuss the requirements and provide additional context to the industry and potential Bidders. Two additional conference calls to discuss additional questions on the RFP were held on April 25, 2013 and May 2, 2013. The Participants also established an e-mail box through which questions on the RFP were received.

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Ten competitive proposals were submitted on March 21, 2014. Each of the ten proposals was carefully reviewed by the Participants, including in-person meetings with each of the ten Bidders. Following this review, the Bids were reduced to six proposals in accordance with the Selection Plan approved by the Commission in February 2014. In accordance with the Selection Plan Amendment approved by the Commission on June 23, 2015, the Participants asked the Bidders on July 14, 2015 to revise their bids to account for the updated requirements included in the CAT NMS Plan as filed on February 27, 2015, as well as to address specific additional questions and considerations. As described more fully throughout this Appendix C, the proposals offer a variety of solutions for creating, implementing and maintaining the CAT.

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As stated above, the Participants received proposals from ten Bidders that were deemed qualified, including many from large and well-respected information technology firms. The open ended nature of the questions contained in the RFP allowed Bidders to provide thoughtful and creative responses with regards to all aspects of the implementation and the operation of the CAT. The RFP process also resulted in the submission of multiple competitively-priced Bids. The six Shortlisted Bids remaining under consideration by the Participants, inclusive of the initial system build and the first five years of maintenance costs, have ranges between $165 million and $556 million, and encompass a number of innovative approaches to meeting the requirements of SEC Rule 613, such as use of non-traditional database architectures and cloud-based infrastructure solutions.

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The Participants conducted the RFP process and the review of Bids pursuant to the Selection Plan approved by the Commission, which was designed to mitigate the conflicts of interest associated with Participants that are participating in developing the CAT while also seeking to become the Plan Processor and to ensure a level playing field for all potential Bidders to be considered on a fair and equal basis.

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(b) Organizational Structure

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The Participants considered various organizational structures of the Bidders to assess whether a particular structure would be a material factor in the ability of a Bidder to effectively operate as the Plan Processor. Of the Bids submitted, three general organizational structures for the Plan Processor emerged: (1) consortiums or partnerships (i.e., the Plan Processor would consist of more than one unaffiliated entity that would operate the CAT); (2) single firms (i.e., one entity would be the Plan Processor and that entity would operate the CAT as part of its other ongoing business operations); and (3) dedicated legal entities (i.e., CAT operations would be conducted in a separate legal entity that would perform no other business activities). Each type of organizational structure has strengths and limitations, but the Participants did not find that a particular organizational structure should be a material factor in selecting a Bidder. Accordingly the Participants have not mandated a specific organizational structure for the Plan Processor.

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(c) Primary Storage

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The Bidders proposed two methods of primary data storage: traditionally-hosted storage architecture, and infrastructure-as-a-service. Traditionally-hosted storage architecture is a model in which an organization would purchase and maintain proprietary servers and other hardware to store CAT Data. Infrastructure-as-a-service is a provisioning model in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components to a third party who charges for the service on a usage basis.

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Each data storage method has a number of considerations that the Participants will take into account when evaluating each Bidder’s proposed solution. Such considerations include the maturity, cost, complexity, and reliability of the data storage method as used in each Bidder’s proposal. The Participants are not mandating a specific method for primary data storage provided that the data storage solution can meet the security, reliability, and accessibility requirements for the CAT, including storage of PII data, separately.

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(d) Customer and Account Data

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All Bidders proposed solutions consistent with the Customer Information Approach in which broker-dealers would report a unique Firm Designated ID for each Customer to the Plan Processor and the Plan Processor would create and store the CAT Customer-ID without passing this information back to the broker-dealer. The use of existing unique identifiers (such as internal firm customer identifiers) could minimize potentially large overhead in the CAT System that otherwise would be required to create and transmit back to CAT Reporters a CAT System-generated unique identifiers. Allowing multiple identifiers also will be more beneficial to CAT Reporters. This approach would still require mapping of identifiers to connect all trading associated with a single Customer across multiple accounts, but it would also ease the burden on CAT Reporters because each CAT Reporter would report information using existing identifiers it currently uses in its internal systems. Moreover, because the CAT System would not be sending a CAT System-generated Customer-ID back to the CAT Reporters, CAT Reporters would not need to process CAT Customer-IDs assigned by the Plan Processor. This approach would reduce the burden on the CAT Reporters because they would not need to build an additional process to receive a Customer-ID and append that identifier to each order origination, receipt or cancellation. This approach may also help alleviate storage and processing costs and potentially reduce the security risk of transmission of the Customer-ID to the CAT Reporter.

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The Participants support the use of the Customer Information Approach and included the approach in the Exemptive Request Letter so that the Central Repository could utilize this approach to link Customer and Customer Account Information. The Participants believe this approach would be the most efficient approach for both the Plan Processor and CAT Reporters.

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(e) Personally Identifying Information (PII)

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All Bidders proposed encrypting all PII, both at rest and in motion. This approach allows for secure storage of PII, even if servers should be compromised or data should be leaked. However, encryption can be highly complex to implement effectively (e.g., the poor choice of password salting or an insecure storage of private keys can compromise security, even without knowledge of the system administrator).

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All Bidders also proposed imposing a Role Based Access Control249 to PII. These controls would allow for varying levels of access depending on user needs, and would allow compartmentalizing access based on “need to know.” However, multiple layers of access can add further complexity to the implementation and use of a system.

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Some Bidders also proposed implementing multi-factor authentication250. This greatly enhances security and can prevent a leak of passwords or keys from completely compromising security. However, it increases system overhead, and increases the difficulty of accessing data.

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The Participants are requiring multi-factor authentication and Role Based Access Control for access to PII, separation of PII from other CAT Data, restricted access to PII (only those with a “need to know” will have access), and an auditable record of all access to PII data contained in the Central Repository. The Participants believe potential increased costs to the Plan Processor and delays that this could cause to accessing PII are balanced by the need to protect PII.

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(f) Data Ingestion Format

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Bidders proposed several approaches for the ingestion format for CAT Data: uniform defined format, use of existing messaging protocols or a hybrid approach whereby data can be submitted in a uniform defined format or using existing message protocols. There are benefits to the industry under any of the three formats. A large portion of the industry currently reports to OATS in a uniform defined format. These firms have invested time and resources to develop a process for reporting to OATS. The uniform formats recommended by the Bidders would leverage the OATS format and enhance it to meet the requirements of SEC Rule 613. This uniform format, therefore, may reduce the burden on certain CAT Reporters and simplify the process for those CAT Reporters to implement the CAT. However, some firms use message protocols, like FIX, as a standard point of reference with Industry Members that is typically used across the order lifecycle and within a firm’s order management processes. Leveraging existing messaging protocols could result in quicker implementation times and simplify data aggregation for Participants, CAT Reporters, and the Plan Processor, though it is worth noting that message formats may need to be updated to support CAT Data requirements.

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The Participants are not mandating the data ingestion format for the CAT. The Participants believe that the nature of the data ingestion is key to the architecture of the CAT. A cost study of members of the Participants did not reveal a strong cost preference for using an existing file format for reporting vs. creating a new format.251 However, FIF did indicate there was an industry preference among its members for using the FIX protocol.252

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(g) Process to Develop the CAT

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Bidders proposed several processes for development of the CAT: the agile or iterative development model, the waterfall model, and hybrid models that incorporate aspects of both the waterfall and agile methodologies. An agile methodology is an iterative model in which development is staggered and provides for continuous evolution of requirements and solutions. A waterfall model is a sequential process of software development with dedicated phases for Conception, Initiation, Analysis, Design, Construction, Testing, Production/ Implementation and Maintenance. The agile or iterative model is flexible to changes and facilitates early delivery of usable software that can be used for testing and feedback, helping to facilitate software that meets users’ needs. However, at the beginning of an agile or iterative development process, it can be difficult to accurately estimate the effort and time required for completion. The waterfall model would provide an up-front estimate of time and effort and would facilitate longer-term planning and coordination among multiple vendors or project streams. However, the waterfall model could be less flexible to changes, particularly changes that occur between design and delivery (and thereby potentially producing software that meets specifications but not user needs).

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The Participants are not mandating a development process. The Participants believe that either agile or iterative development or waterfall method or even a combination of both methods could be utilized to manage the development of CAT.

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(h) Industry Testing

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Bidders also proposed a range of approaches to industry testing, including dedicated environments, re-use of existing environments, scheduled testing events, and ongoing testing.

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Dedicated industry test environments could provide the possibility of continuous testing by participants, rather than allow for testing only on scheduled dates. Use of dedicated industry test environments also would not impact other ongoing operations (such as disaster recovery sites). However, developing and maintaining dedicated test environments would entail additional complexity and expense. Such expenses may be highest in hosted architecture systems where dedicated hardware would be needed, but potentially rarely used.

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The re-use of existing environments, such as disaster recovery environment, would provide simplicity and lower administrative costs. However, it could impact other ongoing operations, such as disaster recovery.

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Scheduled testing events (which might be held, for example, on weekends only, or on specific dates throughout the year) could provide for more realistic testing by involving multiple market participants. This approach also would not require the test environment to be available at all times. However, scheduled events would not allow users to test on the CAT System until a dedicated time window is open.

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Ongoing testing would allow users to test the CAT System as often as needed. However, this approach would require the test environment to be available at all times. It also may lead to lower levels of test participation at any given time, which may lead to less realistic testing.

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The Participants are requiring that the CAT provide a dedicated test environment that is functionally equivalent to the production environment and available on a 24x6 basis. The Participants believe that an ongoing testing model will be more helpful to the industry because it will provide an environment in which to test any internal system changes or updates that may occur in the course of their business that may affect reporting to the CAT. Additionally, this environment will provide a resource through which the CAT Reporters can continually test any CAT System mandated or rule associated changes to identify and reduce data errors prior to the changes being implemented in the production environment.

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(i) Quality Assurance (QA)

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The Participants considered a number of QA approaches and methodologies, informed by the Bidder’s proposals as well as discussions with the Participants’ own subject matter resources. Some of the approaches considered included “continuous integration,” where developer working copies are merged into the master and tested several times a day, test automation, and various industry standards such as ISO 20000/ITIL. The Participants are not mandating a single approach to QA beyond the requirements detailed in the RFP, for which each Bidder provided a detailed approach.

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One key component of the QA approaches proposed by the Bidders was the staffing levels associated with QA. Initial QA proposals from Bidders included staffing ranges from between 2 and 90 FTEs, although some Bidders indicated that their QA function was directly incorporated into their development function. Some Bidders proposed allocating QA resources after the third month. A larger number of QA resources may facilitate structured, in-depth testing and validation of the CAT System. However, a larger set of QA resources could lead to higher fixed costs and administrative overhead.

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The Participants are not mandating the size for QA staffing; however, the Participants will consider each Bidder’s QA staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its QA staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe the QA staffing numbers varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

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(j) User Support and Help Desk

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The RFP required that the CAT Help Desk be available on a 24x7 basis, and that it be able to manage 2,500 calls per month. To comply with these requirements, Bidders proposed user support staffing ranges from five to 36 FTEs. They also proposed dedicated support teams and support teams shared with other groups.

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A larger number of FTE user support staff could provide a higher level and quality of support. However, a higher number of staff would impose additional overhead and administrative costs. Additionally, as the support organization grows, it may become less closely integrated with the development team, which could decrease support effectiveness.

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A dedicated CAT support team would facilitate deep knowledge of the CAT System and industry practices. However, it would create additional overhead and costs. Additionally, management of support teams may not be the managing firm’s primary business, which could lead to inefficiencies. A support staff shared with non-CAT teams could provide for increased efficiency, if the team has greater experience in support more broadly. However, support resources may not have the depth of knowledge that dedicated support teams could be expected to develop.

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The Participants are not requiring specific FTEs for user support staffing; however, the Participants will consider each Bidder’s user support staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe that the number of FTEs varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

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Some Bidders proposed a US-based help desk, while others proposed basing it offshore. A U.S.-based help desk could facilitate a higher level of service, and could provide a greater level of security (given the sensitive nature of the CAT). However, a U.S.-based help desk may have greater labor costs. An offshore help desk would potentially have lower labor costs, but could provide (actual or perceived) lower level of service, and could raise security concerns (particularly where the help desk resources are employed by a third-party).

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The Participants are not requiring a specific location for the help desk. The Participants believe that as long as the Bidder’s solution meets the service and security requirements of the CAT, it is not necessary to prescribe the location.

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(k) CAT User Management

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Bidders proposed several approaches to user management253: help desk creation of user accounts, user (e.g., broker-dealer) creation of accounts, and multi-role. Help desk creation of accounts would allow for greater oversight and validation of user creation. However, it would increase administrative costs, particularly in the early stages of the CAT (as an FTE must setup each user). User creation of accounts would require lower staffing levels but would provide less oversight and validation of user creation.

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A multi-role approach would allow for a blended approach in which the Plan Processor could, for example, set up an administrator at each broker-dealer, and then allow the broker-dealer to set up additional accounts as needed. This approach could allow users with different levels of access to be provisioned differently, with those requiring greater oversight being provisioned manually. However, it would add complexity to the user creation system, and would provide less oversight and validation than would a fully manual system.

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For CAT Reporters entering information into the CAT, the Participants are requiring that each user be validated by the Plan Processor to set-up access to the system. However, for staff at regulators that will be accessing the information for regulatory purposes only, the Plan Processor can establish a set-up administrator who has the ability to provide access to other users within its organization. However, such administrators cannot set up access for PII information. Staff at regulators who need access to PII information must go through an authentication process directly with the Plan Processor. The Participants believe that this approach balances the demand on the staff at the Plan Processor with the need to ensure proper oversight and validation for users of the CAT.

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(l) Required Reportable Order Events

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The Participants considered multiple order event types for inclusion in the Plan. Of the order event types considered, the results order event type and the CAT feedback order event were not required. The Participants determined that a results order event type would not provide additional value over a “daisy chain” linkage method. A CAT feedback order event can be generated by the Plan Processor, thereby removing the reporting burden from reporting firms. Therefore the Participants are not requiring CAT Reporters to provide data for these two event types to the CAT. The required reportable order events are listed in Section 6.3(d).

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(m) Data Retention Requirements

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SEC Rule 613(e)(8) requires data to be available and searchable for a period of not less than five years. Broker-dealers are currently required to retain data for six years under the Exchange Act Rule 17a-4(a).

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The Participants support the use of a six year retention timeframe as it complies with Exchange Act Rule 17a-4(a). The Participants are requiring data for six years to be kept online in an easily accessible format to enable regulators to have access to six years of audit trail materials for purposes of its regulation.

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The Participants understand that requiring this sixth year of data storage may increase the cost to run the CAT; however, they believe the incremental cost would be outweighed by the needs of regulators to have access to the information. An analysis of the six Shortlisted Bidder proposals indicated that the average expected year-on-year annual cost increase during years four and five (i.e., once all reporters were reporting to the Central Repository) was approximately 4%. Extending this increase to another year would result in incremental annual costs to the Plan Processor ranging from approximately $1.15 million to $4.44 million depending upon the Bidder. Based on the assumption that the cumulative annual cost increase from year five to year six will also be 4% (including all the components provided by the Bidders in their respective cost schedules254), the maximum cost increase for data retention for an additional year would be 4%.

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(n) Data Feed Connectivity

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Bidders proposed either real-time SIP connectivity or end-of-day batch SIP connectivity. Real-time SIP connectivity would provide for more rapid access to SIP Data, but may require additional processing support to deal with out-of-sequence or missing records. End-of-day batch SIP connectivity provides the possibility of simpler implementation, but data from SIPs would not be available in the CAT until after overnight processing. Because CAT Reporters are only required to report order information on a next-day basis, the Participants are not requiring that the Plan Processor have real-time SIP connectivity.

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(o) Disaster Recovery

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Participants discussed two commonly accepted structures for disaster recovery: hot-hot255 and hot-warm256. While hot-hot allows for immediate cutover, the Participants agreed that real-time synchronization was not required, but rather that data must be kept synchronized to satisfy disaster recovery timing requirements (e.g., 48 hour cutover). A hot-warm structure meets the requirements of SEC Rule 613, and costs for hot-hot were considered to be higher than hot-warm. Therefore, the Participants are requiring a hot-warm disaster recovery structure, provided it meets the requirements set forth in Appendix D, BCP / DR Process.

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(p) Synchronization of Business Clocks

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The Participants considered multiple levels of precision for the clock synchronization standard set forth in the plan, ranging from 1 second (s) to 100 microseconds (μs). The Participants determined based on their expertise and feedback from industry that an initial clock synchronization of 50 milliseconds (ms) would be the most practical and effective choice and represents the current industry standard. Pursuant to SEC Rule 613(d), the initial standard of 50ms will be subject to annual analysis as to whether or not a more stringent clock synchronization tolerance could be implemented consistent with changes in industry standards.

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In order to identify the industry standard the Participants and Industry Members reviewed their own internal technology around Network Time Protocol (“NTP”) and Precision Time Protocol (“PTP”),257 potentially used in conjunction with Global Positioning System (“GPS”).258 In reviewing internal infrastructure, the Participants and Industry Members noted that the majority of firms had indicated that they leveraged at least NTP clock synchronization technology. In addition, the FIF conducted a clock synchronization survey259 (“FIF Clock Offset Survey”) of 28 firms to identify costs and challenges associated with clock synchronization tolerances of 50ms, 5ms, 1ms, and 100μs. The FIF Clock Offset Survey indicated that 93% of responding firms leverage NTP technology, while fewer than half of responding firms use SNTP, PTP, or GPS. In reviewing the standards for NTP technology, the Participants determined that this technology can accommodate a 50ms tolerance. In addition, the FIF Clock Offset Survey demonstrated that 60% of responding firms currently synchronize their clocks with an offset of 50ms or greater, with approximately 20% of responding firms currently using an offset of 50ms. Only 18% of responding firms used a clock offset of 30ms or less. In light of these reviews and the survey data, the Participants concluded that a clock offset of 50ms represents an aggressive, but achievable, industry standard.

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In addition to determining current industry clock offset standards used in the industry, the FIF Clock Offset Survey indicated that the costs to survey respondents were as follows:260

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As indicated in the above table, annual maintenance costs of survey respondents for a 50ms standard would be on average 31% higher than current costs, and would escalate to 102%, 123%, and 242% increases over current maintenance costs as clock synchronization standards move to 5ms, 1ms, and 100μs respectively, indicating that maintenance costs rapidly escalate as clock synchronization standards increase beyond 50ms. Survey respondents also indicated that increasing clock synchronization requirements would require escalating technology changes, including significant hardware changes (such as installation of dedicated GPS or other hardware clocks and network architecture redesign), migration to new time synchronization standards, and widespread upgrades of operating systems and databases currently in use. For example, to achieve a 5ms clock offset would require firms to install GPS clocks in all locations and migrate from NTP to PTP. The Participants believe, based on the FIF Clock Offset Survey, that fewer than half of firms currently leverage GPS technology or PTP for clock synchronization.

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As noted in Article VI, Section 6.8, the Participants, working with the Processor’s Chief Compliance Officer, shall annually evaluate and make recommendations as to whether industry standards have evolved such that changes to the clock synchronization standards should be changed. It is the belief of the Participants that, while setting an initial clock synchronization of 5ms lower than 50ms may be achievable, it does not represent current industry standard and there may be challenges with small broker-dealers’ potentially substantial costs. However, once both large and small broker-dealers begin reporting data to the Central Repository, and as increased time synchronization standards become more mature, the Participants will assess the ability to tighten the clock synchronization standards to reflect changes in industry standards in accordance with SEC Rule 613.

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(q) Reportable Securities

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SEC Rule 613(c)(6) requires NMS Securities to be reported the Central Repository and SEC Rule 613(i) requires the Participants to detail a plan outlining how non-NMS Securities, debt securities, and Primary Market Transactions in equity securities that are not NMS Securities can be reported to the Central Repository in the future. The Participants considered whether to require including OTC Equity Securities, non NMS Securities, in a future phase of the CAT NMS Plan, as contemplated by the Commission in SEC Rule 613, or accelerating their inclusion into the first phase of the Plan. As part of this consideration, Participants weighed heavily the feedback from the DAG and other market participants of the considerations associated with the two alternatives, and made the determination to include OTC Equities in the requirements under the CAT NMS Plan.

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pubdate: N/A effdate: N/A -

APPENDIX D

- Topic: CAT NMS Plan, Appendix D - Compliance User: 39757d8e-a2cf-4753-9f3c-6d84819d4221 - Keywords: - Requirements, - Retention, - Management, - Data, - Sources, - Reporting, - Timelines, - -

CAT NMS Plan Processor Requirements

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Appendix D, CAT NMS Plan Processor Requirements, outlines minimum functional and technical requirements established by the Participants of the CAT NMS Plan for the Plan Processor. Given the technical nature of many of these requirements, it is anticipated, as technology evolves, that some may change over time. The Participants recognize that effective oversight of, and a collaborative working relationship with, the Plan Processor will be critical to ensure the CAT achieves its intended purpose, namely enhanced investor protection, in an efficient and cost-effective manner. The Participants also recognize that maintaining the efficiency and cost-effectiveness of the CAT requires flexibility to respond to technological innovations and market changes. For example, these minimum functional and technical requirements allow the Plan Processor flexibility to make certain changes to the Technical Specifications, while limiting others to the Operating Committee, and anticipate agreement between the Operating Committee and the Plan Processor on SLAs relating to, among other things, development, change management, and implementation processes and timelines. Maintaining such flexibility to adapt in these and other areas relating to the development and operation of the CAT is a foundational principle of this Appendix D.

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1. Central Repository Requirements

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1.1 Technical Architecture Requirements

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The Central Repository must be designed and sized to ingest, process, and store large volumes of data. The technical infrastructure needs to be scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture.

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The technical architecture must be scalable and able to readily expand its capacity to process significant increases in data volumes beyond the baseline capacity. The baseline capacity requirements are defined in this document. Once the CAT NMS Plan is approved, the Operating Committee will define the baseline metrics on an ongoing basis. CAT capacity planning must include SIP, OPRA and exchange capacity and growth forecasts. The initial baseline capacity requirements will be based on twice (2X) the historical peaks for the most recent six years, and the Plan Processor must be prepared to handle peaks in volume that could exceed this baseline for short periods. The SLA(s) will outline details of the technical performance and scalability requirements, and will be specifically targeted to the selected Bidder’s solution.

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The Central Repository must have the capacity and capability to:

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• Ingest and process throughput to meet baseline capacity requirements as well as scalability to meet peak capacity requirements, including staging, loading, speed of processing, and linking of data;

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• Accommodate data storage and query compute, such as:

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o Scalable for growth data storage and expansion capability, including but not limited to, resizing of database(s), data redistribution across nodes, and resizing of network bandwidth;

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o Robust processes to seamlessly add capacity without affecting the online operation and performance of the CAT System; and

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o Quantitative methods for measuring, monitoring, and reporting of excess capacity of the solution;

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• Satisfy minimum processing standards as described in the CAT RFP and that will be further defined in the SLA(s);

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• Adapt to support future technology developments and new requirements (including considerations for anticipated/potential changes to applicable rules and market behavior);

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• Handle an extensible architecture that is capable of supporting asset classes beyond the initial scope of NMS Securities and OTC Equity Securities;

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• Comply with the clock synchronization standards as set forth in Article VI, Section 6.8; and

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• Handle an extensible data model and messaging protocols that are able to support future requirements such as, but not limited to:

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o Expansion of trading hours, including capability and support for 24-hour markets;

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o Sessions for securities;261 and

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o New asset classes, such as debt securities or derivative instruments.

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1.2 Technical Environments

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The architecture must include environments for production, development, quality assurance testing, disaster recovery, industry-wide coordinated testing, and individual on-going CAT Reporter testing. The building and introduction of environments available to CAT Reporters may be phased in to align with the following agreed upon implementation milestones:

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• Development environment – the development environment must be created to build, develop, and maintain enhancements and new requirements. This environment must be separate from those listed below.

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• Quality assurance environment – a quality assurance (QA) environment must be created to allow simulation and testing of all applications, interfaces, and data integration points contained in the CAT System.

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o The QA environment shall be able to simulate end-to-end production functionality and perform with the same operational characteristics, including processing speed, as the production environment.

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o The QA environment shall support varied types of changes, such as, but not limited to, the following:

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‧ Application patches;

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‧ Bug fixes;

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‧ Operating system upgrades;

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‧ Introduction of new hardware or software components;

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‧ New functionality;

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‧ Network changes;

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‧ Regression testing of existing functionality;

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‧ Stress or load testing (simulation of production-level usage); and

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‧ Recovery and failover.

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o A comprehensive test plan for each build and subsequent releases must be documented.

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• Production environment – fully operational environment that supports receipt, ingestion, processing and storage of CAT Data. Backup/disaster recovery components must be included as part of the production environment.

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• Industry test environment –

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o The Plan Processor must provide an environment supporting industry testing (test environment) that is functionally equivalent to the production environment, including:

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‧ End-to-end functionality (e.g., data validation, processing, linkage, error identification, correction and reporting mechanism) from ingestion to output, sized to meet the standards of the production SLA;

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‧ Performance metrics that mirror the production environment; and

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‧ Management with the same information security policies applicable to the production environment.

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o The industry test environment must also contain functionality to support industry testing, including:

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‧ Minimum availability of 24x6;

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‧ Replica of production data when needed for testing;

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‧ Data storage sized to meet varying needs, dependent upon scope and test scenarios; and

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‧ Support of two versions of code (current and pending).

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o The industry test environment must support the following types of industry testing:

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‧ Technical upgrades made by the Plan Processor;

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‧ CAT code releases that impact CAT Reporters;

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‧ Changes to industry data feeds (e.g., SIP, OPRA, etc.);

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‧ Industry-wide disaster recovery testing;

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‧ Individual CAT Reporter and Data Submitter testing of their upgrades against CAT interfaces and functionality; and

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‧ Multiple, simultaneous CAT Reporter testing.

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o The industry test environment must be a discrete environment separate from the production environment.

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o The Plan Processor must provide the linkage processing of data submitted during coordinated, scheduled, industry-wide testing. Results of the linkage processes must be communicated back to Participants as well as to the Operating Committee.

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o Data from industry testing must be saved for three months. Operational metrics associated with industry testing (including but not limited to testing results, firms who participated, and amount of data reported and linked) must be stored for the same duration as the CAT production data.

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o The Plan Processor must provide support for industry testing, including testing procedures, coordination of industry testing, publish notifications, and provide help desk support during industry testing.

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o The Participants and the SEC must have access to industry test data.

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1.3 Capacity Requirements

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System capacity must have the following characteristics.262

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The Central Repository must be:

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• Designed such that additional capacity can be quickly and seamlessly integrated while maintaining system access and availability requirements;

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• Able to efficiently and effectively handle data ingestion on days with peak and above-peak data submission volumes; and

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• Required to maintain and store data for a 6-year sliding window of data. System access and availability requirements must be maintained during the maintenance of the sliding window. It is expected that the Central Repository will grow to more than 29 petabytes of raw, uncompressed data.

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The Plan Processor must:

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• Define a capacity planning process to be approved by the Operating Committee, with such process incorporating industry utility capacity metrics; and

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• Develop a robust process to add capacity, including both the ability to scale the environment to meet the expected annual increases as well as to rapidly expand the environment should unexpected peaks in data volumes breach the defined capacity baseline. Capacity forecasts from systems, including OPRA, UTP, and CTA, must also be included for capacity planning purposes. This capacity planning process must be approved by the Operating Committee.

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1.3.1 Monitoring Capacity Utilization and Performance Optimization

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In order to manage the data volume, operational capacity planning must be conducted on a periodic basis. The Plan Processor must submit capacity-planning metrics to the Operating Committee for review to ensure that all parties are aware of the system processing capabilities and changes to assumptions. Changes to assumptions could lead to positive or negative adjustments in the costs charged to CAT Reporters. Reports that capture daily disk space, processing time, amount of data received and linkage completion times must be provided by the Plan Processor to the Operating Committee.

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1.4 Data Retention Requirements

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The Plan Processor must develop a formal record retention policy and program for the CAT, to be approved by the Operating Committee, which will, at a minimum:

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• Contain requirements associated with data retention, maintenance, destruction, and holds;

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• Comply with applicable SEC record-keeping requirements;

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• Have a record hold program where specific CAT Data can be archived offline for as long as necessary;

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• Store and retain both raw data submitted by CAT Reporters and processed data; and

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• Make data directly available and searchable electronically without manual intervention for at least six years.

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2. Data Management

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The Plan Processor must develop data management policies and procedures to govern and manage CAT Data, reference data, and metadata contained in and used by the Central Repository.

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The CAT must capture, store, and maintain current and historical reference data information. This master / reference database will include data elements such as, but not limited to, SRO-assigned market participant identifiers, product type, trading unit size, trade / quote minimum price variation, corporate actions, symbology changes, and changes in listings market center. The Plan Processor must support bi-temporal milestones (e.g., Effective Date and as-of-date) of the reference data.

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CAT Reporters will submit data to the Central Repository with the listing exchange symbology format. The Central Repository must use the listing exchange symbology format for output of the linked data. Instrument validation must be included in the processing of data submitted by CAT Reporters.

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The Central Repository must be able to link instrument data across any time period so that data can be properly displayed and linked regardless of changes to issue symbols or market class. The Plan Processor is required to create and maintain a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC. In addition, the Plan Processor will be required to create a start-of-day (“SOD”) and end-of-day (“EOD”) CAT reportable list of securities for use by CAT Reporters. This list must be available online and in a machine readable (e.g., .csv) format by 6 a.m. on each Trading Day.

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Queries, reports, and searches for data that span dates where there are changes to reference data must automatically include data within the requested date range. For example, if a query is run for a symbol that had three issue symbol changes during the time window of the query parameters, the result set must automatically include data for all three symbols that were in use during the time window of the query.

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The Plan Processor must also develop an end-to-end process and framework for technical, business and operational metadata.

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2.1 Data Types and Sources

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The Plan Processor will be responsible for developing detailed data and interface specifications for data to be submitted by CAT Reporters. These specifications will be contained in the Technical Specifications, the initial version of which will be presented to the Operating Committee for approval. The Technical Specifications must be designed to capture all of the data elements required by SEC Rule 613, as well as other information the Participants determine necessary to facilitate elimination of reporting systems that the CAT may cause to be redundant, such as EBS and OATS. In the future, new data sources such as public news may be added to the specifications.

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CAT Reporters and Data Submitters will transmit data in an electronic data format(s) that will be defined by the Plan Processor. The Technical Specifications must include details for connectivity and electronic submission, transmission, retransmission and processing. It is possible that more than one format will be defined to support the various senders throughout the industry.

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The Participants anticipate that some broker-dealers will not directly report to the CAT but will rely on other organizations to report on their behalf. However, the CAT will need to have the flexibility to adapt on a timely basis to changes in the number of entities that report CAT Data.

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2.2 Data Feed Management

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The Plan Processor must monitor and manage incoming and outgoing data feeds for, at a minimum, the following:

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• Data files from each CAT Reporter and Data Submitter;

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• Files that cover multiple trade dates (e.g., to account for clearing and changes);

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• Full and partial file submissions that contain corrections from previously rejected files;

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• Full and partial file submissions based on CAT Reporter; and

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• Receipt and processing of market data feeds (SIP, OPRA, OCC).

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The Plan Processor must also develop a process for detecting, managing, and mitigating duplicate file submissions. It must create and store operational logs of transmissions, success, and failure reasons in order to create reports for CAT Reporters, Participants, and the SEC. Outgoing data feeds must be logged and corresponding metadata elements must be monitored and captured.

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2.2.1 Managing connectivity for data feeds (e.g., SIPs, broker-dealers and regulators)

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The Plan Processor will be required to ensure that it provides all CAT Reporters with the ability to transmit CAT Data to the Central Repository as required to meet the reporting requirements. The Plan Processer is required to have a robust managed file transfer (“MFT”) tool, including full monitoring, permissioning, auditing, security, high availability,263 file integrity checks, identification of data transmission failures / errors, transmission performance metrics, multiple transmission protocols, Latency / network bottlenecks or delays, key management, etc. CAT Reporters must also have the ability to conduct manual data entry via a GUI interface or the uploading of a file, subject to a maximum record capacity, which will be defined by the Plan Processor in consultation with the Operating Committee.

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3. Reporting and Linkage Requirements

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All CAT Data reported to the Central Repository must be processed and assembled to create the complete lifecycle of each Reportable Event. Reportable Events must contain data elements sufficient to ensure the same regulatory coverage currently provided by existing regulatory reporting systems that have been identified as candidates for retirement.

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Additionally, the Central Repository must be able to:

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• Assign a unique CAT-Reporter-ID to all reports submitted to the system based on sub-identifiers, (e.g., MPIDs, ETPID, trading mnemonic) currently used by CAT Reporters in their order handling and trading processes.

-

• Handle duplicate sub-identifiers used by members of different Participants to be properly associated with each Participant.

-

• Generate and associate one or more Customer-IDs with all Reportable Events representing new orders received from a Customer(s) of a CAT Reporter. The Customer-ID(s) will be generated from a Firm Designated ID provided by the CAT Reporter for each such event, which will be included on all new order events.

-

• Accept time stamps on order events handled electronically to the finest level of granularity captured by CAT Reporters. Additionally, the CAT must be able to expand the time stamp field to accept time stamps to an even finer granularity as trading systems expand to capture time stamps in ever finer granularity. The Plan Processor must normalize all processed date/time CAT Data into a standard time zone/format.

-

In addition, the data required from CAT Reporters will include all events and data elements required by the Plan Processor in the Technical Specifications to build the:

-

• Life cycle of an order for defined events within a CAT Reporter;

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• Life cycle of an order for defined events intra-CAT Reporter; and

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• State of all orders across all CAT Reporters at any point in time.

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The Plan Processor must use the “daisy chain approach” to link and create the order lifecycle. In the daisy chain approach, a series of unique order identifiers, assigned to all order events handled by CAT Reporters are linked together by the Central Repository and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order.

-

By using the daisy chain approach the Plan Processor must be able to link all related order events from all CAT Reporters involved in the lifecycle of an order. At a minimum, the Central Repository must be able to create the lifecycle between:

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• All order events handled within an individual CAT Reporter, including orders routed to internal desks or departments with different functions (e.g., an internal ATS);

-

• Customer orders to “representative” orders created in firm accounts for the purpose of facilitating a customer order (e.g., linking a customer order handled on a riskless principal basis to the street-side proprietary order);

-

• Orders routed between broker-dealers;

-

• Orders routed from broker-dealers to exchanges;

-

• Orders sent from an exchange to its routing broker-dealer;

-

• Executed orders and trade reports;

-

• Various legs of option/equity complex orders; and

-

• Order events for all equity and option order handling scenarios that are currently or may potentially be used by CAT Reporters, including:

-

o Agency route to another broker-dealer or exchange;

-

o Riskless principal route to another broker-dealer or exchange capturing within the lifecycle both the customer leg and street side principal leg;

-

o Orders routed from one exchange through a routing broker-dealer to a second exchange;

-

o Orders worked through an average price account capturing both the individual street side execution(s) and the average price fill to the Customer;

-

o Orders aggregated with other orders for further routing and execution capturing both the street side executions for the aggregated order and the fills to each customer order;

-

o Complex orders involving one or more options legs and an equity leg, with a linkage between the option and equity legs;

-

o Complex orders containing more legs than an exchange’s order management system can accept, causing the original order to be broken into multiple orders;

-

o Orders negotiated over the telephone or via a negotiation system;

-

o Orders routed on an agency basis to a foreign exchange;

-

o Execution of customer order via allocation of shares from a pre-existing principal order;

-

o Market maker quotes; and

-

o Complex orders involving two or more options legs.

-

Additionally, the Central Repository must be able to:

-

• Link each order lifecycle back to the originating Customer;

-

• Integrate and appropriately link reports representing repairs of original submissions that are rejected by the CAT due to a failure to meet a particular data validation;

-

• Integrate into the CAT and appropriately link reports representing records that are corrected by a CAT Reporter for the purposes of correcting data errors not identified in the data validation process;

-

• Assign a single CAT-Order-ID to all events contained within the lifecycle of an order so that regulators can readily identify all events contained therein; and

-

• Process and link Manual Order Events with the remainder of the associated order lifecycle.

-

3.1 Timelines for Reporting

-

CAT Data for the previous Trading Day must be reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such data; however, the Plan Processor must accept data prior to that deadline, including intra-day submissions.

-

3.2 Other Items

-

The Plan Processor must anticipate and manage order data processing over holidays, early market closures and both anticipated and unanticipated market closures. The Plan Processor must allow and enable entities that are not CAT Reporters (e.g., service bureaus) to report on behalf of CAT Reporters only upon being permissioned by the CAT Reporter, and must develop appropriate tools to facilitate this process.

-

3.3 Required Data Attributes for Order Records Submitted by CAT Reporters

-

At a minimum, the Plan Processor must be able to receive the data elements as detailed in the CAT NMS Plan.

-

4. Data Security

-

4.1 Overview

-

SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the CAT in accordance with the policies, procedures and standards in the CAT NMS Plan.

-

The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and Data Submitters and the Plan Processor, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the CAT System. The Plan Processor must address security controls for data retrieval and query reports by Participant and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for all components of the CAT System, such as but not limited to access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter performance and comparison statistics.

-

The Plan Processor must provide to the Operating Committee a comprehensive security plan that covers all components of the CAT System, including physical assets and personnel, and the training of all persons who have access to the Central Repository consistent with Article VI, Section 6.1(m). The security plan must be updated annually. The security plan must include an overview of the Plan Processor’s network security controls, processes and procedures pertaining to the CAT Systems. Details of the security plan must document how the Plan Processor will protect, monitor and patch the environment; assess it for vulnerabilities as part of a managed process, as well as the process for response to security incidents and reporting of such incidents. The security plan must address physical security controls for corporate, data center, and leased facilities where Central Repository data is transmitted or stored. The Plan Processor must have documented “hardening baselines” for systems that will store, process, or transmit CAT Data or PII data.

-

4.1.1 Connectivity and Data Transfer

-

The CAT System(s) must have encrypted internet connectivity. CAT Reporters must connect to the CAT infrastructure using secure methods such as private lines or (for smaller broker-dealers) Virtual Private Network connections over public lines. Remote access to the Central Repository must be limited to authorized Plan Processor staff and must use secure multi-factor authentication that meets or exceeds the Federal Financial Institutions Examination Council (“FFIEC”) security guidelines surrounding authentication best practices.264

-

The CAT databases must be deployed within the network infrastructure so that they are not directly accessible from external end-user networks. If public cloud infrastructures are used, virtual private networking and firewalls/access control lists or equivalent controls such as private network segments or private tenant segmentation must be used to isolate CAT Data from unauthenticated public access.

-

4.1.2 Data Encryption

-

All CAT Data must be encrypted at rest and in flight using industry standard best practices (e.g., SSL/TLS) including archival data storage methods such as tape backup. Symmetric key encryption must use a minimum key size of 128 bits or greater (e.g., AES-128), larger keys are preferable. Asymmetric key encryption (e.g., PGP) for exchanging data between Data Submitters and the Central Repository is desirable.

-

Storage of unencrypted PII data is not permissible. PII encryption methodology must include a secure documented key management strategy such as the use of HSM(s). The Plan Processor must describe how PII encryption is performed and the key management strategy (e.g., AES-256, 3DES).

-

If public cloud managed services are used that would inherently have access to the data (e.g., BigQuery, S3, Redshift), then the key management surrounding the encryption of that data must be documented (particularly whether the cloud provider manages the keys, or if the Plan Processor maintains that control). Auditing and real-time monitoring of the service for when cloud provider personnel are able to access/decrypt CAT Data must be documented, as well as a response plan to address instances where unauthorized access to CAT Data is detected. Key management/rotation/revocation strategies and key chain of custody must also be documented in detail.

-

4.1.3 Data Storage and Environment

-

Data centers housing CAT Systems (whether public or private) must, at a minimum, be AICPA SOC 2 certified by a qualified third-party auditor that is not an affiliate of any of the Participants or the CAT Processor. The frequency of the audit must be at least once per year.

-

CAT compute infrastructure may not be commingled with other non-regulatory systems (or tenets, in the case of public cloud infrastructure). Systems hosting the CAT processing for any applications must be segmented from other systems as far as is feasible on a network level (firewalls, security groups, ACL’s, VLAN’s, authentication proxies/bastion hosts and similar). In the case of systems using inherently shared infrastructure/storage (e.g., public cloud storage services), an encryption/key management/access control strategy that effectively renders the data private must be documented.

-

The Plan Processor must include penetration testing and an application security code audit by a reputable (and named) third party prior to launch as well as periodically as defined in the SLA(s). Reports of the audit will be provided to the Operating Committee as well as remediation plan for identified issues. The penetration test reviews of the Central Repository’s network, firewalls, and development, testing and production systems should help the CAT evaluate the system’s security and resiliency in the face of attempted and successful systems intrusions.

-

4.1.4 Data Access

-

The Plan Processor must provide an overview of how access to PII and other CAT Data by Plan Processor employees and administrators is restricted. This overview must include items such as, but not limited to, how the Plan Processor will manage access to the systems, internal segmentation, multi-factor authentication, separation of duties, entitlement management, background checks, etc.

-

The Plan Processor must develop and maintain policies and procedures reasonably designed to prevent, detect, and mitigate the impact of unauthorized access or usage of data in the Central Repository. Such policies and procedures must be approved by the Operating Committee, and should include, at a minimum:

-

• Information barriers governing access to and usage of data in the Central Repository;

-

• Monitoring processes to detect unauthorized access to or usage of data in the Central Repository; and

-

• Escalation procedures in the event that unauthorized access to or usage of data is detected.

-

A Role Based Access Control (“RBAC”) model must be used to permission user with access to different areas of the CAT System. The CAT System must support an arbitrary number of roles with access to different types of CAT Data, down to the attribute level. The administration and management of roles must be documented. Periodic reports detailing the current list of authorized users and the date of their most recent access must be provided to Participants, the SEC and the Operating Committee. The reports of the Participants and the SEC will include only their respective list of users. The Participants must provide a response to the report confirming that the list of users is accurate. The required frequency of this report will be defined by the Operating Committee. The Plan Processor must log every instance of access to Central Repository data by users.

-

Passwords stored in the CAT System must be stored according to industry best practices. Reasonable password complexity rules should be documented and enforced, such as, but not limited to, mandatory periodic password changes and prohibitions on the reuse of the recently used passwords.

-

Password recovery mechanisms must provide a secure channel for password reset, such as emailing a one-time, time-limited login token to a pre-determined email address associated with that user. Password recovery mechanisms that allow in-place changes or email the actual forgotten password are not permitted.

-

Any login to the system that is able to access PII data must follow non-PII password rules and must be further secured via multi-factor authentication (“MFA”). The implementation of MFA must be documented by the Plan Processor. MFA authentication capability for all logins is required to be implemented by the Plan Processor.

-

4.1.5 Breach Management

-

The Plan Processor must develop policies and procedures governing its responses to systems or data breaches. Such policies and procedures will include a formal cyber incident response plan, and documentation of all information relevant to breaches.

-

The cyber incident response plan will provide guidance and direction during security incidents. The plan will be subject to approval by the Operating Committee. The plan may include items such as:

-

• Guidance on crisis communications;

-

• Security and forensic procedures;

-

• Customer notifications;

-

• “Playbook” or quick reference guides that allow responders quick access to key information;

-

• Insurance against security breaches;

-

• Retention of legal counsel with data privacy and protection expertise; and

-

• Retention of a Public Relations firm to manage media coverage.

-

Documentation of information relevant to breaches should include:

-

• A chronological timeline of events from the breach throughout the duration of the investigation;

-

• Relevant information related to the breach (e.g., date discovered, who made the discovery, and details of the breach);

-

• Response efforts, involvement of third parties, summary of meetings/conference calls, and communication; and

-

• The impact of the breach, including an assessment of data accessed during the breach and impact on CAT Reporters.

-

4.1.6 PII Data Requirements

-

PII data must not be included in the result set(s) from online or direct query tools, reports or bulk data extraction. Instead, results will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. By default, users entitled to query CAT Data are not authorized for PII access. The process by which someone becomes entitled for PII access, and how they then go about accessing PII data, must be documented by the Plan Processor. The chief regulatory officer, or other such designated officer or employee at each Participant must, at least annually, review and certify that people with PII access have the appropriate level of access for their role.

-

Using the RBAC model described above, access to PII data shall be configured at the PII attribute level, following the “least privileged” practice of limiting access as much as possible.

-

PII data must be stored separately from other CAT Data. It cannot be stored with the transactional CAT Data, and it must not be accessible from public internet connectivity. A full audit trail of PII access (who accessed what data, and when) must be maintained. The Chief Compliance Officer and the Chief Information Security Officer shall have access to daily PII reports that list all users who are entitled for PII access, as well as the audit trail of all PII access that has occurred for the day being reported on.

-

4.2 Industry Standards

-

The following industry standards—which is not intended to be an exclusive list—must be followed as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee (in the event of a conflict between standards, the more stringent standard shall apply, subject to the approval of the Operating Committee):

-

• National Institute of Standards and Technology:

-

o 800-23 – Guidelines to Federal Organizations on Security Assurance and Acquisition / Use of Test/Evaluated Products

-

o 800-53 – Security and Privacy Controls for Federal Information Systems and Organizations

-

o 800-115 – Technical Guide to Information Security Testing and Assessment

-

o 800-118 – Guide to Enterprise Password Management

-

o 800-133 – Recommendation for Cryptographic Key Generation

-

o 800-137 – Information Security Continuous Monitoring for Federal Information Systems and Organizations

-

o To the extent not specified above, all other provisions of the NIST Cyber Security Framework

-

• Federal Financial Institutions Examination Council:

-

o Authentication Best Practices

-

• International Organization for Standardization:

-

o ISO/IEC 27001 – Information Security Management

-

The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine. The FS-ISAC provides real time security updates, industry best practices, threat conference calls, xml data feeds and a member contact directory. The FS-ISAC provides the Company with the ability to work with the entire financial industry to collaborate for the purposes of staying up to date with the latest information security activities.

-

5. BCP / DR Process

-

5.1 Overview

-

The Plan Processor must develop and implement disaster recovery (“DR”) and business continuity plans (“BCP”) that are tailored to the specific requirements of the CAT environment, and which must be approved and regularly reviewed by the Operating Committee. The BCP must address the protection of data, service for the data submissions, processing, data access, support functions and operations. In the context of this document, BCP generally refers to how the business activities will continue in the event of a widespread disruption and the DR requirements refer to how the CAT infrastructure will be designed to support a full data center outage. In addition, the Plan Processor must have SLAs in place to govern redundancy (i.e., no single point of failure) of critical aspects of the CAT System (e.g., electrical feeds, network connectivity, redundant processors, storage units, etc.) and must have an architecture to support and meet the SLA requirements. Any SLAs between the Plan Processor and third parties must be approved by the Operating Committee.

-

5.2 Industry Standards

-

The following National Institute of Standards and Technology standards, at a minimum, must be followed in association with Disaster Recovery, in each case as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee:

-

• 800-34 – Contingency Planning for Federal Information Systems; and

-

• Specifically, the following sections as minimum requirements for designing and implementing BCP and DR plans:

-

o Chapter 3: Information System Contingency Planning Process, which identifies seven steps to use when developing contingency plans;

-

o Chapter 4: Information System Contingency Plan Development, which outlines the key elements of a contingency plan;

-

o Chapter 5: Technical Contingency Planning Considerations (using the specific sections applicable to the Plan Processor’s systems) which provides considerations specific to different types of technology; and

-

o Other sections and the appendices should be taken into consideration as warranted.

-

In addition, the Plan Processor will need to develop a process to manage and report all breaches.

-

5.3 Business Continuity Planning

-

The Plan Processor will design a BCP that supports a continuation of the business activities required of the CAT in the event of a widespread disruption.

-

With respect to the team supporting CAT business operations, a secondary site must be selected that is capable of housing the critical staff necessary for CAT business operations. The site must be fully equipped to allow for immediate use. The selection of the site must take into account diversity in utility and telecommunications infrastructure as well as the ability for CAT staff to access the site in the event of transit shutdowns, closure of major roadways and other significant disruptions that may affect staff. Planning should consider operational disruption involving significant unavailability of staff.

-

A bi-annual test of CAT operations where CAT staff operates the facility from the secondary site is required. This will ensure that phone systems, operational tools and other help desk functions all work as expected and the Plan Processor still functions as usual even in the event of a disruption.

-

CAT operations staff must maintain, and annually test, remote access capabilities to ensure smooth operations during a site un-availability event. Certain critical staff may be required to report directly to the secondary office site. However, an effective telecommuting solution must be in place for all critical CAT operations staff. Furthermore, any telecommuting strategy must require a remote desktop style solution where CAT operations and data consoles remain at the primary data center and must further ensure that CAT Data may not be downloaded to equipment that is not CAT-owned and compliant with CAT security requirements.

-

The BCP must identify critical third party dependencies. The Plan Processor will coordinate with critical suppliers regarding their arrangements and involve these parties in tests on an annual basis. Critical third party firms may be required to provide evidence of their BCP capabilities and testing.

-

The Plan Processor must conduct third party risk assessments at regular intervals to verify that security controls implemented are in accordance with NIST SP 800-53. These risk assessments must include assessment scheduling, questionnaire completion and reporting. The Plan Processor should provide assessment reports to the Operating Committee.

-

The Plan Processor will develop and annually test a detailed crisis management plan to be invoked following certain agreed disruptive circumstances.

-

The processing sites for business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”265

-

The Plan Processor will conduct an annual Business Continuity Audit using an Independent Auditor approved by the Operating Committee. The Independent Auditor will document all findings in a detailed report provided to the Operating Committee.

-

5.4 Disaster Recovery Requirements

-

The Plan Processor will implement a DR capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the CAT.

-

A secondary processing site must be capable of recovery and restoration of services at the secondary site within a minimum of 48 hours, but with the goal of achieving next day recovery after a disaster event. The selection of the secondary site must consider sites with geographic diversity that do not rely on the same utility, telecom and other critical infrastructure services. The processing sites for disaster recovery and business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”

-

The secondary site must have the same level of availability / capacity / throughput and security (physical and logical) as the primary site. The requirement implies and expects that fully redundant connectivity between the primary and secondary processing sites be established and fully available. Further, given this recovery window, this connectivity must be used to replicate repositories between the primary and secondary sites. Finally, CAT Reporter and Data Submitter submissions must be replicated to the secondary site for possible replay if recent replications are incomplete. Replication must occur as deliveries complete to ensure that a widespread communications failure will have minimal impact to the state of the secondary site.

-

On an annual basis, the Plan Processor must execute an industry DR test, which must include Plan Participants and a critical mass of non-Plan Participant CAT Reporters and Data Submitters. The tests must be structured such that all CAT Reporters and other Data Submitters can upload to the DR site and the data be ingested by the CAT Data loaders. All DR tests are required to realistically reflect the worst-case scenario.

-

Failover processes must be transparent to CAT Reporters, as well as failback. In the event of a site failover, CAT Reporters must be able to deliver their daily files without changing configuration. This avoids requiring all CAT Reporters to update configurations, which is an error-prone effort.

-

After a DR event, the primary processing site must be made available as quickly as possible. For short duration DR events, the primary site must be returned to primary within 48 hours after the DR event. Longer duration outages will have differing SLAs. The DR plan must include designs that allow the re-introduction of the primary site or the introduction of a new primary site as the event dictates and an indication of the time required for this re-introduction.

-

6. Data Availability

-

6.1 Data Processing

-

CAT order events must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. The processing timelines start on the day the order event is received by the Central Repository for processing. Most events must be reported to the CAT by 8:00 a.m. Eastern Time the Trading Day after the order event occurred (referred to as transaction date). The processing timeframes below are presented in this context. All events submitted after T+1 (either reported late or submitted later because not all of the information was available) must be processed within these timeframes based on the date they were received.

-

The Participants require the following timeframes (Figure A) for the identification, communication and correction of errors from the time an order event is received by the processor:

-

• Noon Eastern Time T+1 (transaction date + one day) – Initial data validation, lifecycle linkages and communication of errors to CAT Reporters;

-

• 8:00 a.m. Eastern Time T+3 (transaction date + three days) – Resubmission of corrected data; and

-

• 8:00 a.m. Eastern Time T+5 (transaction date + five days) – Corrected data available to Participant regulatory staff and the SEC.

-

Late submissions or re-submissions (after 8:00 a.m.) may be considered to be processed that day if it falls within a given time period after the cutoff. This threshold will be determined by the Plan Processor and approved by the Operating Committee. In the event that a significant portion of the data has not been received as monitored by the Plan Processor, the Plan Processor may decide to halt processing pending submission of that data.

-

Figure A: CAT Central Repository Data Processing Timelines

- -

6.2 Data Availability Requirements

-

Prior to 12:00 p.m. Eastern Time on T+1, raw unprocessed data that has been ingested by the Plan Processor must be available to Participants’ regulatory staff and the SEC.

-

Between 12:00 p.m. Eastern Time on T+1 and T+5, access to all iterations of processed data must be available to Participants’ regulatory staff and the SEC.

-

The Plan Processor must provide reports and notifications to Participant regulatory staff and the SEC regularly during the five-day process, indicating the completeness of the data and errors. Notice of major errors or missing data must be reported as early in the process as possible. If any data remains un-linked after T+5, it must be available and included with all linked data with an indication that the data was not linked.

-

If corrections are received after T+5, Participants’ regulatory staff and the SEC must be notified and informed as to how re-processing will be completed. The Operating Committee will be involved with decisions on how to re-process the data; however, this does not relieve the Plan Processor of notifying the Participants’ regulatory staff and the SEC.

-

Figure B: Customer and Account Information (Including PII)

- -

CAT PII data must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. Industry Members submitting new or modified Customer information must provide it to the Central Repository no later than 8:00 a.m. Eastern Time on T+1. The Central Repository must validate the data and generate error reports no later than 5:00 p.m. Eastern Time on T+1. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be resubmitted no later than 5:00 p.m. Eastern Time on T+3. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be available to regulators no later than 8:00 a.m. Eastern Time on T+5.

-

Customer information that includes PII data must be available to regulators immediately upon receipt of initial data and corrected data, pursuant to security policies for retrieving PII.

-

7. Receipt of Data from Reporters

-

7.1 Receipt of Data Transmission

-

Following receipt of data files submitted by the CAT Reporter or Data Submitter, the Plan Processor must send an acknowledgement of data received to the CAT Reporter and Data Submitter, if applicable. Such acknowledgment will enable CAT Reporters to create an audit trail of their submissions and allow for tracing of data breakdowns when data is not received. At a minimum, the receipt acknowledgement will include:

-

• SRO-Assigned Market Participant Identifier;

-

• Date of Receipt;

-

• Time of Receipt;

-

• File Identifier; and

-

• Value signifying the acknowledgement of receipt, but not processing, of the file.

-

7.2 Data Validation

-

The Plan Processor will implement data validations at the file and individual record level for data received by the Plan Processor including customer data. If a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit.266 The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. All identified exceptions will be reported back to the CAT Reporter submitting the data and/or the CAT Reporter on whose behalf the data was submitted.

-

The data validations must include the following categories and must be explained in the Technical Specifications document:

-

• File Validations – Confirmation of file transmission and receipt are in the correct formats. This includes validation of header and trailers on the submitted report, confirmation of a valid SRO-Assigned Market Participant Identifier, and verification of the number of records in the file.

-

• Validation of CAT Data – Syntax and context checks, including:

-

o Format checks:

-

‧ Check that the data is entered in the specified format

-

o Data Type checks:

-

‧ Check that the data type of each attribute is as per specification

-

o Consistency checks:

-

‧ Check that all attributes for a record of a specified type are consistent

-

o Range/logic checks:

-

‧ Range check – Validate that each attribute for every record has a value within specified limits

-

‧ Logic check – Validate that the values provided against each attribute are associated with the event type they represent

-

o Data validity checks:

-

‧ Validate that each attribute for every record has an acceptable value

-

o Completeness checks:

-

‧ Verify that each mandatory attribute for every record is not null

-

o Timeliness checks:

-

‧ Verify that records were submitted within the submission timelines

-

• Linkage Validation267 – Process by which related CAT Reportable Events are in a linked daisy chain method

-

CAT Reporters must have the ability to correct, replace or delete records that have passed initial validations within the CAT.

-

After the Central Repository has processed the data, the Plan Processor must provide daily statistics, including at a minimum, the following information:

-

• SRO-Assigned Market Participant Identifier;

-

• Date of Submission;

-

• Number of files received;

-

• Number of files accepted;

-

• Number of files rejected;

-

• Number of total order events received;

-

• Number of order events accepted;

-

• Number of order events rejected;

-

• Number of each type of report received;

-

• Number of each type of report accepted;

-

• Number of each type of report rejected;

-

• Number of customer records received;

-

• Number of total customer records accepted;

-

• Number of total customer records rejected;

-

• Number of unknown accounts;

-

• Number of late submissions;

-

• Order-IDs rejected;

-

• Reason(s) for rejection;

-

• Number of records attempted to be matched;

-

• Number of records matched; and

-

• Percentage of records matched.

-

Individual records contained in files that do not pass the file validation process must not be included for further processing. Once a file passes the initial validation, individual records contained therein may then be processed for further validation. Individual records that do not pass the data validation processes will not be included in the final audit trail but must be retained. Additionally, records not passing the validations will not be included for matching processes.

-

7.3 Exception Management

-

The Plan Processor must capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format and the rejections and daily statistics must be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend any exceptions.

-

The Plan Processor must support bulk error correction. Rejected records can be resubmitted as a new file with appropriate indicators to identify the rejection record, which is being repaired. The Plan Processor will then reprocess repaired records.

-

A GUI must be available for CAT Reporters to make updates to individual records or attributes and must include, at a minimum, the:

-

• Count of each type of rejection;

-

• Reason for each rejection;

-

• Ability to download the rejections;

-

• Firm assigned order ID of each rejection;

-

• Details of each rejection;

-

• Type of report rejected; and

-

• Repair status.

-

The Plan Processor must support bulk replacement of records, and reprocess such replaced records. The Plan Processor must provide CAT Reporters with documentation that detail the process how to amend and upload records that fail the validations that are outlined as part of Section 7.4. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

-

The Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics will be provided after data has been uploaded and validated by the Plan Processor. The Plan Processor must support a continuous validation and feedback model so that CAT Reporters can identify and correct rejections on an ongoing basis. The rejected reports will include descriptive details, or codes related to descriptive details, as to why each data record was rejected by the Plan Processor.

-

On a monthly basis, the Plan Processor must produce and publish reports detailing performance and comparison statistics for CAT Reporters,268 similar to the Report Cards published for OATS presently. This will enable CAT Reporters to assess their performance in relation to their industry peers and help them assess the risk related to their reporting of transmitted data.

-

Breaks in intermittent lifecycle linkages must not cause the entire lifecycle to break nor cause a reject to the CAT Reporter that correctly reported.

-

7.4 Error Corrections

-

Error corrections must be able to be submitted and processed at any time, including timeframes after the standard repair window. Additionally, in order to make corrections, CAT Reporters must have access to the Central Repository over weekends.

-

CAT Reporters must be able to submit error corrections for data errors identified by CAT Reporters that passed format validations.

-

Additionally, the Plan Processor must:

-

• Provide feedback as to the reason(s) for errors;

-

• Prevent a linkage break between reports from resulting in additional events being rejected;

-

• Allow broken linkages to be repaired without having to submit or resubmit additional reports;

-

• Allow error corrections to be submitted both via online and bulk uploads or via file submission;

-

• Support auto-correction of identified errors and notify reporters of any auto-corrections;

-

• Support group repairs (i.e., the wrong issue symbol affecting multiple reports).

-

7.5 Data Ingestion

-

Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the CAT Reporter (i.e., whether the CAT Reporter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

-

8. Functionality of the CAT System

-

8.1 Regulator Access

-

The Plan Processor must provide Participants’ regulatory staff and the SEC with access to all CAT Data for regulatory purposes only. Participants’ regulatory staff and the SEC will access CAT Data to perform functions, including economic analyses, market structure analyses, market surveillance, investigations, and examinations.

-

The CAT must be able to support, at a minimum, 3,000 regulatory users within the system. It is estimated that approximately 20% of all users will use the system on a daily or weekly basis while approximately 10% of all users will require advanced regulator-user access, as described below. Furthermore, it is estimated that there may be approximately 600 concurrent users accessing the CAT at any given point in time. These users must be able to access and use the system without an unacceptable decline in system performance.269

-

As stated in Appendix D, Data Security, the Plan Processor must be able to support an arbitrary number of user roles. Defined roles must include, at a minimum:

-

• Basic regulator users – Individuals with approved access who plan to use the Central Repository to run basic queries (e.g., pulling all trades in a single stock by a specific party).

-

• Advanced regulator users – Individuals with approved access who plan to use the Central Repository to construct and run their own complex queries.

-

Regulators will have access to processed CAT Data through two different methods, an online-targeted query tool and user-defined direct queries and bulk extracts.

-

8.1.1 Online Targeted Query Tool

-

The online targeted query tool will provide authorized users with the ability to retrieve processed and/or validated (unlinked) data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields, including the following:

-

• Instrument(s);

-

• Related instruments (e.g., single stock and all options with for the stock);

-

• Data type (executions, orders, cancelations, quotes, etc.);

-

• Product type (equity, option, etc.);

-

• Processed data, unlinked data or both;

-

• Listing market;

-

• Exchange;

-

• CAT-Reporter-ID(s) – CAT assigned and Participant assigned;

-

• Customer-ID(s) – CAT assigned and CAT Reporter assigned;

-

• CAT-Order-ID(s) – CAT assigned and CAT Reporter assigned;

-

• ISO flag;

-

• Put/call;

-

• Strike price (include ability to select range);

-

• Size;

-

• Price;

-

• Side;

-

• Short-sale identifier;

-

• Time-in-force (IOC, GTC, etc.);

-

• Orders, quotes, BBOs or trades above or below a certain size;

-

• Orders, quotes, BBOs or trades within a range of prices;

-

• Canceled orders and/or trades;

-

• CAT Reporters exceeding specified volume or percentage of volume thresholds in a single instrument or market-wide during a specified period of time;

-

• CAT Reporter correction rate over time;

-

• Audit trail of order linkages;

-

• Corporate action events;

-

• Instrument history; and

-

• Others to be defined.

-

The tool must provide a record count of the result set, the date and time the query request is submitted, and the date and time the result set is provided to the users. In addition, the tool must indicate in the search results whether the retrieved data was linked or unlinked (e.g., using a flag). In addition, the online targeted query tool must not display any PII data. Instead, it will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. The Plan Processor must define the maximum number of records that can be viewed in the online tool as well as the maximum number of records that can be downloaded. Users must have the ability to download the results to .csv, .txt, and other formats, as applicable. These files will also need to be available in a compressed format (e.g., .zip, .gz). Result sets that exceed the maximum viewable or download limits must return to users a message informing them of the size of the result set and the option to choose to have the result set returned via an alternate method.

-

The Plan Processor must define a maximum number of records that the online targeted query tool is able to process. The minimum number of records that the online targeted query tool is able to process is 5,000 (if viewed within the online query tool) or 10,000 (if viewed via a downloadable file).

-

Once query results are available for download, users are to be given the total file size of the result set and an option to download the results in a single or multiple file(s). Users that select the multiple file option will be required to define the maximum file size of the downloadable files. The application will then provide users with the ability to download the files. This functionality is provided to address limitations of end-user network environment that may occur when downloading large files.

-

The tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission, as well as the delivery of results. The Plan Processor will use this logged information to provide monthly reports to each Participant and the SEC of its respective metrics on query performance and data usage of the online query tool. The Operating Committee must receive all monthly reports in order to review items, including user usage and system processing performance.

-

8.1.2 Online Targeted Query Tool Performance Requirements

-

For targeted search criteria, the minimum acceptable response times will be increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time must generally be available within 24 hours of the submission of the request. Regardless of the complexity of the criteria used within the online query tool, any query request for data within one business date of a 12-month period must return results within 3 hours.

-

Performance requirements listed below apply to data:

-

• Online targeted query tool searches that include equities and options trade data only in the search criteria must meet minimum requirements, including:

-

o Returning results within 1 minute for all trades and related lifecycle events for a specific Customer or CAT Reporter with the ability to filter by security and time range for a specified time window up to and including an entire day;

-

o Returning results within 30 minutes for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 1 month);

-

o Returning results within 6 hours for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 12-month duration from the most recent 24 months); and

-

o Returning results for the full 6 years of data for all trades and lifecycle events across daily, weekly, and multi-year periods.

-

• Online targeted query tool searches that include equities and options order and National Best Bid and National Best Offer data in search criteria must meet minimum requirements, including:

-

o Returning results within 5 minutes for all orders and their complete lifecycles for a single security from a specific Participant across all markets (note: a Participant could have multiple participant identifiers) in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders, cancelations, and the National Best Bid and National Best Offer (or the protected best bid and offer) at the time the order is created for a single security in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all equity and options orders, cancelations, and executions from a specific market participant in a single underlying instrument in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders, quotes, routes, cancelations and trades (complete life-cycle) for related instruments (e.g., single stock and all options series for the same stock) in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders and quotes entered during a specific time period by a list of specific CAT Reporters, with the ability to drill down to show the complete life-cycle must return results in a specified time window not to exceed 10 minutes for a single date; and

-

o Returning results within 5 minutes for all orders and quotes entered during a specific time period for a specified list of instruments must return results in a specified time window not to exceed 10 minutes for a single date.

-

The online targeted query tool architecture must include an automated application-level resource management component. This feature must manage query requests to balance the workload to ensure the response times for targeted and complex queries meet the defined response times. The resource management function will categorize and prioritize query requests based on the input parameters, complexity of the query, and the volume of data to be parsed in the query. Additionally, the source of the query may also be used to prioritize the processing. The Plan Processor must provide details on the prioritization plan of the defined solution for online query requests.

-

The online targeted query tool must support parallel processing of queries. At a minimum, the online targeted query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.1.3 Online Targeted Query Tool Access and Administration

-

Access to CAT Data is limited to authorized regulatory users from the Participants and the SEC. Authorized regulators from the Participants and the SEC may access all CAT Data, with the exception of PII data. A subset of the authorized regulators from the Participants and the SEC will have permission to access and view PII data. The Plan Processor must work with the Participants and SEC to implement an administrative and authorization process to provide regulator access. The Plan Processor must have procedures and a process in place to verify the list of active users on a regular basis.

-

A two-factor authentication is required for access to CAT Data. PII data must not be available via the online targeted query tool or the user-defined direct query interface.

-

8.2 User-Defined Direct Queries and Bulk Extraction of Data

-

The Central Repository must provide for direct queries, bulk extraction, and download of data for all regulatory users. Both the user-defined direct queries and bulk extracts will be used by regulators to deliver large sets of data that can then be used in internal surveillance or market analysis applications. The data extracts must use common industry formats.

-

Direct queries must not return or display PII data. Instead, they will return existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements.

-

Participants and regulators must have the ability to create, save, and schedule dynamic queries that will run directly against processed and/or unlinked CAT Data. The examples below demonstrate robust usage of the CAT Data to perform a variety of complex query, surveillance, and market analysis use cases. User-defined direct queries will be used to perform tasks such as market reconstruction, behavioral analysis, and cross-market surveillance.

-

The method(s) for providing this capability is dependent upon the architecture of the CAT and will be defined by the final solution. The CAT cannot be web-based due to the volumes of data that could be extracted.

-

The Participants are agnostic as to how user-defined direct queries or bulk extracts are implemented as long as the solution provides an open API that allows regulators to use analytic tools (e.g., R, SAS, Python, Tableau) and can use ODBC/JDBC drivers to access the CAT Data. Queries invoked through the open API must be auditable. The CAT System must contain the same level of control, monitoring, logging and reporting as the online targeted query tool. The Plan Processor may define a limited set of basic required fields (e.g., date and at least one other field such as symbol, CAT-Reporter ID, or CAT-Customer-ID) that regulators must use in direct dynamic queries.

-

The Plan Processor must provide procedures and training to regulators that will use the direct query feature. The Plan Processor may choose to require that user-defined direct query users participate in mandatory training sessions.

-

The bulk extract feature will replace the current Intermarket Surveillance Group (ISG) ECAT and COATS compliance data files that are currently processed and provided to Participants for use in surveillance applications. These files are used extensively across all Participants in a variety of surveillance applications and are a critical data input to many surveillance algorithms. With the initial implementation of the CAT, opportunities exist to improve the content and depth of information available in these data files. The Plan Processor will need to work with ISG to define new layouts that will include additional data elements that will be available in the CAT Data.

-

The Plan Processor is responsible for providing data models and data dictionaries for all processed and unlinked CAT Data.

-

8.2.1 User-Defined Direct Query Performance Requirements

-

The user-defined direct query tool is a controlled component of the production environment made available to allow the Participants’ regulatory staff and the SEC to conduct queries. The user-defined direct query tool must:

-

• Provide industry standard programmatic interface(s) that allows Participants’ regulatory staff and the SEC with the ability to create, save, and run a query;

-

• Provide query results that are extractable / downloadable and can be used to refine subsequent queries;

-

• Support complex, multistage queries;

-

• Run at a minimum 3,000 queries on a daily basis. Of these, it is anticipated that roughly 60% would be simple queries (e.g., pulling of all trades in a given symbol traded during a certain time period) and 40% would be complex (e.g., looking for quotes or orders more than 5% away from the National Best Bid and National Best Offer);

-

• Process and run approximately 1,800 queries concurrently;

-

• Support SQL 92 as well as recursive queries with common table expressions (recursive CTEs), bulk load utility, interface for dimension management, windowing functions, JBDC and ODBC, or provide another API with equal or greater query capabilities, so long as ODBC and JDBC are supported. Support for stored procedures and user-defined functions are optional;

-

• Include data presentation tools / query tools that support query results that produce data sets ranging from less than 1 gigabyte to at least 10 terabytes or more of uncompressed data;

-

• Provide query owners with the ability to schedule queries;

-

• Provide query owners with the ability to cancel a query during execution or prior to the scheduled running of a query;

-

• Provide Participants with a means to view all saved queries owned by the Participants as well as the scheduling of query executions (for queries that have been scheduled);

-

• Provide an automated delivery method of scheduled query results to the appropriate Participant. Delivery methods must comply with all information security guidelines (encryption, etc.);

-

• Provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability;

-

• Include workload balancer to allow prioritization and processing of queries and delivery of results; and

-

• Support parallel processing of queries. At a minimum, the user-defined direct query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.2.2 Bulk Extract Performance Requirements

-

For bulk extracts of an entire day of data, the minimum acceptable transfer time of equity and options data is four hours. This requirement assumes that there are no limitations within the regulator’s own network environment that will prevent the Plan Processor from meeting this requirement.

-

A consideration was made to require an online Report Center that would include pre-canned reports that could be delivered to regulators or pulled upon request. The reports would be predefined based on requirements developed by Participants and the SEC. Due to the added complexity and the lack of quantifiable use cases, the Participants determined that this was something that may be useful in the future but not at the initial implementation and launch of the CAT. This will be reassessed when broker-dealers begin submitting data to the CAT.

-

It is envisioned that non-Participant CAT Reporters will be unable to access their data submissions through bulk data exports with the initial implementation of CAT. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports.

-

Extraction of data must be consistently in line with all permissioning rights granted by the Plan Processor. Data returned must be encrypted, password protected and sent via secure methods of transmission. In addition, PII data must be masked unless users have permission to view the data that has been requested.

-

The Plan Processor must have an automated mechanism in place to monitor user-defined direct query usage. This monitoring must include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or data extractions. The Plan Processor must provide details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

-

The user-defined direct query and bulk extraction tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission and the date and time of the delivery of results. The Plan Processor will use this logged information to provide monthly reports to the Operating Committee, Participants and the SEC of their respective usage of the online query tool.

-

The bulk extract tool must support parallel processing of queries. At a minimum, the bulk extract tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.3 Identifying Latency and Communicating Latency Warnings to CAT Reporters

-

The Plan Processor will measure and monitor Latency within the CAT network. Thresholds for acceptable levels of Latency will be identified and presented to the Operating Committee for approval. The Plan Processor will also define policies and procedures for handling and the communication of data feed delays to CAT Reporters, the SEC, and Participants’ regulatory staff that occur in the CAT. Any delays will be posted for public consumption, so that CAT Reporters may choose to adjust the submission of their data appropriately, and the Plan Processor will provide approximate timelines for when system processing will be restored to normal operations.

-

8.4 Technical Operations

-

The Plan Processor will develop policies, procedures, and tools to monitor and manage the performance of the Central Repository, to be approved by the Operating Committee. Such policies, procedures, and tools will include, at a minimum:

-

• Monitoring and management of system availability and performance, to include both Online Targeted Query Tool and User-Defined Direct Queries;

-

• Monitoring and management of query tool usage (e.g., to identify long-running or “stuck” queries); and

-

• Segregation of query queues by regulator or Participant (i.e., one regulator or Participant’s queries should not prevent another regulator or Participant’s queries from running).

-

8.5 System SLAs

-

Service Level Agreements for system and operational performance will be established for areas, including the following:

-

• Linkage and order event processing performance;

-

• Query performance and response times;

-

• System availability;

-

• User support/help desk performance;

-

• Application, network, and data security performance; and

-

• Development, change management, and implementation processes and timelines.

-

The actual terms of the SLAs will be negotiated between the Plan Participants and the eventual Plan Processor.

-

9. CAT Customer and Customer Account Information

-

9.1 Customer and Customer Account Information Storage

-

The CAT must capture and store Customer and Customer Account Information in a secure database physically separated from the transactional database. The Plan Processor will maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The following attributes, at a minimum, must be captured:

-

• Social security number (SSN) or Individual Taxpayer Identification Number (ITIN);

-

• Date of birth;

-

• Current name;

-

• Current address;

-

• Previous name; and

-

• Previous address.

-

For legal entities, the CAT must capture the following attributes:

-

• Legal Entity Identifier (LEI) (if available);

-

• Tax identifier;

-

• Full legal name; and

-

• Address.

-

The Plan Processor must maintain valid Customer and Customer Account Information for each trading day and provide a method for Participants’ regulatory staff and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes, etc.).

-

The Plan Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information, and must continue to process orders while investigating Customer information mismatches. Validations should:

-

• Confirm the number of digits on a SSN,

-

• Confirm date of birth, and

-

• Accommodate the situation where a single SSN is used by more than one individual.

-

The Plan Processor will use the Customer information submitted by all broker-dealer CAT Reporters to assign a unique Customer-ID for each Customer. The Customer-ID must be consistent across all broker-dealers that have an account associated with that Customer. This unique CAT-Customer-ID will not be returned to CAT Reporters and will only be used internally by the CAT.

-

Broker-Dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis. In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database. The Central Repository must support account structures that have multiple account owners and associated Customer information (joint accounts, managed accounts, etc.), and must be able to link accounts that move from one CAT Reporter to another (e.g., due to mergers and acquisitions, divestitures, etc.).

-

9.2 Required Data Attributes for Customer Information Data Submitted by Industry Members

-

At a minimum, the following Customer information data attributes must be accepted by the Central Repository:

-

• Account Owner Name;

-

• Account Owner Mailing Address;

-

• Account Tax Identifier (SSN, TIN, ITIN);

-

• Market Identifiers (Larger Trader ID, LEI);

-

• Type of Account;

-

• Firm Identifier Number;

-

o The number that the CAT Reporter will supply on all orders generated for the Account;

-

• Prime Broker ID;

-

• Bank Depository ID; and

-

• Clearing Broker.

-

9.3 Customer-ID Tracking

-

The Plan Processor will assign a CAT-Customer-ID for each unique Customer. The Plan Processor will determine a unique Customer using information such as SSN and DOB for natural persons or entity identifiers for Customers that are not natural persons and will resolve discrepancies. Once a CAT-Customer-ID is assigned, it will be added to each linked (or unlinked) order record for that Customer.

-

Participants and the SEC must be able to use the unique CAT-Customer-ID to track orders from any Customer or group of Customers, regardless of what brokerage account was used to enter the order.

-

9.4 Error Resolution for Customer Data

-

The Plan Processor must design and implement procedures and mechanisms to handle both minor and material inconsistencies in Customer information. The Central Repository needs to be able to accommodate minor data discrepancies such as variations in road name abbreviations in searches. Material inconsistencies such as two different people with the same SSN must be communicated to the submitting CAT Reporters and resolved within the established error correction timeframe as detailed in Section 8.

-

The Central Repository must have an audit trail showing the resolution of all errors. The audit trail must, at a minimum, include the:

-

• CAT Reporter submitting the data;

-

• Initial submission date and time;

-

• Data in question or the ID of the record in question;

-

• Reason identified as the source of the issue, such as:

-

o duplicate SSN, significantly different Name;

-

o duplicate SSN, different DOB;

-

o discrepancies in LTID; or

-

o others as determined by the Plan Processor;

-

• Date and time the issue was transmitted to the CAT Reporter, included each time the issue was re-transmitted, if more than once;

-

• Corrected submission date and time, including each corrected submission if more than one, or the record ID(s) of the corrected data or a flag indicating that the issue was resolved and corrected data was not required; and

-

• Corrected data, the record ID, or a link to the corrected data.

-

10. User Support

-

10.1 CAT Reporter Support

-

The Plan Processor will provide technical, operational and business support to CAT Reporters for all aspects of reporting. Such support will include, at a minimum:

-

• Self-help through a web portal;

-

• Direct support through email and phone;

-

• Support contact information available through the internet; and

-

• Direct interface with Industry Members and Data Submitters via industry events and calls, industry group meetings and informational and training sessions.

-

The Plan Processor must develop tools to allow each CAT Reporter to:

-

• Monitor its submissions;

-

• View submitted transactions in a non-bulk format (i.e., non-downloadable) to facilitate error corrections;

-

• Identify and correct errors;

-

• Manage Customer and Customer Account Information;

-

• Monitor its compliance with CAT reporting requirements; and

-

• Monitor system status.

-

The Plan Processor will develop and maintain communication protocols (including email messaging) and a secure website to keep CAT Reporters informed as to their current reporting status, as well as issues with the CAT that may impact CAT Reporters’ ability to submit or correct data. The website will use user authentication to prevent users for seeing information about firms other than their own, and will contain:

-

• Daily reporting statistics for each CAT Reporter,270 including items such as:

-

o SRO-Assigned Market Participant Identifier;

-

o Date of submission;

-

o Number of files received;

-

o Number of files accepted;

-

o Number of files rejected;

-

o Number of total order events received;

-

o Number of order events accepted;

-

o Number of order events rejected;

-

o Number of each type of report received;

-

o Number of each type of report accepted;

-

o Number of each type of report rejected;

-

o Number of total customer records accepted;

-

o Number of total customer records rejected;

-

o Order-IDs rejected;

-

o Reason for rejection;

-

o Number of records attempted to be matched;

-

o Number of records matched;

-

o Percentage of records matched;

-

o Number of customer records received;

-

o Number of unknown accounts;

-

o Latest view of statistics inclusive of re-submissions to get a trade-date view of exceptions and correction statistics available for CAT Reporters to know when everything for a given trade date has been completed; and

-

o Most recent CAT Reporter Compliance Report Card, as defined in section 12.4;

-

• CAT System status, system notifications, system maintenance, and system outages; and

-

• A mechanism for submitting event data and correcting and resubmitting rejections or inaccurate data.

-

The Plan Processor will develop and maintain a public website containing comprehensive CAT reporting information, including:

-

• Technical Specifications;

-

• Reporting guidance (e.g., FAQs);

-

• Pending rule changes affecting CAT reporting;

-

• CAT contact information;

-

• Availability of test systems;

-

• Testing plans;

-

• Proposed changes to the CAT; and

-

• Fee schedule.

-

The Plan Processor will develop and maintain a mechanism for assigning CAT Reporter-IDs. A mechanism will also be developed and maintained to change CAT Reporter-IDs should this be necessary (e.g., due to a merger), with the expectations that such changes should be infrequent. Changes to CAT-Reporter-IDs must be reviewed and approved by the Plan Processor.

-

Initially, non-Participant CAT Reporters will not have access to their data submissions through bulk data exports with the initial implementation of the Central Repository. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports. Non-Participant CAT Reporters will be able to view their submissions online in a read-only, non-exportable format to facilitate error identification and correction. Data Submitters will be able to export bulk file rejections for repair and error correction purposes.

-

The Plan Processor will define methods by which it will consult with and inform CAT Reporters and industry groups on updates and changes to user support.

-

The Plan Processor will define pre- and post-production support programs to minimize the Error Rate and help CAT Reporters to meet their compliance thresholds. Such pre-production support program shall include, but are not limited to, the following activities:

-

• Educational programs – Includes the following:

-

o Publication and industry-wide communication (including FAQs) of the Technical Specifications, including:

-

‧ Appropriate definitions / expected usages for each value in field format

-

‧ All available attribute values for each field

-

o Establishment of a dedicated help desk for Reporters to contact;

-

o Industry participation in order linkage methodologies;

-

‧ Include information on new order / trade types;

-

o Hosting of industry educational calls; and

-

o Hosting of industry-wide training.

-

• Registration – Requires all firms to:

-

o Register and be certified as CAT Reporters;

-

o Attend industry-wide training;

-

o Establish internal controls to capture potential misreporting scenarios; and

-

o Work with the Plan Processor to understand scenario-based reporting and expected outputs.

-

• Communications Plan – A strong communications plan of the timeline to reporting go-live shall:

-

o Include communication on how Error Rates and Compliance Thresholds are calculated; and

-

o Describe how errors will be communicated back to CAT Reporters.

-

• Industry-wide testing – Industry-wide test results must be available for all CAT Reporters.

-

o As mentioned in Appendix C, Objective Milestones to Assess Progress, appropriate time must be provided between Technical Specification publication and production go-live.

-

o Ample testing time must be provided.

-

o Appropriate scenario-based testing, including all three validation processes, shall be established.

-

o A separate test environment for CAT Reporters that mirrors the production environment shall be provided.

-

Post-production support program activities shall include, but are not limited to the following:

-

• Issuing a monthly Report Card on reporting statistics, with information on how reporters stand against similar entities;

-

• Publishing daily reporting statistics;

-

• Maintaining Technical Specifications with defined intervals for new releases/updates;

-

• Posting FAQs and other informational notices to be updated as necessary;

-

• Hosting of industry educational calls;

-

• Hosting of industry-wide training;

-

• Emailing outliers, meaning firms significantly reporting outside of industry standards;

-

• Conducting annual assessments of dedicated help desk to determine appropriate staffing levels;

-

• Using the test environment prior to releasing new code to production; and

-

• Imposing CAT Reporter requirements:

-

o Attendance/participation of industry testing sessions;

-

o Attendance in industry educational calls; and

-

o Attendance in industry-wide training.

-

10.2 CAT User Support

-

The Plan Processor will develop a program to provide technical, operational and business support to CAT users, including Participants’ regulatory staff and the SEC. The CAT help desk will provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability.

-

The Plan Processor will develop tools, including an interface, to allow users to monitor the status of their queries and/or reports. Such website will show all in-progress queries/reports, as well as the current status and estimated completion time of each query/report.

-

The Plan Processor will develop communication protocols to notify regulators of CAT System status, outages and other issues that would affect Participants’ regulatory staff and the SEC’s ability to access, extract, and use CAT Data. At a minimum, Participants’ regulatory staff and the SEC must each have access to a secure website where they can monitor CAT System status, receive and track system notifications, and submit and monitor data requests.

-

The Plan Processor will develop and maintain documentation and other materials as necessary to train regulators in the use of the Central Repository, including documentation on how to build and run reporting queries.

-

10.3 CAT Help Desk

-

The Plan Processor will implement and maintain a help desk to support broker-dealers, third party CAT Reporters, and Participant CAT Reporters (the “CAT Help Desk”). The CAT Help Desk will address business questions and issues, as well as technical and operational questions and issues. The CAT Help Desk will also assist Participants’ regulatory staff and the SEC with questions and issues regarding obtaining and using CAT Data for regulatory purposes.

-

The CAT Help Desk must go live within a mutually agreed upon reasonable timeframe after the Plan Processor is selected, and must be available on a 24x7 basis, support both email and phone communication, and be staffed to handle at minimum 2,500 calls per month. Additionally, the CAT Help Desk must be prepared to support an increased call volume at least for the first few years. The Plan Processor must create and maintain a robust electronic tracking system for the CAT Help Desk that must include call logs, incident tracking, issue resolution escalation.

-

CAT Help Desk support functions must include:

-

• Setting up new CAT Reporters, including the assignment of CAT-Reporter-IDs and support prior to submitting data to CAT;

-

• Managing CAT Reporter authentication and entitlements;

-

• Managing CAT Reporter and third party Data Submitters testing and certification;

-

• Managing Participants and SEC authentication and entitlements;

-

• Supporting CAT Reporters with data submissions and data corrections, including submission of Customer and Customer Account Information;

-

• Coordinating and supporting system testing for CAT Reporters;

-

• Responding to questions from CAT Reporters about all aspects of CAT reporting, including reporting requirements, technical data transmission questions, potential changes to SEC Rule 613 that may affect the CAT, software/hardware updates and upgrades, entitlements, reporting relationships, and questions about the secure and public websites;

-

• Responding to questions from Participants’ regulatory staff and the SEC about obtaining and using CAT Data for regulatory purposes, including the building and running of queries; and

-

• Responding to administrative issues from CAT Reporters, such as billing.

-

10.4 CAT Reporter Compliance

-

The Plan Processor must include a comprehensive compliance program to monitor CAT Reporters’ adherence to SEC Rule 613. The Chief Compliance Officer will oversee this compliance program, and will have responsibility for reporting on compliance by CAT Reporters to the Participants. The compliance program covers all CAT Reporters, including broker-dealers and Participants.

-

As a fundamental component of this program, the Plan Processor will identify on a daily basis all CAT Reporters exceeding the maximum allowable Error Rate established by the Participants. The Error Rate will initially be set by the CAT NMS Plan, and will be reviewed and adjusted on an ongoing basis by the Operating Committee. Error Rates will be based on timeliness, correctness, and linkages.

-

The Plan Processor will, on an ongoing basis, analyze reporting statistics and Error Rates and recommend to Participants proposed changes to the maximum allowable Error Rates established by the Participants. All CAT Reporters exceeding this threshold will be notified that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections).

-

The Plan Processor will develop and publish CAT Reporter compliance report cards on a periodic basis to assist CAT Reporters in monitoring overall compliance with CAT reporting requirements. The Plan Processor will also recommend criteria and processes by which CAT Reporters will be fined for inaccurate, incomplete, or late submissions. The compliance report cards will include the following information:

-

• Number of inaccurate transactions submitted;

-

• Number of incomplete transactions submitted; and

-

• Number of transactions submitted later than reporting deadlines.

-

The CAT Reporter compliance program will include reviews to identify CAT Reporters that may have failed to submit order events to the CAT, as well as to ensure CAT Reporters correct all identified errors even if such errors do not exceed the maximum allowable Compliance Threshold.

-

The Plan Processor will, on a monthly basis, produce and provide reports containing performance and comparison statistics as needed to each Participant on its members’ CAT reporting compliance thresholds so that Participants can monitor their members’ compliance with CAT reporting requirements and initiate disciplinary action when appropriate. The Plan Processor will also produce and provide, upon request from the Participants and the SEC, reports containing performance and comparison statistics as needed on each CAT Reporter’s compliance thresholds so that the Participants or the SEC may take appropriate action if a Participant fails to comply with its CAT reporting obligations.

-

The Plan Processor will produce and make available on a monthly basis reports for all CAT Reporters, benchmarking their performance and comparison statistics against similar peers. The reports will be anonymized such that it will not be possible to determine the members of the peer group to which the CAT Reporter was compared.

-

The Plan Processor will produce and make available to regulators on a monthly basis a report detailing Error Rates, transaction volumes, and other metrics as needed to allow regulators to oversee the quality and integrity of CAT Reporter reporting to the Central Repository.

-

11. Upgrade Process and Development of New Functionality

-

11.1 CAT Functional Changes

-

The Plan Processor must propose a process governing the determination to develop new functionality, which process must be reviewed and approved by the Operating Committee. The process must, at a minimum:

-

• Contain a mechanism by which changes can be suggested to the Operating Committee by Advisory Committee members, the Participants, or the SEC;

-

• Contain a defined process for developing impact assessments, including implementation timelines, for proposed changes; and

-

• Contain a mechanism by which functional changes which the Plan Processor wishes to undertake can be reviewed and approved by the Operating Committee.

-

The Plan Processor shall not unreasonably withhold, condition, or delay implementation of any changes or modifications reasonably requested by the Operating Committee.

-

11.2 CAT Infrastructure Changes

-

The Plan Processor must implement a process to govern changes to CAT. This process must contain provisions for:

-

• Business-as-usual changes (e.g., replacing failed hardware, adding capacity to deal with expected increases in transaction volumes) that would require the Plan Processor to provide the Operating Committee with a summary report (e.g., infrastructure changes, acquired costs, etc.); and

-

• Isolated infrastructure changes (e.g., moving components of the system from a self-hosted to an Infrastructure-as-a-Service provider) that would require the Plan Processor to provide a request to the Operating Committee for review and approval before commencing any actions.

-

11.3 Testing of New Changes

-

The Plan Processor must implement a process governing user testing of changes to CAT functionality and infrastructure, which process must be reviewed and approved by the Operating Committee. The process must:

-

• Define the process by which changes are to be tested by CAT Reporters;

-

• Define the criteria by which changes will be approved prior to their deployment into the production environment(s); and

-

• Define the environment(s) to be used for user testing.

-
-
fn -

1 This Error Rate includes errors by CAT Reporters and linkage validation errors. In addition, errors attributable to the Plan Processor will be memorialized and reported to the Operating Committee.

-
-
fn -

2 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 Fed. Reg. 45722, 45789 (Aug. 1, 2012) (“Adopting Release”).

-
-
fn -

3 See Adopting Release at 45790. Section B below includes discussions of reasonable alternatives to approaching the creation, implementation, and maintenance of the CAT that the Participants considered. See SEC Rule 613(a)(1)(xii).

-
-
fn -

4 See Adopting Release at 45793.

-
-
fn -

5 The initial RFP was amended in March 2014. See Consolidated Audit Trail National Market System Plan Request for Proposal (last updated Mar. 3, 2014), available at http://catnmsplan.com/web/groups/catnms/documents/catnms/p213400.zip (the “RFP”).

-
-
fn -

6 The SEC has approved two amendments to the Selection Plan. See Securities Exchange Act Rel. No. 75192 (June 17, 2015), 80 Fed. Reg. 36028 (June 23, 2015); and Securities Exchange Act Rel. No.75980 (Sept. 24, 2015), 80 Fed. Reg. 58796 (Sept. 30, 2015).

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-
fn -

7 See Selection Plan, 78 Fed. Reg. 69910, Ex. A §§ I(Q) (defining “Qualified Bid”), VI(A) (providing the process for determining whether Bids are determined to be “Qualified Bids”).

-
-
fn -

8 See Selection Plan § 6; see also id. Article V.

-
-
fn -

9 See SEC Rules 613(a)(1)(xi) and 613(b)(7).

-
-
fn -

10 See original Exemptive Request Letter, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602383.pdf.

-
-
fn -

11 See Participants’ Proposed RFP Concepts Document (last updated Jan. 16, 2013) (the “Proposed RFP Concepts Document”). The Proposed RFP Concepts Document was posted on the Consolidated Audit Trail NMS Plan website, http:// catnmsplan.com (the “CAT NMS Plan Website”).

-
-
fn -

12 See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Sept. 2, 2015), available at the CAT NMS Plan Website. Separately, on April 3, 2015, the Participants filed with the Commission examples demonstrating how the proposed request for exemptive relief related to allocations would operate; this filing did not substantively update or amend the Exemptive Request Letter. See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Apr. 3, 2015), available at the CAT NMS Plan Website.

-
-
fn -

13 See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 Fed. Reg. 72252, 72275 n. 246 (Dec. 5, 2014) (adopting Reg SCI and citing the Adopting Release at 45774).

-
-
fn -

14 See Adopting Release at 45748 n.278 (noting that “the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf”). The Participants note that CAT Reporters using third party service providers to submit information on their behalf would still be responsible for all the data submitted on their behalf. The term “CAT Reporters” is generally used to refer to those parties that are required by SEC Rule 613 and the CAT NMS Plan to submit data to the CAT (i.e., national securities exchanges, national securities associations, and members thereof). The term “Data Submitters” includes those third-parties that may submit data to the CAT on behalf of CAT Reporters as well as outside parties that are not required to submit data to the CAT but from which the CAT may receive data (e.g., SIPs). Thus, all CAT Reporters are Data Submitters, but not all Data Submitters are CAT Reporters.

-
-
fn -

15 As noted, the Participants submitted the Exemptive Request Letters to facilitate compliance with the goals and purposes of the rule while minimizing the impact on existing market practices and reducing burdens on both Participants and broker-dealers.

-
-
fn -

16 See SIFMA Industry Recommendations for the Creation of the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) (“SIFMA Recommendations”), available at http://www.sifma.org/workarea/downloadasset.aspx?id=8589942773. Section 1.1 of the CAT NMS Plan includes OTC Equity Securities as “Eligible Securities.” As discussed in Appendix C, Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), inclusion of OTC Equity Securities in the initial phase of the CAT should facilitate the retirement of FINRA’s Order Audit Trail System (“OATS”) and reduce costs to the industry.

-
-
fn -

17 SEC Rule 613(e)(7).

-
-
fn -

18 See SEC Rule 613(c)(7).

-
-
fn -

19 RFP Question 49.

-
-
fn -

20 RFP Questions 59-60.

-
-
fn -

21 RFP Question 62.

-
-
fn -

22 RFP Question 63.

-
-
fn -

23 SEC Rule 613 and Sections 6.3 and 6.4 of the CAT NMS Plan permit certain other information to be reported by 8:00 a.m. Eastern Time on the Trading Day following the day the CAT Reporter receives the information. See SEC Rule 613(c)(4), (c)(7)(vi)-(viii).

-
-
fn -

24 SIFMA’s recommendations to the Participants regarding the CAT indicates support for the ability of Data Submitters to submit data in batch or near-real-time reporting. See SIFMA Recommendations, at 55.

-
-
fn -

25 As noted above, the term “customer” means “(i) [t]he account holder(s) of the account at a broker-dealer originating an order, and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different than the account holder(s).” SEC Rule 613(j)(3).

-
-
fn -

26 SEC Rule 613(c)(7)(i)(A).

-
-
fn -

27 SEC Rule 613(c)(7)(iv)(F).

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-
fn -

28 SEC Rule 613(c)(8).

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-
fn -

29 SEC Rule 613(j)(5).

-
-
fn -

30 SEC Rule 613(j)(4).

-
-
fn -

31 Where a validated LEI is available for a Customer or entity, it may obviate the need to report other identifier information (e.g., Customer name, address).

-
-
fn -

32 The Participants anticipate that Customer information that is initially reported to the CAT could be limited to only customer accounts that have, or are expected to have, CAT-reportable activity. For example, accounts that are considered open, but have not traded Eligible Securities in a given timeframe may not need to be pre-established in the CAT, but rather could be reported as part of daily updates after they have CAT-reportable activity.

-
-
fn -

33 Because reporting to the CAT is on an end-of-day basis, intra-day changes to information could be captured as part of the daily updates to the information. See SEC Rule 613(c)(3). To ensure the completeness and accuracy of Customer information and associations, in addition to daily updates, broker-dealers would be required to submit periodic full refreshes of Customer information to the CAT. The scope of the “full” Customer information refresh would need to be further defined, with the assistance of the Plan Processor, to determine the extent to which inactive or otherwise terminated accounts would need to be reported.

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-
fn -

34 SIFMA Recommendations at 30-31; Financial Industry Forum (FIF) Consolidated Audit Trail (CAT) Working Group Response to Proposed RFP Concepts Document at 12 (Jan. 18, 2013), available at http://catnmsplan.com/industryFeedback/P197808 (“FIF Response”).

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-
fn -

35 “Active accounts” are defined as accounts that have had activity within the last six months.

-
-
fn -

36 RFP Question 1.

-
-
fn -

37 FIF Response at 35.

-
-
fn -

38 Id.

-
-
fn -

39 SIFMA Recommendations at 62.

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-
fn -

40 Data retention requirements by the Central Repository are discussed more fully in Appendix D, Functionality of the CAT System.

-
-
fn -

41 RFP § 2.3 at 19.

-
-
fn -

42 SEC Rule 613: Consolidated Audit Trail (CAT), Questions for Industry Consideration, available at http://catnmsplan.com/QuestionsforIndustryConsideration.

-
-
fn -

43 RFP Question 1.

-
-
fn -

44 RFP Question 49.

-
-
fn -

45 RFP Questions 59-60.

-
-
fn -

46 RFP Question 62.

-
-
fn -

47 RFP Question 63.

-
-
fn -

48 RFP Question 43.

-
-
fn -

49 RFP Question 50.

-
-
fn -

50 The industry supports receiving information on reporting errors as soon as possible to enable CAT Reporters to address errors in a timely manner. See FIF Response at 36.

-
-
fn -

51 See Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)), for additional details on cost studies.

-
-
fn -

52 See Section 6.1(c) of the CAT NMS Plan.

-
-
fn -

53 See SEC Rule 613(j)(1).

-
-
fn -

54 See SIFMA Recommendations at 13, 39-42; FIF Response at 19.

-
-
fn -

55 See RFP Questions 11 and 12.

-
-
fn -

56 A detailed example of the application of the daisy chain approach to an order routed to an exchange on an agency basis can be found in the Proposed RFP Concepts Document at 26.

-
-
fn -

57 This subcommittee included 21 Industry Members and 16 Participants. It met 11 times over the course of 13 months to discuss order handling and CAT reporting requirements. Examples of order handling scenarios that must be addressed include, in addition to the agency scenario referenced above: orders handled on a riskless principal basis, orders routed out of a national securities exchange through a broker-dealer router to another national securities exchange, orders executed on an average price basis and orders aggregated for further routing and execution. Detailed examples of these types of scenarios can be found in the Proposed RFP Concepts Document at 27-30.

-
-
fn -

58 These scenarios, and how the daisy chain approach could be applied, can be found in the Representative Order Proposal (Feb. 2013), available at http://catnmsplan.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=P197815.

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-
fn -

59 Although the Plan Processor must account for multiple simultaneous queries, the Central Repository must also support the ability to schedule when jobs are run.

-
-
fn -

60 Initially, only the SEC and Participants will have access to data stored in the Central Repository.

-
-
fn -

61 The RFP required support for a minimum of 3,000 users. The actual number of users may be higher based upon regulator and Participant usage of the system.

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-
fn -

62 SEC Rule 613(a)(1)(ii).

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-
fn -

63 Adopting Release at 45790.

-
-
fn -

64 FIF Response at 35.

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-
fn -

65 FIF Response at 35.

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-
fn -

66 SIFMA Recommendations at 62.

-
-
fn -

67 One example of why the Participants believe a five day repair window is too long is that regulators may need access to the data as quickly as possible in order to conduct market reconstruction.

-
-
fn -

68 SEC Rule 613(a)(1)(ii).

-
-
fn -

69 Adopting Release at 45790.

-
-
fn -

70 RFP Question 81.

-
-
fn -

71 RFP Question 82.

-
-
fn -

72 RFP Question 83.

-
-
fn -

73 RFP Question 84.

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-
fn -

74 RFP Question 85.

-
-
fn -

75 RFP Question 86.

-
-
fn -

76 RFP Question 87.

-
-
fn -

77 The SEC defined “off-line” analysis as “any analysis performed by a regulator based on data that is extracted from the [CAT] database, but that uses the regulator’s own analytical tools, software, and hardware.” Adopting Release at 45798 n.853.

-
-
fn -

78 Id.

-
-
fn -

79 Id.

-
-
fn -

80 Id.

-
-
fn -

81 Id.

-
-
fn -

82 Id.

-
-
fn -

83 Id.

-
-
fn -

84 As documented in Appendix D, each CAT Reporter will be issued a public key pair (“PKI”) that it can use to submit data, and access confirmation that their data has been received.

-
-
fn -

85 Adopting Release at 45799. See also RFP § 2.8.2.

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fn -

86 Adopting Release at 45799.

-
-
fn -

87 Adopting Release at 45790-91, 45799.

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-
fn -

88 RFP Section 2.2.4.

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-
fn -

89 RFP Question 14.

-
-
fn -

90 RFP Question 15.

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-
fn -

91 RFP Question 16.

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-
fn -

92 RFP Question 17.

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-
fn -

93 RFP Question 18.

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-
fn -

94 SEC Rule 613(e)(4)(ii) and (iii).

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-
fn -

95 SEC Rule 613(e)(4)(iii).

-
-
fn -

96 FIF Consolidated Audit Trail Working Group Processor Proposed Optimal Solution Recommendations at 6 (Sep. 15, 2014), available at http://www.sec.gov/comments/4-668/4668-16.pdf (the “FIF Optimal Solution Recommendations”).

-
-
fn -

97 FIF Response at 36.

-
-
fn -

98 SEC Rule 613(e)(6)(i) defines “Error Rate” to mean “[t]he percentage of reportable events collected by the central repository for which the data reported does not fully and accurately reflect the order event that occurred in the market.” All CAT Reporters, including the Participants, will be included in the Error Rate. CAT Reporters will be required to meet separate compliance thresholds, which will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance (the “Compliance Thresholds”). Compliance Thresholds will compare a CAT Reporter’s error rate to the aggregate Error Rate over a period of time to be defined by the Operating Committee. See infra note 109 and accompanying text (discussing Compliance Thresholds). A CAT Reporter’s performance with respect to the Compliance Threshold will not signify, as a matter of law, that such CAT Reporter has violated SEC Rule 613 or the rules of any Participant concerning the CAT.

-
-
fn -

99 As indicated by FINRA in its comment to the Adopting Release, OATS compliance rates have steadily improved as reporters have become more familiar with the system. When OATS was first adopted compliance rates were 76%, but current compliance rates are 99%. See Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission (Aug. 9, 2010).

-
-
fn -

100 Adopting Release at 45790-91.

-
-
fn -

101 As required by SEC Rule 613(e)(6)(ii), the Error Rate will be calculated on a daily basis as the number of erroneous records divided by the total number of records received on any given day and will be inclusive of validation of CAT Data and linkage validations. Error Rates are calculated for reporting groups as a whole, not for individual firms. Individual firms within a reporting group may have higher or lower Error Rates, though they would still be subject to any penalties or fines for excessive Error Rates to be defined by the Operating Committee. Additionally, this Error Rate will be considered for the purpose of reporting metrics to the SEC and the Operating Committee and individual firms will need to maintain Compliance Thresholds as described below.

-
-
fn -

102 The Participants expect that error rates after reprocessing of error corrections will be de minimis.

-
-
fn -

103 See FINRA, OATS Phase III, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/PhaseIII/.

-
-
fn -

104 See FINRA, OATS Reporting Requirements to OTC Equity Securities, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OTCEquitySecurities/.

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-
fn -

105 See FINRA, OATS Expansion to all NMS Stocks, https://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/.

-
-
fn -

106 The initial rejection rates for OATS were 23% and a late reporting rate of 2.79%.

-
-
fn -

107 Error rate reporting will be bifurcated by reporter group (e.g., Large Broker/Dealers) rather than product type to minimize the complexity of Error Rate calculations

-
-
fn -

108 As used in this table, “years” refer to years after effectiveness of the NMS Plan.

-
-
fn -

109 Compliance Thresholds will be set by the Operating Committee. Compliance Thresholds for CAT Reporters will be calculated at intervals to be set by the Operating Committee. All CAT Reporters, including the Participants, will be subject to Compliance Thresholds. Compliance Thresholds will include, among other items, compliance with clock synchronization requirements.

-
-
fn -

110 Events occurring within a single system that uses the same clock to time stamp those events should be able to be accurately sequenced based on the time stamp. For unrelated events, e.g., multiple unrelated orders from different broker-dealers, there would be no way to definitively sequence order events within the allowable clock drift as defined in Article 6.8.

-
-
fn -

111 See Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Participant Representatives of the CAT (June 12, 2013), available at http://catnmsplan.com/industryFeedback/P284394 (“FIF Letter”).

-
-
fn -

112 FIF Letter at 11.

-
-
fn -

113 Letter from T.R. Lazo, Managing Director, SIFMA, and Thomas Price, Managing Director, SIFMA (June 11, 2013), available at http://catnmsplan.com/industryFeedback/P284395 (“SIFMA Letter”); FIF Letter at 10.

-
-
fn -

114 FIF Letter at 10.

-
-
fn -

115 FIF Letter at 10; SIFMA Comments on Selected Topics at 11.

-
-
fn -

116 FIF Letter at 10.

-
-
fn -

117 FIF Letter at 10.

-
-
fn -

118 FIF Letter at 10; SIFMA Letter at 11.

-
-
fn -

119 Adopting Release at 45790 n.782.

-
-
fn -

120 See Appendix C, Time and Method by which CAT Data will be Available to Regulators.

-
-
fn -

121 Id.

-
-
fn -

122 Id.

-
-
fn -

123 Some trade data (e.g., trade data feeds disseminated by the SIPs) is public and therefore of little concern from a security standpoint. However, because this data may be linked to confidential order data or other non-public information, the Participants are requiring the Plan Processor to store this public data in the same manner as the non-public order and trade information submitted to the Central Repository by Data Submitters.

-
-
fn -

124 RFP Question 65.

-
-
fn -

125 RFP Question 66.

-
-
fn -

126 RFP Question 67.

-
-
fn -

127 RFP Question 68.

-
-
fn -

128 RFP Question 69.

-
-
fn -

129 RFP Question 70.

-
-
fn -

130 RFP Question 71.

+
fn +

1 15 U.S.C. 78k-1.

-
fn -

131 RFP Question 72.

+
fn +

2 17 CFR 242.608.

-
fn -

132 RFP Question 75.

+
fn +

3 See Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (Notice of Selection Plan).

-
fn -

133RFP Question 76.

-
-
fn -

134RFP Question 77.

-
-
fn -

135RFP Question 78.

-
-
fn -

136RFP Question 79.

-
-
fn -

137RFP Question 80.

-
-
fn -

138RFP Question 5.

-
-
fn -

139RFP Question 6.

-
-
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140 RFP Question 73. The Bidders were asked to include information pertaining to strategy, tools and techniques, and operational and management practices that will be used.

-
-
fn -

141 RFP Question 74.

-
-
fn -

142 SEC Rule 613(e)(4). This section of Appendix C provides an outline of the policies and procedures to be implemented. When adopting this requirement, the Commission recognized “the utility of allowing the [Participants] flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.” Adopting Release at 45782. Additional detail is provided in Appendix D, Data Security.

-
-
fn -

143 See Section 6.2(a)(v) of the CAT NMS Plan for a more detailed list of the activities to be performed by the Chief Compliance Officer.

-
-
fn -

144 See SEC Rule 613(e)(5).

-
-
fn -

145 As described in Appendix C, Reporting Data to the CAT, general queries can be carried out using the Customer-ID without the need to know specific, personally-identifiable information (i.e., who the individual Person associated with the Customer-ID is). The Customer-ID will be associated with the relevant accounts of that Person; thus, the use of Customer-ID for querying will not reduce surveillance.

-
-
fn -

146 See, e.g., Google Cloud Platform, https://cloud.google.com/developers/articles/auto-scaling-on-the-google-cloud-platform/.

-
-
fn -

147 All observations and costs as provided in this section include secondary offerings.

-
-
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148 SEC Rule 613(a)(1)(vi).

-
-
fn -

149 Questions for Public Comment re the CAT NMS Plan (Apr. 22, 2013), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p246652.pdf (“April Request for Comment”).

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fn -

150 Adopting Release at 45792 n.792.

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151 See generally, Securities Act Release No. 8565, 70 Fed. Reg. 19672 (Apr. 13, 2005) (Commission guidance regarding prohibited conduct in connection with IPO allocations) (“IPO Allocation Release”).

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152 Id.

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153 See FIF Letter at 4.

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154 See FIF Letter; SIFMA Letter; Thomson Reuters (May 21, 2013) (“Thomson Reuters Letter”), available at http://catnmsplan.com/industryFeedback/; see also Thomson Reuters Letter, http://catnmsplan.com/industryFeedback/P284396 (systems used for primary market allocations differ from those used for secondary market transactions).

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155 FIF Letter at 4; SIFMA Letter at 3

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156 FIF Letter at 4. The Participants also understand that top account allocation systems do not generally have execution reporting capacity, since reporting of primary market transactions is not currently required under OATS and other transaction reporting systems. SIFMA Letter at 2.

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157 See DAG Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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158 FIF Letter at 4.

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159 For example, commenters noted that “firms generally use the same clearance and settlement systems for clearing and settling final allocations in primary market transactions as they do for clearing and settling secondary market trades.” SIFMA Letter at 4.

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160 Adopting Release at 45792-93.

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161 Id.

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162 Id.

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163 See supra note 157.

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164 Based upon an assumption of 12 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 12 person-months of analysis * 3 * 21.741 person-days per month * $1,200 daily FTE rate = $939,211 * 250 = $234.8 million.

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165 Based upon an assumption of 3 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 3 person-months of analysis * 3 * 21.741 person-days per months * $1,200 daily FTE rate = $234,802 * 250 = $58.7 million.

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166 See, e.g., Memorandum to File Re: Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (outlining foundational elements of regulatory economic analysis).

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167 A unique study link was distributed to 4,406 broker-dealers. For 381 of the broker-dealers, the distribution email either was undeliverable or the broker-dealer responded that the study did not apply to them.

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168 See SEC Rule 613 – Consolidated Audit Trail (CAT) Cost Study Overview and Assumptions, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p535485.pdf.

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169 See Past Events and Announcements, SROs Launch Study to Analyze Implementation Cost of the Consolidated Audit Trail (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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170 See SEC Rule 613: Consolidated Audit Trail (CAT), SRO Hosted Consolidated Audit Trail Cost Study Webinar (July 9, 2014), available at http://catnmsplan.com/PastEvents/P551992.

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171 Materially incomplete responses were those that provided responses for less than half of the cost-related questions.

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172 Responses were outliers if their values were two times greater than the next highest value.

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173 Section 5.2(b) of the CAT NMS Plan describes how the Participants selected the Shortlisted Bidders.

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174 More specifically, Participants anticipate that technology costs and technological solutions may evolve over the bidding process and may affect the Bids. For instance, one Bidder recently provided an update to the Participants, noting “We expect continued cost reductions as Moore’s Law is applied to cloud pricing and to have this bring down total cost to the industry on an ongoing basis.” As another example, evolving technologies for data security may either increase or decrease estimated costs.

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175 Due to the complexity of the cost estimation effort, all figures provided in this analysis section have been rounded to a reasonable degree of accuracy and should be considered approximate.

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176 The discount factor represents an estimate of the average yield on AAA-rated corporate debt for the month period August 28, 2014 to September 27, 2014. Costs anticipated to be accrued after the first year (years 2 through 5) are discounted back to the first year to permit Participants to compare the anticipated costs associated with different Bids on a constant dollar basis.

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177 Bidders indicated that user support costs primarily consisted of FTE costs.

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178 Adopting Release at 45723.

+
fn +

4 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012) (Rule 613 Adopting Release).

fn -

179 See FINRA Rule 7410 et seq.

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180 Adopting Release at 45722.

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181 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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182 See FINRA Rule 7470.

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183 See FINRA Rule 7410(o).

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184 See FINRA Rule 7410(j).

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185 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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186 These costs are not mutually exclusive, and respondents may have included a combination of costs across all categories.

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187 Firms were requested to self-select as “small” if they would qualify under Exchange Act Rule 0-10(c) as a broker or dealer that:

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(1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and

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(2) is not affiliated with any Person (other than a natural Person) that is not a small business or small organization as defined in this section.

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188 Participants recognize that 116 respondents stated that they do not currently report to OATS and this number is greater than the Participants’ estimate of the total number of broker-dealers with reporting obligations to SROs other than FINRA. Participants assume that some broker-dealers who are FINRA members and currently exempt or excluded from OATS reporting requirements identified themselves as having no OATS reporting requirement. Given that these study responses provided data that could not otherwise be presumed to be incomplete or inaccurate, the Participants have chosen to include these responses in the analysis.

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189 The distinction between cost estimates for OATS and non-OATS reporters is being made so that Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that might arise from current reporting practices.

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190 The distinction between cost estimates for OATS and non-OATS reporters is made so that Plan Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that may arise from current reporting practices.

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191 Some respondents provided no response to a specific question, i.e., left that response blank, while providing responses to the other questions in the study. The tables provided throughout this section provide a count of such blank responses for each question.

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192 Participants assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release. Participants do note, however, that as part of the Costs to CAT Reporters Study, respondents were solicited to provide a cost for FTEs. Based on responses, the estimated annual cost per FTE would be $210,000 for large firms and $167,000 for small firms. Applying these estimates instead of the Commission’s assumed annual cost would lead to dollar costs for FTEs on the order of half as large as reported here.

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193 One anonymous small firm in the sample reported a total current regulatory reporting cost of $14 million. The Participants are not in a position to verify this number or determine whether it is due to an erroneous response (e.g., the respondent may not have recognized that the study collected responses to the cost questions in $1,000 increments). Therefore, Participants believe median numbers might better represent the typical costs across large and small firms instead of reported averages.

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194 See FINRA, OATS Frequently Asked Questions at D8 (last updated July 6, 1998), available at http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085541.

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195 See Hibah Yousuf, Only Half of All Americans Invested in Stocks, CNN Money (May 9, 2014), http://money.cnn.com/2013/05/09/investing/american-stock-ownership/ (includes Gallup Poll results).

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196 See, e.g., Andy Nybo, The Retail Options Renaissance, TABB Forum (Jan. 27, 2014), http://tabbforum.com/opinions/the-retail-options-reneissance.

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197 Cumming et al., Global Market Surveillance, 10(2) Am. Law & Econ. Rev. at 454-506 (July 24, 2008).

+

5 See Notice of Selection Plan, supra note 3.

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fn -

198 See, e.g., La Porta, et al., Legal Determinants of External Finance, 52(3) J. Finance 1131-1150 (1997).

+
fn +

6 See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (Selection Plan Approval Order). On December 12, 2014, the SROs filed a proposed amendment to the Selection Plan, which was published for notice and comment in the Federal Register on February 11, 2015, to allow the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan, and to narrow the list of Shortlisted Bidders prior to Commission approval of the CAT NMS Plan (“Amendment No. 1”). See Securities Exchange Act Release No. 74223 (Feb. 6, 2015), 80 FR 7654 (Feb. 11, 2015) (Notice of Amendment No. 1 to the Selection Plan). The Commission is separately issuing an approval order for Amendment No. 1 concurrently with this Notice. See Securities Exchange Act Release No. 75192 (June 17, 2015).

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199 Cumming et al., Exchange Trading Rules, Surveillance and Insider Trading (working paper, Oct. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101826.

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fn +

7 The Selection Plan defines “Bidding Participant” as a Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Notice of Selection Plan, supra note 3, Exhibit A at 2. The Selection Plan defines “Participant” as a party to the Selection Plan (i.e., an SRO). See id., Exhibit A at 3.

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200 Where better surveillance identifies behaviors and practices that are manipulative and harmful to the investing public more quickly and more accurately, the Commission and Participants may be able to adopt rules to stop these practices more quickly and in a more tailored fashion.

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201 Cumming et al., Exchange Trading Rules and Stock Market Liquidity, 99(3) J. Financial Economics 651-71 (Mar. 2011).

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202 Christensen et al., Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement (Dec. 31, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1745105.

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203 Pursuant to Section 31 of the Exchange Act, Participants are required to pay transaction fees and assessments to the Commission that are designed to recover the costs related to the government’s supervision and regulation of the securities markets and securities professionals. Participants, in turn, may collect their Section 31 fees and assessments from their broker-dealer members. 15 U.S.C. § 78ee.

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204 The two approaches are described in detail in Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)).

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205 Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference between Approach 1 and Approach 2 costs is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level. The t-test rejects the null hypothesis for estimates of hardware / software costs, FTE costs, vendor costs, and total costs. The t-test also rejects any significant difference in estimated costs under the two approaches separately for large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

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206 See SIFMA Recommendations.

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207 See SEC Memorandum to File No. S7-11-10, Re: Staff Meeting with the Financial Information Forum (Feb. 29, 2012), available at http://www.sec.gov/comments/s7-11-10/s71110-112.pdf.

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208 See FIF, Comment Letter Re: Consolidated Audit Trail National Market System Plan Submission (Nov. 19, 2014), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601972.pdf.

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209 Small firm total estimated implementation costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for one year, from the beginning of CAT reporting in year 1 through the expected incurring of build costs by small firms in the year prior to the start of their reporting (i.e., year 2). Because large firms report a year earlier than small firms and would incur most implementation costs in year 1, a similar rate has not been applied to their implementation costs.

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210 Id.

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211 Large and small firm total estimated maintenance costs are estimated in year 5 to account for a steady state of reporting, and include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of CAT reporting in year 1 through year 5.

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212 Id.

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213 Id.

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214 Id.

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215 Vendor cost estimates assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release.

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216 The total estimated vendor maintenance costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of broker-dealer CAT reporting in year one through year five.

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217 Cost Survey Report on CAT Reporting of Options Quotes by Market Makers, conducted by the Financial Information Forum, Securities Industry and Financial Markets Association and Securities Traders Association (Nov. 5, 2013); available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf.

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218 Cost estimates provided by the DAG on topics where the Participants have requested exemptive relief can be found at: http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602494.pdf

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219 See Section 11.2 of the CAT NMS Plan.

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220 See id.

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221 See Section 11.3 (a)-(c) of the CAT NMS Plan.

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222 Market share for Execution Venues is defined as the total trade volume executed on an individual Execution Venue as a percentage of total trades executed across all Venues.

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223 See Section 11.3(d) of the CAT NMS Plan.

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224 See Section 11.1(b) of the CAT NMS Plan.

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225 See Section 4.1 and Section 11.5 of the CAT NMS Plan.

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226 See id.

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227 See Section 11.3(d) of the CAT NMS Plan.

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228 There is empirical evidence that firms’ order routing decisions respond to changes in trading fees. Such evidence finds that an increase in the level of an exchange’s net fee is associated with a decrease in trading volume and market share relative to other exchanges. This evidence suggests that there is sufficient competition among Execution Venues such that where the Participant’s costs for the CAT are material it may be difficult for Execution Venues to fully pass those costs to broker-dealers. This argument holds as long as broker-dealers are not able to pass such costs on to their customers. See Cardella et al., Make and Take Fees in the U.S. Equity Market (working paper, Apr. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2149302.

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229 Remarks of Robert Ketchum, Chairman and Chief Executive Officer, FINRA (Sept. 17. 2014), available at http://www.finra.org/Newsroom/Speeches/Ketchum/P600785.

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230 See, e.g., IIROC’s analysis of its market regulation fee model, available at http://www.iiroc.ca/Documents/2011/5f95e549-10d1-473e-93cf-3250e026a476_en.pdf and http://www.iiroc.ca/Documents/2012/bf393b26-7bdf-49ff-a1fc-3904d1de3983_en.pdf.

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231 Further discussion of the Participants’ consideration of the use of the Majority Vote and Supermajority Vote is contained in Appendix C, 11, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi)).

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232 Adopting Release at 45787.

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233 The systems and rules identified for retirement (in full or in part) include: FINRA’s OATS Rules (7400 Series), the rules of other Participants that incorporate FINRA’s OATS requirements (e.g. NASDAQ Rule 7000A Series, BX Rule 6950 Series, PHLX Rule 3400 Series, NYSE Rule 7400 Series, NYSE Arca Equities Rule 7400 Series, and NYSE MKT Rule 7400 Series), COATS and associated rules, NYSE Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and associated rules, C2 Rule 8.7, and CHX BrokerPlex reporting (Rule 5).

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234 See SEC Rule 613 – Consolidated Audit Trail (CAT) Preliminary EBS-CAT Gap Analysis, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p450537.pdf.

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235 See FIF CAT WG: Preliminary Large Trader Rule (Rule 13h-1) – CAT (Rule 613) Gap Analysis (Feb. 11, 2014), available at https://fif.com/fif-working-groups/consolidated-audit-trail/member-resources/current-documents?download=1221:february-11-2014-fif-cat-wg-preliminary-large-trader-rule-rule-13h-1-cat-rule-613-gap-analysis&start=35.

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236 See FINRA Rule 7410(l).

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237 Other SROs have rules requiring their members to report information pursuant to the OATS Rules. See, e.g., NYSE Rule 7400 Series; NASDAQ Rule 7400 Series.

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238 This expansion of the CAT reporting requirements to OTC Equity Securities was generally supported by members of the broker-dealer industry and was discussed with the DAG on July 24, 2013.

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239 SEC Rule 613(c)(7) lists the minimum order information that must be reported to the CAT and specifies the information that must be included in the CAT NMS Plan. The Commission noted in the Adopting Release that “the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of [SEC Rule 613].” Adopting Release at 45750.

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240 Small broker-dealers are defined SEC Rule 0-10(c).

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241 These events are also described on the CAT NMS Plan Website at www.catnmsplan.com. See SEC Rule 613: Consolidated Audit Trail (CAT), Past Events and Announcements (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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242 See generally Industry Feedback on the Consolidated Audit Trail (last updated Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/.

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243 See FIF, Clock Offset Survey Preliminary Report (last updated Feb. 17, 2015), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (the “FIF Clock Offset Survey Preliminary Report”).

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244 See DAG, Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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245 See FIF Clock Offset Survey Preliminary Report.

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246 A summary of industry outreach events is included in Appendix C, General Industry Solicitation.

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247 When adopting the CAT, the Commission directed the Commission staff “to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail.” Adopting Release at 45744-5 n.241.

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248 See supra note 11.

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249 Role Based Access Control (RBAC) is a mechanism for authentication in which users are assigned to one or many roles, and each role is assigned a defined set of permissions. Additional details are provided in Appendix D, Data Security.

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250 Multifactor authentication is a mechanism that requires the user to provide more than one factor (e.g., biometrics/ personal information in addition to a password) in order to be validated by the system.

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251 See Appendix C, Analysis of the CAT NMS Plan, for additional details on cost studies.

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252 See FIF Response.

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253 User management is a business function that grants, controls, and maintains user access to a system.

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254 RFP at 57.

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255 In a hot-hot disaster recovery design, both the production site as well as the backup site are live, and the backup can be brought online immediately.

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256 In a hot-warm disaster recovery design, the backup site is fully equipped with the necessary hardware. In the event of a disaster, the software and data would need to be loaded into the backup site for it to become operational.

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257 NTP and PTP are protocols used to synchronize clocks across a computer network.

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258 GPS is a radio navigation system that can be used to capture a precise determination of time.

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259 FIF Clock Offset Survey Preliminary Report.

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260 The Participants consider the estimates provided to be conservative as a majority of the study respondents fell into the category of large broker-dealers.

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261 Equity markets currently have morning, primary, and evening sessions. It is possible that over time sessions may cross into the next calendar day.

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262 References to data sizing refer to raw, uncompressed data and do not account for benefits of compression, overhead of data storage or indices. Data sizing estimates do not include meta-data and are based on delimited, fixed length data sets. The Plan Processor is responsible for calculating its platform capacity capabilities based on its proposed solution. Three years after the finalization of the CAT NMS Plan, when all CAT Reporters submit their data to the Central Repository, the Central Repository must be sized to receive process and load more than 58 billion records per day.

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263 To be defined in the SLAs to be agreed to between the Participants and the Plan Processor, as detailed in Appendix D, Functionality of the CAT System.

+
fn +

8 See 17 CFR 242.608(a)(4) and (a)(5).

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264 Federal Financial Institutions Examination Council, Supplement to Authentication in an Internet Banking Environment (June 22, 2011), available at http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20(FFIEC%20Formated).pdf.

+
fn +

9 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated March 4, 2015.

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265 See Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System (Apr. 8, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.

+
fn +

10 See Notice of Selection Plan, supra note 3.

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266 If needed – data validation may be a process with an initial validation phase for data errors and a subsequent validation phase later in processing where more time is needed to assess the context of the record in relation to data that may be submitted to the CAT later in the submission window. The Plan Processor must have an additional “matching” process for the purposes of linking together order data passed between CAT Reporters.

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11 See Selection Plan Approval Order, supra note 6.

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267 A linkage validation error should only populate for the CAT Reporter that the Plan Processor determines to have broken the link.

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12 The Participants also have filed a proposed amendment to the Selection Plan (Amendment No. 1) that would allow the Participants to accept revised Bids prior to the Commission’s approval of the CAT NMS Plan, and to narrow the list of Shortlisted Bidders prior to the Commission’s approval of the CAT NMS Plan. See Notice of Amendment No. 1 to the Selection Plan, supra note 6. Amendment No. 1 also requires recusal of a Bidding Participant from voting in the narrowing process if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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268 See Appendix C, Error Communication, Correction, and Processing.

+
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13 See Selection Plan Approval Order, supra note 6 at 11157.

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269 Specific performance requirements will be included in the SLA.

+
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14 17 CFR 242.608.

-
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270 Each CAT Reporter or Data Submitter must only be able to view its own data and data it submits on behalf of others.

+
fn +

15 The marked additions and deletions show the proposed changes to the current Selection Plan without taking into account Amendment No.1. The effect of the proposed additions and deletions on the Selection Plan, taking into account Amendment No. 1, would be renumbering Section V.(B)(3) as Section V.(B)(4).

\ No newline at end of file diff --git a/spider/files/data000010.html b/spider/files/data000010.html index c491cbe..cb96498 100644 --- a/spider/files/data000010.html +++ b/spider/files/data000010.html @@ -1,1202 +1,114 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: CAT NMS Plan Potential Expansion - document_type: Reports - source: US/SEC/Reports/Potential Expansion Report - source_type: Potential Expansion Report + document_title: Joint Industry Plan (Notice of Plan Amendment Release 34-79898) + document_type: Notices + source: US/SEC/Notices/Notice of Plan Amendment + source_type: Notice of Plan Amendment language: English - citation: N/A -
pubdate: May 15, 2017 effdate: N/A -

CAT NMS Plan Potential Expansion

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion - Compliance User: Equity Securities + citation: Notice of Plan Amendment Release 34-79898 +
pubdate: January 30, 2017 effdate: N/A +

Joint Industry Plan (Notice of Plan Amendment Release 34-79898)

+ Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant + Compliance User: MIAX PEARL, LLC Keywords: - File Number 4-698, - National Market System Plan Governing the CAT, + Securities Exchange Act - Section 11A, + Rule 608, + MIAX PEARL, LLC, + CAT NMS plan, -

July 19, 2017

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Brent J. Fields

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Secretary

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Securities and Exchange Commission

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100 F Street, NE

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Washington, DC 20549-1090

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Re: File Number 4-698

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National Market System Plan Governing the Consolidated Audit Trail

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Dear Mr. Fields:

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In accordance with Section 6.11 of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”),1 on May 15, 2017, the Operating Committee for CAT NMS, LLC provided the Securities and Exchange Commission with a document outlining how the Participants2 could incorporate into the consolidated audit trail (“CAT”) information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including Primary Market Transactions in securities that are not NMS Securities or OTC Equity Securities and in debt securities (the “Expansion Report”).3 The Participants determined to update the discussion of equity securities other than NMS Securities and OTC Equity securities that appears on pages 63 and 64 of the enclosed amended Expansion Report.

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Brent J. Fields

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July 19, 2017

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Page2

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Thank you for your attention to this matter. Please contact me at 212-229-2455 if you have any questions or comments.

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cc (via email): The Hon. Jay Clayton, Chairman

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The Hon. Michael S. Piwowar, Commissioner

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The Hon. Kara M. Stein, Commissioner

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Ms. Heather Seidel, Acting Director, Division of Trading and Markets

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Mr. Gary L. Goldsholle, Deputy Director, Division of Trading and Markets

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Mr. David S. Shillman, Associate Director, Division of Trading and Markets

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Mr. David Hsu, Assistant Director, Division of Trading and Markets

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CAT NMS Plan Participants

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pubdate: May 15, 2017 effdate: N/A -

DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN - Compliance User: Equity Securities +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-79898; File No. 4-698)

+

January 30, 2017

+

Joint Industry Plan; Notice of Filing and Immediate Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant

+

Pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 thereunder,2 notice is hereby given that on January 12, 2017, MIAX PEARL, LLC (“MIAX PEARL” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) an amendment to the Plan Governing the Consolidated Audit Trail (“Plan”).3 The Commission approved the application of MIAX PEARL to register as a national securities exchange on December 13, 2016.4 One of the conditions of the Commission’s approval was the requirement for MIAX PEARL to join the CAT NMS Plan.5 The amendment adds MIAX PEARL as a Participant to the Plan.6 The Commission is publishing this notice to solicit comments on the amendment from interested persons.

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pubdate: January 30, 2017 effdate: N/A +

I. Description and Purpose of the Amendment

+ Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Description and Purpose of the Amendment + Compliance User: MIAX PEARL, LLC Keywords: + Rule 608, + MIAX PEARL, LLC, + CAT NMS plan, + Participant, + +

The amendment to the CAT NMS Plan adds MIAX PEARL as a Participant.7 The CAT NMS Plan provides that any Person8 approved by the Commission as a national securities exchange or national securities association under the Exchange Act may become a Participant by submitting to the Company a completed application in the form provided by the Company.9 As a condition to admission as a Participant, said Person shall: (i) execute a counterpart of the CAT NMS Plan, at which time Exhibit A shall be amended to reflect the status of said Person as a Participant (including said Person's address for purposes of notices delivered pursuant to the CAT NMS Plan); and (ii) pay a fee to the Company as set forth in the Plan (the “Participation Fee”).10 The amendment to the Plan reflecting the admission of a new Participant shall be effective only when: (x) it is approved by the Commission in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608; and (y) the prospective Participant pays the Participation Fee.11

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MIAX PEARL has executed a copy of the current CAT NMS Plan, amended to include MIAX PEARL in the List of Parties (including the address of MIAX PEARL), paid the applicable Participation Fee and provided each current Plan Participant with a copy of the executed and amended Plan.12

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+
pubdate: January 30, 2017 effdate: N/A +

II. Effectiveness of the CAT NMS Plan Amendment

+ Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Effectiveness of the CAT NMS Plan Amendment + Compliance User: MIAX PEARL, LLC + Keywords: + Rule 608, + Effectivity, + +

The foregoing Plan amendment has become effective pursuant to Rule 608(b)(3)(iii)13 because it involves solely technical or ministerial matters. At any time within sixty days of the filing of this amendment, the Commission may summarily abrogate the amendment and require that it be refiled pursuant to paragraph (a)(1) of Rule 608,14 if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Act.

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+
pubdate: January 30, 2017 effdate: N/A +

III. Solicitation of Comments

+ Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Solicitation of Comments + Compliance User: MIAX PEARL, LLC + Keywords: + Comments, + Electronic Comments, + Paper Comments, File Number 4-698, - National Market System Plan Governing the CAT, - Potential Expansion of 6.11, - Sec Rule 613, - CAT NMS Plan - Section 6.11, - Expansion Document, + 5 U.S.C. 552, -

PREPARED BY THE PARTICIPANTS TO THE CAT NMS PLAN

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PREPARED MAY 15, 2017

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(AMENDED JULY 19, 2017)

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On July 11, 2012, the Securities and Exchange Commission (“Commission”) adopted Rule 613 of Regulation NMS (“Rule 613”) under the Securities Exchange Act of 1934 (“Exchange Act” or “SEA”)1 to require the national securities exchanges and national securities association to jointly submit a national market system plan to create, implement, and maintain a consolidated audit trail (“CAT”) and central repository.2 On September 30, 2014, the national securities exchanges and the Financial Industry Regulatory Authority (“FINRA”), the sole national securities association (collectively, the “Participants”), filed the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”).3 The Commission unanimously approved the CAT NMS Plan, as amended by the Participants and modified by the Commission, and deemed it effective on November 15, 2016.4

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Pursuant to Rule 613(i) and Section 6.11 of the CAT NMS Plan, the Participants are required to “jointly provide to the Commission within six months after effectiveness of the [CAT NMS Plan] a document outlining how [the Participants] could incorporate into the [CAT] information with respect to . . . debt securities, . . . and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate” (“Expansion Document”). Specifically, Rule 613(i) requires the Expansion Document to address expanding the CAT to include:

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1. Equity securities that are not NMS securities,5

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2. Debt securities, and

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3. Primary market transactions in NMS securities, equity securities that are not NMS securities and debt securities.

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In addition, the Expansion Document must include the relevant details for each order and reportable event, identification of the market participants that would be providing the data, an implementation timeline, and a cost estimate for expanding the CAT.6

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pubdate: May 15, 2017 effdate: N/A -

I. DEBT SECURITIES

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities - Compliance User: Equity Securities - Keywords: - Debt Securities, - CAT NMS plan, - Sec Rule 613, - -
pubdate: May 15, 2017 effdate: N/A -

A. Debt Securities Market Background

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background - Compliance User: Equity Securities - Keywords: - Debt Securities, - CAT NMS plan, - Sec Rule 613, - CMO, - -
pubdate: May 15, 2017 effdate: N/A -
1. Scope of the Term “Debt Securities”
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background, Scope of the Term "Debt Securities" - Compliance User: Equity Securities - Keywords: - CAT NMS Plan - Section 6.11, - Debt Securities, - NYSE, - MSRB, - FINRA, - TRACE, - Corporate Bonds, - Asset-Backed Securities, - Agency Debt Securities, - Collateralized Mortgage Obligations, - Small Business Administration, - -

Section 6.11 of the CAT NMS Plan, which implements Rule 613(i), requires that the Expansion Document address the possible expansion of CAT to “debt securities.” Although there is no definition of the term “debt securities” in Rule 613, when proposing Rule 613, the Commission indicated that it intends that the CAT eventually would be expanded to include corporate bonds, asset-backed securities, municipal bonds, and other debt instruments.7

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Debt securities are issued by many different entities, including the U.S. government, counties, cities, corporations, and financial institutions, as well as international bodies and can take the form of a number of different security types. Debt securities can vary based on factors such as issuer characteristics (e.g., federal government versus private corporations) and issue characteristics (e.g., coupon rate, collateral, maturity), and trading practices in different types of debt securities can also vary (e.g., electronic trading versus voice messaging). Such differences can also lead to different clientele for the instruments. For example, while there is a lot of retail participation in the municipal securities market, mainly due to the tax advantage of interest income for some investors, the corporate bond market has a combination of retail and institutional investors, and securitized products are mainly traded by institutions.

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There are also differences in regulatory reporting across debt securities. FINRA, the New York Stock Exchange (“NYSE”), and the Municipal Securities Rulemaking Board (“MSRB”)8 each already require reporting of certain information for debt securities. The MSRB’s rules govern the reporting of transactions in municipal securities.9 The NYSE’s rules govern the entry, display and execution of orders and the reporting of transactions in debt securities on the NYSE Bonds® system.10 FINRA rules govern the reporting of trades in most other types of debt securities. The debt securities currently reportable to FINRA’s Trade Reporting and Compliance Engine (“TRACE”) system include:11

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• Corporate Bonds: Corporate bonds are issued by individual companies to raise money for capital expenditures, operations, and acquisitions. There are many types of corporate bonds with various structures, coupon rates, maturity dates and credit quality, among other characteristics.12

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• Asset-Backed Securities (“ABSs”): ABSs are certificates that represent an interest in a pool of assets such as credit card receivables, auto loans and leases, home equity loans, and even the future royalties of a musician. This class includes Mortgage-Backed Securities (“MBSs”).13

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• Agency Debt Securities (“Agencies”): There are two types of Agencies: (1) bonds issued or guaranteed by U.S. federal government agencies; and (2) bonds issued by government-sponsored enterprises (“GSEs”)—corporations created by Congress to foster a public purpose, such as affordable housing. Bonds issued or guaranteed by federal agencies such as the Government National Mortgage Association (Ginnie Mae) are backed by the “full faith and credit of the U.S. government,” like Treasuries. This is an unconditional commitment to pay interest payments and to return the principal investment in full to the security holder when a debt security reaches maturity. Bonds issued by GSEs such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage (Freddie Mac), and the Federal Agricultural Mortgage Corporation (Farmer Mac) are not backed by the same guarantee as federal government agencies.14

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• Collateralized Mortgage Obligations (“CMOs”): CMOs are debt securities that are backed by mortgage loans or assets derived from MBSs, including Real Estate Mortgage Investment Conduit (“REMICs”).15

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• Small Business Administration (“SBA”) Backed ABS: An SBA-Backed ABS is a debt instrument issued by a program of the SBA for which the timely payment of principal and interest is guaranteed by the SBA. An SBA-Backed ABS represents an ownership interest in a pool or pools of loans or debentures and structured to “pass through” the principal and interest payment made by the borrowers in such loans or debentures to the holders of the security on a pro rata basis.16

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In addition to FINRA’s TRACE reporting requirements, the MSRB requires reports of transactions in municipal securities, which are debt securities issued by states, cities, counties and other state or local governmental entities to raise money to fund public projects. Most municipal debt pays a specified amount of interest (usually semiannually) and returns the principal to the security holder on a specific maturity date.17 Because the MSRB is not a Participant in the CAT NMS Plan, it did not participate in preparation of the Expansion Document, and since the MSRB has specific jurisdiction over municipal securities, the Participants recommend that the MSRB be consulted before any analysis regarding the potential expansion of the CAT to municipal securities is undertaken.18 Thus, although some concepts discussed in the Expansion Document may be relevant to municipal securities, it is generally focused on debt securities that are reportable to TRACE or the NYSE as of the date of the Expansion Document.

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pubdate: May 15, 2017 effdate: N/A -
2. Debt Markets v. Equity Markets
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Securities Market Background, Debt Markets v. Equity Markets - Compliance User: Equity Securities - Keywords: - Debt Markets, - Equity Markets, - TRACE, - Daily Trading Volume, - FINRA, - NYSE, - -

The U.S. debt markets and equity markets are vastly different in most material respects. As noted above, the markets vary significantly in types of issuers, issue characteristics, trading, and regulatory regimes such as the level of market transparency on both a pre- and post-trade basis. All of these differences would influence how expanding the CAT to include reporting for debt securities could be efficiently and effectively achieved. Below, we describe some of the key characteristics of the government and corporate debt markets.

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First, the U.S. debt market is significantly larger than the equities market in terms of both the number of outstanding securities and the amount of capital raised; however, the size of the U.S. debt market is heavily influenced by U.S. Treasury securities.19 Second, there are significantly more issuances of debt securities as compared with equity securities. Many public companies may have only one class of stock, but can issue numerous types of bonds with different yields, maturities, and denominations.20 For example General Electric has only one class of stock, but it has issued over 1,000 unique bonds.21 In addition, daily trading volumes are significantly different for equities than for debt, with the number of trades in equity securities far surpassing trades in debt securities.

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The following charts highlight some of the more significant differences between the debt markets and the equity markets. Chart 1 compares the monthly value of new issue corporate bonds and public corporate stocks in the United States from January 2015 to January 2017.22

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Chart 2 demonstrates the number of issues in the U.S. debt and equities markets by charting the number of unique CUSIPs reportable to a FINRA facility as of the beginning of the calendar year for each of the last five years.23 As the chart makes clear, there are significantly more CUSIPs for debt securities than for equity securities.24

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Chart 3 displays the average daily trading volume for U.S. corporate debt, all TRACE reported debt, and exchange-listed equity securities for each month from January 2016 to March 2017.25 As the chart makes clear, in any given month the trading volume on equities exchanges is generally over five times that in U.S. corporate debt. However, when compared with all TRACE reported debt, the notional volume of transactions in U.S. debt and exchange-listed equity securities is relatively similar due to the high notional volume of transactions in Agency MBSs.

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Chart 4 shows the combined equity trades on exchanges compared to the TRACE reported trades during each quarter of 2016.26 Despite the fact that there are substantially more bonds in the market and more new bond issuances, the volume of equity trades is higher, and there are significantly more equity transactions on a daily basis than bond transactions. While exchanges had in excess of 1.5 billion trades each quarter, with one quarter over 2.5 billion, TRACE averages only 4.5 million reported trades per quarter.

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Another major difference between the bond and equity markets is the size of the trades. The dollar value of bond transactions typically is greater than stock transactions. The average size of a bond trade exceeds $500,000 whereas the average stock trade is less than $10,000.27 These large transaction sizes are the result of a substantial portion of transactions by institutional investors in the debt markets as compared to the equity markets.28 Chart 5 uses Federal Reserve financial sector data to chart retail investors in different bond types.

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Chart 5: Presence of Retail Investors in the Bond Market29

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In general, the debt markets have a much higher proportion of institutional market participants than in the equity markets, in which retail investor participation is substantially higher.30 However, for purposes of Chart 5, institutional investors include mutual funds, pension funds, insurance companies, and endowments. When these forms of indirect ownership are factored in, 49% of U.S. households are invested in bonds.31

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Two other major differences between the debt and equity markets are related. Due to the vast number and variety of debt securities outstanding, most individual debt securities trade much less often than a typical stock, particularly listed stocks. For an equity security that is listed on an exchange, there is an active market for the stock, and, consequently, it is easy to obtain a current price for any particular listed stock. However, bonds and other debt securities tend to actively trade during the period after their initial issue, but, thereafter, trading in a particular debt security may not occur for months or even years.

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Chart 6: Trading Volume Reduction in Corporate Debt 90 Days After Issuance32

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Because of the relative lack of liquidity in the debt markets compared to the equity markets, there is significantly less pre-trade price transparency for most debt securities compared to equity securities. In addition, because of the relative lack of trading activity in the debt markets compared to the equity markets, it is significantly less difficult to link specific orders in debt securities to resultant trades. For example, an order in an equity security may be split into numerous child orders (or numerous orders can be aggregated into a larger order). By requiring that the parent order and each child order be linked, the equity order audit trail provides insight into these relationships that otherwise would be difficult to ascertain.

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Along with these fundamental differences in the character of equity versus debt securities, the manner in which orders are handled in the two markets—and even what constitutes an “order”—and how trades are executed, differ substantially. In the debt market, it is common for an investor to contact his or her broker to purchase a bond with certain characteristics (e.g., a specific yield, credit rating or maturity) rather than a particular security, and the broker will reach out to other bond brokers and assess what debt securities that meet those criteria are available. Based on this information, the broker generally provides the investor with options, and the investor can choose a particular debt security to purchase when presented with the options. FINRA requires its members to submit trade reports to TRACE and disseminates some of this information; however, this information is limited to post-trade transparency and is subject to other limitations, such as volume thresholds. By contrast, exchanged-listed stocks always have pre-trade bid and offer prices available, often on multiple trading centers.

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Finally, unlike most equity securities, most debt securities are traded over-the counter (“OTC”) rather than on an exchange. In 2017, approximately 10,000 of the approximately 61,500 corporate bonds outstanding–approximately 16% were reportable to NYSE’s bond trading platform, which is the largest centralized corporate bond exchange in the U.S..33 The vast majority of transactions in debt securities are executed through informal networks of bond dealers in the OTC market. Further, while there has been significant growth in electronic trading venues for bonds in recent years—the number of corporate bond transactions occurring on ATSs has grown to approximately 20%—much of the activity in this space occurs as a Request for Quote (“RFQ”) or similar format where the terms of a trade are negotiated bilaterally.34

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pubdate: May 15, 2017 effdate: N/A -

B. Current Audit Trail Requirements for Debt Securities

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities - Compliance User: Equity Securities - Keywords: - TRACE, - Debt Securities, - TRACE-Eligible Securities, - -
pubdate: May 15, 2017 effdate: N/A -
1. TRACE Reporting Requirements
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, TRACE Reporting Requirements - Compliance User: Equity Securities - Keywords: - TRACE, - Debt Securities, - TRACE-Eligible Securities, - FINRA Rule 6730, - TRACE Reporting Timeframes, - Information Reported to TRACE, - Transactions Excepted from TRACE, - Transactions Exempted from TRACE, - -

a. Debt Securities Reportable to TRACE and Reporting Timeframes

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Pursuant to the FINRA Rule 6700 Series (“TRACE Rules”), broker-dealers that are FINRA members generally are required to report executed transactions in TRACE-Eligible Securities35 to FINRA through the TRACE system, unless an exception or exemption applies.36 FINRA uses the information reported to TRACE for regulatory purposes and disseminates certain transaction information publicly. “TRACE-Eligible Security” includes corporate bonds, Agencies37 and Securitized Product38 (“SP”) sub-types. SPs include ABSs,39 Agency Pass-Through Mortgage-Backed Securities,40 SBA-Backed ABSs,41 and any other SP.

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FINRA Rule 6730 prescribes the period of time within which a reportable transaction in a TRACE-Eligible Security must be reported to TRACE: (1) corporates, agencies, ABSs, and Agency Pass-Through Mortgage-Backed Securities traded TBA for good delivery generally must be reported within 15 minutes of execution of the transaction; (2) Agency Pass-Through Mortgage-Backed Securities traded TBA not for good delivery, SBA-Backed ABSs traded TBA or in Specified Pool Transactions, and CMOs executed on or after issuance generally must be reported within 60 minutes of the time of execution of the transaction;42 and (3) other SPs generally must be reported by the end of the day of execution.

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TRACE reporting timeframes differ for primary market transactions, specifically, for transactions that meet the definition of “List or Fixed Offering Price Transaction” or “Takedown Transaction.”43 The TRACE Rules provide that transactions that meet either of these two definitions be reported by no later than the next business day during TRACE system hours. TRACE trade reporting obligations, however, generally do not include any primary market transaction that is a sale from an issuer to an underwriter or initial purchaser as part of an offering.44

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b. Information Reported to TRACE

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Each FINRA member that is a party to a reportable transaction in a TRACE-Eligible Security generally is required to report the transaction to TRACE, and FINRA Rule 6730(c) (Transaction Information To Be Reported) sets forth the items of information required to be reported to TRACE in connection with the execution of a transaction in a TRACE-Eligible Security. Importantly, the TRACE reporting requirements apply only to transactions; any activity prior to execution is not required to be reported. Each TRACE trade report generally must include the following information:

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• CUSIP number, similar numeric identifier, or FINRA symbol;

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• Size (volume) of the transaction;

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• Price of the transaction (or the elements necessary to calculate price, which are contract amount and accrued interest);

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• Buy or Sell;

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• Date of Trade Execution (“as/of” trades only);

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• Contra-party’s identifier (MPID, customer, or a non-member affiliate, as applicable);

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• Principal or Agent;

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• Time of Execution;

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• Reporting side executing broker as “give-up” (if any);

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• Contra side Introducing Broker in case of “give-up” trade;

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• Commission (total dollar amount), if applicable;

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• Date of settlement;

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• If the member is reporting a transaction that occurred on an alternative trading system (“ATS”) pursuant to Rule 6732, the ATS’s separate MPID obtained in compliance with Rule 6720(c); and

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• Modifiers, as applicable.

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c. Transactions Excepted or Exempt from TRACE

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The TRACE Rules except or exempt certain transactions and transfers of securities from trade reporting. FINRA Rule 6730(e) (Reporting Requirements for Certain Transactions and Transfers of Securities) generally provides that the following types of transactions not be reported:

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• Transfers of TRACE-Eligible Securities for the sole purpose of creating or redeeming an instrument that evidences ownership of or otherwise tracks the underlying securities transferred (e.g., an exchange-traded fund);

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• Transactions resulting from the exercise or settlement of an option or a similar instrument, or the termination or settlement of a credit default swap, other type of swap, or a similar instrument;

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• Certain transfers of securities made pursuant to an asset purchase agreement in connection with a bankruptcy (subject to conditions);

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• Transactions where the buyer and the seller have agreed to trade at a price substantially unrelated to the current market for the TRACE-Eligible Security (e.g., to allow the seller to make a gift); and

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• Transactions in TRACE-Eligible Securities that are listed on a national securities exchange, when such transactions are executed on and reported to the exchange and the transaction information is disseminated publicly, and certain transactions in TRACE-Eligible Securities that are executed on a facility of NYSE and reported to NYSE and disseminated publicly by NYSE (subject to conditions).

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In addition to the exceptions provided in FINRA Rule 6730(e), exemptions from TRACE reporting may, on a case-by-case basis, be granted to an ATS under FINRA Rule 6731 (Exemption from Trade Reporting Obligation for Certain Alternative Trading Systems) or FINRA Rule 6732 (Exemption from Trade Reporting Obligation for Certain Transactions on an Alternative Trading System). Where an ATS receives an exemption under FINRA Rule 6731 or 6732, it is not required to report some or all transactions to TRACE, as provided for in each rule. However, FINRA continues to receive transaction information on exempt ATS transactions from the other parties to the transaction on the ATS (who report their role in the trades to TRACE), as well as directly from the ATS outside of the TRACE system.

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pubdate: May 15, 2017 effdate: N/A -
2. MSRB Reporting Requirements for Municipal Securities
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, MSRB Reporting Requirements for Municipal Securities - Compliance User: Equity Securities - Keywords: - TRACE, - Securities Reportable to RTRS, - MSRB Rule G-14, - RTRS, - Reporting Timeframe, - Information Reported to RTRS, - Transactions Excepted from TRACE, - -

As noted above, the MSRB is not a Participant, and the following discussion therefore describes the Participants’ understanding of MSRB requirements and MSRB transparency systems.

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a. Securities Reportable to RTRS

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MSRB Rule G-14 requires a broker, dealer or municipal securities dealer to report information about each transaction effected in a municipal security45 to the MSRB’s Real-time Transaction Reporting System (“RTRS”). The MSRB collects the information to provide reported prices for transparency purposes and to compile an audit trail for regulatory purposes.

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Municipal securities required to be reported to RTRS include four municipal security sub-types – fixed rate and zero coupon securities, commercial paper, variable rate demand obligations, and auction rate securities. MSRB rules generally require that these securities be reported to RTRS as follows:

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MSRB also provides for specific reporting timeframes for particular transaction types.

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b. Information Reported to RTRS

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RTRS collects transaction information for customer and inter-dealer transactions effected in municipal securities. Inter-Dealer Regulatory-Only (IDRO) transactions, which involve instances when an introducing broker effects a trade for a customer against the principal position of its clearing broker, are also reportable to RTRS. For inter-dealer transactions, firms must compare and match their trades through National Securities Clearing Corporation’s (“NSCC”) Real-Time Trade Matching (“RTTM”) system. RTTM allows firms to satisfy their transaction reporting obligations in addition to matching their inter-dealer transactions. Firms are able to submit their municipal securities transactions for both trade matching and regulatory reporting in a single trade message to RTTM. In an IDRO transaction, the transaction between the clearing and introducing broker is not required to be submitted for comparison purposes in RTTM, because it does not result in a movement of a principal position between dealers.46

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Matched data for inter-dealer transactions includes the following:47

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Inter-dealer trade data used solely for regulatory purposes includes the following:48

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• Destination

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• Executing Broker Commission

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• External Reference

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• Originator of message

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• Regulatory Dollar Price

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• Reversal Control Number

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• Special Condition Indicator

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• Trade Time

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• Trading Capacity – Contra-party

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• Trading Capacity – Participant

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• Type of Price – Weighted Price

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• All fields on Customer and IDRO trades are used for regulatory purposes only If the trade is subject to the following special conditions,49 firms report the appropriate indicator code:

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• Flat Trades – A security that is traded on terms that do not include accrued interest.

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• Away From Market Trades – A security that is traded at a price that differs substantially from the market price or involved in one of the following specific scenarios:

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‧ Customer Repurchase Agreement Transactions

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‧ UIT-Related Transactions

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‧ TOB-Related Transactions

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• Alternative Trading System Transactions – Inter-trade that was executed with or using the services of an alternative trading system with Form ATS on file with the SEC.

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• Customer Trades Involving Non-Transaction-Based-Compensation (NTBC) Arrangements – A customer trade that did not include a mark-up, markdown or commission.

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Transaction Fields by Trade Type:50

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c. Transactions Excepted from RTRS

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Firms are not required to the report the following transactions under MSRB Rule G-14:

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• Transactions in securities without assigned CUSIP numbers;

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• Transactions in municipal fund securities (e.g., 529 College Savings Plans);

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• Inter-dealer transactions for principal movement of securities between dealers that are not inter-dealer transactions eligible for comparison in a clearing agency registered with the Commission;51 and

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• Sales from issuers to broker-dealers as part of new issues of municipal securities.52

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pubdate: May 15, 2017 effdate: N/A -
3. NYSE Bonds
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, Order Information for Debt Securities, NYSE Bonds - Compliance User: Equity Securities - Keywords: - NYSE Bonds, - Order Information, - Trade Reports, - -

NYSE Bonds is an electronic order-driven matching system through which Exchange members enter and match orders for eligible debt securities on a price and time priority basis. The system provides access to the order book, which displays orders in the time sequence received. Upon execution, trades are submitted for clearing to the Depository Trust Clearing Corporation.

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a. Order Information

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NYSE members authorized to access NYSE Bonds may enter buy and sell orders in eligible bonds to the NYSE Bonds system. All orders, modifications and cancellations of such orders, by NYSE members entered on the NYSE Bonds system throughout each trading day, are retained by the Exchange.

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Each order generally must include the following information:

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• Entering member’s MPID;

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• CUSIP number or identifier;

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• Order type,53 and any modifiers;

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• Buy or Sell;

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• Price and Quantity; and

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• Capacity (Agent or Principal).

-

NYSE Bonds centralizes bond trading and publishes a real-time bond data feed to members authorized to use NYSE Bonds and to subscribers that reflects all orders in time sequence on the NYSE Bonds order book.

-

b. Trade Reports

-

The trade reports of executions on the NYSE Bonds system include the following information:

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• CUSIP number or identifier;

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• Price and Quantity of each filled execution;

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• Average Price of fills for each order;

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• Total Quantity of fills on open orders;

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• Buy or Sell;

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• Time of Execution;

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• Settlement Type (whether same day, T+1, T+2 or T+3);

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• Type of Trade Execution (“Partially Filled”, “Filled”);

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• Type of Instrument (“Corporate Bond”, “Treasury Bill”); and

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• Contra-party’s MPID identifier, and number of Contra-parties on a fill.

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In addition, the Exchange retains a record and disseminates trade data and execution reports of trades that were cancelled. Such reports identify trades that were cancelled after the execution was reported and includes identifiers to map any cancelled trade with the original trade.

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pubdate: May 15, 2017 effdate: N/A -
4. Order Information for Debt Securities
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Current Audit Trail Requirements for Debt Securities, Order Information for Debt Securities - Compliance User: Equity Securities - Keywords: - FINRA Rules, - MSRB Rules, - SEA Rule 17a-3, - -

As discussed above, FINRA and MSRB rules generally require firms to report transaction information in covered securities within specified periods following the execution of reportable transactions and do not require members to report any order or other pre-trade information.

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SEA Rule 17a-3(a)(6)54 prescribes recordkeeping requirements for broker-dealers, including recordkeeping requirements for orders in debt securities. Specifically, SEA Rule 17a-3(a)(6), among other things, requires broker-dealers to make and keep a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of securities, whether executed or unexecuted. The order memorandum must show: (i) the terms and conditions of the order or instructions and of any modification or cancellation thereof; (ii) the account for which entered; (iii) the time the order was received; (iv) the time of entry; (v) the price at which executed; (vi) the identity of each associated person, if any, responsible for the account; (vii) the identity of any other person who entered or accepted the order on behalf of the customer or, if a customer entered the order on an electronic system, a notation of that entry; and (viii) to the extent feasible, the time of execution or cancellation.55

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Firms also may use various systems to internally manage their order workflow in debt securities. These systems may capture order information such as security information (e.g., CUSIP, side, quantity, coupon and maturity), order details (e.g., date and time of order receipt, the order’s time in force, and any limit price), and may include additional information (e.g., settlement date, whether the order was solicited, the name of the representative who took the order, and account information). Based on discussions with multiple firms, firms’ order workflow management practices differ widely, and the systems firms use may provide varying degrees of linkages with other relevant information, such as executions or order updates/cancellations.

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pubdate: May 15, 2017 effdate: N/A -

C. Debt Security Consolidated Audit Trail – Possible Approaches

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach - Compliance User: Equity Securities - Keywords: - CAR Reporting, - Participants, - CUSIP, - -

As noted above, unlike for equity securities, there is no current regulatory requirement for broker-dealers to report order information for orders involving debt securities. Consequently, there is no current order reporting framework on which to base potential CAT reporting. Set forth below are three general frameworks that could be used in considering how the CAT might be expanded to include debt securities, though the Participants do not currently recommend that the CAT be expanded to debt securities. The Participants believe that the CAT should first be fully implemented for equities and listed options, and that the Participants should then have the benefit of having gained experience with CAT operation in the equity space prior to analyzing the potential expansion to debt securities. In addition, the Participants believe that industry outreach and input would be necessary to inform any analysis of the potential expansion of the CAT to debt securities.

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The possible approaches discussed below by no means are exclusive representations of all frameworks that may warrant discussion. In addition, because current practices related to order taking, sourcing, and agreeing to trades are markedly different for debt securities than for equity securities, the Participants believe that the development of any concept or proposal for CAT expansion (or establishing an order audit trail regime more generally) to debt securities should be carefully considered, including to identify how regulatory objectives may be best met taking these unique characteristics into consideration.

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The three approaches to a possible audit trail framework for debt securities discussed below are presented in order of the simplest and least-granular—from requiring order-originating firms to report new orders and cancellations/executions (Approach #1), to the most complex and granular, which mirrors more closely the extensive order life cycle-reporting regime for equities and options being implemented for the CAT (Approach #3). The approaches attempt to account for unique order handling processes and features in the market for, or nature of, debt securities. For example, in the market for debt securities, customers may contact their representatives providing only general characteristics regarding the type of debt security they wish to invest in, rather than a particular CUSIP. In these cases, based on the investor’s criteria, a representative may present to the customer several similar debt securities for consideration prior to the customer deciding on, and placing an order for, a particular security. In addition to oral interactions with customers, orders or indications of interest between dealers also may be communicated manually (e.g., a telephone call or message to a broker’s broker).

-

Some debt securities may not be widely quoted and may trade infrequently and, as a result, information on the security’s availability and pricing may be limited or unavailable. Firms have stated that representatives, therefore, often must take the additional step of confirming the final details of a potential transaction with the customer prior to executing the order and, for this reason, in these cases the time of order receipt and time of order execution are essentially simultaneous (because the customer officially places the order only once the specifics of the potential transaction are known). Similarly, quotations on electronic platforms (including ATSs) that trade debt securities may not be firm (e.g., RFQs and IOIs). In such cases, the systems do not automatically execute transactions and, instead, require manual confirmation from subscribers. Special consideration would need to be given to the use of non-firm quotation types in debt securities (e.g., RFQs and IOIs) on electronic systems and how this might impact an order audit trail for debt securities.

-

Thus, the concept of order receipt, order routing, and assessing the market for some debt securities can be very different than for equities or for listed options. Further, firms have represented that, due to the manual nature of order taking in the debt market, creating a new order record electronically and systematically tracking orders through to execution may be a significant departure from current practice for many firms. In addition, industry participants have represented that the lack of full detail on and experience in reporting to the CAT makes it impossible to evaluate or estimate the direct and indirect costs of CAT expansion to debt securities at this time. As such, the Participants do not believe that applying the current CAT framework to debt securities, without significant modification, would be workable. For these reasons and others, as discussed in Section I.D. below,56 the Participants do not recommend expanding the CAT to include debt securities at this time.

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pubdate: May 15, 2017 effdate: N/A -
1. Originating Firm New Order Report; Execution Reports (Approach #1)
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Originating Firm New Order Report; Execution Reports (Approach #1) - Compliance User: Equity Securities - Keywords: - CAT Framework, - Participant, - CUSIP, - TRACE, - Report Type, - Report Fields, - -

Under Approach #1, originating firms would report the receipt of a new order from a customer (i.e., when an order for a CUSIP/specific security is received), including a customer identifier that would be linkable to a separate database containing the relevant personally identifiable information (“PII”), similar to the CAT framework.57 If a transaction is fully or partially executed, the originating firm would enter an execution report that is linked to its new order report in the audit trail. Likewise, if the order was cancelled in whole or in part, the cancellation would be included in the audit trail, and would be linked to the originating firm’s new order report. The execution report also would include an identifier that would link it to the related TRACE transaction report. The Participants do not assume any changes to current transaction reporting frameworks. Where no customer order is involved, no audit trail requirement would be required as data would be available from the transaction report.

- -

Approach #1 - Example

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The below relates to the sell order scenario depicted above. Relevant order audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

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• 12:10pm – Firm A creates New Order ID #1234 – New Order Report

- -

• 2:08pm – Order Execution: Firm A executes Order ID #1234 with Firm B – Execution Report by Firm A (linked); Firm B would have no reporting obligation

- -

• If all or part of the order was cancelled, Firm A would submit a Cancel Report. The Cancel and New Order Reports would be linked

- -
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pubdate: May 15, 2017 effdate: N/A -
2. Originating and Route Recipient Firm New Order Reports; Partially Linked; Execution Reports (Approach #2)
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Originating and Route Recipient Firm New Order Reports; Partially Linked; Execution Reports (Approach #2) - Compliance User: Equity Securities - Keywords: - Participant, - CUSIP, - Report Type, - Report Fields, - -

Under Approach #2, originating firms would report the receipt of a new order from a customer (i.e., when an order for a CUSIP/specific security is received), including a customer identifier that would be linkable to a separate database containing the relevant PII. Where the originating firm sends an order to another firm or solicits interest from or through another firm regarding an order, the sending firm would document this activity by submitting a route report. While this approach describes this activity as a “route,” the Participants acknowledge that, because of the differences in the debt markets, typically, the order itself is not truly being routed in the same sense as occurs in the equity markets; rather, the firm is contacting a dealer or market center for indications of interest in the particular bond.

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Under this approach, the receiving firm would be required to create a new order report only if it further sends the order to another firm (e.g., report a new order and link it to the route report). If a receiving firm executes the order, or if the order is cancelled before any further action is taken by the receiving firm, a new order report would not be required of the receiving firm. Full or partial execution reports would be required of any firm with a related new order. The execution report also would include an identifier that would link it to the related transaction report. Likewise, if the order was cancelled in whole or in part, any firm with a new order report related to the cancellation also would report the cancellation.

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Approach #2 - Example

-

The below relates to the same sell order scenario depicted above for Approach #1. Relevant order audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

-

• 12:10pm – Firm A creates New Order ID #1234, a reportable event by Firm A – New Order Report

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• At 12:15pm, 12:16pm and 12:17pm, respectively, Firm A sends Sub-Orders #12341, #12342 and #12343 to Firm B, ATS #1 and ATS #2, respectively. Reportable events by Firm A – Route Reports

- -

• Firm B, ATS #1, and ATS #2 are required to record items of new order information only if they ultimately route the order

-

• 2:08pm - Order Execution: Firm A executes Order ID #1234 / #12341 with Firm B – Execution Report by Firm A

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• Firm A cancels Sub-Orders #12342 and #12343 – Cancel Report

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pubdate: May 15, 2017 effdate: N/A -
3. Complete, Linked, Order through Execution Life Cycle (Approach #3)
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Complete, Linked, Order through Execution Life Cycle (Approach #3) - Compliance User: Equity Securities - Keywords: - Participant, - CAT, - -

In the course of considering how the CAT might be expanded to include debt securities, the Participants also have considered whether the submission of a new order report is the earliest life cycle event that might be captured for debt securities. As noted above, one of the unique features of the debt market is the often simultaneous timing of an order and its execution (where the customer does not place an order until all the specifics of the potential transaction are known). Prior to the entry of an order for a particular security, however, customers may provide firms with desired criteria for a debt security and the firm then works on identifying, locating, and presenting specific options for the customer’s consideration.

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The Participants understand that this process is common in the debt area and, therefore, initially considered whether an audit trail might begin with recording and reporting certain pre-order information obtained by the firm in advance of the entry of an order for a particular security. For example, an approach might be considered where, if a customer provides a minimum number of descriptive elements regarding a debt security — e.g., where a customer provides several of the following: investment dollar amount; issuer; sector; yield; coupon; maturity; rating; or specified additional features — a firm conceivably might be required to submit a pre-order report. Any securities presented by the firm to the customer as satisfying the customer’s criteria also could be entered into a pre-order report and, should an order result, the pre-order report could be linked to the new order report (which would be followed by route, execution or cancellation reports, as applicable). This type of framework would be an attempt to capture in an automated fashion the pre-order events that are likely to be extensive in the debt markets. However, the Participants haven’t included the concept of a pre-order report in Approach #3 due to the possibly numerous manual steps likely necessary to submit and amend such a report to account for each debt security being explored.

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Under Approach #3, firms (both originating firms and route recipients) would report the receipt of a new order, though only originating firms would be required to report a customer identifier that would be linkable to a separate database containing the relevant PII. As noted above, although typically the order itself is not being truly routed to multiple firms (the originating firm is contacting a dealer or market center for indications of interest in the particular bond), this approach would require new order reports from all receiving firms and any associated executions or cancellations. Where a firm sends an order to another firm, a route report would be added to the audit trail by the sender (linked to the related new order report). If an order is fully or partially executed, any firm with a new order report related to the execution would enter an execution report that is linked to its new order report in the audit trail. The execution report also would include an identifier that would link it to the related transaction report. Likewise, if the order was cancelled in whole or in part, any firm with a new order report related to the cancellation also would report the cancellation.

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Approach #3 - Example

- -

The below relates to the sell order scenario depicted above. Relevant audit trail reports under this approach are underlined. Note that the events used in the example are illustrative and that alternatives, such as indications of interest, requests for quotes, non-firm quotes and negotiated trades, may also be used as examples.

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• 12:10pm – Firm A creates a new order and assigns Internal Order ID #1234, a reportable event by Firm A – New Order Report

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• 12:15pm, 12:16pm and 12:17pm, Firm A sends Sub-Orders #12341, #12342 and #12343 to Firm B, ATS #1 and ATS #2, respectively. Reportable events by Firm A – Route Reports

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• 12:15pm - Firm B creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by Firm B – New Order Report

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• 12:16pm - ATS #1 creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by ATS #1 – New Order Report

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• 12:17pm - ATS #2 creates Internal Order ID # (linked to Firm A’s Route Report), a reportable event by ATS #2 – New Order Report

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• 2:08pm - Order Execution: Firm A executes Internal Order ID #1234 / #12341 with Firm B. Required reports are as follows:

-

• Firm A reports execution and links it to Order ID #1234 / #12341 – Execution Report

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• Firm B reports execution and links it to Internal Order ID # (linked to SubOrder #12341) – Execution Report

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• Related Order/Sub-Order cancellations required:

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• Firm A cancels Sub-Orders #12342 and #12343 – Cancel Report

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• ATS #1 cancels Internal Order ID # (linked to Firm A’s Route Report) (Reason Code – cancelled by Firm A) – Cancel Report

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• ATS #2 cancels Internal Order ID # (linked to Firm A’s Route Report) (Reason Code – cancelled by Firm A) – Cancel Report

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pubdate: May 15, 2017 effdate: N/A -
4. Other Considerations
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Debt Security Consolidated Audit Trail - Possible Approach, Other Considerations - Compliance User: Equity Securities - Keywords: - Participant, - CAT, - Debt Securities, - SEC, - MSRB, - FINRA, - NMS Securities, - TRACE Reporting, - TRACE-Eligible Securities, - -

The Participants believe that a discussion of possible ways that order audit trail information for debt securities might be captured for regulatory purposes should include consideration of an option other than expanding the CAT to capture debt securities. One important factor is that there are fewer regulatory entities that would be primary users of order data for debt securities (SEC, MSRB and FINRA) than the universe of regulators for NMS securities, which also would include all national securities exchanges. Thus, the Participants believe that methods other than integrating order audit trail information on debt securities into the CAT should be considered, both from a short-term and long-term solution perspective. For example, the SEC could ask FINRA to: consider ways to enhance its TRACE reporting requirements to include more granular customer information on TRACE-Eligible Securities, such as a large trader identifier or customer categories; and establish a separate reporting mechanism for reporting order-related information that can be linked to TRACE trade reports.

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pubdate: May 15, 2017 effdate: N/A -

D. Economic Impact Analysis

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Economic Impact Analysis - Compliance User: Equity Securities - Keywords: - TRACE, - Debt Securities, - SIFMA Reports, - FINRA, - BIS Report, - CAT Reporting, - Participants, - -

The debt market consists of multiple segmented markets, each with its own clientele and unique trading and reporting practices and processes. Currently, transactions in debt securities in all of the segments except municipal bonds, debt securities issued by a foreign sovereign, and money market instruments are, or soon will be, reportable to TRACE. However, the economic impacts on firms of expanding the CAT to debt securities likely differ in significant ways across these segments due to the differences in the nature and amount of data that is collected in the pre-trade and trade processes in each segment. Such differences in data collection are attributable, to a large extent, to different trading mechanisms (e.g., telephonic communications versus electronic trading systems) and varying levels of automation that are implemented in the trading process (e.g., algorithmic trading).

-

Trading in most debt securities traditionally occurred OTC via messaging across broker-dealers and large institutions. However, recent advancements in technology, a changing regulatory environment, and market forces are increasing the role of electronic trading in debt securities.58 First, the emergence of ATSs and other electronic trading platforms has provided trading opportunities that do not exist in traditional voice trading. Second, regulatory reform initiatives enacted after the financial crisis have decreased dealers’ incentives to hold inventories and reduced proprietary trading by broker dealers.59 Also, as the SIFMA Report suggests, there has been an increased emphasis on best execution in the debt markets.60 This emphasis has increased the value of pre-trade transparency that may provide valuable information on prevailing market values, as well as the sources and movements of liquidity. Third, as the FINRA Study shows, changes in the supply and demand for primary and secondary market transactions for corporate debt have manifested in greater transaction volume, but smaller average transaction sizes and increased numbers of counterparties among dealers.61

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The prevalence of electronic trading in some debt markets is relevant to the discussion of a potential order audit trail for debt securities, as electronic trading protocols may already be systematically collecting some of the information that would be requested in the order life-cycle approaches described above. Accordingly, costs associated with CAT reporting may differ for different debt securities based on the level of electronic trading. The SIFMA Report shows that the number of electronic trading platforms has increased from two in 2000, to an estimated 20 in 2016. There are significant differences across platforms with respect to the bond types being traded, the trading protocols employed, and order types. The BIS Report discusses that the use of electronic trading is greater in the most liquid instruments. According to the SIFMA Report, the share of electronic trading of investment grade bonds is estimated to have increased from approximately 8% in 2013 to 20% in 2015 at the time of the study, whereas the shift to electronic trading is relatively slower in municipal bonds.

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The BIS Report also draws attention to regulators’ lack of access to comprehensive data generated by trading protocols across electronic trading platforms and the lack of comparability across trade information collected in different types of bonds, consistent with the assertion in the SIFMA Report that “stakeholders have limited information to gain a robust understanding of the incumbent and new platforms’ functionality and the evolving price discovery and execution protocols.” These differences can include very basic information, such as whether a bond price is represented as a dollar value, as a yield, or as a basis above a reference security. The fact that the degree of electronic trading varies significantly across different types of debt securities is a relevant factor in considering the challenges that likely would be involved in transitioning from reporting only transaction information to CAT reporting.

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The Participants have identified three approaches described in Section I.C. as possible audit trail framework alternatives for debt securities. These approaches differ from each other in terms of the granularity of the data items that would need to be collected, what events in the order life cycle would be captured, the firms that would have reporting obligations, and the linkages that need to be built across the reports.

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As noted in Section I.B, TRACE reporting requirements apply only to transactions, with no pre-trade or route information collected. Each approach described in Section I.C. above progressively introduces additional layers of data collection and reporting in the pre-trade period, and hence is associated with different levels of costs and benefits.

-

Approach #1 requires only order originating firms to report and link new orders, cancellations and executions. This approach still requires the creation of a New Order Report that contains information that is not currently reported to regulators. The information that would be contained in an Execution Report is included today in trade reports to the applicable regulator, so the costs of this approach would mostly arise from generating the New Order Report and Cancel Report, and from creating the linkages across reports and to the database that contains the personally identifiable information (PII). Approach #1 would be relatively less costly to implement and provide additional information to regulators than currently is available. For example, if an electronic audit trail were established for debt securities, regulators would have a more efficient means to observe the time of order receipt, the time from receiving the order to execution, and the extent to which others sought to sell the same security at the same time. But this approach provides the regulators with only a limited picture of an order’s life cycle relative to Approaches #2 and #3, discussed below. Specifically, Approach #1 does not capture the route information that provides a detailed view of the dealers that the order has been exposed to before execution or cancellation.

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Approach #2 introduces a Route Report that is linked to the New Order Report, to capture the information on the specific dealers that a bond order travels to before it gets executed or cancelled. As noted in the discussion in Section I.C.1 and 2 above, the Participants acknowledge that orders are not “routed” in the debt market as typically occurs in the equity market. However, for purposes of this discussion, a route occurs when a firm sends an order to another firm or solicits interest from or through another firm regarding an order. New Order and Route Reports could enable regulators to have access to a record of the identity, order and timing of dealers contacted as part of a potential purchase or sale of a specific debt security. As with Approach #1, the obligation accrues only once an order for a specific CUSIP or issue has been received. This approach requires the collection of additional information on the life cycle of orders than described in Approach #1, and therefore would be relatively more costly to capture and report. Nevertheless, the route information could provide useful insight regarding routing practices that might potentially be abusive to customers or inconsistent with best execution obligations.

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Approach #3 requires firms to build a more complete order life-cycle record. This approach resembles the level of granularity required in audit trail reporting for equity securities and potentially provides regulators with the most complete data to conduct markup reviews and surveillance for best execution obligations in debt markets, and enables regulators to compare execution quality across all brokers that orders have been exposed to. Nonetheless, Approach #3 would be the most expensive to implement, as it would require connectivity across firms and collection and reporting of more data. This approach may potentially deter some dealers from accepting orders from other firms because accepting an order from another firm would result in an obligation to create a New Order Report (in addition to Execution and Cancel Reports, as applicable).

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Reporting of primary market transactions may entail further challenges in CAT reporting, as establishing the linkages between New Order and Execution Reports may require more resources for distributions in the primary market, as order receipt and executions are different in nature.

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Since there is no current regulatory requirement for broker-dealers to report order information in debt securities and CAT implementation for equities and options has not yet begun, there currently is no framework to base potential costs regarding the expansion of the CAT to incorporate debt securities. Therefore, the Participants solicited industry feedback regarding the viability of expansion along with the potential direct and indirect costs (challenges) to expansion. The Participants solicited feedback from several market participants as well as industry groups62 to collect information on the potential economic impacts of such potential expansion on the industry, third-party providers and customers.

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The Participants actively sought responses to two sets of questions that were shared with the respondents in advance of the meetings. One set solicited feedback regarding the economic impacts associated with data collection, i.e., the new data fields that would have to be collected for each of the potential reporting scenarios described above. Specifically, the questions sought to address issues such as:

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• Whether existing Order Management Systems (OMS) and Execution Management Systems (EMS) for trading in debt securities are flexible enough to accommodate new asset classes and have the capability to capture order life cycles, i.e., linking new orders, routes, cancellations and executions as described in the options above;

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• The challenges and costs associated with collecting the information required in the reports and creating new data fields contained in such reports (e.g., Route ID);

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• Whether there are limitations to communication / coordination / standardization across trading desks that would hinder the collection of certain items in the reports; and

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• Characteristics of orders (e.g., orders with special handling instructions) or any order types (such as limit versus market orders, IOC, etc.) for which CAT reporting would potentially require more resources.

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The second set of questions was intended to gain a better understanding of the potential impacts associated with reporting information under each of the potential scenarios. The Participants requested feedback on potential issues such as:

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• The nature of the changes that would be necessary to apply CAT reporting obligations to debt securities (e.g., software, hardware, backup, or connectivity);

-

• The impact of CAT reporting on order, trade and execution workflows, and competition for provision of intermediation services in debt securities;

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• Whether there would be new functionalities (integration across systems, maintaining and establishing connectivity across brokers, automation of reporting, etc.) and new data management tools (capacity, encryption, transfer, etc.) that would be required to be implemented within the front, middle and back offices;

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• Whether there would be any cost savings provided by potential convergence of platforms and systems across asset classes; and

-

• Whether potential costs vary based on size / business model / characteristics of reporting firms, e.g., introducing vs. clearing firms, large vs. small firms, broker-dealers vs. ATSs.

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The respondents stated that there were material differences between equity markets and debt markets with respect to order characteristics, order handling and trade execution. The respondents also expressed that order handling and trading is predominantly OTC, where dealers communicate through informal networks.

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There may be potential benefits associated with a life cycle reporting regime in debt markets, where more granular data, as depicted in Approach #3, may potentially provide regulators with a detailed view of market participants’ decision-making behavior and can provide further insight into relevant regulatory issues such as the cost of liquidity provision or best execution practices in debt markets. As noted above, order receipt and execution are frequently concurrent, as the execution is an outcome of a negotiated process of order details, and an order is placed only once the execution terms are agreed upon. Moreover, the Participants understand that OMSs that automatically capture the details of the order are not utilized at every firm or for every order; therefore, it is likely that the requirement to collect more information that is not currently being collected will impose greater direct costs on firms, which may potentially result in a change in the way they participate in debt markets, and this could eventually impact investors. Respondents voiced concerns that the collection of order details may become so costly that representatives may switch to offering substitute products such as mutual funds and ETFs to their clients. Such a change in behavior potentially could reduce liquidity in the debt markets, reducing the price efficiency in these instruments. The burden of collecting and reporting such data potentially would be more significant for small firms, and the respondents asserted that some of these firms would be more likely to exit the market.

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The respondents also raised concerns regarding establishing linkages across new order, route and execution reports. Building such linkages necessitates creating connectivity across desks and third-party providers, but, due to the manual process of order receipt and routing orders, using a unique order ID to link the reports would not be feasible for most orders. Such a challenge would be more prominent for certain types of securities. Respondents also indicated that communicating with other broker-dealers regarding an order involves multiple feeds and messages and such messages may contain information regarding multiple orders with varying special conditions. Therefore, building a complete order life cycle for debt securities in a manner similar to equities was not perceived by respondents as a viable option.

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Respondents commented that order and execution characteristics are generally different for larger-sized orders, where there is more negotiation and communication across brokers, which may potentially result in a large number of route reports that are recorded manually. Collecting and processing such information may result in significant costs that may hinder the ability to trade large amounts in debt markets.

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Respondents also provided feedback on issues pertaining to reporting such information to CAT. They stated that uniform reporting across all debt securities may potentially create gaps and inconsistencies across different types of debt securities due to the differences in characteristics. However, some respondents believed that a single transaction reporting platform for all types of debt securities may save costs in the long run, provided that a single platform is flexible enough to capture differences across life cycles of different security types (i.e., a single platform for reporting TRACE-Eligible and municipal securities, instead of separately reporting to FINRA, NYSE and MSRB).

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pubdate: May 15, 2017 effdate: N/A -

E. Recommendations and Projected Implementation Timeframe

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Debt Securities, Recommendations and Projected Implementation Timeframe - Compliance User: Equity Securities - Keywords: - Expansion Document, - Reporting Information, - FINRA, - TRACE, - MSRB's RTRS System, - NYSE Bonds System, - Industry Members, - OATS, - -

As of the submission of this Expansion Document to the Commission, no Participants or industry members are reporting information to the CAT, and Technical Specifications detailing required order information for equity securities by broker-dealers are not yet available. Consequently, it is impractical for the Participants to attempt to itemize with any degree of specificity, beyond that described in Section I.C. above, the order details that might be appropriate to report information regarding orders in debt securities. Based on conversations with industry participants and industry trade organizations, the Participants note the following important considerations:

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• Trade information involving significant portions of the debt markets are already reported to FINRA’s TRACE system, MSRB’s RTRS system, or to the NYSE Bonds system. Consequently, leveraging existing systems could be a more efficient and cost-effective manner to expand the reporting of information concerning debt transactions to include order information.

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• Among industry members, order handling practices for debt securities vary significantly from those in place for equity security orders, primarily due to the differences in the nature of the markets between the two types of securities. Consequently, attempting to replicate the order reporting paradigm for equity securities onto the debt markets is not advisable.

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• The obligation to report information concerning debt security orders and transactions to the CAT would fall primarily on broker-dealers as a substantial majority of all debt market activity is conducted OTC rather than on an exchange. Some of these broker-dealers lack the current infrastructure to report order information. For example, 13% of FINRA members that currently report to TRACE do not conduct equity activity and thus do not report to FINRA’s Order Audit Trail System (“OATS”) and would not have CAT reporting requirements under the Plan. Consequently, expanding order reporting obligations to include debt securities would be a costly and time-intensive effort for these firms.

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As a result of these considerations, the Participants do not currently recommend that the Commission take any steps with respect to requiring the reporting of order information regarding debt securities, including primary market transactions in debt securities,63 to the CAT. The Participants believe such an expansion would be premature at this time and should be considered only after both Participants and industry members are successfully reporting equity securities and listed options information to the CAT so that experience with the operation of the CAT can be used to inform any future expansion. In addition, other alternatives, besides an expansion of CAT, should be considered as a means to collect order data related debt securities. As noted previously, the Participants recommend that the MSRB be consulted before any analysis regarding the potential expansion of the CAT to municipal securities is undertaken. Moreover, a reliable cost/benefit analysis cannot be performed until the Participants and industry members have more details as to the specific information that would be required to be reported and how that information would be reported.

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pubdate: May 15, 2017 effdate: N/A -

II. PRIMARY MARKET TRANSACTIONS

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions - Compliance User: Equity Securities - Keywords: - CAT NMS plan, - Primary Market Transactions, - CAT Reporting, - -

As the Participants described in the CAT NMS Plan, an eventual expansion of the CAT to gather complete information on Primary Market Transactions would be beneficial to providing regulators with a comprehensive audit trail that efficiently and accurately tracks all activity in NMS Securities throughout the U.S. markets.64 The Participants received cost and other information regarding the expansion of the CAT to include Primary Market Transactions in NMS Securities during the comment process for the CAT NMS Plan. Based on the Participants’ 2016 analysis, the Participants concluded that it would be appropriate to limit CAT submissions related to allocations in Primary Market Transactions to sub-account allocations.65

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The Participants believe that any recommendation to expand the CAT to include Primary Market Transactions is premature and should be based on data derived from Participant and Industry Members’ actual experience with CAT reporting. In support of this recommendation, this section discusses our current view of the costs and benefits of the expansion of CAT to include both top-account and sub-account allocations for Primary Market Transactions.66 As required by the Plan, this section also includes details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate associated with incorporating Primary Market Transactions into the CAT.

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pubdate: May 15, 2017 effdate: N/A -

A. Top-Account Allocations

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations - Compliance User: Equity Securities - Keywords: - CAT, - DAG, - SRO, - -

The Participants, during the course of developing the CAT, received cost estimates regarding inclusion of top account allocation information from members of the Development Advisory Group (“DAG”), a group of industry participants formed to assist the SROs with information to inform the design and implementation of the CAT. Using that data, the SROs concluded that reporting top-account allocation information was not currently justified because of the significant costs likely associated with requiring top-account allocations and the marginal benefit likely derived from reporting top-account information in Primary Market Transactions to the CAT.67 Commenters supported this conclusion, indicating that significant analysis and data modeling are required to implement the inclusion of Primary Market Transactions, and the inclusion of top-account information is less feasible than the inclusion of sub-account allocations.68 Furthermore, given the lack of experience with the CAT, market participants cannot currently provide more definitive cost figures related to such a proposal.

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pubdate: May 15, 2017 effdate: N/A -
1. Scope
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations, Scope - Compliance User: Equity Securities - Keywords: - CAT, - Primary Market Transactions, - -

The Participants understand that top-account allocations occur during the book-building phase of Primary Market Transactions. During this phase, the underwriter engages in efforts to ascertain indications of interest in purchasing quantities of the underwritten securities at varying prices from potential investors. Based on this information, the underwriter will then decide how to allocate IPO shares to purchasers. Accordingly, the top-account allocation could be defined to include the following: (1) the conditional indications of interest that may fluctuate until the offering syndicate terminates, and (2) the final allocation (that is, the actual allocation of securities to the customers’ accounts).

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The cost-benefit analysis also depends upon which market participant(s) would be obligated to report the data to the CAT. As the Commission noted, the estimate included in Appendix C of the Plan was sensitive to the number of underwriters.69 In particular, the estimates assumed that all underwriters participating in an offering would need to implement changes if required to submit top-account allocation information. In contrast, however, the Commission suspected that the total number of underwriters that would need to implement changes for top-account information may be lower because lead underwriters could have all of the information necessary to report the top-account allocation information, depending upon the top-account allocation information that was required to be reported. If only the lead underwriters need to implement systems changes to report top-account allocations, the total implementation costs could be lower.

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In addition, the cost-benefit analysis depends on the data elements that would need to be reported for each Primary Market Transaction. The Participants anticipate that the following top-account allocation data could be reported to the CAT:

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• the identity of all market participants that receive top-account allocations of NMS Securities in Primary Market Transactions;

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• the identification of the relevant NMS Security;

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• the number of such NMS Securities each such market participant is allocated via a top-account;

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• the identity of the entity making each such allocation; and

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• the time of the top-account allocation.

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pubdate: May 15, 2017 effdate: N/A -
2. Costs and Benefits
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Top-Account Allocations, Costs and Benefits - Compliance User: Equity Securities - Keywords: - Benefits, - CAT NMS plan, - Participants, - Costs, - CAT Reporters, - broker-dealers, - DAG, - -

a. Benefits

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As set forth in the CAT NMS Plan, the Participants believe that most of the potential benefits could be achieved through the collection of sub-account information.70

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In contrast to the Participants’ conclusions about the value of top-account allocations, the SEC stated that it believes that the inclusion of top-account allocations in the CAT would provide significant regulatory benefits beyond those provided by sub-account allocations.71 The SEC noted that top-account allocation information would be necessary to conduct surveillance for prohibited activities in the book-building process and would improve the efficiency of investigations into such prohibited activities. The SEC also noted that top-account allocation information would provide useful insights into IPO and follow-on allocations in market analysis and that such insights would help inform rulemaking and other policy decisions.72

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Similarly, in response to the proposal of the CAT NMS Plan, one commenter emphasized that many benefits could only be achieved by requiring the reporting of primary market transactions at both the top-account and the sub-account allocation levels.73 Further, this commenter also stated that top-account information would facilitate analyses of the value of discretionary allocation in book-building for issuers. This commenter also indicated that final top-account allocations should be sufficient to achieve such benefits, while also indicating that information on the indications of interest was crucial for the understanding of the capital formation process and for designing efficient regulations that would facilitate capital formation without compromising investor protection.74

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However, the Participants maintain that because top account information of conditional and interim allocations for NMS Securities fluctuates throughout the syndicate process and may vary significantly among firms, the marginal benefits of such information over final sub-account allocations are much less.75

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b. Costs

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The Participants concluded in the CAT NMS Plan that the inclusion of top-account allocations would likely impose significant costs on CAT Reporters. The Participants understand that broker-dealers generally maintain top-account allocation information in book building systems that are separate from their systems for secondary market transactions and that differ across the industry, including the use of applications provided by third parties, in house systems and spreadsheets for small firms. The Participants also understand that the investment banking divisions of broker-dealers typically use different compliance systems than those used for secondary market transactions.76 In addition, the Participants conclusion is based on the estimate received from the DAG that providing top-account allocations would costs $176.1 million.77

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One commenter disputed the DAG’s estimate, stating that the cost would be substantially less, approximately $2,400 per offering for providing top-account allocation information,78 although this estimate may measure the ongoing annual costs to maintain reporting, rather than the implementation costs of adding top-account allocation information to the CAT. Similarly, the SEC posited that the cost to add top-account information to the CAT may be lower than estimated, noting that the cost depended on timestamp requirements and the number of underwriters subject to the reporting requirement.79 The Participants note, however, that they currently have no authoritative information indicating that the less stringent timestamp requirement would result in any material reduction on the cost for Industry Members to institute new systems to enable such reporting. The SEC also noted that it is unclear whether the cost estimates cover the inclusion of indications of interest, or the final top-account allocation information.80

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In light of the varying cost estimates for the inclusion of top-account allocation information in the CAT, the Participants recommend that additional cost analysis be conducted regarding the inclusion of top-account information in the CAT, both for the inclusion of final top-account allocation information and the inclusion of book building indications of interest. Such analysis should be conducted after a period of experience of industry reporting into the CAT. Without the experience of industry reporting into the CAT and without detailed technical analysis by the various industry members who would provide such top-account data, however, the SROs have no ability to improve upon the current cost estimates in this area.

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pubdate: May 15, 2017 effdate: N/A -

B. Sub-Account Allocations

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations - Compliance User: Equity Securities - Keywords: - CAT NMS plan, - Participants, - -

As described in the CAT NMS Plan, information related to sub-account allocations is maintained by broker-dealers in a manner that may allow for reporting to the CAT without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations, including a variety of rulemaking and policy decisions.81 Accordingly, the Participants continue to recommend the inclusion of sub-account allocations in the CAT as a future phase in CAT reporting.

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pubdate: May 15, 2017 effdate: N/A -
1. Scope
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations, Scope - Compliance User: Equity Securities - Keywords: - CAT, - CAT Market, - Primary Market Transactions, - NMS Securities, - -

The costs and benefits of including sub-account allocation information in the CAT depend on the definition of what constitutes a sub-account allocation and what information is to be reported about the sub-account allocations. The Participants understand that sub-account allocations represent the allocation of IPO shares to the actual account receiving the shares. Sub-account allocations occur after top-account allocations and are made by the top-account institutions and broker-dealers prior to settlement.82

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The cost-benefit analysis also depends upon which market participant(s) would be obligated to report the data to the CAT Market. In addition, the cost-benefit analysis also depends upon the data elements that would need to be reported for each primary market transaction. The Participants anticipate that the following sub-account allocation data may be reported to the CAT:

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• the identity of all market participants that receive sub-account allocations of NMS Securities in Primary Market Transactions;

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• the identification of the relevant NMS Security;

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• the number of such NMS Securities each such market participant is allocated via a sub-account;

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• the identity of the market participant making each such allocation; and

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• the time of the sub-account allocation.

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pubdate: May 15, 2017 effdate: N/A -
2. Cost and Benefits
- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Sub-Account Allocations, Scope, Cost and Benefits - Compliance User: Equity Securities - Keywords: - Costs, - Primary Market Transactions, - broker-dealers, - Benefits, - Industry Members, - Participants, - -

a. Benefits

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As set forth in the CAT NMS Plan, the Participants noted that sub-account allocation information could aid the Commission and the Participants to gain a better understanding of how shares allocated in Primary Market Transactions are sold in the secondary market, or how allocations differ across broker-dealers.83 The Commission agreed that such data could improve compliance monitoring and market analyses by the Commission and the Participants, which, in turn, could help inform rulemaking and other policy decisions.84 For example, such data could enhance the Commission’s understanding of the role of the allocations in the capital formation process, when and how investors receiving allocations sell their Eligible Securities and how allocations differ among broker-dealers.85 Such data also could assist the Commission and Participants in conducting their respective examinations and investigations related to Primary Market Transactions.86

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b. Costs

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Based on feedback from Industry Members, the Participants understand that it would be more feasible to gather information relating to sub-account allocations in Primary Market Transactions than top-account allocations.87 The Participants noted their understanding that sub-account allocations are received in a manner and level of detail similar to allocations in secondary market transactions, and that the same middle and back office systems that are used for the processing of sub-account allocations for secondary market transactions generally are also used for the sub-account allocations for Primary Market Transactions. If Industry Members maintain sub-account allocations for Primary Market Transactions in an electronic format that could be converted into a reportable format acceptable for the CAT System, it may be that certain Industry Members could more easily report information about sub-account allocations to the Central Repository. 88 In addition, the Participants’ conclusion was based on the DAG estimate that providing sub-account allocations would cost approximately $58.7 million (as opposed to the much higher $171.6 million for top-account allocations).89

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This conclusion was further supported by another commenter, which argued that the incremental cost of providing sub-account allocation information would be de minimis.90

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pubdate: May 15, 2017 effdate: N/A -

C. Implementation Timeline

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Primary Market Transactions, Implementation Timeline - Compliance User: Equity Securities - Keywords: - CAT NMS plan, - CAT Reporting, - Industry Member CAT Reporters, - SIFMA, - SRO, - -

As noted in the CAT NMS Plan, the Participants do not support the inclusion of any Primary Market Transaction information in the initial phase of CAT reporting.91 As one commenter noted, primary market transactions should not be added to the CAT until regulatory and surveillance requirements have been defined.92 As such, the Participants recommend that further analysis regarding the possible inclusion of Primary Market Transaction data occur no sooner than six months after the Industry Member CAT Reporters have gained experience with implementing changes to secondary market transaction systems and have gained experience reporting to the CAT. Such experience will permit more informed cost analyses. Further supporting the SRO’s recommendation, SIFMA explained that the industry is currently absorbing substantial new regulatory costs. Allowing determination whether to require top-account and sub-account data be reported to CAT reporting to benefit from experience with the CAT would allow the industry to better absorb additional cost because of the experience reporting other data to the CAT and because of the longer time horizon that CAT Reporters would have to comply with any added requirement.93

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pubdate: May 15, 2017 effdate: N/A -

III. EQUITY SECURITIES OTHER THAN NMS SECURITIES AND OTC EQUITY SECURITIES

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities - Compliance User: Equity Securities - Keywords: - Sec Rule 613, - CAT NMS plan, - NMS Securities, - OTC Equity Securities, - -

Rule 613(i) requires the CAT NMS Plan to include a provision requiring the Participants to include in the Expansion Document how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including primary market transactions in such securities. Section 6.11 of the CAT NMS Plan effectuates this requirement. The CAT NMS Plan submitted to the Commission by the Participants included OTC Equity Securities as Eligible Securities subject to CAT reporting requirements; consequently, OTC Equity Securities are already subject to the same CAT reporting requirements as NMS Securities.94

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Although the vast majority of securities that trade on Participant exchanges are Eligible Securities, the Participants considered whether two types of transactions that may fall into this category are cabinet trades and trades in Flex options. After reviewing these trades, the Participants determined to include Reportable Events regarding cabinet trades and Flex options in the CAT. This section describes cabinet trades and flex trades.

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pubdate: May 15, 2017 effdate: N/A -

A. Cabinet Trades

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities, Cabinet Trades - Compliance User: Equity Securities - Keywords: - Trades, - OPRA, - -

Cabinet trades are manual trades that are executed in order to remove worthless options from a member firm’s books for accounting purposes. The trades are permitted by exchange rules and typically execute at a price of $1 per options contract. These relatively rare trades are manual trades that are not reported to OPRA.

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pubdate: May 15, 2017 effdate: N/A -

B. Flex Options

- Topic: SEC Reports, CAT NMS Plan Potential Expansion, Discussion, DISCUSSION OF THE POTENTIAL EXPANSION OF THE CONSOLIDATED AUDIT TRAIL PURSUANT TO SECTION 6.11 OF THE CAT NMS PLAN, Equity Securities Other than NMS Securities, Flex Options - Compliance User: Equity Securities - Keywords: - Expiration Date, - Strike Price, - Exercise Style, - -

Flex options are bespoke option contracts where parties to the transaction may choose the expiration date, the strike price and the exercise style. These options are permitted by exchange rules, although the option is not standardized.

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+

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the amendment is consistent with the Act. Comments may be submitted by any of the following methods:

+

Electronic Comments:

+

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

+

• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-698 on the subject line.

+

Paper Comments:

+

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

+

All submissions should refer to File Number 4-698. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the amendment between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm. Copies of such filing also will be available for inspection and copying at the principal office of MIAX PEARL. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-698 and should be submitted on or before [insert date 21 days from publication in the Federal Register].

+

By the Commission.

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Eduardo A. Aleman

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Assistant Secretary

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fn -

1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. (Nov. 23, 2016). The full text of the CAT NMS Plan is available at www.catnmsplan.com.

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fn -

2 The Participants to the CAT NMS Plan are Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., Investors’ Exchange LLC, Miami International Securities Exchange, LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, NYSE National, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

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3 See Letter from Michael Simon, CAT NMS Plan Chair, to Brent J. Fields, Secretary, SEC (May 15, 2017). Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

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1 17 C.F.R. § 242.613.

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2 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 Fed. Reg. 45722, 45743 (Aug. 1, 2012) (“Rule 613 Adopting Release”).

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3 A copy of the CAT NMS Plan as filed on September 30, 2014, is available at https://www.sec.gov/divisions/marketreg/cat-nms-agreement.pdf. The cover letter for the CAT NMS Plan is available at https://www.sec.gov/divisions/marketreg/cat-nms-plan-letter.pdf. The Participants submitted an Amended and Restated CAT NMS Plan in February 2015 and several subsequent amendments, available at http://www.catnmsplan.com/catnmsplan/.

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4 Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 Fed. Reg. 84696 (Nov. 23, 2016) (“Plan Adopting Release”).

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5 The Participants, with industry support, included equity securities that are not NMS securities in the definition of “Eligible Securities” under Article 1 of the CAT NMS Plan. See SIFMA Industry Recommendations for the Creation of the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) available at http://www.catnmsplan.com/Source/industryfeedback/p242319.pdf, and discussions with the Development Advisory Group (DAG) on July 24, 2013.

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6 Rule 613 Adopting Release, supra note 2, at 45743.

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7 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 Fed. Reg. 32556, at 32569, 32587-88 (June 8, 2010).

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8 In 1975, Congress established the MSRB to regulate the activities of broker-dealers and banks that buy, sell and underwrite municipal securities.

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9 Infra Section I.B.2

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10 NYSE operates the NYSE Bonds® system. Trading in eligible bonds by NYSE members on the NYSE Bonds system is pursuant to NYSE Rules 86-88. FINRA Rule 6730(e)(4) exempts FINRA members from reporting to TRACE transactions in TRACE-Eligible Securities that are executed on a facility of NYSE in accordance with specified NYSE rules and that are reported to NYSE and disseminated publicly, provided that a data sharing agreement between FINRA and NYSE related to transactions covered by FINRA Rule 6730 remains in effect.

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11 On July 10, 2017, FINRA will begin requiring its members to report transactions in U.S. Treasury Securities (“Treasuries”). See FINRA Regulatory Notice 16-39; see also Securities Exchange Act Release No. 79116 (Oct. 18, 2016), 81 Fed. Reg. 73167 (Oct. 24, 2016) (Order Approving SRFINRA-2016-027). The discussion of debt securities in this document does not include Treasuries.

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12 See Types of Bonds, available at http://www.finra.org/investors/types-bonds.

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13 See id.

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14 See id.

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15 See FINRA Rule 6710(dd).

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16 See FINRA Rule 6710(bb).

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17 See Types of Bonds, available at http://www.finra.org/investors/types-bonds.

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18 See 15 USC § 78o-4(b).

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19 For example, at the end of 2016, there was approximately $39.4 trillion in outstanding U.S. bond market debt. Of that total, over one-third (approximately $13.9 trillion) was issued by the U.S. Treasury and another $3.8 trillion represented municipal securities. See U.S. Bond Market Issuance and Outstanding, available at www.sifma.org/research/statistics.aspx.

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20 Kurt Shrout, “The U.S. Bond Market May Be Much Different Than You Think It Is,” LearnBonds, May 30, 2013. Accessed December 18, 2014, available at: http://www.learnbonds.com/how-big-is-the-bond-market.

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21 Id.

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22 Data was compiled from Federal Reserve data available at https://www.federalreserve.gov/data.htm.

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23 For reporting purposes, FINRA maintains CUSIP information for trades reportable to the Over-the-Counter Reporting Facility (ORF) and FINRA’s Trade Reporting Facilities (TRFs). The ORF is the service provided by FINRA for the reporting of trades in OTC Equity Securities executed other than on or through an exchange and for trades in Restricted Equity Securities effected under Securities Act Rule 144A and dissemination of last sale reports. Each FINRA TRF provides FINRA members with a mechanism for the reporting of transactions effected otherwise than on an exchange. Trades by FINRA members in exchange-listed securities executed otherwise than on an exchange may be reported to a FINRA TRF.

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24 From January 2015 through March 2017, there were 52,530 requests for CUSIPs for U.S. corporate or municipal bonds and 22,176 requests for CUSIPs for U.S. equities. Data compiled from CUSIP Issuance Trends available at https://www.cusip.com/cusip/insights.htm.

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25 Data consolidated from SIFMA statistics available at http://www.sifma.org/research/statistics.aspx. TRACE reported debt information includes Agency MBS, Non-Agency MBS, ABS, Corporate Debt and Federal Agency Securities. Equity securities include NYSE, NASDAQ, BATS, Direct Edge, Other and Off-Exchange.

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26 Information for Chart 4 was compiled from https://www.bats.com/us/equities/market_statistics/historical_market_volume/ (equity transactions) and http://www.finra.org/industry/trace/trace-fact-book (TRACE corporate transactions).

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27 Supra note 20.

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28 Id.

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29 Supra note 20. This chart displays corporate bond market data excluding non-financial sector debt obtained from the Federal Reserve at https://www.federalreserve.gov/apps/fof/FOFTables.aspx.

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30 Supra note 20.

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31 See United States, Board of Governors of the Federal Reserve System, “Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances,” Table 3, Federal Reserve Bulletin, September 2014, Vol. 100, No. 4. Accessed February 17, 2016. Available at: http://www.federalreserve.gov/econresdata/scf/scfindex.htm.

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32 This chart displays the reduction in corporate bond trading in the secondary market 90 days after the issuance. See Bruce Mizrach, “Analysis of Corporate Bond Liquidity,” FINRA Office of the Chief Economist Research Note, December 2015 (“FINRA Study”), available at http://www.finra.org/sites/default/files/OCE_researchnote_liquidity_2015_12.pdf.

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33 As of 2017, NYSE Bonds had 10,007 corporate debt securities reportable to its system and TRACE had 61,522 corporate debt securities. In 2016, the average number of corporate debt securities transactions reported to TRACE was approximately 54,600 per day and on NYSE Bonds it was 20 per day.

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34 See Securities Industry and Financial Markets Association, “SIFMA Electronic Bond Trading Report: US Corporate & Municipal Securities,” February 2016 (“SIFMA Report”), available at http://www.sifma.org/issues/item.aspx?id=8589958906.

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35 FINRA Rule 6710 provides that “TRACE-Eligible Security” means a debt security that is United States (“U.S.”) dollar-denominated and issued by a U.S. or foreign private issuer, and, if a “restricted security” as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A; or is a debt security that is U.S. dollar-denominated and issued or guaranteed by an agency or a Government-Sponsored Enterprise (“GSE”). FINRA Rule 6710 also provides that “TRACE-Eligible Security” does not include a debt security that is issued by a foreign sovereign, or a U.S. Treasury Security, or a money market instrument. Effective July 10, 2017, the definition of “TRACE-Eligible Security” will be expanded to include U.S. Treasury Securities. However, as discussed herein, “TRACE-Eligible Security” refers to the definition prior to July 10, 2017, and does not include Treasuries. See supra note 11.

-
-
fn -

36 See also Section I.B.1.c. (Transactions Excepted or Exempt from TRACE).

-
-
fn -

37 FINRA Rule 6710 generally provides that “Agency Debt Security” means a debt security (i) issued or guaranteed by an agency; or (ii) issued or guaranteed by a GSE. The term excludes a U.S. Treasury Security and a Securitized Product (“SP”), where an agency or a GSE is the securitizer or the guarantor of the SP.

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-
fn -

38 FINRA Rule 6710 generally provides that “Securitized Product” means a security collateralized by any type of financial asset, such as a loan, a lease, a mortgage, or a secured or unsecured receivable, and includes but is not limited to an asset-backed security as defined in Section 3(a)(79)(A) of the SEA, a synthetic asset-backed security, and any residual tranche or interest.

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-
fn -

39 FINRA Rule 6710 generally defines ABS as a type of SP where the ABS is collateralized by any type of financial asset, such as a consumer or student loan, a lease, or a secured or unsecured receivable, and excludes: (i) an SP that is backed by residential or commercial mortgage loans, mortgage-backed securities, or other financial assets derivative of mortgage-backed securities; (ii) an SBA-Backed ABS traded To Be Announced (“TBA”) or in a Specified Pool Transaction; and (iii) a collateralized debt obligation.

-

FINRA Rule 6710 generally provides that “To Be Announced” means a transaction in an Agency Pass-Through Mortgage-Backed Security or an SBA-Backed ABS where the parties agree that the seller will deliver to the buyer a pool of a specified face amount and meeting certain other criteria but the specific pool to be delivered at settlement is not specified at the time of execution, and includes TBA transactions “for good delivery” and TBA transactions “not for good delivery.”

-

FINRA Rule 6710 generally provides that “Specified Pool Transaction” means a transaction in an Agency Pass-Through Mortgage-Backed Security or an SBA-Backed ABS requiring the delivery at settlement of a pool that is identified by a unique pool identification number at the time of execution.

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fn -

40 Agency Pass-Through Mortgage-Backed Securities may be traded TBA for good delivery, TBA not for good delivery, or in Specified Pool Transactions. FINRA Rule 6710 generally provides that “Agency Pass-Through Mortgage-Backed Security” means a type of SP issued in conformity with a program of an agency or GSE, for which timely payment (principal and interest) is guaranteed by the agency or GSE representing ownership interest in a pool of mortgage loans structured to “pass through” payments to holders of the security on a pro rata basis.

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fn -

41 FINRA Rule 6710 generally provides that “SBA-Backed ABS” means an SP issued in conformity with a program of the Small Business Administration (“SBA”), for which the timely payment of principal and interest is guaranteed by the SBA, representing ownership interest in a pool of loans or debentures and structured to “pass through” payments by borrowers to the holders of the security on a pro rata basis.

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-
fn -

42 Transactions in SPs that are CMOs executed before the issuance of the security must be reported no later than the first settlement date of the security. See FINRA Rule 6730(a)(3)(C).

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-
fn -

43 FINRA Rule 6710 generally provides that a “List or Fixed Offering Price Transaction” is a primary market sale transaction sold on the first day of trading of a security, including an ABS but excluding any other SP: (i) by a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price.

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fn -

44 FINRA Rule 6710 provides that a “Reportable TRACE Transaction” is “any transaction in a TRACE-Eligible Security except: (1) a transaction that is not reported as specified in Rule 6730(e); and (2) a sale from an issuer to an underwriter(s) or initial purchaser(s) as part of an offering, except a sale of an Agency Pass-Through Mortgage-Backed Security as defined in [Rule 6710] paragraph (v) from a Securitizer as defined in paragraph (s) to any purchaser.”

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fn -

45 Municipal securities are included in the definition of “exempted securities” under Exchange Act Section 3(a)(12)(A)(ii), except with respect to Exchange Act Sections 15 and 17A, and are defined in Section 3(a)(29) as “securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond (as defined in section 103(c)(2) of the Internal Revenue Code of 1954) the interest on which is excludable from gross income under section 103(a)(1) of such Code if, by reason of the application of paragraph (4) or (6) of section 103(c) of such Code (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c)), paragraph (1) of such section 103(c) does not apply to such security.”

-
-
fn -

46 MSRB, “Specifications for Real-Time Reporting of Municipal Securities Transactions,” Version 3.0, July 2016, available at http://www.msrb.org/msrb1/RTRS/RTRS-Specifications.pdf.

-
-
fn -

47 Id.

-
-
fn -

48 Id.

-
-
fn -

49 Special Condition Indicator – The code is used to indicate that a trade is eligible for an extended reporting deadline other than the 15-minute requirement; that a trade is subject to a special condition; and/or that a customer trade did not include a mark-up, markdown, or commission or an inter-dealer transaction executed with or using the services of alternative trading system (ATS) with Form ATS on file with the SEC.

-
-
fn -

50 Supra note 46.

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-
fn -

51 Under MSRB Rule G-12(f)(iv)(A), an “Inter-Dealer Transaction Eligible for Comparison by a Clearing Agency Registered with the Commission” means a contract for purchase and sale between one dealer and another dealer, resulting in a contractual obligation for one such dealer to transfer municipal securities to the other dealer involved in the transaction, and which contract is eligible for comparison under the procedures of an automated comparison system operated by a registered clearing agency.

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-
fn -

52 MSRB Rule D-9 defines “customer” to mean “any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities.” Since Rule G-14 applies only to inter-dealer and customer trades, new issue transactions between an issuer and a broker-dealer, while not explicitly exempt from the reporting requirements, are not subject to the Rule because in this context an issuer is neither a customer nor a broker-dealer.

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-
fn -

53 See NYSE Rule 86(b)(2)(B) for types of orders that may be entered on NYSE Bonds.

-
-
fn -

54 17 CFR 240.17a-3(a)(6).

-
-
fn -

55 Id.

-
-
fn -

56 See Section I.E. (Recommendations and Projected Implementation Timeframe).

-
-
fn -

57 See supra note 3, Amended and Restated CAT NMS Plan at Appendix C, A.1(a)(iii) and Appendix D, 9.

-
-
fn -

58 See Bank for International Settlements, “Electronic trading in fixed income markets,” January 2016 (“BIS Report”), available at http://www.bis.org/publ/mktc07.pdf.

-
-
fn -

59 See Jack Bao, et al., “The Volcker Rule and Market-Making in Times of Stress,” December 8, 2016, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2836714.

-
-
fn -

60 Supra note 34.

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-
fn -

61 Supra note 32.

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fn -

62 FINRA conducted interviews with Securities Industry and Financial Markets Association (SIFMA), Financial Information Forum (FIF), and Bond Dealers of America (BDA).

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-
fn -

63 Supra note 43.

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fn -

64 See Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

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-
fn -

65 Id.

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-
fn -

66 Plan Adopting Release, supra note 4, at 84779-80.

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-
fn -

67 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

-
-
fn -

68 Letter to Brent J. Field, Secretary, SEC, from Mary Lou Kaenel, Managing Director, Financial Information Forum (July 8, 2016) (“FIF Letter”) at 13; Letter to Brent J. Field, Secretary, SEC, from Theodore R. Lazo, Managing Director and Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association (July 18, 2016) (“SIFMA Letter”) at 36.

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-
fn -

69 Plan Adopting Release, supra note 4, at 84904.

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-
fn -

70 Amended and Restated CAT NMS Plan, supra note 3 at Appendix C.

-
-
fn -

71 Plan Adopting Release, supra note 4, at 84905.

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-
fn -

72 Id. at 84904.

-
-
fn -

73 Letter to Brent J. Fields, Secretary, SEC, from Kathleen Weiss Hanley, Bolton-Perella Chair in Finance, Lehigh University, et al., (July 12, 2016) (“Hanley Letter”) at 4.

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-
fn -

74 Id. at 5-6.

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-
fn -

75 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

-
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fn -

76 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

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-
fn -

77 Id.

-
-
fn -

78 Hanley Letter, supra note 73, at 5.

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-
fn -

79 Plan Adopting Release, supra note 4, at 84904.

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-
fn -

80 Id. at 84905.

-
-
fn -

81 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
fn +

1 15 U.S.C. 78k-1(a)(3).

-
fn -

82 Plan Adopting Release, supra note 4, at 84984.

+
fn +

2 17 CFR 242.608.

-
fn -

83 Amended and Restated CAT NMS Plan, supra note 3, at Appendix C.

+
fn +

3 The Commission approved the CAT NMS Plan on November 15, 2016. See Securities Exchange Act Release No. 79318, 81 FR 84695 (Nov. 23, 2016).

-
fn -

84 Plan Adopting Release, supra note 4, at 84984.

+
fn +

4 See Securities and Exchange Act Release No. 79543 (Dec. 13, 2016), 81 FR 92901 (Dec. 20, 2016) (File No. 10-227).

-
fn -

85 Id.

+
fn +

5 See id. 81 FR at 92916.

-
fn -

86 Id.

+
fn +

6 See Letter from Barbara J. Comly, Executive Vice President, General Counsel, and Corporate Secretary, MIAX PEARL, to Brent J. Fields, Secretary, Commission, dated January 11, 2017.

-
fn -

87 See generally Amended and Restated CAT NMS Plan, supra note 3, Appendix C, A.6.

+
fn +

7 See Section 1.1 of the CAT NMS Plan. The term “Participant” is defined in the CAT NMS Plan as any Person that becomes a Participant as permitted by this agreement, in such Person’s capacity as a Participant in the Company (it being understood that the Participants shall comprise the “members” of the Company (as the term “member” is defined in Section 18-101(11) of the Delaware Act)). As defined in the CAT NMS Plan, the name of the “Company” is CAT NMS, LLC.

-
fn -

88 Id. at Appendix C.

+
fn +

8 See Section 1.1 of the CAT NMS Plan. The term “Person” is defined as means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

-
fn -

89 Id.

+
fn +

9 See Section 3.3 of the CAT NMS Plan. MIAX PEARL was approved as a national securities exchange on December 13, 2016. See Securities and Exchange Act Release No. 79543, 81 FR 92901 (Dec. 20, 2016) (File No. 10-227).

-
fn -

90 Hanley Letter, supra note 69, at 5.

+
fn +

10 See Section 3.3 of the CAT NMS Plan.

-
fn -

91 Plan Adopting Release, supra note 4, at 84779.

+
fn +

11 Id.

-
fn -

92 SIFMA Letter, supra note 68, at 36.

+
fn +

12 See supra note 6.

-
fn -

93 Id.

+
fn +

13 17 CFR 242.608(b)(3)(iii).

-
fn -

94 The term “OTC Equity Security” is defined in the CAT NMS Plan as “any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.” This would include all equity securities that are not NMS securities other than Restricted Equity Securities, which are not subject to prompt last sale reporting under FINRA rules, see FINRA Rules 6622(a)(3), 6420(f), and not reportable to FINRA’s Order Audit Trail System, see FINRA Rule 7410(l). Restricted Equity Securities are generally subject to trading restrictions, and the Participants believe inclusion of Restricted Equity Securities in the CAT should be considered only after the CAT is fully implemented.

+
fn +

14 17 CFR 242.608(a)(1).

\ No newline at end of file diff --git a/spider/files/data000011.html b/spider/files/data000011.html index 8d00804..0bd210f 100644 --- a/spider/files/data000011.html +++ b/spider/files/data000011.html @@ -1,323 +1,501 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: CAT NMS PLAN Rollout Plan (SEC Rule 613 Rollout Plan) - document_type: Plan - source: US/SEC/Plan/Rollout Plan - source_type: Rollout Plan + document_title: Joint Industry Plan (Notice of Proposed Plan Release 34-70892) + document_type: Notices + source: US/SEC/Notices/Notice of Proposed Plan + source_type: Notice of Proposed Plan language: English - citation: N/A -
pubdate: N/A effdate: N/A -

CAT NMS PLAN Rollout Plan (SEC Rule 613 Rollout Plan)

- Topic: CAT NMS, Rollout Plan - Compliance User: SRO/Broker-dealers + citation: Notice of Proposed Plan Release 34-70892 +
pubdate: November 15, 2013 effdate: N/A +

Joint Industry Plan (Notice of Proposed Plan Release 34-70892)

+ Topic: Joint Industry Plan (Notice of Proposed Plan Release 34-70892) + Compliance User: Self-Regulatory Organization Keywords: - NMS Plan Participant, - SRO, - Implementation Date, + Joint Industry Plan, + Selection Plan, -

SEC RULE 613 ROLLOUT PLAN

-

Event: CAT Processor Selected by NMS Plan Participants

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Implementation Date: Within two months after effectiveness of the approved NMS Plan (January 17, 2017)

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Event: Business Clock Synchronization for SROs and Broker-dealers

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Implementation Date: Within four months after effectiveness of the approved NMS Plan (March 15, 2017)

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Event: SROs begin submitting data to the central repository

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Implementation Date: Within one year after the effectiveness of the approved NMS Plan (November 15, 2017)

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Event: SROs must implement enhanced surveillance using CAT data

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Implementation Date: Within 14 months after effectiveness of the approved NMS Plan (January 15, 2018)

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Event: SRO members, except small members, must being submitting data to central repository

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Implementation Date: Within two years after effectiveness of the approved NMS Plan (November 15, 2018)

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Event: Small SRO members must begin submitting data to the central repository

-

Implementation Date: Within three years after effectiveness of the approved NMS Plan (November 15, 2019)

+

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-70892; File No. 4-668)

+

November 15, 2013

+

Joint Industry Plan; BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and Topaz Exchange, LLC; Notice of Filing of Proposed National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail

+
pubdate: November 16, 2013 effdate: N/A +

I. Introduction

+ Topic: I. Introduction + Compliance User: Self-Regulatory Organization + Keywords: + Securities Exchange Act - Section 11A, + SRO, + Selection Plan, + CAT NMS plan, + +

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”)1 and Rule 608 thereunder (“Rule 608”),2 notice is hereby given that on September 3, 2013, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc., and Topaz Exchange, LLC (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission”) the proposed National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Plan”). A copy of the Plan is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments on the Plan.

+
+
pubdate: November 17, 2013 effdate: N/A +

II. Background

+ Topic: II. Background + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + Selection Plan, + CAT NMS plan, + Sec Rule 613, + +

On July 11, 2012, the Commission adopted Rule 613 under the Exchange Act3 to require the SROs to jointly submit an NMS plan (the “CAT NMS Plan”) to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.4 Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail.5 In instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the CAT NMS Plan in a way that best achieves the objectives of the Rule.6

+

As described in more detail below, the SROs concluded that publication of a request for proposal was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the SROs and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan. The SROs also decided, for the reasons set forth below, to file the Plan to govern how the SROs will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how to review, evaluate, and narrow down the bids submitted in response to the request for proposal—and ultimately choosing the plan processor that would build, operate, and maintain the consolidated audit trail.

+
+
pubdate: November 18, 2013 effdate: N/A +

III. Description of the Plan

+ Topic: III. Description of the Plan + Compliance User: Self-Regulatory Organization + Keywords: + Rule 608, + SRO, + Purpose of the Plan, + +

Set forth in this Section III is the statement of the purpose of the Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,7 prepared and submitted by the SROs with the Plan to the Commission.8

+
pubdate: November 19, 2013 effdate: N/A +

A. Statement of Purpose

+ Topic: A. Statement of Purpose + Compliance User: Self-Regulatory Organization + Keywords: + Sec Rule 613, + CAT NMS plan, + Purpose of the Plan, + Selection Committe, + Plan Processor, + Participant, + Section (V) Selection Plan, + Bidder, + Shortlisted Bids, + Qualified Bids, + Voting Senior Officer, + +

Rule 613 requires the Participants to “jointly file . . . a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository.”9 The Plan being submitted for approval by the Participants governs the process of selecting a Plan Processor for the consolidated audit trail and developing the CAT NMS Plan.

+

As adopted, Rule 613 “expand[ed] the set of solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and [provided] the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule.”10 As the Commission noted in the Adopting Release, because of this expanded solution set, “the adopted Rule now requires the [Participants] to provide much more information and analysis to the Commission as part of their [CAT NMS Plan] submission.”11 Specifically, these requirements were incorporated into Rule 613 as a series of twelve “considerations” that the Participants must address in the CAT NMS Plan, including:

+

• the specific details and features of the CAT NMS Plan;

+

• the Participants’ analysis of the CAT NMS Plan’s costs and impact on competition, efficiency, and capital formation;

+

• the process in developing the CAT NMS Plan;

+

• information about the implementation of the CAT NMS Plan; and

+

• milestones for the creation of the consolidated audit trail.

+

As part of the discussion of these “considerations,” the Participants must include “cost estimates for the proposed solution, and a discussion of the costs and benefits of alternative [sic] solutions considered but not proposed.”12 In addition, the Commission noted that Rule 613 requires that the [Participants]: (1) Provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the [CAT NMS Plan] submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the [CAT NMS Plan] submitted; and (3) provide their own analysis of the submitted [CAT NMS Plan’s] potential impact on competition, efficiency, and capital formation.13

+

The Commission stated that these detailed requirements are “intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the [CAT NMS Plan] ultimately submitted by the [Participants].”14 Indeed, the Commission expressed its expectation that “the [Participants] will seriously consider various options as they develop the [CAT NMS Plan] to be submitted to the Commission for its consideration.”15

+

In light of the numerous specific requirements of Rule 613, on March 7, 2013, the Commission granted the Participants an extension of the time in which to file the CAT NMS Plan so that the Participants could ensure that all potential options for the consolidated audit trail could be considered. As noted in the Exemptive Letter, the Participants concluded that publication of a request for proposal (“RFP”) was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan.

+

The Participants published the RFP on February 26, 2013, and requested that any potential bidders notify the Participants of their intent to bid by March 5, 2013. Thirty-one firms submitted an intent to bid in response to the publication of the RFP; four of the firms were Participants or Affiliates of Participants.16

+

The Plan is intended to govern how the Participants will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, reviewing, evaluating, and narrowing down the Bids submitted in response to the RFP—and ultimately choosing the Plan Processor. Because of the important regulatory obligations that exist for each Participant with respect to the creation and operation of the consolidated audit trail, it is essential that each Participant contribute to the development of the CAT NMS Plan. The Participants recognize, however, that Participants or Affiliates of Participants may also be Bidders seeking to serve as the Plan Processor or may be included as part of a Bid. The Participants have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions, which are described below, designed to balance these competing factors. The Participants believe that the Plan achieves this balance by allowing all Participants to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.

+

Section III of the Plan establishes the overall governance structure the Participants have chosen.17 Specifically, the Participants propose establishing an Operating Committee responsible for formulating, drafting, and filing with the Commission the CAT NMS Plan and for ensuring the Participants’ joint obligations under Rule 613 are met in a timely and efficient manner. As set forth in Section III(B) of the Plan, each Participant will select one individual and one substitute to serve on the Operating Committee; however, other representatives of each Participant are permitted to attend Operating Committee meetings. Section III of the Plan also establishes the procedures for the Operating Committee, including provisions regarding meetings, Participants’ voting rights, and voting requirements.

+

Sections V and VI of the Plan18 set forth the process for the Participants’ evaluation of Bids and the selection process for narrowing down the Bids and choosing the Plan Processor.19 Pursuant to these Sections, the evaluation of Bids and selection of the Plan Processor will be performed by a Selection Committee composed of one senior officer from each Participant (referred to as the “Voting Senior Officer”).20 Because of the potential conflicts of interest noted above, the Plan includes multiple requirements to increase the independence of the Voting Senior Officer who participates on the Selection Committee on behalf of a Bidding Participant.21 The criteria set forth in Section V(D) of the Plan include requirements concerning the Voting Senior Officer’s job responsibilities, decision-making authority, and reporting, and require that the Bidding Participant establish functional separation between its Plan responsibilities and its business/commercial (including market operations) functions. In addition, the criteria prohibit any disclosure of information regarding the Bid to the Voting Senior Officer and prohibit the Voting Senior Officer from disclosing any non-public information gained in his or her role as such. These criteria are intended to insulate the Voting Senior Officer from any inside knowledge regarding the Bid (while also preventing any information about the evaluation process from being shared with staff preparing the Bidding Participant’s Bid) and to reduce any potential personal motivation that may exist that could improperly influence a Voting Senior Officer’s decisions.22

+

Because of the integral role played by the Selection Committee, any action requiring a vote by the Selection Committee under the Plan can only be taken in a meeting in which all Participants entitled to vote are present. All votes taken by the Selection Committee are confidential and non-public, and a Participant’s individual votes will not be disclosed to other Participants or to the public. For this reason, the Plan provides that votes of the Selection Committee will be tabulated by an independent third party approved by the Operating Committee. Moreover, the Participants do not anticipate that aggregate votes or anonymized voting distribution numbers will be provided to the Participants following votes by the Selection Committee.

+

The Plan divides the review and evaluation of Bids and selection of the Plan Processor into four separate stages. After Bids are received,23 Section VI(A) of the Plan provides that the Selection Committee will review all submitted Bids to determine which Bids are Qualified Bids (i.e., Bids that contain sufficient information to allow the Voting Senior Officers to meaningfully assess and evaluate the Bid).24 At this initial stage, if two-thirds or more of the Participants determine that a Bid does not meet the threshold for a Qualified Bid, the Bid will be eliminated from further consideration. The Participants believe this initial step will ensure that only those Bids meeting a minimum level of detail and sufficiency will move forward in the process, and insufficient Bids can be eliminated.

+

Following the elimination of Bids that are not Qualified Bids, each Qualified Bidder will be provided the opportunity to present its Bid to the Selection Committee. After the Qualified Bidders have made their presentations, the Selection Committee will establish a “shortlist” of Bids that will move on in the process. The Plan provides that, if there are six or fewer Qualified Bids submitted, all of those Bids will be selected as “Shortlisted Bids.”25 If there are more than six but fewer than eleven Qualified Bids, the Selection Committee will choose five Shortlisted Bids, and if there are eleven or more Qualified Bids, the Selection Committee will choose 50% of the Qualified Bids as Shortlisted Bids.26

+

When voting to select the Shortlisted Bids from among the Qualified Bids, each Voting Senior Officer must rank his or her selections, and the points assigned to the rankings increase in single-point increments. Thus, for example, if five Shortlisted Bids are to be chosen, each Participant will vote for its top five choices in rank order, with the first choice being given five points, the second choice four points, the third choice three points, the fourth choice two points, and the fifth choice one point. The Participants considered numerous alternative voting procedures but determined that the proposed process appropriately balances the need to differentiate among Qualified Bids while also ensuring that each Qualified Bid receives due consideration for inclusion as a Shortlisted Bid since each Voting Senior Officer must select multiple Qualified Bids for inclusion as a Shortlisted Bid. Further, while the Participants believe that the independence indicia sufficiently address any potential conflicts of interest that may arise with respect to Bids with which a Participant is affiliated, the proposed process will further

+

mitigate potential conflicts because each Voting Senior Officer must select multiple unaffiliated Qualified Bids. The Participants believe this step is appropriate both to ensure that Bidders submit a complete and thorough Bid initially and so that Qualified Bidders will know whether they have a realistic opportunity to be selected as the Plan Processor after the CAT NMS Plan is approved.

+

To further reduce the impact of potential conflicts of interest in choosing Shortlisted Bids, the Plan also provides that at least two Non-SRO Bids must be included as Shortlisted Bids, provided there are two Non-SRO Bids that are Qualified Bids.27 If, following the vote, no Non-SRO Bids have been selected as Shortlisted Bids, the Plan requires that the two Non-SRO Bids receiving the highest cumulative votes be added as Shortlisted Bids. If, in this scenario, a single Non-SRO Bid was a Qualified Bid, that Non-SRO Bid would be added as a Shortlisted Bid.

+

Following the selection of Shortlisted Bids, the Participants will identify the optimal proposed solution(s) for the consolidated audit trail for inclusion in the CAT NMS Plan for submission to the Commission. Following approval of the CAT NMS Plan by the Commission, the Selection Committee will determine, by majority vote, which Shortlisted Bidders will be provided the opportunity to revise their Bids in light of the provisions in the final, approved CAT NMS Plan. In making a decision whether to permit a Shortlisted Bidder to revise its Bid, the Selection Committee will consider the provisions in the CAT NMS Plan as well as the content of the Shortlisted Bidder’s initial Bid. To reduce potential conflicts of interest, the Plan also provides that if a Bid submitted by or including a Bidding Participant or an Affiliate of a Bidding Participant is a Shortlisted Bidder, that Bidding Participant will be recused from all votes regarding whether a Shortlisted Bidder will be permitted to revise its Bid.

+

After any permitted revisions have been received, the Selection Committee will select the Plan Processor from the Shortlisted Bids in two rounds of voting where, subject to the recusal provision described below, each Participant has one vote. In the first round, each Participant will select a first and second choice, with the first choice receiving two points and the second choice receiving one point. The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.28 In the event of a tie, the tie will be broken by assigning one point per vote to the tied Shortlisted Bids, and the Shortlisted Bid with the most votes will advance. If this procedure fails to break the tie, a revote will be taken on the tied Bids with each vote receiving one point. If the tie persists, the Participants will identify areas for discussion, and revotes will be taken until the tie is broken.

+

Once two Shortlisted Bids have been chosen, the Participants will vote for a single Shortlisted Bid from the final two to determine the Plan Processor. If one or both of the final Bids is submitted by or includes a Bidding Participant or an Affiliate of a Bidding Participant, the Bidding Participant must recuse itself from the final vote. In the event of a tie, a revote will be taken. If the tie persists, the Participants will identify areas for discussion and, following these discussions, revotes will be taken until the tie is broken. As set forth in Section VII of the Plan, following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by Rule 608.

+
+
pubdate: November 20, 2013 effdate: N/A +

B. Governing or Constituent Documents

+ Topic: B. Governing or Constituent Documents + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: November 21, 2013 effdate: N/A +

C. Implementation of Plan

+ Topic: C. Implementation of Plan + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan - Section VI, + CAT NMS plan, + +

The terms of the Plan will be operative immediately upon approval of the Plan by the Commission. The Participants have announced that Bids must be submitted four weeks after the Commission’s approval of the Plan. The Participants will begin reviewing and evaluating the Bids pursuant to Section VI of the Plan upon receipt of the Bids.

+

The Participants anticipate that it will take seven months to evaluate the Bids and submit the CAT NMS Plan to the Commission pursuant to Sections VI(A) and (B) of the Plan.29 As noted above, upon approval of the CAT NMS Plan, the Plan will automatically terminate. The review of revised Shortlisted Bids and the selection of the Plan Processor will be undertaken as set forth in Sections VI(D) and (E) of the Plan as those sections are incorporated into the CAT NMS Plan.

+
+
pubdate: November 22, 2013 effdate: N/A +

D. Development and Implementation Phases

+ Topic: D. Development and Implementation Phases + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: November 23, 2013 effdate: N/A +

E. Analysis of Impact on Competition

+ Topic: E. Analysis of Impact on Competition + Compliance User: Self-Regulatory Organization + Keywords: + Exchange Act - Section 11A, + Bidding Participants, + +

The Plan does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Participants do not believe that the Plan introduces terms that are unreasonably discriminatory for the purposes of Section 11A(c)(1)(D) of the Exchange Act. As noted in Section A, the Participants are aware that potential conflicts of interest are raised because a Participant, or an affiliate of a Participant, may be both submitting a Bid (or participating in a Bid) and participating in the evaluation of Bids to select the Plan Processor. As described in Section A, the Plan includes multiple provisions designed to mitigate the potential impact of these conflicts by imposing restrictions on the Voting Senior Officer and by requiring the recusal of Bidding Participants for certain votes taken by the Selection Committee. In addition, the Plan requires that at least two Non-SRO Bids be Shortlisted Bids to ensure Non-SRO Bids are given full and fair consideration.

+
+
pubdate: November 24, 2013 effdate: N/A +

F. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan

+ Topic: F. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan - Section III, + Selection Plan - Section II, + +

The Participants have no written understandings or agreements relating to interpretations of, or participation in, the Plan other than those set forth in the Plan itself. Section III(F)(2)(a) of the Plan provides that interpretations of the Plan require approval by a majority of Participants entitled to vote. Section II(B) of the Plan sets forth how any entity registered as a national securities exchange or national securities association under the Exchange Act may become a Participant.

+
+
pubdate: November 25, 2013 effdate: N/A +

G. Approval of Amendment of the Plan

+ Topic: G. Approval of Amendment of the Plan + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: November 26, 2013 effdate: N/A +

H. Terms and Conditions of Access

+ Topic: H. Terms and Conditions of Access + Compliance User: Self-Regulatory Organization + Keywords: + Sec Rule 613, + Selection Plan - Section II, + +

Each currently approved national securities exchange and national securities association subject to Rule 613(a)(1) is a Participant in the Plan. Section II(B) of the Plan provides that any entity approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new

+

Participant’s name in Section II of the Plan) and submitting such amendment to the Commission for approval; and (2) providing each then-current Participant with a copy of such executed Plan.

+
+
pubdate: November 27, 2013 effdate: N/A +

I. Method of Determination and Imposition, and Amount of, Fees and Charges

+ Topic: I. Method of Determination and Imposition, and Amount of, Fees and Charges + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: November 28, 2013 effdate: N/A +

J. Method and Frequency of Processor Evaluation

+ Topic: J. Method and Frequency of Processor Evaluation + Compliance User: Self-Regulatory Organization + Keywords: +

Not applicable.

+
+
pubdate: November 29, 2013 effdate: N/A +

K. Dispute Resolution

+ Topic: K. Dispute Resolution + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan - Section III, + CAT NMS plan, + Sec Rule 613, + Rule 608, + +

The Plan does not include specific provisions regarding resolution of disputes between or among Participants. Section III(B) of the Plan provides for each Participant to designate an individual to represent the Participant as a member of an Operating Committee. Section III(A) of the Plan provides that the Operating Committee is responsible for: (1) formulating, drafting, and filing with the Commission the CAT NMS Plan; and (2) ensuring the Participants’ obligations under Rule 613 are met in a timely and efficient manner. Within the areas of its responsibilities and authority as set forth in the Plan, decisions made or actions taken by the Operating Committee, directly or by duly delegated individuals or Subcommittees, shall be binding upon each Participant, without prejudice to the rights of any Participant to seek redress from the Commission pursuant to Rule 608 or in any other appropriate forum.

+
+
+
pubdate: November 30, 2013 effdate: N/A +

IV. Solicitation of Comments

+ Topic: IV. Solicitation of Comments + Compliance User: Self-Regulatory Organization + Keywords: + Submission of Comments, + Electronic Comments, + Paper Comments, + File Number 4-668, + 5 U.S.C. 552, + +

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Plan is consistent with the Act.

+

Comments may be submitted by any of the following methods:

+

Electronic comments:

+

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

+

• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the subject line.

+

Paper comments:

+

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

+

All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Plan that are filed with the Commission, and all written communications relating to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

+

By the Commission.

+

Kevin O’Neill

+

Deputy Secretary

+
+
pubdate: December 01, 2013 effdate: N/A +

EXHIBIT A

+ Topic: EXHIBIT A + Compliance User: Self-Regulatory Organization + Keywords: + Consolidated Audit trail, + Plan Processor Evaluation and Selection Plan, + +

NATIONAL MARKET SYSTEM PLAN GOVERNING THE PROCESS OF SELECTING A PLAN PROCESSOR AND DEVELOPING A PLAN FOR

+

THE CONSOLIDATED AUDIT TRAIL

+

SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 608 OF REGULATION NMS UNDER THE SECURITIES EXCHANGE ACT OF 1934

+

Consolidated Audit Trail: Plan Processor Evaluation and Selection Plan

+

Preamble

+

This Plan governs the process of: (1) evaluating and selecting a Plan Processor for the consolidated audit trail; and (2) developing a national market system plan pursuant to SEC Rule 613 to create, implement, and maintain a consolidated audit trail. This Plan will automatically terminate upon the SEC’s approval of the CAT NMS Plan. The Participants developed this Plan pursuant to Rule 608(a)(3) of Regulation NMS under the Exchange Act, which authorizes the Participants to act jointly in preparing, filing, and implementing national market system plans.

+

I. Definitions

+

(A) An “Affiliate” of an entity means any entity controlling, controlled by, or under common control with such entity.

+

(B) “Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant.

+

(C) “Bid” means a proposal submitted by a Bidder in response to the RFP.

+

(D) “Bidder” means any entity, or any combination of separate entities, submitting a Bid.

+

(E) “Bidding Participant” means a Participant that: (1) submits a Bid; (2) is an

+

Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid.

+

(F) “CAT NMS Plan” means the NMS Plan to be jointly submitted to the Commission by the Participants pursuant to paragraph (a)(1) of SEC Rule 613.

+

(G) “Commission” or “SEC” means the United States Securities and Exchange Commission.

+

(H) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

+

(I) “Material Contract” means any contract resulting in a total cost to all Participants of more than $1,000,000.

+

(J) “Material Subcontractor” means any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year. An entity will not be considered a “Material Subcontractor” solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.

+

(K) “NMS Plan” shall have the same meaning as “[n]ational market system plan” provided in Rule 600(b)(43) of Regulation NMS under the Exchange Act.

+

(L) “Non-SRO Bid” means a Bid that does not include a Bidding Participant.

+

(M) “Operating Committee” shall have the meaning provided in Section III of the Plan.

+

(N) “Participant” means a party to the Plan.

+

(O) “Plan” means the plan set forth in this instrument, as amended from time to time in accordance with its provisions.

+

(P) “Plan Processor” means the entity jointly selected by the Participants pursuant to SEC Rule 613, the Plan, and the CAT NMS Plan to perform the consolidated audit trail processing functions required by SEC Rule 613 and set forth in the RFP.

+

(Q) “Qualified Bid” means a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee. When evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment. The determination of whether a Bid is a Qualified Bid shall be determined pursuant to the process set forth in Section VI of the Plan.

+

(R) “Qualified Bidder” means a Bidder that has submitted a Qualified Bid.

+

(S) “RFP” means the “Consolidated Audit Trail National Market System Plan Request for Proposal” published by the Participants on February 26, 2013, as amended from time to time.

+

(T) “Selection Committee” means the committee formed pursuant to Section V of the Plan.

+

(U) “SEC Rule 608” means Rule 608 of Regulation NMS under the Exchange Act.

+

(V) “SEC Rule 613” means Rule 613 of Regulation NMS under the Exchange Act.

+

(W) “Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section VI(B) of the Plan.

+

(X) “Shortlisted Bidder” means a Qualified Bidder that has submitted a Bid selected as a Shortlisted Bid.

+

(Y) “Voting Senior Officer” means the senior officer of a Participant chosen to serve on the Selection Committee pursuant to Section V of the Plan.

+

II. Participants

+

(A) List of Participants

+

The Participants are as follows:

+

(1) BATS Exchange, Inc.

+

(2) BATS Y-Exchange, Inc.

+

(3) BOX Options Exchange LLC

+

(4) C2 Options Exchange, Incorporated

+

(5) Chicago Board Options Exchange, Incorporated

+

(6) Chicago Stock Exchange, Inc.

+

(7) EDGA Exchange, Inc.

+

(8) EDGX Exchange, Inc.

+

(9) Financial Industry Regulatory Authority, Inc.

+

(10) International Securities Exchange, LLC

+

(11) Miami International Securities Exchange LLC

+

(12) NASDAQ OMX BX, Inc.

+

(13) NASDAQ OMX PHLX LLC

+

(14) The Nasdaq Stock Market LLC

+

(15) National Stock Exchange, Inc.

+

(16) New York Stock Exchange LLC

+

(17) NYSE MKT LLC

+

(18) NYSE Arca, Inc.

+

(19) Topaz Exchange, LLC

+

(B) Admission of New Participants

+

Any entity approved by the SEC as a national securities exchange or national securities association under the Exchange Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new Participant’s name in Section II of the Plan) and submitting such amendment to the SEC for approval; and (2) providing each then-current Participant with a copy of such executed Plan. The amendment shall be effective when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

+

(C) Withdrawal of Participants

+

(1) A Participant may withdraw from the Plan upon written notice to each of the other Participants of no less than 30 days. The written notice must include the legal basis for the Participant's withdrawal from the Plan, including, if applicable, any required approvals or orders issued by the SEC.

+

(2) Withdrawal of a Participant shall be effectuated by an amendment to the Plan, including, if applicable, approval of any such amendment by the SEC.

+

(3) Notwithstanding a Participant’s withdrawal from the Plan, the Participant shall remain liable for, and shall pay upon demand:

+

(a) its proportionate share of any costs, including those resulting from any Material Contracts, accrued or incurred before the effectiveness of the Participant’s withdrawal;

+

(b) its proportionate share of any liabilities arising while the organization was a Participant that are based on actions jointly undertaken by the Participants pursuant to the Plan or in furtherance of the Participants’ obligations pursuant to SEC Rule 613; and

+

(c) any costs incurred as a result of the Participant’s withdrawal from the Plan.

+

(4) Except as aforesaid, a withdrawing Participant shall have no further obligation under the Plan or to any of the other Participants with respect to the period following the effectiveness of its withdrawal.

+

III. Operating Committee

+

(A) Authority

+

The Operating Committee shall be responsible for: (1) formulating, drafting, and filing with the SEC the CAT NMS Plan; and (2) ensuring the Participants’ obligations under SEC Rule 613 are met in a timely and efficient manner. Within the areas of its responsibilities and authority as set forth in the Plan, decisions made or actions taken by the Operating Committee, directly or by duly delegated individuals or Subcommittees, shall be binding upon each Participant, without prejudice to the rights of any Participants to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

+

(B) Composition

+

(1) Each Participant shall select from its staff one individual (the “primary representative”) to represent the Participant as a member of the Operating Committee, together with a substitute(s) for such individual. In the case of Affiliated Participants, one individual may be the primary representative for all or some of the Affiliated Participants, and another individual may be the substitute for all or some of the Affiliated Participants.

+

(2) Regular meetings of the Operating Committee may be attended by each Participant’s primary representative and its substitute(s), and may be attended by other representatives of the Participant.

+

(3) Any organization that is not a Participant but has an actively pending Form 1 Application on file with the Commission to become a national securities exchange will be permitted to appoint one primary representative and one alternate representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer/advisor. If the organization’s Form 1 Application is withdrawn, returned, or otherwise not actively pending with the Commission for any reason, then the organization will no longer be eligible to be represented in the Operating Committee meetings. The Operating Committee shall have the discretion, in limited instances, to deviate from this policy if, as indicated by majority vote, the Operating Committee agrees that circumstances so warrant.

+

(4) Nothing in this section or elsewhere within the Plan shall authorize any person or organization other than Participants and their representatives to participate on the Operating Committee in any manner.

+

(C) Meetings

+

(1) Quorum

+

(a) Any action requiring a vote can only be taken at a meeting in which a quorum of all Participants is present. For actions requiring a majority vote of all Participants, a quorum of greater than 50% of all Participants entitled to vote must be present at the meeting before such a vote may be taken. For actions requiring at least a two-thirds vote of all Participants, a quorum of at least two-thirds of all Participants entitled to vote must be present at the meeting before such a vote may be taken.

+

(b) For purposes of establishing a quorum, a Participant is considered present at a meeting only if a Participant’s primary representative or substitute is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

+

(c) Any Participant recused from voting on a particular action pursuant to Paragraph (E) below shall not be considered to be “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

+

(2) Frequency

+

Meetings of the Operating Committee shall be held as needed at such times and locations as shall from time to time be determined by the Operating Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Operating Committee deems acceptable.

+

(3) Written Consent

+

Any action may be taken without a meeting if a consent in writing, setting forth the action so taken, is sent to, via physical or electronic means, and agreed to by all Participants entitled to vote with respect to the subject matter thereof. The action taken shall be effective when the minimum number of Participants entitled to vote have approved the action, unless the consent specifies a different effective date.

+

(4) Minutes

+

Minutes of each meeting of the Operating Committee shall be taken.

+

(5) Subcommittees

+

In addition to the Selection Committee established pursuant to Section V of the Plan, the Operating Committee may establish any Subcommittees it deems necessary in fulfilling its obligations under the Plan. Membership on any Subcommittee is open to any Participant indicating a desire to participate. Minutes of each meeting of any Subcommittee shall be taken.

+

(D) Voting Rights

+

(1) Unless recused pursuant to Paragraph (E) below, each Participant shall have one vote on all matters considered by the Operating Committee.

+

(2) Where one individual represents more than one Affiliated Participant, either as the primary representative or as a substitute, such individual will have the right to vote on behalf of each such Affiliated Participant. The substitute(s) may participate in deliberations of the Operating Committee and shall be considered a voting member thereof only in the absence of the primary representative.

+

(E) Conflicts and Recusals

+

A Participant may recuse itself from voting on any matter under consideration by the Operating Committee if the Participant determines that voting on such matter raises a conflict of interest. Except as provided in Sections V(B)(2) and V(B)(3) of the Plan, no Participant is automatically recused from voting on any matter.

+

(F) Voting Requirements

+

(1) Supermajority Voting Requirements

+

The following actions require approval by at least two-thirds of Participants entitled to vote:

+

(a) Amendments to the Plan, other than amendments to add a new Participant; and

+

(b) Material Contracts.

+

(2) Majority Voting Requirements

+

The following actions require approval by a majority of Participants entitled to vote:

+

(a) Interpretations of the Plan; and

+

(b) Any other matters not specified as requiring a supermajority vote.

+

(G) Interpretations of Regulations

+

Interpretative questions arising during the time for which the Plan is operative will be presented to the Operating Committee, which will determine whether to seek interpretive guidance from the Commission or other regulatory body and, if so, in what form.

+

(H) Delegated Authority Within the areas of its responsibilities, the Operating Committee may delegate an individual or Subcommittee to make decisions or take action on behalf of the Operating Committee. Any decision made or action taken by such duly delegated individual or Subcommittee within the scope of such delegation shall be binding upon each Participant.

+

IV. Plan Amendments

+

(A) General Amendments

+

Except with respect to the addition of new Participants, any proposed change in, addition to, or deletion from the Plan shall be effected by means of a written amendment to the Plan that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to SEC Rule 608, or otherwise becomes effective under SEC Rule 608.

+

(B) New Participants

+

With respect to new Participants, an amendment to the Plan may be effected by the new national securities exchange or national securities association in accordance with Section II of the Plan.

+

V. Selection Committee

+

The Participants shall establish a Selection Committee in accordance with this Section V to:

+

(1) evaluate and review Bids; and (2) select the Plan Processor.

+

(A) Composition

+

Each Participant shall select from its staff one senior officer (“Voting Senior Officer”) to represent the Participant as a member of a Selection Committee. In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual will have the right to vote on behalf of each such Affiliated Participant.

+

(B) Voting

+

(1) Unless recused pursuant to Paragraph (2) or (3) below, each Participant shall have one vote on all matters considered by the Selection Committee.

+

(2) No Bidding Participant shall vote on whether a Shortlisted Bidder will be permitted to revise its Bid pursuant to Section VI(D)(1) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+

(3) No Bidding Participant shall vote in the second round set forth in Section VI(E)(4) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is part of the second round.

+

(4) All votes by the Selection Committee shall be confidential and non-public. All such votes will be tabulated by an independent third party approved by the Operating Committee, and a Participant’s individual votes will not be disclosed to other Participants or to the public.

+

(C) Quorum

+

(1) Any action requiring a vote by the Selection Committee can only be taken at a meeting in which all Participants entitled to vote are present. Meetings of the Selection Committee shall be held as needed at such times and locations as shall from time to time be determined by the Selection Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Selection Committee deems acceptable.

+

(2) For purposes of establishing a quorum, a Participant is considered present at a meeting only if the Participant’s Voting Senior Officer is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

+

(3) Any Participant recused from voting on a particular action pursuant to Paragraph (B) above shall not be considered “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

+

(D) Qualifications for Voting Senior Officer of Bidding Participants

+

The following criteria must be met before a Voting Senior Officer is eligible to represent a Bidding Participant and serve on the Selection Committee:

+

(1) the Voting Senior Officer is not responsible for the Bidding Participant’s market operations, and is responsible primarily for the Bidding Participant’s legal and/or regulatory functions, including functions related to the formulation and implementation of the Bidding Participant’s legal and/or regulatory program;

+

(2) the Bidding Participant has established functional separation of its legal and/or regulatory functions from its market operations and other business or commercial objectives;

+

(3) the Voting Senior Officer ultimately reports (including through the Bidding Participant’s CEO or Chief Legal Officer/General Counsel) to an independent governing body that determines or oversees the Voting Senior Officer’s compensation, and the Voting Senior Officer does not receive any compensation (other than what is determined or overseen by the independent governing body) that is based on achieving business or commercial objectives;

+

(4) the Voting Senior Officer does not have responsibility for any non-regulatory functions of the Bidding Participant, other than the legal aspects of the organization performed by the Chief Legal Officer/General Counsel or the Office of the General Counsel;

+

(5) the ultimate decision making of the Voting Senior Officer position is tied to the regulatory effectiveness of the Bidding Participant, as opposed to other business or commercial objectives;

+

(6) promotion or termination of the Voting Senior Officer is not based on achieving business or commercial objectives;

+

(7) the Voting Senior Officer has no decision-making authority with respect to the development or formulation of the Bid submitted by or including the Participant or an Affiliate of the Participant; however, the staff assigned to developing and formulating such Bid may consult with the Voting Senior Officer, provided such staff members cannot share information concerning the Bid with the Voting Senior Officer;

+

(8) the Voting Senior Officer does not report to any senior officers responsible for the development or formulation of the Bid submitted by or including the Participant or by an Affiliate of the Participant; however, joint reporting to the Bidding Participant’s CEO or similar executive officer by the Voting Senior Officer and senior staff developing and formulating such Bid is permissible, but the Bidding Participant’s CEO or similar executive officer cannot share information concerning such Bid with the Voting Senior Officer;

+

(9) the compensation of the Voting Senior Officer is not separately tied to income earned if the Bid submitted by or including the Participant or an Affiliate of the Participant is selected; and

+

(10) the Voting Senior Officer, any staff advising the Voting Senior Officer, and any similar executive officer or member of an independent governing body to which the Voting Senior Officer reports may not disclose to any person any non-public information gained during the review of Bids, presentation by Qualified Bidders, and selection process. Staff advising the Voting Senior Officer during the Bid review, presentation, and selection process may not include the staff, contractors, or subcontractors that are developing or formulating the Bid submitted by or including a Participant or an Affiliate of the Participant.

+

VI. RFP Bid Evaluation and Plan Processor Selection

+

(A) Initial Bid Review to Determine Qualified Bids

+

(1) The Selection Committee shall review all Bids in accordance with the process developed by the Selection Committee.

+

(2) After review, the Selection Committee shall vote on each Bid to determine whether such Bid is a Qualified Bid. A Bid that is deemed unqualified by at least a two-thirds vote of the Selection Committee will not be deemed a Qualified Bid and will be eliminated individually from further consideration.

+

(B) Selection of Shortlisted Bids

+

(1) Each Qualified Bidder shall be given the opportunity to present its Bid to the Selection Committee. Following the presentations by Qualified Bidders, the Selection Committee shall review and evaluate the Qualified Bids to select the Shortlisted Bids in accordance with the process in this Paragraph (B).

+

(2) If there are six or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.

+

(3) If there are more than six Qualified Bids but fewer than eleven Qualified Bids, the Selection Committee shall select five Qualified Bids as Shortlisted Bids, subject to the requirement in Paragraph (d) below. Each Voting Senior Officer shall select a first, second, third, fourth, and fifth choice from among the Qualified Bids.

+

(a) A weighted score shall be assigned to each choice as follows:

+

• First – 5 points

+

• Second – 4 points

+

• Third – 3 points

+

• Fourth – 2 points

+

• Fifth – 1 point

+

(b) The five Qualified Bids receiving the highest cumulative scores will be Shortlisted Bids.

+

(c) In the event of a tie to select the five Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

+

(d) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section VI(B)(3) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section VI(B)(3), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

+

(4) If there are eleven or more Qualified Bids, the Selection Committee shall select fifty percent of the Qualified Bids as Shortlisted Bids, subject to the requirement in Paragraph (d) below. If there is an odd number of Qualified Bids, the number of Shortlisted Bids chosen shall be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, then seven Shortlisted Bids will be selected). Each Voting Senior Officer shall select as many choices as Shortlisted Bids to be chosen.

+

(a) A weighted score shall be assigned to each choice in single point increments as follows:

+

• Last – 1 point

+

• Next-to-Last – 2 points

+

• Second-from-Last – 3 points

+

• Third-from-Last – 4 points

+

• Fourth-from-Last – 5 points

+

• Fifth-from-Last – 6 points

+

For each additional Shortlisted Bid that must be chosen, the points assigned will increase in single point increments.

+

(b) The fifty percent of Qualified Bids (or, if there is an odd number of Qualified Bids, the next whole number above fifty percent of Qualified Bids) receiving the highest cumulative scores will be Shortlisted Bids.

+

(c) In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

+

(d) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section VI(B)(4) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section VI(B)(4), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

+

(C) Formulation of the CAT NMS Plan

+

(1) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the consolidated audit trail and provide descriptions of such proposed solutions for inclusion in the CAT NMS Plan. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

+

(2) The Participants shall incorporate information on optimal proposed solutions in the CAT NMS Plan, including cost-benefit information as required by SEC Rule 613.

+

(D) Review of Shortlisted Bids Under the CAT NMS Plan

+

(1) Following approval of the CAT NMS Plan by the SEC, Shortlisted Bidders may be permitted to revise their Bids based on the provisions in the approved CAT NMS Plan, including further discussions if determined to be necessary by the Selection Committee. A Shortlisted Bidder will be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to the recusal provision in Section V(B)(2) above, that revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan. A Shortlisted Bidder may not revise its Bid unless approved to do so by the Selection Committee pursuant to this paragraph.

+

(2) The Selection Committee shall review and evaluate all Shortlisted Bids, including any permitted revisions thereto submitted by Shortlisted Bidders. In performing the review and evaluation, the Selection Committee may consult with the Advisory Committee established pursuant to paragraph (b)(7) of SEC Rule 613.

+

(E) Selection of Plan Processor Under the CAT NMS Plan

+

(1) Under the CAT NMS Plan, there will be two rounds of voting by the Selection Committee to select the Plan Processor from among the Shortlisted Bidders. Each round shall be scored independently of prior rounds of voting, including the scoring to determine the Shortlisted Bids under Section VI(B) of the Plan.

+

(2) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in the second round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in the second round. Until the second round, Bidding Participants may vote for any Shortlisted Bid.

+

(3) First Round Voting by the Selection Committee

+

(a) In the first round of voting, each Voting Senior Officer shall select a first and second choice from among the Shortlisted Bids.

+

(b) A weighted score shall be assigned to each choice as follows:

+

• First – 2 points

+

• Second – 1 point

+

(c) The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.

+

(d) In the event of a tie that would result in more than two Shortlisted Bids advancing to the second round, the tie will be broken by assigning one point per vote, with the Shortlisted Bid(s) receiving the highest number of votes advancing to the second round. If, at this point, the Shortlisted Bids remain tied, a revote will be taken with each vote receiving one point. If the revote results in a tie, the Participants shall identify areas for further discussion and, following any such discussion, voting will continue until two Shortlisted Bids are selected to advance to the second round.

+

(4) Second Round Voting by the Selection Committee

+

(a) In the second round of voting, each Voting Senior Officer, subject to the recusal provisions in Paragraph (E)(2) above, shall vote for one Shortlisted Bid.

+

(b) The Shortlisted Bid receiving the most votes in the second round shall be selected, and the proposed entity included in the Shortlisted Bid to serve as the Plan Processor shall be selected as the Plan Processor.

+

(c) In the event of a tie, a revote will be taken. If the revote results in a tie, the Participants shall identify areas for further discussions with the two Shortlisted Bidders. Following any such discussions, voting will continue until one Shortlisted Bid is selected.

+

VII. Implementation

+

Within two months after effectiveness of the CAT NMS Plan, the Participants will jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Section VI of the Plan and as incorporated into the CAT NMS Plan. Following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by SEC Rule 608.

+

VIII. Applicability of the Exchange Act

+

The rights and obligations of the Participants in respect of the matters covered by the Plan shall at all times be subject to any applicable provisions of the Exchange Act, as amended, and any rules and regulations promulgated thereunder.

+

IX. Counterparts and Signatures

+

The Plan may be executed in any number of counterparts, no one of which need contain all signatures of all Participants, and as many of such counterparts as shall together contain all such signatures shall constitute one and the same instrument.

+

IN WITNESS WHEREOF, this Plan has been executed as of the 23rd day of August 2013 by each of the parties hereto.

+

+ +

+
fn +

1 15 U.S.C. 78k-1.

+
+
fn +

2 17 CFR 242.608.

+
+
fn +

3 17 CFR 242.613.

+
+
fn +

4 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Adopting Release”).

+
+
fn +

5 Id. at 45742.

+
+
fn +

6 Id.

+
+
fn +

7 See 17 CFR 242.608(a)(4) and (a)(5).

+
+
fn +

8 See Letter from the SROs, to Elizabeth Murphy, Secretary, Commission, dated August 23, 2013.

+
+
fn +

9 17 CFR 242.613(a)(1). Rule 613(a) requires that the Participants jointly file the CAT NMS Plan “on or before 270 days from the date of publication of the Adopting Release in the Federal Register.” The release adopting Rule 613 was published in the Federal Register on August 1, 2012. See Adopting Release, supra note 4. On March 7, 2013, the Commission provided a temporary exemption to the Participants to permit them to file the CAT NMS Plan by December 6, 2013. See Exchange Act Release No. 69060 (March 7, 2013), 78 FR 15771 (March 12, 2013) (“Exemptive Order”); see also Letter from Robert L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, dated February 7, 2013 (“Exemptive Letter”).

+
+
fn +

10 Adopting Release, supra note 4 at 45725.

+
+
fn +

11 Id. See also id. at 45789.

+
+
fn +

12 Id. at 45789.

+
+
fn +

13 Id. at 45726.

+
+
fn +

14 Id. at 45725.

+
+
fn +

15 Id. at 45725 and 45789.

+
+
fn +

16 Since that time, six firms—including one Participant and one Affiliate of a Participant—have formally notified the Participants that they will not submit Bids as primary bidders. A list of firms that submitted an intent to bid is located on the Participants’ website at catnmsplan.com.

+
+
fn +

17 Section I of the Plan sets forth the definitions used throughout the Plan. Section II of the Plan lists the Participants, as well as establishing the requirements to admit new Participants or to withdraw as a Participant.

+
+
fn +

18 Section IV of the Plan governs amendments to the Plan. In general, except with respect to the addition of new Participants, any change to the Plan requires a written amendment that sets forth the change, is executed by over two-thirds of the Participants, and is approved by the Commission pursuant to Rule 608 or otherwise becomes effective under Rule 608.

+
+
fn +

19 Initial steps in the evaluation and selection process will be performed pursuant to the Plan; the final two rounds of evaluation and voting, as well as the final selection of the Plan Processor, will be performed pursuant to the CAT NMS Plan. The sections of the CAT NMS Plan governing these final two voting rounds are set forth in Sections VI(D) and (E) of the Plan and will be incorporated into the CAT NMS Plan. The Participants believe it is essential that the entire process be laid out in the Plan so that the Commission can consider and approve the entire evaluation and selection process, even though the final two voting rounds, including the selection of the Plan Processor, will not be conducted until after the approval of the CAT NMS Plan.

+
+
fn +

20 In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants.

+
+
fn +

21 The Plan defines a “Bidding Participant” broadly to include any Participant that (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. A “Material Subcontractor” is “any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year.” The Plan provides that “[a]n entity will not be considered a ‘Material Subcontractor’ solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.”

+
+
fn +

22 As described below, even with the independence criteria in place, the Plan also requires recusal from certain votes.

+
+
fn +

23 The Participants anticipate that Bids must be submitted four weeks after the Commission approves the Plan.

+
+
fn +

24 The Plan defines a Qualified Bid as “a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee.” The Plan provides that, “[w]hen evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment.”

+
+
fn +

25 In the Letter submitted by the SROs describing the Plan, the SROs state that the Plan provides that, if there are fewer than six Qualified Bids submitted, all of those bids will be selected as Shortlisted Bids. See supra note 8. The Commission notes, however, that Section IV(B)(2) of the Plan states, “If there are six or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.” (emphasis added)

+
+
fn +

26 The Plan provides that, if there is an odd number of Qualified Bids, the number of Shortlisted Bids to be chosen will be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, seven Shortlisted Bids will be selected). In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

+
+
fn +

27 The Plan defines a “Non-SRO Bid” as “a Bid that does not include a Bidding Participant.” See supra note 21.

+
+
fn +

28 Each round of voting throughout the Plan is independent of other rounds.

+
+
fn +

29 The Participants recognize that a seven-month timeframe is inconsistent with the current obligation to submit the CAT NMS Plan by December 6, 2013. The Participants anticipate filing an exemptive request with the Commission to extend the date.

+
\ No newline at end of file diff --git a/spider/files/data000012.html b/spider/files/data000012.html index 6146562..0dbd52e 100644 --- a/spider/files/data000012.html +++ b/spider/files/data000012.html @@ -1,316 +1,219 @@ - + jurisdiction: US - regulatory_authority: CAT NMS, LLC + regulatory_authority: US/SEC content_type: periodic - document_title: CAT NMS Announces Initiation of Reporting to the Consolidated Audit Trail - source: CAT NMS Immediate Release - source_type: Press Release + document_title: Joint Industry Plan (Order Approving Plan Amendment No. 1 Release 34-75192) + document_type: Orders + source: US/SEC/Orders/Order Approving Plan Amendment + source_type: Order Approving Plan Amendment language: English -
pubdate: November 16, 2018 effdate: N/A -

CAT NMS Announces Initiation of Reporting to the Consolidated Audit Trail

- Topic: CAT NMS, Press Relelase, Initiation of Reporting to the Consolidated Audit Trail - Compliance User: 1556b799-9c2a-4c2c-8204-ddec238fcbf1 + citation: Order Approving Plan Amendment No. 1 Release 34-75192 +
pubdate: June 17, 2015 effdate: N/A +

Joint Industry Plan (Order Approving Plan Amendment No. 1 Release 34-75192)

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1 + Compliance User: Self-Regulatory Organization Keywords: - CAT NMS, - LLC, - FINRA, + Amendment No. 1, + CAT NMS plan, + Selection Plan, -

FOR IMMEDIATE RELEASE

-

NEW YORK, NY, November 16, 2018 CAT NMS, LLC (CAT NMS) announced the initiation of reporting by exchanges and Financial Industry Regulatory Authority, Inc. (FINRA, and together with the exchanges, the SROs – self-regulatory organizations) of order and transaction data to the Consolidated Audit Trail (CAT). The CAT is intended to enable the SROs and the U.S. Securities and Exchange Commission (SEC) to more efficiently track securities trading activity throughout U.S. markets by collecting how orders are processed, and trades executed.

-

With yesterday’s development, the SROs are reporting to the CAT central repository quote, order, trade, and other information required to be reported by the exchanges and FINRA under the National Market System Plan Governing the Consolidated Audit Trail (CAT NMS Plan). Thesys CAT LLC (Thesys CAT), the plan processor of CAT, has advised the SROs it continues to work to provide the capabilities required for the first reporting phase, such as the regulators’ query functionality and linkages between reported events. Thesys CAT has informed the SROs that it plans to complete the full functionality required by the CAT NMS Plan for the first reporting phase on or before March 31, 2019.

-

At this time, the reporting deadlines for Industry Members as set forth in the August 9, 2018 Industry Outreach Webinar at https://bit.ly/2PXYBsq remain the same.

-

The CAT is intended to allow regulators to improve securities’ market surveillance by creating an extensive audit trail of customer and order event information for all orders in U.S. exchange-listed and over-the-counter equity securities across all markets and trading venues. The CAT is also meant to collect all such data for exchange-listed options contracts. When fully complete, the CAT will ingest billions of records per day to be the world's largest data repository of information on securities transactions, tracking all orders throughout their life cycle.

-

About CAT NMS, LLC

-

CAT NMS, LLC was formed by the SROs to implement the requirements of SEC Rule 613. SEC Rule 613 that requires the SROs to jointly submit to the SEC the CAT NMS Plan to create, implement and maintain the CAT. The SEC approved the CAT NMS Plan on November 15, 2016. Once implemented, the CAT will facilitate regulatory surveillance by creating an extensive audit trail that will capture customer and order event information for orders in NMS securities across all markets, from the time of order inception through routing, cancellation, modification or execution, in a single, consolidated source. More information can be found at www.catnmsplan.com/

-

For CAT NMS LLC related Press Inquiries: mediarequests@catnmsplan.com

+

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-75192; File No. 4-668)

+

June 17, 2015

+

Joint Industry Plan; Order Approving Amendment No. 1 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

+
pubdate: June 18, 2015 effdate: N/A +

I. Introduction

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Introduction + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + Securities Exchange Act - Section 11A, + CAT NMS plan, + Selection Plan, + +

On December 12, 2014, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 an amendment (“Amendment No. 1”) to the National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Selection Plan”).3 Amendment No. 1 was published for comment in the Federal Register on February 11, 2015.4 The Commission received one comment letter5 and the SROs submitted a response to that comment letter.6 This order approves Amendment No. 1 to the Selection Plan.

+
+
pubdate: June 19, 2015 effdate: N/A +

II. Background and Description of the Proposal

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + Descripton of the Proposal, + +
pubdate: June 20, 2015 effdate: N/A +

A. Background

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal, Background + Compliance User: Self-Regulatory Organization + Keywords: + Sec Rule 613, + SRO, + CAT NMS plan, + Shortlisted Bidder, + Plan Processor, + +

On July 11, 2012, the Commission adopted Rule 613 to require the SROs to jointly submit an NMS plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).7 In response, the SROs engaged in a request for proposal (“RFP”) process to help them develop an NMS Plan proposal and to solicit bids (“Bids”) for the role of Plan Processor8 to build, operate, administer, and maintain the consolidated audit trail.9 The Selection Plan, which was approved by the Commission on February 21, 2014, sets forth the process by which the Participants will review, evaluate, and narrow down the Bids, and ultimately select the Plan Processor, following Commission approval of the CAT NMS Plan.10 Currently, the Participants have narrowed the universe of Bids received to a set of six “Shortlisted Bidders.” Under the Selection Plan, a Shortlisted Bidder is only eligible to revise its Bid following Commission approval of the CAT NMS Plan and approval of a majority of the Selection Committee.11 Additionally, the Participants are not permitted to narrow the set of Shortlisted Bidders prior to approval of the CAT NMS Plan, but must proceed with selection of the CAT Plan Processor from among the Shortlisted Bidders in a two-round voting process.12

+

As described in more detail below, Amendment No. 1 would revise the Selection Plan to allow the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan and allow the SROs to narrow the list of Shortlisted Bids prior to Commission approval of the CAT NMS Plan. The SROs believe that providing the Shortlisted Bidders with an additional opportunity (or opportunities) to revise their Bids prior to the approval of the CAT NMS Plan is critical to the timely and considered selection of the CAT Plan Processor, and more importantly, the adherence to the other timelines for the CAT NMS Plan set forth in Rule 613(a).13 The SROs state that since the time the Bidders submitted their Bids, the SROs have gathered and evaluated data and information from a variety of market participants, including Bidders, broker-dealers, vendors, regulators and others, and have made progress in developing an optimal solution and formalizing the solution in the proposed CAT NMS Plan and related technical documents.14 Given these developments, the SROs believe that Bidders should be permitted to revise their Bids using the new information provided in the proposed CAT NMS Plan and technical documents prior to approval of the CAT NMS Plan.15 The SROs also state that given the passage of time since the Bids were submitted, Bidders have indicated that new technological and other beneficial solutions are now available that may further improve the Bids, and, ultimately, the proposed solutions.16

+

The SROs also explain that given the large amount of information they expect will be included in any revised Bids and the importance of appropriately analyzing such information, the SROs do not believe that two months will be sufficient to select the CAT Plan Processor from as many as six Shortlisted Bidders.17 However, the SROs believe that if the existing Shortlisted Bidders were able to revise their Bids, including the option to reflect any new technology or other relevant developments, the SROs could further narrow the list of Shortlisted Bidders to better facilitate the ultimate selection of the CAT Plan Processor within the time limits imposed by Rule 613 in an appropriately thoughtful and deliberative manner.18

+
+
pubdate: June 21, 2015 effdate: N/A +

B. Description of the Proposal

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal, Description of the Proposal + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + Shortlisted Bids, + +

The SROs propose to amend the Selection Plan to permit the Shortlisted Bidders to revise their Bids one or more times prior to Commission approval of the CAT NMS Plan if the Selection Committee determines, by majority vote, subject to the applicable recusal provisions, that such revisions are necessary and appropriate.19 Amendment No. 1 would not affect Section VI.(D) of the Selection Plan, which states that, following approval of the CAT NMS Plan by the Commission, Shortlisted Bidders for the role of Plan Processor may be permitted to revise their Bids only upon approval by a majority of the Selection Committee, subject to certain recusal provisions in the Selection Plan.20

+

In Amendment No. 1, the Participants also propose to provide the Selection Committee discretion to narrow the set of Shortlisted Bids prior to Commission approval of the CAT NMS Plan. Specifically, Amendment No. 1 would authorize an additional round of voting21 to narrow the number of Shortlisted Bids, currently six, down to as few as three Bids. This round of voting, which could occur either before or after any revisions to Shortlisted Bids are accepted, would commence upon at least a two-thirds vote of the Selection Committee, and would proceed in a manner similar to the initial round of voting for determining the Shortlisted Bids.22 Proposed Amendment No. 1 includes a recusal provision providing that no SRO shall vote in the process narrowing the set of Shortlisted Bidders if a Bid submitted by or including the SRO or an Affiliate of the SRO is a Shortlisted Bid.23

+
+
+
pubdate: June 22, 2015 effdate: N/A +

III. Summary of Comment Letter and Response

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Summary of Comment Letter and Response + Compliance User: Self-Regulatory Organization + Keywords: + FIF, + Comment Letter, + Shortlisted Bidders, + Order Audit Trail System, + EBS, + +

As noted above, the Commission received one comment letter from FIF. FIF, on behalf of its Consolidated Audit Trail Working Group, supports Amendment No. 1 but offers two recommendations.24 First, FIF recommends, in the interest of efficiency, that the Participants narrow the list of Bidders before any revision of Bids takes place. FIF believes that in view of the substantial efforts already undertaken by the Participants, there should be sufficient information for the Participants to take action and narrow the list of Bidders. FIF argues that it is unnecessary to require all six of the current Shortlisted Bidders to revise their Bids. Further, FIF argues that narrowing the list of Bidders prior to permitting the revision of Bids would reduce the amount of effort the SROs would need to expend in reviewing the revised Bids.

+

Second, FIF recommends that once the Participants further narrow the list of Shortlisted Bidders, each of the remaining Bidders should receive detailed information on Order Audit Trail System (“OATS”), electronic blue sheets (“EBS”), and Large Trader so that Bidders can consider all of the required functionality to retire these systems in preparing their revised Bids. FIF notes that the retirement of these systems is critical to managing the cost of CAT’s implementation, and additional information concerning the functionality required to retire these systems would aid in revising Bids. FIF believes that understanding the precise functional requirements for retiring OATS is critical and imperative for a level playing field among Bidders.

+

The SROs considered FIF’s recommendations, but declined to propose modifications to the Amendment.25 With regard to FIF’s suggestion that the SROs narrow the list of Bidders before allowing any revisions to the Bids, the SROs state that one of the main purposes of the Amendment is to provide greater flexibility to the SROs to narrow the list of Bidders.26 The SROs, however, note that they recognize the value of a streamlined process for all parties and intend to consider this factor, among others, in determining when to narrow the list of Shortlisted Bidders.27

+

The SROs concur with FIF in the significance of retiring overlapping and redundant systems, but do not see this as linked to the proposed amendment to the Selection Plan. The SROs reiterate their commitment to the retirement of systems as provided in the CAT NMS Plan,28 noting that the Plan describes the major data attributes that will be required to retire such systems. Going forward, as additional technical specifications are developed in accordance with milestones included in the CAT NMS Plan, the SROs will provide this information to Bidders.

+
+
pubdate: June 23, 2015 effdate: N/A +

IV. Discussion

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Discussion + Compliance User: Self-Regulatory Organization + Keywords: + Amendment No. 1, + Shortlisted Bids, + Plan Processor, + CAT NMS plan, + SRO, + OATS, + EBS, + Large Trader, + +

After careful review of Amendment No. 1, the comment received, and the SROs’ response, the Commission finds that Amendment No. 1 is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system. The Commission believes Amendment No. 1 would provide the SROs with additional flexibility with respect to the process of reviewing Shortlisted Bids and selecting the CAT Plan Processor. Such additional flexibility is aimed at allowing the SROs to be more efficient in selecting the CAT Plan Processor, which is particularly important given additional deadlines contained in Rule 613(a)(3).29 The Commission believes that the SROs’ explanation that they prefer to retain flexibility in the process to select the Plan Processor, without any additional conditions or restrictions, in response to FIF’s suggestion that they narrow the list of Bidders before allowing Bidders to revise their Bids, is reasonable. Permitting the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan, and to narrow the number of Shortlisted Bids prior to Commission approval of the CAT NMS Plan,30 will allow the SROs to position themselves to avoid any delays in selecting the CAT Plan Processor,31 thus removing any impediments to meeting the additional deadlines set forth in Rule 613(a)(3).32

+

Regarding FIF’s recommendation that, prior to any Bid revisions, the SROs provide Bidders with detailed functional requirements concerning OATS, EBS, and Large Trader to facilitate retirement of those systems, the Commission notes that the SROs’ Response Letter outlines the steps taken to date by the SROs to furnish pertinent information to assist in eliminating redundant systems and contains commitments to supplement that material in the future as outlined in the CAT NMS Plan.

+
+
pubdate: June 24, 2015 effdate: N/A +

IV. Conclusion

+ Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Conclusion + Compliance User: Self-Regulatory Organization + Keywords: + Selection Plan, + Approval of Order, + +

For the reasons discussed above, the Commission finds that Amendment No. 1 is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

+

IT IS THEREFORE ORDERED, pursuant to Section 11A of the Act,33 and the rules thereunder, that Amendment No. 1 to the Selection Plan be, and it hereby is, approved.

+

By the Commission.

+

Brent J. Fields

+

Secretary

+
+
fn +

1 15 U.S.C. 78k-1.

+
+
fn +

2 17 CFR 242.608.

+
+
fn +

3 The Selection Plan is an NMS Plan approved by the Commission pursuant to Section 11A of the Act and Rule 608 thereunder. See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (“Order Approving Selection Plan”); see also Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (“Notice of Selection Plan”).

+
+
fn +

4 See Securities Exchange Act Release No. 74223 (Feb. 6, 2015), 80 FR 7654 (“Notice of Amendment No. 1”).

+
+
fn +

5 See letter to Brent J. Fields, Secretary, Commission, from Manisha Kimmel, Managing Director, Financial Information Forum (“FIF”), dated March 13, 2015 (“FIF Letter”).

+
+
fn +

6 See letter to Brent J. Fields, Secretary, Commission, from the SROs, dated March 27, 2015 (“SRO Response Letter”).

+
+
fn +

7 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).

+
+
fn +

8 Unless otherwise noted, capitalized terms are used as defined in Rule 613, in the Selection Plan, or in this Order.

+
+
fn +

9 See Notice of Amendment No. 1, supra note 4, at 7655.

+
+
fn +

10 See Order Approving Selection Plan, supra note 3.

+
+
fn +

11 See id. at 11154. The Selection Committee is composed of one senior officer from each SRO and is charged with evaluating the Bids and selecting the Plan Processor. Id. at 11153.

+
+
fn +

12 See id. at 11154.

+
+
fn +

13 See Notice of Amendment No. 1, supra note 4, at 7655.

+
+
fn +

14 Id.

+
+
fn +

15 Id.

+
+
fn +

16 Id.

+
+
fn +

17 Id.

+
+
fn +

18 Id.

+
+
fn +

19 Id. at 7655, 57.

+
+
fn +

20 See Order Approving Selection Plan, supra note 3, at 11154.

+
+
fn +

21 This additional narrowing round would occur prior to the two-round voting process for selection of the CAT Plan Processor under Section VI.(E) of the Selection Plan. See id.

+
+
fn +

22 See Notice of Amendment No. 1, supra note 4, at 7655, 57. In voting to narrow the list of of Shortlisted Bids, the voting representative from each SRO would choose a first, second, and third choice of Shortlisted Bid, with each choice receiving a weight of, respectively, three points, two points, and one point. The three Bids receiving the highest cumulative number of points would constitute the new set of Shortlisted Bids. The Amendment also provides for a tie-breaking process, which could result in more than three Shortlisted Bids continuing in the process for selection of the CAT Plan Processor.

+
+
fn +

23 See id. The SROs have also submitted, and the Commission is currently considering, a second proposed amendment to the Selection Plan extending this recusal requirement to all selection voting rounds. See Securities Exchange Act Release No. 75193 (June 17, 2015).

+
+
fn +

24 See FIF Letter, supra note 5.

+
+
fn +

25 See SRO Response Letter, supra note 6, at 3.

+
+
fn +

26 Id. at 2.

+
+
fn +

27 Id.

+
+
fn +

28 Rule 613(a)(viii) requires “a plan to eliminate existing audit trail rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such audit trail rules and systems (or components thereof); to the extent that any existing audit trail rules or systems provide information that is not rendered duplicative by the consolidated audit trail, an analysis of whether collection of such information continues to be appropriate and, if so, whether such information could instead be incorporated into the consolidated audit trail; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such audit trail rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing audit trail rules and systems (or components thereof)[.]” 17 CFR 242.613(a)(viii).

+
+
fn +

29 17 CFR 242.613(a)(3).

+
+
fn +

30 See Notice of Amendment No. 1, supra note 4, at 7655, 57.

+
+
fn +

31 Rule 613(a)(3)(i) requires the Participants to select the CAT Plan Processor within two months after effectiveness of the CAT NMS Plan. 17 CFR 242.613(a)(3)(i).

+
+
fn +

32 See, e.g., Rule 613(a)(3)(iii), which requires Participants to begin providing data to the central repository within one year after effectiveness of the CAT NMS Plan.

+
+
fn +

33 15 U.S.C. 78k-1.

+
\ No newline at end of file diff --git a/spider/files/data000013.html b/spider/files/data000013.html index 2978031..20c7b6b 100644 --- a/spider/files/data000013.html +++ b/spider/files/data000013.html @@ -1,4859 +1,152 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: compilation - document_title: CAT Participant Technical Specifications v1.7.1 - document_type: Specifications - source: US/SEC/Specifications/Technical Specifications - source_type: Technical Specifications + content_type: periodic + document_title: Joint Industry Plan (Order Approving Plan Amendment No. 2 Release 34-75980) + document_type: Orders + source: US/SEC/Orders/Order Approving Plan Amendment + source_type: Order Approving Plan Amendment language: English - citation: N/A -
pubdate: September 09, 2018 effdate: N/A -

CAT Participant Technical Specifications v1.7.1

- Topic: CAT Participant Technical Specifications v1.7.1 + citation: Order Approving Plan Amendment No. 2 Release 34-75980 +
pubdate: September 24, 2015 effdate: N/A +

Joint Industry Plan (Order Approving Plan Amendment No. 2 Release 34-75980)

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2 Compliance User: Self-Regulatory Organizations Keywords: - Consolidated Audit trail, - CAT NMS plan, - Sec Rule 613, + SRO, + NMS Plan, -

CAT Reporting Technical

-

Specifications for

-

Participants

-

09/09/2018

-

Version 1.7.1

-
pubdate: September 09, 2018 effdate: N/A -

Executive Summary

- Topic: CAT Participant Technical Specifications v1.7.1, Executive Summary - Compliance User: Self-Regulatory Organizations - Keywords: - CAT NMS plan, - Sec Rule 613, - -

The CAT is a Consolidated Audit Trail that tracks orders throughout their lifecycle and identifies the exchanges and broker-dealers handling them, thus allowing regulators to more efficiently and accurately track activity in eligible securities — those under the jurisdiction of the Securities and Exchange Commission (the "SEC") — throughout the U.S. markets. The CAT is created by a joint plan (CAT NMS Plan) of the Plan Participants or simply "Participants."

-

Participants are required to report order events into CAT. Reportable order events include, but are not limited to: accepted orders, routes, replaced orders, canceled orders and executions. All Participants are responsible to submit reference information, including the symbols that are active for the exchange on a particular day, and the Participants' member list.

-

This document provides Participants with information to understand their responsibilities to comply with SEC Rule 613 and CAT NMS Plan, and describes the requirements for reporting data to CAT, including detailed information about data elements and file formats of each reportable event. It also describes how Participants should submit files to CAT, including access instructions, network and transport options, and testing requirements.

-

This document does not include information for Industry Members. A separate document, CAT Reporting Technical Specifications for Industry Members, will be published to provide technical specifications for Industry Members.

-

Contents and Structure

- -

Revision / Change Process

- -
-
pubdate: September 09, 2018 effdate: N/A -

1. Introduction

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction - Compliance User: Self-Regulatory Organizations - Keywords: - CAT Reporting Technical Specifications, - Industry Members Reporting Order Events, - -

This document provides Participants with the necessary information to fulfill their reporting obligations to CAT in compliance with SEC Rule 613 and the CAT NMS Plan.

-

The document is structured as follows:

-

Section 1 Introduction provides an overview of the document, rules and requirements, compliance dates, and change release management processes. In addition, it provides descriptions of identifiers and data types referenced in this document.

-

Section 2 Reference Data describes details for reporting member information, equity symbols, options symbols and corporate actions.

-

Section 3 Special Data Elements and Common Events provides detailed descriptions of reportable data elements that are common to multiple events, and how linkages and lifecycles are created.

-

Section 4 Events for Stock Exchanges provides details regarding the data which must be reported to CAT by each stock exchange Participant. In particular, it details out the Reportable Order Events, explains what data elements are necessary and how those elements are to be collected and reported to CAT.

-

Section 5 Events for Options Exchange provides details regarding the data which must be reported to CAT by each options exchange Participant. In particular, it details out the Reportable Order Events, explains what data elements are necessary and how those elements are to be collected and reported to CAT.

-

Section 6 Other Reporting provides reporting requirements and data elements for events that are not covered in sections 4 and 5 (e.g., TRF reporting).

-

Section 7 Stock Exchange Examples and Section 8 Option Exchange Event Examples provide a representative sample of reporting scenarios and examples for both stocks and options. In each scenario, a detailed description is provided of the reportable order events, which data elements should be reported in each event and how the files are formatted. These sections are intended to provide reporters with a set of examples regarding reportable data elements and formats.

-

Section 9 CAT Submission Process provides information regarding data formats and how to submit information and files to CAT. It includes a general data flow overview, registration process, network and transport options, and CAT feedback access and reporting hours. Additionally, an overview of CAT data security standards is provided. In this section, reporters can get detailed instructions of how to connect and submit information to CAT.

-

Section 10 Feedback and Corrections describes the procedures for reporters to obtain feedback following data submission, and how to submit corrections if necessary. This section addresses feedback files, file acknowledgement, basic file integrity, and feedback for reference data and order events. It also describes information on how to submit corrections and repairs to CAT.

-

Section 11 Testing describes the technical details of the test environment and testing procedures required of reporters. All reporters are required to test their submissions thoroughly before submitting to the CAT Production environment.

-

Section 12 Additional Information provides descriptions about the CAT public website and how to get help from the Service Desk.

-

Appendix sections provide important supplemental details including:

-

A. Clock Synchronization Requirements provide information on how each Participant is expected to maintain the required granularity and accuracy of the Business Clock.

-

B. Failure Messages will come in the form of a machine-parseable description of why a file or record was rejected

-

C. Corporate Action Formats will be reported by each exchange as-is. Examples from various exchanges are listed in this section.

-

D. FINRA Trade Reporting Facility ("TRF") Fields

-

E. Market Move Scenarios which includes use cases for symbol renames and movement between exchanges

-

F. Encryption Example which provides an example of how to submit encrypted files

-

G. Data Dictionary that includes detailed explanations and definitions of each data reference used throughout the technical specifications.

-
pubdate: September 09, 2018 effdate: N/A -

1.1. Rule Overview / Requirements

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements - Compliance User: Self-Regulatory Organizations - Keywords: - Rule 613, - Securities Exchange Act of 1934, - Self-Regulatory Organizations, - National Market System (‘NMS’) plan, - -

As previously stated, this document does not include information for Industry Member reporting. A separate document - CAT Reporting Technical Specifications - Industry Members Reporting Order Events - will be provided for this purpose.

-
pubdate: September 09, 2018 effdate: N/A -

1.1.1. SEC Rule 613

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements, SEC Rule 613 - Compliance User: Self-Regulatory Organizations - Keywords: - CAT NMS plan, - -

The Securities and Exchange Commission approved to adopt Rule 613 under the Securities Exchange Act of 1934 to require national securities exchanges and national securities associations (Self-Regulatory Organizations or SROs) to submit a national market system (‘NMS’) plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of reportable securities — all NMS securities and over the counter ("OTC") Equity securities under SEC jurisdiction — that would capture customer and order event information for orders in reportable securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

-

Refer to SEC Rule 613, available at: https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483188 for more details.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.1.2. CAT NMS Plan

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Rule Overview / Requirements, CAT NMS Plan - Compliance User: Self-Regulatory Organizations - Keywords: - CAT Public Website, - -

After a series of amendments since the initial CAT NMS Plan was filed on September 30, 2014, the Commission unanimously approved the CAT NMS Plan on November 15, 2016.

-

As per the Plan, Participants must begin reporting to CAT by November 15, 2017.

-

For additional information, please refer to CAT NMS Plan at http://www.catnmsplan.com/.

-
-
-
pubdate: September 09, 2018 effdate: N/A -

1.2. Change Release Management Process

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Change Release Management Process - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - -

Changes to this technical specification will be released as follows:

-

• Prior to the go-live date for system changes

-

- A new specification will be posted to the CAT Public Website

-

- A notice will be posted on the website with a summary of changes and links to relevant information.

-

- One or more email alerts will be sent to reporting firms with a summary of changes and links to relevant information.

-

- In some cases, CAT may accept production reporting using the new specification in advance of the go-live date.

-

- Firms that have not conducted testing or production reporting using the new technical specification format will receive support from CAT as the go-live date approaches.

-

• The new technical specification will include a summary list of changes as well as a table listing the specific areas of the document where the changes have been made.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.3. CAT Identifiers

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers - Compliance User: Self-Regulatory Organizations - Keywords: - CAT Reporter ID, - -

CAT uses a number of identifiers, many of which readily convey their meaning from the context in which they are used. The subsections below include terms associated with the entities that will report data into the CAT and their respective roles. As shown in the diagram below, Exchange ID is a subset of Participant ID, which is a subset of Reporter ID.

- -
pubdate: September 09, 2018 effdate: N/A -

1.3.1. Reporter ID

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Reporter ID - Compliance User: Self-Regulatory Organizations - Keywords: - Participant ID, - -

Each entity which reports into CAT will be assigned a unique identifier: a CAT Reporter ID. This ID will uniquely identify each reporter, including plan participants, participant members, and associated reporting facilities. The database of CAT Reporter IDs will be made available both as a downloadable file on the CAT website and through the web portal API.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.3.2. Participant ID

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Participant ID - Compliance User: Self-Regulatory Organizations - Keywords: - Exchange ID, - -

-

The Participant ID is an ID assigned by CAT to each plan participant. The value will be the same as the participant's Reporter ID. However, the use of Reporter ID could be any CAT reporter, while the use of Participant ID means the Reporter ID of a plan participant only.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.3.3. Exchange ID

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Exchange ID - Compliance User: Self-Regulatory Organizations - Keywords: - SRO, - CAT, - Member Alias, - CAT Reporter ID, - -

The Exchange ID is an ID assigned by CAT to each stock/options exchange. The actual value will be the same as the exchange Participant ID and Reporter ID, but, as indicated in the diagram, Exchange ID is a subset of Participant ID, which is a subset of Reporter ID.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.3.4. Member Alias

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, CAT Identifiers, Member Alias - Compliance User: Self-Regulatory Organizations - Keywords: - ASCII decimal 61, hex 3D, - ASCII decimal, - 124, hex 7C, - ASCII 44, hex 2C, - ASCII decimal 34, hex 22, - -

Each SRO will assign unique IDs to its industry members. These IDs are essentially aliases for CAT reporters so that reporting firms can use existing identifiers when reporting market events to CAT. It is important that both the member and SRO are aware of the assigned IDs and when they should be used in various reports to CAT.

-

Each SRO has autonomy in assigning their IDs, and the same ID could possibly be assigned to different industry members across SROs. Furthermore, a particular member may have multiple aliases assigned by the same SRO. Thus, the alias is only valid in combination with the SRO that assigned the ID. Specifically, when an exchange receives a routed order from one of its members, both the routing member and the exchange must report the same Member Alias in their reports to CAT in order to properly link the reports to the same order lifecycle.

-

An industry member can wind up having the same alias value assigned by multiple SROs. This is fine because when an alias is used, it is always used in a manner that identifies the SRO that assigned the alias (either by explicit designation, or implicitly by context).

-

For example, consider three firms (Firm A, Firm B, and Firm C) and three SRO participants (Participant A, Participant B, and Participant C), and the following table of SRO-assigned member IDs.

- -

Note that Member Alias FRMA is assigned to Firm A by both Participant A and Participant C, and Member Alias FRMB is assigned to two different firms by two different participants. While the same alias is used multiple times, these are valid mappings because the same alias is not assigned multiple times within a participant. Also note that Firm B is not a member of Participant B, and so there is no corresponding mapping.

-

Thus, each firm will have at least one alias for each SRO in which they have membership. The value may or may not be the same across all participants. When Participant A refers to Firm C, it will use the alias FRMC. Likewise, when Firm C refers to itself in relation to Participant A, it will use the alias FRMC.

-

Note that industry members can have multiple Member Aliases, but they will also be assigned a unique CAT Reporter ID. CAT will handle mapping the various SRO-assigned Member Alias values to synchronize them to the same unique CAT Reporter ID assigned to the member firm. Further, note that member dictionary entries apply to data uploaded for the same business date as the member dictionary itself (values do not have to be the same from day to day).

-
-
-
pubdate: September 09, 2018 effdate: N/A -

1.4. Name Value Pairs

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Name Value Pairs - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - JSON, - CSV, - -

Some fields are described as containing name/value pairs. This means a list of zero or more attributes, where each attribute is either a name with no value, or a name with an accompanying value such that the name and value are separated by a single equal sign (ASCII decimal 61, hex 3D). Multiple attributes are separated by the pipe symbol (ASCII decimal 124, hex 7C). If an attribute is boolean in nature, it can optionally be represented as a name alone, where its value is implied by its presence (true) or absence (false).

-

The name part is the string up to the first pipe symbol or equal sign. Names must not contain commas (ASCII 44, hex 2C), pipes, equal-signs, or double-quotes (ASCII decimal 34, hex 22).

-

If the name terminates with a pipe, it is a boolean value, and its presence indicates true. If the name terminates with an equal sign, the value must follow.

-

The value part is the string starting with the character just after the equal sign, up to either a pipe symbol or the end of the string. Values may contain an equal sign, but must not contain commas, pipes or double-quotes.

-

In some cases, the names are free-format, in that they are not defined in the specification. This means that both the name and any value are left up to the discretion of the reporter and the contents are not validated by CAT. Most common, however, is that both the name and the expected values are known, documented in this specification, and validated by CAT.

-

For example, the following JSON represents a hypothetical name/value pair field, with a boolean attribute and a price attribute: { "data": "XYZ|ABC=12.55" }

-

The above format works for both JSON and CSV data entry. However, when submitting data in JSON, a more native JSON style can optionally be used by assigning a JSON object as the value for a Name Value Pair attribute. Note, however, that boolean values must be explicitly set. The above example can alternatively be submitted as:

-

{ "data": { "XYZ": true, "ABC": 12.55 } }.

-
-
pubdate: September 09, 2018 effdate: N/A -

1.5. Fundamental Data Types

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Fundamental Data Types - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - Section 10, - -

CAT will accept two kinds of text-based files: JSON and CSV. The fundamental data types used throughout this document are described below. Other data types are defined in the Data Dictionary.

-

To support both JSON and CSV submissions, CAT will publish a JSON schema file which describes each data type with required representation formats, and a mapping that defines the position in a CSV representation that the data element would assume.

-

A schema will be provided for each data object that can be reported in both JSON and CSV.

-

When a data field is marked as either optional or conditional, some records may not provide values for that field. In such a case, the field is simply not reported as part of the JSON record, or reported as an empty column of a CSV record.

-

Data Types

- - -
pubdate: September 09, 2018 effdate: N/A -

1.5.1. Data Validation

- Topic: CAT Participant Technical Specifications v1.7.1, Introduction, Fundamental Data Types, Data Validation - Compliance User: Self-Regulatory Organizations - Keywords: - supplemental data, - -

All data submitted to CAT will be validated based on the defined data type of each item, including proper formatting and range checking. Examples of accepted values are detailed in the above table in section 1.5. Valid values for Choice fields are defined in the Data Dictionary for each data element. Valid data values, ranges, and formats will be specified in the record schema files, which will be used to validate submitted data element values. Records and values which fail validation will be marked as a failure and will be reported as feedback to the Submitting Member as detailed in section 10.

-
-
-
-
pubdate: September 09, 2018 effdate: N/A -

2. Reference Data

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-75980; File No. 4-668)

+

September 24, 2015

+

Joint Industry Plan; Order Approving Amendment No. 2 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

+
pubdate: September 24, 2015 effdate: N/A +

I. Introduction

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Introduction Compliance User: Self-Regulatory Organizations Keywords: SRO, - CAT, - CAT web GUI, - Member Alias, + NMS Plan, + Rule 608, + Securities and Exchange Act - Section 11A, + Selecting a Plan Processor, + Selection Plan, -

This section describes the various pieces of reference or supplemental data required to be reported by each participant.

-
pubdate: September 09, 2018 effdate: N/A -

2.1. Member Information

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Member Information - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - OTC equities, - FINRA, - JSON, - -

Each SRO must submit to CAT a directory of information for each industry member with which it has a reporting relationship. Each dictionary entry identifies a specific industry member, and assigns one or more IDs to that member. These IDs may be used by the SRO and/or the member when reporting order events to CAT. In general, the industry members listed in the dictionary will also be participant members of the SRO, but this is not always the case. For example, each industry member that submits an order to an exchange must be a registered member of that exchange. However, the exchange may route orders to an industry member that is not a member of that exchange. In either case, the exchange must give at least one Member Alias to each industry member which may appear in any of the order events reported to CAT.

-

Furthermore, certain internal systems or non-industry members may need to be reported to CAT with known identifiers. Such entities will be registered via the CAT web GUI. At the time of registration, a unique ID will be issued for that system, which can be used in the daily membership dictionary.

-

Each member may have multiple aliases, but a specific Member Alias may only be assigned once per SRO. Note that the member dictionary is loaded each day, and the values only apply to that trading day. Thus, Member Aliases could be reassigned on subsequent trading days.

-

The data will be uploaded as a file of newline-delimited JSON objects, one object per member entry. The member dictionary is necessary to process other file uploads, and must be uploaded to CAT no later than 6:00AM Eastern, with entries sufficient to support all reports submitted on that trading day (this is a same-day upload requirement whereas order events are required to be reported by 8:00AM Eastern the following trading day).

-

Member Dictionary Entry

- - -

The Inactive status can be used if a Participant wants to report a member who may have been temporarily deactivated. If a member is removed, the member may be reported as Inactive or may be not reported at all.

-

The following example shows a potential member dictionary for exchange Exch1 where the first entry represents an industry member that is also a member of the reporting SRO, the second entry represents an industry member that is not a member of the reporting SRO, and the third entry represents the SRO itself, with various facilities that have been given Member Alias values.

-

{

-

"type": "MDE",

-

"reporter": "Exch1",

-

"ID": "1234567",

-

"status": "Active",

-

"memberAliases": [ "FRMA", "FRMA1", "FRMA:U01", "FRMA:U02" ]

-

}

-

{

-

"type": "MDE",

-

"reporter": "Exch1",

-

"ID": "7654321",

-

"status": "NonMember",

-

"memberAliases": [ "FRMB" ]

-

}

-

{

-

"type": "MDE", "reporter": "Exch1", "ID": "123xyz", "status": "Internal", "memberAliases": [ "XXX" ]

-

}

-

{

-

"type": "MDE", "reporter": "Exch1", "ID": "123abc", "status": "Internal", "memberAliases": [ "ZZZ" ]

-

}

-

The next example shows a potential member dictionary for exchange Exch2. Note how the same entities are members of both Exch1 and Exch2, but they may or may not have different Member Alias values with each SRO.

-

{

-

"type": "MDE",

-

"reporter": "Exch2",

-

"ID": "1234567",

-

"memberAliases": [ "FRMZ", "FRMZ:U01", "FRMZ:U02" ],

-

"status": "Active"

-

}

-

{

-

"type": "MDE",

-

"reporter": "Exch2",

-

"ID": "7654321",

-

"memberAliases": [ "FRMB" ],

-

"status": "Active"

-

}

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2. Equity Symbols

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - CAT Symbol ID, - -

CAT will maintain a symbol master for all exchange-listed and OTC equities. Each listing exchange (and FINRA) must provide appropriate updates to the symbol master either through the CAT web user interface, or daily file uploads.

-

Each change to the symbol is persisted as a change event. All normal updates can be accomplished via the file upload mechanism. However, some types of corrections/updates may cause validation conflicts, and must be done via the GUI (and may require a manual override from the help desk). This is done to prevent faulty uploads from erroneously correcting historical events.

-

Note that corporate actions are reported and maintained separately and are not used to maintain the CAT internal symbol master. Thus, the CAT symbol master must be updated explicitly via the web GUI or a daily file upload.

-

The data items for a symbol are represented as a JSON object with the following fields, where the effective range of the date is defined as an inclusive range [beginDate, endDate].

-

Note that the listing symbol upload process applies only to participants responsible for index or listed/OTC equities. See the Market Move Scenarios section in the appendix for discussion about specific examples when an issue is moved from one participant to another.

-
pubdate: September 09, 2018 effdate: N/A -

2.2.1. Adding a New Issue

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Adding a New Issue - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - Symbol Master Restatement, - -

To add a new issue, an Add Symbol Entry record is submitted. Note that this record is for adding a brand new symbol only - one that has never existed in the CAT system.

-

Add Symbol Entry

- -

This record type is to be submitted when a symbol is assigned to a brand new issue for the very first time. The symbol must not be assigned to any other participant in the beginDate, endDate range. The symbol will be brand new, and will be assigned a new and unique internal CAT Symbol ID. It will not be linked to any other symbol.

-

Once a symbol has been added to the database, it cannot be removed via the API. A request must be made to the CAT support desk to perform such an operation. Even then, a symbol will only be removed if it was a clear error, and the symbol was never activated.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.2. Restating an Issue

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Restating an Issue - Compliance User: Self-Regulatory Organizations - Keywords: - SRO, - CAT Symbol ID, - Symbol Master Transfer, - -

An existing symbol can be restated, providing an explicit check that the exchange and CAT have the same information for the symbol. This is accomplished by submitting a Symbol Master Restatement. The fields for a restatement are identical to those for an add. However, it makes explicit the understanding that the symbol is expected to already be present in the system.

-

The values presented in the restatement must exactly match what is in the CAT database, or the record will be rejected.

-

Symbol Master Restatement

- -
-
pubdate: September 09, 2018 effdate: N/A -

2.2.3. Updating an Issue

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Updating an Issue - Compliance User: Self-Regulatory Organizations - Keywords: - Symbol Master Transfer, - Update Symbol Entry record (USE), - CAT, - -

An issue is updated when any field of an existing issue needs to be changed. Two Symbol Entry objects are passed. The first represents the expected current state of the symbol entry before being updated, and the second represents the new values for the fields that will be updated. The current state of the database must match the expected symbol entry or the update request will be rejected (when comparing name value pairs, the order in which the name/values appear is not considered). If successful, the database will be changed to reflect the updates requested, and the response will contain a complete updated entry.

-

Update Symbol Entry

- -

The SRO requesting the update must be the current "owner" (i.e., listing participant) of the symbol. All updates are kept, and the history of updates can be queried for a given CAT Symbol ID or a symbol name. Note that an update request will not allow the listing participant to be changed. To change the listing participant of a symbol, submit a Symbol Master Transfer record.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.4. Transferring an Issue

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Transferring an Issue - Compliance User: Self-Regulatory Organizations - Keywords: - daily file upload, - -

To transfer an existing issue from one listing participant to another, the new ownership participant must submit a Symbol Master Transfer request. The request will be validated for data accuracy, and once validated, a transfer will be scheduled inside the system.

-

Symbol Master Transfer

- -

Transfer requests should be submitted prior to the effectiveDate, in which case the transfer will be scheduled for the night before the effectiveDate. If the effectiveDate is the same date as the record submission, then the request will be applied immediately instead of being scheduled. This use pattern may be necessary at times, but is discouraged as it does not leave much time for review of the changes by all parties and opens a potential race condition window.

-

Current owners are encouraged to release the symbol prior to transfer by submitting an Update Symbol Entry record (USE), and setting the endDate to be the last day they are responsible for the issue. This is especially important if there may be a gap between the time the symbol is delisted and resisted by another exchange.

-

If the current owner has not submitted an update to their endDate when the transfer is applied, then the current owner's endDate will be automatically updated to be one day prior to the effectiveDate in the transfer request.

-

When a transfer is applied, then new endDate will always be 99991231, effectively assigning the symbol to the new listing participant until it is changed.

-

If an optional field is present, that field will be changed to the new value when the transfer has taken place. Otherwise that field will retain its value after the transfer.

-

The submitted record may be rejected when submitted. Among these reasons:

-

• the submitted record contains malformed fields

-

• the listingParticipant is not the participant submitting the request

-

• the combination of ownershipDate, ownershipParticipant, and ownershipSymbol does not reference a valid symbol in the CAT database

-

• the effectiveDate is in the past

-

A report will be available each day, in conjunction with the symbol master report, that contains all activated and pending transfers.

-

If a transfer must take place, but can't be entered into the system for some reason (e.g., the request is being rejected, or it was not submitted in time), then the the resolution can be accomplished by contacting the CAT help desk.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.5. Daily File Uploads

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Daily File Uploads - Compliance User: Self-Regulatory Organizations - Keywords: - symbol master database, - -

Additions, restatements, updates, and transfers can be included in the same file, or they can be submitted in separate files. For an update to be successful, the participant uploading the update must be the owning listing participant, and the "expected" data must exactly match the current state of the system.

-

Order is important within the daily file upload, as each action will be performed in the order in which it appears in the file.

-

For example, a file with the following entries would

-

• Add the brand new listed symbol ABCD

-

• Restate the currently listed symbol BBBB

-

• Change the endDate for symbol CCCC

-

• Transfer ownership of symbol DDDD

-

{

-

"type": "ASE",

-

"listingParticipant": "Exch1",

-

"issueType": "NMS",

-

"symbol": "ABCD",

-

"beginDate": 20170101,

-

"endDate": 99991231,

-

"companyName": "The Absolute Best Company Description",

-

"lotSize": 100,

-

"IPO": false,

-

"test": false,

-

"attributes": "TPG=TG1"

-

}

-

{

-

"type": "SMRST",

-

"listingParticipant": "Exch1",

-

"issueType": "NMS",

-

"symbol": "BBBB",

-

"beginDate": 20170101,

-

"endDate": 99991231,

-

"companyName": "Bob's Big Bad Burgers",

-

"lotSize": 100,

-

"IPO": false, "test": false

-

}

-

{

-

"type": "USE",

-

"expected": {

-

"listingParticipant": "Exch1",

-

"issueType": "NMS",

-

"symbol": "CCCC",

-

"beginDate": 20170101,

-

"endDate": 99991231,

-

"companyName": "Chattanooga Choo Choo Chocolates",

-

"lotSize": 100,

-

"IPO": false,

-

"test": false

-

},

-

"update": {

-

"endDate": 20170515

-

}

-

}

-

{

-

"type": "SMXFR",

-

"ownershipDate": 20170214,

-

"ownershipParticipant": "Exch4",

-

"ownershipSymbol": "D",

-

"listingParticipant": "Exch1",

-

"issueType": "NMS",

-

"symbol": "DDDD",

-

"effectiveDate": 20170525

-

}

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.6. Query the Master List

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Query the Master List - Compliance User: Self-Regulatory Organizations - Keywords: - master symbol list, - CAT, - SRO, - -

After each file upload, the entire contents of the symbol master database will be sent as feedback. Thus, submitting a symbol master file with zero records would result in a feedback file with the current database contents.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.7. CAT Symbol Master

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, CAT Symbol Master - Compliance User: Self-Regulatory Organizations - Keywords: - NYSE, - CAT, - JSON, - -

CAT will provide a start-of-day equity master symbol list at 6:00AM each day. The same master list can be obtained by querying the web API. If modifications to the list are reported during the day (possibly due to corrections or missed additions), the downloadable master list will be updated throughout the day to reflect any such changes. Each file will be named according to the following pattern: EquityMaster_<YYYYMMDDHHMMSS>.json, where YYYYMMDDHHMMSS is the date and time that the file was created. The most recent file for the day will also be accessible via the name EquityMaster_<YYYYMMDD>.json.

-

Each listing participant is expected to have made appropriate updates to the CAT symbol master database by 4:00AM. If such changes have not been made, a ticket must be entered with the CAT help desk so CAT and the SRO can initiate appropriate steps to resolve any issues in time for delivering the master list by 6:00AM.

-

The symbol master file made available to participants will contain all fields for each entry. In particular, it will contain three different record types: Symbol Master Listings, Pending Transfers, and Applied Transfers. Here are examples of each.

-

{

-

"type":"SM", "catSymbolID": 12345,

-

"listingParticipant":"Exch1", "issueType":"NMS",

-

"symbol":"ABCD", "beginDate":"2017-01-01", "endDate":"9999-12-31",

-

"companyName":"The Absolute Best Company Description",

-

"test":false, "lotSize":100, "IPO":false, "attributes":"TPG=TG1"

-

}

-

{

-

"type":"PXFR", "catSymbolID": 11111,

-

"listingParticipant":"Exch1", "ownershipDate": 20170214,

-

"ownershipParticipant": "Exch4", "ownershipSymbol": "X",

-

"listingParticipant": "Exch1", "issueType": "NMS",

-

"symbol": "XXXX", "effectiveDate": 20170525

-

}

-

{

-

"type":"AXFR", "catSymbolID": 22222,

-

"listingParticipant":"Exch1", "ownershipDate": 20170214,

-

"ownershipParticipant": "Exch4", "ownershipSymbol": "Y",

-

"listingParticipant": "Exch1", "issueType": "NMS",

-

"symbol": "YYYY", "effectiveDate": 20170522,

-

"dateApplied": 20170521

-

}

-

The symbol master file made available to industry members will only contain basic information for each symbol in the database: the listing exchange, the symbol in the symbology of the listing exchange, and a flag indicating whether the symbol is a test symbol.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.8. Daily Symbol Dictionary

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Daily Symbol Dictionary - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - unique ID, - -

Most symbols are known universally as the same symbol name. However, some symbols have different kinds of extensions, and are represented differently by different venues. For example, a symbol listed on NYSE as FOO.A could be known elsewhere as FOO/A, FOO A, FOOA, or possibly some other symbology. Different agencies (and CAT reporters) use different symbology formats for internal distribution and generating external reports.

-

CAT processes symbols in the symbology of the listing exchange. Thus, in the previous example, the only symbol accepted by CAT would be FOO.A. If a reporter uses a different symbology internally, each of those symbols will have to be converted to the symbology of the listing exchange.

-

However, to help ease reporting, each reporter can upload a symbol dictionary that allows the reporter to report symbols in whatever symbology is used internally. This means that symbol conversion only has to occur once - in the symbol dictionary - rather than in every reportable event.

-

For example, assume an exchange receives an order for a symbol in the symbology ABC.B, and then routes it to an away exchange, but the away exchange requires the symbol to be represented as ABC B. This exchange would have to process its routing logs to convert each use of ABC B to ABC.B. However, if it loaded a symbol dictionary with a set of aliases, then it could report events with both ABC.B and ABC B and CAT would determine that they meant the same thing.

-

Note that the symbol dictionary is completely optional. If each symbol will be reported in all events in its native symbology, then the reporter would not need to upload a symbol dictionary.

-

Symbol Dictionary Entry

- -

In the following example, the reporter (MYID)has three internal mappings for the symbol FOO.A: an internal symbol number (345), and two different symbology values (FOO/A and "FOO A").

-

{

-

"type": "SDE",

-

"reporter": "MYID”,

-

"listedSymbol": "FOO.A",

-

"listingParticipant": "Exch2",

-

"symbolAliases": [ "FOO/A", "345", "FOO A" ]

-

}

-

Thus, in reports submitted from this reporter, any events that reported a symbol using symbology FOO.A, 345, FOO A, or FOO/A would all reference the same actual symbol, namely FOO.A, listed by participant Exch2.

-

The symbol dictionary is uploaded as a file of newline delimited JSON objects.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.9. Options Dictionary

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Options Dictionary - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - unique ID, - -

Naming conventions for options can vary among exchanges and trading firms. To reduce confusion and simplify reporting, CAT will allow reporters to submit options reports using a unique ID of type Text(40), as defined by the reporter, for each option. However, this means that each reporter must upload a dictionary every day for which it reports any option quote/ order events. The dictionary is valid only for events reported on the same business day.

-

The options dictionary will include simple option entries and complex option entries, to cover all options utilized in any report submitted to CAT by that reporter on a given date. This file is composed of a series of dictionary entries for each option, with the Option ID that will be used by the reporter for all option reports done on that day.

-

Each Option ID defined in the dictionary must be unique for that reporter on that day, across all simple and complex options. As for reportable order events, Options Dictionary entries can be uploaded throughout the day. When uploaded files are processed, symbol dictionary files and option dictionary files are processed before any order event files for the same uploaded timeframe. Thus, entries can be added dynamically throughout the day.

-

Note that this is not the product definition, but a universal way to reference an options product for the purposes of reporting order events to CAT.

-

The options dictionary is uploaded as a file of newline delimited JSON objects.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.9.1. Option Series Dictionary Entry

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Option Series Dictionary Entry - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - unique ID, - -

The dictionary mapping for an option series (flex or simple) will contain the following information, which allows options events to be reported using the Option ID reported in the dictionary entry.

-

Simple Option Series Dictionary Entries

- -

For example, the following dictionary entry would be for the January 19, 2018 150.0 Put for BRK class B. Note that the primary deliverable is reported in NYSE symbology because BRK.B is listed on NYSE.

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "12345",

-

"kind": "Standard",

-

"optionsSymbol": "BRKB",

-

"primaryDeliverable": "BRK.B",

-

"underlyingType": "Equity",

-

"expirationDate": 20180119,

-

"strikePrice": 150.00,

-

"putCall": "Put",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.9.2. Option Symbol Changes

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Option Symbol Changes - Compliance User: Self-Regulatory Organizations - Keywords: - Symbols, - -

Changes to symbols stemming from corporate actions can be handled by reporters using Dictionary Entries. Each options exchange should ensure that on the effective date for a corporate action, its Dictionary Entries accurately reflect option symbols with the appropriate numerical suffix when applicable, and it includes any new option symbols created as the result of the corporate action. A detailed corporate action example follows:

-

Stock ABCD undergoes a 2 for 1 stock split on June 1, 2018. All strike prices are halved, the deliverable remains 100 and the symbol is unchanged. On August 1, 2018 stock ABCD spins off company EFGH, 10 shares per 100 ABCD owned. On the market opening at ex-date all open interest in ABCD corp. is moved to symbol ABCD1 delivering 100 shares of ABCD and 10 shares of EFGH. Option symbol ABCD1 = 100 ABCD + 10 EFGH. Subsequently, ABCD and EFGH shares are each listed in the underlying cash market and their prices are used in the valuation of options ABCD1 respectively. The options exchanges list new option contracts for each underlying that deliver 100 shares using symbols ABCD and EFGH (assuming listing criteria is met). Options symbols ABCD and EFGH begin trading (independently) and each delivers 100 shares of the corresponding stock upon exercise. On November 1, 2018 ABCD undergoes a 3 for 2 stock split. Option contracts in ABCD and ABCD1 are affected. Contracts in ABCD become ABCD2 delivering 150 shares of underlying stock ABCD. Option symbol ABCD2 = 150 ABCD. Contracts in ABCD1 remain ABCD1 and deliver 150 shares ABCD and 10 shares EFGH. Option symbol ABCD1 = 150 ABCD + 10 EFGH. The exchange will again list a new ABCD delivering 100 shares of ABCD stock upon exercise.

-

Considering the example above, the two entries below demonstrate the values before and after the first corporate action event:

-

Stock ABCD undergoes a 2 for 1 stock split on June 1, 2018. All strike prices are halved, the deliverable remains 100 and the symbol is unchanged.

-

Before 2:1 Stock Split on June 1, 2018

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Standard",

-

"optionSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 45.00,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

After 2:1 Stock Split on June 1, 2018

-

{

-

"type": "OSDE",

-

}

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Standard",

-

"optionsSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

The next entries demonstrate the impact of the second corporate action event – the spinoff on August 1, 2018.

-

On August 1, 2018 stock ABCD spins off company EFGH, 10 shares per 100 ABCD owned. On the market opening at ex-date all open interest in ABCD corp. is moved to symbol ABCD1 delivering 100 shares of ABCD and 10 shares of EFGH. Option symbol ABCD1 = 100 ABCD + 10 EFGH. Subsequently, ABCD and EFGH shares are each listed in the underlying cash market and their prices are used in the valuation of options ABCD1 respectively. The options exchanges list new option contracts for each underlying that deliver 100 shares using symbols ABCD and EFGH (assuming listing criteria is met). Options symbols ABCD and EFGH begin trading (independently) and each delivers 100 shares of the corresponding stock upon exercise.

-

Before Spinoff - Note that at this time, EFGH is still part of ABCD.

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Standard",

-

"optionSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 45.00,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

After Spinoff – three Dictionary Entries would now be reported as the result of this corporate action:

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Non-Standard",

-

"optionsSymbol": "ABCD1",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "99123",

-

"kind": "Standard",

-

"optionsSymbol": "EFGH",

-

"primaryDeliverable": "EFGH",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 5.00,

-

"type": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": 99124,

-

"kind": "Standard",

-

"optionsSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 17.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

The pre- and post-Spinoff JSON Dictionary Entries shown above are also shown in table format below.

- - -

A final example demonstrates the impact of the third corporate action event – the stock split on November 1, 2018.

-

On November 1, 2018 ABCD undergoes a 3 for 2 stock split. Option contracts in ABCD and ABCD1 are affected. Contracts in ABCD become ABCD2 delivering 150 shares of underlying stock ABCD. Option symbol ABCD2 = 150 ABCD. Contracts in ABCD1 remain ABCD1 and deliver 150 shares ABCD and 10 shares EFGH. Option symbol ABCD1 = 150 ABCD + 10 EFGH. The exchange will again list a new ABCD delivering 100 shares of ABCD stock upon exercise.

-

Before 3:2 Stock Split -- ABCD delivers 100 shares of ABCD. ABCD1 options deliver 100 shares of ABCD + 10 shares EFGH.

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Non-Standard",

-

"optionsSymbol": "ABCD1",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "99124",

-

"kind": "Standard",

-

"optionsSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

After 3:2 Stock Split - ABCD becomes ABCD2 and delivers 150 shares of ABCD. Symbol ABCD1 remains, though now delivers 150 shares ABCD and 10 shares EFGH. The exchange lists new, standard ABCD options that deliver 100 shares of ABCD.

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "4322",

-

"kind": "Non-Standard",

-

"optionsSymbol": "ABCD1",

-

"primaryDeliverable": "ABCD”,

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": "99124",

-

"kind": "Non-Standard",

-

"optionsSymbol": "ABCD2",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 22.50,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-

{

-

"type": "OSDE",

-

"reporter": "MYID",

-

"optionID": 100501,

-

"kind": "Standard",

-

"optionsSymbol": "ABCD",

-

"primaryDeliverable": "ABCD",

-

"underlyingType": "Equity",

-

"expirationDate": 20181221,

-

"strikePrice": 15.00,

-

"putCall": "Call",

-

"exerciseStyle": "American",

-

"settlement": "PM"

-

}

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.9.3. Complex Option Dictionary Entry

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Complex Option Dictionary Entry - Compliance User: Self-Regulatory Organizations - Keywords: - Dictionary Mapping, - -

The dictionary mapping for a complex option will contain the following information. Each complex option can contain multiple legs, where each leg is either an option leg or a stock leg (stock leg will generically refer to equity/exchange-traded fund "ETF").

-

Complex Option Dictionary Entries

- -

The Option ID must be unique. Duplicate dictionary entries are ignored. Entries that have the same Option ID, but different details are rejected. Any entry which defines the opposite side of an existing entry will be rejected. For example, a complex option dictionary entry to Buy one (1) contract of option 1234 and Sell two (2) contracts of option 4321 is considered to be the "opposite side" of an entry to Sell one (1) contract of option 1234 and Buy two (2) contracts of 4321. Thus, if both were submitted the second would be rejected.

-

JSON Example

-

{

-

"type": "CODE",

-

"reporter": "MYID",

-

"kind": "Complex",

-

"optionID": "98765",

-

"legs": [

-

{

-

"legType": "Option",

-

"side": "Buy",

-

"ratio": 1,

-

"optionID": "121345"

-

},

-

{

-

"legType": "Equity",

-

"side": "Buy",

-

"ratio": 100,

-

"symbol": "ABCD"

-

}

-

]

-

}

-

JSON Example of reject

-

{

-

"type": "CODE", "reporter": "MYID", "kind": "Complex",

-

"optionID": "98765",

-

"legs": [

-

{ "legType": "Option", "side": "Buy",

-

"ratio": 1, "optionID": "121345"

-

},

-

{ "legType": "Option", "side": "Sell",

-

"ratio": 2, "optionID": "99999"

-

}

-

]

-

}

-

{

-

"type": "CODE", "reporter": "MYID", "kind": "Complex",

-

"optionID": "56789",

-

"legs": [

-

{ "legType": "Option", "side": "Sell",

-

"ratio": 1, "optionID": "121345"

-

},

-

{ "legType": "Option", "side": "Buy",

-

"ratio": 2, "optionID": "99999"

-

}

-

]

-

}

-

In this case, the second entry is being defined from the opposite side of the first entry, and would be rejected as a duplicate.

-
-
pubdate: September 09, 2018 effdate: N/A -

2.2.10. Corporate Actions

- Topic: CAT Participant Technical Specifications v1.7.1, Reference Data, Equity Symbols, Corporate Actions - Compliance User: Self-Regulatory Organizations - Keywords: - Options Clearing Corporation, - -

Similar to equity symbols or option dictionary entries, corporate actions for equities are reported to CAT on a daily basis. Details for corporate actions impacting listed options will be retrieved from the Options Clearing Corporation ("OCC"). An entry must be uploaded for each known corporate action every day by the listing exchange of the affected symbol. SROs must report an entry for a corporate action every day from its declared date through its effective or payment date. For example, if a dividend is declared on Dec 1, 2016 with a payment date on Aug 8, 2017, then an entry must be uploaded to CAT for that dividend every day within that period. Entries for the current trading day must be submitted everyday before 4:00 AM Eastern. For dually-listed securities, an entry must be uploaded by each of the listing exchanges.

-

CAT will accept corporate action entry reporting in the format of each SRO. SROs may use their existing CSV file formats for uploading corporate actions entries to CAT. CAT considers corporate actions to be reportable daily beginning with their declared date through their effective, payment, or cancel date. Some examples:

-

• Cash Dividend

-

• Stock Dividend

-

• Stock Split

-

• Reverse Stock Split

-

• Rights Issue

-

• Warrants Issue

-

• Spin-Off

-

• Delisting

-

• Name Change

-

• New Listing

-

• Symbol Change

-

• Share Issue

-

In addition to daily corporate actions lists, some exchanges also publish supplementary intraday reports on these corporate actions. CAT only requires that daily entries be uploaded for each known corporate action.

-

Exchanges also publish cancellations of known corporate actions to their daily lists. These entries are reportable as well to CAT and should be reported within the same 4:00AM Eastern deadline for a given trading day.

-

SRO-specific CSV formats for daily corporate action entries are included in this document in Appendix C. These are the CSV formats known to CAT. CAT must be alerted to any change in these formats at least 30 days in advance of the change taking affect, and changes to the CSV format must also be propagated to this document.

-
-
+

On March 6, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 an amendment (“Amendment No. 2”) to the National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Selection Plan”).3 Amendment No. 2 was published for comment in the Federal Register on June 23, 2015.4 The Commission received no comment letters on this proposal. This Order approves Amendment No. 2 to the Selection Plan.

-
pubdate: September 09, 2018 effdate: N/A -

3. Special Data Elements and Common Events

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events +
pubdate: September 24, 2015 effdate: N/A +

II. Background and Description of the Proposal

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal Compliance User: Self-Regulatory Organizations Keywords: - Data Elements, - -

This section describes some data elements that are common to most order events, including timestamps, sequence numbers, symbols, material terms of an order, and elements used during the CAT process of creating order lifecycles.

-

Events that are universal, or common, are also described in this section.

-
pubdate: September 09, 2018 effdate: N/A -

3.1. Timestamps and Sequence Numbers

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers - Compliance User: Self-Regulatory Organizations - Keywords: - Time Stamps, - Sequence Number, - -

All order events from a given reporter contain a timestamp. Timestamps are required to be reported in the greatest granularity in use by the reporter's trading platform, up to nanoseconds. Ideally, that timestamp would uniquely sequence every event. However, if the granularity of the reported timestamp is insufficient, multiple events could have the same timestamp. This means that there is no way to confidently sequence those events by timestamp. Thus, if it is possible for multiple events to have the same timestamp (from the same reporter, on the same day, in the same symbol), then an event sequence number must also be attached to each event. The sequence number is required to be strictly increasing, and must guarantee proper sequencing of events in the order in which they originally occurred (sequence number requirement is by reporter, date, and symbol). Technically, the sequence number is used to break ties when events have the exact same timestamp.

-

The sequence number does not help sequence events across multiple reporters with the same timestamp, but it does assist sequencing events from a given reporter. Note that the sequence number may be globally unique, in which case it provides sequencing unilaterally. However, this is not required. The main requirement of the sequence number is that it can provide sequencing between events from the same reporter, on the same date, in the same symbol, with the same reported timestamp.

-

If the timestamp of a given event provides the ability to order within reporter/date/symbol, the Event Sequence Number does not have to be reported.

-
pubdate: September 09, 2018 effdate: N/A -

3.1.1. Sequence Number Subsystems

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers, Sequence Number Subsystems - Compliance User: Self-Regulatory Organizations - Keywords: - Subsystem IDs, - Sequence Number, - -

The purpose of the sequence number is to allow regulators to break ties when multiple events have the same timestamp. However, reports for the same reporter/date/symbol may originate from multiple systems, and it may be difficult to coordinate a sequence number that is unique among all subsystems.

-

In such cases, a sequence number subsystem (seqNumSub) can be optionally reported along with the sequence number. This value can be examined to better determine ordering characteristics of the events that have the same timestamp value.

-

Note that the only time the sequence number is really important is when multiple events for the same reporter/date/symbol have the same timestamp. If a system guarantees that such reports can't happen, then no sequence number is ever needed. If a system can meet the guarantee without using multiple subsystem IDs, then the subsystem IDs are unnecessary.

-
-
pubdate: September 09, 2018 effdate: N/A -

3.1.2. Time of Order Receipt

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Timestamps and Sequence Numbers, Time of Order Receipt - Compliance User: Self-Regulatory Organizations - Keywords: - Order-ID, - -

The time of order receipt means the time which an exchange Participant assigns an Order-ID to an incoming message.

-
-
-
pubdate: September 09, 2018 effdate: N/A -

3.2. Symbology

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Symbology - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - Option ID, - -

When reporting events for equities, the symbol must be reported in the symbology of the listing exchange. Optionally, the reporter can submit their reports using an alternate symbology, provided that a symbol dictionary is uploaded to CAT each day an alternate symbology will be used. Thus, any time a symbol is reported, it is always required to be in the symbology of the listing exchange, or to be a valid symbol dictionary alias.

-

Any reporter who reports options events must submit an option dictionary to CAT. All options are identified using the Option ID, as provided to CAT in the reporter's option dictionary.

-
-
pubdate: September 09, 2018 effdate: N/A -

3.3. NBBO

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, NBBO - Compliance User: Self-Regulatory Organizations - Keywords: - NBBO, - -

The NBBO is provided with each relevant order event (i.e. when available). This is the NBBO from the perspective of the reporter at the time of the event, but not including the effect that the event would have on the NBBO. For example, if the NBBO were 100@10.10 x 100@10.15, and a new order arrived at the exchange to BUY 100@10.10, the reported NBBO would be 100@10.10 x 100@10.15, even though the immediate effect of the order would be to change the best bid to 200@10.10.

-

Note that the bid/ask prices are required, but the quantities being bid or offered are optional.

-

There exist some special cases where the NBBO is unavailable or nonexistent. In those cases, the NBBO values should be reported with a zero price and zero quantity. An entry with both the price and quantity of zero will indicate that the data was either unavailable or not applicable for that particular event. Note that the values can't just be reported as unavailable because it is hard to acquire them. They must truly be unavailable or not applicable to that particular event.

-
-
pubdate: September 09, 2018 effdate: N/A -

3.4. Order Linkage and Lifecycle

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Order Linkage and Lifecycle - Compliance User: Self-Regulatory Organizations - Keywords: - CAT Reporters, - Order Linkages, - Routed Order ID, - -

When all members have submitted their reports to CAT for a given trading day, CAT will link all reportable events in such a way as to create a complete lifecycle of each order. A key part of being able to connect the orders is recognizing and connecting the daisy chain of orders across all CAT reporters. In order to accomplish this, both the reporter routing an order away and the reporter accepting the order must report the exact same details about the order.

-

Of particular interest to reporting participants, the data elements important to creating cross-reporter order linkages are: Exchange ID, Date, Symbol/Option, Routing Party, Routed Order ID, and Session ID.

-

When an order is routed to an exchange, each communication protocol specifies a way to uniquely identify that order (e.g., FIX protocol calls it ClOrdId, OUCH calls it Order Token). However, the uniqueness guarantees differ from protocol to protocol. Some exchanges may assign a unique Member Alias for each account, and require uniqueness based on the account ID and order ID alone. Others may issue special identifiers for each API session that the member uses to connect into the exchange. Since there is no universally accepted method, CAT has decided to use a combination of several different attributes that provide flexibility in ensuring globally unique order IDs across all known supported protocols.

-

Both the routing firm — once industry member reporting has commenced — and the exchange will submit certain pieces of information to CAT in their Order Route and Order Accepted reports. Of particular importance are the Routed Order ID, Routing Party, and Session ID as those fields must match identically between exchange and industry member in order for CAT to accomplish the linkage process.

-

The Routed Order ID is the unique order identifier sent in the API message going from the routing entity to the destination entity.

-

The Routing Party is a text string that the exchange has assigned to the firm routing the order. Complexity arises when a member is assigned multiple values by the exchange. The determination as to which value is used by both parties depends on protocol-specific information. The text string can be a Member Alias, but there is no restriction that it must be a Member Alias. It can be any string, so long as both the sender of the order and the exchange agree on using the same string for their orders.

-

The Session ID is also exchange-assigned, usually a unique login account, an actual protocol session name, IP/port combination, or some other means of identifying a particular API session. The Session ID identifies the specific session used to route the order. Even in cases where there is only one session in use between reporters, the same non-empty value must be reported in the session field by both parties.

-

CAT, in cooperation with each exchange, will determine how the Routing Party, Routed Order ID, and Session ID are derived for each API supported by the exchange. This guidance will be documented and published on the CAT website.

- -
-
pubdate: September 09, 2018 effdate: N/A -

3.5. Material Terms of an Order

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order - Compliance User: Self-Regulatory Organizations - Keywords: - Material Terms, - CAT, - -

The material terms of an order include several well-known fields: price, quantity, side, order type, open/close indicator (for options), time in force, and any special handling instructions. Each order event includes fields for each of these.

-

However, each exchange offers significant distinguishing features and instructions to describe how orders are to be handled. These differences are captured mainly in the possible values for the order type and any special handling instructions. The CAT system is generally agnostic to these values, and their primary utility is in how they are interpreted and used in surveillance activities.

-

In order to provide utility in using the reported data for surveillance purposes, both the reporters and the users must have well known definitions of the data being reported. In addition, without specific definitions, the submitted data cannot be checked for integrity in those fields that comprise the material terms of an order.

-

Thus, every possible value for each field must be explicitly defined both in this specification and the separate specification document for industry members (since they must also report the material terms of the order on their route reports). While this will serve to make the system more friendly to regulatory users, it places the burden of accuracy on each reporter.

-

First, every value that could possibly be reported must be well-defined in the technical specifications. Second, CAT must maintain the technical specifications for both the participants and industry members to reflect changes to order types and/or handling instructions over time. Third, each exchange must provide guidance to CAT on how these values are determined for each of their system interfaces, with lead time sufficient to allow CAT to update the specifications for both participants and industry members.

-

While the advance notice requirement may represent an incumbrance, it bears noting that exchanges must go through a regulatory approval process in order to make changes to order types, so there is already lead time required before implementing new order types and attributes. Communication to CAT can occur within this lead time to minimize the impact of the advance notice requirement.

-
pubdate: September 09, 2018 effdate: N/A -

3.5.1. Order Types

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order, Order Types - Compliance User: Self-Regulatory Organizations - Keywords: - Order Type, - CAT, - -

The Order Type for each order must be assigned with exactly one value from a predefined set of choices. These choices are documented in the data dictionary entry for Order Type. CAT, in cooperation with each exchange, has defined a list of acceptable values for this field, however additional order types may be added to accommodate future market needs.

-

The CAT website contains guidance on how these choices can be determined for each exchange API.

-
-
pubdate: September 09, 2018 effdate: N/A -

3.5.2. Order Handling Instructions

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Material Terms of an Order, Order Handling Instructions - Compliance User: Self-Regulatory Organizations - Keywords: - Sec Rule 613, - CAT Processor, - Handling Instructions, - -

The Handling Instructions field defines special instructions as to how the order should be handled by the exchange. Neither SEC Rule 613, nor the CAT NMS Plan dictate the special handling instructions that must be supported. Furthermore, each exchange may use different names and values to describe how orders are handled, and there can be numerous customized special handling instructions. While the CAT processor must be able to support any instructions which are required to be reported, mandating specific instructions is beyond the scope of the CAT processor as that information is only known by the exchanges and the appropriate surveillance and regulatory entities. Thus, the specification of this field aims to be flexible in providing support for a wide array of special handling instructions.

-

Similar to the Order Type field, each possible Order Handling Instructions value must be documented in the data dictionary of this technical specification, and guidance must be provided to CAT by reporters for how these values can be determined based on each exchange API (such guidance will be subsequently posted on the CAT website).

-

However, unlike Order Type, the Handling Instructions field can specify as many special handling instructions as apply for that order (or be empty if no such instructions apply). Thus, the handling instructions field will be a list of name/value pair.

-

Note that the full intent of the order is reportable to CAT. At minimum, every term and/or instruction for an order that is communicated to the exchange must be reported to CAT. It can be reported as part of the standard set of material terms, or via one of the defined name/ value pairs as defined in the Handling Instructions section of the Data Dictionary. Reporters cannot choose which order instructions to report: they must report every instruction applicable to each order.

-

It bears noting that the Order Handling Instructions field is marked as 'conditionally required' in the event definitions, because its existence is not enforced by the system. If the order does not have any characteristics that are reportable to CAT, then the field does not have to be provided. However, if there are any explicit or implied handling instructions for the order, then this effectively becomes a required field, as all instructions must be reported.

-

For example, assume two hypothetical handling instructions: AON and WDS=<percent>; where AON means all-or-none and WDS means a discretion price is allowed to be less than or equal to some percentage of the spread. If an order were to be placed as all-or-none, with a discretion of up to 50 percent of the spread, then the Order Handling Instructions field would contain "AON|WDS=50" as its value.

-

This approach provides flexibility for exchanges enabling them to represent a wide array of handling instructions, while also enabling CAT to validate submitted data and providing regulators a defined structure for interpretation of the data.

-
-
-
pubdate: September 09, 2018 effdate: N/A -

3.6. Optional, Required, and Conditional Fields

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Optional, Required, and Conditional Fields - Compliance User: Self-Regulatory Organizations - Keywords: - Optional, - Required, - Conditional, - -

Subsequent sections describe event types and their fields. Each field will be notated with the abbreviation R, O, C, or r to represent whether it is required, optional, conditional, or required conditionally. This codification will be present in the last column of each table describing an event.

- -
-
pubdate: September 09, 2018 effdate: N/A -

3.7. Common Events

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events - Compliance User: Self-Regulatory Organizations - Keywords: - Note Event, - Self-Help Declarations, - Supplemental Trade Event, - -
pubdate: September 09, 2018 effdate: N/A -

3.7.1. Note Event

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Note Event - Compliance User: Self-Regulatory Organizations - Keywords: - Order ID, - Quote ID, - Note Event, - -

The Note Event is a generic event that accommodates reporting for certain events that are not defined with explicit events. For example, there could be certain events that occur in the process of handling an order on the floor of an exchange that may be desired to be included in the trail of events for a particular order, but don't fit into an explicitly defined reportable event. Or, there could be a certain process that the order goes through as part of its handling that does not constitute a change in terms of the order, but may be beneficial as part of the order's audit trail.

-

The Note event requires either an Order ID or a Quote ID (but not both), so that the notation can be appropriately linked by CAT to the associated order/quote. If the note relates to a stock order, then both orderID and symbol are required. If the note relates to an option order/quote then both optionID and orderID/quoteID are required.

-

Note Event

- -

The Note Type and Defined Note Data fields are well-defined and must conform to the permitted values as described in this specification. The Undefined Note Data can

-

accommodate any attributes, as long as the field conforms to the format for a list of name/ value pairs.

-

Thus, Note Events, while generic in nature, can be parsed and evaluated by both humans and computer programs.

-

Lifecycle keys for this event:

-

• Order Key: date, reporter, symbol, orderID

-

• Order Key: date, reporter, optionID, orderID

-

• Quote Key: date, reporter, optionID, quoteID

-
-
pubdate: September 09, 2018 effdate: N/A -

3.7.2. Self-Help Declarations

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Self-Help Declarations - Compliance User: Self-Regulatory Organizations - Keywords: - Self-Help, - CAT, - -

“Self-help” declarations allow market participants to disregard the protected quotations of trading centers that are experiencing systems problems such as failure, material delay, or malfunction.

-

Participants must report to CAT any self-help declarations they make. If a self-help declaration is carried over to the next day, it must be reported again on that day. The following data is required to be reported for Self-Help declarations:

-

Self-Help Declaration

- -

Both the declared and revoked timestamps can be reported in one single event by including both declaredTimestamp and revokedTimestamp. Alternatively, the declaration and revocation can be reported independently by just including the relevant timestamp in separate events.

-
-
pubdate: September 09, 2018 effdate: N/A -

3.7.3. Supplemental Trade Event

- Topic: CAT Participant Technical Specifications v1.7.1, Special Data Elements and Common Events, Common Events, Supplemental Trade Event - Compliance User: Self-Regulatory Organizations - Keywords: - Trade Event, - Stock and Option, - -

Each trade event (stock and option) contains some information which may not be readily available when generating the trade event. Thus, an independent event can be submitted to augment the information in the trade event. These events can be submitted in the same file as other events or in a separate file.

-

These events will not be recorded as separate events in CAT. Rather, the information in these events will be merged with the appropriate trade event to provide data that may have been missing in the original trade event. Currently, only the saleCondition can be reported in this way.

-

This event is used for stock and option trades. If the trade references a stock, then the symbol field must be provided. If the trade references an option, then the optionID field must be provided.

-

The description uses "trade" in a general manner. If the event references a trade, the tradeID field is required. If the event references a fill, the fillID and side are required.

-

Supplemental Trade Event

- -

Lifecycle keys for this event:

-

• Trade Key: date, exchange, symbol, tradeID

-

• Trade Key: date, exchange, optionID, tradeID

-

• Fill Key: date, exchange, symbol, fillID

-

• Fill Key: date, exchange, optionID, fillID

-
-
-
-
pubdate: September 09, 2018 effdate: N/A -

4. Events for Stock Exchanges

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges - Compliance User: Self-Regulatory Organizations - Keywords: - Technical Specification, - -

Within this Technical Specification, events for stock exchanges, options exchanges, and the trade reporting facilities are documented in separate sections. This section describes reportable events for stock exchanges.

-

Events for Stock Exchanges

- -
pubdate: September 09, 2018 effdate: N/A -

4.1. Order Accepted Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Accepted Event - Compliance User: Self-Regulatory Organizations - Keywords: - Order Accepted, - Order ID, - -

When an exchange receives and accepts a routed order, an Order Accepted event is reported to CAT. If the order is rejected (i.e., not received and successfully processed by the matching engine), then an event is not reported to CAT.

-

Some systems will outright reject messages if they are malformed or contain a duplicate order ID. Other systems will silently ignore certain malformed messages (e.g., the OUCH protocol specifically states that new orders containing duplicate order tokens are silently ignored). However, all current systems will send some sort of positive acknowledgement when an order has been finally accepted into the system. Some systems will send an acknowledgement from the gateway upon receipt of the request, but the order could still possibly be rejected instead of accepted by the matching engine. Such protocols have a prescribed way of notifying the sender whether or not their order was actually accepted.

-

The basic rule is that orders rejected by the gateway are not reportable, but any order reaching the matching engine is reportable.

-

Note that for the order accepted event, the firm that sends the order to the exchange will be referred to as the routing firm. In the next event, order route event (section 4.2), the routing broker dealer will also be referred to as the routing firm.

-

The Order ID that is used in orders must be globally unique when combined with the date, exchange, symbol and general side, where the general side is either Buy or Sell.

-

Order Accepted

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

-
-
pubdate: September 09, 2018 effdate: N/A -

4.2. Order Route Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Route Event - Compliance User: Self-Regulatory Organizations - Keywords: - Order Route, - Routing Firm, - -

The following Order Route event is used to report when an exchange routes an order through a routing broker dealer.

-

When an order is routed, some exchanges create a derived order (with a different order ID), to represent the order being routed away. Others just route the order (or part of the order) straight to the routing broker without changing the Order ID. In either case, CAT must be able to link the internal order on the exchange with the internal order at the routing BD. Thus, both the report from the exchange and the report from the routing BD must have the same identifiers for the routed order. This is very similar to the process described earlier related to the Accepted event.

-

Note that for an order route event, the routing broker is referred to as the routing firm.

-

The Order Route event reported by the exchange needs three key pieces of information: the Routing Firm receiving the routed order, the Session ID through which the order is being routed, and the Routed Order ID, which is the order ID sent to the routing firm.

-

The Routing Firm must be represented by an entry in the exchange's member dictionary (though not necessarily a member of the exchange). Furthermore, as explained in the linkage section, both the exchange and the Routing Firm must know which Member Alias is to be reported to CAT because both will have to report the same Member Alias (the exchange in their Route event, and the firm in their Accepted event). Either both sides must use a constant value, or there must be some way to derive the value being used (via session configurations or in the message itself).

-

If the exchange creates a derived order, and passes that order ID to the firm via its API, then the Routed Order ID will be the order ID of the derived order. If, however, there is no derived order and the exchange passes its own internal order ID to the routing broker, then the internal order ID will also be assigned as the Routed Order ID. In this case, both the order ID and the routed order ID are populated with the same value.

-

Order Route

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

-
-
pubdate: September 09, 2018 effdate: N/A -

4.3. Internal Order Route Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Internal Order Route Event - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - -

In some cases, an exchange may have multiple internal subsystems involved in handling orders. In such cases, and order may be accepted by one internal system, and then routed to one or more internal systems for processing. Routes within an exchange are not required to be reported to CAT. However, there are cases where it is difficult for an exchange to report the entire status of an order to CAT when its internal processing is handled on multiple systems. Specifically, ensuring that the events contain the same order identifiers would require substantial post processing.

-

Thus, an internal route event may be reported to CAT, indicating that an order is being passed from one internal system to another. This will allow CAT to link events that are related to the same order within an exchange, even if the exchange has changed the identifiers on the order as it moves between internal systems.

-

Internal Order Route

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

-
-
pubdate: September 09, 2018 effdate: N/A -

4.4. Order Modified Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Modified Event - Compliance User: Self-Regulatory Organizations - Keywords: - Original Order ID, - Order Modified, - -

When the material terms of an order have been changed, an Order Modified event must be reported to CAT. For example, the automatic price adjustment of a peg order due to market move is reportable to CAT. However, changes on fields that are not considered material (e.g., change memo field) should not be reported to CAT.

-

Some times, during the course of an order modification, a new internal order is generated (with a new order ID) and completely replaces the previous order (though the new order will be linked to the original order). Both of these cases are handled by the Order Modified event. If the order ID remains the same, then the Original Order ID field will be the same. If the order ID changes, then the Order ID field will contain the new internal ID of the order, and the Original Order ID will contain internal ID of the order prior to being replaced.

-

When a modification is reported, the full state of the order is reported, including those fields which have not changed.

-

Order Modified

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Previous Order Key: date, exchange, symbol, originalOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.5. Order Adjusted Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Adjusted Event - Compliance User: Self-Regulatory Organizations - Keywords: - Order Modified, - Adjustments, - -

The Order Modified event requires the full state of the order be reported to CAT on each modify. However, there are some common cases where the only change is to price, quantity, or side. The Order Adjusted event can be used in these situations.

-

The only types of modifications that are allowed to be reported with this event are changes to the side, price or quantity of the order.

-

Side adjustments are only allowed for same-side changes (e.g., changes between short and long sell). The side only needs to be reported if it changes.

-

For changes in price, both price and workingPrice are required (i.e., either both are reported or neither are reported).

-

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

-

If either the displayPrice or the displayQty change, they both need to be reported. The only exception is if the displayQty changes from non-zero to zero. In such a case, the displayQty would be reported, but the displayPrice would not be reported since there is no display quantity.

-

This event is meant to capture the most common simple adjustments to orders (e.g., reduction in shares, short-to-long sell, price-only changes). Any modification that cannot be fully represented in this event must be reported via the Order Modified event.

-

Order Adjusted

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Previous Order Key: date, exchange, symbol, originalOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.6. Order Canceled Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Canceled Event - Compliance User: Self-Regulatory Organizations - Keywords: - Exchanges, - Cancelled Order, - -

When an exchange cancels an order, in part or in whole, the event must be reported to CAT. Note that an explicit Canceled Event is required for every order that is canceled, even orders that have implicit "execute or cancel" instructions like IOC orders.

-

A Canceled event should be used anytime any part of an order is cancelled. For example, an order can be partially reduced either with a cancel message or a modify (cancel/replace) message. If an actual cancel is processed by the exchange, a Canceled event would be reported. If a modify and/or cancel/replace was sent to the exchange, a Modified event would be reported. This keeps the reported event in line with the original intent.

-

Some protocols only allow full cancels; partial cancels must be accomplished via a cancel/ replace. In such cases, partial cancels would always be reported as Modified events.

-

Order Canceled

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.7. Order Trade Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Trade Event - Compliance User: Self-Regulatory Organizations - Keywords: - Two-sided Transactions, - -

All trade events are reported to CAT as two-sided transactions, with a single event.

-

Each order trade event is represented with the following details. The details in the table Order Trade Side Details must be populated for each side of the trade.

-

Order Trade Event

- -

Order Trade Side Details

- - -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, buyDetails.orderID

-

• Order Key: date, exchange, symbol, sellDetails.orderID

-

• Trade Key: date, exchange, symbol, tradeID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.8. Order Fill Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Fill Event - Compliance User: Self-Regulatory Organizations - Keywords: - Order Fill Event, - Identifier, - Description, - Data Type, - Field Name, - -

When a routed order executes, the routing firm acquires the position. The exchange will report the fill with the order on one side, and the routing firm on the other side.

-

Order Fill Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Fill Key: date, exchange, symbol, fillID

-

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

-
-
pubdate: September 09, 2018 effdate: N/A -

4.9. Bulk Print Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Bulk Print Event - Compliance User: Self-Regulatory Organizations - Keywords: - CAT, - Blue Print Event, - Field Name, - Data Type, - Description, - -

Certain types of executions happen in a batch and not as order-to-order trades (e.g., opening and closing cross). The Bulk Print event is designed to enable reporting of those types of matches.

-

Each batch execution needs an identifier (bulkPrintID) which is unique for that set of executions, by date, reporter, and symbol. An event will be reported to CAT for every order that participated in the batch execution.

-

For example, if the opening cross matched 1,000,000 shares of symbol ABCD across 5,000 buy orders and 4,000 sell orders, then there would be 9,000 Bulk Print Event reports sent to CAT for that cross. Each event would contain the same bulkPrintID, which would uniquely identify that particular cross event. The total of all buy-orders execution quantities should be equal to the total total of all sell-orders execution quantities (in this example, 1,000,000 shares).

-

Bulk Print Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.10. Order Cancel Route Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Cancel Route Event - Compliance User: Self-Regulatory Organizations - Keywords: - Cancel Request, - Field Name, - Data Type, - Description, - -

When an exchange initiates a cancel request on an order it has previously routed away, it must report its intent to cancel, using a Cancel Route Event.

-

Order Cancel Route

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

-
-
pubdate: September 09, 2018 effdate: N/A -

4.11. Order Modify Route Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Modify Route Event - Compliance User: Self-Regulatory Organizations - Keywords: - Cancel or Replace Request, - Modify Route Event, - -

When an exchange initiates a modify or cancel/replace request on an order it has previously routed away, it must report its intent to modify the order, using a Modify Route Event.

-

If the request does not change the routed order ID, then both routedOrderID and routedOriginalOrderID must be the same.

-

Modify Route

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, symbol, exchange, routedOrderID, session, routingParty

-

• Previous Route Link Key: date, symbol, exchange, routedOriginalOrderID, session, routingParty

-
-
pubdate: September 09, 2018 effdate: N/A -

4.12. Order Restatement Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Order Restatement Event - Compliance User: Self-Regulatory Organizations - Keywords: - Restated Orders, - Order Key, - Previous Order Key, - -

Orders that persist across business days (e.g., GTC orders) must be restated each day before any other activity is reported for that symbol. The restatement is an explicit confirmation that the order is still active in the reporter’s order book, and also provides an opportunity to use per-day unique order IDs for all orders.

-

The attributes of the order will be restated in terms of the order's current state, after any corporate actions have been processed (e.g., if a 2:1 split occurred, the quantity and price would reflect the resulting change).

-

Order Restatement

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Previous Order Key: originalOrderDate, exchange, symbol, originalOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.13. Trade Break Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Trade Break Event - Compliance User: Self-Regulatory Organizations - Keywords: - Broken Trade, - Trade Key, - -

When a trade is broken, an event is reported to CAT with the appropriate information. Note that CAT adds the event to the history of the order. The broken trade is not removed from the history, as it is something that actually happened and should be recorded.

-

Order Trade Break

- -

Lifecycle keys for this event:

-

• Trade Key: tradeDate, exchange, symbol, tradeID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.14. Trade Correction Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Trade Correction Event - Compliance User: Self-Regulatory Organizations - Keywords: - Corrected Trade, - Order Key, - Trade Key, - -

If a trade is corrected in any way, a correction event must be reported to CAT with all details of the trade, after having been corrected. This event must capture the entire state of the trade after having been corrected.

-

As with trade breaks, CAT will still keep the original trade, adding the correction to the audit trail of the trade being corrected.

-

Order Trade Correction

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, buyDetails.orderID

-

• Order Key: date, exchange, symbol, sellDetails.orderID

-

• Trade Key: date, exchange, symbol, tradeID

-
-
pubdate: September 09, 2018 effdate: N/A -

4.15. Lifecycle Keys

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Stock Exchanges, Lifecycle Keys - Compliance User: Self-Regulatory Organizations - Keywords: - Lifecycle Keys, - Equity Events, - -

The lifecycle keys for each event are summarized in the following table.

-

Lifecycle Keys for Equity Events

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

5. Events for Options Exchanges

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges - Compliance User: Self-Regulatory Organizations - Keywords: - Options Exchanges, - Modify Option Route, + Sec Rule 613, + NMS Plan, -

These events are specific for options exchanges.

-

Events for Options Exchanges

- -
pubdate: September 09, 2018 effdate: N/A -

5.1. Market Maker Quotes

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes +
pubdate: September 24, 2015 effdate: N/A +

A. Background

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal, Background Compliance User: Self-Regulatory Organizations Keywords: + Sec Rule 613, + NMS Plan, CAT NMS plan, - CAT, - Quotes, - -

Quotes issued by market makers to options exchanges must be reported to CAT. This section will describe the types of attributes that are used to model quote events, and the types of quote events that should be reported to CAT. CAT supports both one-sided and two-sided quotes.

-

While some exchanges create quotes and orders the same way, CAT considers them distinct from a reporting perspective, and they must be reported distinctly. First, market makers are exempt from reporting their quotes to CAT (Section 6.4(d)(iii) of the CAT NMS Plan). Instead, the exchange is fully responsible for submitting the quotes they receive from market makers. Second, the market makers must inform the exchange of the time that they sent each quote, so the exchange can report it to CAT along with the quote (though the MMs are not required to do so until 2018). Third, quotes require fewer data elements than orders.

-

Each quote must have a unique Quote ID. Specifically, when a trade occurs with a MM quote on one side, the Quote ID in the trade will identify the exact quote. The combination of Exchange ID, Date, Option ID, and Quote ID should be globally unique.

-

Furthermore, each quote update must also have a unique Quote ID (different from the Quote ID for the quote being updated). If the exchange only supports a single quote per market maker, the event can be so noted, and the Quote ID for the quote that is being replaced is not necessary. Otherwise, the update must also include the Quote ID for the quote that is being updated/replaced by the new quote.

-

The exchange must guarantee uniqueness of quote IDs throughout the day.

-

There are two types of quote events in CAT:

-

• Quote Event: Used to report a new quote or a quote replacement. When a quote is replaced, the Original Quote ID will identify the quote being replaced, and the Quote ID will provide the new ID for the updated and replaced quote (or note in the event that the market maker can only have one quote active at any given time).

-

• Quote Cancel: Reported when a quote is canceled.

-

For block quotes, each quote in the block would be reported to CAT as a separate quote, with a separate unique Quote ID. In such a case, the quote Sent Timestamp would be the same for each quote from the same block because they were all sent at the same time by the market maker. However, the combination of Event Timestamp and Event Sequence Number must be unique for each quote.

-

Similarly, when a bulk cancel is requested, a separate quote cancel event is required for each quote that is canceled by such a request.

-

On some exchanges, quotes are allowed to be sent before the trading system is ready to process them. For example, there may be an established protocol where the API documents that quotes sent before a particular time are ignored. Or, a protocol may send a "Now Accepting Quotes" message to market makers, and any quotes sent before that time are ignored. In such cases, those ignored quotes are not processed, so they should not be reported to CAT.

-

Note that all pre-open quotes are still reportable to CAT. This exception is explicitly for those cases where the exchange allows quotes to be sent before they are officially accepted - but those quotes are neither processed, nor entered into the book, nor accepted for participating in the opening nor any other trading session.

-

Once the system has started accepting quotes (either because a set time has arrived, or it has sent out a message indicating that quotes are now being accepted), then all quotes must be reported. CAT does not have rules in place for when exchanges start accepting quotes, but it seems that all exchanges start accepting quotes at least five minutes before the start of trading.

-

For example, in the following diagram, an exchange ignores quotes until they send their "Now Accepting Quotes" message. Thereafter all quotes are processed and reported to CAT.

- -

Similarly, if a quote is rejected and neither accepted nor booked, then the quote should not be reported to CAT.

-
pubdate: September 09, 2018 effdate: N/A -

5.1.1. Quote Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes, Quote Event - Compliance User: Self-Regulatory Organizations - Keywords: - Quote Events, - Reported Quote Events, - Quote Key, - Previous Quote Key, - -

The following data elements are to be reported with all quote events. For two-sided quotes, all bid/ask/price/qty values are required. For one-sided quotes, both the price and quantity fields are required, but only for one side.

-

Quote Events

- -

Lifecycle keys for this event:

-

• Quote Key: date, exchange, optionID, quoteID

-

• Previous Quote Key: date, exchange, optionID, originalQuoteID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.1.2. Quote Cancel Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Market Maker Quotes, Quote Cancel Event - Compliance User: Self-Regulatory Organizations - Keywords: - Quote Cancel Event, - Quote Key, - -

The following data elements are required for cancel quote events.

-

Quote Cancel Event

- -

Lifecycle keys for this event:

-

• Quote Key: date, exchange, optionID, quoteID

-
-
-
pubdate: September 09, 2018 effdate: N/A -

5.2. Options Orders

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders - Compliance User: Self-Regulatory Organizations - Keywords: - Order Events, - Simple Option Orders, - Complex Option Orders, - CAT, - -

Order events for options are reported in two flavors: simple and complex. Simple option orders are orders for a single option series (including flex options). Complex option orders contain two or more simple option orders, or at least one each of a simple option order and equity order.

-

For CAT, an order for a complex option will be reported at the parent complex level, and additional orders will be reported if/when orders are created for each leg. Some exchanges create leg orders as soon as the parent is created, and other exchanges create leg orders only when an execution is created. CAT supports both reporting scenarios.

-

Each options order routed to (and then accepted by) an exchange must be reported to CAT. Options orders that are routed to an exchange and then rejected by the exchange are not reportable by the exchange. When an exchange accepts an options order, it must report either a single Option Order Accepted event, or a single Complex Option Order Accepted event followed by one Accepted event for each leg of the complex option.

-

The field executionBroker is defined to be the Member Alias of the broker executing the order. For manual/floor trades, this will be the identifier for the physical broker. For quotes, it will be an alias for the market maker behind the quote. For system trades, it will be an alias for the system handling that order.

-
pubdate: September 09, 2018 effdate: N/A -

5.2.1. Order Accepted Events

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Order Accepted Events - Compliance User: Self-Regulatory Organizations - Keywords: - Order Accepted Events, - -

5.2.1.1. Simple Option Order Accepted Event

-

A simple option order can represent either a stand-alone option series, or one leg of a complex parent order. If the order represents a leg of a complex order, then the field Complex Order ID will be set to the Order ID of the parent complex order. If necessary, the event timestamp and sequence number could be the same as those in the parent complex order.

-

Fields marked with a lower-case 'r' are required if the event represents a normal option order, and they are conditional if the event represents a leg of a complex order.

-

Simple Option Order Accepted Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.1.2. Complex Option Order Accepted Event

-

Each complex option order routed to (and accepted by) an exchange must be reported to CAT. CAT requires each leg of a complex order to be reported separately, thus the parent order is relatively small with most order details reported on behalf of each leg. The complex order event includes the following data elements.

-

The number of legs, and description of each leg is encapsulated in the dictionary entry for the Option ID. In addition to the Complex Order Accepted event, at least one Option Order Accepted event must be submitted for each leg of a complex order (Order Accepted for non-option legs).

-

Some systems allow individual legs to carry specific instructions. Thus, order type information is relevant on a per-leg basis, and not reported for the complex parent itself. Furthermore, some exchange don't create leg orders until a trade is imminent. Thus, the model supports both processes, where leg orders can be created upon initial acceptance and at the point of execution.

-

No matter when the leg orders are created, each leg must have a unique internal Order ID. Some reporters already create such derived order representations, so these IDs are easy to acquire. Others do not assign identifiers to legs. However, all reporters will be expected to report individual order events for each leg. One suggested method for creating unique leg Order IDs is to use the Order ID of the parent complex order, combined with the leg number (its ordering in the complex option definition). Another is to combine the Complex Order ID with the Option ID and Side of that leg.

-

Note that the following fields are conditional in this event. If they are present, then they do not have to appear in the individual order events for option legs, unless the value for a leg would be different from the value in the complex order. In other words, these field values apply to all option legs, unless the option leg contains a different value. If these fields are missing, then the data must be present in each option leg.

-

coverage, exchOriginCode, executingFirm, cmtaFirm, mktMkrSubAccount

-

Complex Option Order Accepted Event

- - -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID (if not isGloballyUnique)

-

Order Key: date, exchange, orderID (if isGloballyUnique)

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

5.2.1.3. Stock Leg Order Event

-

Similar to option legs, stock legs are reported individually, with a link to the parent complex order. If necessary, the event timestamp and sequence number could be the same as those in the parent complex order.

-

Stock Leg Event

- -

See the explanation about leg Order IDs in the section on complex orders. The same process applies to Order IDs for stock legs.

-

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.2.2. Order Modified Events

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Order Modified Events - Compliance User: Self-Regulatory Organizations - Keywords: - Modified Events, - Order ID, - -

An event must be sent to CAT to report changes to any field of an order. Sometimes these changes are applied to the existing internal order. Other times, the modification involves a replacement of the order, causing the exchange to change its internal Order ID. If such a change is necessary, both IDs are needed to maintain the order lifecycle.

-

5.2.2.1. Option Order Modified Event

-

When an option series or an option leg of a complex option is modified, an instance of this event must be reported, with the following elements. The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

-

Option Order Modified Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Previous Order Key: date, exchange, optionID, originalOrderID

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.2.2. Complex Option Order Modified Event

-

If the price or quantity changes on a complex order, a complex option order modified event needs to be submitted to CAT. If a change to the parent complex order causes attributes in the leg orders to change, then Order Modified events must be reported for each affected leg. (Note that this only applies if a leg order actually exists at the time of the modification to the complex order - for exchanges that create leg orders at execution, only the complex order needs to be modified). However, if a change in net price to the complex order causes the price of the leg orders to change, changes to the leg order prices are not reportable to CAT.

-

If the internal order ID of the complex order changes, then modified reports must be generated for every leg that exists at the time of the modification, referencing the new order ID of the parent complex order.

-

The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

-

Complex Option Order Modified Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Previous Order Key: date, exchange, optionID, originalOrderID

-

5.2.2.3. Stock Leg Modified Event

-

When a stock leg is modified, an event must be reported to CAT with the modified data elements. The full state of the modified order must be reported, including fields that did not change value as a result of the modification.

-

Stock Leg Modified Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Previous Order Key: date, exchange, symbol, originalOrderID

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.2.4. Option Order Adjusted Event

-

When an option series or an option leg of a complex option is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Option Order Modified event.

-

The only types of modifications that are allowed to be reported with this event are changes to the price or quantity of the order.

-

For changes in price, both price and workingPrice are required (i.e., either both are reported or neither are reported).

-

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

-

If either the displayPrice or the displayQty change, they both need to be reported. The only exception is if the displayQty changes from non-zero to zero. In such a case, the displayQty would be reported, but the displayPrice would not be reported since there is no display quantity.

-

Option Order Adjusted Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Previous Order Key: date, exchange, optionID, originalOrderID

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.2.5. Complex Option Order Adjusted Event

-

When a complex option is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Complex Option Order Modified event.

-

The only types of modifications that are allowed to be reported with this event are changes to the price or quantity of the order.

-

For changes in quantity, both quantity and leavesQty are required (i.e., either both are reported or neither are reported).

-

Complex Option Order Adjusted Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Previous Order Key: date, exchange, optionID, originalOrderID

-

5.2.2.6. Stock Leg Adjusted Event

-

When a stock leg is modified in such a way that only impacts the price and/or quantity, an instance of this event can be reported in place of the Stock Leg Adjusted event.

-

Stock Leg Adjusted Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Previous Order Key: date, exchange, symbol, originalOrderID

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.2.3. Options Order Canceled Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Options Order Canceled Event - Compliance User: Self-Regulatory Organizations - Keywords: - Cancelled Event, - Partially Cancelled, - Option Order, - -

An order cancelled event is used to report a cancellation of a simple option order or a complex option order. For complex options orders, if leg-level orders have been opened before a cancelled event, then cancelled events must be reported for each of the leg orders as well.

-

CAT also supports partial cancels. Partial cancelled events for complex orders follow the same rule, if there are open leg-level orders before a cancelled event, partial cancelled events must also be reported for each of the legs.

-

Note that the order cancelled events contains both the fields optionID and symbol. Both of these fields are conditional. If the order cancelled event is for a stock leg order corresponding to a complex option order, then the symbol field is mandatory. If the order cancelled event is for a simple option order, a complex option order, or an option leg order of a complex order, then the field optionID is mandatory.

-

Option Order Canceled

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Order Key: date, exchange, symbol, orderID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.2.4. Routing Orders

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Routing Orders - Compliance User: Self-Regulatory Organizations - Keywords: - Internal Routes, - Execution Codes, - Note Event, - Order ID, - Quote ID, - -

5.2.4.1. Internal Routing and Floor Activity

-

Internal routes on the exchange are different from internal routes in a Broker Dealer. In particular, internal routes at a broker dealer are required to be reported to CAT, but internal routes at an exchange are not.

-

However, there are cases where knowing the system or process of where an order executed is useful, for example when orders are routed through various internal systems on the floor. These processes differ between exchanges and the use cases are incredibly diverse. Furthermore, there is no guidance in the CAT requirements as to what is or is not supposed to be reported in these cases, so we need to be flexible in allowing a diverse set of items to be reported. These somewhat reportable data elements arrive in two forms.

-

First, an order may be executed with some additional information that was not available when it was placed (e.g., as part of an auction, or through some floor trading workstation). Thus, there is an element available on Trade Events (Execution Codes), which provides a way to add special exchange specific codes to an execution. The Execution Codes is a name/value pair field (like order Handling Instructions) and can provide additional execution information, like where a trade may have been executed on the floor, or supplemental execution/clearing information.

-

Second, there is the general Note Event, which contains either an Order ID or a Quote ID to link the note to a specific order or quote.

-

Some systems are composed of multiple subsystems, each having their own reporting and order identification requirements. In such cases, it may be extremely difficult or time consuming to coerce events into a single set of unique order IDs and reporting. Thus, an internal route event is also provided for reporting an order as it progresses between internal subsystems, and possibly changes internal order ID.

-

5.2.4.2. Option Route Event

-

External routes from an options exchange come in three basic forms: routing all or part of a simple option series order to an away market, routing two stock legs to be crossed, and routing a stock leg for execution. All of these events require certain pieces of information to enable linkage creation that can track the entire order lifecycle.

-

The following Option Route Event is used to report when an exchange routes a simple option order, or any leg of a complex option order. A complex order will never be routed away.

-

Option Route Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.4.3. Internal Option Route Event

-

This event provides a means by which options (and legs of complex options) can be routed between internal systems.

-

Internal Option Route Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

-

• Complex Order Key: date, exchange, [complexOptionID,] complexOrderID

-

5.2.4.4. Internal Complex Option Route Event

-

While complex orders are not routed between exchanges, they may be routed internally. This event provides a means by which complex options can be routed between internal systems.

-

Internal Complex Option Route Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

5.2.4.5. Modify Option Route Event

-

When an exchange initiates a modify or cancel/replace request on an option or stock leg order it has previously routed away, it must report its intent to modify the order, using a Modify Option Route Event.

-

If the request does not change the routed order ID, then both routedOrderID and routedOriginalOrderID must be the same.

-

Note that the Modify Option Route event contains both the fields optionID and symbol. Both of these fields are conditional. If the Modify Option Route event is for a stock leg order, then the symbol field is mandatory and optionID field is not necessary. If the Modify Option Route event is for a simple option order, or an option leg order of a complex order, then the field optionID is mandatory.

-

Modify Option Route Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

-

• Previous Route Link Key: date, optionID, routingParty, routedOriginalOrderID, session, exchange

-

• Previous Route Link Key: date, symbol, routingParty, routedOriginalOrderID, session, exchange

-

5.2.4.6. Option Cancel Route Event

-

When an exchange initiates a cancel request on an order that has been previously routed away, it must report the intent to cancel, using a Option Cancel Route Event.

-

Note that the Option Cancel Route event contains both the fields optionID and symbol. Both of these fields are conditional. If the Option Cancel Route event is for a stock leg order, then the symbol field is mandatory and optionID field is not necessary. If the Option Cancel Route event is for a simple option order, or an option leg order of a complex order, then the field optionID is mandatory.

-

Option Cancel Route

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Order Key: date, exchange, symbol, orderID

-

• Route Link Key: date, optionID, routingParty, routedOrderID, session, exchange

-

• Route Link Key: date, symbol, routingParty, routedOrderID, session, exchange

-
-
pubdate: September 09, 2018 effdate: N/A -

5.2.5. Trades and Fills

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Trades and Fills - Compliance User: Self-Regulatory Organizations - Keywords: - Two-sided Trades, - Simple Option Trade Event, - Side Trade Details, - Stock Leg Fill Event, - -

All trades on an options exchange involving options are reported as two sided trades, with appropriate clearing information for each side. In the case where an order is routed away, the trade is still reported as a two-sided trade, but without an order on one side (that side will just have clearing information).

-

Trades off-exchange for non-option legs are reported as one-sided pass through fill events. Note the difference between a trade which the exchange transacted and a fill which the exchange is passing on. Both events are reportable, but they will be reported in different ways. The former as a two-sided trade, and the latter as either a one-sided fill.

-

5.2.5.1. Simple Option Trade Event

-

Simple option trade events are two-sided trade reports, providing details about both sides of the trade for an option. The same event is used for both simple options trades and trades for each leg of a complex option.

-

This section will deal only with simple option trades, the following section will demonstrate how the same event type will be used to report trades at the leg level of complex options.

-

Option Trade Event

-

Each option trade contains the following data elements.

-

Option Trade Event

- -

Side Trade Details

-

Each side of a trade contains information pertinent to the order and/or quote that contributed to the trade. The Side Trade Details captures those data elements.

-

Side Trade Details

- -

In some cases, an option trade may occur with neither a quoteID nor an orderID for one or both sides of the trade. In these cases, the quoteID/orderID can be omitted. However, the executionCodes must include NOBUYID and/or NOSELLID as appropriate.

-

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, buyDetails.orderID

-

• Order Key: date, exchange, optionID, sellDetails.orderID

-

• Quote Key: date, exchange, optionID, buyDetails.quoteID

-

• Quote Key: date, exchange, optionID, sellDetails.quoteID

-

• Trade Key: date, exchange, optionID, tradeID

-

5.2.5.2. Stock Leg Fill Event

-

When a stock leg executes, it always executes at an away venue, which will report both sides of the trade. The options exchange, while possibly knowing both orders that crossed, did not actually perform the transaction. Thus, all transactions involving stock legs are reported as one-sided pass-along fills of the order, and contain the following data elements.

-

Stock Leg Fill Event

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, symbol, orderID

-

• Fill Key: date, exchange, symbol, fillID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.2.6. Post Trade Allocation Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Orders, Post Trade Allocation Event - Compliance User: Self-Regulatory Organizations - Keywords: - Modified Event, - Cancelled Event, - Repalced Post Trade Allocation, - -

In the event of a modified, cancelled, or replaced post trade Allocation, only the final allocation should be reported to CAT.

-

The fields quoteID and orderID must reference the quote/order from the original trade that is being allocated. If the trade has neither a quoteID nor an orderID, then this event will include neither IDs as well (this implies that the executionCodes field from the original trade message contains either NOBUYID or NOSELLID.

-

Post Trade Allocation

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Quote Key: date, exchange, optionID, quoteID

-

• Trade Key: date, exchange, optionID, tradeID

-
-
-
pubdate: September 09, 2018 effdate: N/A -

5.3. Options Order Restatement Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Order Restatement Event - Compliance User: Self-Regulatory Organizations - Keywords: - GTC Orders, - Options Order, - Order Key, - Previous Order Key, - -

Options orders that persist across business days (e.g., GTC orders) must be restated each day before any other activity is reported for that symbol. The restatement is an explicit confirmation that the order is still active in the reporter’s order book, and also provides an opportunity to use per-day unique order IDs for all orders.

-

The attributes of the order will be restated in terms of the order's current state, after any corporate actions have been processed. Pursuant to each exchange’s rule book, some corporate action types dictate that persisted orders will be cancelled or converted. If converted, the order restatement field values should reflect the adjusted values on the effective date (e.g., if a 2:1 split occurred, the quantity and price would reflect the resulting change).

-

The following fields will not be included if restating a complex option order, but are otherwise required: openCloseIndicator, orderType, exchOriginCode, coverage, executingFirm.

-

Options Order Restatement

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, orderID

-

• Previous Order Key: originalOrderDate, exchange, optionID, originalOrderID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.4. Options Trade Break Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Trade Break Event - Compliance User: Self-Regulatory Organizations - Keywords: - Options Trade Break, - Trade Key, - -

When a trade is broken, an event is reported to CAT with the appropriate information. Note that CAT adds the event to the history of the order. The broken trade is not removed from the history, as it is something that actually happened and should be recorded.

-

Options Trade Break

- -

Lifecycle keys for this event:

-

• Trade Key: tradeDate, exchange, optionID, tradeID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.5. Options Trade Correction Event

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Options Trade Correction Event - Compliance User: Self-Regulatory Organizations - Keywords: - Corrected Trade, - -

If a trade is corrected in any way, a correction event must be reported to CAT with all details of the trade, after having been corrected. This event must capture the entire state of the trade after having been corrected.

-

As with trade breaks, CAT will still keep the original trade, adding the correction to the audit trail of the trade being corrected.

-

Options Trade Correction

- -

Lifecycle keys for this event:

-

• Order Key: date, exchange, optionID, buyDetails.orderID

-

• Order Key: date, exchange, optionID, sellDetails.orderID

-

• Quote Key: date, exchange, optionID, buyDetails.quoteID

-

• Quote Key: date, exchange, optionID, sellDetails.quoteID

-

• Trade Key: date, exchange, optionID, tradeID

-

• Trade Key: date, exchange, optionID, refTradeID

-
-
pubdate: September 09, 2018 effdate: N/A -

5.6. Lifecycle Keys

- Topic: CAT Participant Technical Specifications v1.7.1, Events for Options Exchanges, Lifecycle Keys - Compliance User: Self-Regulatory Organizations - Keywords: - Lifecycle Keys, - Quote, - -

The lifecycle keys for each event are summarized in the following table.

-

Lifecycle Keys for Option Events

- - - -
-
-
pubdate: September 09, 2018 effdate: N/A -

6. Other Reporting

- Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting - Compliance User: Self-Regulatory Organizations - Keywords: - FINRA, - -
pubdate: September 09, 2018 effdate: N/A -

6.1. FINRA Reporting of TRF/ORF/ADF Transaction Data

- Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of TRF/ORF/ADF Transaction Data - Compliance User: Self-Regulatory Organizations - Keywords: - FINRA, - Eligible Securities, - -

Transactions in Eligible Securities reported to a FINRA trade reporting facility must be reported to the CAT by FINRA as a CSV using the fields described in Appendix D: Finra TRF Fields.

-
-
pubdate: September 09, 2018 effdate: N/A -

6.2. FINRA Reporting of OTCBB Quote Data

- Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of OTCBB Quote Data - Compliance User: Self-Regulatory Organizations - Keywords: - FINRA, - FINRA Reporting, - -

OTC Bulletin Board quote data must be reported to the CAT by FINRA as a CSV with the following fields:

-

OTC BB Quote Elements

- - -
-
pubdate: September 09, 2018 effdate: N/A -

6.3. FINRA Reporting of Halt/Resume Data

- Topic: CAT Participant Technical Specifications v1.7.1, Other Reporting, FINRA Reporting of Halt/Resume Data - Compliance User: Self-Regulatory Organizations - Keywords: - FINRA, - -

Halt/resume data must be reported to the CAT by FINRA as a CSV with the following fields:

-

FINRA Halt/Resume

- - -
-
-
pubdate: September 09, 2018 effdate: N/A -

7. Stock Exchange Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Stock Exchange, - -
pubdate: September 09, 2018 effdate: N/A -

7.1. Order Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples, Order Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Accepted Event, - Modified Event, - -

This section will illustrate examples for an order accepted event, an order modified event, and an order canceled event using the following scenario: A new order is routed to the exchange, accepted by the exchange, updated by the firm that sent the order, and is finally canceled by the exchange.

- - - - -
-
pubdate: September 09, 2018 effdate: N/A -

7.1.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Stock Exchange Event Examples, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Order Accepted Event

- -

Order Modified Event

- -

Order Canceled Event

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

7.2. Order Trade Event Example

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example - Compliance User: Self-Regulatory Organizations - Keywords: - Order Accepted Event, - -

This section will demonstrate a trade event example that occurs after a buy and sell order are matched. In this case, a sell order is accepted for a price of 157.20 and quantity of 100. A buy order is then accepted for a price of 157.20 and quantity of 100. The two orders are matched and a trade event is reported.

-

In this scenario, the exchange is required to report the following events to CAT:

-

1) Order Accepted Events from each of the orders; and

-

2) The order trade event

- - - - -
pubdate: September 09, 2018 effdate: N/A -

7.2.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Order Accepted Event: Sell

- -

Order Accepted Event: Buy

- -

Order Trade Event

- -
-
pubdate: September 09, 2018 effdate: N/A -

7.3. Order Route and Order Fill Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Route and Order Fill Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Order Route, - Order Fill Event Examples, - Order Accepted Event, - Order Route Event, - Order Fill Event, - -

This scenario illustrates the reporting requirements to CAT when an exchange routes an order to a routing broker-dealer for execution on an away exchange, and Exchange 1’s subsequent reporting obligation on fills of the routed order.

-

In this scenario Exchange 1 receives and reports acceptance of an order, then routes the order to their routing broker dealer for execution on an away exchange. When an execution occurs on the away exchange, the routing broker reports the fill back to Exchange 1. The following events are reported:

-

1) Order Accepted Event of the original order,

-

2) The Order Route Event, and

-

3) The Order Fill Event.

- - - - -

JSON Examples

-

Order Accepted Event

- -

Order Route Event

- -

Order Fill Event

- -
-
pubdate: September 09, 2018 effdate: N/A -

7.4. Order Restatement Example

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Restatement Example - Compliance User: Self-Regulatory Organizations - Keywords: - Restated Event, - -

This series of examples shows a restatement of a GTC order before market open the following day. Also it is assumed that a stock split on the symbol ABCD has taken effect, and that this is reflected in the restatement.

- - - -
pubdate: September 09, 2018 effdate: N/A -

7.4.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Restatement Example, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Order Accepted Event

- -

Order Restatement Event

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

7.5. Order Modified Example

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Modified Example - Compliance User: Self-Regulatory Organizations - Keywords: - Modified Event, - -

This section will show how an order modified event is reported when the order type is changed by the initiating member firm from a limit order to a market order. This series of events will follow the submission of a limit order from a member firm to the exchange, that is subsequently modified by the member firm.

- - - -
pubdate: September 09, 2018 effdate: N/A -

7.5.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Modified Example, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Order Accepted Event

- -

Order Modified Event

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

7.6. Order Adjusted Example

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Adjusted Example - Compliance User: Self-Regulatory Organizations - Keywords: - Order Adjusted Example, - -

This section will show how an order adjusted event is reported when a change in the NBBO causes the working price of an order to change. This series of events will follow the route of a peg order followed by an adjustment of the price.

- - - -
pubdate: September 09, 2018 effdate: N/A -

7.6.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Order Trade Event Example, Order Adjusted Example, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Order Accepted Event

- -

Order Adjusted Event

- -
-
-
-
pubdate: September 09, 2018 effdate: N/A -

8. Options Exchange Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Exchange Event Examples, - -
pubdate: September 09, 2018 effdate: N/A -

8.1. Quote and Quote Cancel Events

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events - Compliance User: Self-Regulatory Organizations - Keywords: - Quote, - Quote Cancel Events, - -

Some exchanges use the term "order" to cover both quotes and non-quote orders. For the purpose of reporting to CAT, a quote is to be interpreted as an order/quote that qualifies as a market maker quote for the purposes of satisfying Section 6.4(d)(iii) of the CAT NMS Plan.

-

Basically, that is the section which grants relief to market makers from reporting their quotes to CAT, leaving the exchanges themselves with the sole responsibility of reporting quotes to CAT. If such order/quotes received by the exchange would provide the market maker an exemption from reporting the quote, then the order/quote must be reported to CAT as a quote, not an order.

-

CAT accepts both one-sided and two-sided quotes.

-
pubdate: September 09, 2018 effdate: N/A -

8.1.1. Two Sided Quote Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events, Two Sided Quote Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Two Sided Quote Examples, - -

The following section will provide examples of reportable events for a two-sided market maker quote when it is posted as a new quote, updated by the market maker, then canceled by the market maker or the exchange. Both the new quote and the updated quote are expressed by the Quote Event, while the quote cancel is expressed by the Quote Cancel Event.

- - - - -

8.1.1.1. JSON Examples

-

Quote Event (Step 2)

- -

Quote Event (Step 4)

- -

Quote Cancel Event (Step 6a)

- -

Quote Cancel Event (Step 5b)

- -
-
pubdate: September 09, 2018 effdate: N/A -

8.1.2. Example One Sided Quotes

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Quote and Quote Cancel Events, Example One Sided Quotes - Compliance User: Self-Regulatory Organizations - Keywords: - Example One-sided, - -

The following section will provide examples of reported events for a one-sided market maker quote when it is posted as a new quote, updated by the market maker, then canceled by the market maker or the exchange. Both the new quote and the update are expressed by the Quote Event, while the quote cancel is expressed by the Quote Cancel Event.

- - - -

8.1.2.1. JSON Examples

-

Quote Event (Step 2)

- -

Quote Event (Step 4)

- -

Quote Cancel Event (Step 6a)

- -

Quote Cancel Event (Step 5b)

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

8.2. Option Order Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Option Order Event, - -
pubdate: September 09, 2018 effdate: N/A -

8.2.1. Example Simple Option Order Accepted

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, Example Simple Option Order Accepted - Compliance User: Self-Regulatory Organizations - Keywords: - Simple Option Order, - -

This example describes a Simple Option Order Accepted Event in which the exchange receives and accepts an order for a simple option. Note that in this example Complex Order ID is not provided because there is no parent complex order.

- - - -
-
pubdate: September 09, 2018 effdate: N/A -

8.2.1.1. JSON Example

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, JSON Example - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Simple Option Order Accepted Event

- -
-
pubdate: September 09, 2018 effdate: N/A -

8.2.2. Example Complex Option Order Accepted Event

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Option Order Event Examples, Example Complex Option Order Accepted Event - Compliance User: Self-Regulatory Organizations - Keywords: - Complex Option Order Accepted, - -

In the example below, the exchange only creates leg orders at the time an order is executed. Thus, an order on the complex option would have a report sent to CAT for an order accepted event at the parent level of the complex order. Any leg reports would wait until the leg orders are actually created when a trade occurs.

-

The examples in this section will use an order on the complex option with optionID 9843. This hypothetical complex option has two option series legs:

- -

For this example, we suppose at 192411.121456789 on April 20, 2017 an order was accepted for 10 units of complex option 9843 at net price -65 per unit.

- - - -

8.2.2.1. JSON Examples

-

Complex Order Accepted Event (Step 3)

- -
-
-
pubdate: September 09, 2018 effdate: N/A -

8.3. Simple Option Trade Event Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Simple Option Trade Event Examples - Compliance User: Self-Regulatory Organizations - Keywords: - Simple Option Order, -

The below section will provide an example of a trade event for an option series where a broker order is executed against an existing market maker quote.

- - - - -
pubdate: September 09, 2018 effdate: N/A -

8.3.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Simple Option Trade Event Examples, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Quote Event

- -

Simple Option Order Accepted Event

- -

Option Trade Event

- -
+

The Commission adopted Rule 613 on July 11, 2012, to require the SROs to jointly submit an NMS plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).5 In response, the SROs engaged in a request for proposal (“RFP”) process to help them develop an NMS Plan proposal and solicit bids (“Bids”) for the role of Plan Processor6 to build, operate, administer, and maintain the consolidated audit trail. The Selection Plan, which was approved by the Commission on February 21, 2014, sets forth the process by which the Participants will review, evaluate, and narrow down the Bids submitted in response to the RFP to “Shortlisted Bids,” and ultimately select the Plan Processor following Commission approval of the proposed CAT NMS Plan.7 Amendment No.1 to the Selection Plan, which the Commission approved on June 17, 2015, among other things, permits the SROs to vote to narrow the set of Shortlisted Bids to an even shorter list prior to Commission approval of the proposed CAT NMS Plan.8 The Selection Plan, as amended, provides that the SROs’ Selection Committee will vote to select the Plan Processor from among the remaining bidders, using a two-round voting process, within two months of Commission approval of the proposed CAT NMS Plan.9

-
pubdate: September 09, 2018 effdate: N/A -

8.4. Complex Options Trade Events and Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Complex Options Trade Events and Examples +
pubdate: September 24, 2015 effdate: N/A +

B. Description of the Proposal

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal, Description of the Proposal Compliance User: Self-Regulatory Organizations Keywords: - Complex Options Trade Events, + Bidding Participant, + SRO, + Plan Processor, + Selection Plan, + CAT NMS plan, -

In all cases, complex option trades are reported to CAT only at the leg level. There is no roll-up trade reported at the complex order level. For example, an order on the complex option (ID 9851) below would have had corresponding orders reported to CAT for each of the underlying legs. As the following examples will show, trades on this complex option will report by leg, with each leg trade event corresponding to an order event on the leg that is in turn attached to a parent-level complex order event.

- -

This section follows a series of trade events on the complex option described above, along with examples of the quotes and orders that would be referenced in those trades.

-

• A new market maker quote is posted for the option leg 1491

-

• A new market maker quote is posted for the option leg 1492

-

• An order is placed for quantity 10 of the complex option 9851

-

• A trade on the first option leg 1491 is reported (10 contracts)

-

• A trade on the second option leg 1492 is reported (10 contracts)

-

• A route on the stock leg XYZZY is reported (1,000 shares)

- -

• A fill on the stock leg XYZZY is reported (1,000 shares)

- - - - - - -
pubdate: September 09, 2018 effdate: N/A -

8.4.1. JSON Examples

- Topic: CAT Participant Technical Specifications v1.7.1, Options Exchange Event Examples, Complex Options Trade Events and Examples, JSON Examples - Compliance User: Self-Regulatory Organizations - Keywords: - JSON Examples, - -

Quote Event (Step 2)

- -

Quote Event (Step 4)

- -

Complex Option Order Accepted Event (Step 7)

- -

Simple Option Order Accepted Event (Step 8)

- -

Simple Option Order Accepted Event (Step 9)

- -

Stock Leg Order Accepted Event (Step 10)

- -

Option Trade Event (Step 11)

- -

Option Trade Event (Step 12)

- -

Option Route Event (Step 13)

- -

Stock Leg Fill Event (Step 14)

- -
+

Amendment No. 1 included a provision providing that no SRO shall vote in the process narrowing the set of Shortlisted Bidders if a Bid submitted by the SRO or an Affiliate of the SRO is a Shortlisted Bid or if the SRO or its Affiliate is included as a material subcontractor as part of a Bid (a “Bidding Participant”10).11 The same recusal provision exists in the second—but not the first—round of a two-round voting process by the Selection Committee12 to select the Plan Processor from among the Shortlisted Bidders.13 The SROs state that they included the recusal provision to address potential conflicts of interest in selecting the Plan Processor.

+

In Amendment No. 2, the SROs propose to modify the Selection Plan to require that an SRO that is a Bidding Participant be recused from voting in any round to select the Plan Processor in which a Bid from or including such Bidding Participant or its Affiliate is being considered.14 Amendment No. 2 therefore would extend to the first selection round the recusal requirement that is currently only in place for the second selection round and the vote, if any, that narrows the list of Shortlisted Bidders.

+

The SROs reiterate that the Selection Plan balances the competing goals of ensuring all SROs participate meaningfully in the process of developing the CAT NMS Plan and mitigating potential conflicts of interest related to the involvement of a bidding SRO through information barriers and the voting limitations.15 The SROs state that, based on their experience with these existing measures, the Selection Plan adequately addresses the potential conflicts of interest related to bidding SROs.16 Nonetheless, the SROs explain that requiring recusal in all rounds of the selection process will further the SROs’ goal of ensuring the fair and impartial consideration and selection of the CAT Plan Processor.17

-
pubdate: September 09, 2018 effdate: N/A -

9. Submission Process

- Topic: CAT Participant Technical Specifications v1.7.1, Submission Process - Compliance User: Self-Regulatory Organizations - Keywords: -

This section is excluded for security purposes.

-
-
pubdate: September 09, 2018 effdate: N/A -

10. Feedback and Corrections

- Topic: CAT Participant Technical Specifications v1.7.1, Feedback and Corrections - Compliance User: Self-Regulatory Organizations - Keywords: -

This section is excluded for security purposes.

-
-
pubdate: September 09, 2018 effdate: N/A -

11. Testing

- Topic: CAT Participant Technical Specifications v1.7.1, Testing - Compliance User: Self-Regulatory Organizations - Keywords: -

This section is excluded for security purposes.

-
-
pubdate: September 09, 2018 effdate: N/A -

12. Additional Information

- Topic: CAT Participant Technical Specifications v1.7.1, Additional Information +
pubdate: September 24, 2015 effdate: N/A +

III. Discussion

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Discussion Compliance User: Self-Regulatory Organizations Keywords: - CAT Public Website, + Amendment No. 2, + Plan Processor, -

Additional information is available from the CAT Public Website or the Service Desk. Details are provided below.

-
pubdate: September 09, 2018 effdate: N/A -

12.1. Public Website

- Topic: CAT Participant Technical Specifications v1.7.1, Additional Information, Public Website - Compliance User: Self-Regulatory Organizations - Keywords: - Sec Rule 613, - -

Public Website (http://www.catnmsplan.com) is to provide primary information about CAT. The content will include: Link to SEC Rule 613, Press Releases, Technical Specifications, User Manuals, FAQs, Training Materials and Contact info.

-
-
pubdate: September 09, 2018 effdate: N/A -

12.2. CAT Service Desk

- Topic: CAT Participant Technical Specifications v1.7.1, Additional Information, CAT Service Desk - Compliance User: Self-Regulatory Organizations - Keywords: - Sec Rule 613, - -

The Service Desk is the primary source for answers to questions about interpretation of SEC Rule 613, clock synchronization, reporting responsibilities, technical specifications for reporting to CAT, and more.

-

Meanwhile, the Service Desk is the primary source that provides technical support on data submission, account maintenance, and queries. Strict security controls are applied on this type of support. Additional identification information or web portal access may be required.

-
+

After careful review, the Commission finds that Amendment No. 2 is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system. By extending the aforementioned recusal requirement to both selection rounds, Amendment No. 2 adds an additional procedural safeguard that is designed to further the fairness and impartiality of the Plan Processor selection.

-
pubdate: September 09, 2018 effdate: N/A -

Appendix

- Topic: CAT Participant Technical Specifications v1.7.1, Appendix +
pubdate: September 24, 2015 effdate: N/A +

IV. Conclusion

+ Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Conclusion Compliance User: Self-Regulatory Organizations Keywords: - Clock Synchronization Requirement, - Failure Codes, - Corporate Action Formats, - BATS Specifications, + Amendment No. 2, + National Market System, + Selection Plan, -

A. Clock Synchronization Requirement

-

In previous sections, details are described regarding the Order Events and data elements. Timestamp, as one of the required data elements for each order event, must be correctly recorded by Participants at predefined granularity. This section provides detailed requirements and a recommended approach to how Participants should manage clock synchronization.

-

In order to comply with CAT NMS Plan requirements of Clock Synchronization and correctly record the Timestamp fields for order events. Participants are required synchronize Business Clocks at a minimum to within 100 microseconds1 of the time maintained by the National Institute of Standards and Technology (NIST).

-

The tolerance includes:

-

• The difference between the NIST standard and a time provider’s clock;

-

• Transmission delay from the source; and

-

• The amount of drift in the Participant's clock.

-

In order to ensure the accuracy of timestamps for Reportable Events, Participants are anticipated to adopt policies and procedures to verify such required synchronization each Trading Day (1) before the market opens, and (2) periodically throughout the Trading Day. Participants are recommended to keep documentation which provides details of their Business Clock synchronization process, and the resulting log files from the implementation of such processes.

-

Any time provider and technology may be used for clock synchronization as long as the Business Clocks are in compliance with the accuracy requirement.

-

If additional details are needed, please refer to the Clock Sync User Guide to be published.

-

Note: The tolerance for clock synchronization does not impact the amount of time allowed for CAT reporting. CAT does NOT require reporters to report order information within 100 microseconds of receiving an order.

-

B. Failure Codes

-

A failure code is a machine-parseable description of why a file or record was rejected. This differs from a failure description, which is intended for human consumption.

-

Each failure code is divided into a failure category, sub-category, and value, joined together by a period. Each category roughly corresponds to the stage of processing at which a file or record was rejected. The following failure categories are defined:

-

• FILE - a problem with file name or permissions, with the following sub-categories:

-

• NAME - a problem with the file name

-

• PERM - a problem with file permissions

-

• TIMEOUT - a timeout waiting for the corresponding data or meta file

-

• INT - a problem with file metadata or hash, with the following sub-categories:

-

• META - an incorrect or mismatched metadata value

-

• MD - a problem with a member dictionary file or record, with the following subcategories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• SD - a problem with a symbol dictionary file or record, with the following subcategories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• OD - a problem with a options dictionary file or record, with the following subcategories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• NASD_D, NYSE_D, BATS_D, FINRA_D - a problem with a daily submission record record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• OE - a problem with an order event file or record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• INGEST - a problem with an individual record encountered in the ingestion stage

-

• NORM - a problem with an individual record encountered in the normalization stage

-

• SYNC - a problem with an individual record encountered in the synchronization stage

-

• LINK - a problem with an individual record encountered in the linkage discovery stage

-

• FT - a problem with a FINRA transaction record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• NT - a problem with a Nasdaq trade record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• OQ - a problem with a OTCBB quote record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• SM - a problem with a symbol master file or record, with the following sub-categories:

-

• COUNT - fewer or more records in the file than specified by the Record Count

-

• REC - a problem with an individual record

-

• ADD - the record parsed fine, but the ADD request failed

-

• UPDATE - the record parsed fine, but the UPDATE request failed

-

A failure code may be used for warnings or errors, distinguished by the severity field in the failure report. The failure code itself does not distinguish between a warning (in which a record is accepted but still shows up in the failure report) and an error (which causes a record to be rejected).

-

C. Corporate Action Formats

-

C.1. NASDAQ Specifications

-

NASDAQ will submit all data for the day using a single file type, similar to all other file submissions, with the base filename NASDDaily. The file will contain any or all record types listed in this section, and shall be submitted in JSON format. Note that each record type is identified by a type field.

-

C.1.1. NASDAQ Equities Daily List - Notes for the Day

- -

C.1.2. NASDAQ Equities Daily List

- - - - - - -

C.1.3. NASDAQ Dividends Daily List

- - - - -

C.1.4. NASDAQ Next Day X-Rates Daily List

- - - - -

C.2. BATS Specifications

-

Bats will submit all reports using one single file type, with the base filename BATSDaily. Each report will be submitted in CSV format, where the first column designates the type of that record. Each record type may have different numbers of columns, but each record of the same type must have all columns in the definition for that record type.

-

C.2.1. Header Record

-

The very first record of the file must be a header record, which provides general information about the submitted records. There must be exactly one header record, which contains the following fields.

-

Header Record

- -

C.2.2. Daily Listed Securities Record

-

Daily Listed Securities Record Fields

- - - -

C.2.3. Daily Distribution Record

-

Daily Distribution Record Fields

- - - -

C.2.4. Daily Corporate Action Record

-

Daily Corporate Actions Record Fields

- - - - -

C.3. NYSE Specification

-

The NYSE Group Corporate Actions product is comprised of several reports and provides information for equities listed on the NYSE, NYSE MKT and NYSE Arca market centers, including, but not limited to, new listings (for example IPOs, spin-offs and structured product listings), corporate actions, cash dividends, proxy related matters, and so forth.

-

NYSE will submit all reports using one single file type, with the base filename NYSEDaily. Each report will be submitted in CSV format, where the first column designates the type of that record. Each record type may have different numbers of columns, but each record of the same type must have all columns in the definition for that record type.

-

Data types and formats are consistent with all other CAT reporting data types.

-

C.3.1. NYSE Corporate Actions

-

The NYSE corporate actions and group ex-date corporate actions will be submitted with a record of this type.

-

NYSE Group Daily Corporate Actions & NYSE Group Ex-Date Corporate Actions

- - -

C.4. FINRA Daily Specification

- -

C.4.1. FINRA Corporate Actions

-

The layout of the FINRA Corporate Action.

-

FINRA OTC Corporate Action

- - -

The following table contains the valid choices for the field DAILY_LIST_RSN_CD.

-

Daily List Reason Codes

- - - -

D. FINRA Trade Reporting Facility (TRF) Fields

-

These message types go into the FinraTransactions file kind.

-

TRF Trade Report Required Fields

- - - - - - - - - - -

E. Market Move Scenarios

-

This appendix provides guidance on how some common scenarios where a listed symbol can move from one listing participant to another should be handled.

-

E.1. Common Scenarios

-

These are common scenarios, with well established procedures.

-

E.1.1. OTC to Exchange

-

Security ABCD trades OTC on 7/27/2017. Security moves to Exchange A on 7/28/2017 and is assigned new symbol WXY.

-

FINRA: On 7/27/2017, submit update record for ABCD, to change end date to 20170727. This explicit delisting step is the preferred method of operation. However, a transfer can still occur without it.

-

EXCHANGE A: Anytime before 7/28/2017, Exchange A will submit transfer request to change:

-

• Listing Participant to Exchange A

-

• Issue Type to NMS

-

• Symbol to WXY

-

Some time after the market closes on 7/27/2017, and before 2:00AM on 7/28/2017, a scheduled job will automatically run within the CAT system to transfer the symbol to EXCHANGE A. If the symbol is still owned (i.e., the endDate overlaps the new effectiveDate), then endDate will be set to the date the transfer job runs, so that it is released before being transferred. This job will then change the beginDate for the new owner to be the same as the effectiveDate in the transfer request, and will change the endDate for the new owner to 99991231.

-

Trades in symbol WXY that occur on 7/28/2017 should be accepted. If the Exchange adds WXY, rather than submitting a transfer, the link between the two symbols will not exist – so the move should be handled with an update, rather than an add.

-

E.1.2. Exchange to OTC

-

Security ABC trades on Exchange A on 7/27/2017. Security is delisted effective 7/28/2017 and will trade over-the-counter as ABCF.

-

EXCHANGE A: On 7/27/2017, submit update record for ABC, to change end date to 20170727. This explicit delisting step is the preferred method of operation. However, a transfer can still occur without it.

-

FINRA: Anytime before 7/28/2017, FINRA will submit update record to change:

-

• Listing Participant to FINRA

-

• Issue Type to OTC

-

• Symbol to ABCF

-

Some time after the market closes on 7/27/2017, and before 2:00AM on 7/28/2017, a scheduled job will automatically run within the CAT system to transfer the symbol to FINRA. If the symbol is still owned (i.e., the endDate overlaps the new effectiveDate), then endDate will be set to the date the transfer job runs, so that it is released before being transferred. This job will then change the beginDate for the new owner to be the same as the effectiveDate in the transfer request, and will change the endDate for the new owner to 99991231.

-

Trades in symbol ABCF that occur on 7/28/2017 should be accepted. If FINRA adds ABCF, rather than submitting a transfer, the link between the two symbols will not exist – so the move should be handled with an update, rather than an add.

-

E.1.3. Exchange to Exchange

-

The process is the same as the two examples above, with FINRA being replaced by the other listing exchange.

-

E.2. Other Scenarios

-

These scenarios require further discussion to determine the best procedure.

-

E.2.1. No Definitive Destination

-

Security is delisting from exchange, but FINRA does not have definitive indication that security will trade OTC.

-

An Exchange delists a symbol, but FINRA doesn’t plan to add the symbol to OTC immediately, as we’re not sure what the issuer plans to do (company may be defunct, for example). No trades are received in the symbol after delisting.

-

A delisting should submit an Update Symbol Entry record to CAT, delisting the symbol by changing the endDate to the last day that the symbol was listed for that participant. This ensures that the symbol is not listed at all. If/when the symbol is re-listed, a transfer request is submitted by the new listing participant (FINRA). This may result in some number of days where the symbol is not listed. If any events are received for that symbol during that timeframe, those events will be rejected for having an invalid symbol.

-

E.2.2. Trades OTC While Suspended

-

Security is suspended by the exchange, and trades over the counter while suspended

-

Nasdaq may put a security in the “suspended” state prior to formally delisting it. While suspended, it can be added to the OTC master and actively trade for up to 30 days before the exchange ultimately deletes it or the issuer successfully appeals and the security resumes being listed.

-

The exchange should update the endDate for when the security is suspended by submitting an Update Symbol Entry record. If FINRA picks it up for trading, then FINRA can submit a transfer request to transfer the security to FINRA. If the exchange ultimately does not de-list the security, the exchange can submit a transfer request to transfer the security back to themselves.

-

E.2.3. Move From OTC to Exchange with Symbol and CUSIP Change

-

Security is moving from OTC to an exchange, and simultaneously undergoing a symbol and CUSIP change

-

When FINRA knows the symbol is listing, it will process the OTC delete and once the new symbol is known, send an update with the new symbol and exchange information. We do not always know the new symbol until it has actually listed, however – so that security update record will come after the listing occurs.

-

This should follow Scenario A. The exchange will provide the transfer request to move the security with the correct symbol, and, if practical, FINRA will explicitly release the symbol beforehand.

-

E.2.4. Move to OTC Postponed by Exchange

-

The exchange tells FINRA a security will be listing on the next day, so FINRA processes the OTC end date and updates the security to the exchange – and then the listing is postponed by the exchange.

-

FINRA receives an Add from the exchange on their overnight file, and FINRA relinquishes the security as a result. The exchange notifies FINRA manually the next morning that the listing has been postponed. In the event that FINRA has already sent the end date for the security and relinquished it, and now needs to retract that, what should we do?

-

FINRA can submit another update to change the OTC end date back to 99991231 so that the system can continue to accept OTC trades for the security.

-

E.2.5. Move to OTC Intraday

-

FINRA finds out intraday that a symbol is delisting and needs to be added to OTC.

-

Occasionally, FINRA needs to add a symbol intraday when it delists. If that security has already been trading under the prior symbol, in most cases, FINRA will not change the symbol/add the security until the next day. But there are rare cases where the symbol needs to be moved and changed intraday. How will that scenario be handled?

-

This scenario needs further thought/discussion. While not frequent, there are cases where a security may be exchange listed at the start of the day and firms may submit orders, and then after market open, the issuer files for bankruptcy/merges, etc and the symbol is moved to OTC and begins trading there. In this case, the system needs to accommodate the security having the same End Date on the exchange as its Begin Date on OTC.

-

E.2.6. Temporary Deactivation

-

OTC issues can become inactive due to lack of trading or other activity, and can subsequently begin trading again and be re-activated as a result. When FINRA end-dates a security and it subsequently needs to be re-activated, should we submit an update record to provide a new Begin Date and End Date for the new period of trading?

-

As long as no one has used that symbol in the interim, FINRA should just submit an update to the symbol to change the end date to 99991231 when the symbol begins trading OTC again.

-

E.2.7. Trading Outside Listing Dates

-

Trading in securities prior to symbol start date or as-of reporting after the symbol end date.

-

In the OTC space, a security may trade before a firm requests a symbol for the security. When FINRA receives the symbol request and enters the security, the begin date for that security is the date it is set up. However, firms can enter as-of trades in that symbol with execution dates before the begin date. The report date of the trade has to be on or after the start date of the security, but the execution date does not.

-

After an OTC security has been inactivated, a firm can still submit as-of trades on that security with execution dates prior to the inactivation date. In that case, execution date will be the key field, since it will be before the inactivation date of the security, but the report date will be after.

-

This scenario needs further thought/discussion.

-

E.2.8. As-of Trades in Delisted Symbols

-

As-of trades in delisted exchange symbols

-

An exchange delists security ABC, and it begins trading over the counter as ABCF. A firm has trading activity in ABC that it should have reported prior to the delisting. Because symbol ABC has delisted, the exchange will no longer accept trades in that symbol, so the firm must report the trades to ORF as-of, under symbol ABCF – but the execution date of the trades will be before the Start Date of the OTC symbol.

-

This scenario needs further thought/discussion.

-

F. Encryption Example

-

This section is excluded for security purposes.

-

G. Data Dictionary

-

This dictionary contains definitions for each term used throughout the technical specification.

-

askPrice

-

Events: Quote Event

-

The price being asked for the option in a quote.

-

askQty

-

Events: Quote Event

-

The quantity being asked for the option in a quote.

-

attributes

-

Reference Data: Symbol Entry

-

A Name Value Pairs field, containing attributes associated with a symbol that are meaningful, but may not be permanent. For example, the tick pilot group is meaningful now, but may not be so in the near future. In addition, there may be other "pilots" that may require additional information for symbols.

-

This field is a Symbol Entry Pair data type, and allowed values for this field must be defined in the data dictionary entry for Symbol Entry Pairs.

-

awayExchange

-

Events: Self Help Declaration

-

Exchange ID of the exchange affected by the self help event.

-

beginDate

-

Reference Data: Symbol Entry

-

The effective date of the symbol - the first date on which a symbol is an active listing.

-

bidPrice

-

Events: Quote Event

-

The price being bid for the option (can be zero in two-sided quote) in a quote event.

-

bidQty

-

Events: Quote Event

-

The quantity being bid for the option (can be zero in two-sided quote) in a quote event.

-

buyDetails

-

Events: Order Trade Event, Trade Correction Event, Option Trade Event, Options Trade Correction Event

-

Object in a trade event that contains information for the buy side of the trade. Format and element definitions for Buy Details are described in Trade Side Details. For side trade details for equities, please refer to section 4.5. For side trade details for option, please refer to section 5.2.5.1.

-

cancelQty

-

Events: Order Canceled Event, Options Order Canceled Event

-

The quantity being canceled in Order Cancel Event and Options Order Canceled Event. A value of zero means that the cancel was for the full remaining quantity. For example, if an order for 500 shares had partially executed 200 shares, and then the remainder was canceled, the cancelQty could contain either 300 or 0.

-

cancelReason

-

Events: Order Canceled Event, Quote Cancel Event, Options Order Canceled Event

-

Expresses the cancellation reason for a quote or order with one of the below accepted values. Additional values may be added by request.

-

Allowed Values:

-

IOC Immediately canceled

-

EXP Expired

-

REQ Explicit request to cancel the order

-

DIS Session disconnected

-

ALL Market Maker Canceled All Quotes

-

Allowed Values (CBOE):

-

NOTHING_DONE

-

USER

-

SYSTEM

-

LOST_CONNECTION

-

INSUFFICIENT_QUANTITY

-

SPECIAL_ADJUSTMENT

-

QRM_REMOVED

-

INSUFFICIENT_QUANTITY_BUY_SIDE

-

INSUFFICIENT_QUANTITY_SELL_SIDE

-

WASH_TRADE_PREVENTION

-

QUOTE_UPDATE_CONTROL

-

FAILOVER

-

QUOTE_IN_TRIGGER

-

INVALID_SESSION_ID

-

SAL_IN_PROGRESS

-

CROSS_IN_PROGRESS

-

INVALID_NBBO

-

NOT_WITHIN_NBBO

-

TRADE_THROUGH_CBOE

-

INSUFFICIENT_CUSTOMER_ORDER_QUANTITY

-

INSUFFICIENT_CROSS_ORDER_SIZE

-

INSUFFICIENT_CROSS_ORDER_DOLLAR_AMOUNT

-

SELL_SHORT_RULE_VIOLATION

-

CANCEL_ON_RSS

-

CALL_BID_EXCEEDS_UNDERLYING_PRICE

-

PUT_BID_EXCEEDS_STRIKE_PRICE

-

LIMIT/EXECUTION_PRICE_WOULD_BE_DEBIT

-

LIMIT/EXECUTION_PRICE_EXCEEDS_MAX_VALUE

-

NO_USER_ACTIVITY

-

BROKER_OPTION

-

CANCEL_PENDING

-

CROWD_TRADE

-

DUPLICATE_ORDER

-

EXCHANGE_CLOSED

-

GATE_VIOLATION

-

INVALID_ACCOUNT

-

INVALID_AUTOEX_VALUE

-

INVALID_CMTA

-

INVALID_FIRM

-

INVALID_ORIGIN_TYPE

-

INVALID_POSITION_EFFECT

-

INVALID_PRICE

-

INVALID_PRODUCT

-

INVALID_PRODUCT_TYPE

-

INVALID_QUANTITY

-

INVALID_SIDE

-

INVALID_SUBACCOUNT

-

INVALID_TIME_IN_FORCE

-

INVALID_USER

-

LATE_PRINT

-

NOT_FIRM

-

MISSING_EXEC_INFO

-

NO_MATCHING_ORDER

-

NON_BLOCK_TRADE

-

NOT_NBBO

-

COMM_DELAYS

-

ORIGINAL_ORDER_REJECTED

-

OTHER

-

PROCESSING_PROBLEMS

-

PRODUCT_HALTED

-

PRODUCT_IN_ROTATION

-

STALE_EXECUTION

-

STALE_ORDER

-

ORDER_TOO_LATE

-

TRADE_BUSTED

-

TRADE_REJECTED

-

ORDER_TIMEOUT

-

REJECTED_LINKAGE_TRADE

-

SATISFACTION_ORD_REJ_OTHER

-

UNKNOWN_ORDER

-

INVALD_EXCHANGE

-

TRANSACTION_FAILED

-

NOT_ACCEPTED

-

SUSPENDED

-

AWAY_EXCHANGE_CANCEL

-

LINKAGE_CONDITIONAL_FIELD_MISSING

-

LINKAGE_EXCHANGE_UNAVAILABLE

-

LINKAGE_INVALID_MESSAGE

-

LINKAGE_INVALID_DESTINATION

-

LINKAGE_INVALID_PRODUCT

-

LINKAGE_SESSION_REJECT

-

Allowed Values (BATS):

- -

Allowed Values (BOX):

-

TraderCancelled

-

Eliminated

-

EliminatedByCircuitBreaker

-

EliminatedOnDisconnection

-

EliminatedByMarketControl

-

EliminatedDueToTradingRestriction

-

EliminatedDueToTradeLimitExceeded

-

EliminatedDueToTradeActivityLimitExceeded

-

EliminatedDueToMaximumNbTriggersLimitExceeded

-

EliminatedDueToDrillThroughProtection

-

EliminatedOutOfLimits

-

Allowed Values (MIAX):

- -

Allowed Values (MIAX Pearl):

- -

Allowed Values (CHX):

-

A001_02A New SNAP Order Reject - Order Terms are not valid for SNAP

-

A001_02B New SNAP Order Reject - Invalid market condition

-

A001_07 Cancel Order, SNAP auction end

-

A001_11 SNAP Auction - Cancel of Satisfy/Route Order

-

A001_13 SNAP Auction - Reject of Satisfy/Route Order

-

A001_15 Cancel Order on SNAP Auction - Resting

-

U400_01 order reject-invalid content

-

U400_04 order reject-invalid trading session

-

U400_05 order reject-invalid market state

-

U400_06 order reject-invalid market conditions

-

U400_07 order message cannot be parsed

-

U400_08 order from PMM not is registered stock

-

U400_09 order from PMM did not include position

-

U400_10 order from PMM with position/side discrepancy

-

U400_11 IOC Order Reject-No PM LS

-

U400_14 Market IOC orders not allowed during extended sessions

-

U400_17 New AOO reject

-

U415_01 ME DAS Order Cancel on Restart

-

U430_01 satisfy cross reject-not regular-way settlement

-

U430_02 satisfy cross reject-short sale test failure

-

U430_03 satisfy cross reject-NBBO trade through

-

U430_04 satisfy cross reject-insufficient satisfy volume available

-

U430_05 satisfy cross reject-outside crossed NBBO

-

U430_06 satisfy cross reject-crossed market

-

U431_01 yield cross reject-not regular-way settlement

-

U431_02 yield cross reject-short sale test failure

-

U431_03 yield cross reject-NBBO trade through

-

U431_04 yield cross reject-unwilling to yield appropriate side

-

U431_05 yield cross reject-outside crossed NBBO

-

U431_06 yield cross reject-crossed market

-

U432_01 cross reject-too late for cash settlement

-

U432_02 cross reject-short sale test failure

-

U432_03 cross reject-NBBO trade through

-

U432_04 cross reject-outside crossed NBBO U432_05 cross reject-crossed market

-

U432_06 cross reject-CHX trade through

-

U432_07 cross reject-CHX lock-insufficient size out

-

U432_09 Cross Reject - Price is outside the band

-

U432_10 For cross order rejected price at trade-at

-

U433_01 order reject-outside crossed market NBBO

-

U433_02 order reject-crossed market

-

U433_03 order cancel-unable to display remaining volume

-

U433_04 FOK/IOC Cancel-No Match Opportunity

-

U436_01 midpoint cross reject-market crossed

-

U436_02 midpoint cross reject-market halted

-

U437_01 order cancel-TIF expired

-

U441_01A reject incoming order-NBBO trade through

-

U441_01B cancel resting undisplayed order-NBBO trade through

-

U441_02 Post Only Cancel

-

U441_03 Quote Only

-

U441_05 order was cancelled because received reject message from away market

-

U441_06 SSH Violation

-

U441_07 New incoming order get cancelled because of order’s limit price cross price

-

band (reserved, un-displayed order)

-

U441_08 Resting order get cancelled because of order’s limit price cross price band (reserved, un-displayed order)

-

U441_09 Order was canceled because of stale order.

-

U450_01 cancel order activity

-

U450_03 cancel reject-order not found

-

U451_01 cancel change reject-market halted

-

U451_02 cancel change-cancel original order

-

U451_06 cancel change reject-order not open

-

U451_08 cancel change reject-order not found

-

U451_11 Reject cancel replace to MKT of DAY order

-

U480_02 order canceled on halt

-

U482_02 close time expiration-cancel order activity

-

U482_05 manual close-cancel order activity

-

U482_06 Order gets cancelled because of trading pause.

-

U485_05 Manual Open-Cancel Opening Crosses

-

U485_06 Primary Quote Open-Cancel Opening Crosses

-

U490_02 open timer expiration-cancel opening cross order activity

-

U491_02 firm disconnect-cancel order activity

-

U495_01 ME DAS Order Cancel on Disconnect

-

U496_01 ME DAS Order Cancel on DAS Instruction

-

U497_01 Manual Unsolicited Order Cancel

-

U498_01 Unsolicited cancel because of MTP Cancel Incoming (N)

-

U498_02 Unsolicited cancel because of MTP Cancel Resting (O)

-

U498_03 Unsolicited cancel of the incoming order because of MTP Cancel Both (B)

-

U498_04 Unsolicited cancel of the resting order because of MTP Cancel Both (B)

-

U499_01 Unsolicited Cancel or Reject because Kill Switch Flag is ON.

-

U499_02 Unsolicited cancel because of Kill Switch Cancel Request

-

U900_03 ME receives an Order Cancel from ORS

-

U900_05 ME receives an Order Reject from ORS

-

U900_06 ME receives an internal Order Reject from ORS

-

Allowed Values (IEX):

- -

Allowed Values (Nasdaq - PHLX, NASD, and BX Options exchanges):

-

1 AUTOPURGE

-

2 POD

-

3 FIRM

-

4 REASSIGN

-

5 HALT

-

6 AIQ

-

7 MANUPURGE

-

8 OPENPURGE

-

9 REPRICE

-

10 SUSPEND

-

11 LIQUIDITY TAKER

-

12 RAPID FIRE VOL

-

13 ZAP DELETE

-

14 KILLSWITCH AUTO

-

15 KILLSWITCH CMD LINE

-

16 KILLSWITCH TRADEINFO

-

17 notPermitted

-

18 badStopPrice

-

19 systemClosed

-

20 invalidDisplay

-

21 invalidType

-

22 invalidFirm

-

23 invalidClearing

-

24 halt

-

25 invalidTime

-

26 invalidCross

-

27 invalidMpid

-

28 invalidMinSize

-

29 alreadyOpened

-

30 restrictedSymbol

-

31 closeCross

-

32 invalidSymbol

-

33 testmode

-

34 invalidPrice

-

35 tiedToStockNotAllowed

-

36 invalidSize

-

37 limitTooDeep

-

38 featureNotSupported

-

39 systemError

-

40 invalidAttribute

-

41 suspend

-

42 notFreeTrading

-

43 nbboTooWide

-

44 changeContractsNoOrder

-

45 changeContractsInvalid

-

46 reentry

-

47 killswitch_reentry

-

48 postOnlyReprice

-

49 undLULD

-

50 invalidPreOpenIoc

-

51 userCancel

-

52 ioc

-

53 timeout

-

54 unsolictedOutReentry

-

55 routeRequest

-

56 staleOrder

-

57 sppLimit

-

58 auctionInProgress

-

59 engineCancel

-

60 tooLateToAct

-

61 noAuction

-

62 invalidTIF

-

63 aonNotAllowed

-

64 bboCross

-

65 purge

-

66 orderExpired

-

67 aiq

-

68 cnbboLimit

-

69 noBbo

-

70 mktOrder

-

71 treasuryOptionsNotAllowed

-

72 openingCancel

-

73 executionNotPossible

-

74 badCapacity

-

75 optionNotOpen

-

76 openDelay

-

77 liquidityTaker

-

78 killSwitch

-

79 adminCancel

-

80 systemCancel

-

81 brokerOption

-

82 invalidCrossSurrender

-

83 cod

-

84 eodCancel

-

OTHER Other

-

Allowed Values (Nasdaq - ISE, GEMINI, and Mercury Options exchanges):

-

1 AUTOPURGE

-

2 POD

-

3 FIRM

-

4 REASSIGN

-

5 HALT

-

6 AIQ

-

7 MANUPURGE

-

8 OPENPURGE

-

9 REPRICE

-

10 SUSPEND

-

11 LIQUIDITY TAKER

-

12 RAPID FIRE VOL

-

13 ZAP DELETE

-

14 KILLSWITCH AUTO

-

15 KILLSWITCH CMD LINE

-

16 KILLSWITCH TRADEINFO

-

17 KILLSWITCH USER

-

18 notPermitted

-

19 invalidStopPrice

-

20 systemClosed

-

21 invalidDisplay

-

22 invalidType

-

23 invalidFirm

-

24 invalidClearing

-

25 halt

-

26 invalidTime

-

27 invalidCross

-

28 invalidMpid

-

29 invalidMinSize

-

30 alreadyOpened

-

31 restrictedSymbol

-

32 closeCross

-

33 invalidSymbol

-

34 testmode

-

35 invalidPrice

-

36 tiedToStockNotAllowed

-

37 invalidSize

-

38 limitTooDeep

-

39 featureNotSupported

-

40 systemError

-

41 invalidAttribute

-

42 suspend

-

43 notFreeTrading

-

44 nbboTooWide

-

45 changeContractsNoOrder

-

46 changeContractsInvalid

-

47 reentry

-

48 killswitchReentry

-

49 postOnlyReprice

-

50 undLULD

-

51 invalidPreOpenIoc

-

52 userCancel

-

53 ioc

-

54 timeout

-

55 unsolictedOutReentry

-

56 routeRequest

-

57 staleOrder

-

58 sppLimit

-

59 auctionInProgress

-

60 engineCancel

-

61 tooLateToAct

-

62 noAuction

-

63 invalidTIF

-

64 aonNotAllowed

-

65 bboCross

-

66 purge

-

67 orderExpired

-

68 aiq

-

69 cnbboLimit

-

70 noBbo

-

71 mktOrder

-

72 treasuryOptionNotAllowed

-

73 openingCancel

-

74 executionNotPossible

-

75 invalidCapacity

-

76 optionNotOpen

-

77 openDelay

-

78 liquidityTaker

-

79 killswitchPurge

-

80 adminCancel

-

81 systemCancel

-

82 brokerOption

-

83 invalidSide

-

84 invalidSpread

-

85 invalidAuctionType

-

86 invalidFormat

-

87 frozen

-

88 requestPending

-

89 cancelUp

-

90 cancelDown

-

91 postOnlyTaker

-

92 invalidState

-

93 tooManyAuctions

-

94 invalidAuctionParams

-

95 rejectedReplace

-

96 massCancel

-

97 invalidReprice

-

98 price

-

99 size

-

100 nbboLimit

-

101 impliedExec

-

102 tooManyImplieds

-

103 complexInstrExists

-

104 exceededMaxComplexInstr

-

105 firmExceededMaxComplexInstr

-

106 invalidPtaContracts

-

107 invalidMatchId

-

108 invalidTradeId

-

109 invalidCrossId

-

110 invalidClientId

-

111 dnttNotAllowed

-

112 instrumentClosed

-

113 atrLimitReached

-

114 invalidISO

-

115 invalidStepupPrice

-

116 threeTickLimitReached

-

117 pending

-

118 pennyNbboRestriction

-

119 invalidDntt

-

120 invalidInstrType

-

121 invalidOrderType

-

122 invalidALO

-

123 invalidFlashInst

-

124 invalidPrefParty

-

125 invalidReserveInfo

-

126 invalidPersist

-

127 invalidShortSaleInd

-

128 invalidProduct

-

129 invalidScope

-

130 invalidOpenClose

-

131 invalidToken

-

132 invalidKillAction

-

133 invalidLegCount

-

134 invalidLegType

-

135 invalidLegRatio

-

136 invalidCrossType

-

137 prefNotAllowed

-

138 orderNotFound

-

139 actionNotAllowed

-

140 instrumentState

-

141 qccNotAllowed

-

142 qccWithStockNetPriceNotAllowed

-

143 qccWithMultiOptLegNotAllowed

-

144 invalidDestination

-

145 maxRoutesAttempted

-

146 destinationNotAvailable

-

147 minQtyNotSatisfied

-

148 sorRespTimeout

-

149 invalidAllocSplits

-

150 qccWithStockPriceNotAllowed

-

151 tooManyStockTradeAttempts

-

152 notTob

-

153 cod

-

154 poolExhausted

-

155 eodCancel

-

OTHER OTHER

-

Allowed Values (Nasdaq Equities):

-

1 User requested cancel. Sent in response to a Cancel Order Message or a Replace Order Message

-

2 Immediate or Cancel order.

-

3 Timeout. The Time In Force for this order has expired

-

4 Supervisory.

-

5 This order cannot be executed because of a regulatory restriction

-

6 Self Match Prevention.

-

7 System cancel.

-

8 Cross canceled. Non-bookable cross orders that did not execute in the cross.

-

9 Order cancelled due to insufficient quantity

-

10 This order cannot be executed because of Market Collars

-

11 Halted. The on-open order was canceled because the symbol remained halted after the opening cross completed.

-

12 Open Protection. Orders that are cancelled as a result of the Opening Price Protection Threshold.

-

13 Closed. Any DAY order that was received after the closing cross is complete in a given symbol will receive this cancel reason.

-

14 System cancel. This order was cancelled because it was rejected by an away destination; includes midpoint orders cancelled due to a crossed market.

-

15 Administrative cancel

-

16 Post Only Cancel. This Post Only order was cancelled because it would have been price slid for NMS.

-

17 Post Only Cancel. This Post Only order was cancelled because it would have been price slid due to a contra side displayed order on the book

-

ADMIN for an administrative cancel FEATURE in the service of a customer-requested feature

-

capacity

-

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Trade Event, Order Fill Event, Order Modify Route Event, Order Restatement Event

-

Specifies the capacity of a given order or side of a trade.

-

Allowed Values:

-

Agency

-

Principal

-

RisklessPrincipal

-

clearingFirm

-

Events: Stock Leg Order Event, Stock Leg Fill Event

-

The Member Alias of the clearing firm.

-

clearingNumber

-

Events: Order Trade Event, Order Fill Event, Stock Leg Fill Event

-

DTCC clearing number reported for each side of a stock trade or for the reporting side of a fill event.

-

cmtaFirm

-

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Post Trade Allocation Event, Options Order Restatement Event

-

The OCC number of the CMTA firm (only valid for CMTA trades).

-

companyName

-

Reference Data: Symbol Entry

-

The Name of the Company in free format text.

-

complexOptionID

-

Events: Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event

-

When present in an event, the complexOptionD will contain the same value as the optionID field from the Complex Order Accepted event to which this event is associated.

-

complexOrderID

-

Events: Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event

-

When present in an event, the complexOrderID identifies the complex option order that is the parent order for an leg orders. Note that this will be the same value as the orderID field from the Complex Order Accepted event.

-

contraClearingNumber

-

Events: Order Fill Event

-

DTCC clearing number for contra side of a trade.

-

coverage

-

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

-

Specifies whether an option order is covered or uncovered. Field may also be filled in as unspecified.

-

Allowed Values:

-

Covered

-

Uncovered

-

Unspecified

-

declaredTimestamp

-

Events: Self Help Declaration

-

Date and time self-help was declared.

-

definedNoteData

-

Events: Note Event

-

A list of key/value pairs, providing machine parseable data for the notation. The attributes must be defined in this specification.

-

Allowed Values:

-

CBOE Values

-

SubNoteType Requires a Choice value (e.g SubNoteType=XXX) where XXX must be one of the following choices.

-

SELECTED PAR Order Select Time and NBBO at the time

-

RECEIVED PAR Order Received Time and NBBO at the time

-

TRADED PAR Order Trade Time and NBBO at the time

-

REPRESENT PAR Order represent time and NBBO at the time

-

UID A unique number assigned by the originating system to identify the row in SBT_ORDER_HIST. The value must be Unsigned (e.g. UID=12345).

-

RemQty Quantity remaining after the fill. The value must be Unsigned (e.g., RemQty=700).

-

RouteSrc The source of the route as a text field (Text<40>) of workstation name, PAR broker, etc (e.g., RouteSrc=ABC123).

-

RouteDest The destination of the route as a text field (Text<40>) of workstation name, PAR broker, etc (e.g., RouteSrc=ABC123).

-

RouteSrcType The location type where the order is routed from. The value is one of the following integer values (e.g., RouteSrcType=3):

-

0 - Unspecified

-

1 - CMI

-

3 - TE

-

4 - PAR

-

5 - BOOTH_OMT

-

6 - CROWD_OMT

-

7 - HELP_DESK_OMT

-

8 - OHS

-

9 - LINKAGE

-

10 - DISPLAY

-

11 - Broker Dealer (Stock orders derived from CPS Cross)

-

12 - Broker Dealer (Stock Orders derived from CPS Market Order Split)

-

RouteDestType The location type where the order is routed to. The value is one of the same as described in RouteSrcType.

-

RouteRes Indicates the reason for the route. The value is one of the following integer values (e.g., RouteRes=7)

-

1 = VOLUME_CHECK

-

2 = AUTO_EXECUTION

-

3 = DIRECT_ROUTE

-

4 = ALTERNATE_ROUTE

-

5 = DISCRETIONARY_OR_NH_ORDER

-

6 = ALL_ROUTING_ATTEMPT_FAILED

-

Following are for reroute attempts

-

7 = HAL_REROUTING

-

8 = REROUTING_TO_SENDER

-

9 = REROUTING_TO_DEFAULT_OMT

-

10 = LINKAGE_ROUTE

-

Following are for PAR print requests

-

11 = PAR_PRINT_ORDER_INTRA_DAY

-

12 = PAR_PRINT_ORDER_END_OF_DAY

-

13 = PAR_PRINT_CANCEL

-

14 = PAR_PRINT_CANCEL_REPLACE

-

Following are for PAR order reroute TA and TB

-

15 = MANUAL_REROUTE_ORDER_TA

-

16 = MANUAL_REROUTE_ORDER_TB

-

17 = MANUAL_REROUTE_ORDER_BOOK

-

18 = MANUAL_REROUTE_ORDER_AUCTION

-

19 = CANCEL_FOLLOW_ORDER

-

Following are for PAR order and fill timeouts

-

20 = MANUAL_ORDER_TA_TIMEOUT

-

21 = MANUAL_ORDER_TB_TIMEOUT

-

22 = MANUAL_ORDER_BOOK_TIMEOUT

-

23 = MANUAL_ORDER_AUCTION_TIMEOUT

-

24 = MANUAL_ORDER_LINKAGE_TIMEOUT

-

22 = CABINET_ORDER

-

23 = SIMPLE_FILL_REJECT

-

24 = COMPLEX_FILL_REJECT;

-

25 = MANUAL_FILL_TIMEOUT

-

26 = MANUAL_FILL_LINKAGE_TIMEOUT

-

27 = TRADE_NOTIFICATION_BUNDLE_TIMEOUT

-

28 = TRADE_NOTIFICATION_ACK_TIMEOUT

-

29 = TRADE_NOTIFICATION_REJECT

-

30 = FILL_REPORT_DROP_COPY

-

31 = CANCEL_REPORT_DROP_COPY

-

25 = CANCEL_REQUEST_ON_RSS

-

26 = NBBO_REJECT

-

32 = PREMIUM_EXCEEDS_REASONABILITY

-

33 = VOLUME_DEVIATION_CHECK_FAILED_ALL_LEVELS

-

34 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_1

-

35 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_2

-

36 = VOLUME_DEVIATION_CHECK_PASSED_LEVEL_3

-

37 = CANCEL_REQUEST_ON_FALLBACK

-

38 = TOO_MANY_ROUTES

-

39 = PRODUCT_STATE_ROUTE

-

40 = VOLUME_MAINTENANCE_MISMATCH

-

41 = FORCED_LOGOFF_PAR

-

BBOBP BBO bid price; the value is of type Price.

-

BBOBS BBO bid size; the value is of type Unsigned.

-

BBOAP BBO ask price; the value is of type Price.

-

BBOAS BBO ask size; the value is of type Unsigned.

-

NBBOBP NBBO bid price; the value is of type Price.

-

NBBOBV NBBO bid exchange volume; the value is of type Unsigned.

-

NBBOAP NBBO ask price; the value is of type Price.

-

NBBOAV NBBO ask exchange volume; the value is of type Unsigned.

-

DSMBP Derived Spread Market bid price; the value is of type Price

-

DSMBS Derived Spread Market bid size; the value is of type Unsigned

-

DSMAP Derived Spread Market ask price; the value is of type Price

-

DSMAS Derived Spread Market: The (Integer)

-

BBP Book bid price; the value is of type Price.

-

BBS Book bid size; the value is of type Unsigned.

-

BAP Book ask price; he value is of type Price.

-

BAS Book ask size; the value is of type Unsigned.

-

AuctionType The type of auction; the value is one of the following integers

-

0 = Auction Unspecified,

-

1 = AUCTION_INTERNALIZATION (AIM/Complex AIM),

-

2 = AUCTION_STRATEGY,

-

3 = AUCTION_REGULAR_SINGLE,

-

4 = AUCTION_HAL,

-

5 = AUCTION_SAL.

-

8 = AUCTION_DAIM (for Directed AIM).

-

AucTradeQty auction trade quantity; the value will be Unsigned

-

AucEarlyTerm indicates if an auction ended early; the value is Boolean (true or false)

-

AuctionID Optional field of type UNSIGNED

-

ActTime The actual time at which activity happened on PAR or ME; the value will be Timestamp

-

NYSE Options Values

-

FloorTrade

-

FloorTradeNamesLater

-

FloorTradeNamesLaterAllocation

-

desiredLeavesQty

-

Events: Order Cancel Route Event, Option Cancel Route Event

-

The desired number of shares remaining in the order after the cancel request has been issued for a routed order. A value of zero indicates a full cancel.

-

displayPrice

-

Events: Order Accepted Event, Order Modified Event, Order Restatement Event, Simple Option Order Accepted Event, Option Order Modified Event, Options Order Restatement Event

-

The displayed price for an order.

-

displayQty

-

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Modify Route Event, Order Restatement Event, Simple Option Order Accepted Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

-

The displayed quantity for an order.

-

endDate

-

Reference Data: Symbol Entry

-

The date a symbol will expire. A value must be entered, if unknown, use Dec 31 9999.

-

eventTimestamp

-

Events: All

-

eventTimestamp generally refers to when an event occurred, however this is subjective depending on the event. Refer to the events definitions to see what this timestamp represents within the context of that event.

-

exchange

-

Events: All Stock Exchange Events, All Options Exchange Events

-

The exchange ID of the exchange associated with the event being reported. Refer to each individual event definition for more specific details.

-

exchOriginCode

-

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Options Order Restatement Event, Post Trade Allocation Event

-

Exchange-specific codes that specify the origin of an order. CAT will map all of these exchange-defined codes to either C - Customer, F - Firm, or M - Market Maker internally. Only the exchange specific codes as defined below need to be included in this field.

-

Below are the accepted values for each exchange, with their description, and their mapping to C, F, or M in CAT in parentheses.

-

Note that some values are marked as "C/M," C/M will map to customer unless an order has mktMkrSubAccount, when it will map to M.

-

CBOE/C2 Allowed Values:

-

B Broker Dealer (C)

-

D Customer Floor Broker Workstation (C)

-

E Customer Internal (C)

-

F Firm (F)

-

H Firm Internal (F)

-

I In Crowd Market Maker (M)

-

J Firm Floor Broker Workstation (F)

-

K Broker Dealer Floor Broker Workstation (C)

-

L B/Ds that are billed as ‘Firm’ but clear in the ‘C’ range at OCC (C)

-

N Away Market Maker (M)

-

R Broker Dealer Internal (C)

-

U MM from FBW (C/M)

-

W Broker Dealer Floor Broker Workstation (C/M)

-

X Customer BD (C/M)

-

Y

-

Z N,Y from FBW (C/M)

-

NYSE Options Allowed Values:

-

C Customer (C)

-

F Firm (F)

-

BD Broker Dealer (C/M)

-

M Market Maker (M)

-

P Professional Customer (C)

-

BATS Allowed Values:

-

B Broker Dealer (C)

-

C Customer (C)

-

F Firm (F)

-

J Joint Back Office (F)

-

L Non TPH Affilliate (C)

-

M Market Maker (M)

-

N NonRegMarketMaker (M)

-

U ProCustomer (C)

-

BOX Allowed Values:

-

6 Public Customer (C)

-

7 Broker Dealer (F)

-

8 Market Maker (M)

-

W Broker Customer (C)

-

X Away Affiliated Market Maker (M)

-

T Professional Customer

-

Y Floor Broker (F)

-

Z Floor Market Maker (M)

-

V Floor Broker Customer (C)

-

U Affiliated Broker Customer (F)

-

MIAX Allowed Values:

-

1 Market Maker (M)

-

2 Away MM (M)

-

3 Broker Dealer (F)

-

4 Firm (F)

-

5 Pri Customer (C)

-

6 Non Pri Customer (C)

-

MIAX Pearl Allowed Values:

-

1 Market Maker (M)

-

2 Away MM (M)

-

3 Broker Dealer (F)

-

4 Firm (F)

-

5 Pri Customer (C)

-

6 Non Pri Customer (C)

-

NASDAQ Options Allowed Values:

-

1 Customer (C)

-

2 Firm (F)

-

3 Floor MM (M)

-

4 Off Floor MM (M)

-

5 Broker Dealer (C)

-

6 Professional Customer (C)

-

7 Proprietary Customer (C)

-

8 Retail Customer (C)

-

9 JBO (F)

-

10 Broker Dealer Firm (F)

-

executingFirm

-

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Options Order Restatement Event

-

The OCC number of the executing firm.

-

executionCodes

-

Events: Order Trade Event, Order Fill Event, Trade Correction Event, Option Trade Event, Stock Leg Fill Event, Options Trade Correction Event

-

Codes that provide a way to augment executions with specific information about the execution. The Execution Codes field has the same formatting as Order Handling Instructions, where zero or more codes can be entered to provide additional execution information, like where a trade may have been executed on the floor.

-

Each code is separated by a single pipe symbol (ASCII decimal 124, hex 7C). Codes which require a value will include that value immediately after the code Field Name and a single equal sign (ASCII decimal 61, hex 3D). All instructions that apply to the order are to be included.

-

Allowed Values:

-

AUC If the trade happened as part of an auction, this code identifies the auction by name (e.g., AUC=CROSS)

-

PCTP Executions for FLEXPCT orders are reported, with the price as the final dollar value of the trade. However, the price was determined as a percentage execution. The original trade percentage value is reported using the PCTP execution code, which requires a Numeric(10,8) value, where 94.5% would be reported as PCTP=94.5.

-

PCTO Executions for FLEXPCT trades are reported using the optionID of the percentage product. However, the final execution happens with a different optionID that is not percentage based. This final optionID is a Text<40> field, and is reported in the trade with the PCTO execution code (e.g., PCTO=OPTIONID1234).

-

NOBUYID Indicates that there is neither a quoteID nor an orderID associated with the buy side of the trade.

-

NOSELLID Indicates that there is neither a quoteID nor an orderID associated with the sell side of the trade.

-

ASOF The trade is being reported as- of another date. This option requires a Date value (e.g. ASOF=20171218).

-

Allowed Values (CBOE):

-

TradeType This code requires a choice value (e.g., TradeType=N) where N is one of the following list of values:

-

B Blocktrade

-

R Regular Trade

-

F Intermarket Sweep

-

L No Print Linkage Trade

-

M Manual Trade

-

P Par Trade

-

X Cross Product Leg Trade

-

S Cross Product Cross Trade

-

I Cross Product AIM Cross Trade

-

H Handheld Trade

-

Q Par to Market Maker Trade

-

1 Regular trade reversal

-

2 No Print Linkage Trade Reversal

-

3 No Print Linkage Trade Manual

-

T Two-Day Trade

-

TradeSource This code requires a choice value (e.g., TradeSource=PAR) where the value is one of the three following choices:

-

PAR

-

System

-

Manual

-

FirmTradeRptTime Shows the Firm Trade Report Time (applies to Block trade and manual trades, time the firm/market maker reports the floor trade), requires a timestamp (e.g., FirmTradeRptTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

-

FirmTradeTime Shows the Firm Trade Time - applies to manual trades - Market Makers have an option to specify when they did the trade on the floor. Requires a timestamp (e.g., FirmTradeTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

-

TradeRptTime Shows the Tape Report Time (when the system reports to OPRA i.e. when the GUI user hits the send button) applies to manual and block trades only. Requires a timestamp. (e.g., TradeRptTime=20170108T023000.123456789). Note that the timestamp must be in the CAT timestamp format described in section 1.5 of the tech specs

-

BBOBP CBOE BBO Bid Price at the time of the trade. Requires a price value. (e.g., BBOBP=12.25)

-

BBOBS CBOE BBO Bid Size at the time of the trade. Requires an integer value. (e.g., BBOBS=400)

-

BBOAP CBOE BBO ask price at the time of the trade. Requires a price value. (e.g., BBOAP=12.50)

-

BBOAS CBOE BBO ask size at the time of the trade. Requires an integer value. (e.g., BBOAS=200)

-

BDATE Shows the business date. Requires a date value expressed as YYYYMMDD (e.g., BDATE=20170112).

-

INTLIQ Liquidity classification internal to BATS. Requires a choice value (e.g., INTLIQ=X) from the following list

-

A added

-

R removed

-

X routed

-

B both order washed/removed some liquidity then got booked

-

D externally removed

-

c conditionally added

-

C auction

-

Q options wait order

-

SUBLIQ BATS internal subliquidity indicator. This is filled in on executions once the code offering the best price to the member is selected. Requires a choice value (e.g., SUBLIQ=N) from the following list

-

N normal

-

H hidden

-

B SUM (Options only – step up auctions mechanism)

-

R bolt route

-

D dark book

-

S setter

-

J joiner

-

I hidden improved

-

T dark Book IOC

-

O open auction

-

C close auction

-

P IPO auction

-

A halt auction

-

V visible improved

-

E retail price improvement (BYX Equities: Retail Order vs. Retail Price Improving Order)

-

K hidden reserve (hidden portion of a reserve order)

-

b BamAuction (Options only - Bats Auction Mechanism)

-

c Cboe Market Close

-

m hidden midpoint (US Equities: Hidden midpoint execution)

-

o open queued

-

h halt queued

-

q QCC (Options only - Qualified Contingent Cross)

-

r Persisted (GTC restatement)

-

s SAM Auction

-

Allowed Values (BOX):

-

TT Indicates when the trade was done. Requires choice value as one of the following list of values:

-

Opening

-

MarketOperation

-

ContinuousTrading

-

GuaranteedAuction

-

SolicitationAuction

-

FacilitationAuction

-

AwayTrade

-

FloorTrade

-

STI Indicates the trade type. Requires choice value as one of the following list of values:

-

RegularTrade

-

As-of-Trade

-

Block Trade

-

Late Trade

-

Hidden Trade

-

Price Volume Adjustment

-

ImpliedOption

-

ImpliedStrategy

-

IsoInbound

-

GdoTradeThrough

-

PipSweep

-

USContingent

-

Pip

-

Crossed

-

ImpliedStrategy

-

FloorTrade

-

SID Indicate the Strategy id. Value associated will be blank or will contain the Strategy Identification

-

STID Indicate the Strategy Trade Id. Value associated will be blank or will contain the Strategy Identification

-

SV Indicate the Strategy Verb. Value associated will be blank or will contain B or S

-

Allowed Values (MIAX):

-

AUC Indicates an auction. Requires one of the following values:

-

1 Opening

-

2 Reopening

-

3 Closing

-

4 Routing

-

5 LiquidityRefresh

-

6 PairedPrime

-

7 CustomerCrossPrime

-

8 QualifiedContingentCrossPrime

-

C ImmediateUncrossing

-

I IIPOpening

-

P RIPReEvalutionCross

-

R RIPReEvalution

-

U URIPAuctionOnArrival

-

Y IIPOpeningCross

-

Allowed Values (CHX):

-

TradeType Name value pair, which requires value to be one of the following choices:

-

CSP CSS entered correspondent trades

-

AWA Away Market Executions

-

CHX ECHX Trade

-

MAN Manual

-

DRP Drop copy away market execution

-

NAM Recovery required

-

RCV Recovery of NAME/NAME trade

-

AWE Away sent electronically thru CHX systems

-

AWM Away sent manually thru CHX systems

-

RPT Allocation report

-

AWF Away market trades cleared by CHX

-

VEN Away market clearing flip - non-ORS

-

AAW IB Alternative Away Market Execution

-

AOR ORS Away market clearing flip

-

RPS Riskless Principal Second Component Trade

-

SNAP Sub-second Non-displayed Auction Process (SNAP) Trade

-

executionID For OrderFill, this is the execution ID received from the routing vendor. The value is of type Text<40>

-

executionMarket For OrderFill - requires a choice from the following values:

-

XCHI Chicago Stock Exchange

-

XNYS New York Stock Exchange

-

XASE American Stock Exchange

-

ARCX NYSE ARCA

-

XBOS Boston Stock Exchange

-

XPHL Philadelphia Stock Exchange

-

XCIS National Stock Exchange

-

XADF FINRA ADF

-

XCBO Chicago Board Options Exchange

-

XNAS NASDAQ Stock Exchange

-

BATS BATS Stock Exchange

-

BATY BATS Y - Exchange, Inc.

-

EDGA Direct Edge A

-

EDGX Direct Edge X

-

IEXG Investors Exchange

-

Allowed Values (NYSE Options):

-

OpenAuction

-

CUBEAuction

-

Complex

-

Cabinet

-

Flex

-

Man

-

Allowed Values (NYSE Equities):

-

Auction

-

OPEN

-

CLOSE

-

CROSS

-

Allowed Values (IEX):

-

I Continuous Trade on IEX

-

L Traded with Displayed Liquidity

-

S Self Trade on IEX

-

X Opening Match on IEX

-

O Opening Auction on IEX

-

C Closing Auction on IEX

-

H Halt Auction Opening on IEX

-

N IPO Auction Opening on IEX

-

Allowed Values (NASDAQ Options - ISE, GEMINI, Mercury only): liquidityCode Name value pair, requires one of the following values

-

0 None

-

1 Maker

-

2 Taker

-

4 Response

-

5 Hidden

-

6 OpeningRotation

-

7 Cross

-

8 FlashedOrder

-

9 FlashResponse

-

10 RoutedOut

-

11 TradeReport

-

12 ComboMakerAgainstCombo

-

13 ComboTakerAgainstCombo

-

14 ComboResponseAgainstCombo

-

15 ComboHiddenAgainstCombo

-

16 ComboOpeningRotation

-

17 ComboCross

-

18 ComboTakerAgainstRegular

-

19 RegularMakerAgainstCombo

-

20 ComboTakerAgainstIO

-

21 RegularTakerAgainstIO

-

22 IOMakerAgainstCombo

-

23 IOMakerAgainstRegular

-

24 RegularMakerAgainstIOParticipant

-

25 IOParticipantTakerAgainstRegular

-

26 BrokenPriceImprovement

-

27 BrokenFacilitation

-

28 BrokenSolicitation

-

29 ComboBrokenPriceImprovement

-

30 ComboBrokenFacilitation

-

31 ComboBrokenSolicitation

-

32 Block

-

33 BlockResponse

-

34 DirectedResponse

-

35 Facilitation

-

36 FacilitationResponse

-

37 PriceImprovement

-

38 PriceimprovementResponse

-

39 Solicitation

-

40 SolicitationResponse

-

41 QualifiedContingentCross

-

42 CustomerToCustomer

-

43 ComboFacilitation

-

44 ComboFacilitationResponse

-

45 ComboPriceImprovement

-

46 ComboPriceImprovementResponse

-

47 ComboSolicitation

-

48 ComboSolicitationResponse

-

49 ComboQualifiedContingentCross

-

50 ComboCustomerToCustomer

-

51 SweepRoutedOut

-

52 SweepTradeReport

-

OTHER Other

-

BuyMatchId Unsigned value

-

SellMatchId Unsigned value

-

AuctionId Unsigned value

-

TradeSource Name value pair, requires one of the following values

-

0 AUTO_EXECUTION

-

1 OPENING

-

2 FLASH

-

3 EXPOSURE

-

4 BLOCK

-

5 PIM

-

6 PIM_COMBO

-

7 FAC

-

8 FAC_COMBO

-

9 SOL

-

10 SOL_COMBO

-

11 CCC

-

12 CCC_COMBO

-

13 QCC

-

14 QCC_COMBO

-

15 MANUAL

-

16 NOS

-

17 OPENING_UNCROSS

-

18 UNCROSS

-

OTHER OTHER

-

Allowed Values (NASDAQ Options - PHLX, NASD, and BX only):

-

TradeSource Name value pair, requires one of the following values

-

1 AUTOEX

-

2 DET

-

3 EBOOK

-

4 NOS

-

5 FBMS

-

6 SWEEP

-

7 QUOTE_M

-

8 CO_SWEEP

-

9 LEGGING

-

10 COMPLEX

-

11 OPENING

-

12 COLA

-

13 COCRA

-

14 PIXL_AUTO

-

15 PIXL_STOP

-

16 QCC

-

17 QCC_FBMS

-

FLEX FLEX

-

OTHER OTHER

-

Allowed Values (NASDAQ Equities):

-

LIQ Name value pair, requires one of the following values

-

1 Added

-

2 Removed

-

3 Routed

-

4 DOT

-

5 Opening Trade (on NYSE)

-

6 On-Close order (on NYSE)

-

7 Non-displayed adding liquidity

-

8 Open Cross

-

9 Open Cross (imbalance-only)

-

10 Closing Cross

-

11 Closing Cross (imbalance-only)

-

12 Halt/IPO Cross

-

13 Halt Cross

-

14 Re-Routed by NYSE

-

15 Odd Lot Execution (on NYSE)

-

16 Added Liquidity (on NYSE)

-

17 Routed to BX

-

18 NYSE Other

-

19 Routed to PSX

-

20 Executed in Open, Close, or Re-open on ARCA

-

21 Added post-only

-

22 Removed liquidity at a midpoint

-

23 Added liquidity via a midpoint order

-

24 Displayed, liquidity-adding order improves the NBBO

-

25 Displayed, liquidity-adding order sets the QBBO while joining the NBBO

-

26 Retail designated execution that removed liquidity

-

27 Retail designated execution that added displayed liquidity

-

28 Retail designated execution that added non-displayed liquidity

-

29 RPI (Retail Price Improving) order provides liquidity

-

30 Retail Order removes RPI liquidity

-

31 Retail Order removes price improving non-displayed liquidity other than RPI liquidity

-

32 Added displayed liquidity in a Group A symbol

-

33 Added non-displayed liquidity in a Group A symbol

-

34 Removed liquidity in a Group A symbol

-

35 Added non-displayed mid-point liquidity in a Group A symbol

-

36 Added displayed liquidity in a SCIP Symbol

-

37 Displayed, liquidity-adding order improves the NBBO in a SCIP Symbol

-

38 Displayed, liquidity-adding order set the QBBO while joining the NBBO in a SCIP Symbol

-

39 Displayed, liquidity-adding order improves the NBBO in pilot symbol during specified LULD Pricing Pilot timeframe

-

40 Added displayed liquidity in a pilot symbol during specified LULD Pricing Pilot timeframe

-

41 Removed liquidity in a pilot symbol during specified LULD Pricing Pilot timeframe

-

42 Halt Cross, orders entered in pilot symbols during the LULD Trading Pause

-

executionTimestamp

-

Events: Order Trade Correction, Option Trade Correction

-

When a trade is reported, the time of the trade is reported as the eventTimestamp. The executionTimestamp is used in a correction event if the time of the trade needs to be changed.

-

exerciseStyle

-

Reference Data: Simple Option Series Dictionary Entry

-

Specifies the exercise style of the Option Series in Simple Option Series Dictionary Entry.

-

Allowed Values:

-

American

-

European

-

expirationDate

-

Reference Data: Simple Option Series Dictionary Entry

-

The date an options contract will expire, taking the format: YYYYMMDD.

-

fillID

-

Events: Order Fill Event, Stock Leg Fill Event

-

A unique identifier for the transaction. The combination of reporter, date, symbol, side, and fillID should be unique.

-

floorBroker

-

Events: Option Trade Event

-

The Member Alias of the executing floor broker. handlingInstructions

-

Events: Order Accepted Event, Order Route Event, Order Modified Event, Order Modify Route Event, Order Restatement Event, Simple Option Order Accepted Event, Complex Option Order Accepted Event, Complex Option Order Modified Event, Stock Leg Order Event, Option Order Modified Event, Stock Leg Modified Event, Option Route Event, Modify Option Route Event, Options Order Restatement Event

-

The order handling instructions field is a way to provide multiple instruction codes in a somewhat flexible manner. This field will contain zero or more order instruction codes, each separated by a single pipe symbol (ASCII decimal 124, hex 7C). Codes which require a value will include that value immediately after the code Field Name and a single equal sign (ASCII decimal 61, hex 3D).

-

All instructions that apply to the order are to be included.

-

Allowed Values (Boolean, presence indicates truth):

-

AON All or None

-

AUC Auction Eligible

-

DNR Do Not Route

-

FOK Fill or Kill

-

IOC Immediate or Cancel

-

ISB Intermarket Sweep Book

-

ISO Intermarket Sweep

-

NH Not Held

-

OPG At the Opening

-

PSO Post Only

-

WTP Wash Trade Prevention

-

Note: Some exchanges have special values to indicate handling of ISO orders. All ISO orders must be marked with the boolean ISO value. Thus, if an exchange denotes an ISO order with some custom attribute, it must also be marked with the common ISO value.

-

Some allowed values (are name value pairs and must be accompanied by a value) must be accompanied by further explanation or additional information:

-

Allowed Values (Name Value Pairs):

-

MIN Minimum Quantity - requires an Integer value, representing he minimum quantity allowed to be executed in a single transaction (e.g., MIN=1000).

-

WD With Discretion Price - requires a Numeric value, representing the discretion price (e.g, WD=12.50)

-

STP Stop Price - requires a Numeric value representing the stop price (e.g., STP=17.95)

-

XDATE Expire Date - requires a Date value, representing the date that the order expires. The value must be in Date format (e.g., May 15, 2017 would be XDATE=20170515). The order expires at the close of the specified date.

-

XTIME Expire Time - requires a Time value, representing the time that the order expires. The value must in a valid Timestamp format.

-

R2E Route to Exchange - requires Exchange ID (e.g., R2E=G). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to a specific exchange.

-

R2M Route to Industry Member - requires Member Alias (e.g., R2E=ABC123). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to a specific industry member.

-

R2O Route to Other - requires Text(20) (e.g., R2O=Somebody). The desired route destination is not the party receiving the actual route. The party receiving the route does not have discretion as to where to route the order. It must be routed to an entity who is neither an exchange nor an industry member (i.e., the entity does not have a CAT reporting responsibility).

-

Allowed Values (CBOE Name Value Pairs):

-

MIT Market if touched, becomes a market order if the price is touched. Requires a price value (e.g, MIT=20.53).

-

AucResp A response to an auction, the remainder is canceled at the end of the auction. Requires a integer value representing the auction ID being responded to. (e.g., AucResp=1234).

-

Reserve Reserve, only a portion of the order is displayed. Requires an integer value representing quantity. (e.g., Reserve=300).

-

PMM Preferred market maker, requires a text (text, 10) value representing the acronym of the preferred market maker. (e.g., PMM=FRMA)

-

AIM Automated Improvement Mechanism. Requires a choice value (e.g., AIM=AIM) selected from the following list

-

AIM standard AIM

-

AIQ QCC Primary Order

-

AIS Sweep and AIM primary order

-

AIR Re-route if cannot AIM primary order

-

ARE Contra order to AIM. Requires a text (text 20) value representing the primary order ID. (e.g., ARE=AB54321)

-

AREOUT Contra order to AIM where the user can opt out. Requires a text (text 20) value representing the primary order ID. (e.g., ARE=AB54321)

-

Designation Order designation, requires a choice value (e.g., Designation=4) from the following list of values

-

1 Tied Hedge

-

2 SPXCOMBO

-

3 Tied Hedge and Cash Spread

-

4 SPXCOMBO and Cash Spread

-

5 Cash Spread

-

UHI User handling instruction, requires a choice value (e.g., UHI=4) from the following list of values

-

1 Do Not Auction

-

2 Held

-

3 Solicited Order

-

4 Held and Solicited

-

5 Held and no COA

-

6 Electronic Only

-

7 Electronic Only and Solicited

-

8 Electronic Only and no COA

-

Allowed Values (BATS Name Value Pairs):

-

ExecInst Provides additional values for execution instructions that aren't already present in orderType or other handlingInstructions values. Requires a choice value (e.g., ExecInst=U) from the following list

-

N No special instructions

-

s sweep

-

M hidden peg to midpoint

-

L alternative midpoint peg to less aggressive midpoint or 1 tick inside of NBBO

-

m midpoint peg no lock hidden peg to midpoint but duck at or beyond limit

-

d displayed peg order with discretion to the midpoint

-

g AllOrNone

-

I midpoint match (EDGX)

-

Q market maker peg order

-

v Dart dark route before outbound

-

w DoNotDart opt of dart

-

x ImproveOnly BATS only IOC that only matches better than NBBO

-

y TAISO

-

z DarkScan hit scan fast DLPs first

-

t DarkScanWithoutDart

-

r LateAuction late limit on open/close

-

U route peg order

-

u DartOnly route only to a dark venue

-

F FastDart

-

S SuperDart

-

f ISO

-

R PrimaryPeg

-

Reserve Number of shares of a reserve order to display. Requires an UNSIGNED value

-

ExtExecInst Requires a choice from the following values:

-

N None

-

T Retail Price Improving

-

P Retail Order - Price Improvement Only

-

R Retail Order

-

S Retail Order NoFlagCLC

-

MaxRemovePct The max percentage an order is allowed to remove before booking. Requires an Unsigned (e.g., MaxRemovePct=10)

-

AttributedOrder Requires a choice value from the following list

-

N None

-

Y Attributed

-

R Retail

-

DisplayRange This will be of type Unsigned, and is used for a “random replenishment” reserve order. The reload quantity is randomly selected using Reserve +/- displayRange e.g. Reserve of 1000, displayRange of 200, reload quantity will be randomly selected from 800, 900, 1000, 1100, or 1200

-

Allowed Values (BATS Name Value Pairs - Equities Only):

-

TifMod Supplemental time-in-force information. Requires a choice value (e.g., TifMod=1) from the following list

-

1 include early (7 – 8 AM) and pre-market trading sessions (8 AM – 9:30 AM)

-

2 include pre-market session (8 - 9:30 AM)

-

3 include early (7- 8 AM), pre (8 – 9:30 AM), and post-market sessions (4 -5 PM BZX and BYX, 4 – 8 PM for EDGA and EDGX)

-

4 include pre (8 – 9:30 AM), and post-market sessions (4 -5 PM BZX and BYX, 4 – 8 PM for EDGA and EDGX

-

Allowed Values (BATS Name Value Pairs - Options Only):

-

TifMod Supplemental time-in-force information. Requires a choice value (e.g., TifMod=1) from the following list

-

1 include pre-market session (7:30 - 9:30 AM)

-

Allowed Values (BOX Name Value Pairs):

-

EP Directed Order Executing Participant. Requires a BOX Participant ID string value (e.g., EP=XYZ123).

-

IML Indicate the Inter Market Linkage Behavior for the order. Requires a choice value from the following list of values

-

FLASH

-

ROUTING

-

NONE

-

NBBO

-

ISO

-

CONTINGENT

-

NOFLASH

-

PT Indicate BOX Price Term for the order. Requires a choice value from the following list of values

-

PIP

-

SOLICITATION

-

FACILITATION

-

CROSS

-

DIRECTED

-

PREF

-

FLOOR

-

OT Indicate the order type for auction phase. Requires a choice value from the following list of values

-

IMPROVE

-

INITO

-

EXPOSED

-

CROSS

-

CONTINGENT

-

MBF

-

GTD Indicates Date in YYYYMMDD Format

-

QT Requires a choice value from the following list of values

-

MINIMUM

-

SURRENDER

-

MIP

-

AQ Indicate the additional quantity when QT is either MINIMUM or SURRENDER. Requires an unsigned integer value (e.g, AQ=1000)

-

AP This will be field of type Price

-

AT Requires a choice value from the following list of values

-

PIP

-

SOLICITATION

-

FACILITATION

-

CROSS

-

FIXED

-

FLOOR

-

AID This will contain a n UNSIGNED number that will allow BOX to track "Auction Phase Number" (e.g., AID=123456)

-

Allowed Values (CHX):

-

ExecInst Requires a choice value (e.g., ExecInst=f) from the following list:

-

5 Held

-

E DNI - Do not increase

-

F DNR - Do not reduce

-

K Cancel on Trading Halt

-

X TALG - Trade Along

-

y Trade At Intermarket Sweep (TAISO)

-

q Always Quote

-

I Midpoint Cross

-

v Stock-Option (for cross order only)

-

TradeThruExemptReason Requires a choice value (e.g., TradeThruExemptReason=2) from the following list:

-

1 Benchmark

-

2 QCT Qualified Contingent Trade

-

3 Bonafide Error Indicator

-

PriceSliding Requires a choice value (e.g., PriceSliding=L) from the following list:

-

L CHX Only – Slide limit price on lock NBBO

-

S CHX Only – Slide limit price on lock or cross NBBO

-

MatchTradePrevention Requires a choice value (e.g., MatchTradePrevention=N) from the following list:

-

I MTP Inactivate

-

N MTP Cancel Newest

-

O MTP Cancel Oldest

-

B MTP Cancel Both

-

MTPSublevelInd Requires a choice value (e.g., MTPSublevelInd=1) from the following values:

-

[0-9,A-Z,a-z]

-

Allowed Values (NYSE Options):

-

NOW

-

ISO

-

AON

-

PNP

-

PNPLO

-

PNPB

-

ALO

-

FloorTrade

-

FloorTradeNamesLater

-

FloorTradeNamesLaterAllocation

-

ClearTheBook

-

Cabinet

-

Flex

-

CUBEAUCPI

-

CUBEAUCF

-

QCC

-

COA

-

PNP+

-

Stop Requires a Price value (e.g., Stop=42.42)

-

StopLimit Requires a Price value (e.g., StopLimit=42.42)

-

Allowed Values (NYSE Equities):

-

ALO

-

ISO

-

TradeAtISO

-

Non-Routable

-

RoutableIOC

-

Tracking

-

Non-Display

-

RPI

-

Retail

-

MPEG Market Peg

-

PPEG Primary Peg

-

DPO

-

DPP

-

MPL

-

PO

-

945

-

355

-

945-355

-

ImblOffset

-

NonRoutableIOC

-

ClosOffset

-

LPEG

-

DMP

-

DLP

-

NoMPL

-

NoIOI

-

NoMPL-IOI

-

Allowed Values (NASDAQ Options):

-

Boolean Values

-

PostOnly

-

PostOnlyPrice

-

WAIT

-

AllowFlash

-

AllowExposure

-

DNR

-

DNTT (Do not trade through)

-

DNA (Do not Auction)

-

AO (Auction Only)

-

Name Value Pairs

-

DMM STRING; DMM Name

-

DisplayWhen For reserve orders, requires one of the following

-

1 Immediate

-

2 onExhaust

-

RefreshMax UNSIGNED; Contracts

-

RefreshMin UNSIGNED; Contracts

-

InitDispContracts UNSIGNED; Contracts [Initial Display Contracts for reserve orders] RoutingStrategy Must be one of the following

-

SRCH

-

FIND

-

SEEK

-

RespAuctionId UNSIGNED; auctionId

-

MIN UNSIGNED; Contracts

-

OrderSource Must be one of the following

-

FIX

-

OTTO

-

SQF

-

FBMS_FIX

-

FBMS

-

PRECISE_FIX

-

BrokerPct NUMERIC<3,4>; Percentage

-

EffectiveTime TIME

-

StepUpPrice PRICE

-

StepUpPriceType Must be one of the following

-

1 Market

-

2 Limit

-

DMA DMA Name [for route event], where ‘DMA Name’ can have following values:

-

CITI

-

WEX

-

MLGW

-

GSG

-

OTHER

-

DestExch Dest Exch [for route event], where ‘DestExch’ can have following values:

-

11 AMEX

-

12 BOXE

-

13 CBOE

-

14 EDGO

-

15 GMNI

-

16 ISEX

-

17 MCRY

-

18 MIAX

-

19 NYSE

-

20 MPRL

-

21 NSDQ

-

22 NOBO

-

23 CBC2

-

24 PHLX

-

25 BATS

-

1 BNY

-

2 CHBC

-

3 LBKI

-

4 FOGS

-

OTHER OTHER

-

Allowed Values (NASDAQ Options - ISE, GEMINI, and Mercury):

-

CrossType Value must be on of the following

-

1 None

-

2 Close

-

3 Open

-

4 PriceImp

-

5 QCC

-

6 Solicit

-

7 Facilit

-

8 Flash

-

9 Block

-

10 Exposure

-

11 Cust

-

OTHER OTHER

-

Allowed Values (NASDAQ Options - PHLX, NASD, BX):

-

CrossType Value must be on of the following

-

1 None

-

2 Close

-

3 Open

-

4 Complex

-

5 Open Complex

-

6 Close Complex

-

7 PIXL

-

8 QCC

-

9 SOLICIT

-

10 Complex PIXL

-

11 Complex SOLICIT

-

OTHER OTHER

-

Allowed Values (NASDAQ Equities):

-

MELO for a Midpoint ELO order

-

SUPL for a Supplemental order

-

RPI for a Retail Price Improvement Program order

-

ExecBroker Value must be on of the following

-

DOTA

-

DOTD

-

DOTM

-

DOTI

-

MOPP

-

TFTY

-

SCAN

-

SKIP

-

SKNY

-

SAVE

-

QSAV

-

QTFY

-

DOTZ

-

LIST

-

CART

-

SOLV

-

QSLV

-

ESCN

-

MOPB

-

RFTY

-

QRTY

-

INET

-

Display Value must be one of the following

-

1 Attributable-Price to Display

-

2 Anonymous-Price to Comply

-

3 Non-Display

-

4 Post-Only

-

5 Imbalance-Only (for opening and closing cross only)

-

6 Mid-Point

-

7 Mid-Point Post Only

-

8 Post-Only and Attributable – Price to Display

-

9 Retail Order Type 1

-

10 Retail Order Type 2

-

11 Retail Price Improvement Order

-

ExecInst Value must be one of the following

-

1 Midpoint Peg

-

2 No Peg

-

3 Market Peg

-

4 Quoting Peg

-

5 Primary Peg

-

6 INAV pegging

-

7 means Intermarket Sweep Order (ISO)

-

8 means Trade-at Intermarket Sweep Order

-

9 means Reactive Trade Now

-

10 means Reactive Trade Now opt-out

-

initiator

-

Events: Order Modified Event, Order Canceled Event, Quote Cancel Event, Option Order Modified Event, Complex Option Order Modified Event, Stock Leg Modified Event, Option Order Canceled Event

-

Indicates who initiated a cancel or modification request. If an order/quote is implicitly modified or canceled via an unsolicited action (e.g., peg order price change or cancelation due to timeout), then the initiator is the exchange itself.

-

If an order/quote is modified or canceled as a result of an explicit request from the party that sent the order/quote, then the initiator is the firm/market maker that sent the explicit modify/ cancel request.

-

Thus, all explicit modify/cancel requests will have an initiator of either Firm or MarketMaker, as appropriate and all implicit, unsolicited modify/cancel actions will have an initiator of Exchange.

-

Allowed Values:

-

Firm

-

Exchange

-

MarketMaker

-

IPO

-

Reference Data: Symbol Entry

-

Indicates whether the issue is an Initial Public Offering ("IPO"). It will be set to false on the day after the IPO occurs (required for NMS).

-

issueType

-

Reference Data: Symbol Entry

-

Specifies the type of equity being described in the equity symbol entry.

-

Allowed Values:

-

NMS

-

OTC

-

Index

-

ETF

-

kind

-

Reference Data: Option Series Dictionary Entry, Complex Option Dictionary Entry

-

Specifies if an option is a simple, complex, flex, or percentage denominated flex option. For the value FLEXPCT, the strike price and order prices of the option are in percentages.

-

Allowed Values:

-

Complex

-

Standard

-

Non-Standard

-

FLEX

-

FLEXPCT

-

leavesQty

-

Events: Order Canceled Event, Order Trade Event, Order Fill Event, Order Cancel Route Event, Order Restatement Event, Option Order Canceled Event, Option Cancel Route Event, Option Trade Event, Stock Leg Fill Event, Options Order Restatement Event

-

The quantity remaining unfilled after the event. The meaning of this field is subjective depending on the event, refer to each individual event definition for more detail.

-

legType

-

Reference Data: Complex Option Dictionary Entry

-

For a Complex Option Dictionary Entry, this field defines the type of each leg.

-

Allowed Values:

-

Equity

-

Index

-

Option

-

liquidityCode

-

Events: Order Trade Event, Option Trade Event

-

Included in the side trade details for options and equity trade events, represents whether a given side was adding or removing liquidity.

-

Allowed Values:

-

Added

-

Removed

-

RoutedOut

-

Opening-ReopeningAuction

-

ClosingAuction

-

CrossOrderExecution

-

Other

-

listedSymbol

-

Reference Data: Symbol Dictionary Entry

-

The symbol in the symbology of the listing exchange.

-

listingParticipant

-

Reference Data: Symbol Entry, Symbol Dictionary Entry

-

The exchangeID of the listing exchange for the symbol being described in the event where this field is present.

-

lotSize

-

Reference Data: Symbol Entry

-

Used in a symbol definition entry to state the number of shares in a round lot.

-

marketMaker

-

Events: Quote Event, Quote Cancel Event

-

The Member Alias assigned by the SRO to identify the market maker issuing the quote or quote cancel. In the case where a market maker has multiple users (e.g., acronyms used to differentiate users within the same MM), there would be a separate Member Alias given to each user or sub-account.

-

memberAliases

-

Reference Data: Member Dictionary Entry

-

A list of member aliases for an SRO member.

-

mktMkrSubAccount

-

Events: Simple Option Order Accepted Event, Option Order Modified Event, Option Trade Event, Option Order Restatement Event, Post Trade Allocation Event

-

The sub-account for the market maker. This is a text field and will be treated as pass through data - not validated. nbbPrice

-

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

-

The national best bid price at the moment the event. If the event changes the NBBO, this is the national best bid price before the change effected by the event, in this sense, this field is always the national best bid price immediately before the event occurs. See this field in context of the event definitions for more info.

-

nbbQty

-

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

-

The national best bid quantity at the moment the event. If the event changes the NBBO, this is the national best bid quantity before the change effected by the event, in this sense, this field is always the national best bid quantity immediately before the event occurs. See this field in context of the event definitions for more info.

-

nboPrice

-

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

-

The national best offer price at the moment the event. If the event changes the NBBO, this is the national best offer price before the change effected by the event, in this sense, this field is always the national best offer price immediately before the event occurs. See this field in context of the event definitions for more info.

-

nboQty

-

Events: Order Accepted, Order Route, Order Modified, Order Trade, Order Modify Route, Simple Option Order Accepted, Stock Leg Order, Option Order Modified, Stock Leg Modified, Option Route, Modify Option Route, Simple Option Trade

-

The national best offer quantity at the moment the event. If the event changes the NBBO, this is the national best offer quantity before the change effected by the event, in this sense, this field is always the national best offer quantity immediately before the event occurs. See this field in context of the event definitions for more info.

-

note

-

Events: Note Event

-

Free form text provided by the exchange to describe the notation of the event.

-

noteType

-

Events: Note Event

-

For a note event, classifies the type of note.

-

Allowed Values:

-

MISC

-

CBOE Note Types

-

CBOE:1 Order Route Event (When an order is routed between internal CBOE systems). The source and destination will indicate more details.

-

CBOE:2 Cross Order Route Event

-

CBOE:3 Auction Start

-

CBOE:4 Auction End

-

CBOE:5 PAR_BROKER_USED_MKT_DATA

-

CBOE:6 PAR_BROKER_MKT_DATA

-

CBOE:7 PAR_BROKER_LEG_MKT

-

CBOE:8 PAR_MANUAL_MARKET_DATA

-

NYSE Options Note Types

-

Floor

-

NYSE Equities Note Types

-

CrossingSession

-

onlyOneQuote

-

Events: Quote Event, Quote Cancel Event

-

True if the system allows only one quote for the particular market maker; false otherwise.

-

openCloseIndicator

-

Events: Simple Option Order Accepted, Options Modified, Post Trade Allocation, Options Restatement or sideDetail of Option Trade events. (When this field is present in the sideDetails of an options trade event, it is applicable only when the side of the trade is an order)

-

Indicates the position of the order.

-

Allowed Values:

-

Open

-

Close

-

Unspecified

-

optionID

-

Reference Data: Simple Option Series Dictionary Entries, Complex Option Dictionary Entries Events: All events for Options Exchanges

-

The unique ID assigned to this option by the reporter. None of any two simple/complex/flex options should receive the same ID.

-

orderAttributes

-

Events: Order Accepted, Order Modified, Order Restatement, Simple Option Order Accepted, Complex Option Order Accepted, Complex Option Order Modified, Stock Leg Order, Option Order Modified, Complex Order Modified, Stock Leg Modified, Option Order Restatement

-

The order attributes field is a way to provide attributes of an order that are not necessarily the same as handling instructions.

-

For example, the rank price of an order, or the participant with the best bid.

-

Allowed Values:

-

RNKP Rank Price - requires a Price value, representing the price used to rank the order in the book (e.g., RNKP=10.25).

-

NBBPAR Participant at the best bid - requires a Participant ID, representing the participant at the best bid (e.g, NBBPAR=Par1)

-

NBOPAR Participant at the best offer - requires a Participant ID, representing the participant at the best bid (e.g, NBOPAR=Par1)

-

Allowed Values (CBOE):

-

MPID Market participant ID, requires an alphanumeric(8) value. (e.g., MPID=A12345)

-

MeetExchangeID Meet Exchange ID, requires a text(8) value. (e.g., MeetExchangeID=B76543)

-

Branch Branch ID, requires a alphanumeric(8) value. (e.g., Branch=ABCD5)

-

BranchSeqNbr The branch sequence number, requires an integer(10) value. (e.g., BranchSeqNbr=500321)

-

CorrespFirm The corresponding firm, requires an alphanumeric(8) value. (e.g., CorrespFirm=987765B)

-

UserID The user ID. Requires a text(8) value. (e.g., UserID=4321A)

-

Extensions Order Extensions. Requires a text(256) value.

-

NBBOProtection Specifies if the order is NBBO protected. Requires a choice value from one of the following choices: true, false. (e.g., NBBOProtection=false).

-

Allowed Values (BATS):

-

AckSubLiquidity This is a subset of the SubLiquidity values. Better prices are offered (in some cases) if an order is at the NBBO. This tells the member on order entry if their order did that. Requires a choice value (e.g., AckSubLiquidity=N) from the following list:

-

N Normal

-

S Setter

-

J Joiner

-

r Persisted (GTC restatement)

-

AddLiquidityOnly Values used for "Post Only" orders. Requires a choice value (e.g., AddLiquidityOnly=A) from the following list of values:

-

A Add only, don't remove liquidity

-

B Bypass removing hidden peg

-

R Allow removal

-

L don't remove at limit

-

AllowPriceSlide Describes what to do with an order if it locks/crosses with the NBBO. Requires a choice value (e.g., AllowSidePrice=M) from the following list:

-

S allow slide and nerf

-

R no nerf and no slide

-

L allow slide no nerf

-

P price adjust

-

m multiple price adjust

-

M slide nerf unnerf when possible

-

H hide not slide

-

N don't re-scrape book at limit

-

D Slide Price

-

E Slide Price but no Nerf

-

X Don't Slide Don't Reject

-

C Bold but no Nerf

-

m Multiple Price Adjust

-

K Cancel Back

-

AuctionType Auction type, used for fee purposes. Requires a choice value (e.g., AuctionType=H) from the following list:

-

O open

-

C close

-

H halt

-

I IPO

-

N none

-

c Cboe Market Close

-

Display Display. Requires a choice value (e.g., Display=V) from the following list:

-

V visible

-

I invisible

-

Executable Further describes the status of an order if it is/ is not yet live or executable. Can be updated with a modify event. Requires a choice value (e.g. Executable=W) from the following list:

-

E order is executable

-

P order is route pending

-

W order in a wait state

-

O open auction MOO/LOO/LLOO + pre-open RHO

-

C close auction MOC/LOC/LLOC

-

U queued

-

T order is stop pending

-

S suspended

-

Q non executable visible quote

-

D pending queued

-

I Periodic Auction

-

A Step Up

-

b BAM Auction

-

c COA (Options only - Complex Order Auction - order is not currently executable as auction is not complete)

-

q QCC

-

BookLiquidity Signifies whether the order is being added to the book. Requires a choice from the following values:

-

A Booked

-

R Not Booked

-

X Routed

-

B Booked Remainder

-

Q Wait

-

C Auction

-

MODR Modify reason, requires a choice value (e.g., MODR=+) from the following list. Note that in this list the acceptable values are surrounded by quotes because the list contains non alphanumeric values:

-

'P' peg adjustment

-

'C' Cboe Market Close

-

'+' price was un-slid

-

'L' liquidity flag was changed (resting order routed away or fully delivered)

-

'R' user reduce (no loss of priority)

-

'D' adjustment of discretion price ONLY no loss in priority (midpoint discretionary peg orders)

-

'U' user other

-

'-' an external NBBO change (sip) caused some sort of change in the order

-

'^' Reroute (order lifted from book to reroute)

-

'B' un-bolt OR bolt-expire

-

'W' wash

-

'T' wait order

-

'!' reload of displaySize and loss of priority

-

'K' working price slid back to display price due to another market locking our protected quote

-

‘S’ stop order

-

‘A’ order routed away due to ROOC e.g. a few minutes before an open/close/ipo/halt auction

-

‘E’ sweep SWPA or SWPB order after route plan has been developed

-

'@' Trading At Last

-

'X' Locked In Cross

-

'Y' Recovery

-

PWASH Prevent wash, more information about wash prevention. Requires a choice value (e.g., PWASH=P) from the following list:

-

N do not prevent (none)

-

F prevent same firm match

-

C prevent clearing firm match

-

P prevent port-owner match

-

RTLM Route to listing market, specifies whether the order can be routed to the opening auction, the closing auction, or both on the listing exchange. Requires a choice value (e.g., RTLM=O) from the following list:

-

N none

-

O only on the open

-

C only on the close

-

B both (on the open or close)

-

H Halt

-

ROUTESTRAT The route strategy used internally in the Bats system. Requires a choice value (e.g., ROUTESTRAT=O) from the following list:

-

O default, let the router select the strategy

-

F failover strategy for use when the router has a NoQuote condition

-

L legacy (emulate the behavior of the old router)

-

C cycle (sequentially route walking depth of book)

-

K dark liquidity scan

-

T toggle (causes the router to cycle through various other strategies on a per-order basis)

-

B ParT (Parallel Top)

-

S ParD (Parallel Depth), exhaust price level before proceeding

-

2 Par2D (Parallel Depth including multiple price levels)

-

M Slim (predefined set of markets, DRT and then ALL)

-

m SlimPlus (Slim, but send to BYX before scraping the local book)

-

R Trim, scrape local book on way in (predefined set of markets, DRT, and then another predefined set of markets)

-

r Trim, but don't scrape local book on way in

-

P Trim2

-

p Trim2, but don't scrape local book on way in

-

Q Trim3

-

q Trim 3, but don't scrape local book on way in

-

G MidPoint routing

-

b SWEEPB (Route to market centers to remove least amount of protected quote shares so order can post. No executions occur is order size too small to completely remove all protected quotes)

-

i Book + IOC/(Day effective 10/21/14) Nasdaq

-

t Book + DRT + IOC/(Day effective 10/17/14) NYSE

-

x Book + IOC/(Day effective 10/17/14) NYSE

-

f Book + IOC LavaFlow

-

a ISO Sweep of all protected markets (similar to BATS Parallel T)

-

o ROBB

-

c ROCO

-

l ROUC

-

Z RMPT

-

z IOCM

-

u Dark lit

-

W Lit sweep

-

D Directed

-

A ALLB

-

RESTA Resting action, specifies whether this order will go onto the Bats book or be routed away to post on somebody else’s book. Requires a choice value (e.g., RESTA=I) from the following list:

-

I Integrated, will rest on the BATS book (though may not be resting at the point of the OA if it is a routed order, may never rest if it is a routed IOC)

-

A PostAway, will rest on another exchange’s book, looking like a routed order that hasn’t come back to BATS

-

D Dark

-

E Expose

-

REROUTE Reroute, specifies whether or not we can reroute an order (route it a second time after it has been booked), if the NBBO goes locked or crossed. Requires a choice value (e.g. REROUTE=N) from the following list:

-

N none

-

L onLock

-

C onCross

-

K onLockOddLot

-

REJA Reject action, provides further information on action if the order can't be executed on entry. Requires a choice value (e.g., REJA=W) from the following list:

-

O outbound

-

R reject

-

Z BZX only

-

J BYX only

-

N NASDAQ only

-

A ARCA only

-

C NSX only

-

M CHX only

-

X PHLX only

-

K BEX only

-

E ISE only

-

U AMEX only

-

D EDGA only

-

G EDGX only

-

Y NYSE only

-

T TRACO only

-

L FLOW only

-

W CBSX only

-

V DATA only

-

H CTWO only

-

S NOBX only

-

F MIAX only

-

g GMNI only

-

r Dark Reject

-

a Dark Auto

-

x Dark Self Cross

-

P Periodic

-

t Wait

-

p Primary Only

-

b BXE Only

-

c CXE Only

-

q TRQX Only

-

h XHFT Only

-

l Bats Select

-

e PERL Only

-

m MERC Only

-

i IEX Only

-

Allowed Values (BOX):

-

ST Requires a choice from the following list:

-

InOrderBook

-

Executed

-

Exposed

-

ToOla

-

Directed

-

CancelPending

-

Eliminated

-

TraderCancelled

-

EliminatedOutOfLimit

-

EliminatedByCircuitBreaker

-

EliminatedOnDisconnection

-

EliminatedByMarketControl

-

EliminatedDueToUnpricedLeg

-

EliminatedDueToTradingRestriction

-

CancelledBySupervisor

-

Received

-

EliminatedDueToTradeLimitExceeded

-

EliminatedDueToTradeActivityLimitExceeded

-

EliminatedDueToMaximumNbTriggersLimitExceeded

-

EliminatedDueToDrillThroughProtection

-

Allowed Values (CHX Name Value Pairs):

-

SettlementType Requires a choice value (e.g., SettlementType=0) from the following list:

-

0 REG - Regular Way

-

1 CASH - Cash

-

2 NXT - Next Day

-

3 T+2 - Trade Date + 2

-

4 T+3 - Trade Date + 3

-

5 T+4 - Trade Date + 4

-

6 FUT - Future

-

7 WI - When and If Issued

-

8 SO - Sellers Option

-

9 T+5 - Trade Date + 5

-

S SLR - Settlement Days

-

FutureSettlementDate Requires value (e.g., FutureSettlementDate=YYYYMMDD) when SettlementType is 6 or S. Value is a date in format YYYYMMDD.

-

FutureSettlementDays Requires value (e.g., FutureSettlementDays=4) when settlementType is S. Value is an integer. It is the number of settlement days.

-

ExpireSeconds Requires value (e.g., ExpireSeconds=3) when timeInForce is GFS. Value is an integer. It is the number seconds for the good-till-seconds order.

-

ExpireDate Requires value (e.g., ExpireDate=YYYYMMDD) when timeInForce code is GTD. Value is an integer. It is the date for the good-till-date order.

-

PegDiff Requires value (e.g., PegDiff=2) for SNAP Auction market peg order. Value is an integer. It is the number of ticks for the symbol.

-

CancelOnSNAPAuctionFlag Requires value (e.g., CancelOnSNAPAuctionFlag=Y) for an order.

-

Y When a SNAP Auction is invoked, the order will not participate in the SNAP Auction

-

N When a SNAP Auction is invoked, the order will participate in the SNAP Auction

-

SNAPMinExecRequiredFlag Requires value (e.g., SNAPMinExecRequiredFlag=Y) for a SNAP Auction order.

-

Y Minimum SNAP Auction threshold required

-

N Minimum SNAP Auction threshold not required

-

SNAPConvertToAOOFlag Requires value (e.g., SNAPConvertToAOOFlag=Y) for a SNAP Auction order.

-

Y Convert to SNAP Auction Only Order if a SNAP Auction has already started by another order.

-

N Cancel Order if a SNAP Auction has already started by another order.

-

SNAPAOOOneAndDoneFlag Requires value (e.g., SNAPAOOOneAndDoneFlag=Y) for a SNAP Auction order.

-

Y SNAP Auction Only Order will only participate in one SNAP Auction, then it will be canceled.

-

N SNAP Auction Only Order will participate in every SNAP Auction.

-

CreationTimestamp Requires value (e.g., CreationTimestamp=20180415T143055.123456789) when the eventTimestamp is different from the creation timestamp.

-

SNAPAuctionOrder Requires a choice value (e.g., SNAPAuctionOrder=s) from the following list:

-

s SNAP Auction Order. Order used to potentially initiate a SNAP Auction.

-

Allowed Values (NYSE Options):

-

STP

-

Reserve

-

BOLD

-

Exposed

-

Covered

-

Allowed Values (NYSE Equities):

-

STP

-

Reserve

-

QOrder

-

SOrder

-

BOrder

-

YGOrder

-

RMO

-

BrokerOrder

-

ProactiveIns

-

MinQty Requires Unsigned value (e.g., MinQty=1000)

-

MFS <MinQty>; Requires Unsigned value (e.g., MFS=1000)

-

PriceOffset <Price_offset>; Requires Price value (e.g., PriceOffset=0.01)

-

MinTriggerSize <OppSideMinSizeTriggerValue>; Requires Unsigned value (e.g., MinTriggerSize=1000)

-

MinPegSize <MinPegSize>; Requires Unsigned value (e.g., MinPegSize=1000)

-

MaxDiscVol <MaxDiscVol>; Requires Unsigned value (e.g., MaxDiscVol=1000)

-

CeilingFloorPrice <Peg_Price>; Requires Price value (e.g., CeilingFloorPrice=0.01)

-

DiscPriceRange <disc_price_range>; Requires Price value (e.g., DiscPriceRange=0.01)

-

TypeOfInterest A value from the following list of choices.

-

DOTR

-

CO

-

EQAA

-

EQBB

-

EQDA

-

EQDB

-

EQGA

-

RQGB

-

SQAA

-

SQBB

-

SQDA

-

SQDB

-

DSQCC

-

SQDC

-

Allowed Values (IEX):

-

RoutingStrategy Allowed values from the following list.

-

u Router

-

s Router Basic

-

MinQtyInstruction Allowed values from the following list.

-

C Composite

-

M Minimum Execution Size with Cancel Remaining

-

A Minimum Execution Size with AON Remaining

-

AntiInternalizationGroupId Used for wash trade prevention. Allowed any two alphanumeric characters or the two-character string "--".

-

[A-Za-z0-9][A-Za-z0-9] Depending upon the value used, these will be used to identify orders which have elected to not trade with identically marked orders from the same firm. The lower case and upper case characters are two distinct values. For example, "a1" and "A1" will be two distinct values.

-

-- Represents free to trade with anyone.

-

Allowed Values (NASDAQ Options):

-

Boolean

-

Persist

-

PrimarySide

-

Name Value Pairs

-

PrivateReference Text<20>

-

BrokerText Text<6>

-

BranchSeqNum Text<20>

-

Text Text<64>

-

FloorBrk Text<6>

-

Tag1AcctId Text<32>

-

CrossClOrderId Text<64>

-

CrossOrderId Text<64>

-

StortSaleInd Value must be on of the following

-

1 SHORT SALE

-

2 SHORT SALE EXEMPT

-

StockCapacity Value must be one of the following

-

1 Agent

-

2 Principal

-

3 Riskless Principal

-

Allowed Values (NASDAQ Equities):

-

CrossType Value must be one of the following

-

0 None

-

1 Open

-

2 Halt

-

3 Close

-

4 Pause

-

5 Supplemental

-

6 Retail

-

CustomerType Value must be one of the following

-

1 Retail Designated

-

2 Non Retail Designated

-

orderID

-

Events: Order Accepted, Route, Modified, Canceled, Trade (sideDetails), Fill, Cancel Route, Modify Route and Restatement events, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Route, Option Order Modified, Complex Option Order Modified, Option Order Canceled, Modify Option Route, Option Cancel Route, Simple Option Trade, Stock Leg Fill, Option Order Restatement and Options Post Trade Allocation events

-

The internal order ID assigned to the order by the exchange.

-

orderType

-

Events: Order Accepted, Order Routed, Order Modified, Order Restatement, Order Modify Route, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Option Route, Option Order Restatement, Modify Option Route events

-

The order type defines the type of order being placed, and must be exactly one of the permitted values. Some values are exchange specific. This document details the technical specifications for what is reported in this field, not necessarily how to determine what value to be included in each report. See the CAT website for exchange-specific guidance on how to determine which values to use for reporting specific orders.

-

All Exchanges:

-

AMPEG Alt Midpoint Peg - pegs to less aggressive of midpoint or 1 tick inside the NBBO

-

BLK Block

-

CAB Cabinet

-

FAC Facilitation

-

LEG Leg - Computed Price

-

LMT Limit

-

LOB Limit or Better

-

LOC Limit on Close

-

LOO Limit on Open

-

LW Limit With or With Out

-

MA At Market

-

MIT Market If Touched

-

MKT Market

-

MOC Market on Close

-

MOO Market on Open

-

MDPEG Midpoint Discretionary Peg - a primary peg, but has discretion to the midpoint of the NBBO

-

MPEG Midpoint Peg

-

MMPEG Market Maker Peg - will peg at 8%, 20%, or 28% of the NBBO depending on symbol and time of day (follows the LULD bands). Designed to allow MMs to satisfy their quoting obligations without stub orders

-

OB On Basis

-

PPEG Primary Peg

-

RPEG Market Peg

-

RTPEG Route Peg - Non-displayed primary peg order that only interacts with orders that are about to be routed out with size <= peg order size

-

SIM Simple

-

SOL Solicitation

-

STL Stop Limit

-

STP Stop

-

WW With or Without

-

Allowed Values (NYSE Options):

-

AutoMatch

-

LimitCross

-

Allowed Values (NYSE Equities):

-

Peg

-

LimitCross

-

Allowed Values (IEX):

-

DPEG Discretionary Peg

-

originalOrderDate

-

Events: Order Restatement, Option Order Restatement

-

This field represents the most recent trading day for which the order was active. Note that this may not be the date when the order was originally accepted. If the order has been active for multiple trading days, this field must reference the most recent trading day when the order was active.

-

originalOrderID

-

Events: Order Modified, Order Restatement, Option Order Modified Event, Complex Option Order Modified Event, Stock Leg Modified, Option Order Restatement

-

The most recent internal order ID before the modify / replacement created a new order ID.

-

originalQuoteID

-

Events: Quote Event

-

The most recent quoteID of the existing quote before being updated or replaced.

-

Participant ID

-

Valid Participant ID values. Note that participants will use their Participant ID as their

-

Reporter ID.

-

Allowed Values:

-

BZX Cboe BZX Exchange

-

BYX Cboe BYX Exchange

-

BOX BOX Options Exchange

-

C2 Cboe C2 Exchange

-

CBOE Cboe Exchange

-

CHX Chicago Stock Exchange

-

EDGA Cboe EDGA Exchange

-

EDGX Cboe EDGX Exchange

-

FINRA Financial Industry Regulatory Authority

-

GEMX Nasdaq GEMX

-

MRX Nasdaq MRX

-

ISE Nasdaq ISE

-

IEX Investor’s Exchange

-

MIAMI Miami International Securities Exchange

-

PEARL MIAX PEARL

-

BX Nasdaq BX

-

PHLX Nasdaq PHLX

-

NASD The NASDAQ Stock Market

-

NSX NYSE National

-

NYSE The New York Stock Exchange

-

AMER NYSE American

-

ARCA NYSE ARCA

-

price

-

Events: Order Accepted, Route, Modified, Modify Route or Restatement events, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Option Route, Modify Option Route, Option Order Restatement

-

The limit price of the order. For a complex option, this is the net price of the order, which can be either positive, negative, or zero.

-

Events: Order Trade, Order Fill, Trade Break, Trade Correction

-

Trade/fill price of the trade/fill.

-

Events: Post Trade Allocation

-

The price of the allocation.

-

primaryDeliverable

-

Reference Data: Simple Option Series Dictionary Entries

-

The symbol for the primary deliverable component of the option, in the symbology of the listing exchange for that symbol. Alternatively, if a symbol dictionary is provided, a valid alias could be used.

-

putCall

-

Reference Data: Simple Option Series Dictionary Entries

-

Specifies if this simple option or option leg is a put or call.

-

Allowed Values:

-

Put

-

Call

-

quantity

-

Events: Order Accepted, Route, Modified, Canceled, Trade, Fill, Modify Route, Order Restatement events; Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Stock Leg Modified, Option Route, Option Order Cancelled, Simple Option Trade, Stock Leg Fill, Modify Option Route, Option Order Restatement events

-

The quantity of the order.

-

quoteID

-

Events: Note Event, Options Quote, Quote Cancel, Options Trade (sideDetails) and Stock Leg Fill events

-

The ID assigned to this quote by the exchange to uniquely identify the quote.

-

ratio

-

Reference Data: Complex Option Dictionary Entries

-

The ratio quantity of a complex option leg, relative to other legs. Ratios must already be

-

reduced to the smallest units possible.

-

reason

-

Events: Trade Break, Trade Correction, Option Trade Break, Option Trade Correction, Post Trade

-

Allocation

-

Free format text field, with reason for the trade break or correction.

-

reporter

-

Events: Note event, Self Help Declaration

-

Reference Data: Member Dictionary Entry, Symbol Dictionary Entry and Option Series Dictionary Entry

-

Reporter ID of the entity reporting the events or reference data.

-

result

-

Events: Order Route, Order Cancel Route, Order Modify Route; Option Route, Modify Option Route, Option Cancel Route

-

The result of the Route, Cancel Route or Modify Route request communicated to the exchange.

-

Allowed Values:

-

ACK Acknowledged

-

REJ Rejected

-

NR No Response

-

UNSOL Unsolicited: only valid for an unsolicited cancel route

-

resultTimestamp

-

Events: Order Route, Order Cancel Route, Order Modify Route; Option Route, Modify Option Route, Option Cancel Route

-

The date/time the result of Route, Modify Route, or Cancel Route request was received.

-

revokedTimestamp

-

Events: Self Help Declaration

-

Date and time the self-help was revoked. If self-help is not revoked by the end of the day, this field may be left unreported or can be set to the closing time. However, another self-help event must be reported for the next day.

-

routedOrderID

-

Events: Order Accepted, Order Modified, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Order Modified, Complex Option Order Modified, Stock Leg Modified

-

The ID assigned to this order by the routing firm when submitting the order to the exchange.

-

Events: Order Route, Modify Route or Cancel Route, Option Route, Modify Option Route, Option Cancel Route

-

The ID assigned to this order by the exchange for sending message to the routing broker.

-

routedOriginalOrderID

-

Events: Order Modified, Option Order Modified, Complex Option Order Modified, Stock Leg Modified

-

The routedOrderID for the order, as sent by the routing broker in the original route message, or the most recent modify message (in FIX OrigClOrdId, in OUCH Existing Order Token).

-

Events: Order Modify Route, Modify Option Route events

-

The routedOrderID as represented in the original or most recent Route/Modify Route message sent to the routing broker.

-

routingParty

-

A string used to identify the entity on the other side of an accepted or route event.

-

Events: Order Accepted, Order Modified, Simple Option Order Accepted, Complex Option Order Accepted

-

In the events above, this is the unique identifier for the firm that sent the order to the exchange.

-

Events: Order Route, Order Fill, Order Modify Route, Order Cancel Route, Option Route, Modify Option Route, Option Cancel Route

-

In the events above, this is the firm to which the exchange routed the order.

-

The routingParty on a ROUTE event must match the routingParty on the other side's ACCEPTED event.

-

saleCondition

-

Events: Order Trade, Order Fill, Trade Correction, Simple Option Trade, Stock Leg Fill, Option Trade Correction

-

Indicates a special condition under which a trade was reported.

-

The first character must be either 'E' or 'O' indicating whether the following characters are to be interpreted as OPRA sale condition codes for options or UTP/CTS sale condition codes for equities. 'E' stands for the UTP/CTS, while 'O' stands for the OPRA.

-

The following characters will use the single-character codes as defined in the OPRA, UTP, and CTS specifications - one character code for as many conditions as apply. Note that the <space> character is a valid code.

-

Second character if first character is O (OPRA Values):

-

blank Indicates that the transaction was a regular sale and was made without stated conditions

-

A Transaction previously reported (other than as the last or opening report for the particular option contract) is not to be cancelled

-

B Transaction is being reported late and is out of sequence, i.e. later transactions have been reported for the particular option contract.

-

C Transaction is the last reported for the particular option contract and is now cancelled.

-

D Transaction is being reported late, but is in the correct sequence, i.e. no later transactions have been reported for the particular option contract.

-

E Transaction was the first one (opening) reported for this day for the particular option contract. Although later transactions have been reported, this transaction is not to be cancelled.

-

F Transaction is a late report of the opening trade and is out of sequence: i.e. other transactions have been reported for the particular option contract.

-

G Transaction was the only one reported this day for the particular option contract and is now to be cancelled

-

H Transaction is a late report of the opening trade, but is in the correct sequence, i.e., no other transactions have been reported for this particular option contract.

-

I Transaction was executed electronically. This prefix appears solely for information; process as a regular transaction.

-

J Transaction is a reopening of an option contract in which trading has been previously halted. This prefix appears solely for information; process as a regular transaction.

-

K Transaction is an option contract for which the terms have been adjusted to reflect a stock dividend, stock split, or similar event. This prefix appears solely for information; process as a regular transaction.

-

L Transaction represents a trade in two options in the same option class (a buy and sell in the same class). This prefix appears solely for information; process as a regular transaction.

-

M Transaction represents a trade in two options in the same option class (a buy and sell in a put and a call). This prefix appears solely for information; process as a regular transaction

-

N Transaction is the execution of a sale at a price agreed upon by the floor personnel involved, where a condition of the trade is that it be reported following a non-stopped trade of the same series at the same price.

-

O Cancel stopped transaction

-

P Transaction represents the option portion of an order involving a single option leg (buy or sell of a call or put) and stock. The prefix appears solely for information; process as a regular transaction.

-

Q Transaction represents the buying of a call and the selling of a put for the same underlying stock or index. This prefix appears solely for information; process as a regular transaction

-

R Transaction was the execution of an order that was ‘stopped’ at a price that did not constitute a Trade-Through on another market at the time of the stop.

-

S Transaction was the execution of an order identified as an Intermarket Sweep Order

-

T Transaction reflects the execution of a ‘benchmark trade’.

-

X Transaction is Trade Through Exempt. The transaction should be treated like a regular sale.

-

Second character if first character is E (UTP and CTS Values):

-

@ Regular Sale

-

blank No Sale Condition required within the category it appears (Long Trade Format Only)

-

A Acquisition

-

B Bunched Trade or Average Price Trade

-

C Cash Sale

-

D Distribution

-

E Automatic Execution

-

F Intermarket Sweep

-

G Bunched Sold Trade

-

H Price Variation Trade

-

I Odd Lot Trade

-

K Rule 155 Trade (AMEX)

-

L Sold Last

-

M Market Center Official Close

-

N Next Day Trade (Next Day Clearing)

-

O Opening Prints / Market Center Opening Trade

-

P Prior Reference Price

-

Q Market Center Official Open

-

R Seller

-

S Split Trade

-

T Form T (Extended Hours Trade)

-

U Extended Trading Hours (Sold Out of Sequence)

-

V Contingent Trade

-

W Average Price Trade

-

X Cross Trade

-

Y Yellow Flag Regular Trade

-

Z Sold (out of Sequence)

-

1 Stopped Stock (Regular Trade)

-

4 Derivatively Priced

-

5 Re-Opening Prints (Market Center Reopening Trade)

-

6 Closing Prints (Market Center Closing Trade)

-

7 Qualified Contingent Trade (QCT)

-

8 Placeholder for 611 Exempt

-

9 Corrected Consolidated Close (per listing market)

-

sellDetails

-

Events: Order Trade, Trade Correction, Simple Option Trade, Option Trade Correction

-

Information for the sell side of the trade. Format and element definitions for sellDetails are described in sideTradeEvent in section 4.5.

-

sentTimestamp

-

Events: Quote Event, Quote Cancel Event

-

The date/time when the market maker sent the quote or quote cancel to the exchange.

-

sequenceNumber

-

Events: All Stock Exchange Events, All Options Exchange Events

-

The sequence number of the event, used to identify the sequence of events when multiple events have the same timestamps.

-

The sequence number is required to be strictly increasing for a given reporter, date, and symbol, and can be used to sort each event in chronological order where multiple events have the same timestamp.

-

For more detail, please refer to section 3.1: Timestamps and Sequence Numbers.

-

session

-

Events: Order Accepted, Order Route, Order Modified, Order Fill, Order Cancel Route, Order Modify Route, Simple Option Order Accepted, Complex Option order Accepted, Option Route, Modify Option Route, Option Cancel Route

-

The name/ID of the session being used to send the order (from the routing firm to the exchange, or from the exchange to the routing broker). If this event represents a leg of a complex order, the Session must be the same as reported in the parent complex order.

-

settlement

-

Reference Data: Simple Option Series Dictionary Entry

-

Specifies the settlement of option in Simple Option Series Dictionary Entries.

-

Supported Values:

-

AM At the open

-

PM At the close

-

Asian European/PM settlement, but the exercise settlement value is the arithmetic average of the closing prices of the underlying index on 12 pre-determined, consecutive monthly observation dates.

-

Cliquet European/PM settlement, but the exercise settlement value is the greater of zero, or [(closing price of the underlying index on the initial trade date) * (sum of the monthly capped returns)] + strike price.

-

side

-

Reference Data: Complex Option Dictionary Entry

-

Events: Order Accepted, Order Route, Order Trade, Order Fill, Order Restatement, Trade Correction, Simple Option Order Accepted, Complex Option Order Accepted, Stock Leg Order, Option Route, Option Trade, Stock Leg Fill, Post Trade Allocation

-

Side of the event. Note that AsDirected and Opposite are only used for complex option order accepted events.

-

Supported Values:

-

Buy

-

Sell

-

Short

-

Exempt

-

Cross

-

CrossExempt

-

CrossShort

-

CrossShortExempt

-

AsDirected

-

Opposite

-

status

-

Reference Data: Member Dictionary Entry

-

The status of the member on the reporting date.

-

Supported Values:

-

Active An active member of the SRO (ID must be CRD)

-

Inactive An inactive member of the SRO (ID must be CRD)

-

NonMember An entity that is not a member of the SRO. For example, if the routing broker dealer is not a member of the exchange, it would be listed here (ID must be CRD).

-

Internal Some internal part of the SRO system (a utility or facility) which will be used in reportable events. In this case, the ID must have been a preregistered with CAT via the web GUI.

-

Other Another entity (e.g., foreign firm) without a CRD number. In this case, the ID must have been pre-registered with CAT via the web GUI.

-

strikePrice

-

Reference Data: Simple Option Series Dictionary Entry

-

In Simple Option Series Dictionary Entries, this field is the pre-arranged transaction price if the option is exercised. Note that if option kind = FLEXPCT, this will be the percentage.

-

symbol

-

Events: All Stock Exchange Events, All Options Stock Leg Events

-

Reference Data: Symbol Entry, Complex Option Dictionary Entry

-

The stock symbol. Note that for all events of stock exchange, or options stock leg related events, this field may be in either the symbology of the listing exchange, or the reporter's symbology mapping as appropriate. However, in Symbol Entry, or stock leg of Complex Option Dictionary entry, this must be in the symbology of the listing exchange.

-

symbolAliases

-

Reference Data: Symbol Dictionary Entry

-

A list of symbol aliases for a listed symbol. Using an alias allows a reporter to submit events using the symbol in their own format rather than the symbology of the listed exchange.

-

Symbol Entry Pairs

-

This is a data type. Currently, this data type must be used for the field "attributes" found in the reference data element: Symbol Entry.

-

Allowed values for this data type include the following:

-

Allowed values for Symbol Entry:

-

TPG Tick Pilot Group (Choice) - requires one of the defined values from the list below (e.g., TPG=TG2).

-

CTRL Control Group

-

TG1 Test Group 1

-

TG2 Test Group 2

-

TG3 Test Group 3

-

test

-

Reference Data: Symbol Entry

-

Indicates whether the symbol is a "test" symbol used for testing production systems.

-

timeInForce

-

Events: Order Accepted, Order Route, Order Modified, Order Modify Route, Order Restatement, Simple Option Order Accepted, Complex Option Order Accepted, Complex Option Order Modified, Stock Leg Order, Option Order Modified, Option Route, Modify Option Route, Option Order Restatement

-

Specifies the Time-In-Force for an order. Supported TIF values are listed below.

-

Supported Values:

-

AOK Auction or Kill

-

CLO At the Close

-

DAY A day order

-

IOC Immediate or Cancel

-

GTC Good till Canceled

-

GTT Good till Time (requires XTIME in handlingInstructions)

-

GTD Good till Date

-

GTX Good till Crossing

-

FOK Fill or Kill

-

OPG At the Open

-

REG Regular Hours Only

-

WCO While Connected

-

Additional Values Allowed (BATS):

-

EXT Extended Day

-

Additional Values Allowed (CHX):

-

AOO Auction-only order

-

GFS Good for Seconds

-

Additional Values Allowed (IEX):

-

SYS System Hours

-

EXT Day + Extended Hours

-

Additional Values Allowed (NASDAQ Equities):

-

EXT Extended Days

-

OPG On Open

-

CLO On Close

-

Additional Values Allowed (MIAX):

-

AOC Auction or Cancel

-

Additional Values Allowed (MIAX) Pearl:

-

AOC Auction or Cancel

-

tradeDate

-

The date on which a trade occurred.

-

tradeID

-

Events: Order Trade, Trade Break, Trade Correction, Option Trade, Post Trade Allocation, Option Trade Break, Option Trade Correction

-

An identifier for the trade, unique for the given exchange, date, and Symbol/OptionID.

-

type

-

Specifies the event type.

-

General Events:

-

NOTE Note

-

SHD Self Help Declaration

-

STE Supplemental Trade Event

-

Stock Exchange Events:

-

EOA Order Accepted

-

EOR Order Route

-

EIR

-

Internal Order Route

-

EOM Order Modified

-

EOJ Order Adjusted

-

EOC Order Canceled

-

EOT Order Trade

-

EOF Order Fill

-

EBP Bulk Print

-

ECR Order Cancel Route

-

EMR Order Modify Route

-

EORS Order Restatement

-

ETB Trade Break

-

ETC Trade Correction

-

Options Exchange Events:

-

OQ Quote

-

OQC Quote Cancel

-

OOA Simple Option Order Accepted

-

OCOA Complex Option Order Accepted

-

OSL Stock Leg Order

-

OOM Option Order Modified

-

OCOM Complex Option Order Modified

-

OSLM Stock Leg Modified

-

OOJ Option Order Adjusted

-

OCOJ Complex Option Order Adjusted

-

OSLJ Stock Leg Adjusted

-

OOC Option Order Canceled

-

OOR Option Route

-

OIR Internal Option Route

-

OCIR Internal Complex Option Route

-

OOMR Modify Option Route

-

OOCR Option Cancel Route

-

OT Simple Option Trade

-

OSLF Stock Leg Fill

-

OPTA Post Trade Allocation

-

OORS Option Order Restatement

-

OTB Option Trade Break

-

OTC Option Trade Correction

-

undefinedNoteData

-

Events: Note Event

-

A list of key/value pairs, providing machine parseable data for the notation in a Note Event. The attributes are not defined in the specs, and can be any values as long as they conform to the format for a list of name/value pairs.

-

underlyingType

-

Reference Data: Option Series Dictionary Entry

-

This field specifies whether a simple option series has an equity or index as its underlying. The underlying type mapping is consistent with the same mapping used at OCC (e.g., ETF is treated as Equity and WCO is treated as Index).

-

Allowed Values:

-

Equity

-

Index

-

version

-

This is a data type, not a field. Digits and decimals are the only allowed characters. The first character must be a digit group followed by any number of optional pairs of decimals and digit groups.

-

workingPrice

-

Events: Order Accepted, Order Restatement, Simple Option Order Accepted, Option Order Modified, Option Order Restatement

-

The working price of the order.

+

For the reasons discussed above, the Commission finds that Amendment No. 2 is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

+

IT IS THEREFORE ORDERED, pursuant to Section 11A of the Act,18 and the rules thereunder, that Amendment No. 2 to the Selection Plan be, and it hereby is, approved.

+

By the Commission.

+

Robert W. Errett

+

Deputy Secretary

-
fn -

1 Industry Members are required to maintain the accuracy to within 50 milliseconds of the time maintained by NIST. 100 microseconds requirement is for Participants only.

+
fn +

1 15 U.S.C. 78k-1.

+
+
fn +

2 17 CFR 242.608.

+
+
fn +

3 The Selection Plan is an NMS Plan approved by the Commission pursuant to Section 11A of the Act and Rule 608 thereunder. See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (“Order Approving Selection Plan”); see also Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (“Notice of Selection Plan”).

+
+
fn +

4 See Securities Exchange Act Release No. 75193 (June 17, 2015), 80 FR 36006 (June 23, 2015) (“Notice of Amendment No. 2”).

+
+
fn +

5 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).

+
+
fn +

6 Unless otherwise noted, capitalized terms are used as defined in Rule 613, in the Selection Plan, or in this Order.

+
+
fn +

7 See Order Approving Selection Plan, supra note 3.

+
+
fn +

8 See Securities Exchange Act Release No. 75192, 80 FR 36028 (June 23, 2015) (“Order Approving Amendment No. 1”).

+
+
fn +

9 See Order Approving Selection Plan, supra note 3; Order Approving Amendment No. 1, supra note 8.

+
+
fn +

10 The Selection Plan defines “Bidding Participant” as a Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Notice of Selection Plan, supra note 3, Exhibit A, at 2.

+
+
fn +

11 See Order Approving Amendment No. 1, supra note 8.

+
+
fn +

12 The Selection Committee is composed of one senior officer from each Participant. See Section V.A of the Selection Plan.

+
+
fn +

13 This two-round voting process would take place after any further narrowing of the Shortlisted Bids, if such narrowing were to occur pursuant to Amendment No. 1. See Order Approving Amendment No. 1, supra note 8, at 36029 & n.21.

+
+
fn +

14 Notice of Amendment No. 2, supra note 4, at 36007.

+
+
fn +

15 Id.

+
+
fn +

16 Id.

+
+
fn +

17 Id.

+
+
fn +

18 15 U.S.C. 78k-1.

\ No newline at end of file diff --git a/spider/files/data000014.html b/spider/files/data000014.html index ba5104f..40d7ee2 100644 --- a/spider/files/data000014.html +++ b/spider/files/data000014.html @@ -1,471 +1,3870 @@ - + jurisdiction: US - regulatory_authority: Office of the Federal Register/Securities and Exchange Commission + regulatory_authority: US/SEC content_type: compilation - document_title: §242.613 Consolidated audit trail. - source: Code of Federal Regulations - source_type: Code + document_title: LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company + document_type: Plan + source: US/SEC/Plan/NMS Plan + source_type: NMS Plan language: English -
pubdate: February 11, 2019 effdate: N/A -

§242.613 Consolidated audit trail.

- Topic: Code of Federal Regulations, Title 17: Commodity and Securities Exchanges, Part 242 - Regulations M, SHO, ATS, AC, NMS, and SBSR and Customer Margin Requirements for Security Features, §242.613 - Compliance User: b435673b-9248-437d-9d76-8204037af993 + citation: N/A +
pubdate: January 10, 2018 effdate: N/A +

LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company

+ Topic: CAT NMS Plan + Compliance User: National Securities Exchanges/National Securities Associations Keywords: - National Market System, - Cost, - Objectives, - Operation, - Administration, - Data Recording, - Data Reporting, - Data Retention, - Definitions, + National Securities Exchanges, + National Securities Associations, -

(a) Creation of a national market system plan governing a consolidated audit trail. (1) Each national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section. The national market system plan shall discuss the following considerations:

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(i) The method(s) by which data will be reported to the central repository including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load, and retain such data; and the basis for selecting such method(s);

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(ii) The time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities;

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(iii) The reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators;

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(iv) The security and confidentiality of the information reported to the central repository;

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(v) The flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments;

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(vi) The feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

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(A) The identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction;

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(B) The number of such securities each such market participant is allocated; and

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(C) The identity of the broker-dealer making each such allocation;

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(vii) The detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify:

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(A) An estimate of the costs to the plan sponsors for establishing and maintaining the central repository;

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(B) An estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan;

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(C) An estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and

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(D) How the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors;

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(viii) An analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining of the national market system plan;

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(ix) A plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of:

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(A) Whether the collection of such information remains appropriate;

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(B) If still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and

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(C) If no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof);

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(x) Objective milestones to assess progress toward the implementation of the national market system plan;

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(xi) The process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan; and

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(xii) Any reasonable alternative approaches to creating, implementing, and maintaining a consolidated audit trail that the plan sponsors considered in developing the national market system plan including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan.

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(2) The national market system plan, or any amendment thereto, filed pursuant to this section shall comply with the requirements in §242.608(a), if applicable, and be filed with the Commission pursuant to §242.608.

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(3) The national market system plan submitted pursuant to this section shall require each national securities exchange and national securities association to:

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(i) Within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor;

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(ii) Within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with paragraph (d) of this section;

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(iii) Within one year after effectiveness of the national market system plan provide to the central repository the data specified in paragraph (c) of this section;

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(iv) Within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by paragraph (f) of this section;

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(v) Within two years after effectiveness of the national market system plan require members of each such exchange and association, except those members that qualify as small broker-dealers as defined in §240.0-10(c) of this chapter, to provide to the central repository the data specified in paragraph (c) of this section; and

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(vi) Within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in §240.0-10(c) of this chapter to provide to the central repository the data specified in paragraph (c) of this section.

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(4) Each national securities exchange and national securities association shall be a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

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(5) No national market system plan filed pursuant to this section, or any amendment thereto, shall become effective unless approved by the Commission or otherwise permitted in accordance with the procedures set forth in §242.608. In determining whether to approve the national market system plan, or any amendment thereto, and whether the national market system plan or any amendment thereto is in the public interest under §242.608(b)(2), the Commission shall consider the impact of the national market system plan or amendment, as applicable, on efficiency, competition, and capital formation.

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(b) Operation and administration of the national market system plan. (1) The national market system plan submitted pursuant to this section shall include a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor.

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(2) The national market system plan submitted pursuant to this section shall include a provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan.

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(3) The national market system plan submitted pursuant to this section shall include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.

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(4) The national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan.

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(5) The national market system plan submitted pursuant to this section shall require the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

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(6) The national market system plan submitted pursuant to this section shall include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum:

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(i) An evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with paragraph (e)(6) of this section), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with paragraph (e)(4) of this section), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics;

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(ii) A detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the national market system plan to include new instruments and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer;

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(iii) An estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and

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(iv) An estimated implementation timeline for any such potential improvements, if applicable.

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(7) The national market system plan submitted pursuant to this section shall include an Advisory Committee which shall function in accordance with the provisions set forth in this paragraph (b)(7). The purpose of the Advisory Committee shall be to advise the plan sponsors on the implementation, operation, and administration of the central repository.

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(i) The national market system plan submitted pursuant to this section shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsors.

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(ii) Members of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors; provided, however, that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.

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(c) Data recording and reporting. (1) The national market system plan submitted pursuant to this section shall provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part) of the order.

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(2) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to report to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format, or in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage.

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(3) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event. The national market system plan shall require that information recorded pursuant to paragraphs (c)(7)(i) through (v) of this section must be reported to the central repository by 8:00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association, or member. The national market system plan may accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(4) The national market system plan submitted pursuant to this section shall require each member of a national securities exchange or national securities association to record and report to the central repository the information required by paragraphs (c)(7)(vi) through (viii) of this section by 8:00 a.m. Eastern Time on the trading day following the day the member receives such information. The national market system plan may accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(5) The national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

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(6) The national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association.

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(7) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and any member of such exchange or association to record and electronically report to the central repository details for each order and each reportable event, including, but not limited to, the following information:

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(i) For original receipt or origination of an order:

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(A) Customer-ID(s) for each customer;

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(B) The CAT-Order-ID;

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(C) The CAT-Reporter-ID of the broker-dealer receiving or originating the order;

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(D) Date of order receipt or origination;

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(E) Time of order receipt or origination (using time stamps pursuant to paragraph (d)(3) of this section); and

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(F) Material terms of the order.

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(ii) For the routing of an order, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is routed;

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(C) Time at which the order is routed (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order;

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(E) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed;

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(F) If routed internally at the broker-dealer, the identity and nature of the department or desk to which an order is routed; and

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(G) Material terms of the order.

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(iii) For the receipt of an order that has been routed, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is received;

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(C) Time at which the order is received (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order;

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(E) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order; and

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(F) Material terms of the order.

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(iv) If the order is modified or cancelled, the following information:

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(A) The CAT-Order-ID;

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(B) Date the modification or cancellation is received or originated;

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(C) Time the modification or cancellation is received or originated (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Price and remaining size of the order, if modified;

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(E) Other changes in material terms of the order, if modified; and

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(F) The CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction.

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(v) If the order is executed, in whole or part, the following information:

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(A) The CAT-Order-ID;

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(B) Date of execution;

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(C) Time of execution (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Execution capacity (principal, agency, riskless principal);

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(E) Execution price and size;

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(F) The CAT-Reporter-ID of the national securities exchange or broker-dealer executing the order; and

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(G) Whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information.

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(vi) If the order is executed, in whole or part, the following information:

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(A) The account number for any subaccounts to which the execution is allocated (in whole or part);

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(B) The CAT-Reporter-ID of the clearing broker or prime broker, if applicable; and

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(C) The CAT-Order-ID of any contra-side order(s).

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(vii) If the trade is cancelled, a cancelled trade indicator.

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(viii) For original receipt or origination of an order, the following information:

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(A) Information of sufficient detail to identify the customer; and

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(B) Customer account information.

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(8) All plan sponsors and their members shall use the same Customer-ID and CAT-Reporter-ID for each customer and broker-dealer.

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(d) Clock synchronization and time stamps. The national market system plan submitted pursuant to this section shall require:

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(1) Each national securities exchange, national securities association, and member of such exchange or association to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event that must be reported pursuant to this section to the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

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(2) Each national securities exchange and national securities association to evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards; and

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(3) Each national securities exchange, national securities association, and member of such exchange or association to utilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in the national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond. To the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, the plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced. The national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments.

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(e) Central repository. (1) The national market system plan submitted pursuant to this section shall provide for the creation and maintenance of a central repository. Such central repository shall be responsible for the receipt, consolidation, and retention of all information reported pursuant to paragraph (c)(7) of this section. The central repository shall store and make available to regulators data in a uniform electronic format, and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information required by paragraph (c)(7) of this section for all reportable events for that order.

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(2) Each national securities exchange, national securities association, and the Commission shall have access to the central repository, including all systems operated by the central repository, and access to and use of the data reported to and consolidated by the central repository under paragraph (c) of this section, for the purpose of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. The national market system plan submitted pursuant to this section shall provide that such access to and use of such data by each national securities exchange, national securities association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports.

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(4) The national market system plan submitted pursuant to this section shall include policies and procedures, including standards, to be used by the plan processor to:

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(i) Ensure the security and confidentiality of all information reported to the central repository by requiring that:

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(A) All plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in this paragraph (e)(4)(i)(A) shall be construed to prevent a plan sponsor from using the data that it reports to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation;

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(B) Each plan sponsor adopt and enforce rules that:

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(1) Require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository; and

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(2) Permit only persons designated by plan sponsors to have access to the data in the central repository;

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(C) The plan processor:

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(1) Develop and maintain a comprehensive information security program for the central repository, with dedicated staff, that is subject to regular reviews by the Chief Compliance Officer;

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(2) Have a mechanism to confirm the identity of all persons permitted to access the data; and

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(3) Maintain a record of all instances where such persons access the data; and

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(D) The plan sponsors adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository with respect to information security.

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(ii) Ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository pursuant to paragraph (c) of this section; and

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(iii) Ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository pursuant to paragraph (c) of this section.

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(5) The national market system plan submitted pursuant to this section shall address whether there will be an annual independent evaluation of the security of the central repository and:

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(i) If so, provide a description of the scope of such planned evaluation; and

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(ii) If not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead.

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(6) The national market system plan submitted pursuant to this section shall:

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(i) Specify a maximum error rate to be tolerated by the central repository for any data reported pursuant to paragraphs (c)(3) and (c)(4) of this section; describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce such maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof;

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(ii) Require the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan;

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(iii) Specify a process for identifying and correcting errors in the data reported to the central repository pursuant to paragraphs (c)(3) and (c)(4) of this section, including the process for notifying the national securities exchanges, national securities association, and members who reported erroneous data to the central repository of such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and

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(iv) Specify the time by which data that has been corrected will be made available to regulators.

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(7) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information consolidated and stored pursuant to paragraph (c)(7) of this section:

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(i) Information, including the size and quote condition, on the national best bid and national best offer for each NMS security;

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(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, §242.601; and

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(iii) Last sale reports reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, §242.608.

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(8) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years.

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(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

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(g) Compliance by members. (1) Each national securities exchange and national securities association shall file with the Commission pursuant to section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and §240.19b-4 of this chapter on or before 60 days from approval of the national market system plan a proposed rule change to require its members to comply with the requirements of this section and the national market system plan approved by the Commission.

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(2) Each member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to agree to enforce compliance by its members with the provisions of any approved plan.

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(4) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance with the requirements of any approved plan by the members of a national securities exchange or national securities association.

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(h) Compliance by national securities exchanges and national securities associations. (1) Each national securities exchange and national securities association shall comply with the provisions of the national market system plan approved by the Commission.

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(2) Any failure by a national securities exchange or national securities association to comply with the provisions of the national market system plan approved by the Commission shall be considered a violation of this section.

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(3) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance by the sponsors of the plan with the requirements of any approved plan. Such enforcement mechanism may include penalties where appropriate.

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(i) Other securities and other types of transactions. The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission within six months after effectiveness of the national market system plan a document outlining how such exchanges and associations could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

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(j) Definitions. As used in this section:

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(1) The term CAT-Order-ID shall mean a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of such order.

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(2) The term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository.

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(3) The term customer shall mean:

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(i) The account holder(s) of the account at a registered broker-dealer originating the order; and

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(ii) Any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

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(4) The term customer account information shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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(5) The term Customer-ID shall mean, with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository.

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(6) The term error rate shall mean the percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market.

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(7) The term material terms of the order shall include, but not be limited to, the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator; time in force (if applicable); if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions.

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(8) The term order shall include:

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(i) Any order received by a member of a national securities exchange or national securities association from any person;

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(ii) Any order originated by a member of a national securities exchange or national securities association; or

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(iii) Any bid or offer.

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(9) The term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order.

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[77 FR 45808, Aug. 1, 2012]

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This Limited Liability Company Agreement (including its Recitals and the Exhibits, Appendices, Attachments, and Schedules identified herein, this “Agreement”) of CAT NMS, LLC, a Delaware limited liability company (the “Company”), dated as of the __ day of ______, ____, is made and entered into by and among the Participants.

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RECITALS

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A. Prior to the formation of the Company, in response to SEC Rule 613 requiring national securities exchanges and national securities associations to submit a national market system plan to the Securities and Exchange Commission (“Commission” or “SEC”) to create, implement and maintain a consolidated audit trail, such national securities exchanges and national securities associations, pursuant to SEC Rule 608(a)(3), which authorizes them to act jointly in preparing, filing and implementing national market system plans, developed the National Market System Plan Governing the Process for Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”). The Selection Plan was approved by the Commission on February 21, 2014, amended on June 17, 2015 and September 24, 2015, and, by its terms, shall automatically terminate upon the Commission’s approval of this Agreement.

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B. The Participants have now determined that it is advantageous and desirable to conduct in a limited liability company the activities they have heretofore conducted as parties to the Selection Plan, and have formed the Company for this purpose. This Agreement, which takes the place of the Selection Plan, is a National Market System Plan as defined in SEC Rule 600(b)(43), and serves as the National Market System Plan required by SEC Rule 613. The Participants shall jointly own the Company, which shall create, implement, and maintain the CAT and the Central Repository pursuant to SEC Rule 608 and SEC Rule 613.

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C. This Agreement incorporates the exemptive relief from certain provisions of SEC Rule 613 requested in the original and supplemental request letters submitted by the Participants to the Commission, as described further in Appendix C (“Exemptive Request Letters”).

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pubdate: January 10, 2018 effdate: N/A +

ARTICLE I DEFINITIONS

+ Topic: CAT NMS Plan, Article I - Definitions + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Definition, + +
pubdate: January 10, 2018 effdate: N/A +

Section 1.1. Definitions.

+ Topic: CAT NMS Plan, Article I - Definitions, Definitions + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Definition, + CAT,, + CAT NMS plan, + +

As used throughout this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement):

+

“Account Effective Date” means: (a) with regard to those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, (i) when the trading relationship was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), either (A) the date the relationship identifier was established within the Industry Member, (B) the date when trading began (i.e., the date the first order was received) using the relevant relationship identifier, or (C) if both dates are available, the earlier date will be used to the extent that the dates differ; or (ii) when the trading relationship was established on or after the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date the Industry Member established the relationship identifier, which would be no later than the date the first order was received; (b) where an Industry Member changes back office providers or clearing firms prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (c) where an Industry Member acquires another Industry Member prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (d) where there are multiple dates associated with an account established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the earliest available date; (e) with regard to Industry Member proprietary accounts established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), (i) the date established for the account in the Industry Member or in a system of the Industry Member or (ii) the date when proprietary trading began in the account (i.e., the date on which the first orders were submitted from the account). With regard to paragraphs (b) – (e), the Account Effective Date will be no later than the date trading occurs at the Industry Member or in the Industry Member’s system.

+

“Active Accounts” means an account that has had activity in Eligible Securities within the last six months.

+

“Advisory Committee” has the meaning set forth in Section 4.13(a).

+

“Affiliate” of a Person means any Person controlling, controlled by, or under common control with such Person.

+

“Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant.

+

“Agreement” has the meaning set forth in the preamble to this Agreement.

+

“Allocation Report” means a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation; provided, for the avoidance of doubt, any such Allocation Report shall not be required to be linked to particular orders or executions.

+

“Bid” means a proposal submitted by a Bidder in response to the RFP or subsequent request for proposal (or similar request).

+

“Bidder” means any entity, or any combination of separate entities, submitting a Bid.

+

“Bidding Participant” means a Participant that: (a) submits a Bid; (b) is an Affiliate of an entity that submits a Bid; or (c) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid.

+

“Business Clock” means a clock used to record the date and time of any Reportable Event required to be reported under SEC Rule 613.

+

“CAT” means the consolidated audit trail contemplated by SEC Rule 613.

+

“CAT Data” means data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as “CAT Data” from time to time.

+

“CAT NMS Plan” means the plan set forth in this Agreement, as amended from time to time.

+

“CAT-Order-ID” has the same meaning provided in SEC Rule 613(j)(1).

+

“CAT Reporter” means each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).

+

“CAT-Reporter-ID” has the same meaning provided in SEC Rule 613(j)(2).

+

“CAT System” means all data processing equipment, communications facilities, and other facilities, including equipment, utilized by the Company or any third parties acting on the Company’s behalf in connection with operation of the CAT and any related information or relevant systems pursuant to this Agreement.

+

“Central Repository” means the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT pursuant to SEC Rule 613 and this Agreement.

+

“Certificate” has the meaning set forth in Section 2.2.

+

“Chair” has the meaning set forth in Section 4.2(b).

+

“Chief Compliance Officer” means the individual then serving (even on a temporary basis) as the Chief Compliance Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(a).

+

“Chief Information Security Officer” means the individual then serving (even on a temporary basis) as the Chief Information Security Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(b).

+

“Code” means the Internal Revenue Code of 1986.

+

“Company” has the meaning set forth in the preamble to this Agreement.

+

“Company Interest” means any membership interest in the Company at any particular time, including the right to any and all benefits to which a Participant may be entitled under this Agreement and the Delaware Act, together with the obligations of such Participant to comply with this Agreement.

+

“Commission” or “SEC” means the United States Securities and Exchange Commission.

+

“Compliance Rule” means, with respect to a Participant, the rule(s) promulgated by such Participant as contemplated by Section 3.11.

+

“Compliance Subcommittee” has the meaning set forth in Section 4.12(b).

+

“Compliance Threshold” has the meaning set forth in Appendix C.

+

“Conflict of Interest” means that the interest of a Participant (e.g., commercial, reputational, regulatory or otherwise) in the matter that is subject to a vote: (a) interferes, or would be reasonably likely to interfere, with that Participant’s objective consideration of the matter; or (b) is, or would be reasonably likely to be, inconsistent with the purpose and objectives of the Company and the CAT, taking into account all relevant considerations including whether a Participant that may otherwise have a conflict of interest has established appropriate safeguards to eliminate such conflict of interest and taking into account the other guiding principles set forth in this Agreement. If a Participant has a “Conflict of Interest” in a particular matter, then each of its Affiliated Participants shall be deemed to have a “Conflict of Interest” in such matter. A “Conflict of Interest” with respect to a Participant includes the situations set forth in Sections 4.3(b)(iv), 4.3(d)(i) and 4.3(d)(ii).

+

“Customer” has the same meaning provided in SEC Rule 613(j)(3).

+

“Customer Account Information” shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable); except, however, that (a) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will (i) provide the Account Effective Date in lieu of the “date account opened”; (ii) provide the relationship identifier in lieu of the “account number”; and (iii) identify the “account type” as a “relationship”; (b) in those circumstances in which the relevant account was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), and no “date account opened” is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances: (i) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system; (ii) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system; (iii) where there are multiple dates associated with an account in an Industry Member’s system, and the parameters of each date are determined by the individual Industry Member; and (iv) where the relevant account is an Industry Member proprietary account.

+

“Customer-ID” has the same meaning provided in SEC Rule 613(j)(5).

+

“Customer Identifying Information” means information of sufficient detail to identify a Customer, including, but not limited to, (a) with respect to individuals: name, address, date of birth, individual tax payer identification number (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney); and (b) with respect to legal entities: name, address, Employer Identification Number (“EIN”)/Legal Entity Identifier (“LEI”) or other comparable common entity identifier, if applicable; provided, however, that an Industry Member that has an LEI for a Customer must submit the Customer’s LEI in addition to other information of sufficient detail to identify a Customer.

+

“Delaware Act” means the Delaware Limited Liability Company Act.

+

“Disclosing Party” has the meaning set forth in Section 9.6(a).

+

“Effective Date” means the date of approval of this Agreement by the Commission.

+

“Eligible Security” includes (a) all NMS Securities and (b) all OTC Equity Securities.

+

“Error Rate” has the meaning provided in SEC Rule 613(j)(6).

+

“Exchange Act” means the Securities Exchange Act of 1934.

+

“Execution Venue” means a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).

+

“Exemptive Request Letters” has the meaning set forth in Recital C.

+

“FINRA” means Financial Industry Regulatory Authority, Inc.

+

“Firm Designated ID” means a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.

+

“Fiscal Year” means the fiscal year of the Company determined pursuant to Section 9.2(a).

+

“FS-ISAC” has the meaning set forth in Section 6.2(b)(vi).

+

“GAAP” means United States generally accepted accounting principles.

+

“Independent Auditor” has the meaning set forth in Section 6.2(a)(v)(B).

+

“Industry Member” means a member of a national securities exchange or a member of a national securities association.

+

“Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

+

“Information” has the meaning set forth in Section 9.6(a).

+

“Initial Plan Processor” means the first Plan Processor selected by the Operating Committee in accordance with SEC Rule 613, Section 6.1 and the Selection Plan.

+

“Last Sale Report” means any last sale report reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the SEC pursuant to, and meeting the requirements of, SEC Rule 608.

+

“Latency” means the delay between input into a system and the outcome based upon that input. In computer networks, latency refers to the delay between a source system sending a packet or message, and the destination system receiving such packet or message.

+

“Listed Option” or “Option” have the meaning set forth in Rule 600(b)(35) of Regulation NMS.

+

“Majority Vote” means the affirmative vote of at least a majority of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)).

+

“Manual Order Event” means a non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.

+

“Material Amendment” has the meaning set forth in Section 6.9(c).

+

“Material Contract” means any: (a) contract between the Company and the Plan Processor; (b) contract between the Company and any Officer; (c) contract, or group of related contracts, resulting in a total cost or liability to the Company of more than $900,000; (d) contract between the Company, on the one hand, and a Participant or an Affiliate of a Participant, on the other; (e) contract containing other than reasonable arms-length terms; (f) contract imposing, or purporting to impose, non-customary restrictions (including non-competition, non-solicitation or confidentiality (other than customary confidentiality agreements entered into in the ordinary course of business that do not restrict, or purport to restrict, any Participant or any Affiliate of any Participant)) or obligations (including indemnity, most-favored nation requirements, exclusivity, or guaranteed minimum purchase commitments) on the Company or any Participant or any Affiliate of a Participant; (g) contract containing terms that would reasonably be expected to unduly interfere with or negatively impact the ability of the Company, any Participant or any Affiliate of any Participant to perform its regulatory functions (including disciplinary matters), to carry out its responsibilities under the Exchange Act or to perform its obligations under this Agreement; (h) contract providing for a term longer than twelve (12) months or the termination of which would reasonably be expected to materially and adversely affect the Company, any Participant or any Affiliate of a Participant; (i) contract for indebtedness, the disposition or acquisition of assets or equity, or the lease or license of assets or properties; or (j) joint venture or similar contract for cost or profit sharing.

+

“Material Subcontractor” means any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC: (a) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (b) accounts for 5% or more of the total estimated annual cost of the Bid for any given year. An entity shall not be considered a “Material Subcontractor” solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.

+

“Material Systems Change” means any change or update to the CAT System made by the Plan Processor which will cause a significant change to the functionality of the Central Repository.

+

“Material Terms of the Order” includes: the NMS Security or OTC Equity Security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator (except on transactions in equities); time in force (if applicable); if the order is for a Listed Option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close (except on market maker quotations); and any special handling instructions.

+

“National Best Bid” and “National Best Offer” have the same meaning provided in SEC Rule 600(b)(42).

+

“NMS Plan” has the same meaning as “National Market System Plan” provided in SEC Rule 613(a)(1) and SEC Rule 600(b)(43).

+

“NMS Security” means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.

+

“Non-SRO Bid” means a Bid that does not include a Bidding Participant.

+

“Officer” means an officer of the Company, in his or her capacity as such, as set forth in Section 4.6.

+

“Operating Committee” means the governing body of the Company designated as such and described in Article IV.

+

“Options Exchange” means a registered national securities exchange or automated trading facility of a registered securities association that trades Listed Options.

+

“Options Market Maker” means a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.

+

“Order” or “order” has, with respect to Eligible Securities, the meaning set forth in SEC Rule 613(j)(8).

+

“OTC Equity Security” means any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.

+

“Other SLAs” has the meaning set forth in Section 6.1(h).

+

“Participant” means each Person identified as such on Exhibit A hereto, and any Person that becomes a Participant as permitted by this Agreement, in such Person’s capacity as a Participant in the Company (it being understood that the Participants shall comprise the “members” of the Company (as the term “member” is defined in Section 18-101(11) of the Delaware Act)).

+

“Participant Data” has the meaning set forth in Section 6.3(d).

+

“Participation Fee” has the meaning set forth in Section 3.3(a).

+

“Payment Date” has the meaning set forth in Section 3.7(b).

+

“Permitted Legal Basis” means the Participant has become exempt from, or otherwise has ceased to be subject to, SEC Rule 613 or has arranged to comply with SEC Rule 613 in some manner other than through participation in this Agreement, in each instance subject to the approval of the Commission.

+

“Permitted Person” has the meaning set forth in Section 4.9.

+

“Permitted Transferee” has the meaning set forth in Section 3.4(c).

+

“Person” means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

+

“PII” means personally identifiable information, including a social security number or tax identifier number or similar information; Customer Identifying Information and Customer Account Information.

+

“Plan Processor” means the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan Processor, the Selection Plan, to perform the CAT processing functions required by SEC Rule 613 and set forth in this Agreement.

+

“Pledge” and any grammatical variation thereof means, with respect to an interest, asset, or right, any pledge, security interest, hypothecation, deed of trust, lien or other similar encumbrance granted with respect to the affected interest, asset or right to secure payment or performance of an obligation.

+

“Primary Market Transaction” means any transaction other than a secondary market transaction and refers to any transaction where a Person purchases securities in an offering.

+

“Prime Rate” means the prime rate published in The Wall Street Journal (or any successor publication) on the last day of each month (or, if not a publication day, the prime rate last published prior to such last day).

+

“Proceeding” has the meaning set forth in Section 4.8(b).

+

“Qualified Bid” means a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain the CAT so that such Bid can be effectively evaluated by the Selection Committee. When evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment. The determination of whether a Bid is a Qualified Bid shall be determined pursuant to the process set forth in Section 5.2.

+

“Qualified Bidder” means a Bidder that has submitted a Qualified Bid.

+

“Quotation Information” means all bids (as defined under SEC Rule 600(b)(8)), offers (as defined under SEC Rule 600(b)(8)), all bids and offers of OTC Equity Securities, displayed quotation sizes in Eligible Securities, market center identifiers (including, in the case of FINRA, the FINRA member that is registered as a market maker or electronic communications network or otherwise utilizes the facilities of FINRA pursuant to applicable FINRA rules, that entered the quotation), withdrawals and other information pertaining to quotations in Eligible Securities required to be reported to the Plan Processor pursuant to this Agreement and SEC Rule 613.

+

“Raw Data” means Participant Data and Industry Member Data that has not been through any validation or otherwise checked by the CAT System.

+

“Received Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

+

“Receiving Party” has the meaning set forth in Section 9.6(a).

+

“Recorded Industry Member Data” has the meaning set forth in Section 6.4(d)(i).

+

“Registered Person” means any member, principal, executive, registered representative, or other person registered or required to be registered under a Participant’s rules.

+

“Reportable Event” includes, but is not limited to, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.

+

“Representatives” has the meaning set forth in Section 9.6(a).

+

“RFP” means the “Consolidated Audit Trail National Market System Plan Request for Proposal” published by the Participants on February 26, 2013 attached as Appendix A, as amended from time to time.

+

“Securities Information Processor” or “SIP” has the same meaning provided in Section 3(a)(22)(A) of the Exchange Act.

+

“Selection Committee” means the committee formed pursuant to Section 5.1.

+

“Selection Plan” has the meaning set forth in Recital A.

+

“Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section 5.2(b) and, if applicable, pursuant to Section 5.2(c)(iii).

+

“Shortlisted Bidder” means a Qualified Bidder that has submitted a Bid selected as a Shortlisted Bid.

+

“SIP Data” has the meaning set forth in Section 6.5(a)(ii).

+

“SLA” has the meaning set forth in Section 6.1(h).

+

“Small Industry Member” means an Industry Member that qualifies as a small broker-dealer as defined in SEC Rule 613.

+

“SRO” means any self-regulatory organization within the meaning of Section 3(a)(26) of the Exchange Act.

+

“SRO-Assigned Market Participant Identifier” means an identifier assigned to an Industry Member by an SRO or an identifier used by a Participant.

+

“Subcommittee” has the meaning set forth in Section 4.12(a).

+

“Supermajority Vote” means the affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)); provided that if two-thirds of all of such members authorized to cast a vote is not a whole number then that number shall be rounded up to the nearest whole number.

+

“Tax Matters Partner” has the meaning set forth in Section 9.5(a).

+

“Transfer” and any grammatical variation thereof means any sale, exchange, issuance, redemption, assignment, distribution or other transfer, disposition or alienation in any way (whether voluntarily, involuntarily or by operation of law). Transfer shall specifically include any: (a) assignment or distribution resulting from bankruptcy, liquidation, or dissolution; or (b) Pledge.

+

“Technical Specifications” has the meaning set forth in Section 6.9(a).

+

“Trading Day” shall have such meaning as is determined by the Operating Committee. For the avoidance of doubt, the Operating Committee may establish different Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time.

+

“Voting Senior Officer” has the meaning set forth in Section 5.1(a).

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 1.2. Principles of Interpretation.

+ Topic: CAT NMS Plan, Article I - Definitions, Principles of Interpretation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Interpretation, + Reference, + +

In this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement), unless the context otherwise requires:

+

(a) words denoting the singular include the plural and vice versa;

+

(b) words denoting a gender include all genders;

+

(c) all exhibits, appendices, attachments, recitals, and schedules to the document in which the reference thereto is contained shall, unless the context otherwise requires, constitute an integral part of such document for all purposes;

+

(d) a reference to a particular clause, section, article, exhibit, appendix, attachment, recital, or schedule shall be a reference to a clause, section or article of, or an exhibit, appendix, attachment, recital, or schedule to, this Agreement;

+

(e) a reference to any statute, regulation, amendment, ordinance or law includes all statutes, regulations, proclamations, amendments or laws varying, consolidating or replacing the same from time to time, and a reference to a statute includes all regulations, policies, protocols, codes, proclamations, interpretations and ordinances issued or otherwise applicable under that statute unless, in any such case, otherwise expressly provided in any such statute or in the document in which the reference is contained;

+

(f) a reference to a “SEC Rule” refers to the correspondingly numbered Rule promulgated under the Exchange Act;

+

(g) a definition of or reference to any document, instrument or agreement includes an amendment or supplement to, or restatement, replacement, modification or novation of, any such document, instrument or agreement unless otherwise specified in such definition or in the context in which such reference is used;

+

(h) a reference to any Person includes such Person’s permitted successors and assigns in that designated capacity;

+

(i) a reference to “$”, “Dollars” or “US $” refers to currency of the United States of America;

+

(j) unless otherwise expressly provided in this Agreement, wherever the consent of any Person is required or permitted herein, such consent may be withheld in such Person’s sole and absolute discretion;

+

(k) words such as “hereunder”, “hereto”, “hereof” and “herein” and other words of similar import shall refer to the whole of the applicable document and not to any particular article, section, subsection or clause thereof; and

+

(l) a reference to “including” (and grammatical variations thereof) means “including without limitation” (and grammatical variations thereof).

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE II EFFECTIVENESS OF AGREEMENT; ORGANIZATION

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Effectivity, + CAT NMS LLC, + +
pubdate: January 10, 2018 effdate: N/A +

Section 2.1. Effectiveness.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Effectiveness + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Effectivity, + +

This Agreement shall become effective upon approval by the Commission and execution by all Participants identified on Exhibit A and shall continue until terminated. Notwithstanding any provision in this Agreement to the contrary and without the consent of any Person being required, the Company’s execution, delivery and performance of this Agreement are hereby authorized, approved and ratified in all respects.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.2. Formation.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Formation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Company Formation, + Delaware Act, + +

The Company was formed as a limited liability company under the Delaware Act by filing a certificate of formation (the “Certificate”) with the Delaware Secretary of State.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.3. Name.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Name + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + CAT NMS LLC, + +

The name of the Company is “CAT NMS, LLC.” The name of the Company may be changed at any time or from time to time with the approval of the Operating Committee. All Company business shall be conducted in that name or such other names that comply with applicable law as the Operating Committee may select from time to time.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.4. Registered Office; Registered Agent; Principal Office; Other Offices.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Registered Office; Registered Agent; Principal Office; Other Offices + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Delaware Act, + Principal Office, + Registered Office, + +

The registered office of the Company required by the Delaware Act to be maintained in the State of Delaware shall be the office of the initial registered agent named in the Certificate or such other office (which need not be a place of business of the Company) as the Operating Committee may designate from time to time in the manner provided by law. The registered agent of the Company in the State of Delaware shall be the initial registered agent named in the Certificate or such other Person or Persons as the Operating Committee may designate from time to time in the manner provided by law. The principal office of the Company shall be at such place as the Operating Committee may designate from time to time, which need not be in the State of Delaware. The Company may have such other offices as the Operating Committee may designate from time to time.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.5. Certain Filings.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Certain Filings + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Filings, + Filing Requirements, + Operating Committee, + +

The Company shall cause to be filed such certificates and documents as may be necessary or appropriate to comply with the Delaware Act and any other applicable requirements for the organization, continuation and operation of a limited liability company in accordance with the laws of the State of Delaware and any other jurisdiction in which the Company shall conduct business, and shall continue to do so for so long as the Company conducts business therein. Each member of the Operating Committee is hereby designated as an “authorized person” within the meaning of the Delaware Act.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.6. Purposes and Powers.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Purposes and Powers + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + SEC Rule 608, + Sec Rule 613, + +

The Company may engage in: (a) the creation, implementation, and maintenance of the CAT pursuant to SEC Rule 608 and SEC Rule 613; and (b) any other business or activity that now or hereafter may be necessary, incidental, proper, advisable or convenient to accomplish the foregoing purpose and that is not prohibited by the Delaware Act, the Exchange Act or other applicable law and is consistent with tax exempt status under Section 501(c)(6) of the Code. The Company shall have and may exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Delaware Act.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 2.7. Term.

+ Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Term + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Secretary of State of Delaware, + Term of Company, + +

The term of the Company commenced on the date the Certificate was filed with the office of the Secretary of State of Delaware, and shall be perpetual unless dissolved as provided in this Agreement.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE III PARTICIPATION

+ Topic: CAT NMS Plan, Article III - Participation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: +
pubdate: January 10, 2018 effdate: N/A +

Section 3.1. Participants.

+ Topic: CAT NMS Plan, Article III - Participation, Participants + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Rights of a participant, + Company Interest, + Section 3.4, + Section 3.7, + +

The name and address of each Participant are set forth on Exhibit A. New Participants may only be admitted to the Company in accordance with Section 3.5. No Participant shall have the right or power to resign or withdraw from the Company, except: (a) upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4; or (b) as permitted by Section 3.6. No Participant may be expelled or required to resign or withdraw from the Company except upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4, or as provided by Section 3.7(a)(ii) or Section 3.7(a)(iii).

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.2. Company Interests Generally.

+ Topic: CAT NMS Plan, Article III - Participation, Company Interests Generally + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Company Interests, + Participant, + Section 3.3, + +

(a) All Company Interests shall have the same rights, powers, preferences and privileges, and shall be subject to the same restrictions, qualifications and limitations. Additional Company Interests may be issued only as permitted by Section 3.3.

+

(b) Without limiting Section 3.2(a), each Participant shall be entitled to one vote on any matter presented to the Participants for their consideration at any meeting of the Participants (or by written action of the Participants in lieu of a meeting).

+

(c) Company Interests shall not be evidenced by certificates.

+

(d) Each Participant shall have an equal Company Interest as each other Participant.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.3. New Participants.

+ Topic: CAT NMS Plan, Article III - Participation, New Participants + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Participants, + Participation Fee, + CAT, + Section 3.3, + SEC Rule 608, + Operating Committee, + +

(a) Any Person approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the Effective Date may become a Participant by submitting to the Company a completed application in the form provided by the Company. As a condition to admission as a Participant, said Person shall: (i) execute a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Person as a Participant (including said Person’s address for purposes of notices delivered pursuant to this Agreement); and (ii) pay a fee to the Company in an amount determined by a Majority Vote of the Operating Committee as fairly and reasonably compensating the Company and the Participants for costs incurred in creating, implementing, and maintaining the CAT, including such costs incurred in evaluating and selecting the Initial Plan Processor and any subsequent Plan Processor and for costs the Company incurs in providing for the prospective Participant’s participation in the Company, including after consideration of the factors identified in Section 3.3(b) (the “Participation Fee”). The amendment to this Agreement reflecting the admission of a new Participant shall be effective only when: (x) it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608; and (y) the prospective Participant pays the Participation Fee. Neither a prospective Participant nor any Affiliate of such prospective Participant that is already a Participant shall vote on the determination of the amount of the Participation Fee to be paid by such prospective Participant. Participation Fees paid to the Company shall be added to the general revenues of the Company.

+

(b) In determining the amount of the Participation Fee to be paid by any prospective Participant, the Operating Committee shall consider the following factors:

+

(i) the portion of costs previously paid by the Company for the development, expansion and maintenance of the CAT which, under GAAP, would have been treated as capital expenditures and would have been amortized over the five (5) years preceding the admission of the prospective Participant;

+

(ii) an assessment of costs incurred and to be incurred by the Company for modifying the CAT or any part thereof to accommodate the prospective Participant, which are not otherwise required to be paid or reimbursed by the prospective Participant;

+

(iii) Participation Fees paid by other Participants admitted as such after the Effective Date;

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(iv) elapsed time from the Effective Date to the anticipated date of admittance of the prospective Participant; and

+

(v) such other reasonable, equitable and not unfairly discriminatory factors, if any, as may be determined to be appropriate by the Operating Committee and approved by the Commission.

+

In the event the Company (following the vote of the Operating Committee contemplated by Section 3.3(a)) and a prospective Participant do not agree on the amount of the Participation Fee, such amount shall be subject to review by the Commission pursuant to Rule 608 of the Exchange Act.

+

(c) An applicant for participation in the Company may apply for limited access to the CAT System for planning and testing purposes pending its admission as a Participant by submitting to the Company a completed Application for Limited Access to the CAT System in a form provided by the Company, accompanied by payment of a deposit in the amount established by the Company, which shall be applied or refunded as described in such application. To be eligible to apply for such limited access, the applicant must have been approved by the SEC as a national securities exchange or national securities association under the Exchange Act but the applicant has not yet become a Participant, or the SEC must have published such applicant’s Form 1 application or Form X-15AA-1 application to become a national securities exchange or a national securities association, respectively.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.4. Transfer of Company Interest.

+ Topic: CAT NMS Plan, Article III - Participation, Transfer of Company Interest + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Transfer of Company Interest, + Permitted Transferree, + SEC Rule 608, + Section 3.4, + Participant, + Operating Company, + +

(a) No Participant may Transfer any Company Interest except in compliance with this Section 3.4. Any Transfer or attempted Transfer in contravention of the foregoing sentence or any other provision of this Agreement shall be null and void ab initio and ineffective to Transfer any Company Interest and shall not bind or be recognized by or on the books of the Company, and any transferee in such transaction shall not, to the maximum extent permitted by applicable law, be or be treated as or deemed to be a Participant (or an assignee within the meaning of § 18-702 of the Delaware Act) for any purpose.

+

(b) No Participant may Transfer any Company Interest except to a national securities exchange or national securities association that succeeds to the business of such Participant as a result of a merger or consolidation with such Participant or the Transfer of all or substantially all of the assets or equity of such Participant.

+

(c) Notwithstanding anything to the contrary contained in this Agreement, no Participant may Transfer any Company Interest to any transferee as permitted by Section 3.4(b) (a “Permitted Transferee”) unless: (i) such Permitted Transferee executes a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Permitted Transferee as a Participant (including said Permitted Transferee’s address for purposes of notices delivered pursuant to this Agreement); and (ii) the amendment to this Agreement reflecting the Transfer of a Company Interest to a Permitted Transferee is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608. Subject to compliance with this Section 3.4, such amendment and such Transfer shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608, as applicable.

+

(d) The Company shall not be required to recognize any Transfer of any Company Interest until the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been delivered to the Company at its principal office for recordation on the books of the Company and the transferring Participant or Permitted Transferee has paid all costs and expenses of the Company in connection with such Transfer. The Company shall be entitled to treat the record owner of any Company Interest as the absolute owner thereof in all respects, and neither the Company nor any Participant shall incur liability for distributions of cash or other property made in good faith to such owner until such time as the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been received and accepted by the Company and recorded on the books of the Company.

+

(e) Notwithstanding anything to the contrary contained in this Agreement, without prior approval thereof by the Operating Committee, no Transfer of any Company Interest shall be made if the Company is advised by its counsel that such Transfer: (i) may not be effected without registration under the Securities Act of 1933; (ii) would result in the violation of any applicable state securities laws; (iii) would require the Company to register as an investment company under the Investment Company Act of 1940 or modify the exemption from such registration upon which the Company has chosen to rely; or (iv) would require the Company to register as an investment adviser under state or federal securities laws.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.5. Admission of New Participants.

+ Topic: CAT NMS Plan, Article III - Participation, Admission of New Participants + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Permitted Transferree, + Section 3.4, + Section 3.3, + +

Any Person acquiring a Company Interest pursuant to Section 3.3, or any Permitted Transferee acquiring a Participant’s Company Interest pursuant to Section 3.4, shall, unless such acquiring Permitted Transferee is a Participant as of immediately prior to such acquisition, be deemed to have been admitted to the Company as a Participant, automatically and with no further action being necessary by the Operating Committee, the Participants or any other Person, by virtue of, and upon the consummation of, such acquisition of a Company Interest and compliance with Section 3.3 or Section 3.4, as applicable.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.6. Voluntary Resignation from Participation.

+ Topic: CAT NMS Plan, Article III - Participation, Voluntary Resignation from Participation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Voluntary Resignation, + Withdrawing Participant, + Permitted Legal basis, + +

Any Participant may voluntarily resign from the Company, and thereby withdraw from and terminate its right to any Company Interest, only if (a) a Permitted Legal Basis for such action exists and (b) such Participant provides to the Company and each other Participant no less than thirty (30) days prior to the effective date of such action written notice specifying such Permitted Legal Basis, including appropriate documentation evidencing the existence of such Permitted Legal Basis, and, to the extent applicable, evidence reasonably satisfactory to the Company and other Participants that any orders or approvals required from the Commission in connection with such action have been obtained. A validly withdrawing Participant shall have the rights and obligations provided in Section 3.7.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.7. Termination of Participation.

+ Topic: CAT NMS Plan, Article III - Participation, Termination of Participation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Termination, + Payment Date, + SEC Rule 608, + Delaware Act § 18-304, + Section 3.7, + +

(a) The participation in the Company of a Participant, and its right to any Company Interest, shall terminate as of the earliest of: (i) the effective date specified in a valid notice delivered pursuant to Section 3.6 (which date, for the avoidance of doubt, shall be no earlier than the date that is thirty (30) days after the delivery of such notice); (ii) such time as such Participant is no longer registered as a national securities exchange or national securities association; or (iii) the date of termination pursuant to Section 3.7(b).

+

(b) Each Participant shall pay all fees or other amounts required to be paid under this Agreement within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated) (the “Payment Date”). The Participant shall pay interest on the outstanding balance from the Payment Date until such fee or amount is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. If any such remaining outstanding balance is not paid within thirty (30) days after the Payment Date, the Participants shall file an amendment to this Agreement requesting the termination of the participation in the Company of such Participant, and its right to any Company Interest, with the SEC. Such amendment shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

+

(c) In the event a Participant becomes subject to one or more of the events of bankruptcy enumerated in § 18-304 of the Delaware Act, that event by itself shall not cause the termination of the participation in the Company of the Participant so long as the Participant continues to be registered as a national securities exchange or national securities association. A terminated Participant shall remain liable for its proportionate share of costs and expenses allocated to it for the period during which it was a Participant, for obligations under Section 3.8(c), for its indemnification obligations pursuant to Section 4.1, and for obligations under Section 9.6, but it shall have no other obligations under this Agreement following the effective date of termination. This Agreement shall be amended to reflect any termination of participation in the Company of a Participant pursuant to this Section 3.7; provided that such amendment shall be effective only when it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.8. Obligations and Liability of Participants.

+ Topic: CAT NMS Plan, Article III - Participation, Obligations and Liability of Participants + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Company Interest, + Delaware Act, + Limited Liability Company, + Company Liability, + +

(a) Except as may be determined by the unanimous vote of all the Participants or as may be required by applicable law, no Participant shall be obligated to contribute capital or make loans to the Company. No Participant shall have the right to withdraw or to be repaid any capital contributed by it or to receive any other payment in respect of any Company Interest, including as a result of the withdrawal or resignation of such Participant from the Company, except as specifically provided in this Agreement.

+

(b) Except as provided in this Agreement and except as otherwise required by applicable law, no Participant shall have any personal liability whatsoever in its capacity as a Participant, whether to the Company, to any Participant or any Affiliate of any Participant, to the creditors of the Company or to any other Person, for the debts, liabilities, commitments or any other obligations of the Company or for any losses of the Company. Without limiting the foregoing, the failure of the Company to observe any formalities or requirements relating to exercise of its powers or management of its business or affairs under this Agreement or the Delaware Act shall not be grounds for imposing personal liability on any Participant or any Affiliate of a Participant for any liability of the Company.

+

(c) In accordance with the Delaware Act, a member of a limited liability company may, under certain circumstances, be required to return amounts previously distributed to such member. It is the intent of the Participants that no distribution to any Participant shall be deemed a return of money or other property paid or distributed in violation of the Delaware Act. The payment of any such money or distribution of any such property to a Participant shall be deemed to be a compromise within the meaning of the Delaware Act, and the Participant receiving any such money or property shall not be required to return any such money or property to any Person. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Participant is obligated to make any such payment, such obligation shall be the obligation of such Participant and not of the Operating Committee, the Company or any other Participant.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.9. Loans.

+ Topic: CAT NMS Plan, Article III - Participation, Loans + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Loans, + Additional Funds, + Operating Committe, + +

If the Company requires additional funds to carry out its purposes, to conduct its business, to meet its obligations, or to make any expenditure authorized by this Agreement, the Company may borrow funds from such one or more of the Participants, or from such third party lender(s), and on such terms and conditions, as may be approved by a Supermajority Vote of the Operating Committee.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.10. No Partnership.

+ Topic: CAT NMS Plan, Article III - Participation, No Partnership + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Partnership, + Joint venturer, + +

The Company is not intended to be a general partnership, limited partnership or joint venture for any purpose, and no Participant shall be considered to be a partner or joint venturer of any other Participant, for any purpose, and this Agreement shall not be construed to suggest otherwise.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 3.11. Compliance Undertaking.

+ Topic: CAT NMS Plan, Article III - Participation, Compliance Undertaking + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Compliance Requirement, + Sec Rule 613, + Participant, + +

Each Participant shall comply with and enforce compliance, as required by SEC Rule 608(c), by its Industry Members with the provisions of SEC Rule 613 and of this Agreement, as applicable, to the Participant and its Industry Members. The Participants shall endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of SEC Rule 613 and this Agreement.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE IV MANAGEMENT OF THE COMPANY

+ Topic: CAT NMS Plan, Article IV - Management of the Company + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Company, + +
pubdate: January 10, 2018 effdate: N/A +

Section 4.1. Operating Committee.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Operating Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Duties of Operating Committee, + Sec Rule 613, + Receiving Party, + +

Except for situations in which the approval of the Participants is required by this Agreement or by non-waivable provisions of applicable law, the Company shall be managed by the Operating Committee, which shall have general charge and supervision of the business of the Company and shall be constituted as provided in Section 4.2. The Operating Committee: (a) acting collectively in accordance with this Agreement, shall be the sole “manager” of the Company within the meaning of § 18-101(10) of the Delaware Act (and no individual member of the Operating Committee shall (i) be a “manager” of the Company within the meaning of Section 18-101(10) of the Delaware Act or (ii) have any right, power or authority to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company); (b) shall have the right, power and authority to exercise all of the powers of the Company except as otherwise provided by applicable law or this Agreement; and (c) except as otherwise expressly provided herein, shall make all decisions and authorize or otherwise approve all actions taken or to be taken by the Company. Decisions or actions relating to the Company that are made or approved by the Operating Committee, or by any Subcommittee within the scope of authority granted to such Subcommittee in accordance with this Agreement (or, with respect to matters requiring a vote, approval, consent or other action of the Participants hereunder or pursuant to non-waivable provisions of applicable law, by the Participants) in accordance with this Agreement shall constitute decisions or actions by the Company and shall be binding on the Company and each Participant. Except to the extent otherwise expressly provided to the contrary in this Agreement, no Participant shall have authority to act for, or to assume any obligation or responsibility on behalf of, the Company, without the prior approval of the Operating Committee, and each Participant shall indemnify and hold harmless the Company and each other Participant for any breach of the provisions of this sentence by such breaching Participant. Without limiting the generality of the foregoing, except as otherwise expressly provided in this Agreement, the Operating Committee shall make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and under this Agreement. Notwithstanding anything to the contrary, the Operating Committee may delegate all or part of its administrative functions under this Agreement, but not its policy making (except to the extent determinations are delegated as specifically set forth in this Agreement) authority, to one or more Subcommittees, and any other Person. A Person to which administrative functions are so delegated shall perform the same as agent for the Company, in the name of the Company. Each Person who performs administrative functions on behalf of the Company (including the Plan Processor) shall be required to: (i) agree to be bound by the confidentiality obligations in Section 9.6(a) as a “Receiving Party”; and (ii) agree that any nonpublic business information pertaining to any Participant or any Affiliate of such Participant that becomes known to such Person shall be held in confidence and not shared with the other Participants or any other Person, except for information that may be shared in connection with joint activities permitted under this Agreement.

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+
pubdate: January 10, 2018 effdate: N/A +

Section 4.2. Composition and Selection of Operating Committee; Chair.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Composition and Selection of Operating Committee; Chair + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Voting, + Participant, + CAT System, + Majority Vote, + +

(a) The Operating Committee shall consist of one voting member representing each Participant and one alternate voting member representing each Participant who shall have a right to vote only in the absence of that Participant’s voting member of the Operating Committee. Each of the voting and alternate voting members of the Operating Committee shall be appointed by the Participant that he or she represents, shall serve at the will of the Participant appointing such member and shall be subject to the confidentiality obligations of the Participant that he or she represents as set forth in Section 9.6. One individual may serve as the voting member of the Operating Committee for multiple Affiliated Participants, and such individual shall have the right to vote on behalf of each such Affiliated Participant.

+

(b) No later than the date the CAT System commences operations, the Operating Committee shall elect, by Majority Vote, one member thereof to act as the initial chair of the Operating Committee (the “Chair”). Such initial Chair, and each successor thereto, shall serve in such capacity for a two (2)-year term or until the earliest of his death, resignation or removal in accordance with the provisions of this Agreement. The Operating Committee shall elect, from the members thereof, a successor to the then serving Chair (which successor, subject to the last sentence of this Section 4.2(b), may be the Person then serving in such capacity) no later than three (3) months prior to the expiration of the then current term of the Person then serving as Chair. The Operating Committee, by Supermajority Vote, may remove the Chair from such position. In the case of any death, removal, resignation, or other vacancy of the Chair, a successor Chair shall be promptly elected by the Operating Committee, by Majority Vote, from among the members thereof who shall serve until the end of the then current term. The Chair shall preside at all meetings of the Operating Committee, shall designate a Person to act as Secretary to record the minutes of each such meeting, and shall perform such other duties and possess such other powers as the Operating Committee may from time to time prescribe. The Chair shall not be entitled to a tie-breaking vote at any meeting of the Operating Committee. Notwithstanding anything in this Agreement to the contrary: (i) no Person shall serve as Chair for more than two successive full terms; and (ii) no Person then appointed to the Operating Committee by a Participant that then serves, or whose Affiliate then serves, as the Plan Processor shall be eligible to serve as the Chair.

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+
pubdate: January 10, 2018 effdate: N/A +

Section 4.3. Action of Operating Committee.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Action of Operating Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Vote, + Operating Committee, + Majority Vote, + Chief Compliance Officer, + +

(a) Except as otherwise provided herein, each of the members of the Operating Committee, including the Chair, shall be authorized to cast one (1) vote for each Participant that he or she represents on all matters voted upon by the Operating Committee, and action of the Operating Committee shall be authorized by Majority Vote, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder. Action of the Operating Committee authorized in accordance with this Agreement shall be without prejudice to the rights of any Participant to present contrary views to any regulatory body or in any other appropriate forum. Without limiting the generality of the foregoing, the Company shall not take any of the following actions unless the Operating Committee, by Majority Vote, authorizes such action:

+

(i) select the Chair pursuant to Section 4.2(b);

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(ii) select the members of the Advisory Committee pursuant to Section 4.13;

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(iii) interpret this Agreement (unless otherwise noted herein);

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(iv) approve any recommendation by the Chief Compliance Officer pursuant to Section 6.2(a)(v)(A);

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(v) determine to hold an Executive Session of the Operating Committee pursuant to Section 4.4(a);

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(vi) determine the appropriate funding-related policies, procedures and practices consistent with Article XI; or

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(vii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee (other than those matters expressly requiring a Supermajority Vote or a different vote of the Operating Committee).

+

(b) Notwithstanding Section 4.3(a) or anything else to the contrary in this Agreement, the Company shall not take any of the following actions unless such action shall have been authorized by the Supermajority Vote of the Operating Committee, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder:

+

(i) select a Plan Processor, other than the Initial Plan Processor selected in accordance with Article V;

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(ii) terminate a Plan Processor without cause in accordance with Section 6.1(q);

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(iii) approve the Plan Processor’s appointment or removal of the Chief Information Security Officer, the Chief Compliance Officer, or any Independent Auditor in accordance with Section 6.1(b);

+

(iv) enter into, modify or terminate any Material Contract (if the Material Contract is with a Participant or an Affiliate of a Participant, such Participant and Affiliated Participant shall be recused from any vote under this Section 4.3(b)(iv));

+

(v) make any Material Systems Change;

+

(vi) approve the initial Technical Specifications pursuant to Section 6.9 or any Material Amendment to the Technical Specifications proposed by the Plan Processor in accordance with Section 6.9;

+

(vii) amend the Technical Specifications on its own motion; or

+

(viii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee by a Supermajority Vote.

+

(c) Any action required or permitted to be taken at any meeting of the Operating Committee or any Subcommittee may be taken without a meeting, if all of the members of the Operating Committee or Subcommittee, as the case may be, then serving consent to the action in writing or by electronic transmission. Such written consents and hard copies of the electronic transmissions shall be filed with the minutes of proceedings of the Operating Committee or Subcommittee, as applicable.

+

(d) If a member of the Operating Committee or any Subcommittee determines that voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall recuse himself or herself from voting on such matter. If the members of the Operating Committee or any Subcommittee (excluding the member thereof proposed to be recused) determine by Supermajority Vote that any member voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall be recused from voting on such matter. No member of the Operating Committee or any Subcommittee shall be automatically recused from voting on any matter, except as provided in Section 4.3(b)(iv) or as otherwise specified elsewhere in this Agreement, and except as provided below:

+

(i) if a Participant is a Bidding Participant whose Bid remains under consideration, members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (A) whether another Bidder may revise its Bid; (B) the selection of a Bidder; or (C) any contract to which such Participant or any of its Affiliates would be a party in its capacity as Plan Processor; and

+

(ii) if a Participant is (A) then serving as Plan Processor, (B) is an Affiliate of the Person then serving as Plan Processor, or (C) is an Affiliate of an entity that is a Material Subcontractor to the Plan Processor, then in each case members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (1) the proposed removal of such Plan Processor; or (2) any contract between the Company and such Plan Processor.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.4. Meetings of the Operating Committee.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Meetings of the Operating Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Meetings, + Participant, + Representatives, + Advisory Committee, + Participant’s Affiliated Participants, + Form X-15AA-1 Application, + +

(a) Meetings of the Operating Committee may be attended by each Participant’s voting Representative and its alternate voting Representative and by a maximum of two (2) nonvoting Representatives of each Participant, by members of the Advisory Committee, by the Chief Compliance Officer, by other Representatives of the Company and the Plan Processor, by Representatives of the SEC, and by such other Persons that the Operating Committee may invite to attend; provided that the Operating Committee may, where appropriate, determine to meet in an Executive Session, during which only voting members of the Operating Committee and Representatives of the SEC shall be present; provided, that the Operating Committee may invite other Representatives of the Participants, of the Company, of the Plan Processor (including the Chief Compliance Officer and the Chief Information Security Officer), or such other Persons that the Operating Committee may invite to attend, to be present during an Executive Session. Any determination of the Operating Committee to meet in an Executive Session shall be made upon a Majority Vote and shall be reflected in the minutes of the meeting. Regular meetings of the Operating Committee shall be held not less than once each calendar quarter at such times as shall from time to time be determined by the Operating Committee, on not less than ten (10) days’ notice. Special meetings of the Operating Committee may be called upon the request of two or more Participants on not less than two (2) days’ notice; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. Emergency meetings of the Operating Committee may be called upon the request of two (2) or more Participants and may occur as soon as practical after calling for such meeting; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. In the case of an emergency meeting of the Operating Committee, in addition to those Persons otherwise entitled to attend such meeting: (i) each Participant shall have the right to designate a reasonable number of its employees or other Representatives with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; and (ii) each Participant shall use commercially reasonable efforts to designate an employee or other Representative of such Participant with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; provided, for the avoidance of doubt, that no Person attending any such meeting solely by virtue of this sentence shall have the right to vote on any matter submitted for a vote at any such meeting. The Chair, or in his or her absence, a member of the Operating Committee designated by the Chair or by members of the Operating Committee in attendance, shall preside at each meeting of the Operating Committee, and a Person in attendance designated by the Chair (or the member of the Operating Committee presiding in the Chair’s absence) shall act as Secretary to record the minutes thereof. The location of the regular and special meetings of the Operating Committee shall be fixed by the Operating Committee, provided that in general the location of meetings shall be rotated among the locations of the principal offices of the Participants. Members of the Operating Committee may be present at a meeting by conference telephone or other electronic means that enables each of them to hear and be heard by all others present at the meeting. Whenever notice of any meeting of the Operating Committee is required to be given by law or this Agreement, a written waiver, signed by the Person entitled to notice, or a waiver by electronic transmission by the Person entitled to notice, whether before, at or after the time stated in such notice, shall be deemed equivalent to notice. Attendance at a meeting of the Operating Committee by a member thereof shall constitute a waiver of notice of such meeting, except when such member of the Operating Committee attends any such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

+

(b) Any Person that is not a Participant, but for which the SEC has published a Form 1 Application or Form X-15AA-1 Application to become a national securities exchange or a national securities association, respectively, shall be permitted to appoint one primary Representative and one alternate Representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer but shall not be permitted to have any Representative attend a special meeting, emergency meeting or meeting held in Executive Session of the Operating Committee. If such Person’s Form 1 Application or Form X-15AA-1 Application is withdrawn or returned for any reason, then such Person shall no longer be eligible to be represented in regularly scheduled Operating Committee meetings. The Operating Committee shall have the discretion, in limited instances, to deviate from this policy if it determines, by Majority Vote, that circumstances so warrant; provided, however, that the exercise of such discretion is reasonable and does not impose any unnecessary or inappropriate burden on competition.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.5. Interpretation of Other Regulations.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Other Regulations + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Interpretive questions, + Operating Committee, + +

Interpretive questions arising during the operation or maintenance of the Central Repository with respect to applicable laws, rules or regulations shall be presented to the Operating Committee, which shall determine whether to seek interpretive guidance from the SEC or other appropriate regulatory body and, if so, in what form.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.6. Officers of the Company.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Officers of the Company + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Chief Compliance Officer, + Chief Information Security Officer, + Plan Processor, + Section 4.7, + Operating Committee, + +

(a) Each of the Chief Compliance Officer and the Chief Information Security Officer (each of whom shall be employed solely by the Plan Processor and neither of whom shall be deemed or construed in any way to be an employee of the Company) shall be an Officer with the same respective title, as applicable, as the Chief Compliance Officer of the Company and the Chief Information Security Officer of the Company. Neither such Officer shall receive or be entitled to any compensation from the Company or any Participant by virtue of his or her service in such capacity (other than, if a Participant is then serving as the Plan Processor, compensation paid to such Officer as an employee of such Participant). Each such Officer shall report directly to the Operating Committee. The Chief Compliance Officer shall work on a regular and frequent basis with the Compliance Subcommittee and/or other Subcommittees as may be determined by the Operating Committee. Except to the extent otherwise provided herein, including Section 6.2, each such Officer shall have such fiduciary and other duties with regard to the Plan Processor as imposed by the Plan Processor on such individual by virtue of his or her employment by the Plan Processor. Notwithstanding the foregoing, the Company shall require the Plan Processor, in a written agreement with the Company, to acknowledge that the Officers of the Company owe fiduciary duties to the Company (set forth in Section 4.7(c) of this Agreement), and that, to the extent that the duties owed to the Company by the Officers of the Company, including the Chief Compliance Officer or Chief Information Security Officer, conflict with any duties owed to the Plan Processor, the duties to the Company will control.

+

(b) The Plan Processor shall inform the Operating Committee of the individual who has direct management responsibility for the Plan Processor’s performance of its obligations with respect to the CAT. Subject to approval by the Operating Committee of such individual, the Operating Committee shall appoint such individual as an Officer. In addition, the Operating Committee by Supermajority Vote may appoint other Officers as it shall from time to time deem necessary, and may assign any title to any such Officer as it deems appropriate. Any Officer appointed pursuant to this Section 4.6(b) shall have only such duties and responsibilities as set forth in this Agreement or as the Operating Committee shall from time to time expressly determine, but no such Officer shall have any authority to bind the Company (which authority is vested solely in the Operating Committee) or be an employee of the Company, unless in each case the Operating Committee, by Supermajority Vote, expressly determines otherwise. No person subject to a “statutory disqualification” (as defined in Section 3(a)(39) of the Exchange Act) may serve as an Officer. It is the intent of the Participants that the Company have no employees.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.7. Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Obligations of the Participants, + Operating Committee, + Duties, + +

To the fullest extent permitted by the Delaware Act and other applicable law:

+

(a) the respective obligations of the Participants, Officers, and the members of the Operating Committee, to each other and to the Company are limited to the express obligations set forth in this Agreement;

+

(b) the Participants hereby expressly acknowledge and agree that each member of the Operating Committee, individually, is serving hereunder solely as, and shall act in all respects hereunder solely as, an agent of the Participant appointing such member of the Operating Committee;

+

(c) no Participant or member of the Operating Committee, in such Person’s capacity as such, shall have any fiduciary or similar duties or obligations to the Company or any other Participant or member of the Operating Committee, whether express or implied by the Delaware Act or any other law, in each case subject only to the implied contractual covenant of good faith and fair dealing, and each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Participant or member of the Operating Committee that might otherwise arise in respect of any such fiduciary duty or similar duty or obligation; provided, however, that the provisions of this Section 4.7(c) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member of the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor. Each Officer shall have the same fiduciary duties and obligations to the Company as a comparable officer of a Delaware corporation and in all cases shall conduct the business of the Company and execute his or her duties and obligations in good faith and in the manner that the Officer reasonably believes to be in the best interests of the Company;

+

(d) subject to Section 4.7(c), each Participant and each member of the Operating Committee may, with respect to any vote, consent or approval that such Person is entitled to grant or withhold pursuant to this Agreement, grant or withhold such vote, consent or approval in its sole and absolute discretion, with or without cause; and

+

(e) for the avoidance of doubt, no Participant shall be entitled to appraisal or dissenter rights for any reason with respect to any Company Interest.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.8. Exculpation and Indemnification.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Exculpation and Indemnification + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Participant's Liability, + Exceptions, + Operating Committee, + Misconduct, + +

(a) Except for the indemnification obligations of Participants under Section 4.1, no Participant or member of the Operating Committee shall be liable to the Company or to any Participant for any loss suffered by the Company or by any other Participant unless such loss is caused by: (i) the fraud, gross negligence, willful misconduct or willful violation of law on the part of such Participant or member of the Operating Committee; or (ii) in the case of a Participant, a material breach of this Agreement by such Participant. The provisions of this Section 4.8(a) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member to the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

+

(b) Subject to the limitations and conditions as provided in this Section 4.8(b), the Company shall indemnify any Participant and any member of the Operating Committee (and may, upon approval of the Operating Committee, indemnify any employee or agent of the Company) who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative (hereinafter a “Proceeding”), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that such Person is or was a Participant, a member of the Operating Committee or any Subcommittee, or an employee or agent of the Company against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys’ fees) actually incurred by such Person in connection with such Proceeding, if and only if the Person seeking indemnification is entitled to exculpation pursuant to Section 4.8(a). Indemnification under this Section 4.8(b) shall continue as to a Person who has ceased to serve in the capacity which initially entitled such Person to indemnification hereunder. As a condition precedent to an indemnified Person’s right to be indemnified pursuant to this Section 4.8(b), such indemnified Person must notify the Company in writing as soon as practicable of any Proceeding for which such indemnified Person will or could seek indemnification. With respect to any Proceeding of which the Company is so notified, the Company shall be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the indemnified Person. If the Company does not assume the defense of any such Proceeding of which the Company receives notice under this Section 4.8(b), reasonable expenses incurred by an indemnified Person in connection with any such Proceeding shall be paid or reimbursed by the Company in advance of the final disposition of such Proceeding upon receipt by the Company of: (i) written affirmation by the indemnified Person of such Person’s good faith belief that such Person has met the standard of conduct necessary for such Person to be entitled to indemnification by the Company (which, in the case of a Person other than a Participant or a member of the Operating Committee, shall be, unless otherwise determined by the Operating Committee, that (A) such Person determined, in good faith, that such conduct was in, or was not opposed to, the best interests of the Company and (B) such conduct did not constitute gross negligence or willful misconduct); and (ii) a written undertaking by such Person to repay such expenses if it shall ultimately be determined by a court of competent jurisdiction that such Person has not met such standard of conduct or is otherwise not entitled to indemnification by the Company. The Company shall not indemnify an indemnified Person to the extent such Person is reimbursed from the proceeds of insurance, and in the event the Company makes any indemnification payments to an indemnified Person and such Person is subsequently reimbursed from the proceeds of insurance, such Person shall promptly refund such indemnification payments to the Company to the extent of such insurance reimbursement. The rights granted pursuant to this Section 4.8(b) shall be deemed contract rights, and no amendment, modification or repeal of this Section 4.8(b) shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any amendment, modification or repeal. It is expressly acknowledged that the indemnification provided in this Section 4.8(b) could involve indemnification for negligence or under theories of strict liability. For Persons other than Participants or members of the Operating Committee, indemnification shall only be made upon the approval of the Operating Committee. Notwithstanding anything to the contrary in this Section 4.8 or elsewhere in this Agreement, no Person shall be indemnified hereunder for any losses, liabilities or expenses arising from or out of a violation of federal or state securities laws or any other intentional or criminal wrongdoing. Any indemnification under this Section 4.8 shall be paid from, and only to the extent of, Company assets, and no Participant shall have any personal liability on account thereof in the absence of a separate written agreement to the contrary.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.9. Freedom of Action.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Freedom of Action + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Premitted Persons, + Section 4.9, + Plan Processor, + +

Each Participant and such Participant’s Affiliates, and their respective Representatives (individually, “Permitted Person” and collectively, the “Permitted Persons”) may have other business interests and may engage in any business or trade, profession, employment, or activity whatsoever (regardless of whether any such activity competes, directly or indirectly, with the Company’s business or activities), for its own account, or in partnership with, or as a Representative of, any other Person. No Permitted Person (other than, if a Participant is then serving as the Plan Processor, any Officer then employed by the Plan Processor) shall be required to devote its entire time (business or otherwise), or any particular portion of its time (business or otherwise) to the business of the Company. Neither the Company nor any Participant nor any Affiliate thereof, by virtue of this Agreement, shall have any rights in and to any such independent venture or the income or profits derived therefrom, regardless of whether or not such venture was initially presented to a Permitted Person as a direct or indirect result of such Permitted Person’s relationship with the Company. No Permitted Person shall have any obligation hereunder to present any business opportunity to the Company, even if the opportunity is one that the Company might reasonably have pursued or had the ability or desire to pursue, in each case, if granted the opportunity to do so, and no Permitted Person shall be liable to the Company or any Participant (or any Affiliate thereof) for breach of any fiduciary or other duty relating to the Company (whether imposed by applicable law or otherwise), by reason of the fact that the Permitted Person pursues or acquires such business opportunity, directs such business opportunity to another Person or fails to present such business opportunity, or information regarding such business opportunity, to the Company. Each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Permitted Person for breach of any fiduciary duty or other duty (contractual or otherwise) by reason of the fact that the Permitted Person pursues or acquires any opportunity for itself, directs such opportunity to another Person, or does not present such opportunity to the Company. This Section 4.9 shall have no effect on the terms of any relationship, agreement or arrangement between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.10. Arrangements with Participants and Members of the Operating Committee.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Arrangements with Participants and Members of the Operating Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Participant, + Operating Committee, + Section 4.3, + +

Subject to the terms of this Agreement, including Section 4.3(b)(iv) and Section 4.3(d), and any limitations imposed on the Company and the Participants under applicable law, rules, or regulations, the Company may engage in business with, or enter into one or more agreements, leases, contracts or other arrangements for the furnishing to or by it of goods, services, technology or space with, any Participant, any member of the Operating Committee or any Affiliate of any Participant or member of the Operating Committee, and may pay compensation in connection with such business, goods, services, technology or space.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.11. Participant Action Without a Meeting.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Participant Action Without a Meeting + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Without meeting, + Consent, + Participant, + +

Any action required or permitted to be taken by Participants pursuant to this Agreement (including pursuant to any provision of this Agreement that requires the consent or approval of Participants) may be taken without a meeting, by unanimous consent in writing, setting forth the action so taken, which consent shall be signed by all Participants entitled to consent.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.12. Subcommittees.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Subcommittees + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Majority Vote, + Operating Committee, + Compliance, + Confidentiality, + Timeliness, + Section 4.1, + Sec Rule 613, + +

(a) The Operating Committee may, by Majority Vote, designate by resolution one (1) or more subcommittees (each, a “Subcommittee”) it deems necessary or desirable in furtherance of the management of the business and affairs of the Company. For any Subcommittee, any member of the Operating Committee who wants to serve thereon may so serve, and if Affiliated Participants have collectively appointed one member to the Operating Committee to represent them, then such Affiliated Participants may have only that member serve on the Subcommittee or may decide not to have only that collectively appointed member serve on the Subcommittee. Such member may designate an individual other than himself or herself who is also an employee of the Participant or Affiliated Participants that appointed such member to serve on a Subcommittee in lieu of the particular member. Any Subcommittee, to the extent provided in the resolution of the Operating Committee designating it and subject to Section 4.1 and non-waivable provisions of the Delaware Act, shall have and may exercise all the powers and authority of the Operating Committee in the management of the business and affairs of the Company as so specified in the resolution of the Operating Committee. Each Subcommittee shall keep minutes and make such reports as the Operating Committee may from time to time request. Except as the Operating Committee may otherwise determine, any Subcommittee may make rules for the conduct of its business, but unless otherwise provided by the Operating Committee or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in this Agreement for the Operating Committee.

+

(b) The Operating Committee shall maintain a compliance Subcommittee (the “Compliance Subcommittee”). The Compliance Subcommittee’s purpose shall be to aid the Chief Compliance Officer (who shall directly report to the Operating Committee in accordance with Section 6.2(a)(iii)) as necessary, including with respect to issues involving:

+

(i) the maintenance of the confidentiality of information submitted to the Plan Processor or Central Repository pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members;

+

(ii) the timeliness, accuracy, and completeness of information submitted pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members; and

+

(iii) the manner in and extent to which each Participant is meeting its obligations under SEC Rule 613, Section 3.11, and as set forth elsewhere in this Agreement and ensuring the consistency of this Agreement’s enforcement as to all Participants.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 4.13. Advisory Committee.

+ Topic: CAT NMS Plan, Article IV - Management of the Company, Advisory Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Broker-dealer, + Affiliates, + Participant, + Advisory Committee, + Central Repository, + Sec Rule 613, + +

(a) An advisory committee to the Company (the “Advisory Committee”) shall be formed and shall function in accordance with SEC Rule 613(b)(7) and this Section 4.13.

+

(b) No member of the Advisory Committee may be employed by or affiliated with any Participant or any of its Affiliates or facilities. A Representative of the SEC shall serve as an observer of the Advisory Committee (but shall not be a member thereof). The Operating Committee shall select one (1) member to serve on the Advisory Committee from representatives of each category identified in Sections 4.13(b)(i) through 4.13(b)(xii) to serve on the Advisory Committee on behalf of himself or herself individually and not on behalf of the entity for which the individual is then currently employed; provided that the members so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) must include, in the aggregate, representatives of no fewer than three (3) broker-dealers that are active in the options business and representatives of no fewer than three (3) broker-dealers that are active in the equities business; and provided further that upon a change in employment of any such member so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) a Majority Vote of the Operating Committee shall be required for such member to be eligible to continue to serve on the Advisory Committee:

+

(i) a broker-dealer with no more than 150 Registered Persons;

+

(ii) a broker-dealer with at least 151 and no more than 499 Registered Persons;

+

(iii) a broker-dealer with 500 or more Registered Persons;

+

(iv) a broker-dealer with a substantial wholesale customer base;

+

(v) a broker-dealer that is approved by a national securities exchange (A) to effect transactions on an exchange as a specialist, market maker, or floor broker; or (B) to act as an institutional broker on an exchange;

+

(vi) a proprietary-trading broker-dealer;

+

(vii) a clearing firm;

+

(viii) an individual who maintains a securities account with a registered broker or dealer but who otherwise has no material business relationship with a broker or dealer or with a Participant;

+

(ix) a member of academia who is a financial economist;

+

(x) three institutional investors, including an individual trading on behalf of an investment company or group of investment companies registered pursuant to the Investment Company Act of 1940;

+

(xi) an individual with significant and reputable regulatory expertise; and

+

(xii) a service bureau that provides reporting services to one or more CAT Reporters.

+

(c) Four of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of one (1) year. Five of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of two (2) years. All other members of the Advisory Committee shall have a term of three (3) years. No member of the Advisory Committee may serve thereon for more than two consecutive terms.

+

(d) The Advisory Committee shall advise the Participants on the implementation, operation, and administration of the Central Repository, including possible expansion of the Central Repository to other securities and other types of transactions. Members of the Advisory Committee shall have the right to attend meetings of the Operating Committee or any Subcommittee, to receive information concerning the operation of the Central Repository (subject to Section 4.13(e)), and to submit their views to the Operating Committee or any Subcommittee on matters pursuant to this Agreement prior to a decision by the Operating Committee on such matters; provided that members of the Advisory Committee shall have no right to vote on any matter considered by the Operating Committee or any Subcommittee and that the Operating Committee or any Subcommittee may meet in Executive Session if, by Majority Vote, the Operating Committee or Subcommittee determines that such an Executive Session is advisable. The Advisory Committee may provide the Operating Committee with recommendations of one or more candidates for the Operating Committee to consider when selecting members of the Advisory Committee pursuant to Section 4.3(a)(ii); provided, however, that the Operating Committee, at its sole discretion, will select the members of the Advisory Committee pursuant to Section 4.3(a)(ii) from the candidates recommended to the Operating Committee by the Advisory Committee, the Operating Committee itself, Participants or other persons. The Operating Committee may solicit and consider views on the operation of the Central Repository in addition to those of the Advisory Committee.

+

(e) Members of the Advisory Committee shall receive the same information concerning the operation of the Central Repository as the Operating Committee; provided, however, that the Operating Committee may withhold information it reasonably determines requires confidential treatment. Any information received by members of the Advisory Committee in furtherance of the performance of their functions pursuant to this Agreement shall remain confidential unless otherwise specified by the Operating Committee.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE V INITIAL PLAN PROCESSOR SELECTION

+ Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + CAT NMS plan, + +
pubdate: January 10, 2018 effdate: N/A +

Section 5.1. Selection Committee.

+ Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Selection Committee + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Participants, + Selection, + Composition, + Voting, + Quorum, + Qualifications, + Bidding Participants, + Sections 5.1, + Sections 5.2, + Selection Committee, + +

The Participants shall establish a Selection Committee in accordance with this Article V to evaluate and review Bids and select the Initial Plan Processor.

+

(a) Composition. Each Participant shall select from its staff one (1) senior officer (“Voting Senior Officer”) to represent the Participant as a member of the Selection Committee. In the case of Affiliated Participants, one (1) individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one (1) individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual shall have the right to vote on behalf of each such Affiliated Participant.

+

(b) Voting.

+

(i) Unless recused pursuant to Sections 5.1(b)(ii), 5.1(b)(iii), or 5.1(b)(iv), each Participant shall have one vote on all matters considered by the Selection Committee.

+

(ii) No Bidding Participant shall vote on whether a Shortlisted Bidder shall be permitted to revise its Bid pursuant to Section 5.2(c)(ii) or 5.2(d)(i) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+

(iii) No Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders as set forth in Section 5.2(c)(iii) if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

+

(iv) No Bidding Participant shall vote in any round if a Bid submitted by or including the Participant or an Affiliate of the Participant is a part of such round.

+

(v) All votes by the Selection Committee shall be confidential and non-public. All such votes shall be tabulated by an independent third party approved by the Operating Committee, and a Participant’s individual votes shall not be disclosed to other Participants or to the public.

+

(c) Quorum.

+

(i) Any action requiring a vote by the Selection Committee can only be taken at a meeting in which all Participants entitled to vote are present. Meetings of the Selection Committee shall be held as needed at such times and locations as shall from time to time be determined by the Selection Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Selection Committee deems acceptable.

+

(ii) For purposes of establishing a quorum, a Participant is considered present at a meeting only if the Participant’s Voting Senior Officer is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

+

(iii) Any Participant recused from voting on a particular action pursuant to Section 5.1(b) above shall not be considered “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

+

(d) Qualifications for Voting Senior Officer of Bidding Participants. The following criteria must be met before a Voting Senior Officer is eligible to represent a Bidding Participant and serve on the Selection Committee:

+

(i) the Voting Senior Officer is not responsible for the Bidding Participant’s market operations, and is responsible primarily for the Bidding Participant’s legal and/or regulatory functions, including functions related to the formulation and implementation of the Bidding Participant’s legal and/or regulatory program;

+

(ii) the Bidding Participant has established functional separation of its legal and/or regulatory functions from its market operations and other business or commercial objectives;

+

(iii) the Voting Senior Officer ultimately reports (including through the Bidding Participant’s CEO or Chief Legal Officer/General Counsel) to an independent governing body that determines or oversees the Voting Senior Officer’s compensation, and the Voting Senior Officer does not receive any compensation (other than what is determined or overseen by the independent governing body) that is based on achieving business or commercial objectives;

+

(iv) the Voting Senior Officer does not have responsibility for any non-regulatory functions of the Bidding Participant, other than the legal aspects of the organization performed by the Chief Legal Officer/General Counsel or the Office of the General Counsel;

+

(v) the ultimate decision making of the Voting Senior Officer position is tied to the regulatory effectiveness of the Bidding Participant, as opposed to other business or commercial objectives;

+

(vi) promotion or termination of the Voting Senior Officer is not based on achieving business or commercial objectives;

+

(vii) the Voting Senior Officer has no decision-making authority with respect to the development or formulation of the Bid submitted by or including the Participant or an Affiliate of the Participant; however, the staff assigned to developing and formulating such Bid may consult with the Voting Senior Officer, provided such staff members cannot share information concerning the Bid with the Voting Senior Officer;

+

(viii) the Voting Senior Officer does not report to any senior officers responsible for the development or formulation of the Bid submitted by or including the Participant or by an Affiliate of the Participant; however, joint reporting to the Bidding Participant’s CEO or similar executive officer by the Voting Senior Officer and senior staff developing and formulating such Bid is permissible, but the Bidding Participant’s CEO or similar executive officer cannot share information concerning such Bid with the Voting Senior Officer;

+

(ix) the compensation of the Voting Senior Officer is not separately tied to income earned if the Bid submitted by or including the Participant or an Affiliate of the Participant is selected; and

+

(x) the Voting Senior Officer, any staff advising the Voting Senior Officer, and any similar executive officer or member of an independent governing body to which the Voting Senior Officer reports may not disclose to any Person any non-public information gained during the review of Bids, presentation by Qualified Bidders, and selection process. Staff advising the Voting Senior Officer during the Bid review, presentation, and selection process may not include the staff, contractors, or subcontractors that are developing or formulating the Bid submitted by or including a Participant or an Affiliate of the Participant.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 5.2. Bid Evaluation and Initial Plan Processor Selection.

+ Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Bid Evaluation and Initial Plan Processor Selection + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Initial Bid Review, + Selection of Shortlisted, + Review of Shortlisted, + Selection of Plan, + Sections 5.2, + Non-SRO Bids, + +

(a) Initial Bid Review to Determine Qualified Bids.

+

(i) The Selection Committee shall review all Bids in accordance with the process developed by the Selection Committee.

+

(ii) After review, the Selection Committee shall vote on each Bid to determine whether such Bid is a Qualified Bid. A Bid that is deemed unqualified by at least a two-thirds (2/3rds) vote of the Selection Committee shall not be deemed a Qualified Bid and shall be eliminated individually from further consideration.

+

(b) Selection of Shortlisted Bids.

+

(i) Each Qualified Bidder shall be given the opportunity to present its Bid to the Selection Committee. Following the presentations by Qualified Bidders, the Selection Committee shall review and evaluate the Qualified Bids to select the Shortlisted Bids in accordance with the process in this Section 5.1(b).

+

(ii) If there are six (6) or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.

+

(iii) If there are more than six (6) Qualified Bids but fewer than eleven (11) Qualified Bids, the Selection Committee shall select five (5) Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. Each Voting Senior Officer shall select a first, second, third, fourth, and fifth choice from among the Qualified Bids.

+

(A) A weighted score shall be assigned to each choice as follows:

+

(1) First choice receives five (5) points;

+

(2) Second choice receives four (4) points;

+

(3) Third choice receives three (3) points;

+

(4) Fourth choice receives two (2) points; and

+

(5) Fifth choice receives one (1) point.

+

(B) The five (5) Qualified Bids receiving the highest cumulative scores shall be Shortlisted Bids.

+

(C) In the event of a tie to select the five Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

+

(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iii) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iii), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

+

(iv) If there are eleven (11) or more Qualified Bids, the Selection Committee shall select fifty percent (50%) of the Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. If there is an odd number of Qualified Bids, the number of Shortlisted Bids chosen shall be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, then seven Shortlisted Bids shall be selected). Each Voting Senior Officer shall select as many choices as Shortlisted Bids to be chosen.

+

(A) A weighted score shall be assigned to each choice in single point increments as follows:

+

(1) Last receives one (1) point;

+

(2) Next-to-last choice receives two (2) points;

+

(3) Second-from-last choice receives three (3) points;

+

(4) Third-from-last choice receives four (4) points;

+

(5) Fourth-from-last choice receives five (5) points; and

+

(6) Fifth-from-last choice receives six (6) points.

+

For each additional Shortlisted Bid that must be chosen, the points assigned shall increase in single point increments.

+

(B) The fifty percent (50%) of Qualified Bids (or, if there is an odd number of Qualified Bids, the next whole number above fifty percent (50%) of Qualified Bids) receiving the highest cumulative scores shall be Shortlisted Bids.

+

(C) In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

+

(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iv) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iv), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

+

(c) Formulation of the CAT NMS Plan.

+

(i) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the CAT and provide descriptions of such proposed solutions for inclusion in this Agreement. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

+

(ii) Prior to the approval of the CAT NMS Plan, all Shortlisted Bidders will be permitted to revise their Bids one or more times if the Selection Committee determines, by majority vote, that such revision(s) are necessary or appropriate.

+

(iii) Prior to approval of the CAT NMS Plan, and either before or after any revisions to Shortlisted Bids are accepted, the Selection Committee may determine, by at least a two-thirds vote, to narrow the number of Shortlisted Bids to three Bids, in accordance with the process in this Section 5.2(c)(iii).

+

(A) Each Voting Senior Officer shall select a first, second, and third choice from among the Shortlisted Bids.

+

(B) A weighted score shall be assigned to each choice as follows:

+

(1) First receives three (3) points;

+

(2) Second receives two (2) points; and

+

(3) Third receives one (1) point.

+

(C) The three Shortlisted Bids receiving the highest cumulative scores will be the new set of Shortlisted Bids.

+

(D) In the event of a tie that would result in more than three final Shortlisted Bids, the votes shall be recounted, omitting each Voting Senior Officer’s third choice, in order to break the tie. If this recount produces a tie that would result in a number of final Shortlisted Bids larger than or equal to that from the initial count, the results of the initial count shall constitute the final set of Shortlisted Bids.

+

(E) To the extent there are Non-SRO Bids that are Shortlisted Bids, the final Shortlisted Bids selected pursuant to this Section 5.2(c)(iii) must, if possible, include at least one Non-SRO Bid. If following the vote set forth in this Section 5.2(c)(iii), no Non-SRO Bid was selected as a final Shortlisted Bid, the Non-SRO Bid receiving the highest cumulative votes shall be retained as a Shortlisted Bid.

+

(F) The third party tabulating votes, as specified in Section 5.1(b)(5), shall identify to the Selection Committee the new set of Shortlisted Bids, but shall keep confidential the individual scores and rankings of the Shortlisted Bids from the process in this Section 5.2(c)(iii).

+

(iv) The Participants shall incorporate information on optimal proposed solutions in this Agreement, including cost-benefit information as required by SEC Rule 613.

+

(d) Review of Shortlisted Bids Under the CAT NMS Plan.

+

(i) A Shortlisted Bidder shall be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to the recusal provision in Section 5.1(b)(ii) above, that revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions in this Agreement. A Shortlisted Bidder may not revise its Bid unless approved to do so by the Selection Committee pursuant to this Section 5.2(d)(i).

+

(ii) The Selection Committee shall review and evaluate all Shortlisted Bids, including any permitted revisions thereto submitted by Shortlisted Bidders. In performing the review and evaluation, the Selection Committee may consult with the Advisory Committee established pursuant to paragraph (b)(7) of SEC Rule 613 and Section 4.13, and such other Persons as the Selection Committee deems appropriate.

+

(e) Selection of Plan Processor Under this Agreement.

+

(i) There shall be two rounds of voting by the Selection Committee to select the Initial Plan Processor from among the Shortlisted Bidders. Each round shall be scored independently of prior rounds of voting, including the scoring to determine the Shortlisted Bids under Section 5.2(b).

+

(ii) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in any round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such round.

+

(iii) First Round Voting by the Selection Committee.

+

(A) In the first round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii), shall select a first and second choice from among the Shortlisted Bids.

+

(B) A weighted score shall be assigned to each choice as follows:

+

(1) First choice receives two (2) points; and

+

(2) Second choice receives one (1) point.

+

(C) The two Shortlisted Bids receiving the highest cumulative scores in the first round shall advance to the second round.

+

(D) In the event of a tie that would result in more than two Shortlisted Bids advancing to the second round, the tie shall be broken by assigning one point per vote, with the Shortlisted Bid(s) receiving the highest number of votes advancing to the second round. If, at this point, the Shortlisted Bids remain tied, a revote shall be taken with each vote receiving one point. If the revote results in a tie, the Participants shall identify areas for further discussion and, following any such discussion, voting shall continue until two Shortlisted Bids are selected to advance to the second round.

+

(iv) Second Round Voting by the Selection Committee.

+

(A) In the second round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii) above, shall vote for one Shortlisted Bid.

+

(B) The Shortlisted Bid receiving the most votes in the second round shall be selected, and the proposed entity included in the Shortlisted Bid to serve as the Plan Processor shall be selected as the Plan Processor.

+

(C) In the event of a tie, a revote shall be taken. If the revote results in a tie, the Participants shall identify areas for further discussions with the two Shortlisted Bidders. Following any such discussions, voting shall continue until one Shortlisted Bid is selected.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE VI FUNCTIONS AND ACTIVITIES OF CAT SYSTEM

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + CAT System, + +
pubdate: January 10, 2018 effdate: N/A +

Section 6.1. Plan Processor.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Plan Processor + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Plan Processor, + Central Repository Requirements, + Advisory Committee, + CAT System, + System Service Level Agreements, + Sec Rule 613, + Operating Committee, + +

(a) The Initial Plan Processor shall be selected in accordance with Article V and shall serve as the Plan Processor until its resignation or removal from such position in accordance with this Section 6.1. The Company, under the direction of the Operating Committee shall enter into one or more agreements with the Plan Processor obligating the Plan Processor to perform the functions and duties contemplated by this Agreement to be performed by the Plan Processor, as well as such other functions and duties the Operating Committee deems necessary or appropriate.

+

(b) The Plan Processor may appoint such officers of the Plan Processor as it deems necessary and appropriate to perform its functions under this Agreement and SEC Rule 613; provided that the Plan Processor shall, at a minimum, appoint, in accordance with Section 6.2: (i) the Chief Compliance Officer; (ii) the Chief Information Security Officer; and (iii) the Independent Auditor. Notwithstanding anything to the contrary, the Operating Committee, by Supermajority Vote, shall approve any appointment or removal of the Chief Compliance Officer, the Chief Information Security Officer, or the Independent Auditor.

+

(c) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement policies, procedures, and control structures related to the CAT System that are consistent with SEC Rule 613(e)(4), Appendix C, and Appendix D.

+

(d) The Plan Processor shall:

+

(i) comply with applicable provisions of 15 U.S.C. § 78u-6 (Securities Whistleblower Incentives and Protection) and the recordkeeping requirements of SEC Rule 613(e)(8);

+

(ii) consistent with Appendix D, Central Repository Requirements, ensure the effective management and operation of the Central Repository;

+

(iii) consistent with Appendix D, Data Management, ensure the accuracy of the consolidation of the CAT Data reported to the Central Repository pursuant to Section 6.3 and Section 6.4; and

+

(iv) consistent with Appendix D, Upgrade Process and Development of New Functionality, design and implement appropriate policies and procedures governing the determination to develop new functionality for the CAT including, among other requirements, a mechanism by which changes can be suggested by Advisory Committee members, Participants, or the SEC. Such policies and procedures also shall: (A) provide for the escalation of reviews of proposed technological changes and upgrades (including as required by Section 6.1(i) and Section 6.1(j) or as otherwise appropriate) to the Operating Committee; and (B) address the handling of surveillance, including coordinated, SEC Rule 17d-2 or Regulatory Service Agreement(s) (“RSA”) surveillance queries and requests for data.

+

(e) Any policy, procedure or standard (and any material modification or amendment thereto) applicable primarily to the performance of the Plan Processor’s duties as the Plan Processor (excluding, for the avoidance of doubt, any policies, procedures or standards generally applicable to the Plan Processor’s operations and employees) shall become effective only upon approval thereof by the Operating Committee.

+

(f) The Plan Processor shall, subject to the prior approval of the Operating Committee, establish appropriate procedures for escalation of matters to the Operating Committee.

+

(g) In addition to other policies, procedures and standards generally applicable to the Plan Processor’s employees and contractors, the Plan Processor shall have hiring standards and shall conduct and enforce background checks (e.g., fingerprint-based) for all of its employees and contractors to ensure the protection, safeguarding and security of the facilities, systems, networks, equipment and data of the CAT System, and shall have an insider and external threat policy to detect, monitor and remedy cyber and other threats. Each Participant will also conduct background checks of its employees and contractors that will use the CAT System.

+

(h) The Plan Processor shall enter into appropriate Service Level Agreements (“SLAs”) governing the performance of the Central Repository, as generally described in Appendix D, Functionality of the CAT System, with the prior approval of the Operating Committee. The Plan Processor in conjunction with the Operating Committee shall regularly review and, as necessary, update the SLAs, in accordance with the terms of the SLAs. As further contemplated in Appendix C, System Service Level Agreements (SLAs), and in Appendix D, System SLAs, the Plan Processor may enter into appropriate service level agreements with third parties applicable to the Plan Processor’s functions related to the CAT System (“Other SLAs”), with the prior approval of the Operating Committee. The Chief Compliance Officer and/or the Independent Auditor shall, in conjunction with the Plan Processor and, as necessary, the Operating Committee, regularly review and, as necessary, update the Other SLAs, in accordance with the terms of the applicable Other SLA.

+

(i) The Plan Processor shall, on an ongoing basis and consistent with any applicable policies and procedures, evaluate and implement potential system changes and upgrades to maintain and improve the normal day-to-day operating function of the CAT System.

+

(j) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis and consistent with any applicable operational and escalation policies and procedures, implement such material system changes and upgrades as may be required to ensure effective functioning of the CAT System (i.e., those system changes and upgrades beyond the scope contemplated by Section 6.1(i)).

+

(k) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis, implement system changes and upgrades to the CAT System to ensure compliance with any applicable laws, regulations or rules (including those promulgated by the SEC or any Participant).

+

(l) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a securities trading policy, as well as necessary procedures, control structures and tools to enforce this policy. The securities trading policy shall include:

+

(i) the category(ies) of employees, and as appropriate, contractors, of the Plan Processor to whom the policy will apply;

+

(ii) the scope of securities that are allowed or not allowed for trading;

+

(iii) the creation and maintenance of restricted trading lists;

+

(iv) a mechanism for declaring new or open account activity;

+

(v) a comprehensive list of any exclusions to the policy (e.g., blind trust, non-discretionary accounts);

+

(vi) requirements for duplicative records to be received by the Plan Processor for periodic review; and

+

(vii) a mechanism to review employee trading accounts.

+

(m) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a training program that addresses the security and confidentiality of all information accessible from the CAT, as well as the operational risks associated with accessing the Central Repository. The training program will be made available to all individuals who have access to the Central Repository on behalf of the Participants or the SEC, prior to such individuals being granted access to the Central Repository.

+

(n) The Operating Committee will review the Plan Processor’s performance under this Agreement at least once each year, or more often than once each year upon the request of two Participants that are not Affiliated Participants. The Operating Committee shall notify the SEC of any determination made by the Operating Committee concerning the continuing engagement of the Plan Processor as a result of the Operating Committee’s review of the Plan Processor and shall provide the SEC with a copy of any reports that may be prepared in connection therewith.

+

(o) The Plan Processor shall provide the Operating Committee regular reports on the CAT System’s operation and maintenance. The reports shall address:

+

(i) operational performance management information regarding the capacity and performance of the CAT System as specified by the Operating Committee. Such reports shall at a minimum address:

+

(A) the capacity and performance of the Central Repository, including at a minimum the requirements set forth in Appendix D, Central Repository Requirements;

+

(B) the basic functionality of the CAT System, including the functions set forth in Appendix D, Functionality of the CAT System.

+

(ii) data security issues for the Plan Processor and the Central Repository taking into account the data security requirements set forth in Appendix D, Data Security;

+

(iii) Participant usage statistics for the Plan Processor and the Central Repository, including capacity planning studies and daily reports called for by Appendix D, Capacity Requirements, as well as business continuity planning and disaster recovery issues for the Plan Processor and the Central Repository, taking into account the business continuity planning and disaster recovery requirements set forth in Appendix D, BCP / DR Process;

+

(iv) system improvement issues with the Plan Processor and the Central Repository as contemplated by Appendix D, Upgrade Process and Development of New Functionality;

+

(v) Error Rates relating to the Central Repository,1 including, in each case to the extent the Operating Committee determines necessary or advisable, Error Rates by day and by delta over time, and Compliance Thresholds by CAT Reporter, by Reportable Event, by age before resolution, by symbol, by symbol type (e.g., ETF and Index) and by event time (by hour and cumulative on the hour) as set forth in Appendix C, Error Communication, Correction, and Processing;

+

(vi) financial statements of the Plan Processor prepared in accordance with GAAP (A) audited by an independent public accounting firm or (B) certified by the Plan Processor’s Chief Financial Officer (which financial statements contemplated by this Section 6.1(o)(vi) shall be provided no later than 180 days after the Plan Processor’s fiscal year end);

+

(vii) continued solvency of the Plan Processor;

+

(viii) budgetary status of any items subject to Section 6.2(a)(ii);

+

(ix) internal audit analysis and the status of any internal audit related deliverables; and

+

(x) additional items as requested by the Operating Committee, any Officer of the Company, or the Independent Auditor.

+

(p) Upon the request of the Operating Committee or any Subcommittee, the Plan Processor shall attend any meeting of the Operating Committee or such Subcommittee.

+

(q) The Operating Committee, by Supermajority Vote, may remove the Plan Processor from such position at any time.

+

(r) The Operating Committee may, by Majority Vote, remove the Plan Processor from such position at any time if it determines that the Plan Processor has failed to perform its functions in a reasonably acceptable manner in accordance with the provisions of this Agreement or that the Plan Processor’s expenses have become excessive and are not justified. In making such determination, the Operating Committee shall consider, among other factors: (i) the reasonableness of the Plan Processor’s response to requests from Participants or the Company for technological changes or enhancements; (ii) results of any assessments performed pursuant to Section 6.6; (iii) the timeliness of conducting preventative and corrective information technology system maintenance for reliable and secure operations; (iv) compliance with requirements of Appendix D; and (v) such other factors related to experience, technological capability, quality and reliability of service, costs, back-up facilities, failure to meet service level agreement(s) and regulatory considerations as the Operating Committee may determine to be appropriate.

+

(s) The Plan Processor may resign from such position; provided that no such resignation shall be effective earlier than two (2) years (or such other shorter period as may be determined by the Operating Committee by Supermajority Vote) after the Plan Processor provides written notice of such resignation to the Company.

+

(t) The Operating Committee, by Supermajority Vote, shall fill any vacancy in the Plan Processor position, and shall establish a Plan Processor Selection Subcommittee in accordance with Section 4.12 to evaluate and review Bids and make a recommendation to the Operating Committee with respect to the selection of the successor Plan Processor. Any successor Plan Processor appointed pursuant to this Section 6.1(t) shall be subject to all the terms and conditions of this Agreement applicable to the Plan Processor commencing from such appointment effective date.

+

(u) The Plan Processor shall afford to Participants and the Commission such access to the Representatives of the Plan Processor as any Participant or the Commission may request solely for the purpose of performing such Person’s regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations or any contractual obligations, and shall direct such Representatives to cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of any Participant or the Commission related to such purpose.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.2. Chief Compliance Officer and Chief Information Security Officer.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Chief Compliance Officer and Chief Information Security Officer + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Plan Processor, + Operating Committee, + Chief Compliance Officer, + Duties of Chief Compliance Officer, + SEC Rule 17d-2, + +

(a) Chief Compliance Officer.

+

(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Compliance Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Compliance Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Compliance Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Compliance Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Compliance Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Compliance Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Compliance Officer if the Chief Compliance Officer’s employment with the Plan Processor terminates or the Chief Compliance Officer is otherwise unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(a)(i) to the SEC.

+

(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Compliance Officer has appropriate resources to fulfill the obligations of the Chief Compliance Officer set forth in SEC Rule 613 and in this Agreement.

+

(iii) In respect of all duties and responsibilities of the Chief Compliance Officer in such capacity (including those set forth in this Agreement), the Chief Compliance Officer shall be directly responsible and shall directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

+

(iv) The compensation (including base salary and bonus) of the Chief Compliance Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Compliance Officer’s annual performance review.

+

(v) The Chief Compliance Officer shall:

+

(A) regularly review the operation of the Central Repository to ensure its continued effectiveness based on market and technological developments and consistent with Appendix D, Upgrade Process and Development of New Functionality, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed;

+

(B) identify and assist the Company in retaining an appropriately qualified independent auditor of national recognition (subject to the approval of the Operating Committee by Supermajority Vote, the “Independent Auditor”) and, in collaboration with such Independent Auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee) which shall at a minimum include a review of all Plan Processor policies, procedures and control structures;

+

(C) in collaboration with the Chief Information Security Officer, and consistent with Appendix D, Data Security, and any other applicable requirements related to data security, Customer Account Information and Customer Identifying Information, identify and assist the Company in retaining an appropriately qualified independent auditor (based on specialized technical expertise, which may be the Independent Auditor or subject to the approval of the Operating Company by Supermajority Vote, another appropriately qualified independent auditor), and in collaboration with such independent auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee), which shall at a minimum include a review of all Plan Processor policies, procedures and control structures, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository;

+

(D) have the ability to hire or retain adequate resources as needed (e.g., advisors and counsel) to fulfill its obligations;

+

(E) perform reviews with respect to the matters referenced in Section 4.12(b) and report periodically, and on an as needed basis, to the Operating Committee concerning the findings of any such reviews;

+

(F) report to the Operating Committee and conduct any relevant review of the Plan Processor or the Central Repository requested by the Operating Committee, including directing internal or external auditors, as appropriate, to support any such review;

+

(G) perform and provide the regular written assessment to the SEC required by Section 6.6 and SEC Rule 613;

+

(H) regularly review the information security program developed and maintained by the Plan Processor pursuant to Section 6.12 and determine the frequency of such reviews;

+

(I) report in a timely manner to the Operating Committee any instances of non-compliance by the Plan Processor with any of the Central Repository’s policies or procedures with respect to information security;

+

(J) conduct regular monitoring of the CAT System for compliance by each Participant and each Industry Member with SEC Rule 613, this Agreement and Appendix D, Reporting and Linkage Requirements, and provide the results: (1) with regard to Industry Members, to each Participant with oversight of such Industry Member or to such Participant’s agent pursuant to a regulatory services agreement, or to the Participant responsible for enforcing compliance by such Industry Member pursuant to an agreement entered into by the applicable Participant pursuant to SEC Rule 17d-2; and (2) with regard to each Participant, to the chief regulatory officer or equivalent of such Participant;

+

(K) develop a mechanism to conduct regular monitoring of the CAT System for compliance by each Participant with SEC Rule 613, this Agreement, and Appendix D, Reporting and Linkage Requirements;

+

(L) develop and implement a notification and escalation process to resolve and remediate any alleged noncompliance by a Participant or Industry Member with the rules of the CAT, which process will include appropriate notification and order of escalation to a Participant, the Operating Committee, or the Commission;

+

(M) develop and conduct an annual assessment of Business Clock synchronization as specified in Section 6.8(c);

+

(N) have access to Plan Processor staff and documentation as appropriate to fulfill its obligations;

+

(O) have access to the Operating Committee, including attending all regular, special and emergency meetings of the Operating Committee as a non-voting observer; provided, however, that the Chief Compliance Officer shall not have the right to attend any Executive Session that the Operating Committee may hold;

+

(P) work on a more regular and frequent basis with the Compliance Subcommittee or other Subcommittee as may be determined by the Operating Committee; and

+

(Q) oversee the Plan Processor’s compliance with applicable laws, rules and regulations related to the CAT System, in its capacity as Plan Processor.

+

(b) Chief Information Security Officer.

+

(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Information Security Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Information Security Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Information Security Officer if the employee then serving as the Chief Information Security Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Information Security Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Information Security Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Information Security Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Information Security Officer if the employee then serving as Chief Information Security Officer becomes unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Information Security Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Information Security Officer if the Chief Information Security Officer’s employment with the Plan Processor terminates or the Chief Information Security Officer is otherwise unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(b)(i) to the SEC.

+

(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Information Security Officer has appropriate resources to fulfill the obligations of the Chief Information Security Officer set forth in SEC Rule 613 and in this Agreement, including providing appropriate responses to questions posed by the Participants and the SEC.

+

(iii) In respect of all duties and responsibilities of the Chief Information Security Officer in such capacity (including those set forth in this Agreement), the Chief Information Security Officer shall be directly responsible and directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

+

(iv) The compensation (including base salary and bonus) of the Chief Information Security Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Information Security Officer’s annual performance review.

+

(v) Consistent with Appendices C and D, the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, and control structures to monitor and address data security issues for the Plan Processor and the Central Repository including:

+

(A) data security, including the standards set forth in Appendix D, Data Security;

+

(B) connectivity and data transfer, including the standards set forth in Appendix D, Connectivity and Data Transfer;

+

(C) data encryption, including the standards set forth in Appendix D, Data Encryption;

+

(D) data storage and environment, including the standards set forth in Appendix D, Data Storage and Environment;

+

(E) data access and breach management, including the standards set forth in Appendix D, Data Access, and Appendix D, Breach Management;

+

(F) PII data requirements, including the standards set forth in Appendix D, PII Data Requirements;

+

(G) industry standards, including the standards set forth in Appendix D, Industry Standards; and

+

(H) penetration test reviews, which shall occur at least every year or earlier, or at the request of the Operating Committee, set forth in Appendix D, Data Storage and Environment.

+

(vi) At regular intervals, to the extent that such information is available to the Company, the Chief Information Security Officer shall report to the Operating Committee the activities of the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) or other comparable body.

+

(vii) The Chief Information Security Officer shall review the information security policies and procedures of the Participants that are related to the CAT to ensure that such policies and procedures are comparable to the information security policies and procedures applicable to the Central Repository. If the Chief Information Security Officer, in consultation with the Chief Compliance Officer, finds that any such policies and procedures are not comparable to the policies and procedures applicable to the CAT System, and the issue is not promptly addressed by the applicable Participant, the Chief Information Security Officer, in consultation with the Chief Compliance Officer, will be required to notify the Operating Committee of such deficiencies.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.3. Data Recording and Reporting by Participants.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Recording and Reporting by Participants + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Format, + Recording, + Reporting, + Applicable Securities, + Participant Data, + CAT-Reporter-ID, + Transmission, + Section 6.3, + +

This Section 6.3 shall become effective on the first anniversary of the Effective Date and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

+

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall report Participant Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

+

(b) Timing of Recording and Reporting.

+

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall record Participant Data contemporaneously with the applicable Reportable Event.

+

(ii) Each Participant shall report Participant Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Participant records such Participant Data. A Participant may voluntarily report Participant Data prior to the 8:00 a.m. Eastern Time deadline.

+

(c) Applicable Securities.

+

(i) Each Participant that is a national securities exchange shall report Participant Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

+

(ii) Each Participant that is a national securities association shall report Participant Data for each Eligible Security for which transaction reports are required to be submitted to such association.

+

(d) Participant Data. Subject to Section 6.3(c), and Appendix D, Reporting and Linkage Requirements, and in accordance with the Technical Specifications, each Participant shall record and electronically report to the Central Repository the following details for each order and each Reportable Event, as applicable (“Participant Data”):

+

(i) for original receipt or origination of an order:

+

(A) Firm Designated ID(s) for each Customer;

+

(B) CAT-Order-ID;

+

(C) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order;

+

(D) date of order receipt or origination;

+

(E) time of order receipt or origination (using timestamps pursuant to Section 6.8); and

+

(F) Material Terms of the Order;

+

(ii) for the routing of an order:

+

(A) CAT-Order-ID;

+

(B) date on which the order is routed;

+

(C) time at which the order is routed (using timestamps pursuant to Section 6.8);

+

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order;

+

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed;

+

(F) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed; and

+

(G) Material Terms of the Order;

+

(iii) for the receipt of an order that has been routed, the following information:

+

(A) CAT-Order-ID;

+

(B) date on which the order is received;

+

(C) time at which the order is received (using timestamps pursuant to Section 6.8);

+

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant receiving the order;

+

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; and

+

(F) Material Terms of the Order;

+

(iv) if the order is modified or cancelled:

+

(A) CAT-Order-ID;

+

(B) date the modification or cancellation is received or originated;

+

(C) time at which the modification or cancellation is received or originated (using timestamps pursuant to Section 6.8);

+

(D) price and remaining size of the order, if modified;

+

(E) other changes in the Material Terms of the Order, if modified; and

+

(F) whether the modification or cancellation instruction was given by the Customer or was initiated by the Industry Member or Participant;

+

(v) if the order is executed, in whole or in part:

+

(A) CAT-Order-ID;

+

(B) date of execution;

+

(C) time of execution (using timestamps pursuant to Section 6.8);

+

(D) execution capacity (principal, agency or riskless principal);

+

(E) execution price and size;

+

(F) SRO-Assigned Market Participant Identifier of the Participant or Industry Member executing the order;

+

(G) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information; and

+

(vi) other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

+

(e) CAT-Reporter-ID.

+

(i) Each Participant must submit to the Central Repository, on a daily basis,

+

(A) all SRO-Assigned Market Participant Identifiers used by its Industry Members or itself; and

+

(B) information to identify (1) each such Industry Member, including CRD number and LEI if such LEI has been obtained, and itself, including LEI, if such LEI has been obtained.

+

(ii) The Plan Processor will use the SRO-Assigned Market Participant Identifiers and identifying information to assign a CAT-Reporter-ID to each Industry Member or Participant for internal use across all CAT Data in the Central Repository.

+

(f) Means of Transmission. As contemplated in Appendix D, each Participant may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Participant Data to the Central Repository.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.4. Data Reporting and Recording by Industry Members.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Reporting and Recording by Industry Members + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Format, + Recording, + Reporting, + Applicable Securities, + Industry Member Data, + Transmission, + Section 6.4, + +

The requirements for Industry Members under this Section 6.4 shall become effective on the second anniversary of the Effective Date in the case of Industry Members other than Small Industry Members, or the third anniversary of the Effective Date in the case of Small Industry Members, and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

+

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall, through its Compliance Rule, require its Industry Members to report Industry Member Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

+

(b) Timing of Recording and Reporting.

+

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to record Recorded Industry Member Data contemporaneously with the applicable Reportable Event.

+

(ii) Consistent with Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to report: (A) Recorded Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member records such Recorded Industry Member Data; and (B) Received Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such Received Industry Member Data. Each Participant shall, through its Compliance Rule, permit its Industry Members to voluntarily report Industry Member Data prior to the applicable 8:00 a.m. Eastern Time deadline.

+

(c) Applicable Securities.

+

(i) Each Participant that is a national securities exchange shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

+

(ii) Each Participant that is a national securities association shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each Eligible Security for which transaction reports are required to be submitted to such association.

+

(d) Required Industry Member Data.

+

(i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and electronically report to the Central Repository for each order and each Reportable Event the information referred to in Section 6.3(d), as applicable (“Recorded Industry Member Data”).

+

(ii) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository the following, as applicable (“Received Industry Member Data” and collectively with the information referred to in Section 6.4(d)(i) “Industry Member Data”):

+

(A) if the order is executed, in whole or in part:

+

(1) An Allocation Report;

+

(2) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and

+

(3) CAT-Order-ID of any contra-side order(s);

+

(B) if the trade is cancelled, a cancelled trade indicator; and

+

(C) for original receipt or origination of an order, the Firm Designated ID for the relevant Customer, and in accordance with Section 6.4(d)(iv), Customer Account Information and Customer Identifying Information for the relevant Customer.

+

(iii) With respect to the reporting obligations of an Options Market Maker with regard to its quotes in Listed Options, Reportable Events required pursuant to Section 6.3(d)(ii) and (iv) shall be reported to the Central Repository by an Options Exchange in lieu of the reporting of such information by the Options Market Maker. Each Participant that is an Options Exchange shall, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, any subsequent quote modifications and/or cancellation time when such modification or cancellation is originated by the Options Market Maker). Such time information also shall be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.

+

(iv) Each Industry Member must submit an initial set of the Customer information required in Section 6.4(d)(ii)(C) for Active Accounts to the Central Repository upon the Industry Member’s commencement of reporting to the Central Repository. Each Industry Member must submit to the Central Repository any updates, additions or other changes to the Customer information required in Section 6.4(d)(ii)(C) on a daily basis for all Active Accounts. In addition, on a periodic basis as designated by the Plan Processor and approved by the Operating Committee, each Industry Member will be required to submit to the Central Repository a complete set of all Customer information required in Section 6.4(d)(ii)(C). The Plan Processor will correlate such Customer information across all Industry Members, use it to assign a Customer-ID for each Customer, and use the Customer-ID to link all Reportable Events associated with an order for a Customer.

+

(v) Each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

+

(vi) Each Industry Member must submit to the Central Repository information sufficient to identify such Industry Member, including CRD number and LEI, if such LEI has been obtained.

+

(e) Means of Transmission. As contemplated in Appendix D, Data Types and Sources, each Industry Member may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Industry Member Data to the Central Repository.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.5. Central Repository.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Central Repository + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Collection, + Retention, + Access, + Accuracy, + Confidentiality, + Confidentiality Policies, + Section 6.1, + +

(a) Collection of Data.

+

(i) The Central Repository, under the oversight of the Plan Processor, and consistent with Appendix D, Central Repository Requirements, shall receive, consolidate, and retain all CAT Data.

+

(ii) The Central Repository shall collect (from a SIP or pursuant to an NMS Plan) and retain on a current and continuing basis, in a format compatible with the Participant Data and Industry Member Data, all data, including the following (collectively, “SIP Data”):

+

(A) information, including the size and quote condition, on quotes including the National Best Bid and National Best Offer for each NMS Security;

+

(B) Last Sale Reports and transaction reports reported pursuant to an effective transaction reporting plan filed with the SEC pursuant to, and meeting the requirements of, SEC Rules 601 and 608;

+

(C) trading halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down indicators; and

+

(D) summary data or reports described in the specifications for each of the SIPs and disseminated by the respective SIP.

+

(b) Retention of Data.

+

(i) Consistent with Appendix D, Data Retention Requirements, the Central Repository shall retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of SEC Rule 613 in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six (6) years. Such data when available to the Participant regulatory staff and the SEC shall be linked.

+

(ii) The Plan Processor shall implement and comply with the records retention policy contemplated by Section 6.1(d)(i) (as such policy is reviewed and updated periodically in accordance with Section 6.1(d)(i)).

+

(c) Access to the Central Repository

+

(i) Consistent with Appendix D, Data Access, the Plan Processor shall provide Participants and the SEC access to the Central Repository (including all systems operated by the Central Repository), and access to and use of the CAT Data stored in the Central Repository, solely for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules and regulations or any contractual obligations.

+

(ii) The Plan Processor shall create and maintain a method of access to CAT Data stored in the Central Repository that includes the ability to run searches and generate reports. The method in which the CAT Data is stored in the Central Repository shall allow the ability to return results of queries that are complex in nature, including market reconstruction and the status of order books at varying time intervals.

+

(iii) The Plan Processor shall, at least annually and at such earlier time promptly following a request by the Operating Committee, certify to the Operating Committee that only Participants and the SEC have access to the Central Repository (other than access provided to any Industry Member for the purpose of correcting CAT Data previously reported to the Central Repository by such Industry Member).

+

(iv) Appendix C, The Security and Confidentiality of Information Reported to the Central Repository, and Appendix D, Data Security, describes the security and confidentiality of the CAT Data, including how access to the Central Repository is controlled.

+

(d) Data Accuracy

+

(i) The Operating Committee shall set and periodically review a maximum Error Rate for data reported to the Central Repository. The initial maximum Error Rate shall be set to 5%.

+

(ii) Consistent with Appendix D, Reporting and Linkage Requirements and Data Security, the Operating Committee shall adopt policies and procedures, including standards, requiring CAT Data reported to the Central Repository be timely, accurate, and complete, and to ensure the integrity of such CAT Data (e.g., that such CAT Data has not been altered and remains reliable). The Plan Processor shall be responsible for implementing such policies and procedures.

+

(iii) Appendix D, Receipt of Data from Reporters, describes the mechanisms and protocols for Participant Data and Industry Member Data submission for all key phases, including:

+

(A) file transmission and receipt validation;

+

(B) validation of CAT Data; and

+

(C) validation of linkages.

+

(e) Appendix D, Receipt of Data from Reporters, also describes the mechanisms and protocols for managing and handling corrections of CAT Data. The Plan Processor shall require an audit trail for corrected CAT Data in accordance with mechanisms and protocols approved by the Operating Committee.

+

(f) Data Confidentiality

+

(i) The Plan Processor shall, without limiting the obligations imposed on Participants by this Agreement and in accordance with the framework set forth in, Appendix D, Data Security, and Functionality of the CAT System, be responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository. Without limiting the foregoing, the Plan Processor shall:

+

(A) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to agree: (1) to use appropriate safeguards to ensure the confidentiality of CAT Data stored in the Central Repository; and (2) not to use CAT Data stored in the Central Repository for purposes other than surveillance and regulation in accordance with such individual’s employment duties; provided that a Participant will be permitted to use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as permitted by applicable law, rule, or regulation;

+

(B) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to execute a personal “Safeguard of Information Affidavit” in a form approved by the Operating Committee providing for personal liability for misuse of data;

+

(C) develop and maintain a comprehensive information security program with a dedicated staff for the Central Repository, consistent with Appendix D, Data Security, that employs state of the art technology, which program will be regularly reviewed by the Chief Compliance Officer and Chief Information Security Officer;

+

(D) implement and maintain a mechanism to confirm the identity of all individuals permitted to access the CAT Data stored in the Central Repository and maintain a record of all instances where such CAT Data was accessed; and

+

(E) implement and maintain appropriate policies regarding limitations on trading activities of its employees and independent contractors involved with all CAT Data consistent with Section 6.1(n).

+

(ii) Each Participant shall adopt and enforce policies and procedures that:

+

(A) implement effective information barriers between such Participant’s regulatory and non-regulatory staff with regard to access and use of CAT Data stored in the Central Repository;

+

(B) permit only persons designated by Participants to have access to the CAT Data stored in the Central Repository; and

+

(C) impose penalties for staff non-compliance with any of its or the Plan Processor’s policies or procedures with respect to information security.

+

(iii) Each Participant shall as promptly as reasonably practicable, and in any event within 24 hours, report to the Chief Compliance Officer, in accordance with the guidance provided by the Operating Committee, any instance of which such Participant becomes aware of: (A) noncompliance with the policies and procedures adopted by such Participant pursuant to Section 6.5(e)(ii); or (B) a breach of the security of the CAT.

+

(iv) The Plan Processor shall:

+

(A) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository and data maintenance by the Central Repository;

+

(B) require the establishment of secure controls for data retrieval and query reports by Participant regulatory staff; and

+

(C) otherwise provide appropriate database security for the Central Repository.

+

(v) The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine.

+

(g) Participants Confidentiality Policies and Procedures. The Participants shall establish, maintain and enforce written policies and procedures reasonably designed to (1) ensure the confidentiality of the CAT Data obtained from the Central Repository; and (2) limit the use of CAT Data obtained from the Central Repository solely for surveillance and regulatory purposes. Each Participant shall periodically review the effectiveness of the policies and procedures required by this paragraph, and take prompt action to remedy deficiencies in such policies and procedures.

+

(h) A Participant may use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as otherwise not prohibited by applicable law, rule or regulation.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.6. Written Assessments, Audits and Reports.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Written Assessments, Audits and Reports + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Written Assessments, + Reports, + Requirement, + Central Repository, + +

(a) One-Time Written Assessments and Reports. The Participants shall provide the SEC with the following written assessments, audits and reports:

+

(i) at least one (1) month prior to submitting a rule filing to establish initial fees for CAT Reporters, an independent audit of fees, costs, and expenses incurred by the Participants on behalf of the Company prior to the Effective Date of the Plan that will be publicly available;

+

(ii) within six (6) months of effectiveness of the Plan, an assessment of the clock synchronization standard, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and propose any appropriate amendment based on this assessment;

+

(iii) within twelve (12) months of effectiveness of the Plan, a report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into 17d-2 agreements or regulatory services agreements);

+

(iv) within 24 months of effectiveness of the Plan, a report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository;

+

(v) within 36 months of effectiveness of the Plan, an assessment of errors in the customer information submitted to the Central Repository and whether to prioritize the correction of certain data fields over others;

+

(vi) within 36 months of effectiveness of the Plan, a report on the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity; and

+

(vii) prior to the implementation of any Material Systems Change, an assessment of the projected impact of such Material Systems Change on the maximum Error Rate.

+

(b) Regular Written Assessment of the Plan Processor’s Performance.

+

(i) Requirement.

+

(A) Annually, or more frequently in connection with any review of the Plan Processor’s performance under this Agreement pursuant to Section 6.1(n), the Participants shall provide the SEC with a written assessment of the operation of the CAT that meets the requirements of SEC Rule 613, Appendix D, and this Agreement.

+

(B) The Chief Compliance Officer shall oversee the assessment contemplated by Section 6.6(b)(i)(A) and shall provide the Participants a reasonable time to review and comment upon such assessment prior to its submission to the SEC. In no case shall the written assessment be changed or amended in response to a comment by a Participant; rather, any comment by a Participant shall be provided to the SEC at the same time as the written assessment.

+

(ii) Contents of Written Assessment. The annual written assessment required by this Section 6.6 shall include:

+

(A) an evaluation of the performance of the CAT, including the items specified in SEC Rule 613(b)(6)(i) and other performance metrics identified by the Chief Compliance Officer, and a description of such metrics;

+

(B) a detailed plan, based on the evaluation conducted pursuant to Section 6.6(b)(i), for any potential improvements to the performance of the CAT with respect to the items specified in SEC Rule 613(b)(6)(ii), as well as:

+

(1) an evaluation of potential technology upgrades based on a review of technological advancements over the preceding year, drawing on technological expertise whether internal or external;

+

(2) an evaluation of the time necessary to restore and recover CAT Data at a back-up site;

+

(3) an evaluation of the information security program to ensure that the program is consistent with the highest industry standards for the protection of data;

+

(4) an evaluation of how the Plan Processor and the Participants are monitoring Error Rates and to explore the imposition of Error Rates based on product, data elements or other criteria;

+

(5) a copy of the evaluation required by Section 6.8(c) as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments;

+

(6) an assessment of whether any data elements should be added, deleted or changed; and

+

(7) any other items identified and described by the Chief Compliance Officer;

+

(C) an estimate of the costs and benefits associated with any potential improvements to the performance of the CAT, including an assessment of the potential impact on competition, efficiency, capital formation, and investor protection; and

+

(D) an estimated implementation timeline for any potential improvements to the performance of the CAT, if applicable.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.7. Implementation.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Implementation + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Effective Date, + Initial Plan Processor, + Section 6.8, + Central Repository Participant Data, + +

(a) Unless otherwise ordered by the SEC:

+

(i) within two (2) months after the Effective Date, the Participants shall jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Article V. Following the selection of the Initial Plan Processor, the Participants shall file with the Commission a statement identifying the Plan Processor and including the information required by SEC Rule 608;

+

(ii) within four (4) months after the Effective Date, each Participant shall, and through its Compliance Rule shall require its Industry Members to, synchronize its or their Business Clocks as required by Section 6.8 and certify to the Chief Compliance Officer (in the case of Participants) or the applicable Participant (in the case of Industry Members) that such Participant has met this requirement;

+

(iii) within one (1) year after the Effective Date, each Participant shall report to the Central Repository Participant Data;

+

(iv) within fourteen (14) months after the Effective Date, each Participant shall implement a new or enhanced surveillance system(s) in accordance with Section 6.10;

+

(v) within two (2) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Industry Members (other than Small Industry Members) to report to the Central Repository Industry Member Data; and

+

(vi) within three (3) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Small Industry Members to report to the Central Repository Industry Member Data.

+

(b) The Chief Compliance Officer shall appropriately document objective milestones to assess progress toward the implementation of this Agreement.

+

(c) Industry Members and Participants shall be required to participate in testing with the Central Repository on a schedule to be determined by the Operating Committee.

+

(d) Appendix C, A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth additional implementation details concerning the elimination of rules and systems.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.8. Timestamps and Synchronization of Business Clocks.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Timestamps and Synchronization of Business Clocks + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Business Clock, + Compliance Rule, + NIST, + Operating Committee, + Sec Rule 613, + +

(a) Each Participant shall:

+

(i) other than such Business Clocks used solely for Manual Order Events, synchronize its Business Clocks at a minimum to within 100 microseconds of the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

+

(ii) other than such Business Clocks used solely for Manual Order Events or the time of allocation on Allocation Reports, through its Compliance Rule, require its Industry Members to:

+

(A) synchronize their respective Business Clocks at a minimum to within fifty (50) milliseconds of the time maintained by the National Institute of Standards and Technology, and maintain such a synchronization;

+

(B) certify periodically (according to a schedule to be defined by the Operating Committee) that their Business Clocks meet the requirements of the Compliance Rule;

+

(C) and report to the Plan Processor and the Participant any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee; and

+

(iii) synchronize its Business Clocks and, through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for Manual Order Events meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for Manual Order Events to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

+

(iv) through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for the time of allocation on Allocation Reports meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for the time of allocation on Allocation Reports to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

+

(b) Each Participant shall, and through its Compliance Rule shall require its Industry Members to, report information required by SEC Rule 613 and this Agreement to the Central Repository in milliseconds. To the extent that any Participant’s order handling or execution systems utilize timestamps in increments finer than the minimum required in this Agreement, such Participant shall utilize such finer increment when reporting CAT Data to the Central Repository so that all Reportable Events reported to the Central Repository can be adequately sequenced. Each Participant shall, through its Compliance Rule: (i) require that, to the extent that its Industry Members utilize timestamps in increments finer than the minimum required in this Agreement in their order handling or execution systems, such Industry Members shall utilize such finer increment when reporting CAT Data to the Central Repository; and (ii) provide that a pattern or practice of reporting events outside of the required clock synchronization time period without reasonable justification or exceptional circumstances may be considered a violation of SEC Rule 613 and the CAT NMS Plan. Notwithstanding the preceding sentences, each Participant and Industry Member shall be permitted to record and report: (i) Manual Order Events to the Central Repository in increments up to and including one second, provided that Participants and Industry Members shall be required to record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Participant or Industry Member (“Electronic Capture Time”) in milliseconds; and (ii) the time of allocation on Allocation Reports in increments up to and including one second.

+

(c) In conjunction with Participants’ and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate and make a recommendation to the Operating Committee as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments. Industry standards should be determined based on the type of CAT Reporter, Industry Member and type of system.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.9. Technical Specifications.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Technical Specifications + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Publication, + Content, + Amendments, + Sec Rule 613, + Operating Committee, + +

(a) Publication. The Plan Processor shall publish technical specifications that are at a minimum consistent with Appendices C and D, and updates thereto as needed, providing detailed instructions regarding the submission of CAT Data by Participants and Industry Members to the Plan Processor for entry into the Central Repository (collectively, the “Technical Specifications”). The Technical Specifications shall be made available on a publicly available web site to be developed and maintained by the Plan Processor. The initial Technical Specifications and any Material Amendments thereto shall be provided to the Operating Committee for approval by Supermajority Vote.

+

(b) Content. The Technical Specifications shall include a detailed description of the following:

+

(i) the specifications for the layout of files and records submitted to the Central Repository;

+

(ii) the process for the release of new data format specification changes;

+

(iii) the process for industry testing for any changes to data format specifications;

+

(iv) the procedures for obtaining feedback about and submitting corrections to information submitted to the Central Repository;

+

(v) each data element, including permitted values, in any type of report submitted to the Central Repository;

+

(vi) any error messages generated by the Plan Processor in the course of validating the data;

+

(vii) the process for file submissions (and re-submissions for corrected files);

+

(viii) the storage and access requirements for all files submitted;

+

(ix) metadata requirements for all files submitted to the CAT System;

+

(x) any required secure network connectivity;

+

(xi) data security standards, which shall, at a minimum: (A) satisfy all applicable regulations regarding database security, including provisions of Regulation Systems Compliance and Integrity under the Exchange Act (“Reg SCI”); (B) to the extent not otherwise provided for under this Agreement (including Appendix C hereto), set forth such provisions as may be necessary or appropriate to comply with SEC Rule 613(e)(4); and (C) comply with industry best practices; and

+

(xii) any other items reasonably deemed appropriate by the Plan Processor and approved by the Operating Committee.

+

(c) Amendments. Amendments to the Technical Specifications may be made only in accordance with this Section 6.9(c). For purposes of this Section 6.9(c), an amendment to the Technical Specifications shall be deemed “material” if it would require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to this Agreement or if it is required to safeguard the security or confidentiality of the CAT Data (“Material Amendment”).

+

(i) Except for Material Amendments to the Technical Specifications, the Plan Processor shall have the sole discretion to amend and publish interpretations regarding the Technical Specifications as needed in furtherance of the purposes and requirements of this Agreement. All non-Material Amendments made to the Technical Specifications and all published interpretations shall be provided to the Operating Committee in writing at least ten (10) days before being published. Such non-Material Amendments and published interpretations shall be deemed approved ten (10) days following provision to the Operating Committee unless two (2) unaffiliated Participants call for a vote to be taken on the proposed amendment or interpretation. If an amendment or interpretation is called out for a vote by two or more unaffiliated Participants, the proposed amendment must be approved by Majority Vote of the Operating Committee. Once a non-Material amendment has been approved, or deemed approved, by the Operating Committee, the Plan Processor shall be responsible for determining the specific changes to the Central Repository and providing technical documentation of those changes, including an implementation timeline.

+

(ii) The Operating Committee, by Supermajority Vote, shall approve any Material Amendments to the Technical Specifications.

+

(iii) The Operating Committee, by Supermajority Vote, may amend the Technical Specifications on its own motion.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.10. Surveillance.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Surveillance + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Surveillance System, + Coordinated Surveillance, + CAT Data, + +

(a) Surveillance Systems. Using the tools provided for in Appendix D, Functionality of the CAT System, each Participant shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the Central Repository. Unless otherwise ordered by the SEC, within fourteen (14) months after the Effective Date, each Participant shall initially implement a new or enhanced surveillance system(s) as required by SEC Rule 613 and the preceding sentence.

+

(b) Coordinated Surveillance. Participants may, but are not required to, coordinate or share surveillance efforts through the use of regulatory services agreements and agreements adopted pursuant to SEC Rule 17d-2.

+

(c) Use of CAT Data by Regulators.

+

(i) Consistent with Appendix D, Functionality of the CAT System, the Plan Processor shall provide Participants and the SEC with access to all CAT Data stored in the Central Repository. Regulators will have access to processed CAT Data through two different methods; an online targeted query tool, and user-defined direct queries and bulk extracts.

+

(A) The online targeted query tool will provide authorized users with the ability to retrieve CAT Data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields.

+

(B) The user-defined direct queries and bulk extracts will provide authorized users with the ability to retrieve CAT Data via a query tool or language that allows users to query all available attributes and data sources.

+

(ii) Extraction of CAT Data shall be consistent with all permission rights granted by the Plan Processor. All CAT Data returned shall be encrypted, and PII data shall be masked unless users have permission to view the CAT Data that has been requested.

+

(iii) The Plan Processor shall implement an automated mechanism to monitor direct query usage. Such monitoring shall include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or CAT Data extractions. The Plan Processor shall provide the Operating Committee or its designee(s) details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

+

(iv) The Plan Processor shall reasonably assist regulatory staff (including those of Participants) with creating queries.

+

(v) Without limiting the manner in which regulatory staff (including those of Participants) may submit queries, the Plan Processor shall submit queries on behalf of a regulatory staff (including those of Participants) as reasonably requested.

+

(vi) The Plan Processor shall staff a CAT help desk, as described in Appendix D, CAT Help Desk, to provide technical expertise to assist regulatory staff (including those of Participants) with questions about the content and structure of the CAT Data.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.11. Debt Securities and Primary Market Transactions.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Debt Securities and Primary Market Transactions + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Market Transactions, + Reportable Event, + NMS Securities, + +

Unless otherwise ordered by the Commission, within six (6) months after the Effective Date, the Participants shall jointly provide to the SEC a document outlining how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including Primary Market Transactions in securities that are not NMS Securities or OTC Equity Securities and in debt securities, which document shall include details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 6.12. Information Security Program.

+ Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Information Security Program + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Plan Processor, + Central Repository, + +

The Plan Processor shall develop and maintain a comprehensive information security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee, and which contains at a minimum the specific requirements detailed in Appendix D, Data Security.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE VII INTENTIONALLY OMITTED

+ Topic: CAT NMS Plan, Article VII - Intentionally Omitted + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: +
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE VIII TAX STATUS

+ Topic: CAT NMS Plan, Article VIII - Tax Status + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Internal Revenue Service, + Form 1024, + Business League, + Section 501, + +

The Company intends to operate in a manner such that it qualifies as a “business league” within the meaning of Section 501(c)(6) of the Code. The Operating Committee shall cause the Company to: (i) make an election to be treated as a corporation for U.S. federal income tax purposes by filing Form 8832 with the Internal Revenue Service effective as of the date of formation and (ii) file with the Internal Revenue Service, Form 1024, Application for Recognition of Exemption under Section 501(a) to be treated as a “business league” as described in Section 501(c)(6) of the Code.

+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE IX RECORDS AND ACCOUNTING; REPORTS

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Accounting Records, + +
pubdate: January 10, 2018 effdate: N/A +

Section 9.1. Books and Records.

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Books and Records + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Records, + Company Books, + Ownership of Records, + SEC Rule 17a-1, + CAT NMS plan, + Operating Committee, + +

The Company shall maintain complete and accurate books and records of the Company in accordance with SEC Rule 17a-1, which shall be maintained and be available, in addition to any documents and information required to be furnished to the Participants under the Act, at the office of the Plan Processor and/or such other location(s) as may be designated by the Company for examination and copying by any Participant or its duly authorized representative, at such Participant’s reasonable request and at its expense during ordinary business hours for any purpose reasonably related to such Participant’s involvement with the CAT NMS Plan, including for compliance and other regulatory purposes, and in compliance with such other conditions as may be reasonably established by the Operating Committee. For the avoidance of doubt, all CAT Data and other books and records of the Company shall be the property of the Company, rather than the Plan Processor, and, to the extent in the possession or control of the Plan Processor, shall be made available by the Plan Processor to the Commission upon request. Except as provided in this Section 9.1 or required by non-waivable provisions of applicable law, no Participant shall have any right to examine or copy any of the books and records of the Company.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 9.2. Accounting.

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Accounting + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + GAAP, + Financial Statement, + Fiscal year, + +

(a) Except as provided in Section 9.3, the Operating Committee shall maintain a system of accounting established and administered in accordance with GAAP, and all financial statements or information that may be supplied to the Participants shall be prepared in accordance with GAAP (except that unaudited statements shall be subject to year-end adjustments and need not include footnotes). The Company shall prepare and provide to each Participant (1) within 30 days after the end of each calendar month, an unaudited balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, (x) such month and (y) the portion of the then current Fiscal Year ending at the end of such month; and (2) as soon as practicable after the end of each Fiscal Year, a balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, such year, audited by an independent public accounting firm (which audited balance sheet, income statement, statement of cash flows and statement of changes in equity contemplated by this Section 9.2(a) shall be made publicly available). The Fiscal Year shall be the calendar year unless otherwise determined by the Operating Committee.

+

(b) In all other respects, matters concerning accounting procedures shall be determined by the Operating Committee.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 9.3. Tax Returns.

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Tax Returns + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Tax returns, + +

The Operating Committee shall cause federal, state, provincial, and local income tax returns for the Company to be prepared and timely filed with the appropriate authorities.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 9.4. Company Funds.

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Company Funds + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Funds, + Investment Policy, + +

Pending use in the business of the Company or distribution to the Participants, the funds of the Company shall be held and/or invested in accordance with the then effective cash management and investment policy adopted by the Operating Committee.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 9.5 Intentionally Omitted.

+ Topic: N/A + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: +
+
pubdate: January 10, 2018 effdate: N/A +

Section 9.6. Confidentiality.

+ Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Confidentiality + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + CAT System, + Disclosing Party, + Receiving Party, + +

(a) For purposes of this Agreement, “Information” means information disclosed by or on behalf of the Company or a Participant (the “Disclosing Party”) to the Company or any other Participant (the “Receiving Party”) in connection with this Agreement or the CAT System, but excludes any CAT Data or information otherwise disclosed pursuant to the requirements of SEC Rule 613. The Receiving Party agrees to maintain the Information in confidence with the same degree of care it holds its own confidential information (but in any event not less than reasonable care). A Receiving Party may only disclose Information to its Representatives (as defined below) on a need-to-know basis, and only to those of such Representatives whom shall have agreed to abide by the non-disclosure and non-use provisions in this Section 9.6. Each Receiving Party that is a Participant agrees that he, she or it shall not use for any purpose, other than in connection with the operation of the Company, and the Company agrees not to use for any purpose not expressly authorized by the Disclosing Party, any Information. The “Representatives” of a Person are such Person’s Affiliates and the respective directors, managers, officers, employees, consultants, advisors and agents of such Person and such Person’s Affiliates; provided, however, that a Participant is not a Representative of the Company. The obligations set forth in this Section 9.6(a) shall survive indefinitely (including after a Participant ceases to hold any Company Interest) but shall not apply to: (i) any Information that was already lawfully in the Receiving Party’s possession and, to the knowledge of the Receiving Party, free from any confidentiality obligation to the Disclosing Party at the time of receipt from the Disclosing Party; (ii) any Information that is, now or in the future, public knowledge through no act or omission in breach of this Agreement by the Receiving Party; (iii) any Information that was lawfully obtained from a third party having, to the knowledge of the Receiving Party, the right to disclose it free from any obligation of confidentiality; or (iv) any Information that was independently developed by the Receiving Party prior to disclosure to it pursuant hereto and without recourse to or reliance upon Information disclosed to it pursuant hereto as established by its written records or other competent evidence. The obligations set forth in this Section 9.6(a) shall not restrict: (x) disclosures that are, in the opinion of the Receiving Party after consultation with counsel; required to be made by applicable laws and regulations, stock market or exchange requirements or the rules of any self-regulatory organization having jurisdiction; (y) disclosures required to be made pursuant to an order, subpoena or legal process; or (z) disclosures reasonably necessary for the conduct of any litigation or arbitral proceeding among the Participants (and their respective Representatives) and/or the Company; provided that the Receiving Party shall, to the extent not prohibited by applicable law, notify the Disclosing Party prior to making any disclosure permitted by the foregoing clause (x) or clause (y), and, in the case of a disclosure permitted by the foregoing clause (y), shall consult with the Disclosing Party with respect to such disclosure, and prior to making such disclosure, to the extent not prohibited by applicable law, shall permit the Disclosing Party, at such Disclosing Party’s cost and expense, to seek a protective order or similar relief protecting the confidentiality of such Information.

+

(b) The Company shall not, and shall cause its Representatives not to, disclose any Information of a Participant to any other Participant without the prior written approval of the disclosing Participant.

+

(c) A Participant shall be free, in its own discretion, to share Information of such Participant to other Participants without the approval of the Company.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE X DISSOLUTION AND TERMINATION

+ Topic: CAT NMS Plan, Article X - Dissolution and Termination + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Dissolution, + +
pubdate: January 10, 2018 effdate: N/A +

Section 10.1. Dissolution of Company.

+ Topic: CAT NMS Plan, Article X - Dissolution and Termination, Dissolution + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Dissolution, + Winding-up, + +

The Company shall, subject to the SEC’s approval, dissolve and its assets and business shall be wound up upon the occurrence of any of the following events:

+

(a) unanimous written consent of the Participants to dissolve the Company;

+

(b) an event that makes it unlawful or impossible for the Company business to be continued;

+

(c) the termination of one or more Participants such that there is only one remaining Participant; or

+

(d) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 10.2. Liquidation and Distribution.

+ Topic: CAT NMS Plan, Article X - Dissolution and Termination, Liquidation and Distribution + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Winding-up, + Liquidation, + Assets, + Liabilities, + Obligations, + +

Following the occurrence of an event described in Section 10.1, the Operating Committee shall act as liquidating trustee and shall wind up the affairs of the Company by: (a) selling its assets in an orderly manner (so as to avoid the loss normally associated with forced sales); and (b) applying and distributing the proceeds of such sale, together with other funds held by the Company: (i) first, to the payment of all debts and liabilities of the Company; (ii) second, to the establishments of any reserves reasonably necessary to provide for any contingent recourse liabilities and obligations; and (iii) third, to such persons or institutions as is consistent with the purposes of the Company and consistent with Section 501(c)(6) of the Code.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 10.3. Termination.

+ Topic: CAT NMS Plan, Article X - Dissolution and Termination, Termination + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Cessation of Participants, + Section 10.2, + +

Each of the Participants shall be furnished with a statement prepared by the Company’s independent accountants, which shall set forth the assets and liabilities of the Company as of the date of the final distribution of the Company’s assets under Section 10.2 and the net profit or net loss for the fiscal period ending on such date. Upon compliance with the distribution plan set forth in Section 10.2, the Participants shall cease to be such, and the liquidating trustee shall execute, acknowledge, and cause to be filed a certificate of cancellation of the Company. Upon completion of the dissolution, winding up, liquidation and distribution of the liquidation proceeds, the Company shall terminate.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE XI FUNDING OF THE COMPANY

+ Topic: CAT NMS Plan, Article XI - Funding of the Company + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Funding, + +
pubdate: January 10, 2018 effdate: N/A +

Section 11.1. Funding Authority.

+ Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Authority + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Budget, + Funding, + Operating Committee, + Consolidated Audit Trail Funding Fees, + Industry Members, + +

(a) On an annual basis the Operating Committee shall approve an operating budget for the Company. The budget shall include the projected costs of the Company, including the costs of developing and operating the CAT for the upcoming year, and the sources of all revenues to cover such costs, as well as the funding of any reserve that the Operating Committee reasonably deems appropriate for prudent operation of the Company.

+

(b) Subject to Section 11.2, the Operating Committee shall have discretion to establish funding for the Company, including: (i) establishing fees that the Participants shall pay; and (ii) establishing fees for Industry Members that shall be implemented by Participants. The Participants shall file with the SEC under Section 19(b) of the Exchange Act any such fees on Industry Members that the Operating Committee approves, and such fees shall be labeled as “Consolidated Audit Trail Funding Fees.”

+

(c) To fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. In determining fees on Participants and Industry Members the Operating Committee shall take into account fees, costs and expenses (including legal and consulting fees and expenses) incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT, and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members. Any surplus of the Company’s revenues over its expenses shall be treated as an operational reserve to offset future fees.

+

(d) Consistent with this Article XI, the Operating Committee shall adopt policies, procedures, and practices regarding the budget and budgeting process, assignment of tiers, resolution of disputes, billing and collection of fees, and other related matters. For the avoidance of doubt, as part of its regular review of fees for the CAT, the Operating Committee shall have the right to change the tier assigned to any particular Person in accordance with fee schedules previously filed with the Commission that are reasonable, equitable and not unfairly discriminatory and subject to public notice and comment, pursuant to this Article XI. Any such changes will be effective upon reasonable notice to such Person.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 11.2. Funding Principles.

+ Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Principles + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Principles, + CAT Reporters, + +

In establishing the funding of the Company, the Operating Committee shall seek:

+

(a) to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company;

+

(b) to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations;

+

(c) to establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members’ non-ATS activities are based upon message traffic; and (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).

+

(d) to provide for ease of billing and other administrative functions;

+

(e) to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and

+

(f) to build financial stability to support the Company as a going concern.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 11.3. Recovery.

+ Topic: CAT NMS Plan, Article XI - Funding of the Company, Recovery + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Execution Venue, + Fees, + +

(a) The Operating Committee will establish fixed fees to be payable by Execution Venues as provided in this Section 11.3(a):

+

(i) Each Execution Venue that: (A) executes transactions; or (B) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association’s market share.

+

(ii) Each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s Listed Options market share. For these purposes, market share will be calculated by contract volume.

+

(b) The Operating Committee will establish fixed fees to be payable by Industry Members, based on the message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers of fixed fees, based on message traffic. For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member.

+

(c) The Operating Committee may establish any other fees ancillary to the operation of the CAT that it reasonably determines appropriate, including fees: (i) for the late or inaccurate reporting of information to the CAT; (ii) for correcting submitted information; and (iii) based on access and use of the CAT for regulatory and oversight purposes (and not including any reporting obligations).

+

(d) The Company shall make publicly available a schedule of effective fees and charges adopted pursuant to this Agreement as in effect from time to time. The Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 11.4. Collection of Fees.

+ Topic: CAT NMS Plan, Article XI - Funding of the Company, Collection of Fees + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + Fees, + Failure to pay, + +

The Operating Committee shall establish a system for the collection of fees authorized under this Article XI. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. Alternatively, the Operating Committee may use the facilities of a clearing agency registered under Section 17A of the Exchange Act to provide for the collection of such fees. Participants shall require each Industry Member to pay all applicable fees authorized under this Article XI within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due (as determined in accordance with the preceding sentence), such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (a) the Prime Rate plus 300 basis points; or (b) the maximum rate permitted by applicable law. Each Participant shall pay all applicable fees authorized under this Article XI as required by Section 3.7(b).

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 11.5. Fee Disputes.

+ Topic: CAT NMS Plan, Article XI - Funding of the Company, Fee Disputes + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Operating Committee, + SEC Rule 608, + +

Disputes with respect to fees the Company charges Participants pursuant to this Article XI shall be determined by the Operating Committee or a Subcommittee designated by the Operating Committee. Decisions by the Operating Committee or such designated Subcommittee on such matters shall be binding on Participants, without prejudice to the rights of any Participant to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum. The Participants shall adopt rules requiring that disputes with respect to fees charged to Industry Members pursuant to this Article XI be determined by the Operating Committee or a Subcommittee. Decisions by the Operating Committee or Subcommittee on such matters shall be binding on Industry Members, without prejudice to the rights of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

+
+
+
pubdate: January 10, 2018 effdate: N/A +

ARTICLE XII MISCELLANEOUS

+ Topic: CAT NMS Plan, Article XII - Miscellaneous + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Industry Members, + Participants, + +
pubdate: January 10, 2018 effdate: N/A +

Section 12.1. Notices and Addresses.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Notices and Addresses + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Written Notices,, + Delivery, + Effectivity, + +

All notices required to be given under this Agreement shall be in writing and may be delivered by certified or registered mail, postage prepaid, by hand, or by any private overnight courier service. Such notices shall be mailed or delivered to the Participants at the addresses set forth on Exhibit A to this Agreement or such other address as a Participant may notify the other Participants of in writing. Any notices to be sent to the Company shall be delivered to the principal place of business of the Company or at such other address as the Operating Committee may specify in a notice sent to all of the Participants. Notices shall be effective: (i) if mailed, on the date three (3) days after the date of mailing; or (ii) if hand delivered or delivered by private courier, on the date of delivery.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.2. Governing Law; Submission to Jurisdiction.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Governing Law; Submission to Jurisdiction + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Delaware Act, + Jurisdiction, + Rights of Participants, + Exchange Act, + Delaware Act, + +

This Agreement shall be governed by and construed in accordance with the Delaware Act and internal laws and decisions of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware; provided that the rights and obligations of the Participants, Industry Members and other Persons contracting with the Company in respect of the matters covered by this Agreement shall at all times also be subject to any applicable provisions of the Exchange Act and any rules and regulations promulgated thereunder. Each of the Company and the Participants: (a) consents to submit itself to the exclusive personal jurisdiction of the Court of Chancery of the State of Delaware, New Castle County, or, if that court does not have jurisdiction, a federal court sitting in Wilmington, Delaware in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement; (b) agrees that all claims in respect of such action or proceeding shall be heard and determined only in any such court; (c) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or any of the transaction contemplated by this Agreement in any other court. Each of the Company and the Participants waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Person with respect thereto. The Company or any Participant may make service on the Company or any other Participant by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 12.1. Nothing in this Section 12.2, however, shall affect the right of any Person to serve legal process in any other manner permitted by law.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.3. Amendments.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Amendments + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Written Amendment, + Vote, + SEC Rule 608, + +

Except as provided by Section 3.3, Section 3.4, Section 3.7, and Section 5.3, this Agreement may be amended from time to time only by a written amendment authorized by the affirmative vote of not less than two-thirds of all of the Participants or with respect to Section 3.8 by the affirmative vote of all of the Participants, in each case that has been approved by the SEC pursuant to SEC Rule 608 or has otherwise become effective under SEC Rule 608. Notwithstanding the foregoing or anything else to the contrary, to the extent the SEC grants exemptive relief applicable to any provision of this Agreement, Participants and Industry Members shall be entitled to comply with such provision pursuant to the terms of the exemptive relief so granted at the time such relief is granted irrespective of whether this Agreement has been amended.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.4. Successors and Assigns.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Successors and Assigns + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Transfer of Interest, + +

Subject to the restrictions on Transfers set forth herein, this Agreement: (a) shall be binding upon, and inure to the benefit of, the Company and the Participants, and their respective successors and permitted assigns; and (b) may not be assigned except in connection with a Transfer of Company Interests permitted hereunder.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.5. Counterparts.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Counterparts + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Agreement, + Transmission, + +

This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. Any counterpart may be delivered by facsimile transmission or by electronic communication in portable document format (.pdf) or tagged image format (.tif), and the parties hereto agree that their electronically transmitted signatures shall have the same effect as manually transmitted signatures.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.6. Modifications to be in Writing; Waivers.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Modifications to be in Writing; Waivers + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Waivers, + +

This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, and no amendment, modification or alteration shall be binding unless the same is in writing and adopted in accordance with Section 12.3. No waiver of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Person granting the waiver. No waiver by any Person of any default or breach hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default or breach or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.7. Captions.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Captions + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Caption, + +

The captions are inserted for convenience of reference only and shall not affect the construction of this Agreement.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.8. Validity and Severability.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Validity and Severability + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Effectivity, + Enforceability, + +

If any provision of this Agreement shall be held invalid or unenforceable, that shall not affect the validity or enforceability of any other provisions of this Agreement, all of which shall remain in full force and effect. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, each of the Company and the Participants agrees that the body making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.9. Third Party Beneficiaries.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Third Party Beneficiaries + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Creditor, + Section 12.9, + Participants, + +

Except to the extent provided in any separate written agreement between the Company and another Person, the provisions of this Agreement are not intended to be for the benefit of any creditor or other Person (other than a Participant in its capacity as such) to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Company or any Participants. Moreover, notwithstanding anything contained in this Agreement (but subject to the immediately following sentence), no such creditor or other Person shall obtain any rights under this Agreement or shall, by reason of this Agreement, make any claim in respect of any debt, liability or obligation (or otherwise) against the Company or any Participant. Notwithstanding the foregoing provisions of this Section 12.9, each Person entitled to indemnification under Section 4.8 that is not a party to this Agreement shall be deemed to be an express third party beneficiary of this Agreement for all purposes relating to such Person’s indemnification and exculpation rights hereunder.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.10. Expenses.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Expenses + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Article XI, + Operating Committee, + +

Except as may be otherwise specifically provided to the contrary in this Agreement, including in Article XI, or as may be otherwise determined by the Operating Committee, each of the Company and the Participants shall bear its own internal costs and expenses incurred in connection with this Agreement, including those incurred in connection with all periodic meetings of the Participants or the Operating Committee, and the transactions contemplated hereby.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.11. Specific Performance.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Specific Performance + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Breach, + Court Action, + +

Each of the Company and the Participants acknowledges and agrees that one or more of them would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each such Person agrees that each other such Person may be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having jurisdiction over the Parties and the matter, in each case with no need to post bond or other security.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.12. Waiver of Partition.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Waiver of Partition + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Properties, + Partition, + Appraisal, + +

Each Participant agrees that irreparable damage would be done to the Company if any Participant brought an action in court to partition the assets or properties of the Company. Accordingly, each Participant agrees that such Person shall not, either directly or indirectly, take any action to require partition or appraisal of the Company or of any of the assets or properties of the Company, and notwithstanding any provisions of this Agreement to the contrary, each Participant (and such Participant’s successors and permitted assigns) accepts the provisions of this Agreement as such Person’s sole entitlement on termination, dissolution and/or liquidation of the Company and hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale or other liquidation with respect to such Person’s interest, in or with respect to, any assets or properties of the Company. Each Participant agrees not to petition a court for the dissolution, termination or liquidation of the Company.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.13. Construction.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Construction + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Interpretation, + Participants, + +

The Company and all Participants have participated jointly in negotiating and drafting this Agreement. If an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Company and all Participants, and no presumption or burden of proof shall arise favoring or disfavoring any Person by virtue of the authorship of any provision of this Agreement.

+
+
pubdate: January 10, 2018 effdate: N/A +

Section 12.14. Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules.

+ Topic: CAT NMS Plan, Article XII - Miscellaneous, Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Exhibits, + Appendices, + Attachments, + Recitals, + Schedules, + +

The Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

+
+
+

[SIGNATURE PAGE FOLLOWS]

+

IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

+

PARTICIPANTS:

+

BATS BZX EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

BATS BYX EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

BOX OPTIONS EXCHANGE LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

C2 OPTIONS EXCHANGE, INCORPORATED

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

CHICAGO STOCK EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

BATS EDGA EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

BATS EDGX EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

ISE GEMINI, LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

ISE MERCURY, LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

INTERNATIONAL SECURITIES EXCHANGE, LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

INVESTORS’ EXCHANGE, LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

MIAMI INTERNATIONAL SECURITIES EXCHANGE LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

MIAX PEARL, LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NASDAQ BX, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NASDAQ PHLX LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

THE NASDAQ STOCK MARKET LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NATIONAL STOCK EXCHANGE, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NEW YORK STOCK EXCHANGE LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NYSE MKT LLC

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

NYSE ARCA, INC.

+

By: ______________________________

+

Name: ____________________________

+

Title: _____________________________

+

EXHIBIT A

+

PARTICIPANTS IN CAT NMS, LLC

+ +
pubdate: January 10, 2018 effdate: N/A +

APPENDIX A

+ Topic: CAT NMS Plan, Appendix A + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Request for Proposal, + +

Consolidated Audit Trail National Market System Plan Request for Proposal, issued February 26, 2013, version 3.0 updated March 3, 2014

+

(The Request for Proposal is available at Securities Exchange Act Release No. 77724 (CAT NMS Plan published for comment on May 17, 2016))

+

Certain provisions of Articles I-XII have been modified as noted on the cover page of this CAT NMS Plan. To the extent text in the following Appendices conflicts with any such modifications, the modified language of Articles I-XII shall control

+
+
pubdate: January 10, 2018 effdate: N/A +

APPENDIX B

+ Topic: CAT NMS Plan, Appendix B + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: +

[Reserved]

+
+
pubdate: January 10, 2018 effdate: N/A +

APPENDIX C

+ Topic: CAT NMS Plan, Appendix C + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + Features, + Consideration, + Background, + Reporting, + Sec Rule 613, + Sources of Data, + Submission, + Analysis, + Implementation, + Objective, + Process, + Reporting, + +

DISCUSSION OF CONSIDERATIONS

+

SEC Rule 613(a)(1) CONSIDERATIONS

+

SEC Rule 613(a) requires the Participants to discuss various “considerations” related to how the Participants propose to implement the requirements of the CAT NMS Plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.2 This Appendix C discusses the considerations identified in SEC Rule 613(a). The first section below provides a background of the process the Participants have undertaken to develop and draft the CAT NMS Plan. Section A below addresses the requirements, set forth in SEC Rule 613(a)(1)(i) through (a)(1)(vi), that the “Participants specify and explain the choices they made to meet the requirements specified in [SEC Rule 613] for the [CAT].”3 In many instances, details of the requirements (i.e., the specific technical requirements that the Plan Processor must meet) will be set forth in the Plan Processor Requirements document (“PPR”). Relevant portions of the PPR are outlined and described throughout this Appendix C, as well as included as Appendix D.

+

Section B below discusses the requirements in SEC Rule 613(a)(1)(vii) and SEC Rule 613(a)(1)(viii) that the CAT NMS Plan include detailed estimates of the costs, and the impact on competition, efficiency, and capital formation, for creating, implementing, and maintaining the CAT. The information in Section B below is intended to aid the Commission in its economic analysis of the CAT and the CAT NMS Plan.4

+

Section C below, in accordance with SEC Rule 613(a)(1)(x), establishes objective milestones to assess the Participants’ progress toward the implementation of the CAT in accordance with the CAT NMS Plan. This section includes a plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the CAT, as required by SEC Rule 613(a)(1)(ix).

+

Section D below addresses how the Participants solicited the input of their Industry Members and other appropriate parties in designing the CAT NMS Plan as required by SEC Rule 613(a)(1)(xi).

+

Capitalized terms used and not otherwise defined in this Appendix C have the respective meanings ascribed to such terms in the Agreement to which this Appendix C is attached.

+

BACKGROUND

+

SEC Rule 613 requires the Participants to jointly file a national market system plan to govern the creation, implementation, and maintenance of the CAT, and the Central Repository. Early in the process, the Participants concluded that the publication of a request for proposal soliciting Bids from interested parties to serve as the Plan Processor for the CAT was necessary prior to filing the CAT NMS Plan to ensure that potential alternative solutions to creating the CAT could be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis could be performed, both of which are required considerations to be addressed in the CAT NMS Plan. To that end, the Participants published the RFP on February 26, 2013,5 and 31 firms formally notified the Participants of their intent to bid.

+

On September 3, 2013, the Participants filed with the Commission the Selection Plan, a national market system plan to govern the process for Participant review of the Bids submitted in response to the RFP, the procedure for evaluating the Bids, and, ultimately, selection of the Plan Processor. Several critical components of the Participants’ process for formulating and drafting the CAT NMS Plan were contingent upon approval of the Selection Plan, which occurred on February 21, 2014.6 Bids in response to the RFP were due four weeks following approval of the Selection Plan, on March 21, 2014. Ten Bids were submitted in response to the RFP.

+

The Participants considered each Bid in great detail to ensure that the Participants can address the considerations enumerated in SEC Rule 613, including analysis of the costs and benefits of the proposed solution(s), as well as alternative solutions considered but not proposed, so that the Commission and the public will have sufficiently detailed information to carefully consider all aspects of the CAT NMS Plan the Participants ultimately submit. Soon after receiving the Bids, and pursuant to the Selection Plan, the Participants determined that all ten Bids were “qualified” pursuant to the Selection Plan.7 On July 1, 2014, after the Participants had hosted Bidder presentations to learn additional details regarding the Bids and conducted an analysis and comparison of the Bids, the Participants voted to select six Shortlisted Bidders.

+

Under the terms of the Selection Plan, and as incorporated into the CAT NMS Plan, the Plan Processor for the CAT has not been selected and will not be selected until after approval of the CAT NMS Plan.8 Any one of the six remaining Shortlisted Bidders could be selected as the Plan Processor, and because each Shortlisted Bidder has proposed different approaches to various issues, the CAT NMS Plan does not generally mandate specific technical approaches; rather, it mandates specific requirements that the Plan Processor must meet, regardless of approach. Where possible, this Appendix C discusses specific technical requirements the Participants have deemed necessary for the CAT; however, in some instances, provided the Plan Processor meets certain general obligations, the specific approach taken in implementing aspects of the CAT NMS Plan will be dependent upon the Bidder ultimately selected as the Plan Processor.

+

SEC Rule 613 also includes provisions to facilitate input on the implementation, operation, and administration of the Central Repository from the broker-dealer industry.9 To this end, the Participants formed a Development Advisory Group (“DAG”) to solicit industry feedback. Following multiple discussions between the Participants and both the DAG and the Bidders, as well as among the Participants themselves, the Participants recognized that some provisions of SEC Rule 613 would not permit certain solutions to be included in the CAT NMS Plan that the Participants determined advisable to effectuate the most efficient and cost-effective CAT. Consequently, the Participants submitted their original Exemptive Request Letter seeking exemptive relief from the Commission with respect to certain provisions of SEC Rule 613 regarding (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking of executions to specific subaccount allocations on allocation reports; and (5) timestamp granularity for Manual Order Events.10 Specifically, the Participants requested that the Commission grant an exemption from:

+

Rule 613(c)(7)(ii) and (iv) for options market makers with regard to their options quotes.

+

Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B) and (c)(8) which relate to the requirements for Customer-IDs.11

+

Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E), (c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F), (c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-Reporter-IDs.

+

Rule 613(c)(7)(vi)(A), which requires CAT Reporters to record and report the account number of any subaccounts to which the execution is allocated.

+

• The millisecond timestamp granularity requirement in Rule 613(d)(3) for certain Manual Order Events subject to timestamp reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).

+

The Participants supplemented their original Exemptive Request Letter with a supplemental Exemptive Request Letter (together, the “Exemptive Request Letters”), clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).12 The Participants believe that the requested relief is critical to the development of a cost-effective approach to the CAT.

+

The Participants also will seek to comply with their obligations related to the CAT under Reg SCI as efficiently as possible. When it adopted Reg SCI, the Commission expressed its belief that the CAT “will be an SCI system of each SCI SRO that is a member of an approved NMS plan under Rule 613, because it will be a facility of each SCI SRO that is a member of such plan.”13 The Participants intend to work together and with the Plan Processor, in consultation with the Commission, to determine a way to effectively and efficiently meet the requirements of Reg SCI without unnecessarily duplicating efforts.

+

A. Features and Details of the CAT NMS Plan

+

1. Reporting Data to the CAT

+

As required by SEC Rule 613(a)(1)(i), this section describes the reporting of data to the Central Repository, including the sources of such data and the manner in which the Central Repository will receive, extract, transform, load, and retain such data. As a general matter, the data reported to the Central Repository is of two distinct types: (1) reference data (e.g., data concerning CAT Reporters and customer information, issue symbology information, and data from the SIPs); and (2) order and trade data submitted by CAT Reporters, including national securities exchanges, national securities associations and broker-dealers. Each of these types of data is discussed separately below.

+

(a) Sources of Data

+

In general, data will be reported to the Central Repository by national securities exchanges, national securities associations, broker-dealers, the SIPs for the CQS, CTA, UTP and Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information(“OPRA”) Plans, and certain other vendors or appropriate third parties (“Data Submitters”).14 Specifically, in accordance with SEC Rule 613(c)(5) and Sections 6.3 and 6.4 of the CAT NMS Plan, each national securities exchange and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileged on such exchange (subject to relief pursuant to the Exemptive Request Letters).15 Similarly, in accordance with SEC Rule 613(c)(6), each national securities association and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security for which transaction reports are required to be submitted to the association (subject to relief pursuant to the Exemptive Request Letters). Additionally, the Participants, in consultation with the DAG and with industry support, have determined to include OTC Equity Securities in the initial phase-in of the CAT; thus, CAT Reporters must also include order and trade information regarding orders for OTC Equity Securities in addition to those involving NMS Securities.16

+

In addition to order and execution data, SEC Rule 613 requires Industry Members to report customer information, including Customer-IDs, to the CAT so that order and execution data can be associated with particular Customers. However, in the Exemptive Request Letters, the Participants request relief that would permit CAT Reporters to provide information to the Central Repository using Firm Designated IDs instead of Customer-IDs. In addition, Industry Members are permitted to use Data Submitters that are not national securities exchanges, national securities associations, or members thereof to report the required data to the Central Repository on their behalf. The approach proposed in the Exemptive Request Letters also would permit Data Submitters to provide information to the Central Repository using Firm Designated ID for purposes of reporting information to the CAT.

+

The Central Repository also is required to collect National Best Bid and National Best Offer information, transaction reports reported to an effective transaction reporting plan filed with the SEC pursuant to SEC Rule 601, and Last Sale Reports reported pursuant to the OPRA Plan.17 Consequently, the Plan Processor must receive information from the SIPs for those plans and incorporate that information into the CAT. Lastly, as set forth in Appendix D, the Plan Processor must maintain a complete symbology database, including historical symbology. CAT Reporters will submit data to the CAT with the listing exchange symbology format, and the CAT must use the listing exchange symbology format in the display of linked data. The Participants will be responsible for providing the Plan Processor with issue symbol information, and issue symbol validation must be included in the processing of data submitted by CAT Reporters.

+

After reviewing the Bids and receiving industry input, the Participants do not believe there is a need to dictate that the Plan Processor adopt a particular format for the submission of data to the Central Repository. Rather, regardless of the format(s) adopted, the CAT must be able to monitor incoming and outgoing data feeds and be capable of performing the following functions:

+

• Support daily files from each CAT Reporter;

+

• Support files that cover multiple days (for re-transmission);

+

• Support error correction files;

+

• Capture operational logs of transmissions, success, failure reasons, etc.; and

+

• Support real-time and batch feeds.

+

The Plan Processor will be required to ensure that each CAT Reporter is able to access its submissions for error correction purposes and transmit their data to the Central Repository on a daily basis. The Plan Processer must have a robust file management tool that is commercially available, including key management. In addition, at a minimum, the Plan Processor must be able to accept data from CAT Reporters and other Data Submitters via automated means (e.g., Secure File Transfer Protocol (“SFTP”)) as well as manual entry means (e.g., GUI interface).

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The Plan Processor will be required to ensure that all file processing stages are handled correctly. This will include the start and stop of data reception, the recovery of data that is transmitted, the retransmission of data from CAT Reporters, and the resynchronization of data after any data loss. At a minimum, this will require the Plan Processor to have logic that identifies duplication of files. If transmission is interrupted, the Plan Processor must specify:

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• data recovery process for partial submissions;

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• operational logs/reporting;

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• operational controls for receipt of data; and

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• managing/handling failures.

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The Plan Processor is required to establish a method for developing an audit trail of data submitted to and received by the Central Repository. This must include a validation of files to identify file corruption and incomplete transmissions. As discussed more fully below, an acknowledgement of data receipt and information on rejected data must be transmitted to CAT Reporters.

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(i) Data Submission for Orders and Reportable Events, including Manual Submission

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Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to provide details for each order and each Reportable Event to the Central Repository.18 In the RFP, the Participants requested that the Bidders describe the following:

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• system interfaces, including data submission, data access and user interfaces;19

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• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);20

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• the process and associated protocols for accepting batch submissions; 21 and

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• the process and any associated protocols for supporting manual data submissions.22

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(ii) The Timing of Reporting Data

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Pursuant to SEC Rule 613(c)(3), Sections 6.3 and 6.4 of the CAT NMS Plan require that CAT Reporters report certain order and transaction information recorded pursuant to SEC Rule 613 or the CAT NMS Plan to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day such information is recorded.23 SEC Rule 613(c)(3) notes, however, that the CAT NMS Plan “may accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not impose an earlier deadline on the reporting parties.” Sections 6.3 and 6.4 of the CAT NMS Plan explicitly permit, but do not require, CAT Reporters to submit information to the CAT throughout the day. Because of the amount of data that will ultimately be reported to the CAT, the Participants have decided to permit Data Submitters to report data to the CAT as end of day files (submitted by 8:00 a.m. Eastern Time the following Trading Day) or throughout the day. The Participants believe that permitting Data Submitters to report data throughout the day may reduce the total amount of bandwidth used by the Plan Processor to receive data files and will allow CAT Reporters and other Data Submitters to determine which method is most efficient and cost-effective for them. However, the Plan Processor will still be required to have the capacity to handle two times the historical peak daily volume to ensure that, if CAT Reporters choose to submit data on an end-of-day basis, the Plan Processor can handle the influx of data.24

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(iii) Customer and Customer Account Information

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In addition to the submission of order and trade data, broker-dealer CAT Reporters must also submit customer information to the CAT so that the order and trade data can be matched to the specific customer.25 SEC Rule 613(c)(7) sets forth data recording and reporting requirements that must be included in the CAT NMS Plan. Under SEC Rule 613(c)(7)(i)(A), the CAT NMS Plan must require each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting to the CAT order receipt or origination information.26 When reporting the modification or cancellation of an order, the rule further requires the reporting of “the Customer-ID of the Person giving the modification or cancellation instruction.”27 In addition, SEC Rule 613(c)(8) mandates that all CAT Reporters “use the same Customer-ID . . . for each customer and broker-dealer.”28 For purposes of SEC Rule 613, “Customer-ID” means, “with respect to a customer, a code that uniquely identifies such customer for purposes of providing data to the central repository.”29 Also, SEC Rule 613(c)(7)(viii) requires that, for original receipt or origination of an order, CAT Reporters report “customer account information,” which is defined as including “account number, account type, customer type, date account opened, and large trader identifier (if applicable).”30

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After considering the requirements of SEC Rule 613 with respect to recording and reporting Customer-IDs, Customer Account Information, and information of sufficient detail to identify the Customer as well as industry input and the Commission’s reasons for adopting these requirements, the Participants requested that Industry Members and other industry participants provide ideas on implementing the Customer-ID requirement. After careful consideration, including numerous discussions with the DAG, the Participants concluded that the CAT NMS Plan should use a reporting model that requires broker-dealers to provide detailed account and Customer information to the Central Repository, including the specific identities of all Customers associated with each account, and have the Central Repository correlate the Customer information across broker-dealers, assign a unique customer identifier to each Customer (i.e., the Customer-ID), and use that unique customer identifier consistently across all CAT Data (hereinafter, the “Customer Information Approach”).

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Under the Customer Information Approach, the CAT NMS Plan would require each broker-dealer to assign a unique Firm Designated ID to each customer, as that term is defined in SEC Rule 613. For the Firm Designated ID, broker-dealers would be permitted to use an account number or any other identifier defined by the firm, provided each identifier is unique across the firm for each business date (i.e., a single firm may not have multiple separate customers with the same identifier on any given date). Under the Customer Information Approach, broker-dealers must submit an initial set of customer information to the Central Repository, including, as applicable, the Firm Designated ID for the customer, name, address, date of birth, Individual Tax ID (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney) and Legal Entity Identifier (“LEI”),31 and/or Large Trader ID (“LTID”), if applicable.32 Under the Customer Information Approach, broker-dealers would be required to submit to the Central Repository daily updates for reactivated accounts, newly established or revised Firm Designated IDs, or associated reportable Customer information.33

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Within the Central Repository, each Customer would be uniquely identified by identifiers or a combination of identifiers such as TIN/SSN, date of birth, and, as applicable, LEI and LTID. The Plan Processor would be required to use these unique identifiers to map orders to specific customers across all broker-dealers. Broker-dealers would therefore be required to report only Firm Designated ID information on each new order submitted to the Central Repository rather than the “Customer-ID” as set forth in SEC Rule 613(c)(7), and the Plan Processor would associate specific customers and their Customer-IDs with individual order events based on the reported Firm Designated ID.

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The Customer-ID approach is strongly supported by the industry as it believes that to do otherwise would interfere with existing business practices and risk leaking proprietary order and customer information into the market.34 To adopt such an approach, however, requires certain exemptions from the requirements of SEC Rule 613. Therefore, the Participants included the Customer Information Approach in the Exemptive Request Letters so that this approach could be included in the CAT NMS Plan.

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In addition to the approach described above, the CAT NMS Plan details a number of requirements which the Plan Processor must meet regarding Customer and Customer Account Information.

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The Plan Processor must maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The Plan Processor must document and publish, with the approval of the Operating Committee, the minimum list of attributes to be captured to maintain this association.

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The CAT Processor must maintain valid Customer and Customer Account Information for each Trading Day and provide a method for Participants and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes).

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The CAT Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information.

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The Plan Processor must be able to link accounts that move from one CAT Reporter to another due to mergers and acquisitions, divestitures, and other events. Under the approach proposed by the Participants, broker-dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis.35 In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database.

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In the RFP, the Participants asked for a description of how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each Customer.36 All Bidders anticipated Customer and Customer Account Information to be captured in an initial download of data. The precise method(s) by which CAT Reporters submit Customer data to the Central Repository will be set out in the Technical Specifications provided by the Plan Processor in accordance with Section 6.9 of the CAT NMS Plan. Data capture would occur using both file-based and entry screen methods. Data validation would check for potential duplicates with error messages being generated for follow-up by CAT Reporters. Data Reporters can update data as needed or on a predetermined schedule.

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(iv) Error Reporting

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SEC Rule 613(e)(6) requires the prompt correction of errors in data submitted to the Central Repository. As discussed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, initial validation, lifecycle linkages, and communications of errors to CAT Reporters will be required to occur by 12:00 p.m. Eastern Time T+1 and corrected data will be required to be resubmitted to the Central Repository by 8:00 a.m. Eastern Time on T+3. Each of the Bidders indicated that it was able to meet these timeframes.

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However, the industry expressed concern that reducing the error repair window will constitute a significant burden to Data Submitters and also question whether the proposed error correction timeframe is possible.37 Financial Information Forum (“FIF”) supports maintaining the current OATS Error Handling timelines, which allows for error correction within five OATS business days from the date of original submission.38 Securities Industry and Financial Markets Association (“SIFMA”) also recommends a five-day window for error correction.39 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible and recommend the three-day window for corrections to balance the need for regulators to access corrected data in a timely manner while considering the industry’s concerns.

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(b) The Manner in which the Central Repository will Receive, Extract, Transform, Load, and Retain Data

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The Central Repository must receive, extract, transform, load, and retain the data submitted by CAT Reporters and other Data Submitters. In addition, the Plan Processor is responsible for ensuring that the CAT contains all versions of data submitted by a CAT Reporter or other Data Submitter (i.e., the Central Repository must include different versions of the same information, including such things as errors and corrected data).40

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In the RFP, the Participants requested that each Bidder perform a detailed analysis of current industry systems and interface specifications to propose and develop their own format for collecting data from the various data sources relevant under SEC Rule 613, as outlined in the RFP. Bidders also were requested to perform an analysis on their ability to develop, test and integrate this interface with the CAT.41 In addition, the Participants sought input from the industry regarding different data submission mechanisms and whether there needs to be a method to allow broker-dealers with very small order volumes to submit their data in a non-automated manner.42

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As noted above, since the Central Repository is required to collect and transform customer, order and trade information from multiple sources, the RFP requested that Bidders describe:

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• how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each customer;43

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• the system interfaces, including data submission, data access and user interfaces;44

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• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);45

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• the process and associated protocols for accepting batch submissions;46 and

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• the process and any associated protocols for supporting manual data submissions.47

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Various Bidders proposed multiple methods by which Data Reporters could report information to the Central Repository. Bidders proposed secure VPN, direct line access through TCP/IP or at co-location centers, and web-based manual data entry.

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The RFP also requested that Bidders describe:

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• the overall technical architecture;48 and

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• the network architecture and describe how the solution will handle the necessary throughput, processing timeline and resubmissions.49

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There are two general approaches by which the Central Repository could receive information. Approach 1 described a scenario in which broker-dealers would submit relevant data to the Central Repository using their choice of existing industry messaging protocols, such as the Financial Information eXchange (“FIX”) protocol. Approach 2 provided a scenario in which broker-dealers would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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Following receipt of data files, the Plan Processor will be required to send an acknowledgement of data received to CAT Reporters and third party Data Submitters. This acknowledgement will enable CAT Reporters to create an audit trail of their data submissions and allow for tracing of data breakdowns if data is not received. The minimum requirements for receipt acknowledgement are detailed in Appendix D, Receipt of Data from Reporters.

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Once the Central Repository has received the data from the CAT Reporters, it will extract individual records from the data, and validate the data through a review process that must be described in the Technical Specifications involving context, syntax, and matching validations. The Plan Processor will need to validate data and report back to any CAT Reporter any data that has not passed validation checks according to the requirements in Appendix D, Receipt of Data from Reporters. To ensure the accuracy and integrity of the data in the Central Repository, data that does not pass the basic validation checks performed by the Plan Processor must be rejected until it has been corrected by the CAT Reporter responsible for submitting the data/file. After the Plan Processor has processed the data, it must provide daily statistics regarding the number of records accepted and rejected to each CAT Reporter.

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The Plan Processor also will be required to capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format, and the rejections and daily statistics must also be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend records that contain exceptions. The Plan Processor must also support bulk error correction so that rejected records can be resubmitted as a new file with appropriate indicators for rejection repairs. The Plan Processor must, in these instances, reprocess repaired records. In addition, a web GUI must be available for CAT Reporters to make updates, including corrections, to individual records or attributes. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

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The Plan Processor must provide CAT Reporters with documentation that details how to amend/upload records that fail the required validations, and if a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can be repaired and resubmitted.50 In order for regulators to have access to accurate and complete data as expeditiously as practicable, the Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics must be provided after data has been uploaded and validated. The reports will include descriptive details as to why each data record was rejected by the Plan Processor.

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In addition, on a monthly basis, the Plan Processor should produce and publish reports detailing CAT Reporter performance and comparison statistics, similar to the report cards published for OATS presently. These reports should include data to enable CAT Reporters to assess their performance in comparison to the rest of their industry peers and to help them assess the risk related to their reporting of transmitted data.

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CAT Reporters will report data to the Central Repository either in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format, for consolidation and storage. The Technical Specifications will describe the required format for data reported to the Central Repository. Results of a study conducted of broker-dealers showed average implementation and maintenance costs for use of a new file format to be lower than those for use of an existing file format (e.g., FIX)51, although an FIF “Response to Proposed RFP Concepts Document” dated January 18, 2013 did indicate a preference among its members for use of the FIX protocol.

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As noted above, the specific formats of data submission and loading will depend upon the Bidder chosen as the Plan Processor. Regardless of the ultimate Plan Processor, however, data submitted to the CAT will be loaded into the Central Repository in accordance with procedures that are subject to approval by the Operating Committee.52 The Central Repository will retain data, including the Raw Data, linked data, and corrected data, for at least six years. Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the Data Submitter (e.g., whether the Data Submitter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

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SEC Rule 613 reflects the fact that the Participants can choose from alternative methods to link order information to create an order lifecycle from origination or receipt to cancellation or execution.53 After review of the Bids and discussions with Industry Members, the CAT NMS Plan reflects the fact that the Participants have determined that the “daisy chain” approach to CAT-Order-ID that requires linking of order events rather than the repeated transmission of an order ID throughout an order’s lifecycle is appropriate. This approach is widely supported by the industry, and using the daisy chain approach should minimize impact on existing OATS reporters, since OATS already uses this type of linking.54 The RFP asked Bidders to propose any additional alternatives to order lifecycle creation; however, all of the Bidders indicated that they would use the daisy chain approach to link order events.55

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In the daisy chain approach, a series of unique order identifiers assigned by CAT Reporters to individual order events are linked together by the CAT and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order. Under this approach, each CAT Reporter generates its own unique order ID but can pass a different identifier as the order is routed to another CAT Reporter, and the CAT will link related order events from all CAT Reporters involved in the life of the order.56

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The Participants believe that the daisy chain approach can handle anticipated order handling scenarios, including aggregation and disaggregation, and generally apply to both equities and options. The Participants created a subcommittee of DAG members and Participants to walk through multiple complex order-handling scenarios to ensure that the daisy chain approach can handle even the most complex of order handling methods.57

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Additionally, the daisy chain approach can handle representative order reporting scenarios58 and order handling scenarios sometimes referred to as “complex orders” that are specific to options and may include an equity component and multiple option components (e.g., buy-write, straddle, strangle, ratio spread, butterfly and qualified contingent transactions). Typically, these orders are referenced by exchange systems on a net credit/debit basis, which can cover between two and twelve different components. Such “complex orders” must also be handled and referenced within the CAT. The Bidder must develop, in close consultation with Industry Members, a linking mechanism that will allow the CAT to link the option leg(s) to the related equity leg or the individual options components to each other in a multi-leg strategy scenario.

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Once a lifecycle is assembled by the CAT, individual lifecycle events must be stored so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, and routed through multiple broker-dealers before being sent to the exchange for execution.

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The Plan Processor must transform and load the data in a way that provides the Participants with the ability to build and generate targeted queries against data in the Central Repository across product classes submitted to the Central Repository. The Participants’ regulatory staff and the SEC must be able to create, adjust, and save ad-hoc queries to provide data to the regulators that can then be used for their market surveillance purposes. All data fields may be included in the result set from targeted queries. Because of the size of the Central Repository and its use by multiple parties simultaneously, online queries will require a minimum set of criteria, including data or time range as well as one or more of the parameters specified in Appendix D, Functionality of the CAT System.59

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Because of the potential size of the possible result sets, the Plan Processor must have functionality to create an intermediate result count of records before running the full query so that the query can be refined if warranted. The Plan Processor must include a notification process that informs users when reports are available, and there should be multiple methods by which query results can be obtained (e.g., web download, batch feed). Regulatory staff also must have the ability to create interim tables for access / further investigation. In addition, the Plan Processor must provide a way to limit the number of rows from a result set on screen with full results being created as a file to be delivered via a file transfer protocol.

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The Plan Processor will be reasonably required to work with the regulatory staff at the Participants and other regulators60 to design report generation screens that will allow them to request on-demand pre-determined report queries. These would be standard queries that would enable regulators quick access to frequently-used information and could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader reporting.

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The Central Repository must, at a minimum, be able to support approximately 3,000 active users, including Participants’ regulatory staff and the SEC, authorized to access data representing market activity (excluding the PII associated with customers and accounts).61

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2. Time and Method by which CAT Data will be Available to Regulators (SEC Rule 613(a)(1)(ii))

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SEC Rule 613(a)(1)(ii) requires the Participants to discuss the “time and method by which the data in the Central Repository will be made available to regulators to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities.”62 As the Commission noted, “[t]he time and method by which data will be available to regulators are fundamental to the utility of the Central Repository because the purpose of the repository is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.”63

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(a) Time Data will be Made Available to Regulators

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At any point after data is received by the Central Repository and passes basic format validations, it will be available to the Participants and the SEC. The Plan Processor must ensure that regulators have access to corrected and linked order and Customer data by 8:00 a.m. Eastern Time on T+5.

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As noted above, SEC Rule 613(e)(6) requires the prompt correction of data reported to the Central Repository, and the Participants believe that the timeframes established in Appendix D, Data Availability, meet this requirement. Additionally, each of the Bidders indicated that it would be able to process the reported data within these timeframes. However, the FIF, an industry trade group, expressed concern that the error repair window will constitute a significant burden to CAT Reporters and questioned whether the error repair window “can be reasonably met.”64 FIF supports maintaining the current OATS Error Handling timelines, which allow for error correction within five OATS-business days from the date of original submission.65 SIFMA also recommends a five-day window for error correction.66 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible, and therefore the Participants do not support adopting the five-day repair window permitted under OATS, but instead are providing a three-day repair window for the Central Repository.67

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(b) Method by which Data will be Available to Regulators

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As required by SEC Rule 613(a)(1)(ii), this section describes the ability of regulators to use data stored in the Central Repository for investigations, examinations and surveillance, including the ability to search and extract such data.68 The utility of the Central Repository is dependent on regulators being able to have access to data for use in market reconstruction, market analysis, surveillance and investigations.69 The Participants anticipate that the Plan Processor will adopt policies and procedures with respect to the handling of surveillance (including coordinated, SEC Rule 17d-2 or RSA surveillance) queries and requests for data. In the RFP, the Participants asked that the Bidders describe:

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• the tools and reports that would allow for the extraction of data search criteria;70

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• how the system will accommodate simultaneous users from Participants and the SEC submitting queries;71

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• the expected response time for query results, the manner in which simultaneous queries will be managed and the maximum number of concurrent queries and users that can be supported by the system;72

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• the format in which the results of targeted queries will be provided to users;73

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• the methods of data delivery that would be made available to Participant regulatory staff and the Commission;74

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• any limitations on the size of data that can be delivered at one time, such as number of days or number of terabytes;75 and

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• how simultaneous bulk data requests will be managed to ensure fair and equitable access.76

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All Bidders provide means for off-line analysis77 and dynamic search and extraction. The Bids described a variety of tools that could be used for providing access and reports to the Participants and the SEC, including: Oracle Business Intelligence Experience Edition, SAS Enterprises Business Intelligence, and IBM Cognos. The Bids proposed data access via direct access portals and via web-based applications. In addition, the Bids proposed various options for addressing concurrent users and ensuring fair access to the data, including: processing queries on a first in, first out (FIFO) basis; monitoring to determine if any particular user is using more systems resources than others and prioritizing other users’ queries; or evaluating each users’ demands on the systems over a predetermined timeframe and, if there is an imbalance, working with users to provide more resources needed to operate the system more efficiently.

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The Bids included a multitude of options for formatting the data provided to regulators in response to their queries, including but not limited to FIX, Excel, Binary, SAS data sets, PDF, XML, XBRL, CSV, and .TXT. Some Bidders would provide Participants and the SEC with a “sandbox” in which the user could store data and upload its own analytical tools and software to analyze the data within the Central Repository, in lieu of performing off-line analyses.

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The Participants anticipate that they will be able to utilize Central Repository data to enhance their existing regulatory schemes. The Participants do not endorse any particular technology or approach, but rather set forth standards which the Plan Processor must meet. By doing so, the Participants are seeking to maximize the utility of the data from the Central Repository without burdening the Plan Processor to comply with specific format or application requirements which will need to be updated over time. In addition, the Participants wanted to ensure that the Bidders have the ability to put forth the ideas they believe are the most effective.

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(c) Report Building – Analysis Related to Usage of Data by Regulators

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It is anticipated that the Central Repository will provide regulators with the ability to, for example, more efficiently conduct investigations, examinations, conduct market analyses, and to inform policy-making decisions. The Participants’ regulatory staff and the SEC will frequently need to be able to perform queries on large amounts of data. The Plan Processor must provide the Participants and other regulators the access to build and generate targeted queries against data in the Central Repository. The Plan Processor must provide the regulatory staff at the Participants and regulators with the ability to create, adjust, and save any ad-hoc queries they run for their surveillance purposes via online or direct access to the Central Repository.78 Queries will require a minimum set of criteria that are detailed in Appendix D.79 The Plan Processor will have controls to manage load, cancel queries, if needed, and create a request process for complex queries to be run.80 The Plan Processor must have a notification process to inform users when reports are available, provide such reports in multiple formats, and have the ability to schedule when queries are run.81

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In addition, the Plan Processor will be required to reasonably work with the regulatory staff at the Participants and other regulators to design report generation screens that will allow them to request on-demand pre-determined report queries.82 These would be standard queries that would enable regulators quick access to frequently-used information. This could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader.83

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The Plan Processor should meet the following response times for different query types. For targeted search criteria, the minimum acceptable response times would be measured in time increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time should generally be available within 24 hours of the submission of the request.

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The Central Repository will support a permission mechanism to assign data access rights to all users so that CAT Reporters will only have access to their own reported data, the regulatory staff at the Participants and other regulators will have access to data; except for PII.84 Regulators that are authorized to access PII will be required to complete additional authentications. The Central Repository will be able to provide access to the data at the working locations of both the Participants’ and SEC’s regulatory staff as well as other non-office locations. The Central Repository must be built with operational controls to control access to make requests and to track data requests to support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated.

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In addition to targeted analysis of data from the Central Repository, regulators will also need access to bulk data for analysis. The Participants and other regulators will need the ability to do bulk extraction and download of data, based on a specified date or time range, market, security, and Customer-ID. The size of the resulting data set may require the ability to feed data from the Central Repository into analytical “alert” programs designed to detect potentially illegal activity.85 “For example, the Commission is likely to use data from the Central Repository to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform Participant and SEC rulemaking.”86

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The Plan Processor must provide for bulk extraction and download of data in industry standard formats. In addition, the Plan Processor is required to generate data sets based on market event data to the Participants and other regulators. The Central Repository must provide the ability to define the logic, frequency, format, and distribution method of the data. It must be built with operational controls to track data requests to oversee the bulk usage environment and support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated. Extracted data should be encrypted, and PII data should be masked unless users have permission to view the data that has been requested.

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The Plan Processor must have the capability and capacity to provide bulk data necessary for the Participants and the other regulators to run and operate their surveillance processing. Such data requests can be very large; therefore, the Plan Processor must have the ability to split large requests into smaller data sets for data processing and handling. All reports should be generated by a configurable workload manager that is cost based, while also ensuring that no single user is using a disproportionate amount of resources for query generation.

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(d) System Service Level Agreements (SLAs)

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As further described in Appendix D, Functionality of CAT Systems, the Participants and the Plan Processor will enter into appropriate SLAs in order to establish system and operational performance requirements for the Plan Processor and help ensure timely Regulator access to Central Repository data. Among the items to be included in the SLA(s) will be specific requirements regarding query performance, linkage and order event processing performance of the Central Repository (e.g., linkage and data availability timelines, linkage errors not related to invalid data, and data retention) as well as system availability requirements (e.g., system uptime and DR/BCP performance). The Operating Committee will periodically review the SLAs according to the terms to be established in negotiation with the Plan Processor.

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3. The Reliability and Accuracy of the Data (SEC Rule 613(a)(1)(iii))

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As required by SEC Rule 613(a)(1)(iii), this section discusses the reliability and accuracy of the data reported to and maintained by the Central Repository throughout its lifecycle, including: transmission and receipt from CAT Reporters; data extraction, transformation and loading at the Central Repository; data maintenance at the Central Repository; and data access by the Participants and other regulators. In the Adopting Release, the Commission noted that the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate and as such, the Commission requested that the Participants discuss in detail how the Central Repository will be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained in it.87

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(a) Transmission, Receipt, and Transformation

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The initial step in ensuring the reliability and accuracy of data in the Central Repository is the validation checks made by the Plan Processor when data is received and before it is accepted into the Central Repository. In the RFP, the Participants stated that validations must include checks to ensure that data is submitted in the required formats and that lifecycle events can be accurately linked by 12:00 p.m. Eastern Time on T+1, four hours following the submission deadline for CAT Reporters.88 Once errors are identified, they must be efficiently and effectively communicated to CAT Reporters on a daily basis. CAT Reporters will be required to correct and resubmit identified errors within established timeframes (as discussed in Appendix D, Data Availability).

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The Plan Processor must develop specific data validations in conjunction with development of the Central Repository which must be published in the Technical Specifications. The objective of the data validation process is to ensure that data is accurate, timely and complete at or near the time of submission, rather than to identify submission errors at a later time after data has been processed and made available to regulators. To achieve this objective, a comprehensive set of data validations must be developed that addresses both data quality and completeness. For any data that fails to pass these validations, the Plan Processor will be required to handle data correction and resubmission within established timeframes both in a batch process format and via manual web-based entry.

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To assess different validation mechanisms and integrity checks, the RFP required Bidders to provide information on the following:

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• how data format and context validations for order and quote events submitted by CAT Reporters will be performed and how rejections or errors will be communicated to CAT Reporters;89

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• a system flow diagram reflecting the overall data format, syntax and context validation process that includes when each types of validation will be completed and errors communicated to CAT Reporters, highlighting any dependencies between the different validations and impacts of such dependencies on providing errors back to CAT Reporters;90

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• how related order lifecycle events submitted by separate CAT Reporters will be linked and how unlinked events will be identified and communicated to CAT Reporters for correction and resubmission, including a description of how unlinked records will be provided to CAT Reporters for correction (e.g., specific transmission methods and/or web-based downloads);91

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• how Customer and Customer Account Information submitted by broker-dealers will be validated and how rejections or errors will be communicated to CAT Reporters;92 and

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• the mechanisms that will be provided to CAT Reporters for the correction of both market data (e.g., order, quotes, and trades) errors, and Customer and account data errors, including batch resubmissions and manual web-based submissions.93

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Most Bidders indicated that Customer Account Information including SSN, TIN or LEI will be validated in the initial onboarding processing. Additional validation of Customer Account Information, such as full name, street address, etc., would occur across CAT Reporters and potential duplications or other errors would be flagged for follow-up by the CAT Reporters.

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All Bidders recommended that order data validation be performed via rules engines, which allow rules to be created and modified over time in order to meet future market data needs. Additionally, all Bidders indicated that data validations will be real-time and begin in the data ingestion component of the system. Standard data validation techniques include format checks, data type checks, consistency checks, limit and logic checks, or data validity checks. Some Bidders mentioned the ability to schedule the data validation at a time other than submission, because there may be a need to have rules engines perform validation in a batch mode or customized schedule during a different time. All Bidders indicated that when errors are found, the Raw Data will be stored in an error database and notifications would be sent to the CAT Reporters. Most Bidders permitted error correction to be submitted by CAT Reporters at any time.

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Section 6.3(b) of the CAT NMS Plan sets forth the policies and procedures for ensuring the timeliness, accuracy and completeness of the data provided to the Central Repository as required by SEC Rule 613(e)(4)(ii) and the accuracy of the data consolidated by the Plan Processor pursuant to SEC Rule 613(e)(4)(iii).94 It also mandates that each Participant and its Industry Members that are CAT Reporters must ensure that its data reported to the Central Repository is accurate, timely, and complete. Each Participant and its Industry Members that are CAT Reporters must correct and resubmit such errors within established timeframes. In furtherance thereof, data related to a particular order will be reported accurately and sequenced from receipt or origination, to routing, modification, cancellation and/or execution. Additionally each Participant and its Industry Members that are CAT Reporters must test their reporting systems thoroughly before beginning to report data to the Central Repository and Appendix D sets forth that the Plan Processor must make testing facilities available for such testing.

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Pursuant to SEC Rule 613(e)(4)(iii), the Plan Processor will design, implement and maintain (1) data accuracy and reliability controls for data reported to the Central Repository and (2) procedures for testing data accuracy and reliability during any system release or upgrade affecting the Central Repository and the CAT Reporters.95 The Operating Committee will, as needed, but at least annually, review policies and procedures to ensure the timeliness, accuracy, and completeness of data reported to the Central Repository.

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In order to validate data receipt, the Plan Processor will be required to send an acknowledgement to each CAT Reporter notifying them of receipt of data submitted to the Central Repository to enable CAT Reporters to create an audit trail of their own submissions and allow for tracking of data breakdowns when data is not received. The data received by the Plan Processor must be validated at both the file and individual record level if appropriate. The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. Records that do not pass basic validations, such as syntax rejections, will be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit the data.

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(b) Error Communication, Correction, and Processing

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The Plan Processor will define and design a process to efficiently and effectively communicate to CAT Reporters identified errors. All identified errors will be reported back to the CAT Reporter and other Data Submitters who submitted the data to the Central Repository on behalf of the CAT Reporter, if necessary. The Central Repository must be able to receive error corrections and process them at any time, including timeframes after the standard repair window. The industry supports a continuous validation process for the Central Repository, continuous feedback to CAT Reporters on error identification and the ability to provide error correction at any time even if beyond the error correction timeframe.96 The industry believes that this will better align with the reporting of complex transactions and allocations and is more efficient for CAT Reporters.97 CAT Reporters will be able to submit error corrections through a web-interface or via bulk uploads or file submissions. The Plan Processor must support bulk replacement of records, subject to approval by the Operating Committee, and reprocess such replaced records. A GUI must be available for CAT Reporters to make updates to individual records or attributes. Additionally, the Plan Processor will provide a mechanism to provide auto-correction of identified errors and be able to support group repairs (i.e., the wrong issue symbol affecting multiple reports).

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SEC Rule 613(e)(6) also requires the Participants to specify a maximum Error Rate for data reported to the Central Repository pursuant to SEC Rule 613(c)(3) and (4).98 The Participants understand that the Central Repository will require new reporting elements and methods for CAT Reporters and there will be a learning curve when CAT Reporters begin to submit data to the Central Repository.99 However, the utility of the CAT is dependent on it providing a timely, accurate and complete audit trail for the Participants and other regulators.100 Therefore, the Participants are proposing an initial maximum Error Rate of 5%, subject to quality assurance testing performed prior to launch, and it is anticipated that it will be reset when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and again when Small Industry Members begin to report to the Central Repository. The Participants believe that this rate strikes the balance of making allowances for adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction. Periodically, the Plan Processor will analyze reporting statistics and Error Rates and make recommendations to the Operating Committee for proposed changes to the maximum Error Rate. Changes to the maximum Error Rate will be approved by the Operating Committee. The maximum Error Rate will be reviewed and reset at least on an annual basis.

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In order to help reduce the maximum Error Rate, the Plan Processor will measure the Error Rate on each business day and must take the following steps in connection with error reporting: (1) the Plan Processor will provide CAT Reporters with their error reports as they become available and daily statistics will be provided after data has been uploaded and validated by the Central Repository; (2) error reports provided to CAT Reporters will include descriptive details as to why each data record was rejected by the Central Repository; and (3) on a monthly basis, the Plan Processor will produce and publish reports detailing performance and comparison statistics, similar to the Report Cards published for OATS presently, which will enable CAT Reporters to identify how they compare to the rest of their industry peers and help them assess the risk related to their reporting of transmitted data.

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All CAT Reporters exceeding the Error Rate will be notified each time that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections). Upon request from the Participants or other regulators, the Plan Processor will produce and provide reports containing Error Rates and other metrics as needed on each CAT Reporter’s Compliance Thresholds so that the Participants as Participants or the SEC may take appropriate action for failing to comply with the reporting obligations under the CAT NMS Plan and SEC Rule 613.

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SEC Rule 613(e)(6) requires the prompt correction of data to the Central Repository. As discussed in the NMS Plan, there are a minimum of three validation processes that will be performed on data submitted to the Central Repository. The Plan Processor will be required to identify specific validations and metrics to define the Data Quality Governance requirements, as defined in Appendix D, Receipt of Data from Reporters.

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The Plan Processor will identify errors on CAT file submissions that do not pass the defined validation checks above and conform to the Data Quality Governance requirements. Error Rates will be calculated during the CAT Data and linkage validation processes. As a result, the Participants propose an initial maximum overall Error Rate of 5%101 on initially submitted data, subject to quality assurance testing period performed prior to launch.102 It is anticipated that this Error Rate will be evaluated when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and then again when Small Industry Members begin to report to the Central Repository.

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In determining the initial maximum Error Rate of 5%, the Participants have considered the current and historical OATS Error Rates, the magnitude of new reporting requirements on the CAT Reporters and the fact that many CAT Reporters may have never been obligated to report data to an audit trail.

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The Participants considered industry experience with FINRA’s OATS system over the last 10 years. During that timeframe there have been three major industry impacting releases. These three releases are known as (1) OATS Phase III, which required manual orders to be reported to OATS;103 (2) OATS for OTC Securities which required OTC equity securities to be reported to OATS;104 and (3) OATS for NMS which required all NMS stocks to be reported to OATS.105 Each of these releases was accompanied by significant updates to the required formats which required OATS reporters to update and test their reporting systems and infrastructure.

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The combined average error rates for the time periods immediately following release across five significant categories for these three releases follow. The average rejection percentage rate, representing order events that did not pass systemic validations, was 2.42%. The average late percentage rate, representing order events not submitted in a timely manner, was 0.36%. The average order / trade matching error rate, representing OATS Execution Reports unsuccessfully matched to a TRF trade report was 0.86%. The average Exchange/Route matching error rate, representing OATS Route Reports unsuccessfully matched to an exchange order was 3.12%. Finally, the average Interfirm Route matching error rate, representing OATS Route Reports unsuccessfully matched to a report representing the receipt of the route by another reporting entity was 2.44%. Although the error rates for the 1999 initial OATS implementation were significantly higher than those laid out above, the Participants believe that technical innovation and institutional knowledge of audit trail creation over the past 15 years makes the more recent statistics a better standard for the initial Error Rate.106 Based upon these historical error rates, and given that reporting to the Central Repository will involve reporting on new products (i.e., options) and reporting by new reporters (including both broker-dealers and Participants who have not previously been required to report to OATS), the Participants believe that the initial Error Rate will be higher than the recent rates associated with OATS releases and that an initial Error Rate of 5% is an appropriate standard.

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The Participants believe that to achieve this Error Rate, however, the Participants and the industry must be provided with ample resources, including a stand-alone test environment functionally equivalent to the production environment, and time to test their reporting systems and infrastructure. Additionally, the Technical Specifications must be well written and effectively communicated to the reporting community with sufficient time to allow proper technical updates, as necessary. The Participants believe that the Error Rate strikes the balance of adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction, as well as having a sufficient level of accuracy to facilitate the retirement of existing regulatory reports and systems where possible.

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The Participants are proposing a phased approach to lowering the maximum Error Rate. Under the proposed approach, one year after a CAT Reporter’s respective filing obligation has begun, their maximum Error Rate would become 1%.107 Maximum Error Rates under the proposed approach would thus be as follows:

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In addition to the above mentioned daily Error Rate, CAT Reporters will be required to meet separate Compliance Thresholds,109 which rather than the Error Rate, will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance. Although Compliance Thresholds will not be calculated on a daily basis, this does not: (1) relieve CAT Reporters from their obligation to meet daily reporting requirements set forth in SEC Rule 613; or (2) prohibit disciplinary action against a CAT Reporter for failure to meet its daily reporting requirements set forth in SEC Rule 613. The Operating Committee may consider other exceptions to this reporting obligation based on demonstrated legal or regulatory requirements or other mitigating circumstances.

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In order to reduce the maximum Error Rate and help CAT Reporters to meet their Compliance Thresholds, the Plan Processor must provide support for CAT Reporter “go-live” dates, as specified in Appendix D, User Support.

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(c) Sequencing Orders and Clock Synchronization

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SEC Rule 613(c)(1) requires the Central Repository to provide “an accurate, time-sequenced record of orders,” and SEC Rule 613(d)(1) requires the CAT NMS Plan to require each CAT Reporter “to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event . . . to the time maintained by the National Institute of Standards and Technology (NIST), consistent with industry standards.” As an initial matter, because of the drift between clocks, an accurately-sequenced record of orders cannot be based solely on the time stamps provided by CAT Reporters. As discussed above, the CAT NMS Plan requires that CAT Reporters synchronize their clocks to within 50 milliseconds of the NIST. Because of this permitted drift, any two separate clocks can vary by 100 milliseconds: one clock can drift forward 50 milliseconds while another can drift back 50 milliseconds. Thus, it is possible to have, for example, one firm report the route of an order at 10:40:00.005 while the firm receiving the routed order reports a receipt time of 10:39:59.983 (i.e., the time stamps alone indicate that the routed order was received before it was sent). For this reason, the Participants plan to require that the Plan Processor develop a way to accurately track the sequence of order events without relying entirely on time stamps.110

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There were several different approaches suggested by the Bidders to accomplish the accurate sequencing of order events. Some Bidders suggested using time stamp-based sequencing; however, most Bidders recognized that, while all CAT Reporters should have their time stamp clocks synchronized, in practice this synchronization cannot be wholly relied upon due to variations in computer systems. These Bidders rely on linkage logic to derive the event sequencing chain, such as parent/child orders. To help resolve time stamp issues, one Bidder proposed adding unique sequence ID numbers as well to the event information to help with time clock issues and a few others would analyze the variations on clock time and notify those CAT Reporters that need to resynchronize their clocks.

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The Participants believe that using a linking logic not dependent on time stamps would enable proper sequencing of an order. This decision is supported by the industry since time stamps across disparate systems cannot be guaranteed and are likely to be error-prone.111 The Participants believe that this type of sequencing can be successfully used for both simple and complex orders that will be reported to the Central Repository. The industry supports using event sequencing that is already built into the exchange protocols, which imposes sequencing and determines the true market environment.112

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As required by Section 6.8(a) of the CAT NMS Plan, each Participant will synchronize its Business Clocks (other than Business Clocks used solely for Manual Order Events, which will be required to be synchronized to within one second of the time maintained by the NIST) used for the purposes of recording the date and time of any Reportable Event that must be reported under SEC Rule 613 to within 50 milliseconds of the time maintained by the NIST, and will adopt a Compliance Rule requiring its Industry Members to do the same. Furthermore, in order to ensure the accuracy of time stamps for Reportable Events, the Participants anticipate that Participants and Industry Members will adopt policies and procedures to verify such required synchronization each Trading Day (1) before the market opens and (2) periodically throughout the Trading Day.

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As noted above, Rule 613(d)(1) requires the CAT NMS Plan to impose a clock synchronization requirement “consistent with industry standards.” The Participants believe that the 50 millisecond clock synchronization drift tolerance included in Section 6.8(a) represents the current industry clock synchronization standard and therefore satisfies the Rule. To determine the current industry standard, the Participants relied on survey feedback provided by industry members, as further discussed in Appendix C, D.12.

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Importantly, Section 6.8 requires, pursuant to Rule 613(c)(2), that Participants, together with the Plan Processor’s Chief Compliance Officer, evaluate the clock synchronization standard on an annual basis to reflect changes in industry standards. Accordingly, to the extent existing technology that synchronizes business clocks with a lower tolerance (i.e., within less than 50 milliseconds drift from NIST) becomes widespread enough throughout the industry to constitute a new standard, the clock synchronization requirement of the CAT NMS Plan would be revised to take account of the new standard.

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In accordance with SEC Rule 613(d), Section 6.8(c) of the CAT NMS Plan states that “[i]n conjunction with Participants and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments.”

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The Participants anticipate that compliance with this provision will require Participants and Industry Members to perform the following or comparable procedures. The Participants and their Industry Members will document their clock synchronization procedures and maintain a log recording the time of each clock synchronization performed, and the result of such synchronization, specifically identifying any synchronization revealing that the discrepancy between its Business Clock and the time maintained by the NIST exceeded 50 milliseconds. At all times such log will include results for a period of not less than five years ending on the then current date.

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In addition to clock synchronization requirements, the Participants considered the appropriate level of time granularity to be required in the CAT NMS Plan. Although millisecond increments are generally the industry standard for trading systems, there is a wide range of time stamp granularity across the industry commonly ranging from seconds to milliseconds to micro-seconds for Latency sensitive applications.113 The disparity is largely attributed to the age of the system being utilized for reporting, as older systems cannot cost effectively support, finer time stamp granularity.114 To comply with a millisecond time stamp requirement, the Participants understand that firms may face significant costs in both time and resources to implement a consistent time stamp across multiple systems.115 This may include a need to upgrade databases, internal messaging applications/protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository.116 Because of this, FIF recommended to the Participants a two year grace period for time stamp compliance.117 FIF and SIFMA also supported an exception for millisecond reporting for order events that are manually processed, which is discussed below.118

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To the extent that any CAT Reporter uses time stamps in increments finer than the minimum required by the CAT NMS Plan, each Participant will, and will adopt a rule requiring its Industry Members that are CAT Reporters to, use such finer increments when providing data to the Central Repository.

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With respect to the requirement under SEC Rule 613(c) and (d)(3) that time stamps “reflect current industry standards and be at least to the millisecond,” the Participants believe that time stamp granularity to the millisecond reflects current industry standards. However, after careful consideration, including numerous discussions with the DAG, the Participants have determined that time stamp granularity at the level of a millisecond is not practical for order events that involve non-electronic communication of information (“Manual Order Events”). In particular, it is the Participants’ understanding that recording Manual Order Events to the millisecond would be both very costly, requiring specialized software configurations and expensive hardware, and inherently imprecise due to the manner in which human interaction is required. The industry feedback that the Participants received through the DAG suggests that the established business practice with respect to Manual Order Events is to manually capture time stamps with granularity at the level of a second because finer increments cannot be accurately captured when dealing with manual processes which, by their nature, take longer to perform than a time increment of under one second. The Participants agree that, due to the nature of transactions originated over the phone, it is not practical to attempt granularity finer than one second, as any such finer increment would be inherently unreliable. Further, the Participants do not believe that recording Manual Order Events to the second will hinder the ability of regulators to determine the sequence in which Reportable Events occur.

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As a result of these discussions, the Exemptive Request Letter requested exemptive relief from the Commission to allow the CAT NMS Plan to require Manual Order Events to be captured with granularity of up to and including one second or better, but also require CAT Reporters to report the time stamp of when a Manual Order Event was captured electronically in the relevant order handling and execution system of the party to the event. Granularity of the Electronic Capture Time will be consistent with the SEC Rule 613(d)(3) requirement that time stamps be at least to the millisecond.

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Thus, the Participants have determined that adding the Electronic Capture Time would be beneficial for successful reconstruction of the order handling process and would add important information about how the Manual Order Events are processed once they are entered into an electronic system. Additionally, Manual Order Events, when reported, must be clearly identified as such.

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(d) Data Maintenance and Management

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Data Maintenance and Management of the Central Repository “refers to the process for storing data at the [C]entral [R]epository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.”119

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The Plan Processor must create a formal records retention policy to be approved by the Operating Committee. All of the data (including both corrected and uncorrected or rejected data) in the Central Repository must be kept online for a rolling six year period, which would create a six year historical audit trail. This data must be directly available and searchable by regulators electronically without any manual intervention. Additionally, the Plan Processor is required to create and maintain for a minimum of six years a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC.

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Assembled lifecycles of order events must be stored in a linked manner so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, or routed through multiple broker-dealers before being sent to the exchange for execution.

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Most Bidders recommended dividing data in the Central Repository into nodes based on symbol, date or a combination thereof in order to speed query response times. The Participants are not specifying how the data is divided, but will require that it be partitioned in a logical manner in order to optimize access and retrieval.

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All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site. The Participants are requiring that the Plan Processor implement a disaster recover capability that will ensure no loss of data and will support the data availability requirements for the Central Repository and a secondary processing site will need to be capable of recovery and restoration of services at the secondary site within 48 hours of a disaster event.

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(e) Data Access by Regulators

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As detailed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, the Participants and other regulators will have access to raw unprocessed data that has been ingested by the Central Repository prior to Noon Eastern Time on T +1.120 Between Noon Eastern Time on T +1 and T+5, the Participants and other regulators should have access to all iterations of processed data.121 At T+5, the Participants and other regulators should have access to corrected data.122 The Plan Processor must adopt policies and procedures to reasonably inform Participants and the SEC of material data corrections made after T+5. The Participants and other regulators will be able to build and generate targeted queries against data in the Central Repository. More information about the report, query, and extraction capabilities can be found in Appendix D, Functionality of the CAT System.

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(f) Data Recovery and Business Continuity

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As noted above, in addition to describing data security and confidentiality, all of the Bidders were required to set forth an approach to data loss recovery and business continuity in the event of data loss. All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site.

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The Plan Processor must comply with industry best practices for disaster recovery and business continuity planning, including the standards and requirements set forth in Appendix D, BCP / DR Process.

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With respect to business continuity, the Participants have developed the following requirements that the Plan Processor must meet. In general, the Plan Processor will implement efficient and cost-effective backup and disaster recovery capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the Central Repository. The disaster recovery site must have the same level of availability / capacity / throughput and data as the primary site. In addition, the Plan Processor will be required to design a Business Continuity Plan that is inclusive of the technical and business activities of the Central Repository, including the items specified in Appendix D, BCP / DR Process (e.g., bi-annual DR testing and an annual Business Continuity Audit).

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4. The Security and Confidentiality of the Information Reported to the Central Repository (SEC Rule 613(a)(1)(iv))

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As required by SEC Rule 613(a)(1)(iv), this section describes the security and confidentiality of the information reported to the Central Repository. As the Commission noted in the Adopting Release, keeping the data secure and confidential is critical to the efficacy of the Central Repository and the confidence of market participants. There are two separate categories for purposes of treating data security and confidentiality: (1) PII; and (2) other data related to orders and trades reported to the CAT.123

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Because of the importance of data security, the Participants included in the RFP numerous questions to Bidders requesting detailed information on their data security approaches. In the RFP, the Participants requested general information regarding the following:

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• how the Bidder’s solution protects data during transmission, processing, and at rest (i.e., when stored in the Central Repository);124

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• the specific security governance/compliance methodologies utilized in the proposed solution;125

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• how access to the data is controlled and how the system(s) confirms the identity of persons (e.g., username/password), monitors who is permitted to access the data and logs every instance of user access;126

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• what system controls for users are in place to grant different levels of access depending on their role or function;127

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• the strategy, tools and techniques, and operational and management practices that will be used to maintain security of the system;128

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• the proposed system controls and operational practices;129

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• the organization’s security auditing practices, including internal audit, external audit, third-party independent penetration testing, and all other forms of audit and testing;130

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• how security practices may differ across system development lifecycles and environments that support them (e.g., development, testing, and production);131

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• experiences in developing policies and procedures for a robust security environment, including the protection of PII;132

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• the use of monitoring and incident handling tools to log and manage the incident handling lifecycle;133

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• the approach(es) to secure user access, including security features that will prevent unauthorized users from accessing the system;134

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• the processes/procedures followed if security is breached;135

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• the infrastructure security architecture, including network, firewalls, authentication, encryption, and protocols; and136

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• the physical security controls for corporate, data center and leased data center locations.137

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All Bidders acknowledged the importance of data security; however, the proposals varied in the details about security policies, data access management, proactive monitoring and intrusion prevention, and how data security will be implemented. Some Bidders intend to leverage their experience in financial services and adopt their policies and technologies to control data, and many Bidders supported such measures as role-based access controls, two factor authentication, detailed system logs, and segmentation of sensitive data that is isolated in both logical and physical layers. Other Bidders indicated that they would use role-based security policies, data and file encryption, and redundant and layered controls to prevent unauthorized access. Additionally, Bidders noted that the physical locations at which data is stored need security measures to ensure data is not compromised. Some Bidders indicated that physical controls would include background checks for employees working with the system; physical building security measures (e.g., locks, alarms, key control programs, CCTV monitoring for all critical areas, and computer controlled access systems with ID badges).

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The RFP also requested additional information specific to the treatment and control over PII. The RFP required Bidders to specifically address:

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• how PII will be stored;138 and

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• how PII access will be controlled and tracked.139

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All of the Bidders proposed segregating PII from the other data in the Central Repository. Additionally, all of the Bidders recommended limiting access to PII to only those regulators who need to have access to such information, and requiring additional validations to access PII. Although all Bidders proposed to keep a log of access to the Central Repository by user, the Bidders suggested different methods of authentication and utilized varying security policies, including the use of VPNs or HTTPS.

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The RFP also requested information from Bidders on data loss prevention (“DLP”) and business continuity to ensure the continued security and availability of the data in the Central Repository. Specifically, the RFP asked Bidders to describe:

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• their DLP program;140 and

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• the process of data classification and how it relates to the DLP architecture and strategy.141

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Based upon the RFP responses, as well as input from the Participants’ information security teams and discussions with the DAG, information security requirements were developed and are defined in Appendix D, Data Security. These requirements are further explained below.

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(a) General Security Requirements

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SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the Central Repository in accordance with the policies, procedures, and standards in the CAT NMS Plan.142 Based on the numerous options and proposals identified by the Bidders, the Participants have outlined multiple security requirements the Plan Processor will be required to meet to ensure the security and confidentiality of data reported to the Central Repository. The Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing as well as data at rest.

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The Plan Processor must provide a solution addressing physical security controls for corporate, data center and any leased facilities where any of the above data is transmitted or stored. In addition to physical security, the Plan Processor must provide for data security for electronic access by outside parties, including Participants and the SEC and, as permitted, CAT Reporters or Data Submitters. Specific requirements are detailed in Appendix D, Data Security, and include requirements such as role-based user access controls, audit trails for data access, and additional levels of protection for PII.

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Pursuant to SEC Rule 613(i)(C), the Plan Processor has to develop and maintain a comprehensive security program for the Central Repository with dedicated staff: (1) that is subject to regular reviews by the Chief Compliance Officer; (2) that has a mechanism to confirm the identity of all persons permitted to access the data; and (3) that maintains a record of all such instances where such persons access the data. In furtherance of this obligation, the CAT NMS Plan requires the Plan Processor to designate a Chief Compliance Officer and a Chief Information Security Officer, each subject to approval by the Operating Committee. Each position must be a full-time position. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer must develop a comprehensive compliance program covering all CAT Reporters, including the Participants and Industry Members.143 Section 6.2(b) of the CAT NMS Plan provides that the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, standards and control structures to monitor and address data security issues for the Plan Process and the CAT System as detailed in Appendix D, Data Security.

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Section 6.12 of the CAT NMS Plan requires that the Plan Processor develop and maintain a comprehensive information technology security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee. To effectuate these requirements, Appendix D sets forth certain provisions designed to (1) limit access to data stored in the Central Repository to only authorized personnel and only for permitted purposes; (2) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository, and data maintenance by the Central Repository; (3) require the establishment of secure controls for data retrieval and query reports by Participants’ regulatory staff and the SEC; and (4) otherwise provide appropriate database security for the Central Repository. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer, in collaboration with the Chief Information Security Officer, will retain independent third parties with appropriate data security expertise to review and audit on an annual basis the policies, procedures, standards, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository.144

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The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and the CAT System, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the system. The solution must also address secure controls for data retrieval and query reports by Participant regulatory staff and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for different components of the system, such as access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter calculated Error Rates.

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In addition, pursuant to SEC Rule 613(e)(4)(i)(C)(2), the Plan Processor will develop and maintain a mechanism to confirm the identity of all persons permitted to access the data. The Plan Processor is responsible for defining, assigning and monitoring CAT Reporter entitlements. Similarly, pursuant to SEC Rule 613(e)(4)(i)(C)(3), the Plan Processor will record all instances where a person accesses the data.

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Pursuant to SEC Rule 613(e)(4)(i)(B), Section 6.5(e)(ii) of the CAT NMS Plan requires each Participant to adopt and enforce rules that require information barriers between its regulatory staff and non-regulatory staff with regard to access to and use of data in the Central Repository, and permit only persons designated by such Participants to have access to and use of the data in the Central Repository.

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The Plan Processor will also develop a formal cyber incident response plan to provide guidance and direction during security incidents, and will also document all information relevant to any security incidents, as detailed in Appendix D, Data Security.

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(b) PII

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As noted above, because of the sensitivity of PII, the Participants have determined PII should be subject to more stringent standards and requirements than other order and trading data. In response to the RFP questions, many Bidders mentioned that a range of techniques were required to ensure safety of PII. These techniques included development of PII policies and managerial processes for use by Plan Processor as well as Participants’ staff and the SEC, physical data center considerations and strong automated levels, such as application, mid-tier, database, and operating systems levels, and use of role-based access and other parameters such as time-limited, case-restricted, and compartmentalized privilege. Most Bidders advocated for separate storage of PII in a dedicated repository to reduce the ability for hacking events to occur.

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In accordance with SEC Rule 613(e)(4)(i)(A), all Participants and their employees, as well as all employees of the Plan Processor, will be required to use appropriate safeguards to ensure the confidentiality of data reported to the Central Repository and not to use such data for any purpose other than surveillance and regulatory purposes. A Participant, however, may use the data that it reports to the Central Repository for regulatory, surveillance, commercial, or other purposes.

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The Participants anticipate that access to PII will be limited to a “need-to-know” basis. Therefore, it is expected that access to PII associated with customers and accounts will have a much lower number of registered users, and access to this data will be limited to Participants’ staff and the SEC who need to know the specific identity of an individual. For this reason, PII such as SSN and TIN will not be made available in the general query tools, reports, or bulk data extraction.145 The Participants will require that the Plan Processor provide for a separate workflow granting access to PII (including an audit trail of such requests) that allows this information to be retrieved only when required by specific regulatory staff of a Participant or the SEC, including additional security requirements for this sensitive data. Specifically, the Plan Processor must take steps to protect PII as defined in Appendix D, Data Security and including items such as storage of PII separately from order and transaction data, multi-factor authentication for access to PII data, and a full audit trail of all PII data access.

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It is anticipated that the Technical Specifications will set forth additional policies and procedures concerning the security of data reported to the Central Repository; however, any such policies and procedures must, at a minimum, meet the requirements set forth in the CAT NMS Plan and Appendix D.

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5. The Flexibility and Scalability of the CAT (SEC Rule 613(a)(1)(v))

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(a) Overview

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As required by SEC Rule 613(a)(1)(v), this section discusses the flexibility and scalability of the systems used by the Central Repository to collect, consolidate and store CAT Data, including the capacity of the Central Repository to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional Eligible Securities or transactions, changes in regulatory requirements, and other developments.

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The Plan Processor will ensure that the Central Repository’s technical infrastructure is scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture. The technical infrastructure should be designed so that in the event of a capacity upgrade or hardware replacement, the Central Repository can continue to receive data from CAT Reporters with no unexpected issues.

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The Plan Processor will perform assessments of the Central Repository’s technical infrastructure to ensure the technology employed therein continues to meet the functional requirements established by the Participants. The Plan Processor will provide such assessments to, and review such assessments with, the Operating Committee within one month of completion. The Operating Committee will set forth the frequency with which the Plan Processor is required to perform such assessments. The Operating Committee must approve all material changes / upgrades proposed by the Plan Processor before they can be acted upon. The Operating Committee may solicit feedback from the Advisory Committee for additional comments and/or suggestions on changes to the capacity study as the Operating Committee determines necessary.

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The Central Repository will employ optimal technology for supporting (1) scalability to increase capacity to handle a significant increase in the volume of data reported, (2) adaptability to support future technology developments and new requirements and (3) maintenance and upgrades to ensure that technology is kept current, supported and operational.

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Participants will provide metrics and forecasted growth to facilitate Central Repository capacity planning. The Plan Processor will maintain records of usage statistics to identify trends and processing peaks. The Central Repository’s capacity levels will be determined by the Operating Committee and used to monitor resources, including CPU power, memory, storage, and network capacity.

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The Plan Processor will ensure the Central Repository’s compliance with all applicable service level agreements concerning flexibility and scalability of the Central Repository, including those specified in the CAT NMS Plan and by the Operating Committee.

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(b) Approaches proposed by Bidders

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Information received from Shortlisted Bidders indicated that all six Shortlisted Bidders considered incoming transaction volumes to be one of their most significant drivers of cost across hardware, software, and full-time employees (“FTEs”), with the expected rate of increase in transaction volumes and retention requirements also being prominent drivers of cost. The approaches described above will facilitate effective management of these factors to provide for a cost-effective and flexible Central Repository.

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As noted in the RFP, the Bidders were required to provide comments on how the Central Repository would be scalable for growth in the following aspects: number of issues accepted by the CAT, types of messages accepted by the CAT, addition of fields stored on individual data records or increases in any data type due to market growth. The Bidders were also requested to describe how the system can be scaled up for peak periods and scaled down as needed.

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Bidders using a network infrastructure of data collection hubs noted the use of Ethernet links throughout a single hub as a method of handling additional throughput and capacity. Other Bidders note access points will be load balanced, allowing for additional capacity. Some Bidders note the need for continued monitoring to facilitate timely addition of capacity or other upgrades. Other Bidders highlighted the ability to scale processing horizontally by adding nodes to the database structure which will allow for additional capacity. In this instance, adding nodes to an existing clustered environment allows for the preservation of processing speed in the existing processing environment. In a cloud solution, Bidders note the systems will scale automatically. That is, the processing load or capacity is determined at the instance the tool is ‘run’ by the processer.146 Some Bidders broadly note that the selection of platform components or features of their proposed solution infrastructure was the key in developing a scalable system. It is further noted that the selection of these elements allows for technological upgrades to incorporate newer technologies without a system replacement. Bidders identify the use of additional server and storage capacity as a key proponent of providing a scalable system.

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6. The Feasibility, Benefits, and Costs for Broker-Dealers Reporting Allocations in Primary Market Transactions to the Consolidated Audit Trail (SEC Rule 613(a)(1)(vi))

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SEC Rule 613(a)(1)(vi) requires the Participants to assess the feasibility, benefits and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

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• The identity of all market participants (including broker-dealers and customers) that are allocated NMS Securities, directly or indirectly, in a Primary Market Transaction;147

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• The number of such NMS Securities each such market participant is allocated; and

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• The identity of the broker-dealer making each such allocation.148

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The objective of this CAT NMS Plan is to provide a comprehensive audit trail that “allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets.” The Participants believe that an eventual expansion of the CAT to gather complete information on Primary Market Transactions would be beneficial to achieving that objective. However, based on the analysis directed to be completed as part of this plan, the Participants have concluded that it is appropriate to limit CAT submissions related to allocations in Primary Market Transactions to sub-account allocations, as described below.

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Specifically, based on comments received by the Participants on this and other topics related to the consolidated audit trail,149 the Participants believe that information related to sub-account allocations – the allocation of shares in a primary market offering to the accounts that ultimately will own them – currently is maintained by broker-dealers in a manner that would allow for reporting to the Central Repository without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations, including a variety of rulemaking and policy decisions. By contrast, the reporting of so-called “top account” information in Primary Market Transactions to the Central Repository would involve significantly more costs which, when balanced against the marginal benefit, is not justified at this time. These issues are discussed further below.

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As a preliminary matter, the analysis required pursuant to this section is limited to Primary Market Transactions in NMS Securities that involve allocations. As the Commission has noted, “‘a primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering.’”150 The Participants understand that Primary Market Transactions generally involve two phases that implicate the allocation of shares. The “book building” phase involves the process “by which underwriters gather and assess investor demand for an offering of securities and seek information important to their determination as to the size and pricing of an issue.”151 This process may involve road shows to market an offering to potential investors, typically institutional investors, including the discussion of the prospective issuer, and its management and prospects. The book building phase also involves efforts by the underwriter to ascertain indications of interest in purchasing quantities of the underwritten securities at varying prices from potential investors.152 Using this and other information, the underwriter will then decide how to allocate IPO shares to purchasers. The Participants understand that these are so-called “top account” allocations – allocations to institutional clients or retail broker-dealers, and that such allocations are conditional and may fluctuate until the offering syndicate terminates. Sub-account allocations occur subsequently, and are made by top account institutions and broker-dealers prior to settlement. Sub-account allocations represent the allocation of IPO shares to the actual account receiving the shares and are based on an allocation process that is similar to secondary market transactions.153

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(a) Feasibility

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In the April 2013 Request for Comment, the Participants requested information on how firms handle Primary Market Transactions. In response to the request, FIF, SIFMA and Thomson Reuters submitted comments explaining current industry practice with respect to Primary Market Transactions.154 Both SIFMA and FIF noted that broker-dealers generally maintain top account allocation information in book building systems that are separate from their systems for secondary market transactions and that differ across the industry, including the use of applications provided by third parties, in house systems and spreadsheets for small firms.155 The Participants also understand that the investment banking divisions of broker-dealers typically use different compliance systems than those used for secondary market transactions.156 The DAG also provided feedback157 indicating that the impacted systems differ across the industry, given differing processes for Primary Market Transactions depending upon the structure of the deal, and that initial allocations are stored in book-building systems with varying levels of sophistication across the industry, including third-party systems, custom-built systems, and spreadsheets. The Participants thus believe that capturing indications of interest and other information about top account allocations in an accurate and consistent manner across the industry would be challenging.

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By contrast, the Participants believe that it would be more feasible to gather information relating to sub-account allocations in Primary Market Transactions. The Participants understand that sub-account allocations are received in a manner and level of detail similar to allocations in secondary market transactions,158 and that the same middle and back office systems that are used for the processing of sub-account allocations for secondary market transactions generally are also used for the sub-account allocations for Primary Market Transactions.159 Similarly, sub-account allocations for Primary Market Transactions generally are maintained in an electronic format that could be converted into a reportable format acceptable for the CAT System. Therefore, these systems could more easily report information about sub-account allocations to the Central Repository than systems containing information regarding top-account allocations.

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(b) Benefits

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As the Commission notes, data about the final allocations of NMS Securities in Primary Market Transactions could improve compliance monitoring and market analyses by the Commission and the Participants, which, in turn, could help inform rulemaking and other policy decisions.160 For example, such data could enhance the Commission’s understanding of the role of the allocations in the capital formation process, when and how investors receiving allocations sell their Eligible Securities and how allocations differ among broker-dealers.161 Such data also could assist the Commission and Participants in conducting their respective examinations and investigations related to Primary Market Transactions.162

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The Participants believe that most of these potential benefits could be achieved through the gathering of information relating to sub-account allocations rather than top account information. For example, sub-account allocation information would aid the Commission and the Participants in gaining a better understanding of how shares allocated in Primary Market Transactions are sold in the secondary market, or how allocations differ across broker-dealers. By contrast, because top account information of conditional and interim allocations for NMS Securities fluctuates throughout the syndicate process and may vary significantly among firms, the marginal benefits of such information over final sub-account allocations are much less clear.

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(c) Costs

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The cost of reporting Primary Market Transaction information will depend on the scope of allocation information subject to the rule, as well as the related technology upgrades that would be necessary to report such information to the Central Repository. Based on the response of commenters, the Participants believe that reporting top account information about conditional allocations to the Central Repository would require significant technology enhancements. As noted above, current market practices capture top account allocations using systems and data sources that are different and separate from those used in secondary market transactions. Commenters also noted that there may be significant variability among underwriters in terms of the systems and applications used to gather such data.

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The DAG provided cost estimates associated with the reporting of Primary Market Transactions.163 These estimates indicated that to report both initial and sub-account allocations would cost the industry as a whole at least $234.8 million164 and require approximately 36 person-months per firm to implement. The DAG’s estimate to report sub-account allocations only was approximately $58.7 million165 for the industry and would require approximately 12 person-months per firm to implement. The DAG commented that given the higher costs associated with reporting initial allocations, if Primary Market Transactions are required to be reported to the Central Repository, that only reporting final sub-account allocations be required.

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Based upon this analysis, the Participants are supportive of considering the reporting of Primary Market Transactions, but only at the sub-account level, and will incorporate analysis of this requirement, including how and when to implement such a requirement, into their document outlining how additional Eligible Securities could be reported to the Central Repository, in accordance with SEC Rule 613(i) and Section 6.11 of the Plan.

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B. ANALYSIS OF THE CAT NMS PLAN: These considerations are intended to help inform the Commission about the cost for development, implementation and maintenance of the CAT and to help determine if such plan is in the public interest.

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7. Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii))

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The analysis of expected benefits and estimated costs presented here is informed by the Commission’s public guidance on conducting economic analysis in conjunction with SEC rulemaking.166 The analysis begins with a statement of the need for regulatory action, describes the sources of information used in the analysis, and provides a description of the economic baseline used to evaluate the impacts associated with the CAT NMS Plan. The analysis then provides estimates of the costs to build, implement, and maintain the CAT, as contemplated, and ends with a description of the alternatives considered.

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(a) Need for Regulatory Action

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SEC Rule 613 further requires the Participants to consider and discuss in the CAT NMS Plan detailed estimated costs for creating, implementing, and maintaining the CAT as contemplated by the CAT NMS Plan. Specifically, SEC Rule 613 requires that the estimated costs should specify: (1) an estimate of the costs to the Participants in establishing and maintaining the Central Repository; (2) an estimate of the costs to broker-dealers, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants and broker-dealers. Set forth below is a discussion of cost estimates, including the studies undertaken to obtain relevant data, as well as the proposed funding model.

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(b) Economic Analysis

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(i) Sources of Cost Information

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Participants relied on two primary sources of information to estimate current audit trail costs (i.e., costs associated with the economic baseline), the costs incurred to meet the requirements of SEC Rule 613 for both the Participants and other CAT Reporters and the costs associated with the creation, implementation and maintenance of the CAT. First, to assess the costs associated with Participant and CAT Reporter obligations, Participants solicited study responses from Participants, broker-dealers and third party vendors. These three constituencies are the primary parties with direct costs arising from SEC Rule 613, as discussed further below. Second, to assess the costs associated with creating, implementing and maintaining the CAT, this analysis relies on estimated costs submitted by the Bidders as part of the bidding process.

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(A) Studies

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(1) Costs to Participants Study

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The first study undertaken collected information from the Participants about current audit trail reporting costs under the existing regulatory reporting framework and the potential costs of reporting to the Central Repository (the “Costs to Participants Study”). Respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. The study also requested information about costs associated with retiring current regulatory systems that would be rendered redundant by the CAT.

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The Costs to Participants Study was distributed to the 19 Participants on August 11, 2014. The initial due date for responses was August 25, 2014; however due to the complexity of the data collection effort, the due date for the study was extended to September 24, 2014. Discussions with respondents suggested that at least some of the costs were more appropriate to measure at the level of the group of Affiliated Participants that hold multiple licenses (“Affiliated Participants Group”). Based on this approach, study results are presented for four Participants holding a single exchange registration and FINRA, which also is a Participant but is a registered securities association, and another five Affiliated Participants Groups representing the remaining fourteen registered exchanges. Subsequent to the filing of the CAT NMS Plan, the Participants determined that additional detail about anticipated costs could be provided to enhance the data collected as part of the Costs to Participants Study and a second data collection was conducted.

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(2) Costs to CAT Reporters Study

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The study sent to broker-dealers (the “Costs to CAT Reporters Study”) was distributed to 4,406 broker-dealers,167 and requested estimates for current costs under the existing regulatory reporting framework as well as future costs for reporting to the Central Repository. Broker-dealer respondents were asked to estimate the future costs to report to the Central Repository under two separate scenarios.168 Approach 1 described a scenario in which broker-dealers would submit data to the Central Repository using their choice of existing industry messaging protocols, such as the FIX protocol. Approach 2 provided a scenario in which broker-dealers would submit data to the Central Repository using a defined or specified format, such as an augmented version of OATS. For each approach, respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. Finally, broker-dealers were requested to provide the cost of retirement of existing systems to be replaced by the CAT.

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The development of the Costs to CAT Reporters Study took place over two months, starting in May 2014, and included detailed discussions with the DAG. The Participants developed an initial outline of questions based on the requirements in SEC Rule 613, as well as a detailed assumptions document. To make the Costs to CAT Reporters Study effective and informative, the Participants spent two months formulating the Costs to CAT Reporters Study with detailed input from the DAG. The initial draft of the Costs to CAT Reporters Study was presented to the DAG in May 2014, and was discussed in two additional meetings with the DAG until mid-June 2014. In addition, on June 4, 2014, the Participants received and subsequently incorporated detailed written feedback from DAG members on the Costs to CAT Reporters Study and associated assumptions document.169

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The study link was sent on June 23, 2014, to the compliance contact at each recipient CAT Reporter identified by the applicable designated examining authority or designated options examining authority to receive regulatory update and information requests. The initial due date for the study was August 6, 2014. On June 25, 2014 and July 9, 2014, the Participants hosted a webinar170 to review the materials associated with the Costs to CAT Reporters Study, and to answer any questions from the CAT Reporters. On July 17, 2014, July 30, 2014, and August 4, 2014, reminders were sent to the CAT Reporters to submit their final responses to the Costs to CAT Reporters Study by August 6, 2014. In addition, the Participants requested that industry associations that are part of the DAG encourage their members to respond to the Costs to CAT Reporters Study.

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On August 6, 2014, the first extension was granted for the Costs to CAT Reporters Study, extending the due date to August 20, 2014. On August 20, 2014, an additional extension was granted, extending the due date to September 3, 2014.

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During the process of collecting responses to the Costs to CAT Reporters Study, CAT Reporters were informed that all responses were captured on an anonymous basis and would only be reported to the Participants in an aggregated, anonymous format. The third party facilitator of the Costs to CAT Reporters Study reviewed all responses received through the study portal. Study respondents had the option of identifying their firm should additional follow-up be required; any such follow-up was undertaken by the third-party facilitator, as necessary, to enhance the overall quality of responses received.

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The Participants received 422 responses. Of those responses, 180 were deemed to be materially incomplete171 and, thus, they were considered effectively nonresponsive. An additional 75 responses were determined to be clearly erroneous; for example the responses had repeating values that could not be used in analysis, or the magnitude of reported FTEs or other costs was so high as to be considered an outlier172. As a result, the Participants excluded these incomplete and clearly erroneous responses from the data set, resulting in a population of 167 responses that was used for purposes of conducting the cost analysis described herein.

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(3) Costs to Vendors Study

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A study requested information from various service providers and vendors about the potential costs of reporting to the Central Repository (the “Costs to Vendors Study”). The Participants developed the content of the Costs to Vendors Study, based on the structure and content of the Costs to CAT Reporters Study. The distribution list for the Costs to Vendors Study was provided by the DAG, and was distributed to 13 service bureaus and technology vendors on August 13, 2014. The initial due date for responses was September 1, 2014; however, due to the complexity of the data collection effort, the due date for the study was extended to September 12, 2014. The Participants received five completed responses to the Costs to Vendors Study.

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(B) Bidder Estimates

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To estimate the costs to Participants for creating, implementing and maintaining the CAT, Bidders were asked to provide in their Bid documents total one-year and annual recurring cost estimates. As part of the RFP process, the Bidders were asked to provide a schedule of the anticipated total cost of creating, implementing and maintaining the CAT. As noted above in the Background Section of Appendix C, any one of the six Shortlisted Bidders could be selected as the Plan Processor and each Shortlisted Bidder173 has proposed different approaches to various issues. The Bidder selected as the Plan Processor must meet the specific requirements set forth in the Plan and Appendix D and may be given the opportunity to revise its Bid prior to the final selection of a Plan Processor. Accordingly, the Participants anticipate that the cost estimates to create, implement and maintain the CAT may differ from what is set forth below.174

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In its final rule for the Consolidated Audit Trail, the Commission amended its proposal to include enhanced security and privacy requirements. Specifically, SEC Rule 613(e)(4) requires the NMS Plan to include policies and procedures, including standards, to be used by the Plan Processor to ensure the security and confidentiality of all information reported to the Central Repository. Participants did not ask Bidders to separately assess the costs associated with the enhanced security requirements in SEC Rule 613; rather these costs were embedded in the Bids as a component of the total costs.

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The RFP requested that Bidders provide an estimate of the total one-time cost to build the CAT, including technological, operational, administrative, and any other material costs. The six Shortlisted Bidders provided estimates ranging from a low of $30,000,000 to a high of $91,600,000, with an average one-time cost of $53,000,000.175

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The RFP also requested that Bidders provide an estimate of annual recurring operating and maintenance costs for the five year period following the selection of the Plan Processor, and an estimate of the annual peak year costs (i.e., cost for the year during which it will cost the most to operate the CAT). The six Shortlisted Bidders provided estimates ranging from a low of $135,000,000 to a high of $465,100,000 over the course of the first five years of operation, with an average five-year cost of $255,600,000 and an average annual cost of $51,100,000. Estimates of peak year recurring costs range from a low of $27,000,000 to a high of $109,800,000, with an average of $59,400,000. The table presented below reports the low, median, average, and maximum expected costs for the build, maintenance, and peak year maintenance of the Central Repository arising from the Shortlisted Bids. These figures are subject to change as Bidders may update their cost estimates.

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The Participants note, however, that there may be a relation between the initial construction costs and maintenance costs based on technological choices, among other factors. To better compare estimates, the Participants are providing a range based on the reported combined build and annual recurring costs for the five year period following Plan Processor selection, discounted by a factor of 2%.176 Estimates of total costs range from $159,800,000 to $538,700,000.

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Participants sought insight into the economic drivers of the cost estimates from the Shortlisted Bidders. Specifically, Participants asked each Shortlisted Bidder to identify the factors, such as the amount of message traffic, complexity of order life cycles, number and complexity of Participant and Commission data requests and administration and support costs that were material to its Bid. Bidders identified the following as primary drivers of their Bid costs: (1) reportable volumes of data ingested into the Central Repository; (2) number of technical environments that would be have to be built to report to the Central Repository; (3) likely future rate of increase of reportable volumes; (4) data archival requirements; and (5) user support and/or help desk resource requirements.177

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(ii) Economic Baseline

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In publishing SEC Rule 613, the Commission stated that it “believes that the regulatory infrastructure on which the Participants and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system.”178 The purpose of the CAT NMS Plan is to develop, build and maintain a system that provides an infrastructure to appropriately monitor, surveil and oversee the national market system in its current state and provide sufficient flexibility to reasonably adjust for future financial market innovations.

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Such a system will necessarily impact the Commission, Participants, potential future Participant entrants, broker-dealers and other market participants, issuers and investors. Each party may derive costs, benefits and other economic impacts, depending upon plan implementation, the relevant economic activities of each entity and the allocation of costs and responsibilities across those entities. These estimated costs, benefits, and other economic impacts must be assessed against the current economic baseline, capturing the existing state of regulatory audit trail activity in the markets. The economic baseline for different affected parties is described in greater detail below.

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(A) Description of Current Audit Trail Reporting

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Currently, separate audit trails exist within each exchange in addition to the audit trail requirements for FINRA members to report to OATS.179 For equities, all broker-dealers that are members of FINRA must report their orders in NMS Stocks and OTC Equity Securities, including executions or cancellations, to OATS. Accordingly, for FINRA members, it is possible to match OATS reports to related exchange audit trail entries, provided that the related exchange has a regulatory services agreement with FINRA such that FINRA has access to the exchange data. Broker-dealers that are not FINRA members do not have a regular equity audit trail reporting requirement, although NYSE and NASDAQ member proprietary firms that are not FINRA members have an obligation to record OATS data and report to FINRA upon request. Additionally, each exchange creates its own audit trail for each order received that it receives and processes.

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For options, the options exchanges utilize the Consolidated Options Audit Trail System (“COATS”) to obtain and review information on options transactions. COATS data includes trades, the National Best Bid and National Best Offer at the time of the trade and clearing information for customers at the clearing firm level. It also identifies clearing firm proprietary trading and individual marker maker transactions if they are reported correctly at the time of the trade. However, COATS does not include adjustment data from the Options Clearing Corporation; these adjustments include changes to either the account type or size of the position. Additionally, order information is only available to the Commission upon request from the options exchanges. Currently reports need to be constructed based on order information received from the various options exchanges. As previously noted, only the National Best Bid and National Best Offer at the time of the trade is included in the COATS data; however, this is optional data that the exchanges may or may not provide. The options exchanges utilize their independent quote information to build their reports.

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In sum, each equities and options exchange is built on its own unique platform, utilizes unique entry protocols and requirements and thus creates uniquely formatted audit trails.

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The existence of multiple non-integrated audit trails has direct consequences on the accuracy and efficiency of regulatory oversight. The Commission has stated that:

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…there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, re-routed, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.180

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In addition, the Intermarket Surveillance Group’s (“ISG”) consolidated equity audit trail combines transaction data from all exchanges and is used by all Participants for surveillance purposes. However, the ISG audit trail is limited because it contains clearing member and executing broker’s CRD numbers, but does not contain information about the beneficial owner to a trade. It also does not contain order detail information such as a complete order entry time or routing history.

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COATS and the ISG equity audit trails are utilized to generate various option cross market/cross product exception reports, such as front-running and anticipatory hedges. Since the current data is unable to drill down to beneficial owner or order information, these reports are less effective and produce a large number of false positives.

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(B) Costs, Benefits, and Other Economic Impacts of Audit Trail Reporting on Regulators and Market Participants

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(1) Participants

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There are 19 Participants of varying sizes that have established audit trail reporting requirements for NMS Securities. Of these, one is a registered securities association. The other 18 Participants are exchanges. Fourteen of these exchanges permit quotation and transactions in NMS Securities and 12 permit transactions and quotations in Listed Options.

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Participants expend resources currently to maintain and update their audit trail reporting systems. Costs for current surveillance programs as indicated by Participants responding to the Costs to Participants Study vary significantly, reflecting the various sizes of Participants: total annual costs associated with meeting current regulatory requirements are estimated to be $6,900,000. Total annual costs for current surveillance programs for all Participants are $147,200,000.

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(2) Broker-Dealers

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Broker-dealers benefit from the current regime of audit trail reporting to the extent that reporting today permits the Commission and Participants to monitor for rule compliance. Effective regulatory and compliance oversight ensures increased market integrity and supports investor confidence in participating in financial markets. Conversely, if investors believe that regulators are unable to adequately and effectively monitor activities in a complex market (through current audit trail reporting), broker-dealers bear some of the cost in the form of lower market activity.

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Broker-dealers that are FINRA members must have systems and processes in place to provide FINRA with the reportable data in the required format. These systems also require resources to ensure that data quality and consistency and timeliness of reporting are maintained, and record-keeping obligations are fulfilled.181 Additionally, firm trading and order routing systems send orders and quotations to each exchange in the format required by such exchange. In turn, each exchange must store and convert the data for the purposes of creating internal exchange audit trails. Broker-dealers also commit staff to respond to Participant and Commission requests for additional data and related information based upon surveillance.

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Broker-dealers may take varied approaches to fulfilling their regulatory reporting obligations. For instance, many broker-dealers develop internal systems for the purpose of compiling order and trading data into a reportable format. In these instances, the firms may need to centralize varied and disparate systems. Other broker-dealers typically use third parties to help them comply with their reporting obligations. These third parties may include service bureaus that provide the firms with order management systems. Firms may also contract with their clearing firms to package and submit order data files on their behalf.

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Some broker-dealers that are FINRA members may be exempt from OATS reporting, or are excluded under FINRA rules from OATS requirements. Exempt firms go through a formal exemption request process through which they certify that they meet the exemption criteria which includes: (1) the member firm has total annual revenue of less than $2,000,000; (2) the member firm and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last 10 years to any disciplinary action involving fraud; (3) the member does not conduct any clearing or carrying activities for other firms; (4) the member does not conduct any market making activities in NMS Stocks and OTC Equity Securities; and (5) the member does not execute principal transactions with its customers.182 FINRA also excludes some members from the definition of a reporting member. The criteria to receive this exclusion include: (1) the member must engage in a non-discretionary order routing process where the firm immediately routes all of its orders to a single receiving reporting member; (2) the member cannot direct or maintain control over subsequent routing or execution by the receiving reporting member; (3) the receiving reporting member must record and report all information under applicable FINRA rules; and (4) the member must have a written agreement with the receiving reporting member specifying the respective functions and responsibilities of each party.183 Approximately 660 broker-dealers are either exempt or excluded from OATS requirements, but will be required to report to the Central Repository. These broker-dealers are included in the estimate of broker-dealers currently quoting or executing trades in NMS Securities and/or Listed Options.

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Additionally, the OATS rules do not require that proprietary orders generated in the normal course of market-making be reported.184 While some firms have chosen to voluntarily report such orders, there may be current gaps in the audit trail.

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Broker-dealers that are members of other Participants must also have systems and processes in place to provide the necessary reportable data in the required format. These systems also require resources to ensure data quality and consistency, timeliness of reporting, and record-keeping obligations.185 Broker-dealers that are members of more than one Participant must maintain and manage systems that provide the relevant audit trail data to each Participant for which they have an obligation to report such data, in the manner and by the rules proscribed by each Participant, as applicable.

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Upon request, broker-dealers must submit Electronic Blue Sheet (“EBS”) data to the requesting Participant by the specified due date, which is generally ten business days after receipt of the initial request. An EBS request is made by product and trade date range, with the data providing detailed information about the underlying accounts that transacted in the requested security. EBS requests can only be made for settled transactions in equity, option, or fixed income products, and they include information on allocations and executions of the requested product and may cover a time period of up to seven years from the date requested. Large Trader Reports are similar to EBS reports, except they are requested only by the Commission. Large trader requests may only be requested for NMS Securities, which may include unsettled transactions. In addition to requests being made by security and trade date range, a Large Trader request may be made by a LTID and trade date range. An LTID is an SEC identifier used to identify related entities under the same beneficial ownership structure. Broker-dealers must have systems and processes in place to provide EBS or large trader reportable data in the required format. These systems require resources to ensure that the data quality and timeliness of reporting are maintained, and record-keeping obligations are met. As with OATS, broker-dealers must commit staff to respond to requests for EBS or large trader data and may take varied approaches to fulfilling their regulatory reporting obligations.

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PHLX Rule 1022 initially required members to submit specified data to PHLX for all accounts, however this rule was amended in May 2014 to more closely mirror NYSE Rule 757, ARCA Rule 6.39, and CBOE Rule 8.9, and to only require broker-dealers to report data for all of the accounts for which they engage in trading activities or which they exercise investment discretion upon request, rather than on a continuing basis. PHLX Rule 1022 was in place prior to the existence of the compliance data files from ISG (COATS and ECAT) and OCC (position). The remaining requirement for members to provide data upon request is to enable a review if required for regulatory purposes. PHLX Rule 1022 is anticipated to be retired once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT, rather than from Industry Members.

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CBOE Rule 8.9(b) requires clearing firms to submit, on a daily basis and in a manner prescribed by CBOE, every executed order entered by market makers for securities underlying options traded on CBOE or convertible into such securities or for securities traded on CBOE, as well as for opening and closing positions in all such securities held in each market maker account. To the extent that clearing firms do not report such orders and information, the market maker who entered the order is responsible for reporting the order information. These data files are commonly known as Market Maker Equity Trade (MMET) and Market Maker Stock Position (MMSTK) files. The CBOE daily reporting requirement for market makers is comparable to other option exchange reporting requirements. CBOE Rule 8.9(b) is anticipated to be amended once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT rather than from Industry Members.

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As of June 30, 2014, there were 4,406 registered broker-dealers that were members of at least one Participant. The Participants determined that, as of July 31, 2014, approximately 1,800 of these registered broker-dealers quoted or executed transactions in NMS Securities, Listed Options or OTC Equity Securities. Of these 1,800 broker-dealers, approximately 1,700 are FINRA members and are either reporting to OATS or were identified as routing firms in OATS reports submitted by other OATS reporting broker-dealers, but are otherwise excluded from the definition of an OATS reporting member or exempt from the OATS rules. In addition, there are an estimated 100 broker-dealers that reported transactions to another SRO, but that are not FINRA members. This determination was made through a review of the number of broker-dealers that transmitted order information to OATS, reported transaction information or quoted messages to a Participant for each month, over the previous 18 months. The Participants also reviewed message traffic data in the same month in the prior year and found that July 2014 was a reasonable representation of such activity.

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Cost components considered in this process included technology costs (hardware / software costs), FTE costs (including, technology, operational, and compliance staffing requirements), and any outsourcing costs.186 The study also contained questions related to current costs that are intended to capture the baseline costs to broker-dealers for regulatory reporting, including costs related to compliance with OATS, the EBS and Large Trader reporting, and other reporting requirements, such as NYSE Rule 410B, PHLX Rule 1022, FESC/NYSE Rule123(e)/(f), and CBOE Rule 8.9.

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(C) Description of Costs to CAT Reporters Study Results

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Of the 167 responses to the Costs to CAT Reporters Study used in the analysis of costs associated with reporting to the Central Repository, 49 were from large firms and 118 were from small firms.187 Fifty-one respondents indicated that they have OATS reporting obligations and 116 respondents188 stated that they do not currently have OATS reporting obligations.189 Of these 51 OATS reporters, 21 were large and 30 were small broker-dealers, with one firm completing al reporting using in-house staffing, 26% using a combination of in-house staffing and outsourcing, 44% of firms outsourcing to clearing firms, and the remaining 26% outsourcing their reporting to service bureaus. Of the remaining 116 broker-dealers, self-identified as non-OATS reporters,190 28 were large and 88 were small. Figures for each respondent category have been provided for reference to support the cost analysis and include the average, median, minimum, maximum, and number of responses received equal to zero (0) or blank.191

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In analyzing responses to the Costs to CAT Reporters Study, Participants found responses to specific questions to be outliers. However, if the overall response from that respondent was otherwise deemed to be reasonably complete, the response was included in the analysis. As a result, in some cases, this may result in averages or medians being higher or lower than may be expected. In addition, a significant number of firms, in particular large firms, indicated that their current cost for regulatory obligations is $0. It is the Participants’ understanding that this is likely due to current operational practices among broker-dealers that do not differentiate between technology and headcount costs that support business functionality and regulatory reporting.

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Tables 1 and 2 describe the costs associated with current regulatory reporting requirements. Current costs for study respondents consisted of hardware / software costs, FTE costs consisting of development / maintenance, operational, and compliance staffing as well as third party outsourcing costs. Current average (median) hardware / software costs for the 49 large firms were equal to $310,000 ($0) and the 118 small firms were equal to $130,000 ($0).

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Large firms reported that they employ an average (median) of 9.56 (0.00) FTEs for OATS, EBS and other regulatory reporting requirements, while small firms employed 2.36 (0.00) FTEs for the same reporting requirements. Participants estimate the dollar costs associated with these FTEs by applying an annual expenditure of $401,440 per FTE192 to determine cost. The resulting average (median) FTE costs were equal to $3,800,000 ($0) for the 49 large firms and $950,000 ($0) for the 118 small firms.

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Third party / outsourcing costs were also varied by firm size. Average (median) third party / outsourcing costs for large firms was $180,000 ($0) and $130,000 ($0) for small firms.193

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Based on the costs associated with current regulatory reporting requirements, large firms provided an average cost of $4,290,000, and small firms reported an average cost of $1,210,000 for current reporting costs, with a median estimate of $0 for both large and small firms.

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Tables 3 to 6 describe the current regulatory costs for respondents who identified themselves as having OATS reporting obligations versus those that do not (referred to as non-OATS). For the 21 large OATS reporters, current hardware / software costs averaged $720,000, with a median cost of $10,000, while the 28 large non-OATS reporters reported an average hardware / software cost of $2,600, with a median cost of $0. For the 30 small OATS reporters, current hardware / software costs averaged $490,000, with a median value of $3,000, with the 88 small non-OATS reporters reporting an average hardware / software cost of $900 and a median cost of $0.

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Large OATS reporters stated they required, on average, 17.88 FTEs, with a median value of 7.00 FTEs. Applying the FTE rate described above, this translates into an average FTE cost of $7,200,000, and a median value of $2,800,000. Large non-OATS reporters indicated an average FTE requirement of 3.32 and a median requirement of 0.00, translating into an average cost of $1,300,000 and a median cost of $0. On the other side of the spectrum, small OATS reporters stated they required, on average, 6.11 FTEs, with a median value of 3.50 FTEs. Applying the FTE rate described previously, this translates into an average FTE cost of $2,500,000, and a median value of $1,400,000. Small non-OATS reporters indicated average FTE requirements of 1.08 and a median requirement of 0.00, translating into an average cost of $430,000 and median cost of $0.

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Third party / outsourcing costs for Large OATS reporters averaged $400,000, with a median value of $0; large non-OATS reporters indicated average third party / outsourcing costs of $22,000, with a median value of $0. For small OATS reporters, third party / outsourcing costs averaged $510,000 with a median value of $3,000; small non-OATS reporters provided average costs of $2,900, with median costs of $0.

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Based on the cost estimates above, large OATS reporters estimated an average (median) cost equal to $8,320,000 ($2,810,000) while large non-OATS respondents estimated an average (median) cost equal to $1,324,600 ($0). Small OATS reporters estimated an average (median) cost equal to $3,500,000 ($1,406,000) while small non-OATS respondents estimated an average (median) cost equal to $433,800 ($0).

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To understand the current costs associated with regulatory reporting and estimate the direct costs associated with the CAT NMS Plan, the Participants also conducted the Costs to Vendors Study. CAT Reporters may currently rely on third-parties to provide key services necessary to meet the reporting obligations. Smaller broker-dealers may rely wholly or in part on third-party providers for the infrastructure to manage and maintain their electronic records, including all of the data required for audit trail reporting. Larger broker-dealers and Participants may augment their own internal IT capacity and capabilities by purchasing the services of one or more third-party vendor. As a result, it is important to understand the current reporting cost as well as the likely impact of SEC Rule 613 on these vendors and to include them in the estimate of aggregate economic impacts.

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The Participants received five completed responses to the Costs to Vendors Study. One of the respondents indicated that the vendor did not currently have any reporting expenses on behalf of its clients and did not expect to face any costs under the CAT. Of the remaining responses, three respondents supported more than 100 clients, and one supported between 50 and 99 clients. Two of the respondents supported up to 25 million accounts, and two supported up to 50 million accounts. Two of the respondents serviced clients with institutional and retail businesses, while the remaining two supported clients with institutional businesses only.

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For equity order reporting, two respondents indicated that they process up to 1 million equity orders per day on behalf of their clients, and two respondents indicated that they process up to 2 million equity orders per day on behalf of their clients. For options order reporting, three respondents indicated that they report up to 1 million options orders per day on behalf of their clients, and one respondent indicated that it reports up to 2 million options orders per day on behalf of its clients. All four respondents indicated that they report between 3 million and 100 million OATS reportable order events194 per day on behalf of their clients. Three of the four respondents submitted EBS reports for their clients, with two submitting up to 200 responses per month and one submitting up to 400 responses per month.

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Reported costs for current regulatory reporting for vendors varied widely across both dollar costs and FTE requirements. Each respondent provided an FTE rate associated with their FTE requirements; therefore, FTE costs for the vendors are reported using rates provided by each respondent. Dollar costs for hardware and software ranged from $50,000 to $15,000,000, and FTE requirements (cost) ranged from 11 ($2,700,000) to 92 ($8,600,000). While the respondent with the largest number of clients reported the highest costs, costs did not always correlate uniformly with the number of clients for other firms.

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(iii) Estimated Costs, Benefits, and Other Economic Impacts of the CAT NMS Plan on Affected Parties

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As required by SEC Rule 613(a)(1)(vii), this section provides detailed estimated costs for creating, implementing, and maintaining the CAT, specifying (1) an estimate of the costs to Participants for establishing and maintaining the CAT; (2) an estimate of the costs to members of the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants, and between the Participants and members of the Participants. The Participants are sensitive to the economic impacts of SEC Rule 613. Throughout the development of the CAT NMS Plan, the Participants have continued to focus on minimizing the costs associated with the CAT. The Participants note that the figures presented in this analysis are estimates based on research completed and currently available data and are inherently subject to uncertainties.

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Through the RFP, review of proposals received, and interaction with industry, the Participants have identified the sources of the costs associated with the CAT NMS Plan. These include direct costs associated with creating, implementing and maintaining the CAT necessary to meet the requirements of the CAT NMS Plan. There are also direct costs associated with developing and adapting applicable CAT Reporter systems to meet the requirements of the CAT NMS Plan and comply with the Plan on an ongoing basis. Additionally, Participants and broker-dealers may incur direct costs associated with the retirement of redundant reporting systems, although there may also be significant savings to broker-dealers associated with retiring those systems over time.

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In order to meet the responsibilities outlined in SEC Rule 613, the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process. In addition, the Participants have incurred public relations, legal, and consulting costs in the preparation of the CAT NMS Plan. The Participants estimate the costs of these services to be $8,800,000. These public relations, legal, and consulting costs are considered reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan.

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Given the size and scope of the CAT initiative, estimating the costs of the creation, implementation and maintenance of the CAT is a complex task, and one that necessarily relies on input from parties not directly charged under SEC Rule 613 with the responsibility to create and file the CAT NMS Plan. In light of this, the Participants have used a multi-pronged approach to assess the potential costs of the CAT. Among other things, the Participants have evaluated the many cost-related comments received in response to the Commission’s rule proposal for SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants have considered cost analyses and considerations provided by Bidders as well as the views and related information provided by the DAG and written feedback from the SIFMA and the FIF.

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The economic baseline against which the potential costs and benefits of the CAT must be compared are discussed above in Section B(7)(b)(ii). The potential impacts and estimated costs of the CAT are discussed separately below, presenting study results where applicable.

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(A) Investors

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Approximately 52% of Americans hold individual stocks, stock mutual funds or stocks through their retirement plan,195 and the retail options industry continues to grow.196

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Investors benefit from the protections provided through the use of audit trail data, permitting regulators to adequately and effectively monitor activities in today’s complex securities markets. In SEC Rule 613, the Commission identified several ways that the CAT would enhance the protections to investors. These include: facilitating risk-based examinations, better identification of potentially manipulative trading activity, improved processes for evaluating tips, complaints and referrals of potential misconduct made to regulators, increased efficiency of cross-market and principal order surveillance, improved analysis and reconstruction of broad-based market events, improved ability to monitor and evaluate changes to market structure, and efficiencies from a potential reduction in disparate reporting requirements and data requests.

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For instance, as shown in academic literature, surveillance has been demonstrated to increase investor confidence, by mitigating manipulative behavior and increasing trading activity.197 Academic literature provides support for the notion that investors associate enhanced surveillance with greater investment opportunity across a larger number of listed companies and with higher market capitalizations.198 Cross-market surveillance – an opportunity expected to be improved by CAT – is likely more effective in detecting manipulative behavior than single-market surveillance. A more recent study provides evidence that better surveillance is associated with reduced insider trading, as it would be harder to hide such trades.199

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To the extent that better surveillance leads to more effective rulemaking,200 investors should also benefit from the improvements in market quality that might arise from such rulemaking. For example, one study shows that detailed trading rules are positively correlated with liquidity measures evidenced by lower volatility and bid-ask spreads.201 Similarly, a separate study finds that European Union countries that have more effective rules to prevent market abuse and enhance transparency experience higher market liquidity.202

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Investors may also bear the costs associated with maintaining and enhancing the current audit trail systems. In some cases, broker-dealers may pass on regulatory charges that support Participant supervision, such as with respect to Section 31 fees.203 In other cases, broker-dealers may cover some of their regulatory charges through commissions and other charges. Similarly, broker-dealers may seek to pass on to investors their costs to build and maintain the CAT, which may include their own costs and any costs passed on to them by Participants. This analysis does not measure either the likelihood of these costs being passed through to investors nor the potential dollar impact on investors. The extent to which these costs are passed on to investors depends on the materiality of the costs and the ease with which investors can substitute away from any given broker-dealer.

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(B) Participants

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Participants are expected to benefit from the requirements to report to the Central Repository. To the extent that the CAT enhances comparability of audit trail data – thereby enhancing order lifecycle comparability across different trading venues – Participants may better fulfill their obligations to “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities” as set forth in Section 6 of the Exchange Act.

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Participants would also incur direct costs associated with creating, implementing and maintaining the CAT infrastructure. The full cost associated with the build and maintenance of the CAT would be shared among Participants and Industry Members, consistent with the CAT NMS Plan. Participants would also be subject to costs associated with updating and maintaining their own systems to comply with their obligations to report to the Central Repository.

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(1) Central Repository Build and Maintenance Costs

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The CAT NMS Plan provides that the costs arising from the build and maintenance of the CAT will be collected from all CAT Reporters, which includes Participants. As described in Article XI of the CAT NMS Plan and in Section C(b)(7)(iii)below, Participants will be required to pay their allocated portion of these costs on an annual basis.

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The CAT NMS Plan also contemplates that Participants may impose greater requirements on the Central Repository based on their use of information in the repository for regulatory purposes. These requirements may take the form of frequent and complex analyses of data which may likely require more resources from the Central Repository. It is critical that the Company recover its costs in a manner consistent with the principles articulated in the CAT NMS Plan, which include both the need to allocate costs in a manner consistent with the cost to operations and that the CAT NMS Plan not create significant disincentives to Participants in seeking to meet their regulatory obligations. As such, the CAT NMS Plan permits the Company to assess additional charges to Participants associated with their use of the Central Repository’s data and reporting facilities as it deems necessary.

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(2) Costs to Participants to Meet Reporting Requirements

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The Costs to Participants Study was distributed to the Participants to collect information about the potential costs of the CAT to the Participants. The Costs to Participants Study was designed to provide insight into the current total costs associated with regulatory reporting and surveillance programs discussed above, as well as expected implementation and maintenance costs associated with reporting to and surveillance through the Central Repository.

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The anticipated costs associated with the implementation of regulatory reporting to the Central Repository were estimated to be a total of $17,900,000 across all ten Participants. Included in this cost, Participants reported a total of $770,000 in legal and consulting costs, as well as total FTE costs of $10,300,000 for operational, technical/development and compliance-type functions.

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Maintenance costs associated with regulatory reporting to Central Repository were estimated to be a total of $14,700,000 across all ten Participants. Included in this estimate are legal, consulting, and other costs associated with maintenance, a total of $720,000, and $7,300,000 to FTEs for operational, technical/development, and compliance functions regarding the maintenance of regulatory reporting associated with CAT.

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The Participants were also asked to identify the costs associated with the implementation of surveillance programs within the Central Repository. The estimated total costs across all ten Participants were $23,200,000 including estimated legal, consulting, and other costs of $560,000. Also included in the total, Participants reported that they would allocate a total of $17,500,000 to FTEs to operational, technical/development, and compliance staff to be engaged in the creation of surveillance programs.

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The estimated total costs associated with the maintenance of surveillance programs were $87,700,000, including $1,000,000 for legal, consulting, and other costs. Of the total cost, the Participants estimated that they would allocate a total of $66,700,000 to FTEs to operational, technical/development and compliance staff.

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Retirement costs for current systems were estimated to be $310,000 across all Participants. However, Participants expect that by no longer needing to maintain these legacy systems due to adoption of the CAT, they will realize aggregate savings of $10,600,000, which will partially offset some of the costs expected to be borne by the Participants as described further below. To the extent that the Participants are able to retire legacy systems and replace them with more efficient and cost effective technologies, they may experience additional cost savings. The Costs to Participants Study does not attempt to quantify any such additional cost savings to broker-dealers.

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(C) Broker-Dealers

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The CAT is expected to provide a more resilient audit trail system that may benefit broker-dealers. For instance, as noted above, more effective oversight of market activity may increase investor confidence and help expand the investment opportunity set through increased listings. Broker-dealers may benefit from increased investor confidence, provided that it results in increased trading activity. In addition, broker-dealers may experience less burden, to the extent that, data provided to the Central Repository reduces the number of direct requests by regulators for their surveillance, examination and enforcement programs. For example, after the implementation of CAT, regulators seeking to identify activity for NMS Securities at the customer account level, would access that information from the Central Repository, rather than making a Blue Sheet request.

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More broadly, one benefit identified to broker-dealers of the CAT may arise from consolidating the collection and transmission of audit trail data into a uniform activity, regardless of where the quoting and trading occur. Such a consolidation may permit some broker-dealers to reduce the number of systems they operate to provide audit trail data to Participants and to retire legacy systems, at an appropriate time. Additionally, technological advances may make the operation of the new CAT Systems more efficient than those associated with the legacy systems. The Costs to CAT Reporters Study did not attempt to quantify any such cost savings to firms, an as such, the cost estimates provided here do not include consideration that such cost savings may be low.

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Broker-dealers would also incur costs associated with creating, implementing and maintaining the CAT infrastructure. These costs would arise from building and maintaining the CAT and updating and maintaining their own systems to comply with their reporting obligations.

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(1) CAT Build and Maintenance Costs

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Broker-dealers will also be required to contribute their portion of the direct costs associated with building and maintaining the CAT, as required by SEC Rule 613 and implemented by the CAT NMS Plan. Broker-dealers with CAT reporting obligations will be required to pay their allocated portion of these costs on an annual basis, pursuant to the Funding Model.

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The Funding Model acknowledges that the operating models of broker-dealers and Execution Venues are substantially different. Therefore, the Funding Model imposes different fee structures for broker-dealers and Executions Venues. ATSs that execute orders, which are operated by registered broker-dealers pursuant to Regulation ATS, are considered Execution Venues, for purposes of the CAT NMS Plan.

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(2) CAT Reporters Costs to Meeting Reporting Requirements

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Responses to the Costs to CAT Reporters Study provide estimates of the direct costs to broker-dealers associated with meeting requirements to report to the Central Repository. The Costs to CAT Reporters Study contained questions related to future costs related to both the retirement of existing systems and compliance with requirements of SEC Rule 613.

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Respondents were asked to evaluate the future costs under two separate approaches.204 For each approach, respondents were asked to estimate both for CAT implementation and maintenance: (1) the associated hardware and software costs; (2) the number of required FTEs; and (3) third-party provider costs.

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a. Implementation Phase of Approach 1

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Tables 7 and 8 describe the costs associated with the implementation of Approach 1. Based on the 167 study responses for the implementation of Approach 1, large firms provided an average (medium) hardware / software cost of $580,000 ($0) and small firms provided an average (median) cost estimates of $5,200 ($0).

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Large firms provided an average (median) FTE count of 11.00 (0.00). Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated as $4,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.17, with the median response provided by small respondents equal to 0.00. Participants estimate a dollar cost for the small respondent FTE requirements to be on average $470,000, with a median estimated cost of $0.

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Participants estimate large firms would incur average (median) third party / outsourcing costs of $72,000 ($0) and small firms would incur an estimated average (median) cost of $76,000 ($0).

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Total average (median) costs for Approach 1 Implementation are estimated to be $5,052,000 ($0) for large firms, and $551,200 ($0) for small firms.

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Tables 9 and 10 describe the costs associated with the implementation of Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided an average (median) hardware / software cost estimate of $750,000 ($0), and large non-OATS respondents providing average (median) estimated costs of $450,000 ($0).

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Large OATS reporters provided an average (median) FTE requirement of 14.92 (7.00), translating into estimated costs of $6,000,000 ($2,800,000), while large non-OATS respondents provided an average (median) FTE requirement of 8.05 (0.00), translating into an average (median) estimated cost of $3,200,000 ($0).

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Large OATS respondents estimated an average (median) third party / outsourcing cost of $150,000 ($0), while large non-OATS respondents provided an average (median) estimate of $9,500 ($0).

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Tables 11 and 12 describe the costs associated with the implementation of Approach 1 for small respondents with current OATS and non-OATS reporting obligations, small OATS respondents provided an average (median) hardware / software cost estimate of $21,000 ($1,000), with small non-OATS respondents providing an estimated average (median) cost of $100 ($0).

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Small OATS reporters provided an average (median) FTE requirement of 3.51 (2.00), translating into estimated an average (median) costs of $1,400,000 ($800,000), while small non-OATS respondents provided an average (median) FTE requirement of 0.38 (0.00), translating into an estimated average (median) cost of $150,000 ($0).

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Finally, small OATS respondents estimated an average (median) third party / outsourcing cost of $300,000 ($1,000), while small non-OATS respondents provided an average (median) estimate of $1,100 ($0).

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b. Maintenance Phase of Approach 1

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Tables 13 and 14 describe the costs associated with the maintenance of CAT reporting obligations for the full set of study responses under Approach 1. Based on the 167 study responses for the maintenance of Approach 1, large firms reported an average (median) hardware / software cost estimate of $210,000 ($0), and small firms reported an estimated cost of $1,600 ($0).

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Large firms provided an average FTE count requirement of 8.54, with the median response provided by large firms equaled to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $3,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.12, with the median response provided by small respondents equal to 0.00. Participants estimated the average dollar cost for the small respondent FTE requirement l to be $450,000, and a median cost of $0.

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Large firms estimated that the average (median) third party / outsourcing cost is equal to $52,000 ($0) and small firms estimated average (median) costs to be equal to $24,000 ($0).

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Total average (median) costs for Approach 1 Maintenance are estimated to be $3,662,000 ($0) for large firms and $475,600 ($0) for small firms.

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Tables 15 and 16 show the costs associated with the maintenance of CAT reporting obligations for Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $380,000 ($22,000), with large non-OATS respondents providing estimated average (median) costs of $80,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 10.03 (4.00), translating to estimated costs of $4,000,000 ($1,600,000), while large non-OATS respondents provided average (median) FTE requirements of 7.41 (0.00), translating to estimated costs of $3,000,000 ($0).

+

Large OATS respondents estimated average (median) third party / outsourcing costs of $120,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

+ + +

Tables 17 and 18 describe the costs associated with the maintenance of CAT reporting obligations for Approach 1 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

+

Small OATS reporters provided average (median) FTE requirements of 3.52 (2.00), translating to estimated costs of $1,400,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

+

Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $90,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

+ + +

c. Implementation Phase of Approach 2

+

Tables 19 and 20 show the costs associated with the implementation phase of Approach 2 for the full set of study responses. Based on the 167 study responses for the implementation phase of Approach 2, large firms provided average (median) hardware / software costs of $570,000 ($0), and small firms provided costs estimates of $5,000 ($0).

+

Large firms provided average FTE count requirements of 10.15, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $4,100,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.08, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $440,000, and a median cost of $0.

+

Large firms estimated that average (median) third party / outsourcing costs are equal to $68,000 ($0) and small firms estimated average (median) costs to be equal to $16,000 ($0).

+

Total average (median) costs for Approach 2 Implementation are estimated to be $4,738,000 ($0) for large firms, and $461,000 ($0) for small firms.

+ + +

Tables 21 and 22 show the costs associated with the implementation phase of Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $740,000 ($60,000), with large non-OATS respondents providing estimated average (median) costs of $450,000 ($0).

+

Large OATS reporters provided average (median) FTE requirements of 14.81 (7.00), translating to estimated costs of $5,900,000 ($2,800,000), while large non-OATS respondents provided average (median) FTE requirements of 6.66 (0.00), translating to estimated costs of $2,700,000 ($0).

+

Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $140,000 ($0), while large non-OATS respondents provided estimates of $10,000 ($0).

+ + +

Tables 23 and 24 show the costs associated with the implementation of Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $20,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

+

Small OATS reporters provided average (median) FTE requirements of 3.33 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.32 (0.00), translating to estimated costs of $130,000 ($0).

+

Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $60,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

+ + +

d. Maintenance Phase of Approach 2

+

Tables 25 and 26 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for the full set of study responses. Based on the 167 study responses for the maintenance phase of Approach 2, large firms provided average (median) hardware / software costs of $200,000 ($0) and small firms provided costs estimates of $1,500 ($0).

+

Large firms provided average FTE count requirements of 7.27, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $2,900,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.06, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $430,000, with a median cost of $0.

+

Large firms estimated that average (median) third party / outsourcing costs are equal to $48,000 ($0) and small firms estimated average (median) costs to be equal to $10,000 ($0).

+

Total average (median) costs for Approach 2 Maintenance are estimated to be $3,148,000 ($0) for large firms, and $441,500 ($0) for small firms.

+ + +

Tables 27 and 28 provide the costs associated with the maintenance of CAT reporting obligations for Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $370,000 ($14,000), with large non-OATS respondents providing estimated average (median) costs of $79,000 ($0).

+

Large OATS reporters provided average (median) FTE requirements of 9.79 (5.60), translating to estimated costs of $3,900,000 ($2,200,000), while large non-OATS respondents provided average (median) FTE requirements of 5.38 (0.00), translating to estimated costs of $2,200,000 ($0).

+

Finally, large OATS respondents estimated average (maximum) third party / outsourcing costs of $110,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

+ + +

Tables 29 and 30 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($500), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

+

Small OATS reporters provided average (median) FTE requirements of 3.28 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

+

Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $42,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

+ + +

e. Implementation and Maintenance Costs for Approach 1 vs. Approach 2

+

Participants compared the estimated implementation and maintenance costs for Approach 1 and Approach 2 to determine if one solution would be more cost effective for the industry than the other. In general, respondents indicated that Approach 1 would lead to larger costs than Approach 2. Large firms estimated that it will cost approximately $5,052,000 to implement Approach 1, versus an estimated $4,738,000 for Approach 2, a cost difference of $314,000. From a maintenance perspective, large firms estimated that it would cost $3,662,000 for Approach 1 versus $3,148,000 for Approach 2, a cost difference of $514,000. Small firms also indicated that Approach 1 would be more expensive to implement and maintain than Approach 2. Small firms indicated that it would cost $551,200 to implement Approach 1 versus $475,600 for Approach 2, indicating a cost difference of $90,200. For the maintenance phases, small firms estimated it would cost approximately $475,600 for Approach 1 maintenance, versus $441,500 for Approach 2 maintenance, a cost difference of $34,100 between approaches. However, the cost estimates between these two approaches are not statistically significant and Participants conclude that there would likely be no incremental costs associated with either Approach.205

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f. Retirement of Systems Costs

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Participants recognize that in implementing the anticipated requirements in the CAT NMS Plan, broker-dealers would likely replace some components of their current systems. The costs associated with retiring current systems were considered as part of the impacts associated with the CAT NMS Plan.

+

Tables 31 and 32 describe the cost associated with retirement of systems for the full set of study responses. Based on the 167 study responses for the retirement of systems large firms provided average (median) hardware / software costs of $120,000 ($0) and small firms provided cost estimates of $31,000 ($0).

+

Large firms provided average FTE count requirements of 6.80, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $2,700,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.92, with the median response provided by a small respondent of 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be an average costs of $770,000, and a median cost of $0.

+

Large firms estimated that average (median) third party / outsourcing costs to be $10,000 ($0) and small firms estimated average (median) costs to be $63,000 ($0).

+

Total average (median) costs for the Retirement of Systems are estimated to be $2,830,000 ($0) for large firms and $864,000 ($0) for small firms.

+ + +

Tables 33 and 34 describe the costs associated with the retirement of systems for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $270,000 ($0), with large non-OATS respondents providing estimated average (median) costs of $4,300 ($0).

+

Large OATS reporters provided average (median) FTE requirements of 4.92 (3.10), translating to estimated costs of $2,000,000 ($1,200,000), while large non-OATS respondents provided average (median) FTE requirements of 8.21 (0.00), translating to estimated costs of $3,300,000 ($0).

+

Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $18,000 ($0), while large non-OATS respondents provided estimates of $4,800 ($0).

+ + +

Tables 35 and 36 show the costs associated with the retirement of systems for small respondents with current OATS and non-OATS reporting obligations for the full set of study respondents. Small OATS respondents provided estimated average (median) hardware / software requirements of $3,600 ($500), with small non-OATS respondents providing estimated average (median) costs of $40,000 ($0).

+

Small OATS reporters provided average (median) FTE requirements of 4.60 (0.00), translating to estimated costs of $1,800,000 ($0), while small non-OATS respondents provided average (median) FTE requirements of 1.00 (0.00), translating to estimated costs of $400,000 ($0).

+

Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $240,000 ($1,500), while small non-OATS respondents provided estimates of $3,000 ($0).

+ + +

In comparing the two approaches and their costs to the current costs incurred by a broker-dealer for current regulatory reporting, respondents have indicated that they estimate both Approach 1 and Approach 2 to be less expensive than current regulatory reporting requirements. Overall, firms estimated that current costs would be $4,290,000 for large firms versus $1,210,000 for small firms, while maintenance costs of Approach 1 for large firms would cost $3,662,000 and $475,600 for small firms, indicating cost savings of $628,000 for large firms and cost savings of $734,400 for small firms. For maintenance costs related to Approach 2, large firms indicated costs of $3,148,000 with an expected savings of $1,142,000 while small firms estimated maintenance costs of $441,500 with expected savings of $768,500.

+

Although there are differences in the current and anticipated maintenance costs discussed above, the Participants conclude that there would be no statistical difference in costs associated with the maintenance of the CAT, compared to maintenance costs for existing regulatory reporting requirements. Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference in costs to broker-dealers between Approach 1 and Approach 2 is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level separately for estimates of hardware / software costs, FTE costs, vendor costs, and total costs across large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

+

g. Industry Feedback on Costs to CAT Reporters Study

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Participants’ understanding of broker-dealer costs has been enhanced through frequent dialogue with Industry Members. The DAG has largely provided written feedback on costs through the industry association members. In March 2013, SIFMA provided feedback on industry costs in its Consolidated Audit Trail White Paper.206 The association group stated that the industry is likely to face costs related to upgrading the regulatory reporting infrastructure. SIFMA highlighted that additional costs borne will be distributed across the front office, middle office, customer master data, compliance and risk and data management. Additionally, in February 2012, the FIF conducted a study to assess the costs associated with the implementation of OATS.207 In a summary of the study, FIF highlights that “future estimates of cost should consider the FIF cost model, most importantly the effort expended on business analysis and testing as part of the implementation effort.” One key view presented by the DAG was that retiring legacy systems will likely reduce costs to the industry, given their redundancies with the CAT. However, the FIF highlighted that existing timelines do not take into account costs associated with concurrent reporting for existing regulatory reporting and new regulatory requirements associated with the Central Repository.208 Additional detail around the plan to retire existing regulatory reports can be found in Appendix C, Section C.9.

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(D) Vendors

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The Costs to Vendors Study requested information regarding various third party service provider and vendor costs to comply with the requirements of SEC Rule 613.

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Based upon the responses to the Costs to Vendors Study, the expected dollar costs for implementation and maintenance of the CAT are largely the same for both approaches, and ranged widely between $0 and $20,000,000 for implementation and $50,000 and $6,000,000 for ongoing maintenance. One firm did indicate that Approach 1 would have substantially higher maintenance costs ($400,000 for Approach 1 versus $50,000 for Approach 2). For headcount and costs associated with implementation and maintenance of the CAT, all respondents indicated that Approach 1 would require more FTE resources (costs) to implement (ranging from 14 ($9,600,000) to 170 ($35,900,000) FTEs for Approach 1 and from 4 ($2,700,000) to 45 ($24,200,000) for Approach 2), while Approach 2 would require more FTE resources to maintain (ranging from 4.5 ($4,100,000) to 35 ($9,300,000) for Approach 1 and from 2 ($2,500,000) to 56 ($11,200,000) for Approach 2). As with current regulatory reporting costs, the firm with the largest number of clients reported the highest costs, but number of clients did not always correlate uniformly with higher expected costs for the other firms.

+

Three of the four respondents to the vendor study indicated that they would incur costs to retire current regulatory reporting systems, with costs ranging from $500,000 to $5,000,000, with the firm with the highest expected retirement costs also having the highest current reporting costs. FTE requirements ranged from 1.5 ($250,000) to 23 ($7,200,000) FTEs.

+

Under Approach 1, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, with the remaining two expecting higher costs. Under Approach 2, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, one expected costs to be the same, and the final firm expected costs to be greater. All firms expected headcount associated with ongoing maintenance of the CAT to be less than under current reporting requirements.

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(E) Issuers

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Issuers also benefit from an effective regulatory regime supported by a reliable and complete audit trail. Specifically, issuers may benefit from enhanced investor confidence associated with better and more efficient oversight. The increase in investor confidence may draw more investors into the market, relative to other investment opportunities that do not provide the same protections. Increasing the pool of investors willing to invest in a primary offering may manifest itself in a lower cost of capital. Increased investor participation in secondary trading may also increase demand in the primary market, as the increased interest would be associated with greater efficiency in pricing and lower adverse selection costs. To the extent that the issuers do not have independent reporting obligations to the Central Repository (i.e., they are not otherwise CAT Reporters), they are not anticipated to incur direct costs associated with the CAT NMS Plan.

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(F) Indirect Costs

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The Participants recognize that in addition to direct costs, there may be indirect costs borne by parties as a result of the implementation of the CAT NMS Plan. As discussed further below, it is not possible for the Participants to quantify these costs, and as such, we present a qualitative discussion.

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The Participants have identified at least three distinct ways for indirect costs to arise as a result of the implementation of the CAT NMS Plan. First, all CAT Reporters are subject to direct fees to pay for the creation, implementation, and maintenance of the CAT along with other direct costs to meet CAT NMS Plan obligations. CAT Reporters may endeavor to shift these fees and other costs to their clients. Where CAT Reporters can do so successfully, the clients bear an indirect cost arising from the CAT NMS Plan. Second, to the extent that the Commission and the Participants amend their surveillance programs in the presence of the Central Repository, the broker-dealers may incur costs to adjust their internal compliance programs. And third, as described more fully in Appendix C, Analysis of the Impact on Competition, Efficiency and Capital Formation, broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Such a reduction in the provision of these services may impose an indirect cost on the public as well.

+

The Participants considered the potential for CAT Reporters to shift fees and other costs associated with the CAT NMS Plan. Participants may charge their members to cover the CAT NMS Plan costs either explicitly or subsume those costs in other fees or assessments. Broker-dealers may charge their clients for their own costs, whether incurred directly or indirectly, either through explicit fees associated with CAT or through their existing fee structures. This analysis does not measure either the likelihood of costs being passed from the Participant to the broker-dealers or from the broker-dealers to their clients, or the potential associated dollar impacts. The extent to which these costs may be passed on to clients is related to alternative sources of revenue available to the CAT Reporters, the materiality of those costs, and the ease with which clients can substitute away from any given Participant or broker-dealer. Participants note, however, that Participants and broker-dealers may currently have incentives and opportunity to shift regulatory compliance costs to their customers and that nothing in the CAT NMS Plan alters those incentives or the likelihood of those costs being passed on.

+

In addition, indirect costs to broker-dealers may arise as a result of the implementation of the CAT NMS Plan. First, broker-dealers may incur additional costs related to training and professional development, to equip the staff with the necessary knowledge necessary for compliance with the SEC Rule 613. Broker-dealers were specifically asked to consider these costs as part of their study response. Second, the enhanced and standardized data to be captured by the Central Repository is anticipated to increase the effectiveness of surveillance by regulators, which may impact broker-dealer compliance programs.

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(iv) Estimate of Aggregate Direct Costs and the Allocation of Costs across CAT Reporters

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(A) Estimate of Aggregate Costs

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In order to create the regulatory data infrastructure required by SEC Rule 613, this Plan proposes to build and maintain the CAT, along with resources necessary to generate regulatory reports and related analysis. CAT Reporters, including Participants and broker-dealers engaging in trading and quoting activities in Eligible Securities, will be jointly responsible for providing the capital to build and maintain the CAT. Costs eligible to be allocated jointly include any associated liabilities accrued during the planning and building phases of the project that are directly attributable to the CAT NMS Plan, for example, legal and consulting fees, and will be allocated according to the funding model described in Article XI of the CAT NMS Plan.

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In order to calculate to the implementation and annual maintenance costs of the CAT, the Participants considered the relevant cost factors for the following entities: Plan Processor, Participants, broker-dealers (large and small) and vendors. All implementation costs reflected below are in dollar costs for the year they are expected to be incurred, while all maintenance costs are estimated for the fifth year after the approval of the CAT NMS Plan, when all CAT Reporters are expected to be live.

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(1) Plan Processor

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Implementation Costs. For implementation costs associated with the Plan Processor, the Participants reviewed the build costs received from the Shortlisted Bidders and identified the high and low costs to use as a component of the overall industry cost. The lowest cost received was $30,000,000 and the highest estimate received was $91,600,000.

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Maintenance Costs. For maintenance costs associated with the Plan Processor, the Participants also reviewed the cost schedules received from the Shortlisted Bidders to build the range. To define the range of maintenance costs, the Participants reviewed the peak year maintenance costs from the Shortlisted Bidders. In addition to the costs received from the Shortlisted Bidders associated with the maintenance of operating and running the CAT, the Participants also included a yearly technical upgrade estimate to conservatively take into account changes in technology that may take place during the maintenance of the CAT. These additional costs begin at approximately 20% in year one, and slowly decrease to 5% during year five of operation. As such, the annual maintenance costs are estimated to range from $35,200,000 to $134,900,000.

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Retirement of Systems Costs. The Plan Processor is not expected to incur costs related to the retirement of systems.

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(2) Participants

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Upon review of the requirements associated with Approach 1 and Approach 2, the Participants identified that they do not favor one approach over the other.

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Implementation Costs. To estimate implementation costs for the Participants, the Participants used the aggregated results from the Costs to Participants Study. Based on the responses received from the Participants, the implementation of regulatory reporting is expected to cost $17,900,000 and the implementation of surveillance functions is estimated to cost $23,200,000.

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Maintenance Costs. To estimate the maintenance costs for the Participants, the Participants reviewed the results from the Costs to Participants Study for regulatory reporting and surveillance costs. The Participants estimated that annual aggregate regulatory reporting costs would be equal to $14,700,000 and that annual aggregate surveillance maintenance costs would cost $87,700,000.

+

Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the Participants, the Participants reviewed the results from the Costs to Participants Study for retirement of systems costs. The Participants estimated that costs associated with retirement of systems would be equal to $310,000.

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(3) Broker-Dealers

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Implementation and maintenance costs related to the CAT for broker-dealers were extrapolated from the results of the Costs to CAT Reporters Study. As described above, the Participants believe there to be approximately 1,800 broker-dealers that would be CAT Reporters. Of the 167 respondents to the Costs to CAT Reporters Study, 49 were large firms, and 118 were small firms, indicating a large to small firm ratio in the overall population of 29% to 71%. Applying this ratio to the total population of 1,800 broker-dealers, results in 522 large firms and 1,278 small firms. In comparing the costs between the two approaches, the Participants have identified that Approach 1 is more expensive than the Approach 2, which causes Approach 1 to form the upper bound of the broker-dealer cost range, and Approach 2 to form the lower bound of the broker-dealer cost range.

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Implementation Costs. For Approach 1, large firm respondents estimated that implementation costs would be equal to $5,052,000 per firm, for a total estimated implementation cost of approximately $2.6 billion. Small firm respondents estimated that implementation costs for Approach 1 would be equal to $551,200 per firm, for a total estimated implementation cost of $740 million.209 For Approach 2, large firm respondents estimated that implementation costs would be equal to $4,738,000 per firm, for a total estimated implementation cost of approximately $2.5 billion, while small firms estimated implementation costs for Approach 2 to be equal to $461,000 per firm, for a total cost of $619 million.210 This results in a cost range of $2.5 billion to $2.6 billion for large firms, and a cost range of $619 million to $740 million for small firms for the implementation of the CAT.

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Maintenance Costs. For Approach 1, large firm respondents estimated that maintenance costs would be equal to $3,662,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.3 billion.211 Small firm respondents estimated that maintenance costs for Approach 1 would be equal to $475,600 per firm per year, for a total estimated annual maintenance cost of approximately $739 million.212 For Approach 2, large firm respondents estimated that maintenance costs would be equal to $3,148,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.0 billion,213 while small firms estimated maintenance costs for Approach 2 to be equal to $441,500 per firm per year, for a total annual cost of approximately $686 million.214 This implies an annual cost range of approximately $2.0 billion to $2.3 billion for large firms, and an annual cost range of approximately $686 million to $739 million for small firms for maintenance of reporting to the Central Repository. These maintenance costs are discrete costs for the maintenance of CAT reporting, and are not intended to show incremental costs against current regulatory reporting requirements. Based on the Costs to CAT Reporters Study, Participants estimate these incremental costs to be negligible.

+

Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the broker dealers, the Participants reviewed the results from the Costs to CAT Reporters Study for retirement of systems costs. Large firm respondents estimated costs to be equal to $2,830,000, for a total retirement of systems cost equal to approximately $1.47 billion. Small firms estimated that costs related to the retirement of systems would cost $864,000, for a total retirement of systems cost of approximately $1.10 billion.

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(4) Vendors

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Implementation Costs. For implementation costs associated with Vendors, the Participants reviewed the aggregate build costs received from the Costs to Vendors Study and identified that Approach 1 would cost $118,200,000 to implement, while it would cost $51,600,000 to implement Approach 2.215

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Maintenance Costs. For maintenance costs associated with Vendors, the Participants also reviewed the cost schedules received from the Costs to Vendors Study. Vendors indicated an aggregate estimated annual cost of $38,600,000 for maintenance of Approach 1, and annual estimated maintenance costs of $48,700,000 for Approach 2.216

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Retirement of Systems Costs. Vendors indicated an aggregate cost of $21,300,000 for the retirement of existing regulatory reporting systems.

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(5) Total Aggregate Costs

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Based on the analysis of responses to the studies described above, and cost estimates provided by the Shortlisted Bidders, the Participants estimate the initial aggregate cost to the industry related to building and implementing the CAT would range from $3.2 billion to $3.6 billion. Estimated annual aggregate costs for the maintenance and enhancement of the CAT would range from $2.8 billion and $3.4 billion. Additionally, costs to retire existing systems would be approximately $2.6 billion.

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(B) Impacts of Not Receiving Requested Exemptions

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On January 30, 2015, the Participants submitted a letter to request that the Commission grant exemptions, pursuant to its authority under Section 36 of the Exchange Act, from the requirement to submit a national market system plan that meets certain reporting requirements specified in SEC Rule 613(c) and (d). Specifically, the Participants requested exemptive relief related to: (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking executions to specific subaccount allocations on Allocation Reports; and (5) time stamp granularity. On September 2, 2015, the Participants supplemented their request with a supplemental request, clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).

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First, SEC Rule 613(c)(7) requires both options market makers and the options exchanges to record and report the details of options market maker quotes received by the options exchanges to the Central Repository. The Participants requested that the Commission provide the Participants with an exemption so that only options exchanges would record and report details for each options market maker quote and related Reportable Event to the Central Repository, while options market makers would be relieved of their obligation to record and report their quotes and related Reportable Events to the Central Repository. The Participants estimated that having both parties report options market maker quotes to the CAT would impose significant costs on the Plan Processor due to increased data storage and technical infrastructure, and on the options market makers due to a higher volume of reporting obligations. The Participants estimated that having both parties report options market maker quotes to the CAT would increase the size of data submitted to the CAT by approximately 18 billion records each day. Bidders estimated that requiring dual reporting of options market maker quotes would, over a five year period, lead to additional costs of between $2 million and $16 million for data storage and technical infrastructure for the Plan Processor. In addition, according to the results of a cost study conducted by three industry associations,217 the cost to options market makers to meet their quote reporting obligations ranges from $307 million to $382 million over a five year period.

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Second, Rule 613(c)(7) requires each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting order receipt or origination information to the Central Repository. The Commission noted that including a unique customer identifier could enhance the efficiency of surveillance and regulatory oversight. The Participants, however, favor the Customer Information Approach, that would require broker-dealers to provide detailed account and Customer information to the CAT, and have the Plan Processor correlate the Customer information across broker-dealers, assign a unique Customer identifier to each Customer and use that unique Customer identifier consistently across all CAT Data. The Participants believe that the Customer-ID approach imposes a significant cost burden on market participants and on the Plan Processor. According to cost estimates provided by the DAG,218 the cost for the top 250 CAT reporters to implement the Customer-ID as required in SEC Rule 613 would be at least $195 million. The Participants believe that this cost estimate is conservative, since it only represents the cost estimate for 11% of the total broker-dealers that are expected to be CAT Reporters.

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Third, SEC Rule 613(c)(7) requires that a CAT-Reporter-ID be reported to the Central Repository for each order and Reportable Event, so that regulators can determine which market participant took action with respect to an order at each Reportable Event. The Participants, however, have proposed to leverage existing business practices and identifiers (“Existing Identifier Approach”), rather than requiring new identifiers be established, as the former is deemed more efficient and cost-effective in implementing the CAT-Reporter-ID. The Participants believe that the CAT-Reporter-ID approach would impose a material cost burden on broker-dealers and Participants, as compared to the Existing Identifier Approach, since it would require major changes to broker-dealer systems. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to implement the CAT-Reporter-ID as required by SEC Rule 613 would be $78 million.

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Fourth, Rule 613(c)(7) requires each CAT Reporter to record and report the “the account number for any subaccounts to which the execution is allocated (in whole or part)” if an order is executed. The Participants acknowledge that this information is useful to regulators to fulfill their obligations to protect investors. However, the Participants estimate that meeting the obligations of the Rule would be unduly burdensome and costly to achieve given the existing allocation practices. As an alternative, the Participants proposed that allocations will be reported by CAT Reporters via a tool described as an Allocation Report. To create linkages from the order execution to the allocation process by means of an order identifier, the broker-dealers would be required to perform extensive re-engineering of their front, middle, and back office systems, and thus incur significant costs. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to link allocations to executions would be $525 million.

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Finally, Rule 613(d) requires the recording and reporting of the time of certain Reportable Events to the Central Repository with time stamps at least to the millisecond. The Participants understand that time stamp granularity to the millisecond reflects current industry standards with respect to electronically-processed events in the order lifecycle. However, due to the lack of precision, the industry practice with respect to manual orders is to capture manual time stamps with granularity at the level of one second. The Participants believe that compliance with the time stamp granularity requirements of the Plan for Manual Order Events would result in added costs to the industry as there may be a need to upgrade databases, internal messaging applications/ protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository. The Participants estimate that the total minimum cost to the industry to comply with a singular time stamp requirement for all CAT reporting would be approximately $10.5 million. This estimate is based on a current cost of $1,050 per manual timestamp clock which stamps to the second, with approximately 10,000 clocks requiring replacement across the industry. Upgrading this to millisecond granularity would likely add to the cost to the industry.

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(C) Allocation of Costs Across CAT Reporters

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Article XI of the CAT NMS Plan provides the process for determining the funding of the Company. In general, the Participants’ approach to funding of the Company is: (A) to operate the Company on a break-even basis, which means having fees imposed and collected that cover the Company’s costs and an appropriate reserve; and (B) to establish a fee structure that is equitable based on funding principles.219 Such equitable funding principles include: (1) to create transparent, predictable revenue streams aligned with anticipated costs; (2) to allocate costs among Participants and Industry Members taking into account the timeline for implementation of the CAT and the distinctions in the securities trading operations of Participants and Industry Members and their impact on the Company’s resources and operations; (3) to establish a tiered fee structure in which there is general comparability in the level of fees charged to CAT Reporters with the most CAT-related activity as measured by market share for Execution Venues, including ATSs, and by message traffic for non-ATS activities of Industry Members, where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members; (4) to provide ease of administrative functions; (5) to avoid disincentives such as burdens on competition and reduction in market quality; and (6) to build financial stability for the Company as a going concern.220

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Based on these principles, the Operating Committee will establish the Company’s funding, which is expected to arise primarily from fees charged to Participants and Industry Members. The Participants have sought input from the DAG as to the specific types of fees. Accordingly, the Participants propose to include the following fee types: (i) fixed fees payable by each Execution Venue that trades NMS Securities and OTC Equity Securities based on its market share (establishing two to five tiers of fixed fees); (ii) fixed fees payable by each Execution Venue that trades Listed Options (as defined in Rule 600(b)(35) of Regulation NMS) based on its market share (establishing two to five tiers of fixed fees); (iii) fixed fees payable by each Industry Member based on message traffic generated by such Industry Member (for the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; (ii) routing orders to and from any ATS sponsored by such Industry Member); and (iii) ancillary fees (e.g., fees for late or inaccurate reporting, corrections, and access and use of the CAT for regulatory and oversight purposes).221

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The Operating Committee will use two different criteria to establish fees – market share222 for Execution Venues, including ATSs, and message traffic for Industry Members’ non-ATS activities – due to the fundamental differences between the two types of entities. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, Bidders stated during workshops and in response to specific questions posed by the Participants that processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT. Thus, the Participants believe that basing fees on message traffic for non-Execution Venue Industry Members is consistent with an equitable allocation of the costs of the CAT. On the other hand, message traffic would not provide the same degree of differentiation between Participants that it does for Industry Members. Because the majority of message traffic at the Participants consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. In contrast, execution volume more accurately delineates the different levels of trading activity of the Participants. For these reasons, the Participants believe that market share is the appropriate metric to use in establishing fees for Participants. Moreover, given the similarity between the activity of exchange Participants and ATSs, both of which meet the definition of an “exchange” as set forth in the Exchange Act, the Participants believe that ATSs should be treated in the same manner as the exchange Participants for the purposes of determining the level of fees associated with the CAT.

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Costs are allocated across the different types of CAT Reporters (broker-dealers, Execution Venues) on a tiered basis, in order to equitably allocate costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT. The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic from firms in each tier. Therefore, larger broker-dealers, generating the majority of message traffic, will be in the higher tiers, and therefore be charged a higher fee. Smaller broker-dealers with low levels of message traffic will be in lower tiers and will be assessed a minimal fee for the CAT. The Participants estimate that up to 75% of broker-dealers will be in the lower tiers of the Funding Model.

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All fees under Article XI charged directly to Participants and indirectly to Industry Members will be reviewed by the Operating Committee at least annually.223 All proposed fees to be charged to Industry Members by Participants will be filed with the Commission pursuant to Section 19(b) of the Exchange Act.224 In addition, all disputes with respect to the fees the Company charges Participants will be resolved by the Operating Committee or a Subcommittee designated by the Operating Committee, subject to the right of Participants to seek redress from the Commission pursuant to SEC Rule 608 or in any other appropriate forum.225 The Participants will adopt rules requiring that disputes with respect to fees charged to Industry Members will be resolved by the Operating Committee or a Subcommittee, subject to the right of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.226

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The CAT NMS Plan contemplates that the Plan Processor will be responsible for developing and executing administrative processes and procedures to effectuate the smooth functioning of the CAT, consistent with the principles articulated in Article XI. These processes and procedures would include, but are not limited to, establishing budget, notice, billing and collection cycles that provide transparency, predictability and ease of administrative functions to CAT reporters. Criteria and schedules for ancillary fees that might be collected pursuant to Article XI are also anticipated to be published by the Operating Committee.

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In articulating the funding principles of the CAT NMS Plan, Participants have established the need for the CAT NMS Plan to, among other things: (1) create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate, and administer the CAT and the other costs of the Company; and (2) provide for ease of billing and other administrative functions. The funding principles articulated in Article XI should also inform the policies and procedures adopted by the Operating Committee in executing the associated functions. To that end, to promote fairness and transparency with respect to fees, the Participants expect that the Operating Committee will adopt policies, procedures, and practices around budgeting, assignment of tiers, adjudicating disputes, billing, and collection of fees that provide appropriate transparency to all CAT Reporters. Participants expect that policies or procedures adopted to implement the administration of fee allocation and collection among CAT Reporters would be subject to comment by impacted parties before adoption.

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(v) Alternatives Considered

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(A) Technical Solution

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SEC Rule 613(a)(1)(xii) directs Participants to discuss reasonable alternative approaches to creating, implementing and maintaining the CAT. As part of the development of the CAT NMS Plan, the Participants considered a variety of alternatives with respect to technical and user support considerations. The technical considerations include: primary storage, data ingestion format, development process, quality assurance staffing and user support staffing. The analysis presented in Appendix C, D.12, below, describes alternative approaches considered for each technical consideration and the ultimate choice of the CAT NMS Plan based on factors that consider feasibility, cost and efficiency.

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In addition, the questions included in the Costs to CAT Reporters Study described above permitted the Participants to evaluate cost considerations to Industry Members associated with two different technical formats for reporting audit trail data to the Central Repository. One approach might permit broker-dealers to submit information data to the Central Repository using their choice among existing industry protocols, such as FIX. The second approach provided a scenario where CAT Reporters would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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(B) Funding Model

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As discussed above, Article XI of the CAT NMS Plan sets forth the provisions for establishing the funding of the Company and recovering the costs of operating the CAT. The Participants recognize that there are a number of different approaches to funding the CAT and have considered a variety of different funding and cost allocation models. Each model has its potential advantages and disadvantages. For example, a structure in which all CAT Reporters are charged a fixed fee regardless of reportable activity would provide CAT Reporters greater certainty regarding their fee obligations, but may place undue burden on small CAT Reporters. A variable fee structure focused on specific reportable information may make it easier for Industry Members to pass fees to their customers. However, such fees would be more complex and difficult to administer. Participants were particularly sensitive to the possibility that the fee structure might create distortions to the economic activities of CAT Reporters if not set appropriately.

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The Participants considered alternatives to cost allocation ranging from a strict pro-rata distribution, regardless of the type or size of the CAT Reporters, to a distribution based purely on CAT Reporter activity. Participants also considered a variety of ways to measure activity, including notional value of trading (as currently used for purposes of Section 31 fees), number of trades or quotations, and all message traffic sent. Further, Participants considered the comparability of audit trail activity across different Eligible Securities. The Participants discussed the potential approaches to funding, including the principles articulated in Article XI and an illustrative funding model, with the DAG multiple times, beginning on September 3, 2014.

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After extensive analysis and taking into consideration feedback from the DAG, the Participants determined that a tiered fixed fee structure would be fair and relatively uncomplicated. The Participants discussed several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. For example, a review of OATS data for a recent month shows the wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders for the month and other broker-dealers submitting millions and even billions of orders in the same period. The Participants also considered a tiered model where CAT Reporters would be charged different variable fees based on tier assignment. However, the Participants believe a tiered fixed fee model is preferable to a variable model because a variable model would lack the transparency, predictability, and ease of calculation afforded by fixed fees. Such factors are crucial to estimating a reliable revenue stream for the Company and to permitting CAT Reporters to reasonably predict their obligations. Moreover, the Participants believe that the tiered approach would help ensure that fees are equitably allocated among similarly situated CAT Reporters and would further the goal of the Participants to lessen the impact on smaller firms. Irrespective of the approach taken with fees, the Participants believe that revenues generated should be aligned to the costs of building, implementing and maintaining the CAT, and if revenues collected are in excess of costs for any given year, such excess should be considered in setting fees for the following year.

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Finally, the Participants believe that it is important to establish a simple fee structure that is easy to understand and administer. The Participants are committed to establishing and billing fees so that Industry Members will have certainty and the ability to budget for them. In that regard, the CAT NMS Plan expressly provides that the Operating Committee shall not make any changes to any fees on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.227

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8. An Analysis of the Impact on Competition, Efficiency, and Capital Formation (SEC Rule 613(a)(1)(viii))

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As required by SEC Rule 613(a)(1)(viii), this section provides an analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining the CAT NMS Plan. In recognition of the complexity of this analysis, the Participants have evaluated a variety of sources of information to assist in the analysis of the impact of the CAT NMS Plan on competition, efficiency and capital formation. Specifically, the Participants have evaluated the many comments related to competition, efficiency and capital formation received in response to the Commission’s proposal of SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants considered the input of the DAG. Finally, the Participants used information derived from three cost studies described in the prior section on costs. Based on a review and analysis of these materials, the Participants believe that the CAT NMS Plan, as submitted, is justified given its estimated impacts on competition, efficiency and capital formation.

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(a) Impact on Competition

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Through an analysis of the data and information described above, the Participants have evaluated the potential impact of the CAT NMS Plan on competition, including the competitive impact on the market generally and the competitive impact on each type of Person playing a role in the market (e.g., Participants, broker-dealers, vendors, investors). Potential negative impacts on competition could arise if the CAT NMS Plan were to burden a group or class of CAT Reporters in a way that would harm the public’s ability to access their services, either through increasing costs or decreased provision of those services. These impacts may be direct, as in the provision of brokerage services to individual investors, or indirect, as in the aggregate costs of managing, trading and maintaining a securities holding. These impacts should be measured relative to the economic baseline, described above.

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The Participants have identified a series of potential impacts on competition that may arise as a result of the terms and conditions of the CAT NMS Plan. These potential impacts may be related to: (1) the technology ultimately used by the CAT and differences across CAT Reporters in their efforts necessary to meet the CAT NMS Plan’s requirements; (2) the method of cost allocation across CAT Reporters; and (3) changes in regulatory reporting requirements, and their attendant costs, particularly to smaller entities, who may previously have benefited from regulatory exemptions.

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In general, the Participants believe that the CAT NMS Plan will avoid disincentives such as placing an inappropriate burden on competition in the U.S. securities markets. The discussion below focuses on competition in the Participant and broker-dealer communities, where the Participants believe there is the greatest potential for impact on competition.

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(i) Participants

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The Participants already incur significant costs to maintain and surveil an audit trail of activity for which they are responsible. Each Participant bears these costs whether it expends internal resources to monitor relevant activity itself, or whether it contracts with others to perform these services on its behalf. The CAT NMS Plan, through the funding principles it sets forth in Section 11.2, seeks to distribute the regulatory costs associated with the development and maintenance of a meaningful and comprehensive audit trail in a principled manner. By calibrating the CAT NMS Plan’s funding according to these principles, the Participants sought to avoid placing undue burden on exchanges relative to their core characteristics, including market share and volume of message traffic. Thus, the Participants do not believe that any particular exchange in either the equities or options markets would be placed at a competitive disadvantage in a way that would materially impact the respective Execution Venue marketplaces for either type of security.

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In addition, because the CAT NMS Plan seeks to allocate costs in a manner consistent with the Participants’ activities, the Participants do not believe that it would discourage potential new entrants. For instance, an equity ATS – which would already incur costs under the CAT NMS Plan as a reporting broker-dealer – should not be discouraged from becoming a national securities exchanges because of the costs it would incur as a Participant based on its business model or pricing structure. As proposed here, the entity would be assessed exactly the same amount for a given level of activity whether it acted as an ATS or as an exchange. Accordingly, the Participants do not believe that adoption of the CAT NMS Plan would favor existing exchanges or types of exchanges vis-à-vis potential new competitors in a way that would degrade available Execution Venue services or pricing. For similar reasons, the Participants also do not believe that the costs of the CAT NMS Plan would distort the marketplace for existing or potential registered securities associations.

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(ii) Broker-Dealers

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Broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Further, competition may be harmed if a particular class or group of broker-dealers bears the costs disproportionately, and as a result, investors have more limited choices or increased costs for certain types of broker-dealer services.

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For larger broker-dealers, the Participants rely on the information obtained from the Costs to CAT Reporters Study and discussions with the industry to preliminarily conclude that the CAT NMS Plan will not likely have an adverse impact on competition. Under the CAT NMS Plan, broker-dealers would be assessed charges, as determined by the Operating Committee, for the build and maintenance of the CAT. They would also incur costs to build and maintain systems and processes necessary to submit and retain their own information to the Central Repository. The Participants’ efforts to align costs with market activity leads to an outcome where dollar costs are borne significantly more by larger entities.

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Additionally, large broker-dealers may view themselves as direct competitors to large Participants, in that they may provide similar execution services. The CAT NMS Plan seeks to mitigate competitive impacts by aligning the cost allocation in a manner that seeks comparability among the largest CAT Reporters regardless of their regulatory status.228

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According to the Costs to CAT Reporters Study, for large broker-dealers, the average decrease in maintenance costs associated with the CAT (i.e., the cost that CAT would impose on firms beyond the current economic baseline) would be $651,924, and the average decrease in maintenance costs for small firms would be $726,216 using Approach 1. For Approach 2, large broker-dealers would see a decrease in maintenance costs associated with the CAT of $1,170,548, and small firms would see a decrease in the same costs of $763,371. These averages could suggest that the decreased costs imposed by the CAT would represent a benefit to both large and small broker-dealers’ regulatory budgets. The Participants believe that the CAT NMS Plan would not materially disadvantage small broker-dealers versus large broker-dealers.

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For small broker-dealers, the Participants considered their contribution to market activity as an important determinant of the amount of the cost of the CAT that they should bear. While this allocation of costs may be significant for some small firms, and may even impact their business models materially, SEC Rule 613 requires these entities to report. The Participants have not identified a way to further minimize the costs to these firms within the context of the funding principles established as part of the CAT NMS Plan.

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The Participants were particularly sensitive during the development of the CAT NMS Plan to the potential burdens it could place on small broker-dealers. These broker-dealers may incur minimal costs under existing audit trail requirements because they are OATS-exempt or excluded broker-dealers or limited purpose broker-dealers. The Participants note that the CAT NMS Plan contemplates steps to diffuse the potential cost differential between large and small firms. For instance, small broker-dealers generally will have an additional year before they are required to start reporting data under the CAT NMS Plan to the Central Repository. This will permit these firms greater time to implement the changes to their own systems necessary to comply with the Plan. Furthermore, the Participants have sought exemptive relief concerning time stamps for recording the time of Manual Order Events.

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact competition. For instance, if the method of cost allocation created disincentives to quoting activity, certain broker-dealer’s business models might be affected more greatly than others. The Participants are unable to determine whether and how changing these incentives may impact competition. Participants intend to monitor changes to overall market activity and market quality and consider appropriate changes to the cost allocation model where merited.

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The Participants note that if the exemption requests that have been submitted to the Commission are not granted, the requirements of SEC Rule 613 may impose significantly greater costs that could potentially cause small broker-dealers to exit the marketplace, discourage new entrants to the small broker-dealer marketplace, or impact the broker-dealer landscape in other ways that may dampen competitive pressures.

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(b) Impact on Efficiency

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Through an analysis of the data and information described above, the Participants have evaluated the impact of the CAT NMS Plan on efficiency, including the impact on the time, resources and effort needed to perform various regulatory and other functions. In general, the Participants believe that the CAT NMS Plan should have a net positive effect on efficiency.

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Overall, the Participants believe that the CAT NMS Plan could improve market efficiency by reducing monitoring costs and increasing efficiency in the enforcement of Participant and Commission rules. Additionally, the Participants believe that the CAT will enable the Participants and the Commission to detect more quickly wrongdoing on a cross-market basis, which may deter some market participants from taking such actions. For example, FINRA’s equity cross-market surveillance patterns have already demonstrated the value of integrating data from multiple markets. FINRA has found that approximately 44 percent of the manipulation-based alerts it generated involved conduct on two or more equity markets and 43 percent of the alerts involved conduct by two or more market participants.229 A reduction in prohibited activity, as well as faster identification of such activity by regulators, would lead to a reduction in losses to investors and increased efficiency.

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The CAT could also create more focused efficiencies for broker-dealers and Participants by reducing the redundant and overlapping systems and requirements identified above. For all CAT Reporters, the standardization of various technology systems will provide, over time, improved process efficiencies, including efficiencies gained through the replacement of outdated processes and technology with cost saving and related staffing reductions. Standardization of systems will improve efficiency, for both Participants and broker-dealers, in the form of resource consolidation, sun-setting of systems, consolidated legacy systems and processes and consolidated data processing. In addition, more sophisticated monitoring may reduce the number of ad hoc information requests, thereby reducing the overall burden and increasing the operational efficiency of CAT Reporters.

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CAT Reporters may also experience various long term efficiencies from the increase in surveillance capabilities, such as greater efficiencies related to administrative functions provided by enhanced regulatory access, superior system speed and reduced system downtime. Moreover, the Commission and the Participants expect to have more fulsome access to unprocessed regulatory data and timely and accurate information on market activity, thus providing the opportunity for improved market surveillance and monitoring.

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Note, however, that uniform reporting of data to the Central Repository may require the development of data mapping and data dictionaries that will impose burdens in the short term. CAT Reporters also may incur additional time and direct costs to comply with new encryption mechanisms in connection with the transmission of PII data (although the quality of the process will improve).

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact efficiency. For instance, if the method of cost allocation created disincentives to the provision of liquidity, there may be an impact on the quality of the markets and an increase in the costs to investors to transact. As a result, the Participants set forth the funding principles that will guide the selection of the cost allocation model. The Participants have also sought out evidence available to best understand how cost allocation models may impact market participation, and more importantly, ultimately market outcomes.230

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The Participants intend to monitor changes to overall market activity and market quality and will consider appropriate changes to the cost allocation model where merited.

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(c) Impact on Capital Formation

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Through an analysis of the data and information described above, the Participants also have assessed the impact of the CAT NMS Plan on capital formation, including the impact on both investments and the formation of additional capital. In general, the Participants believe that the CAT NMS Plan will have no deleterious effect on capital formation.

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In general the Participants believe that the enhanced surveillance of the markets may instill greater investor confidence in the markets, which, in turn, may prompt greater participation in the markets. It is possible that greater investor participation in the markets could bolster capital formation by supporting the environment in which companies raise capital.

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Moreover, the Participants believe that the CAT NMS Plan would not discourage capital formation. As discussed in greater detail above, the Participants have analyzed the degree to which the CAT NMS Plan should cover Primary Market Transactions. Based on this analysis, the Participants believe that the CAT NMS Plan has been appropriately tailored so it does not create an undue burden on the primary issuances that companies may use to raise capital.

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In addition, the Participants do not believe that the costs of the CAT NMS Plan would come to bear on investors in a way that would materially limit their access to or participation in the capital markets.

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Finally, the Participants believe that, given the CAT NMS Plan’s provisions to secure the data collected and stored by the Central Repository, the CAT NMS Plan should not discourage participation by market participants who are worried about data security and data breaches. As described more fully in the CAT NMS Plan and Appendix C, The Security and Confidentiality of the Information Reported to the Central Repository, and Appendix D, Data Security, the Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing, as well as at rest, and for ensuring that the data is used only for permitted purposes. The Plan Processor will be required to provide physical security for facilities where data is transmitted or stored, and must provide for the security of electronic access to data by outside parties, including Participants and the Commission, CAT Reporters, or Data Submitters. The Plan Processor must include in these measures heightened security for populating, storing, and retrieving particularly sensitive data such as PII. Moreover, the Plan Processor must develop and maintain this security program with a dedicated staff including, among others, a Chief Information Security Officer dedicated to monitoring and addressing data security issues for the Plan Processor and Central Repository, subject to regular review by the Chief Compliance Officer. The Plan Processor also will be required to provide regular reports to the Operating Committee on a number of items, including any data security issues for the Plan Processor and Central Repository.

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(d) Impacts of the CAT NMS Plan Governance on Efficiency, Competition, and Capital Formation

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Participants considered the impacts of the CAT NMS Plan governance on efficiency, competition, and capital formation. Participants recognize that without effective governance, it will become harder for the CAT NMS Plan to achieve its intended outcome, namely, enhanced investor protection, in an efficient manner. Participants specifically considered two areas where ineffective governance might lead to economic distortions or inefficiencies: (i) the voting protocols defined in the CAT NMS Plan both for Participants in developing the CAT, and for the Operating Committee after the adoption of the CAT NMS Plan; and (ii) the role of industry advisors within the context of CAT NMS Plan governance.

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Participants understand that there may be detrimental impacts to adopting voting protocols that might impede the effective administration of the CAT System. For instance, too high a threshold for decision making may limit the ability of the body to adopt broadly agreed upon provisions. The extreme form of this would have been for the CAT NMS Plan to require unanimity on all matters. In such case, one dissenting opinion could effectively derail the entire decision-making apparatus. The inability to act in a timely way may create consequences for efficiency, competition, and capital. Conversely, if Participants set a voting threshold that is too low, it might have the impact of not giving sufficient opportunity to be heard or value to dissenting opinions and alternative approaches. As an example, if Participants were to set voting thresholds too low, it might be possible for a set of Participants to adopt provisions that might provide them a competitive advantage over other Participants. Either forms (a too high or too low threshold) could result in negative impacts to efficiency, competition, and capital formation. These issues apply in the context of efforts of the Participants to develop the CAT NMS Plan submitted here or in the context of the Operating Committee’s responsibilities after approval of the CAT NMS Plan.

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To address these concerns, Participants carefully considered which matters should require a Supermajority Vote and which matters should require a Majority Vote.231 The decision required Participants to balance the protection of rights of all parties with the interest of avoiding unnecessary deadlock in the decision making process. As a result, Participants have determined that use of a Supermajority Vote should be for instances considered by the Participants to have a direct and significant impact on the functioning, management, and financing of the CAT System. This formulation, relying on Majority Vote for routine decisions and Supermajority Vote for significant matters, is intended to meet the Commission’s direction for “efficient and fair operation of the NMS plan governing the consolidated audit trail.”232

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Participants also considered the role of industry representation as part of the governance structure. Participants recognize the importance of including industry representation in order to assure that all affected parties have a representative in discussing the building, implementation, and maintenance of the CAT System. Participants actively sought insight and information from the DAG and other industry representatives in developing the CAT NMS Plan. The CAT NMS Plan also contemplates continued industry representation through an Advisory Committee, intended to support the Operating Committee and to promote continuing efficiency in meeting the objective of the CAT.

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C. IMPLEMENTATION AND MILESTONES OF THE CAT

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9. A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix))

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As required by SEC Rule 613(a)(1)(ix), this section sets forth a plan to eliminate rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of, among other things, whether the collection of such information remains appropriate; if still appropriate whether such information should continue to be separately collected or should instead be incorporated into the CAT; or if no longer appropriate, how the collection of such information could be efficiently terminated.

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Order Audit Trail System (“OATS”)

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The OATS Rules impose obligations on FINRA members to record in electronic form and report to FINRA, on a daily basis, certain information with respect to orders originated, received, transmitted, modified, canceled, or executed by members relating to OTC equity securities236 and NMS Securities.237 OATS captures this order information and integrates it with quote and transaction information to create a time-sequenced record of orders, quotes, and transactions. This information is then used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws. In general, the OATS Rules apply to any FINRA member that is a “Reporting Member,” which is defined in Rule 7410 as “a member that receives or originates an order and has an obligation to record and report information under Rules 7440 and 7450.”

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Although FINRA is committed to retiring OATS in as efficient and timely a manner as practicable, its ability to retire OATS is dependent on a number of events. Most importantly, before OATS can be retired, the Central Repository must contain CAT Data sufficient to ensure that FINRA can effectively conduct surveillance and investigations of its members for potential violations of FINRA rules and federal laws and regulations, which includes ensuring that the CAT Data is complete and accurate. Consequently, one of the first steps taken by the Participants to address the elimination of OATS was an analysis of gaps between the informational requirements of SEC Rule 613 and current OATS recording and reporting rules. In particular, SEC Rule 613(c)(5) and (6) require reporting of data only for each NMS Security that is (a) registered or listed for trading on a national securities exchange; (b) or admitted to unlisted trading privileges on such exchange; or (c) for which reports are required to be submitted to the national securities association. SEC Rule 613(i) requires the Participants to provide to the Commission within six months after the Effective Date a document outlining how the Participants could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS Securities (“OTC Equity Securities”) and debt securities (and Primary Market Transactions in such securities). Even though SEC Rule 613 does not require reporting of OTC Equity Securities, the Participants have agreed to expand the reporting requirements to include OTC Equity Securities to facilitate the elimination of OATS.238

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Next, the Participants performed a detailed analysis of the current OATS requirements and the specific reporting obligations under SEC Rule 613 and concluded that there are 42 data elements found in both OATS and SEC Rule 613; however, there are 33 data elements currently captured in OATS that are not specified in SEC Rule 613.239 The Participants believe it is appropriate to incorporate data elements into the Central Repository that are necessary to retire OATS and the OATS Rules. The Participants believe that these additional data elements will increase the likelihood that the Central Repository will include sufficient order information to ensure FINRA can continue to perform its surveillance with CAT Data rather than OATS data and can, thus, more quickly eliminate OATS and the OATS Rules.

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The purpose of OATS is to collect data to be used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws and regulations. SEC Rule 613 requires the Participants to include in the CAT NMS Plan a requirement that all Industry Members report information to the Central Repository within three years after the Effective Date. Consistent with this provision, under the terms of Sections 6.4 and 6.7 of the CAT NMS Plan, some Reporting Members will not be reporting information to the Central Repository until three years after the Effective Date. Because FINRA must continue to perform its surveillance obligations without interruption, OATS cannot be entirely eliminated until all FINRA members who currently report to OATS are reporting CAT Data to the Central Repository. However, FINRA will monitor its ability to integrate CAT Data with OATS data to determine whether it can continue to perform its surveillance obligations. If it is practicable to integrate the data in a way that ensures no interruption in FINRA’s surveillance capabilities, FINRA will consider exempting firms from the OATS Rules provided they report data to the Central Repository pursuant to the CAT NMS Plan and any implementing rules.

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FINRA’s ability to eliminate OATS reporting obligations is dependent upon the ability of the Plan Processor and FINRA to work together to integrate CAT Data with the data collected by OATS. FINRA is committed to working diligently with the Plan Processor to ensure this process occurs in a timely manner; however, it is anticipated that Reporting Members will have to report to both OATS and the Central Repository for some period of time until FINRA can verify that the data into the Central Repository is of sufficient quality for surveillance purposes and that all reporting requirements meet the established steady state Error Rates set forth in Section A.3(b). Once this is verified, FINRA’s goal is to minimize the dual-reporting requirement.

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Finally, the Participants note that, pursuant to Section 19 of the Exchange Act, the amendment or elimination of the OATS Rules can only be done with Commission approval. Approval of any such filings is dependent upon a number of factors, including public notice and comment and required findings by the Commission before it can approve any amendments; therefore, FINRA cannot speculate how long this process may ultimately take.

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10. Objective Milestones to Assess Progress (SEC Rule 613(a)(1)(x))

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As required by SEC Rule 613(a)(1)(x), this section sets forth a series of detailed objective milestones, with required completion dates, toward implementation of the consolidated audit trail.

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(a) Publication and Implementation of the Methods for Providing Information to the Customer-ID Database

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(b) Submission of Order and MM Quote Data to Central Repository

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(c) Linkage of Lifecycle of Order Events

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(d) Access to the Central Repository for Regulators

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(e) Integration of Other Data (“Other Data” includes, but is not limited to, SIP quote and trade data, OCC data, trade and quote information from Participants and reference data)

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D. PROCESS FOLLOWED TO DEVELOP THE NMS PLAN: These considerations require the CAT NMS Plan to discuss: (i) the views of the Participants’ Industry Members and other appropriate parties regarding the creation, implementation, and maintenance of the CAT; and (ii) the alternative approaches to creating, implementing, and maintaining the CAT considered and rejected by the Participants.

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11. Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi))

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(a) Process Used to Solicit Views:

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When the Participants first began creating a CAT pursuant to SEC Rule 613, the Participants developed the following guiding principles (the “Guiding Principles”):

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i. The CAT must meet the specific requirements of SEC Rule 613 and achieve the primary goal of creating a single, comprehensive audit trail to enhance regulators’ ability to surveil the U.S. markets in an effective and efficient way.

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ii. The reporting requirements and technology infrastructure developed must be adaptable to changing market structures and reflective of trading practices, as well as scalable to increasing market volumes.

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iii. The costs of developing, implementing, and operating the CAT should be minimized to the extent possible. To this end, existing reporting structures and technology interfaces will be utilized where practicable.

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iv. Industry input is a critical component in the creation of the CAT. The Participants will consider industry feedback before decisions are made with respect to reporting requirements and cost allocation models.

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The Participants explicitly recognized in the Guiding Principles that meaningful input by the industry was integral to the successful creation and implementation of the CAT, and as outlined below, the Participants have taken numerous steps throughout this process to ensure the industry and the public have a voice in the process.

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(i) General Industry Solicitation

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SEC Rule 613 was published in the Federal Register on August 1, 2012, and the following month, the Participants launched the CAT NMS Plan Website, which includes a dedicated email address for firms or the public to submit views on any aspect of the CAT. The CAT NMS Plan Website has been used as a means to communicate information to the industry and the public at large since that time. Also beginning in September 2012, the Participants hosted several events intended to solicit industry input regarding the CAT NMS Plan. A summary of the events is provided below:241

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• CAT Industry Call (September 19, 2012). The Participants provided an overview of SEC Rule 613, the steps the Participants were taking to develop a CAT NMS Plan as required by SEC Rule 613, and how the Participants planned to solicit industry comments and feedback on key implementation issues.

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• CAT Industry Events (October 2012). The Participants provided an overview of SEC Rule 613 and the steps the Participants were taking to develop an NMS Plan as required by SEC Rule 613. The events included an open Q & A and feedback session so that Industry Members could ask questions of the Participants and share feedback on key implementation issues. Two identical sessions were held on October 15, 2012 from 2:00 p.m. to 4:00 p.m. and on October 16, 2012 from 10:00 a.m. to 12:00 p.m. A total of 89 Industry Members attended the October 15 event in person, and a total of 162 Industry Members attended it by phone. A total of 130 Industry Members attended the October 16 event in person, and a total of 48 Industry Members attended it by phone.

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• CAT Industry Call and WebEx (November 29, 2012). The Participants provided an update on CAT NMS Plan development efforts including the process and timeline for issuing the RFP to solicit Bids to build and operate the CAT.

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• CAT Industry Events (February 27, 2014 and April 9, 2014). During these two events, the Participants provided an overview of the latest progress on the RFP process and the overall development of the NMS Plan. A total of 120 Industry Members attended the February event in person, and a total of 123 Industry Members attended it by phone. A total of 46 Industry Members attended the April event in person, and a total of 76 Industry Members attended it by phone.

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• CAT Cost Study Webinars (June 25, 2014 and July 9, 2014). The Participants hosted two Webinars to review and answer questions related to the Reporter Cost Study. There were approximately 100 to 120 Industry Members on each call.

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• CAT Industry Call and WebEx (December 10, 2014). The Participants provided an update on CAT NMS Plan development efforts, including filing of the CAT NMS Plan on September 30, 2014, the development of a funding model, and the PPR, which documents additional requirements for the CAT.

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For the above events, documentation was developed and presented to attendees, as well as posted publicly on the CAT NMS Plan Website.

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In addition to the above events, some Participants individually attended or participated in additional industry events, such as SIFMA conferences and FIF working groups, where they provided updates on the status of CAT NMS Plan development and discussed areas of expected CAT functionality.

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The Participants received general industry feedback from broker-dealers and software vendors.242 The Participants reviewed such feedback in detail, and addressed as appropriate while developing the RFP.

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The Participants also received industry feedback in response to solicitations by the Participants for industry viewpoints as follows:

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• Proposed RFP Concepts Document (published December 5, 2012, updated January 16, 2013). The Participants published via the CAT NMS Plan Website this document to solicit feedback on the feasibility and cost of implementing the CAT reporting requirements being considered by the Participants. Feedback was received from seven organizations, including software vendors, industry associations and broker-dealers, and the Participants discussed and addressed the feedback as appropriate in the final RFP document.

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• Representative Order Scenarios Solicitation for Feedback (February 1, 2013). The Participants solicited feedback via the CAT NMS Plan Website on potential CAT reporting requirements to facilitate the reporting of representative orders. Approximately 30 responses were received.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (April 22, 2013). The Participants solicited feedback via the CAT NMS Plan Website on four components of the CAT NMS Plan: (1) Primary Market Transactions; (2) Advisory Committee; (3) Time Stamp Requirement; and (4) Clock Synchronization. Approximately 80 Industry Members provided responses. FIF, SIFMA, and Thomson Reuters submitted detailed responses to the request for comments.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (June 2013). The Participants solicited feedback via the CAT NMS Plan Website concerning Customer identifiers, Customer information, CAT-Reporter-IDs, CAT-Order-IDs, CAT intra-firm order linkages, CAT inter-firm order linkages, broker-dealer CAT order-to-exchange order linkages, data transmission, and error correction.

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• CAT Industry Feedback on Clock Drift and Time Stamp Issues (September 2013). The Participants solicited feedback via the DAG concerning the implementation impact associated with a 50 millisecond clock drift requirement for electronic orders and executions.

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• Cost Survey on CAT Reporting of Options Market Maker Quotes (November 2013). The Participants solicited feedback via the DAG concerning the implementation impact and costs associated with reporting of quotes by options market makers to the Central Repository.

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• Cost Estimates for CAT Exemptive Relief (December 2014). The Participants solicited feedback via the DAG regarding minimum additional costs to be expected by Industry Members in the absence of the requested Exemptive Relief.

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• Cost Estimate for Adding Primary Market Transactions in CAT (February 2015). The Participants solicited feedback via the DAG concerning the feasibility and costs of broker-dealers to report to the Central Repository information regarding primary market transactions in NMS securities.

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• Clock Offset Survey (February 2015). The Participants solicited further feedback via the DAG concerning current broker-dealer clock synchronization practices and expected costs associated with complying with a 50ms, 5ms, 1ms, and 100 microsecond clock drift requirement for electronic orders and executions.

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Feedback on these topics was received primarily through discussion during meetings of the DAG.

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(ii) The Development Advisory Group (DAG)

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In furtherance of Guiding Principle (iv) above, the Participants solicited members for the DAG in February 2013 to further facilitate input from the industry regarding various topics that are critical to the success of the CAT NMS Plan. Initially, the DAG consisted of 10 firms that represented large, medium, and small broker-dealers, the Options Clearing Corporation (OCC), a service bureau and three industry associations: the Security Traders Association (STA), SIFMA, and FIF.

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In March 2014, the Participants invited additional firms to join the DAG in an effort to ensure that it reflected a diversity of perspectives. At this time, the Participants increased the membership of the DAG to include 12 additional firms. As of January 2015, the DAG consisted of the Participants and Representatives from 24 firms and industry associations.

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The DAG has had 49 meetings since April 2013. Topics discussed with the DAG have included:

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• CAT Plan Feedback. The Participants shared draft versions of the CAT NMS Plan, including the PPR, as it was being developed with the DAG, who provided feedback to the Participants. The Participants reviewed and discussed this feedback with the DAG, and incorporated portions of it into the CAT NMS Plan.

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• Options Market Maker Quotes. The DAG discussed the impact of options market maker quotes on the industry. A cost analysis was conducted by the industry trade associations to analyze the impact of market maker quote reporting, as well as adding a “quote sent” time stamp to messages sent to exchanges by all options market makers The Participants included in the Exemptive Request Letters a request for exemptive relief related to option market maker quotes given that exchanges will be reporting this data to the CAT.

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• Customer-ID. The DAG discussed the requirements for capturing Customer-ID. The Participants proposed a Customer Information Approach in which broker-dealers assign a unique Firm Designated ID to each Customer and the Plan Processor creates and stores the Customer-ID. This concept was supported by the DAG and the Participants included in the Exemptive Request Letters a request for exemptive relief related to the Customer-ID to reduce the reporting on CAT Reporters.

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• Time Stamp, Clock Synchronization and Clock Drift. The DAG discussed time stamps in regards to potential exemptive relief on the time stamp requirements for allocations and Manual Order Events. In addition, industry clock synchronization processes were discussed as well as the feasibility of specific clock drift requirements (e.g., 50ms), with the DAG and the FIF conducting an industry survey to identify the costs and challenges associated with various levels of clock synchronization requirements.243 The Participants included in the Exemptive Request Letters a request for exemptive relief related to manual time stamps.

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• Exemptive Request Letters. In addition to the specific areas detailed above (Options Market Maker Quotes, Customer-ID, and Time Stamp, Clock Synchronization, and Clock Drift), the DAG provided input and feedback on draft versions of the Exemptive Request Letters prior to their filing with the SEC, including cost estimates to firms and the Industry as a whole should the exemptive requests not be granted. This feedback was discussed by the Participants and the DAG and incorporated into the Exemptive Request Letters. The DAG also provided input and feedback on the Exemptive Request Letters covering Linking Allocations to Executions and Account Effective Date submitted on April 3, 2015 and September 2, 2015 respectively.

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• Primary Markets. At the request of the Participants, the DAG discussed with the Participants the feasibility, costs, and benefits associated with reporting allocations of NMS Securities in Primary Market Transactions. The DAG further provided estimated costs associated with reporting allocations of NMS Securities in Primary Market Transactions at the top-account and sub-account levels, which was incorporated into the CAT NMS Plan.244

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• Order Handling Scenarios. The DAG discussed potential CAT reporting requirements for certain order handling scenarios and additional corresponding sub-scenarios (e.g., riskless principal order and sub-scenarios involving post-execution print-for-print matching, pre-execution one-to-one matching, pre-execution many-to-one matching, complex options and auctions) An Industry Member and Participant working group was established to discuss order handling scenarios in more detail.

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• Error Handling and Correction Process. The DAG discussed error handling and correction process. Industry Members of the DAG provided recommendations for making the CAT error correction processes more efficient. The Participants have reviewed and analyzed these recommended solutions for error correction processes and incorporated them in the requirements for the Plan Processor.

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• Elimination of Systems. The DAG discussed the gaps between CAT and both OATS and EBS. An OATS-EBS-CAT gap analysis was developed and published on the CAT NMS Plan Website to identify commonalities and redundancies between the systems and the functionality of the CAT. Additionally, gaps between LTID and the CAT were also developed. Additional examples of systems and rules being analyzed include, but are not limited to: CBOE Rule 8.9, PHLX Rule 1022, COATS, Equity Cleared Reports, LOPR, and FINRA Rule 4560.

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• Cost and Funding of the CAT. The DAG helped to develop the cost study that was distributed to Industry Members. Additionally, the Participants have discussed with the DAG the funding principles for the CAT and potential funding models.

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In addition, a subgroup of the DAG has met six times to discuss equity and option order handling scenarios, order types, how and whether the orders are currently reported and how linkages could be created for the orders within the CAT.

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(b) Summary of Views Expressed by Members and Other Parties and How Participants Took Those Views Into Account in Preparing the CAT NMS Plan

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The various perspectives of Industry Members and other appropriate parties informed the Participants’ consideration of operational and technical issues during the development of the CAT NMS Plan. In addition to the regular DAG meetings and special industry calls and events noted above, the Participants conducted multiple group working sessions to discuss the industry’s unique perspectives on CAT-related operational and technical issues. These sessions included discussions of options and equity order scenarios and the RFP specifications and requirements.

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Industry feedback was provided to Participants through gap analyses, cost studies, comment letters and active discussion in DAG meetings and industry outreach events. Specific topics on which the industry provided input include:

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Overall Timeline. Industry Members expressed a concern that the original timeline for implementation of the CAT is significantly shorter than the timeline for other large scale requirements such as Large Trader Reporting. The industry requested that, in developing the overall timeline for development and implementation of the CAT NMS Plan, the Participants account for additional industry comment/input on specifications in the official timeline and discussed risk mitigation strategies for implementation of the Central Repository.

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Request for proposal. The Participants provided relevant excerpts of the RFP to DAG members for review and input. These sections were discussed by the Participants, and appropriate feedback was incorporated prior to publishing the RFP.

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Options Market Maker Quotes. Industry Members expressed the view that requiring market makers to provide quote information to the CAT will be duplicative of information already being submitted to the CAT by the exchanges. Participants worked closely with DAG members to develop an alternative approach that will meet the goals of SEC Rule 613, and which is detailed in the Exemptive Request Letter that the Participants submitted to the Commission related to manual time stamps.

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Customer-ID. Extensive DAG discussions reviewed the Customer-ID requirements in SEC Rule 613. The industry expressed significant concern that the complexities of adding a unique CAT customer identifier to order reporting would introduce significant costs and effort related to the system modifications and business process changes broker-dealers would face in order to implement this requirement of SEC Rule 613. Working with Industry Members, the Participants proposed a Customer Information Approach in which broker-dealers would assign a unique Firm Designated ID to each Customer which the Plan Processor would retain. Additional feedback was provided by the DAG for the use of the Legal Entity Identifier (“LEI”) as a valid unique customer identifier as an alternative to Tax Identification Numbers to identify non-natural person accounts. This Customer Information Approach is included in the Exemptive Request Letters that the Participants submitted to the Commission.

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Error Correction. DAG members discussed the criticality of CAT Data quality to market surveillance and reconstruction, as well as the need for a robust process for the timely identification and correction of errors. Industry Members provided feedback on error correction objectives and processes, including the importance of those data errors not causing linkage breaks. This feedback was incorporated into the RFP and relevant portions of the PPR.

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Industry Members also suggested that CAT Reporters be provided access to their submitted data. Participants discussed the data security and cost considerations of this request and determined that it was not a cost-effective requirement for the CAT.

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Governance of the CAT. Industry Members provided detailed recommendation for the integration of Industry Members into the governance of the CAT, including an expansion of the proposed Advisory Committee to include industry associations such as FIF and SIFMA. Industry Members also recommended a three-year term with one-third turnover per year is recommended to provide improved continuity given the complexity of CAT processing.

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The Participants have discussed CAT governance considerations with the DAG at several meetings. The Participants incorporated industry feedback into the CAT NMS Plan to the extent possible in light of the regulatory responsibilities placed solely upon the Participants under the provisions of SEC Rule 613. The proposed structure and composition of the Advisory Committee in Article 4.12 was discussed with the DAG in advance of the submission of this Plan.

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Role of Operating Committee. The Operating Committee, consisting of one voting member representing each Participant, is structured to ensure fair and equal representation of the Participants in furtherance of SEC Rule 613(b)(1). The overarching role of the Operating Committee is to manage the Company and the CAT System similar to the manner in which a board of directors manages the business and affairs of a corporation. The primary and more specific role of the Operating Committee is to make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and the CAT NMS Plan. In connection with its role, the Operating Committee has the right, power and authority to exercise all of the powers of the Company, to make all decisions, and to authorize or otherwise approve all actions by the Company, except as otherwise provided by applicable law or as otherwise provided in the CAT NMS Plan (Section 4.1 of the CAT NMS Plan). The Operating Committee also monitors, supervises and oversees the actions of the Plan Processor, the Chief Compliance Officer and the Chief Information Security Officer, all of whom are involved with the CAT System on a more detailed and day-to-day basis.

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The decisions made by the Operating Committee include matters that are typically considered ordinary course for a governing body like a board of directors (e.g., approval of compensation of the Chief Compliance Officer (Section 6.2(a)(iv) the CAT NMS Plan) and approval to hold an executive session of the Operating Committee (Section 4.3(a)(v) of the CAT NMS Plan)), in addition to matters that are specific to the functioning, management and financing of the CAT System (e.g., changes to Technical Specifications (Sections 4.3(b)(vi)-(vii) of the CAT NMS Plan) and significant changes to the CAT System (Section 4.3(b)(v) of the CAT NMS Plan)).

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The CAT NMS Plan sets forth a structure for decisions that the Operating Committee may make after approval of the CAT NMS Plan by the SEC. These decisions relate to events that may occur in the future as a result of the normal operation of any business (e.g., additional capital contributions (Section 3.8 of the CAT NMS Plan), approval of a loan to the Company (Section 3.9 of the CAT NMS Plan)) or that may occur due to the operation of the CAT System (e.g., the amount of the Participation Fee to be paid by a prospective Participant (Section 3.3(a) of the CAT NMS Plan)). These decisions cannot be made at the time of approval of the CAT NMS Plan because the Operating Committee will need to make its determination based on the facts and circumstances as they exist in the future. For example, in determining the appropriate Participation Fee, the Operating Committee will apply the factors identified in Section 3.3 of the CAT NMS Plan (e.g., costs of the Company and previous fees paid by other new Participants) to the facts existing at the time the prospective Participant is under consideration. Another example is the establishment of funding for the Company and fees for Participants and Industry Members. Section 11.2 of the CAT NMS Plan sets forth factors and principles that the Operating Committee will use in determining the funding of the Company. The Operating Committee then has the ability to review the annual budget and operations and costs of the CAT System to determine the appropriate funding and fees at the relevant future time. This approach, which sets forth standards at the time the CAT NMS Plan is approved that will be applied to future facts and circumstances, provides the Operating Committee with guiding principles to aid its decision-making in the future.

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The Participants also recognize that certain decisions that are fundamental and significant to the operation of the Company and the CAT System must require the prior approval of the SEC, such as the use of new factors in determining a Participation Fee (Section 3.3(b)(v) of the CAT NMS Plan). In addition, any decision that requires an amendment to the CAT NMS Plan, such as termination of a Participant (Section 3.7(b) of the CAT NMS Plan), requires prior approval of the SEC (Section 12.3 of the CAT NMS Plan).

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The Operating Committee has the authority to delegate administrative functions related to the management of the business and affairs of the Company to one or more Subcommittees and other Persons; however, the CAT NMS Plan expressly states that the Operating Committee may not delegate its policy-making functions (except to the extent policy-making determinations are already delegated as set forth in the CAT NMS Plan, which determinations will have been approved by the SEC) (Section 4.1 of the CAT NMS Plan). For example, the CAT NMS Plan provides for the formation of a Compliance Subcommittee to aid the Chief Compliance Officer in performing compliance functions, including (1) the maintenance of confidentiality of information submitted to the CAT; (2) the timeliness, accuracy and completeness of information; and (3) the manner and extent to which each Participant is meeting its compliance obligations under SEC Rule 613 and the CAT NMS Plan (Section 4.12(b) of the CAT NMS Plan). The Operating Committee also has delegated authority to the Plan Processor with respect to the normal day-to-day operating function of the Central Repository (Section 6.1 of the CAT NMS Plan). Nevertheless, decisions made by the Plan Processor that are more significant in nature remain subject to approval by the Operating Committee, such as decisions related to the implementation of policies and procedures (Section 6.1(c) of the CAT NMS Plan), appointment of the Chief Compliance Officer, Chief Information Officer, and Independent Auditor (Section 6.1(b) of the CAT NMS Plan), Material System Changes or any system changes for regulatory compliance (Sections 6.1(i) and 6.1(j) of the CAT NMS Plan). In addition, the Operating Committee will conduct a formal review of the Plan Processor’s performance under the CAT NMS Plan on an annual basis (Section 6.1(n) of the CAT NMS Plan). As to Subcommittees that the Operating Committee may form in the future, the Participants have determined that the Operating Committee will establish a Selection Subcommittee to select a successor Plan Processor when the time arises (Section 6.1(t) of the CAT NMS Plan). In the future, the Operating Committee will take a similar approach when delegating authority by providing Subcommittees or other Persons with discretion with respect to administrative functions and retaining authority to approve decisions related to policy and other significant matters of the Company and the CAT System.

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The role of the Operating Committee, including the delegation of its authority to Subcommittees and other limited Persons, as provided in the CAT NMS Plan is similar to that of other national market system plans, including the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC. It also is based on rules and regulations under the Exchange Act, and general principles with respect to the governance of a limited liability company. All decisions made by the Operating Committee will be governed by the guiding principles of the CAT NMS Plan and SEC Rule 613.

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Voting Criteria of the Operating Committee: This section describes the voting criteria for decisions made by the Operating Committee, which consists of a representative for each Participant, and by any Subcommittee of the Operating Committee in the management and supervision of the business of the Company and the CAT System.

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A Majority Vote (an affirmative vote of at least a majority of all members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is the default standard for decisions that are typically considered ordinary course matters for a governing body like a board of directors or board of managers or that address the general governance and function of the Operating Committee and its Subcommittees. All actions of the Company requiring a vote by the Operating Committee or any Subcommittee requires authorization by a Majority Vote except for matters specified in certain sections of the CAT NMS Plan described below, which matters require either a Supermajority Vote or a unanimous vote. As a general matter, the approach adopted by the Operating Committee is consistent with the voting criteria of the NASDAQ Unlisted Trading Privileges Plan (the “NASDAQ UTP Plan”), the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC, the Consolidated Quotation Plan and the Consolidated Tape Association Plan.

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A Supermajority Vote (an affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is required to authorize decisions on matters that are outside ordinary course of business and are considered by the Participants to have a direct and significant impact on the functioning, management and financing of the CAT System. This approach was informed by similar plans (e.g., the NASDAQ UTP Plan, which requires a unanimous vote in many similar circumstances); however, the CAT NMS Plan has the lower requirement of a Supermajority Vote because overuse of the unanimity requirement makes management and oversight difficult. This approach takes into account concerns expressed by the Participants regarding management of the CAT NMS Plan, an is consistent with suggestions in the Adopting Release for the Participants to take into account t need for efficient and fair operation of the CAT NMS Plan and to consider the appropriateness of unanimity requirement and the possibility of a governance requirement other than unanimity, or even supermajority approval, for all but the most important decisions.

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The Participants believe that certain decisions that may directly impact the functioning and performance of the CAT System should be subject to the heightened standard of a Supermajority Vote, such as: selection and removal of the Plan Processor and key officers; approval of the initial Technical Specifications; approval of Material Amendments to the Technical Specifications proposed by the Plan Processor; and direct amendments to the Technical Specifications by the Operating Committee. In addition, the Participants believe the instances in which the Company enters into or modifies a Material Contract, incurs debt, makes distributions or tax elections or changes fee schedules should be limited, given that the Company is intended to operate on a break-even basis. Accordingly, those matters should also require the heightened standard of a Supermajority Vote.

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A unanimous vote of all Participants is required in only three circumstances. First, a decision to obligate Participants to make a loan or capital contribution to the Company requires a unanimous vote (Section 3.8(a) of the CAT NMS Plan). Requiring Participants to provide additional financing to the Company is an event that imposes an additional and direct financial burden on each Participant, thus it is important that each Participant’s approval is obtained. Second, a decision by the Participants to dissolve the Company requires unanimity (Section 10.1 of the CAT NMS Plan). The dissolution of the Company is an extraordinary event that would have a direct impact on each Participant’s ability to meet its compliance requirements so it is critical that each Participant consents to this decision. Third, a unanimous vote is required if Participants decide to take an action by written consent in lieu of a meeting (Section 4.10 of the CAT NMS Plan). In that case, because Participants will not have the opportunity to discuss and exchange ideas on the matter under consideration, all Participants must sign the written consent. This approach is similar to the unanimity requirement under the Delaware General Corporation Law for decisions made by written consent of the directors of a corporation in lieu of a meeting.

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Voting on Behalf of Affiliated Participants: Each Participant has one vote on the Operating Committee to permit equal representation among all the Participants. Initially, the Operating Committee will have 19 Participants. Of the 19 Participants, there are five Participants that are part of the Affiliated Participants Group and five Participants without any Affiliated Participants. Because of the relationship between the respective Affiliated Participants and given the large number of Participants on the Operating Committee, the Participants believe an efficient and effective way of structuring the Operating Committee in order to have an orderly and well-functioning committee is to permit but not require one individual to serve as a voting member for multiple Affiliated Participants. This approach does not change the standard rule that each Participant has one vote. This approach provides Affiliated Participants with the flexibility to choose whether to have one individual represent one or more of the Affiliated Participants or to have each of them represented by a separate individual. Affiliated Participants may likely vote on a matter similarly, and allowing them to choose the same individual as a voting member would be a convenient and practical way of having the Affiliated Participants’ votes cast. Because there is no requirement that the representative of multiple Affiliated Participants cast the same vote for all represented Participants, there is no practical difference between this approach and an approach that mandates a separate representative for each Participant. In addition, the Participants considered whether this approach would result in less participation because of a reduced number of individuals on the Operating Committee. If each group of Affiliated Participants were to choose one individual to serve as a voting member, there would be still be 10 individuals on the Operating Committee, which the Participants do not believe would cause less active representation or participation or would otherwise lead to unwanted concentration on the Operating Committee.

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Affiliated Participant Groups and Participants without Affiliations:

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1. New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC

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2. The NASDAQ Stock Market LLC; NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX LLC

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3. BATS Exchange, Inc.; BATS Y-Exchange, Inc.; EDGX Exchange, Inc.; EDGA Exchange, Inc.

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4. Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated

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5. International Securities Exchange, LLC; ISE Gemini, LLC

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6. National Stock Exchange, Inc.

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7. Chicago Stock Exchange, Inc.

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8. BOX Options Exchange LLC

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9. Miami International Securities Exchange LLC

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10. Financial Industry Regulatory Authority, Inc.

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Conflicts of Interest Definition: The Participants arrived at the definition of Conflicts of Interest set forth in Article I of the CAT NMS Plan based on a review of existing rules and standards of securities exchanges, other plans, including the Selection Plan as to qualifications of a Voting Senior Officer of a Bidding Participant, and general corporate and governance principles.

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Transparency in the Bidding and Selection Process: DAG members requested input into the bidding and selection process for the Plan Processor, citing the extensive impact of CAT requirements on the industry as well as proposed cost for compliance. Specifically, Industry Members requested that non-proprietary aspects of the responses to the RFP should be available to the public to inform the discussion regarding the costs and benefits of various CAT features and the technological feasibility of different solutions. Participants, working with counsel, determined that such information could be appropriately shared with DAG members pursuant to the provisions of a non-disclosure agreement (“NDA”) that was consistent with the terms of the NDA executed between the Participants and the Bidders. After extensive discussion, DAG members declined to sign such an NDA. The Participants continued to share non-bid specific information and to solicit the views and perspective of DAG members as it developed a Plan approach and related solutions.

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Time Stamp Granularity and Clock Synchronization Requirement: Industry Members recommended a millisecond time stamp for electronic order and execution events and a time stamp in seconds for manual order handling. Industry Members suggested a grace period of two years after the CAT requirements are finalized to allow broker-dealers sufficient time to meet the millisecond time stamp granularity. In addition, Industry Members recommended maintaining the current OATS rule of a one second clock drift tolerance for electronic order and execution events, citing a significant burden to Industry Members to comply with a change to the current one-second clock drift.245 Participants conducted active discussions with Industry Members on this topic, and included in the Exemptive Request Letter a request for exemptive relief related to time stamp granularity for Manual Order Events.

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Equitable Cost and Funding: Industry Members expressed the view that any funding mechanism developed by the Participants should provide for equitable funding among all market participants, including the Participants. The Participants recognized the importance of this viewpoint and have incorporated it within the guiding principles that were discussed with the Industry.

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Order ID/Linkages: The DAG formed an order scenarios working group to discuss approaches to satisfy the order linkage requirements of SEC Rule 613. On the topic of allocations, Industry Members provided feedback that the order and execution processes are handled via front office systems, while allocation processes are conducted in the back office. Industry Members expressed the view that creating linkages between these systems, which currently operate independently, would require extensive reengineering of middle and back office processes not just within a broker-dealer but across broker-dealers, imposing significant additional costs on the industry as a whole. Given the widespread use of average price processing accounts, clearing firms, prime brokers and self-clearing firm cannot always determine which specific order results in a given allocation or allocations. Industry Members worked closely with Participants on a proposed alternative approach which the Participants submitted to the Commission in the Exemptive Request Letters.

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Elimination of Systems and Rules: The elimination of duplicative and redundant systems and rules is a critical aspect of the CAT development process. Industry DAG members including SIFMA and FIF provided broad based and comprehensive insight on the list of existing regulatory systems and Participant rules that they deem to be duplicative, including, among others, OATS, the EBS reporting system, and Large Trader reporting. In addition, FIF provided a gap analysis of CAT requirements against Large Trader transactional reporting obligations.

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The Participants discussed feedback from the industry in a variety of forums: (i) during DAG meetings; (ii) in relevant Subcommittee meetings, depending on the topic; and (iii) at two multi-day offsite meetings where Representatives of each Participant gathered in a series of in-person workshops to discuss the requirements of the Plan Processor, both technical and operational. This was in addition to numerous video-conference meetings when Participants discussed and developed the RFP document incorporating, where appropriate, feedback from the industry.

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12. Discuss Reasonable Alternative Approaches that the Participants Considered to Create, Implement, and Maintain the CAT (SEC Rule 613(a)(1)(xii))

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The Participants, working as a consortium, selected the approach reflected in the Plan through a detailed analysis of alternatives, relying on both internal and external knowledge and expertise to collect and evaluate information related to the CAT. For some of the requirements of SEC Rule 613, the Participants’ analysis indicated that the required approach would be unduly burdensome or complex. In these cases, the Participants have requested exemption from these requirements in the Exemptive Request Letter, which details the analysis performed and alternatives considered for these specific requirements.

+

The Participants leveraged their own extensive experience with regulatory, technical and securities issues in formulating, drafting and filing the CAT NMS Plan. Specifically, the nineteen Participants formed various Subcommittees to focus on specific critical issues during the development of the CAT NMS Plan. The Subcommittees included:

+

• a Governance Committee, which developed recommendations for decision-making protocols and voting criteria critical to the development of the CAT NMS Plan, in addition to developing formal governance and operating structures for the CAT NMS Plan;

+

• a Technical Committee, which developed the technical scope requirements of the CAT, the CAT RFP documents, and the PPR;

+

• an Industry Outreach Committee, which provided recommendations on effective methods for soliciting industry input, in addition to facilitating industry involvement in CAT-related public events246 and development of the CAT NMS Plan and the Exemptive Request Letters;

+

• a Press Committee as a Subcommittee of the Industry Outreach Committee, which coordinated interactions with the press;

+

• a Cost and Funding Committee, which drafted a framework for determining the costs of the CAT, and provided recommendations on revenue/funding of the CAT for both initial development costs and ongoing costs; and

+

• an Other Products Committee, which is designed to assist the SEC, as necessary, when the SEC is determining whether and how other products should be added to the CAT.247

+

Representatives from all Subcommittees met to discuss the overall progress of the CAT initiative in the Operating Committee.

+

To support the Participants’ internal expertise, the Participants also engaged outside experts to assist in formulating the CAT NMS Plan. Specifically, the Participants engaged the consulting firm Deloitte & Touche LLP as a project manager, and engaged the law firm Wilmer Cutler Pickering Hale and Dorr LLP to serve as legal counsel in drafting the CAT NMS Plan, both of which have extensive experience with issues raised by the CAT. Additionally, the Participants engaged the services of the public relations firm Peppercomm to assist with public relations and press engagement in formulating the CAT NMS Plan.

+

Furthermore, as discussed in more detail above in Appendix C, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan, the Participants engaged in meaningful dialogue with Industry Members with respect to the development of the CAT through the DAG and other industry outreach events.

+

Using this internal and external expertise, the Participants developed a process to identify, evaluate and resolve issues so as to finalize the CAT NMS Plan. As discussed above in Appendix C, the Participants have, among other things, developed the Selection Plan to describe the process for selecting the Plan Processor, created and published an RFP, evaluated Bids, and chosen a shortlist of Bids. Contemporaneously, the Participants have drafted the Plan set forth herein to reflect the recommendations that have resulted from the approach and analysis described above.

+

For certain technical considerations for the development and maintenance of the CAT that do not materially impact cost, required functionality or data security, the Participants did not mandate specific approaches, but rather chose to consider solutions proposed by the Bidders.

+

(a) Request for Proposal

+

The Participants considered multiple alternatives for the best approach to gathering the information necessary to determine how to create, implement and maintain the CAT, including issuance of a Request for Information (“RFI”) and Request for Proposal (“RFP”). After due consideration, with a view to meeting the demanding deadline set forth in SEC Rule 613, the Participants decided to use their expertise to craft an RFP seeking proposals to implement the main requirements to successfully build and operate the CAT. This approach was designed to solicit imaginative and competitive proposals from the private sector as well as to provide an adequate amount of insight into the costs associated with creating, implementing, and maintaining the CAT.

+

To design the RFP process, the Participants consulted with their technology subject matter resources to determine technical implications and requirements of the CAT and to develop the RFP. Based on these requirements, the Participants developed the Proposed RFP Concepts Document,248 which identified the high level requirements for which potential Bidders would be expected to design a solution, ahead of publishing the full RFP on February 26, 2013. The Participants received 31 intents to bid, and then hosted a Bidder conference on March 8, 2013 to discuss the requirements and provide additional context to the industry and potential Bidders. Two additional conference calls to discuss additional questions on the RFP were held on April 25, 2013 and May 2, 2013. The Participants also established an e-mail box through which questions on the RFP were received.

+

Ten competitive proposals were submitted on March 21, 2014. Each of the ten proposals was carefully reviewed by the Participants, including in-person meetings with each of the ten Bidders. Following this review, the Bids were reduced to six proposals in accordance with the Selection Plan approved by the Commission in February 2014. In accordance with the Selection Plan Amendment approved by the Commission on June 23, 2015, the Participants asked the Bidders on July 14, 2015 to revise their bids to account for the updated requirements included in the CAT NMS Plan as filed on February 27, 2015, as well as to address specific additional questions and considerations. As described more fully throughout this Appendix C, the proposals offer a variety of solutions for creating, implementing and maintaining the CAT.

+

As stated above, the Participants received proposals from ten Bidders that were deemed qualified, including many from large and well-respected information technology firms. The open ended nature of the questions contained in the RFP allowed Bidders to provide thoughtful and creative responses with regards to all aspects of the implementation and the operation of the CAT. The RFP process also resulted in the submission of multiple competitively-priced Bids. The six Shortlisted Bids remaining under consideration by the Participants, inclusive of the initial system build and the first five years of maintenance costs, have ranges between $165 million and $556 million, and encompass a number of innovative approaches to meeting the requirements of SEC Rule 613, such as use of non-traditional database architectures and cloud-based infrastructure solutions.

+

The Participants conducted the RFP process and the review of Bids pursuant to the Selection Plan approved by the Commission, which was designed to mitigate the conflicts of interest associated with Participants that are participating in developing the CAT while also seeking to become the Plan Processor and to ensure a level playing field for all potential Bidders to be considered on a fair and equal basis.

+

(b) Organizational Structure

+

The Participants considered various organizational structures of the Bidders to assess whether a particular structure would be a material factor in the ability of a Bidder to effectively operate as the Plan Processor. Of the Bids submitted, three general organizational structures for the Plan Processor emerged: (1) consortiums or partnerships (i.e., the Plan Processor would consist of more than one unaffiliated entity that would operate the CAT); (2) single firms (i.e., one entity would be the Plan Processor and that entity would operate the CAT as part of its other ongoing business operations); and (3) dedicated legal entities (i.e., CAT operations would be conducted in a separate legal entity that would perform no other business activities). Each type of organizational structure has strengths and limitations, but the Participants did not find that a particular organizational structure should be a material factor in selecting a Bidder. Accordingly the Participants have not mandated a specific organizational structure for the Plan Processor.

+

(c) Primary Storage

+

The Bidders proposed two methods of primary data storage: traditionally-hosted storage architecture, and infrastructure-as-a-service. Traditionally-hosted storage architecture is a model in which an organization would purchase and maintain proprietary servers and other hardware to store CAT Data. Infrastructure-as-a-service is a provisioning model in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components to a third party who charges for the service on a usage basis.

+

Each data storage method has a number of considerations that the Participants will take into account when evaluating each Bidder’s proposed solution. Such considerations include the maturity, cost, complexity, and reliability of the data storage method as used in each Bidder’s proposal. The Participants are not mandating a specific method for primary data storage provided that the data storage solution can meet the security, reliability, and accessibility requirements for the CAT, including storage of PII data, separately.

+

(d) Customer and Account Data

+

All Bidders proposed solutions consistent with the Customer Information Approach in which broker-dealers would report a unique Firm Designated ID for each Customer to the Plan Processor and the Plan Processor would create and store the CAT Customer-ID without passing this information back to the broker-dealer. The use of existing unique identifiers (such as internal firm customer identifiers) could minimize potentially large overhead in the CAT System that otherwise would be required to create and transmit back to CAT Reporters a CAT System-generated unique identifiers. Allowing multiple identifiers also will be more beneficial to CAT Reporters. This approach would still require mapping of identifiers to connect all trading associated with a single Customer across multiple accounts, but it would also ease the burden on CAT Reporters because each CAT Reporter would report information using existing identifiers it currently uses in its internal systems. Moreover, because the CAT System would not be sending a CAT System-generated Customer-ID back to the CAT Reporters, CAT Reporters would not need to process CAT Customer-IDs assigned by the Plan Processor. This approach would reduce the burden on the CAT Reporters because they would not need to build an additional process to receive a Customer-ID and append that identifier to each order origination, receipt or cancellation. This approach may also help alleviate storage and processing costs and potentially reduce the security risk of transmission of the Customer-ID to the CAT Reporter.

+

The Participants support the use of the Customer Information Approach and included the approach in the Exemptive Request Letter so that the Central Repository could utilize this approach to link Customer and Customer Account Information. The Participants believe this approach would be the most efficient approach for both the Plan Processor and CAT Reporters.

+

(e) Personally Identifying Information (PII)

+

All Bidders proposed encrypting all PII, both at rest and in motion. This approach allows for secure storage of PII, even if servers should be compromised or data should be leaked. However, encryption can be highly complex to implement effectively (e.g., the poor choice of password salting or an insecure storage of private keys can compromise security, even without knowledge of the system administrator).

+

All Bidders also proposed imposing a Role Based Access Control249 to PII. These controls would allow for varying levels of access depending on user needs, and would allow compartmentalizing access based on “need to know.” However, multiple layers of access can add further complexity to the implementation and use of a system.

+

Some Bidders also proposed implementing multi-factor authentication250. This greatly enhances security and can prevent a leak of passwords or keys from completely compromising security. However, it increases system overhead, and increases the difficulty of accessing data.

+

The Participants are requiring multi-factor authentication and Role Based Access Control for access to PII, separation of PII from other CAT Data, restricted access to PII (only those with a “need to know” will have access), and an auditable record of all access to PII data contained in the Central Repository. The Participants believe potential increased costs to the Plan Processor and delays that this could cause to accessing PII are balanced by the need to protect PII.

+

(f) Data Ingestion Format

+

Bidders proposed several approaches for the ingestion format for CAT Data: uniform defined format, use of existing messaging protocols or a hybrid approach whereby data can be submitted in a uniform defined format or using existing message protocols. There are benefits to the industry under any of the three formats. A large portion of the industry currently reports to OATS in a uniform defined format. These firms have invested time and resources to develop a process for reporting to OATS. The uniform formats recommended by the Bidders would leverage the OATS format and enhance it to meet the requirements of SEC Rule 613. This uniform format, therefore, may reduce the burden on certain CAT Reporters and simplify the process for those CAT Reporters to implement the CAT. However, some firms use message protocols, like FIX, as a standard point of reference with Industry Members that is typically used across the order lifecycle and within a firm’s order management processes. Leveraging existing messaging protocols could result in quicker implementation times and simplify data aggregation for Participants, CAT Reporters, and the Plan Processor, though it is worth noting that message formats may need to be updated to support CAT Data requirements.

+

The Participants are not mandating the data ingestion format for the CAT. The Participants believe that the nature of the data ingestion is key to the architecture of the CAT. A cost study of members of the Participants did not reveal a strong cost preference for using an existing file format for reporting vs. creating a new format.251 However, FIF did indicate there was an industry preference among its members for using the FIX protocol.252

+

(g) Process to Develop the CAT

+

Bidders proposed several processes for development of the CAT: the agile or iterative development model, the waterfall model, and hybrid models that incorporate aspects of both the waterfall and agile methodologies. An agile methodology is an iterative model in which development is staggered and provides for continuous evolution of requirements and solutions. A waterfall model is a sequential process of software development with dedicated phases for Conception, Initiation, Analysis, Design, Construction, Testing, Production/ Implementation and Maintenance. The agile or iterative model is flexible to changes and facilitates early delivery of usable software that can be used for testing and feedback, helping to facilitate software that meets users’ needs. However, at the beginning of an agile or iterative development process, it can be difficult to accurately estimate the effort and time required for completion. The waterfall model would provide an up-front estimate of time and effort and would facilitate longer-term planning and coordination among multiple vendors or project streams. However, the waterfall model could be less flexible to changes, particularly changes that occur between design and delivery (and thereby potentially producing software that meets specifications but not user needs).

+

The Participants are not mandating a development process. The Participants believe that either agile or iterative development or waterfall method or even a combination of both methods could be utilized to manage the development of CAT.

+

(h) Industry Testing

+

Bidders also proposed a range of approaches to industry testing, including dedicated environments, re-use of existing environments, scheduled testing events, and ongoing testing.

+

Dedicated industry test environments could provide the possibility of continuous testing by participants, rather than allow for testing only on scheduled dates. Use of dedicated industry test environments also would not impact other ongoing operations (such as disaster recovery sites). However, developing and maintaining dedicated test environments would entail additional complexity and expense. Such expenses may be highest in hosted architecture systems where dedicated hardware would be needed, but potentially rarely used.

+

The re-use of existing environments, such as disaster recovery environment, would provide simplicity and lower administrative costs. However, it could impact other ongoing operations, such as disaster recovery.

+

Scheduled testing events (which might be held, for example, on weekends only, or on specific dates throughout the year) could provide for more realistic testing by involving multiple market participants. This approach also would not require the test environment to be available at all times. However, scheduled events would not allow users to test on the CAT System until a dedicated time window is open.

+

Ongoing testing would allow users to test the CAT System as often as needed. However, this approach would require the test environment to be available at all times. It also may lead to lower levels of test participation at any given time, which may lead to less realistic testing.

+

The Participants are requiring that the CAT provide a dedicated test environment that is functionally equivalent to the production environment and available on a 24x6 basis. The Participants believe that an ongoing testing model will be more helpful to the industry because it will provide an environment in which to test any internal system changes or updates that may occur in the course of their business that may affect reporting to the CAT. Additionally, this environment will provide a resource through which the CAT Reporters can continually test any CAT System mandated or rule associated changes to identify and reduce data errors prior to the changes being implemented in the production environment.

+

(i) Quality Assurance (QA)

+

The Participants considered a number of QA approaches and methodologies, informed by the Bidder’s proposals as well as discussions with the Participants’ own subject matter resources. Some of the approaches considered included “continuous integration,” where developer working copies are merged into the master and tested several times a day, test automation, and various industry standards such as ISO 20000/ITIL. The Participants are not mandating a single approach to QA beyond the requirements detailed in the RFP, for which each Bidder provided a detailed approach.

+

One key component of the QA approaches proposed by the Bidders was the staffing levels associated with QA. Initial QA proposals from Bidders included staffing ranges from between 2 and 90 FTEs, although some Bidders indicated that their QA function was directly incorporated into their development function. Some Bidders proposed allocating QA resources after the third month. A larger number of QA resources may facilitate structured, in-depth testing and validation of the CAT System. However, a larger set of QA resources could lead to higher fixed costs and administrative overhead.

+

The Participants are not mandating the size for QA staffing; however, the Participants will consider each Bidder’s QA staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its QA staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe the QA staffing numbers varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

+

(j) User Support and Help Desk

+

The RFP required that the CAT Help Desk be available on a 24x7 basis, and that it be able to manage 2,500 calls per month. To comply with these requirements, Bidders proposed user support staffing ranges from five to 36 FTEs. They also proposed dedicated support teams and support teams shared with other groups.

+

A larger number of FTE user support staff could provide a higher level and quality of support. However, a higher number of staff would impose additional overhead and administrative costs. Additionally, as the support organization grows, it may become less closely integrated with the development team, which could decrease support effectiveness.

+

A dedicated CAT support team would facilitate deep knowledge of the CAT System and industry practices. However, it would create additional overhead and costs. Additionally, management of support teams may not be the managing firm’s primary business, which could lead to inefficiencies. A support staff shared with non-CAT teams could provide for increased efficiency, if the team has greater experience in support more broadly. However, support resources may not have the depth of knowledge that dedicated support teams could be expected to develop.

+

The Participants are not requiring specific FTEs for user support staffing; however, the Participants will consider each Bidder’s user support staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe that the number of FTEs varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

+

Some Bidders proposed a US-based help desk, while others proposed basing it offshore. A U.S.-based help desk could facilitate a higher level of service, and could provide a greater level of security (given the sensitive nature of the CAT). However, a U.S.-based help desk may have greater labor costs. An offshore help desk would potentially have lower labor costs, but could provide (actual or perceived) lower level of service, and could raise security concerns (particularly where the help desk resources are employed by a third-party).

+

The Participants are not requiring a specific location for the help desk. The Participants believe that as long as the Bidder’s solution meets the service and security requirements of the CAT, it is not necessary to prescribe the location.

+

(k) CAT User Management

+

Bidders proposed several approaches to user management253: help desk creation of user accounts, user (e.g., broker-dealer) creation of accounts, and multi-role. Help desk creation of accounts would allow for greater oversight and validation of user creation. However, it would increase administrative costs, particularly in the early stages of the CAT (as an FTE must setup each user). User creation of accounts would require lower staffing levels but would provide less oversight and validation of user creation.

+

A multi-role approach would allow for a blended approach in which the Plan Processor could, for example, set up an administrator at each broker-dealer, and then allow the broker-dealer to set up additional accounts as needed. This approach could allow users with different levels of access to be provisioned differently, with those requiring greater oversight being provisioned manually. However, it would add complexity to the user creation system, and would provide less oversight and validation than would a fully manual system.

+

For CAT Reporters entering information into the CAT, the Participants are requiring that each user be validated by the Plan Processor to set-up access to the system. However, for staff at regulators that will be accessing the information for regulatory purposes only, the Plan Processor can establish a set-up administrator who has the ability to provide access to other users within its organization. However, such administrators cannot set up access for PII information. Staff at regulators who need access to PII information must go through an authentication process directly with the Plan Processor. The Participants believe that this approach balances the demand on the staff at the Plan Processor with the need to ensure proper oversight and validation for users of the CAT.

+

(l) Required Reportable Order Events

+

The Participants considered multiple order event types for inclusion in the Plan. Of the order event types considered, the results order event type and the CAT feedback order event were not required. The Participants determined that a results order event type would not provide additional value over a “daisy chain” linkage method. A CAT feedback order event can be generated by the Plan Processor, thereby removing the reporting burden from reporting firms. Therefore the Participants are not requiring CAT Reporters to provide data for these two event types to the CAT. The required reportable order events are listed in Section 6.3(d).

+

(m) Data Retention Requirements

+

SEC Rule 613(e)(8) requires data to be available and searchable for a period of not less than five years. Broker-dealers are currently required to retain data for six years under the Exchange Act Rule 17a-4(a).

+

The Participants support the use of a six year retention timeframe as it complies with Exchange Act Rule 17a-4(a). The Participants are requiring data for six years to be kept online in an easily accessible format to enable regulators to have access to six years of audit trail materials for purposes of its regulation.

+

The Participants understand that requiring this sixth year of data storage may increase the cost to run the CAT; however, they believe the incremental cost would be outweighed by the needs of regulators to have access to the information. An analysis of the six Shortlisted Bidder proposals indicated that the average expected year-on-year annual cost increase during years four and five (i.e., once all reporters were reporting to the Central Repository) was approximately 4%. Extending this increase to another year would result in incremental annual costs to the Plan Processor ranging from approximately $1.15 million to $4.44 million depending upon the Bidder. Based on the assumption that the cumulative annual cost increase from year five to year six will also be 4% (including all the components provided by the Bidders in their respective cost schedules254), the maximum cost increase for data retention for an additional year would be 4%.

+

(n) Data Feed Connectivity

+

Bidders proposed either real-time SIP connectivity or end-of-day batch SIP connectivity. Real-time SIP connectivity would provide for more rapid access to SIP Data, but may require additional processing support to deal with out-of-sequence or missing records. End-of-day batch SIP connectivity provides the possibility of simpler implementation, but data from SIPs would not be available in the CAT until after overnight processing. Because CAT Reporters are only required to report order information on a next-day basis, the Participants are not requiring that the Plan Processor have real-time SIP connectivity.

+

(o) Disaster Recovery

+

Participants discussed two commonly accepted structures for disaster recovery: hot-hot255 and hot-warm256. While hot-hot allows for immediate cutover, the Participants agreed that real-time synchronization was not required, but rather that data must be kept synchronized to satisfy disaster recovery timing requirements (e.g., 48 hour cutover). A hot-warm structure meets the requirements of SEC Rule 613, and costs for hot-hot were considered to be higher than hot-warm. Therefore, the Participants are requiring a hot-warm disaster recovery structure, provided it meets the requirements set forth in Appendix D, BCP / DR Process.

+

(p) Synchronization of Business Clocks

+

The Participants considered multiple levels of precision for the clock synchronization standard set forth in the plan, ranging from 1 second (s) to 100 microseconds (μs). The Participants determined based on their expertise and feedback from industry that an initial clock synchronization of 50 milliseconds (ms) would be the most practical and effective choice and represents the current industry standard. Pursuant to SEC Rule 613(d), the initial standard of 50ms will be subject to annual analysis as to whether or not a more stringent clock synchronization tolerance could be implemented consistent with changes in industry standards.

+

In order to identify the industry standard the Participants and Industry Members reviewed their own internal technology around Network Time Protocol (“NTP”) and Precision Time Protocol (“PTP”),257 potentially used in conjunction with Global Positioning System (“GPS”).258 In reviewing internal infrastructure, the Participants and Industry Members noted that the majority of firms had indicated that they leveraged at least NTP clock synchronization technology. In addition, the FIF conducted a clock synchronization survey259 (“FIF Clock Offset Survey”) of 28 firms to identify costs and challenges associated with clock synchronization tolerances of 50ms, 5ms, 1ms, and 100μs. The FIF Clock Offset Survey indicated that 93% of responding firms leverage NTP technology, while fewer than half of responding firms use SNTP, PTP, or GPS. In reviewing the standards for NTP technology, the Participants determined that this technology can accommodate a 50ms tolerance. In addition, the FIF Clock Offset Survey demonstrated that 60% of responding firms currently synchronize their clocks with an offset of 50ms or greater, with approximately 20% of responding firms currently using an offset of 50ms. Only 18% of responding firms used a clock offset of 30ms or less. In light of these reviews and the survey data, the Participants concluded that a clock offset of 50ms represents an aggressive, but achievable, industry standard.

+

In addition to determining current industry clock offset standards used in the industry, the FIF Clock Offset Survey indicated that the costs to survey respondents were as follows:260

+ +

As indicated in the above table, annual maintenance costs of survey respondents for a 50ms standard would be on average 31% higher than current costs, and would escalate to 102%, 123%, and 242% increases over current maintenance costs as clock synchronization standards move to 5ms, 1ms, and 100μs respectively, indicating that maintenance costs rapidly escalate as clock synchronization standards increase beyond 50ms. Survey respondents also indicated that increasing clock synchronization requirements would require escalating technology changes, including significant hardware changes (such as installation of dedicated GPS or other hardware clocks and network architecture redesign), migration to new time synchronization standards, and widespread upgrades of operating systems and databases currently in use. For example, to achieve a 5ms clock offset would require firms to install GPS clocks in all locations and migrate from NTP to PTP. The Participants believe, based on the FIF Clock Offset Survey, that fewer than half of firms currently leverage GPS technology or PTP for clock synchronization.

+

As noted in Article VI, Section 6.8, the Participants, working with the Processor’s Chief Compliance Officer, shall annually evaluate and make recommendations as to whether industry standards have evolved such that changes to the clock synchronization standards should be changed. It is the belief of the Participants that, while setting an initial clock synchronization of 5ms lower than 50ms may be achievable, it does not represent current industry standard and there may be challenges with small broker-dealers’ potentially substantial costs. However, once both large and small broker-dealers begin reporting data to the Central Repository, and as increased time synchronization standards become more mature, the Participants will assess the ability to tighten the clock synchronization standards to reflect changes in industry standards in accordance with SEC Rule 613.

+

(q) Reportable Securities

+

SEC Rule 613(c)(6) requires NMS Securities to be reported the Central Repository and SEC Rule 613(i) requires the Participants to detail a plan outlining how non-NMS Securities, debt securities, and Primary Market Transactions in equity securities that are not NMS Securities can be reported to the Central Repository in the future. The Participants considered whether to require including OTC Equity Securities, non NMS Securities, in a future phase of the CAT NMS Plan, as contemplated by the Commission in SEC Rule 613, or accelerating their inclusion into the first phase of the Plan. As part of this consideration, Participants weighed heavily the feedback from the DAG and other market participants of the considerations associated with the two alternatives, and made the determination to include OTC Equities in the requirements under the CAT NMS Plan.

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+
pubdate: January 10, 2018 effdate: N/A +

APPENDIX D

+ Topic: CAT NMS Plan, Appendix C + Compliance User: National Securities Exchanges/National Securities Associations + Keywords: + CAT NMS Plan Processor Requirement, + Central Repository Requirement, + Technical Environments, + Data Retention Requirements, + Connectivity and Data Transfer, + +

CAT NMS Plan Processor Requirements

+

Appendix D, CAT NMS Plan Processor Requirements, outlines minimum functional and technical requirements established by the Participants of the CAT NMS Plan for the Plan Processor. Given the technical nature of many of these requirements, it is anticipated, as technology evolves, that some may change over time. The Participants recognize that effective oversight of, and a collaborative working relationship with, the Plan Processor will be critical to ensure the CAT achieves its intended purpose, namely enhanced investor protection, in an efficient and cost-effective manner. The Participants also recognize that maintaining the efficiency and cost-effectiveness of the CAT requires flexibility to respond to technological innovations and market changes. For example, these minimum functional and technical requirements allow the Plan Processor flexibility to make certain changes to the Technical Specifications, while limiting others to the Operating Committee, and anticipate agreement between the Operating Committee and the Plan Processor on SLAs relating to, among other things, development, change management, and implementation processes and timelines. Maintaining such flexibility to adapt in these and other areas relating to the development and operation of the CAT is a foundational principle of this Appendix D.

+

1. Central Repository Requirements

+

1.1 Technical Architecture Requirements

+

The Central Repository must be designed and sized to ingest, process, and store large volumes of data. The technical infrastructure needs to be scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture.

+

The technical architecture must be scalable and able to readily expand its capacity to process significant increases in data volumes beyond the baseline capacity. The baseline capacity requirements are defined in this document. Once the CAT NMS Plan is approved, the Operating Committee will define the baseline metrics on an ongoing basis. CAT capacity planning must include SIP, OPRA and exchange capacity and growth forecasts. The initial baseline capacity requirements will be based on twice (2X) the historical peaks for the most recent six years, and the Plan Processor must be prepared to handle peaks in volume that could exceed this baseline for short periods. The SLA(s) will outline details of the technical performance and scalability requirements, and will be specifically targeted to the selected Bidder’s solution.

+

The Central Repository must have the capacity and capability to:

+

• Ingest and process throughput to meet baseline capacity requirements as well as scalability to meet peak capacity requirements, including staging, loading, speed of processing, and linking of data;

+

• Accommodate data storage and query compute, such as:

+

o Scalable for growth data storage and expansion capability, including but not limited to, resizing of database(s), data redistribution across nodes, and resizing of network bandwidth;

+

o Robust processes to seamlessly add capacity without affecting the online operation and performance of the CAT System; and

+

o Quantitative methods for measuring, monitoring, and reporting of excess capacity of the solution;

+

• Satisfy minimum processing standards as described in the CAT RFP and that will be further defined in the SLA(s);

+

• Adapt to support future technology developments and new requirements (including considerations for anticipated/potential changes to applicable rules and market behavior);

+

• Handle an extensible architecture that is capable of supporting asset classes beyond the initial scope of NMS Securities and OTC Equity Securities;

+

• Comply with the clock synchronization standards as set forth in Article VI, Section 6.8; and

+

• Handle an extensible data model and messaging protocols that are able to support future requirements such as, but not limited to:

+

o Expansion of trading hours, including capability and support for 24-hour markets;

+

o Sessions for securities;261 and

+

o New asset classes, such as debt securities or derivative instruments.

+

1.2 Technical Environments

+

The architecture must include environments for production, development, quality assurance testing, disaster recovery, industry-wide coordinated testing, and individual on-going CAT Reporter testing. The building and introduction of environments available to CAT Reporters may be phased in to align with the following agreed upon implementation milestones:

+

• Development environment – the development environment must be created to build, develop, and maintain enhancements and new requirements. This environment must be separate from those listed below.

+

• Quality assurance environment – a quality assurance (QA) environment must be created to allow simulation and testing of all applications, interfaces, and data integration points contained in the CAT System.

+

o The QA environment shall be able to simulate end-to-end production functionality and perform with the same operational characteristics, including processing speed, as the production environment.

+

o The QA environment shall support varied types of changes, such as, but not limited to, the following:

+

‧ Application patches;

+

‧ Bug fixes;

+

‧ Operating system upgrades;

+

‧ Introduction of new hardware or software components;

+

‧ New functionality;

+

‧ Network changes;

+

‧ Regression testing of existing functionality;

+

‧ Stress or load testing (simulation of production-level usage); and

+

‧ Recovery and failover.

+

o A comprehensive test plan for each build and subsequent releases must be documented.

+

• Production environment – fully operational environment that supports receipt, ingestion, processing and storage of CAT Data. Backup/disaster recovery components must be included as part of the production environment.

+

• Industry test environment –

+

o The Plan Processor must provide an environment supporting industry testing (test environment) that is functionally equivalent to the production environment, including:

+

‧ End-to-end functionality (e.g., data validation, processing, linkage, error identification, correction and reporting mechanism) from ingestion to output, sized to meet the standards of the production SLA;

+

‧ Performance metrics that mirror the production environment; and

+

‧ Management with the same information security policies applicable to the production environment.

+

o The industry test environment must also contain functionality to support industry testing, including:

+

‧ Minimum availability of 24x6;

+

‧ Replica of production data when needed for testing;

+

‧ Data storage sized to meet varying needs, dependent upon scope and test scenarios; and

+

‧ Support of two versions of code (current and pending).

+

o The industry test environment must support the following types of industry testing:

+

‧ Technical upgrades made by the Plan Processor;

+

‧ CAT code releases that impact CAT Reporters;

+

‧ Changes to industry data feeds (e.g., SIP, OPRA, etc.);

+

‧ Industry-wide disaster recovery testing;

+

‧ Individual CAT Reporter and Data Submitter testing of their upgrades against CAT interfaces and functionality; and

+

‧ Multiple, simultaneous CAT Reporter testing.

+

o The industry test environment must be a discrete environment separate from the production environment.

+

o The Plan Processor must provide the linkage processing of data submitted during coordinated, scheduled, industry-wide testing. Results of the linkage processes must be communicated back to Participants as well as to the Operating Committee.

+

o Data from industry testing must be saved for three months. Operational metrics associated with industry testing (including but not limited to testing results, firms who participated, and amount of data reported and linked) must be stored for the same duration as the CAT production data.

+

o The Plan Processor must provide support for industry testing, including testing procedures, coordination of industry testing, publish notifications, and provide help desk support during industry testing.

+

o The Participants and the SEC must have access to industry test data.

+

1.3 Capacity Requirements

+

System capacity must have the following characteristics.262

+

The Central Repository must be:

+

• Designed such that additional capacity can be quickly and seamlessly integrated while maintaining system access and availability requirements;

+

• Able to efficiently and effectively handle data ingestion on days with peak and above-peak data submission volumes; and

+

• Required to maintain and store data for a 6-year sliding window of data. System access and availability requirements must be maintained during the maintenance of the sliding window. It is expected that the Central Repository will grow to more than 29 petabytes of raw, uncompressed data.

+

The Plan Processor must:

+

• Define a capacity planning process to be approved by the Operating Committee, with such process incorporating industry utility capacity metrics; and

+

• Develop a robust process to add capacity, including both the ability to scale the environment to meet the expected annual increases as well as to rapidly expand the environment should unexpected peaks in data volumes breach the defined capacity baseline. Capacity forecasts from systems, including OPRA, UTP, and CTA, must also be included for capacity planning purposes. This capacity planning process must be approved by the Operating Committee.

+

1.3.1 Monitoring Capacity Utilization and Performance Optimization

+

In order to manage the data volume, operational capacity planning must be conducted on a periodic basis. The Plan Processor must submit capacity-planning metrics to the Operating Committee for review to ensure that all parties are aware of the system processing capabilities and changes to assumptions. Changes to assumptions could lead to positive or negative adjustments in the costs charged to CAT Reporters. Reports that capture daily disk space, processing time, amount of data received and linkage completion times must be provided by the Plan Processor to the Operating Committee.

+

1.4 Data Retention Requirements

+

The Plan Processor must develop a formal record retention policy and program for the CAT, to be approved by the Operating Committee, which will, at a minimum:

+

• Contain requirements associated with data retention, maintenance, destruction, and holds;

+

• Comply with applicable SEC record-keeping requirements;

+

• Have a record hold program where specific CAT Data can be archived offline for as long as necessary;

+

• Store and retain both raw data submitted by CAT Reporters and processed data; and

+

• Make data directly available and searchable electronically without manual intervention for at least six years.

+

2. Data Management

+

The Plan Processor must develop data management policies and procedures to govern and manage CAT Data, reference data, and metadata contained in and used by the Central Repository.

+

The CAT must capture, store, and maintain current and historical reference data information. This master / reference database will include data elements such as, but not limited to, SRO-assigned market participant identifiers, product type, trading unit size, trade / quote minimum price variation, corporate actions, symbology changes, and changes in listings market center. The Plan Processor must support bi-temporal milestones (e.g., Effective Date and as-of-date) of the reference data.

+

CAT Reporters will submit data to the Central Repository with the listing exchange symbology format. The Central Repository must use the listing exchange symbology format for output of the linked data. Instrument validation must be included in the processing of data submitted by CAT Reporters.

+

The Central Repository must be able to link instrument data across any time period so that data can be properly displayed and linked regardless of changes to issue symbols or market class. The Plan Processor is required to create and maintain a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC. In addition, the Plan Processor will be required to create a start-of-day (“SOD”) and end-of-day (“EOD”) CAT reportable list of securities for use by CAT Reporters. This list must be available online and in a machine readable (e.g., .csv) format by 6 a.m. on each Trading Day.

+

Queries, reports, and searches for data that span dates where there are changes to reference data must automatically include data within the requested date range. For example, if a query is run for a symbol that had three issue symbol changes during the time window of the query parameters, the result set must automatically include data for all three symbols that were in use during the time window of the query.

+

The Plan Processor must also develop an end-to-end process and framework for technical, business and operational metadata.

+

2.1 Data Types and Sources

+

The Plan Processor will be responsible for developing detailed data and interface specifications for data to be submitted by CAT Reporters. These specifications will be contained in the Technical Specifications, the initial version of which will be presented to the Operating Committee for approval. The Technical Specifications must be designed to capture all of the data elements required by SEC Rule 613, as well as other information the Participants determine necessary to facilitate elimination of reporting systems that the CAT may cause to be redundant, such as EBS and OATS. In the future, new data sources such as public news may be added to the specifications.

+

CAT Reporters and Data Submitters will transmit data in an electronic data format(s) that will be defined by the Plan Processor. The Technical Specifications must include details for connectivity and electronic submission, transmission, retransmission and processing. It is possible that more than one format will be defined to support the various senders throughout the industry.

+

The Participants anticipate that some broker-dealers will not directly report to the CAT but will rely on other organizations to report on their behalf. However, the CAT will need to have the flexibility to adapt on a timely basis to changes in the number of entities that report CAT Data.

+

2.2 Data Feed Management

+

The Plan Processor must monitor and manage incoming and outgoing data feeds for, at a minimum, the following:

+

• Data files from each CAT Reporter and Data Submitter;

+

• Files that cover multiple trade dates (e.g., to account for clearing and changes);

+

• Full and partial file submissions that contain corrections from previously rejected files;

+

• Full and partial file submissions based on CAT Reporter; and

+

• Receipt and processing of market data feeds (SIP, OPRA, OCC).

+

The Plan Processor must also develop a process for detecting, managing, and mitigating duplicate file submissions. It must create and store operational logs of transmissions, success, and failure reasons in order to create reports for CAT Reporters, Participants, and the SEC. Outgoing data feeds must be logged and corresponding metadata elements must be monitored and captured.

+

2.2.1 Managing connectivity for data feeds (e.g., SIPs, broker-dealers and regulators)

+

The Plan Processor will be required to ensure that it provides all CAT Reporters with the ability to transmit CAT Data to the Central Repository as required to meet the reporting requirements. The Plan Processer is required to have a robust managed file transfer (“MFT”) tool, including full monitoring, permissioning, auditing, security, high availability,263 file integrity checks, identification of data transmission failures / errors, transmission performance metrics, multiple transmission protocols, Latency / network bottlenecks or delays, key management, etc. CAT Reporters must also have the ability to conduct manual data entry via a GUI interface or the uploading of a file, subject to a maximum record capacity, which will be defined by the Plan Processor in consultation with the Operating Committee.

+

3. Reporting and Linkage Requirements

+

All CAT Data reported to the Central Repository must be processed and assembled to create the complete lifecycle of each Reportable Event. Reportable Events must contain data elements sufficient to ensure the same regulatory coverage currently provided by existing regulatory reporting systems that have been identified as candidates for retirement.

+

Additionally, the Central Repository must be able to:

+

• Assign a unique CAT-Reporter-ID to all reports submitted to the system based on sub-identifiers, (e.g., MPIDs, ETPID, trading mnemonic) currently used by CAT Reporters in their order handling and trading processes.

+

• Handle duplicate sub-identifiers used by members of different Participants to be properly associated with each Participant.

+

• Generate and associate one or more Customer-IDs with all Reportable Events representing new orders received from a Customer(s) of a CAT Reporter. The Customer-ID(s) will be generated from a Firm Designated ID provided by the CAT Reporter for each such event, which will be included on all new order events.

+

• Accept time stamps on order events handled electronically to the finest level of granularity captured by CAT Reporters. Additionally, the CAT must be able to expand the time stamp field to accept time stamps to an even finer granularity as trading systems expand to capture time stamps in ever finer granularity. The Plan Processor must normalize all processed date/time CAT Data into a standard time zone/format.

+

In addition, the data required from CAT Reporters will include all events and data elements required by the Plan Processor in the Technical Specifications to build the:

+

• Life cycle of an order for defined events within a CAT Reporter;

+

• Life cycle of an order for defined events intra-CAT Reporter; and

+

• State of all orders across all CAT Reporters at any point in time.

+

The Plan Processor must use the “daisy chain approach” to link and create the order lifecycle. In the daisy chain approach, a series of unique order identifiers, assigned to all order events handled by CAT Reporters are linked together by the Central Repository and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order.

+

By using the daisy chain approach the Plan Processor must be able to link all related order events from all CAT Reporters involved in the lifecycle of an order. At a minimum, the Central Repository must be able to create the lifecycle between:

+

• All order events handled within an individual CAT Reporter, including orders routed to internal desks or departments with different functions (e.g., an internal ATS);

+

• Customer orders to “representative” orders created in firm accounts for the purpose of facilitating a customer order (e.g., linking a customer order handled on a riskless principal basis to the street-side proprietary order);

+

• Orders routed between broker-dealers;

+

• Orders routed from broker-dealers to exchanges;

+

• Orders sent from an exchange to its routing broker-dealer;

+

• Executed orders and trade reports;

+

• Various legs of option/equity complex orders; and

+

• Order events for all equity and option order handling scenarios that are currently or may potentially be used by CAT Reporters, including:

+

o Agency route to another broker-dealer or exchange;

+

o Riskless principal route to another broker-dealer or exchange capturing within the lifecycle both the customer leg and street side principal leg;

+

o Orders routed from one exchange through a routing broker-dealer to a second exchange;

+

o Orders worked through an average price account capturing both the individual street side execution(s) and the average price fill to the Customer;

+

o Orders aggregated with other orders for further routing and execution capturing both the street side executions for the aggregated order and the fills to each customer order;

+

o Complex orders involving one or more options legs and an equity leg, with a linkage between the option and equity legs;

+

o Complex orders containing more legs than an exchange’s order management system can accept, causing the original order to be broken into multiple orders;

+

o Orders negotiated over the telephone or via a negotiation system;

+

o Orders routed on an agency basis to a foreign exchange;

+

o Execution of customer order via allocation of shares from a pre-existing principal order;

+

o Market maker quotes; and

+

o Complex orders involving two or more options legs.

+

Additionally, the Central Repository must be able to:

+

• Link each order lifecycle back to the originating Customer;

+

• Integrate and appropriately link reports representing repairs of original submissions that are rejected by the CAT due to a failure to meet a particular data validation;

+

• Integrate into the CAT and appropriately link reports representing records that are corrected by a CAT Reporter for the purposes of correcting data errors not identified in the data validation process;

+

• Assign a single CAT-Order-ID to all events contained within the lifecycle of an order so that regulators can readily identify all events contained therein; and

+

• Process and link Manual Order Events with the remainder of the associated order lifecycle.

+

3.1 Timelines for Reporting

+

CAT Data for the previous Trading Day must be reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such data; however, the Plan Processor must accept data prior to that deadline, including intra-day submissions.

+

3.2 Other Items

+

The Plan Processor must anticipate and manage order data processing over holidays, early market closures and both anticipated and unanticipated market closures. The Plan Processor must allow and enable entities that are not CAT Reporters (e.g., service bureaus) to report on behalf of CAT Reporters only upon being permissioned by the CAT Reporter, and must develop appropriate tools to facilitate this process.

+

3.3 Required Data Attributes for Order Records Submitted by CAT Reporters

+

At a minimum, the Plan Processor must be able to receive the data elements as detailed in the CAT NMS Plan.

+

4. Data Security

+

4.1 Overview

+

SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the CAT in accordance with the policies, procedures and standards in the CAT NMS Plan.

+

The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and Data Submitters and the Plan Processor, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the CAT System. The Plan Processor must address security controls for data retrieval and query reports by Participant and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for all components of the CAT System, such as but not limited to access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter performance and comparison statistics.

+

The Plan Processor must provide to the Operating Committee a comprehensive security plan that covers all components of the CAT System, including physical assets and personnel, and the training of all persons who have access to the Central Repository consistent with Article VI, Section 6.1(m). The security plan must be updated annually. The security plan must include an overview of the Plan Processor’s network security controls, processes and procedures pertaining to the CAT Systems. Details of the security plan must document how the Plan Processor will protect, monitor and patch the environment; assess it for vulnerabilities as part of a managed process, as well as the process for response to security incidents and reporting of such incidents. The security plan must address physical security controls for corporate, data center, and leased facilities where Central Repository data is transmitted or stored. The Plan Processor must have documented “hardening baselines” for systems that will store, process, or transmit CAT Data or PII data.

+

4.1.1 Connectivity and Data Transfer

+

The CAT System(s) must have encrypted internet connectivity. CAT Reporters must connect to the CAT infrastructure using secure methods such as private lines or (for smaller broker-dealers) Virtual Private Network connections over public lines. Remote access to the Central Repository must be limited to authorized Plan Processor staff and must use secure multi-factor authentication that meets or exceeds the Federal Financial Institutions Examination Council (“FFIEC”) security guidelines surrounding authentication best practices.264

+

The CAT databases must be deployed within the network infrastructure so that they are not directly accessible from external end-user networks. If public cloud infrastructures are used, virtual private networking and firewalls/access control lists or equivalent controls such as private network segments or private tenant segmentation must be used to isolate CAT Data from unauthenticated public access.

+

4.1.2 Data Encryption

+

All CAT Data must be encrypted at rest and in flight using industry standard best practices (e.g., SSL/TLS) including archival data storage methods such as tape backup. Symmetric key encryption must use a minimum key size of 128 bits or greater (e.g., AES-128), larger keys are preferable. Asymmetric key encryption (e.g., PGP) for exchanging data between Data Submitters and the Central Repository is desirable.

+

Storage of unencrypted PII data is not permissible. PII encryption methodology must include a secure documented key management strategy such as the use of HSM(s). The Plan Processor must describe how PII encryption is performed and the key management strategy (e.g., AES-256, 3DES).

+

If public cloud managed services are used that would inherently have access to the data (e.g., BigQuery, S3, Redshift), then the key management surrounding the encryption of that data must be documented (particularly whether the cloud provider manages the keys, or if the Plan Processor maintains that control). Auditing and real-time monitoring of the service for when cloud provider personnel are able to access/decrypt CAT Data must be documented, as well as a response plan to address instances where unauthorized access to CAT Data is detected. Key management/rotation/revocation strategies and key chain of custody must also be documented in detail.

+

4.1.3 Data Storage and Environment

+

Data centers housing CAT Systems (whether public or private) must, at a minimum, be AICPA SOC 2 certified by a qualified third-party auditor that is not an affiliate of any of the Participants or the CAT Processor. The frequency of the audit must be at least once per year.

+

CAT compute infrastructure may not be commingled with other non-regulatory systems (or tenets, in the case of public cloud infrastructure). Systems hosting the CAT processing for any applications must be segmented from other systems as far as is feasible on a network level (firewalls, security groups, ACL’s, VLAN’s, authentication proxies/bastion hosts and similar). In the case of systems using inherently shared infrastructure/storage (e.g., public cloud storage services), an encryption/key management/access control strategy that effectively renders the data private must be documented.

+

The Plan Processor must include penetration testing and an application security code audit by a reputable (and named) third party prior to launch as well as periodically as defined in the SLA(s). Reports of the audit will be provided to the Operating Committee as well as remediation plan for identified issues. The penetration test reviews of the Central Repository’s network, firewalls, and development, testing and production systems should help the CAT evaluate the system’s security and resiliency in the face of attempted and successful systems intrusions.

+

4.1.4 Data Access

+

The Plan Processor must provide an overview of how access to PII and other CAT Data by Plan Processor employees and administrators is restricted. This overview must include items such as, but not limited to, how the Plan Processor will manage access to the systems, internal segmentation, multi-factor authentication, separation of duties, entitlement management, background checks, etc.

+

The Plan Processor must develop and maintain policies and procedures reasonably designed to prevent, detect, and mitigate the impact of unauthorized access or usage of data in the Central Repository. Such policies and procedures must be approved by the Operating Committee, and should include, at a minimum:

+

• Information barriers governing access to and usage of data in the Central Repository;

+

• Monitoring processes to detect unauthorized access to or usage of data in the Central Repository; and

+

• Escalation procedures in the event that unauthorized access to or usage of data is detected.

+

A Role Based Access Control (“RBAC”) model must be used to permission user with access to different areas of the CAT System. The CAT System must support an arbitrary number of roles with access to different types of CAT Data, down to the attribute level. The administration and management of roles must be documented. Periodic reports detailing the current list of authorized users and the date of their most recent access must be provided to Participants, the SEC and the Operating Committee. The reports of the Participants and the SEC will include only their respective list of users. The Participants must provide a response to the report confirming that the list of users is accurate. The required frequency of this report will be defined by the Operating Committee. The Plan Processor must log every instance of access to Central Repository data by users.

+

Passwords stored in the CAT System must be stored according to industry best practices. Reasonable password complexity rules should be documented and enforced, such as, but not limited to, mandatory periodic password changes and prohibitions on the reuse of the recently used passwords.

+

Password recovery mechanisms must provide a secure channel for password reset, such as emailing a one-time, time-limited login token to a pre-determined email address associated with that user. Password recovery mechanisms that allow in-place changes or email the actual forgotten password are not permitted.

+

Any login to the system that is able to access PII data must follow non-PII password rules and must be further secured via multi-factor authentication (“MFA”). The implementation of MFA must be documented by the Plan Processor. MFA authentication capability for all logins is required to be implemented by the Plan Processor.

+

4.1.5 Breach Management

+

The Plan Processor must develop policies and procedures governing its responses to systems or data breaches. Such policies and procedures will include a formal cyber incident response plan, and documentation of all information relevant to breaches.

+

The cyber incident response plan will provide guidance and direction during security incidents. The plan will be subject to approval by the Operating Committee. The plan may include items such as:

+

• Guidance on crisis communications;

+

• Security and forensic procedures;

+

• Customer notifications;

+

• “Playbook” or quick reference guides that allow responders quick access to key information;

+

• Insurance against security breaches;

+

• Retention of legal counsel with data privacy and protection expertise; and

+

• Retention of a Public Relations firm to manage media coverage.

+

Documentation of information relevant to breaches should include:

+

• A chronological timeline of events from the breach throughout the duration of the investigation;

+

• Relevant information related to the breach (e.g., date discovered, who made the discovery, and details of the breach);

+

• Response efforts, involvement of third parties, summary of meetings/conference calls, and communication; and

+

• The impact of the breach, including an assessment of data accessed during the breach and impact on CAT Reporters.

+

4.1.6 PII Data Requirements

+

PII data must not be included in the result set(s) from online or direct query tools, reports or bulk data extraction. Instead, results will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. By default, users entitled to query CAT Data are not authorized for PII access. The process by which someone becomes entitled for PII access, and how they then go about accessing PII data, must be documented by the Plan Processor. The chief regulatory officer, or other such designated officer or employee at each Participant must, at least annually, review and certify that people with PII access have the appropriate level of access for their role.

+

Using the RBAC model described above, access to PII data shall be configured at the PII attribute level, following the “least privileged” practice of limiting access as much as possible.

+

PII data must be stored separately from other CAT Data. It cannot be stored with the transactional CAT Data, and it must not be accessible from public internet connectivity. A full audit trail of PII access (who accessed what data, and when) must be maintained. The Chief Compliance Officer and the Chief Information Security Officer shall have access to daily PII reports that list all users who are entitled for PII access, as well as the audit trail of all PII access that has occurred for the day being reported on.

+

4.2 Industry Standards

+

The following industry standards—which is not intended to be an exclusive list—must be followed as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee (in the event of a conflict between standards, the more stringent standard shall apply, subject to the approval of the Operating Committee):

+

• National Institute of Standards and Technology:

+

o 800-23 – Guidelines to Federal Organizations on Security Assurance and Acquisition / Use of Test/Evaluated Products

+

o 800-53 – Security and Privacy Controls for Federal Information Systems and Organizations

+

o 800-115 – Technical Guide to Information Security Testing and Assessment

+

o 800-118 – Guide to Enterprise Password Management

+

o 800-133 – Recommendation for Cryptographic Key Generation

+

o 800-137 – Information Security Continuous Monitoring for Federal Information Systems and Organizations

+

o To the extent not specified above, all other provisions of the NIST Cyber Security Framework

+

• Federal Financial Institutions Examination Council:

+

o Authentication Best Practices

+

• International Organization for Standardization:

+

o ISO/IEC 27001 – Information Security Management

+

The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine. The FS-ISAC provides real time security updates, industry best practices, threat conference calls, xml data feeds and a member contact directory. The FS-ISAC provides the Company with the ability to work with the entire financial industry to collaborate for the purposes of staying up to date with the latest information security activities.

+

5. BCP / DR Process

+

5.1 Overview

+

The Plan Processor must develop and implement disaster recovery (“DR”) and business continuity plans (“BCP”) that are tailored to the specific requirements of the CAT environment, and which must be approved and regularly reviewed by the Operating Committee. The BCP must address the protection of data, service for the data submissions, processing, data access, support functions and operations. In the context of this document, BCP generally refers to how the business activities will continue in the event of a widespread disruption and the DR requirements refer to how the CAT infrastructure will be designed to support a full data center outage. In addition, the Plan Processor must have SLAs in place to govern redundancy (i.e., no single point of failure) of critical aspects of the CAT System (e.g., electrical feeds, network connectivity, redundant processors, storage units, etc.) and must have an architecture to support and meet the SLA requirements. Any SLAs between the Plan Processor and third parties must be approved by the Operating Committee.

+

5.2 Industry Standards

+

The following National Institute of Standards and Technology standards, at a minimum, must be followed in association with Disaster Recovery, in each case as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee:

+

• 800-34 – Contingency Planning for Federal Information Systems; and

+

• Specifically, the following sections as minimum requirements for designing and implementing BCP and DR plans:

+

o Chapter 3: Information System Contingency Planning Process, which identifies seven steps to use when developing contingency plans;

+

o Chapter 4: Information System Contingency Plan Development, which outlines the key elements of a contingency plan;

+

o Chapter 5: Technical Contingency Planning Considerations (using the specific sections applicable to the Plan Processor’s systems) which provides considerations specific to different types of technology; and

+

o Other sections and the appendices should be taken into consideration as warranted.

+

In addition, the Plan Processor will need to develop a process to manage and report all breaches.

+

5.3 Business Continuity Planning

+

The Plan Processor will design a BCP that supports a continuation of the business activities required of the CAT in the event of a widespread disruption.

+

With respect to the team supporting CAT business operations, a secondary site must be selected that is capable of housing the critical staff necessary for CAT business operations. The site must be fully equipped to allow for immediate use. The selection of the site must take into account diversity in utility and telecommunications infrastructure as well as the ability for CAT staff to access the site in the event of transit shutdowns, closure of major roadways and other significant disruptions that may affect staff. Planning should consider operational disruption involving significant unavailability of staff.

+

A bi-annual test of CAT operations where CAT staff operates the facility from the secondary site is required. This will ensure that phone systems, operational tools and other help desk functions all work as expected and the Plan Processor still functions as usual even in the event of a disruption.

+

CAT operations staff must maintain, and annually test, remote access capabilities to ensure smooth operations during a site un-availability event. Certain critical staff may be required to report directly to the secondary office site. However, an effective telecommuting solution must be in place for all critical CAT operations staff. Furthermore, any telecommuting strategy must require a remote desktop style solution where CAT operations and data consoles remain at the primary data center and must further ensure that CAT Data may not be downloaded to equipment that is not CAT-owned and compliant with CAT security requirements.

+

The BCP must identify critical third party dependencies. The Plan Processor will coordinate with critical suppliers regarding their arrangements and involve these parties in tests on an annual basis. Critical third party firms may be required to provide evidence of their BCP capabilities and testing.

+

The Plan Processor must conduct third party risk assessments at regular intervals to verify that security controls implemented are in accordance with NIST SP 800-53. These risk assessments must include assessment scheduling, questionnaire completion and reporting. The Plan Processor should provide assessment reports to the Operating Committee.

+

The Plan Processor will develop and annually test a detailed crisis management plan to be invoked following certain agreed disruptive circumstances.

+

The processing sites for business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”265

+

The Plan Processor will conduct an annual Business Continuity Audit using an Independent Auditor approved by the Operating Committee. The Independent Auditor will document all findings in a detailed report provided to the Operating Committee.

+

5.4 Disaster Recovery Requirements

+

The Plan Processor will implement a DR capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the CAT.

+

A secondary processing site must be capable of recovery and restoration of services at the secondary site within a minimum of 48 hours, but with the goal of achieving next day recovery after a disaster event. The selection of the secondary site must consider sites with geographic diversity that do not rely on the same utility, telecom and other critical infrastructure services. The processing sites for disaster recovery and business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”

+

The secondary site must have the same level of availability / capacity / throughput and security (physical and logical) as the primary site. The requirement implies and expects that fully redundant connectivity between the primary and secondary processing sites be established and fully available. Further, given this recovery window, this connectivity must be used to replicate repositories between the primary and secondary sites. Finally, CAT Reporter and Data Submitter submissions must be replicated to the secondary site for possible replay if recent replications are incomplete. Replication must occur as deliveries complete to ensure that a widespread communications failure will have minimal impact to the state of the secondary site.

+

On an annual basis, the Plan Processor must execute an industry DR test, which must include Plan Participants and a critical mass of non-Plan Participant CAT Reporters and Data Submitters. The tests must be structured such that all CAT Reporters and other Data Submitters can upload to the DR site and the data be ingested by the CAT Data loaders. All DR tests are required to realistically reflect the worst-case scenario.

+

Failover processes must be transparent to CAT Reporters, as well as failback. In the event of a site failover, CAT Reporters must be able to deliver their daily files without changing configuration. This avoids requiring all CAT Reporters to update configurations, which is an error-prone effort.

+

After a DR event, the primary processing site must be made available as quickly as possible. For short duration DR events, the primary site must be returned to primary within 48 hours after the DR event. Longer duration outages will have differing SLAs. The DR plan must include designs that allow the re-introduction of the primary site or the introduction of a new primary site as the event dictates and an indication of the time required for this re-introduction.

+

6. Data Availability

+

6.1 Data Processing

+

CAT order events must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. The processing timelines start on the day the order event is received by the Central Repository for processing. Most events must be reported to the CAT by 8:00 a.m. Eastern Time the Trading Day after the order event occurred (referred to as transaction date). The processing timeframes below are presented in this context. All events submitted after T+1 (either reported late or submitted later because not all of the information was available) must be processed within these timeframes based on the date they were received.

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The Participants require the following timeframes (Figure A) for the identification, communication and correction of errors from the time an order event is received by the processor:

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• Noon Eastern Time T+1 (transaction date + one day) – Initial data validation, lifecycle linkages and communication of errors to CAT Reporters;

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• 8:00 a.m. Eastern Time T+3 (transaction date + three days) – Resubmission of corrected data; and

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• 8:00 a.m. Eastern Time T+5 (transaction date + five days) – Corrected data available to Participant regulatory staff and the SEC.

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Late submissions or re-submissions (after 8:00 a.m.) may be considered to be processed that day if it falls within a given time period after the cutoff. This threshold will be determined by the Plan Processor and approved by the Operating Committee. In the event that a significant portion of the data has not been received as monitored by the Plan Processor, the Plan Processor may decide to halt processing pending submission of that data.

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Figure A: CAT Central Repository Data Processing Timelines

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6.2 Data Availability Requirements

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Prior to 12:00 p.m. Eastern Time on T+1, raw unprocessed data that has been ingested by the Plan Processor must be available to Participants’ regulatory staff and the SEC.

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Between 12:00 p.m. Eastern Time on T+1 and T+5, access to all iterations of processed data must be available to Participants’ regulatory staff and the SEC.

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The Plan Processor must provide reports and notifications to Participant regulatory staff and the SEC regularly during the five-day process, indicating the completeness of the data and errors. Notice of major errors or missing data must be reported as early in the process as possible. If any data remains un-linked after T+5, it must be available and included with all linked data with an indication that the data was not linked.

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If corrections are received after T+5, Participants’ regulatory staff and the SEC must be notified and informed as to how re-processing will be completed. The Operating Committee will be involved with decisions on how to re-process the data; however, this does not relieve the Plan Processor of notifying the Participants’ regulatory staff and the SEC.

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Figure B: Customer and Account Information (Including PII)

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CAT PII data must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. Industry Members submitting new or modified Customer information must provide it to the Central Repository no later than 8:00 a.m. Eastern Time on T+1. The Central Repository must validate the data and generate error reports no later than 5:00 p.m. Eastern Time on T+1. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be resubmitted no later than 5:00 p.m. Eastern Time on T+3. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be available to regulators no later than 8:00 a.m. Eastern Time on T+5.

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Customer information that includes PII data must be available to regulators immediately upon receipt of initial data and corrected data, pursuant to security policies for retrieving PII.

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7. Receipt of Data from Reporters

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7.1 Receipt of Data Transmission

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Following receipt of data files submitted by the CAT Reporter or Data Submitter, the Plan Processor must send an acknowledgement of data received to the CAT Reporter and Data Submitter, if applicable. Such acknowledgment will enable CAT Reporters to create an audit trail of their submissions and allow for tracing of data breakdowns when data is not received. At a minimum, the receipt acknowledgement will include:

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• SRO-Assigned Market Participant Identifier;

+

• Date of Receipt;

+

• Time of Receipt;

+

• File Identifier; and

+

• Value signifying the acknowledgement of receipt, but not processing, of the file.

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7.2 Data Validation

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The Plan Processor will implement data validations at the file and individual record level for data received by the Plan Processor including customer data. If a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit.266 The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. All identified exceptions will be reported back to the CAT Reporter submitting the data and/or the CAT Reporter on whose behalf the data was submitted.

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The data validations must include the following categories and must be explained in the Technical Specifications document:

+

• File Validations – Confirmation of file transmission and receipt are in the correct formats. This includes validation of header and trailers on the submitted report, confirmation of a valid SRO-Assigned Market Participant Identifier, and verification of the number of records in the file.

+

• Validation of CAT Data – Syntax and context checks, including:

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o Format checks:

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‧ Check that the data is entered in the specified format

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o Data Type checks:

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‧ Check that the data type of each attribute is as per specification

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o Consistency checks:

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‧ Check that all attributes for a record of a specified type are consistent

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o Range/logic checks:

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‧ Range check – Validate that each attribute for every record has a value within specified limits

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‧ Logic check – Validate that the values provided against each attribute are associated with the event type they represent

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o Data validity checks:

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‧ Validate that each attribute for every record has an acceptable value

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o Completeness checks:

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‧ Verify that each mandatory attribute for every record is not null

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o Timeliness checks:

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‧ Verify that records were submitted within the submission timelines

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• Linkage Validation267 – Process by which related CAT Reportable Events are in a linked daisy chain method

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CAT Reporters must have the ability to correct, replace or delete records that have passed initial validations within the CAT.

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After the Central Repository has processed the data, the Plan Processor must provide daily statistics, including at a minimum, the following information:

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• SRO-Assigned Market Participant Identifier;

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• Date of Submission;

+

• Number of files received;

+

• Number of files accepted;

+

• Number of files rejected;

+

• Number of total order events received;

+

• Number of order events accepted;

+

• Number of order events rejected;

+

• Number of each type of report received;

+

• Number of each type of report accepted;

+

• Number of each type of report rejected;

+

• Number of customer records received;

+

• Number of total customer records accepted;

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• Number of total customer records rejected;

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• Number of unknown accounts;

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• Number of late submissions;

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• Order-IDs rejected;

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• Reason(s) for rejection;

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• Number of records attempted to be matched;

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• Number of records matched; and

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• Percentage of records matched.

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Individual records contained in files that do not pass the file validation process must not be included for further processing. Once a file passes the initial validation, individual records contained therein may then be processed for further validation. Individual records that do not pass the data validation processes will not be included in the final audit trail but must be retained. Additionally, records not passing the validations will not be included for matching processes.

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7.3 Exception Management

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The Plan Processor must capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format and the rejections and daily statistics must be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend any exceptions.

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The Plan Processor must support bulk error correction. Rejected records can be resubmitted as a new file with appropriate indicators to identify the rejection record, which is being repaired. The Plan Processor will then reprocess repaired records.

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A GUI must be available for CAT Reporters to make updates to individual records or attributes and must include, at a minimum, the:

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• Count of each type of rejection;

+

• Reason for each rejection;

+

• Ability to download the rejections;

+

• Firm assigned order ID of each rejection;

+

• Details of each rejection;

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• Type of report rejected; and

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• Repair status.

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The Plan Processor must support bulk replacement of records, and reprocess such replaced records. The Plan Processor must provide CAT Reporters with documentation that detail the process how to amend and upload records that fail the validations that are outlined as part of Section 7.4. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

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The Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics will be provided after data has been uploaded and validated by the Plan Processor. The Plan Processor must support a continuous validation and feedback model so that CAT Reporters can identify and correct rejections on an ongoing basis. The rejected reports will include descriptive details, or codes related to descriptive details, as to why each data record was rejected by the Plan Processor.

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On a monthly basis, the Plan Processor must produce and publish reports detailing performance and comparison statistics for CAT Reporters,268 similar to the Report Cards published for OATS presently. This will enable CAT Reporters to assess their performance in relation to their industry peers and help them assess the risk related to their reporting of transmitted data.

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Breaks in intermittent lifecycle linkages must not cause the entire lifecycle to break nor cause a reject to the CAT Reporter that correctly reported.

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7.4 Error Corrections

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Error corrections must be able to be submitted and processed at any time, including timeframes after the standard repair window. Additionally, in order to make corrections, CAT Reporters must have access to the Central Repository over weekends.

+

CAT Reporters must be able to submit error corrections for data errors identified by CAT Reporters that passed format validations.

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Additionally, the Plan Processor must:

+

• Provide feedback as to the reason(s) for errors;

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• Prevent a linkage break between reports from resulting in additional events being rejected;

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• Allow broken linkages to be repaired without having to submit or resubmit additional reports;

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• Allow error corrections to be submitted both via online and bulk uploads or via file submission;

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• Support auto-correction of identified errors and notify reporters of any auto-corrections;

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• Support group repairs (i.e., the wrong issue symbol affecting multiple reports).

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7.5 Data Ingestion

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Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the CAT Reporter (i.e., whether the CAT Reporter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

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8. Functionality of the CAT System

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8.1 Regulator Access

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The Plan Processor must provide Participants’ regulatory staff and the SEC with access to all CAT Data for regulatory purposes only. Participants’ regulatory staff and the SEC will access CAT Data to perform functions, including economic analyses, market structure analyses, market surveillance, investigations, and examinations.

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The CAT must be able to support, at a minimum, 3,000 regulatory users within the system. It is estimated that approximately 20% of all users will use the system on a daily or weekly basis while approximately 10% of all users will require advanced regulator-user access, as described below. Furthermore, it is estimated that there may be approximately 600 concurrent users accessing the CAT at any given point in time. These users must be able to access and use the system without an unacceptable decline in system performance.269

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As stated in Appendix D, Data Security, the Plan Processor must be able to support an arbitrary number of user roles. Defined roles must include, at a minimum:

+

• Basic regulator users – Individuals with approved access who plan to use the Central Repository to run basic queries (e.g., pulling all trades in a single stock by a specific party).

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• Advanced regulator users – Individuals with approved access who plan to use the Central Repository to construct and run their own complex queries.

+

Regulators will have access to processed CAT Data through two different methods, an online-targeted query tool and user-defined direct queries and bulk extracts.

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8.1.1 Online Targeted Query Tool

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The online targeted query tool will provide authorized users with the ability to retrieve processed and/or validated (unlinked) data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields, including the following:

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• Instrument(s);

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• Related instruments (e.g., single stock and all options with for the stock);

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• Data type (executions, orders, cancelations, quotes, etc.);

+

• Product type (equity, option, etc.);

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• Processed data, unlinked data or both;

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• Listing market;

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• Exchange;

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• CAT-Reporter-ID(s) – CAT assigned and Participant assigned;

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• Customer-ID(s) – CAT assigned and CAT Reporter assigned;

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• CAT-Order-ID(s) – CAT assigned and CAT Reporter assigned;

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• ISO flag;

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• Put/call;

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• Strike price (include ability to select range);

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• Size;

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• Price;

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• Side;

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• Short-sale identifier;

+

• Time-in-force (IOC, GTC, etc.);

+

• Orders, quotes, BBOs or trades above or below a certain size;

+

• Orders, quotes, BBOs or trades within a range of prices;

+

• Canceled orders and/or trades;

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• CAT Reporters exceeding specified volume or percentage of volume thresholds in a single instrument or market-wide during a specified period of time;

+

• CAT Reporter correction rate over time;

+

• Audit trail of order linkages;

+

• Corporate action events;

+

• Instrument history; and

+

• Others to be defined.

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The tool must provide a record count of the result set, the date and time the query request is submitted, and the date and time the result set is provided to the users. In addition, the tool must indicate in the search results whether the retrieved data was linked or unlinked (e.g., using a flag). In addition, the online targeted query tool must not display any PII data. Instead, it will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. The Plan Processor must define the maximum number of records that can be viewed in the online tool as well as the maximum number of records that can be downloaded. Users must have the ability to download the results to .csv, .txt, and other formats, as applicable. These files will also need to be available in a compressed format (e.g., .zip, .gz). Result sets that exceed the maximum viewable or download limits must return to users a message informing them of the size of the result set and the option to choose to have the result set returned via an alternate method.

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The Plan Processor must define a maximum number of records that the online targeted query tool is able to process. The minimum number of records that the online targeted query tool is able to process is 5,000 (if viewed within the online query tool) or 10,000 (if viewed via a downloadable file).

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Once query results are available for download, users are to be given the total file size of the result set and an option to download the results in a single or multiple file(s). Users that select the multiple file option will be required to define the maximum file size of the downloadable files. The application will then provide users with the ability to download the files. This functionality is provided to address limitations of end-user network environment that may occur when downloading large files.

+

The tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission, as well as the delivery of results. The Plan Processor will use this logged information to provide monthly reports to each Participant and the SEC of its respective metrics on query performance and data usage of the online query tool. The Operating Committee must receive all monthly reports in order to review items, including user usage and system processing performance.

+

8.1.2 Online Targeted Query Tool Performance Requirements

+

For targeted search criteria, the minimum acceptable response times will be increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time must generally be available within 24 hours of the submission of the request. Regardless of the complexity of the criteria used within the online query tool, any query request for data within one business date of a 12-month period must return results within 3 hours.

+

Performance requirements listed below apply to data:

+

• Online targeted query tool searches that include equities and options trade data only in the search criteria must meet minimum requirements, including:

+

o Returning results within 1 minute for all trades and related lifecycle events for a specific Customer or CAT Reporter with the ability to filter by security and time range for a specified time window up to and including an entire day;

+

o Returning results within 30 minutes for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 1 month);

+

o Returning results within 6 hours for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 12-month duration from the most recent 24 months); and

+

o Returning results for the full 6 years of data for all trades and lifecycle events across daily, weekly, and multi-year periods.

+

• Online targeted query tool searches that include equities and options order and National Best Bid and National Best Offer data in search criteria must meet minimum requirements, including:

+

o Returning results within 5 minutes for all orders and their complete lifecycles for a single security from a specific Participant across all markets (note: a Participant could have multiple participant identifiers) in a specified time window not to exceed 10 minutes for a single date;

+

o Returning results within 5 minutes for all orders, cancelations, and the National Best Bid and National Best Offer (or the protected best bid and offer) at the time the order is created for a single security in a specified time window not to exceed 10 minutes for a single date;

+

o Returning results within 5 minutes for all equity and options orders, cancelations, and executions from a specific market participant in a single underlying instrument in a specified time window not to exceed 10 minutes for a single date;

+

o Returning results within 5 minutes for all orders, quotes, routes, cancelations and trades (complete life-cycle) for related instruments (e.g., single stock and all options series for the same stock) in a specified time window not to exceed 10 minutes for a single date;

+

o Returning results within 5 minutes for all orders and quotes entered during a specific time period by a list of specific CAT Reporters, with the ability to drill down to show the complete life-cycle must return results in a specified time window not to exceed 10 minutes for a single date; and

+

o Returning results within 5 minutes for all orders and quotes entered during a specific time period for a specified list of instruments must return results in a specified time window not to exceed 10 minutes for a single date.

+

The online targeted query tool architecture must include an automated application-level resource management component. This feature must manage query requests to balance the workload to ensure the response times for targeted and complex queries meet the defined response times. The resource management function will categorize and prioritize query requests based on the input parameters, complexity of the query, and the volume of data to be parsed in the query. Additionally, the source of the query may also be used to prioritize the processing. The Plan Processor must provide details on the prioritization plan of the defined solution for online query requests.

+

The online targeted query tool must support parallel processing of queries. At a minimum, the online targeted query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

+

8.1.3 Online Targeted Query Tool Access and Administration

+

Access to CAT Data is limited to authorized regulatory users from the Participants and the SEC. Authorized regulators from the Participants and the SEC may access all CAT Data, with the exception of PII data. A subset of the authorized regulators from the Participants and the SEC will have permission to access and view PII data. The Plan Processor must work with the Participants and SEC to implement an administrative and authorization process to provide regulator access. The Plan Processor must have procedures and a process in place to verify the list of active users on a regular basis.

+

A two-factor authentication is required for access to CAT Data. PII data must not be available via the online targeted query tool or the user-defined direct query interface.

+

8.2 User-Defined Direct Queries and Bulk Extraction of Data

+

The Central Repository must provide for direct queries, bulk extraction, and download of data for all regulatory users. Both the user-defined direct queries and bulk extracts will be used by regulators to deliver large sets of data that can then be used in internal surveillance or market analysis applications. The data extracts must use common industry formats.

+

Direct queries must not return or display PII data. Instead, they will return existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements.

+

Participants and regulators must have the ability to create, save, and schedule dynamic queries that will run directly against processed and/or unlinked CAT Data. The examples below demonstrate robust usage of the CAT Data to perform a variety of complex query, surveillance, and market analysis use cases. User-defined direct queries will be used to perform tasks such as market reconstruction, behavioral analysis, and cross-market surveillance.

+

The method(s) for providing this capability is dependent upon the architecture of the CAT and will be defined by the final solution. The CAT cannot be web-based due to the volumes of data that could be extracted.

+

The Participants are agnostic as to how user-defined direct queries or bulk extracts are implemented as long as the solution provides an open API that allows regulators to use analytic tools (e.g., R, SAS, Python, Tableau) and can use ODBC/JDBC drivers to access the CAT Data. Queries invoked through the open API must be auditable. The CAT System must contain the same level of control, monitoring, logging and reporting as the online targeted query tool. The Plan Processor may define a limited set of basic required fields (e.g., date and at least one other field such as symbol, CAT-Reporter ID, or CAT-Customer-ID) that regulators must use in direct dynamic queries.

+

The Plan Processor must provide procedures and training to regulators that will use the direct query feature. The Plan Processor may choose to require that user-defined direct query users participate in mandatory training sessions.

+

The bulk extract feature will replace the current Intermarket Surveillance Group (ISG) ECAT and COATS compliance data files that are currently processed and provided to Participants for use in surveillance applications. These files are used extensively across all Participants in a variety of surveillance applications and are a critical data input to many surveillance algorithms. With the initial implementation of the CAT, opportunities exist to improve the content and depth of information available in these data files. The Plan Processor will need to work with ISG to define new layouts that will include additional data elements that will be available in the CAT Data.

+

The Plan Processor is responsible for providing data models and data dictionaries for all processed and unlinked CAT Data.

+

8.2.1 User-Defined Direct Query Performance Requirements

+

The user-defined direct query tool is a controlled component of the production environment made available to allow the Participants’ regulatory staff and the SEC to conduct queries. The user-defined direct query tool must:

+

• Provide industry standard programmatic interface(s) that allows Participants’ regulatory staff and the SEC with the ability to create, save, and run a query;

+

• Provide query results that are extractable / downloadable and can be used to refine subsequent queries;

+

• Support complex, multistage queries;

+

• Run at a minimum 3,000 queries on a daily basis. Of these, it is anticipated that roughly 60% would be simple queries (e.g., pulling of all trades in a given symbol traded during a certain time period) and 40% would be complex (e.g., looking for quotes or orders more than 5% away from the National Best Bid and National Best Offer);

+

• Process and run approximately 1,800 queries concurrently;

+

• Support SQL 92 as well as recursive queries with common table expressions (recursive CTEs), bulk load utility, interface for dimension management, windowing functions, JBDC and ODBC, or provide another API with equal or greater query capabilities, so long as ODBC and JDBC are supported. Support for stored procedures and user-defined functions are optional;

+

• Include data presentation tools / query tools that support query results that produce data sets ranging from less than 1 gigabyte to at least 10 terabytes or more of uncompressed data;

+

• Provide query owners with the ability to schedule queries;

+

• Provide query owners with the ability to cancel a query during execution or prior to the scheduled running of a query;

+

• Provide Participants with a means to view all saved queries owned by the Participants as well as the scheduling of query executions (for queries that have been scheduled);

+

• Provide an automated delivery method of scheduled query results to the appropriate Participant. Delivery methods must comply with all information security guidelines (encryption, etc.);

+

• Provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability;

+

• Include workload balancer to allow prioritization and processing of queries and delivery of results; and

+

• Support parallel processing of queries. At a minimum, the user-defined direct query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

+

8.2.2 Bulk Extract Performance Requirements

+

For bulk extracts of an entire day of data, the minimum acceptable transfer time of equity and options data is four hours. This requirement assumes that there are no limitations within the regulator’s own network environment that will prevent the Plan Processor from meeting this requirement.

+

A consideration was made to require an online Report Center that would include pre-canned reports that could be delivered to regulators or pulled upon request. The reports would be predefined based on requirements developed by Participants and the SEC. Due to the added complexity and the lack of quantifiable use cases, the Participants determined that this was something that may be useful in the future but not at the initial implementation and launch of the CAT. This will be reassessed when broker-dealers begin submitting data to the CAT.

+

It is envisioned that non-Participant CAT Reporters will be unable to access their data submissions through bulk data exports with the initial implementation of CAT. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports.

+

Extraction of data must be consistently in line with all permissioning rights granted by the Plan Processor. Data returned must be encrypted, password protected and sent via secure methods of transmission. In addition, PII data must be masked unless users have permission to view the data that has been requested.

+

The Plan Processor must have an automated mechanism in place to monitor user-defined direct query usage. This monitoring must include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or data extractions. The Plan Processor must provide details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

+

The user-defined direct query and bulk extraction tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission and the date and time of the delivery of results. The Plan Processor will use this logged information to provide monthly reports to the Operating Committee, Participants and the SEC of their respective usage of the online query tool.

+

The bulk extract tool must support parallel processing of queries. At a minimum, the bulk extract tool must be able to process up to 300 simultaneous query requests with no performance degradation.

+

8.3 Identifying Latency and Communicating Latency Warnings to CAT Reporters

+

The Plan Processor will measure and monitor Latency within the CAT network. Thresholds for acceptable levels of Latency will be identified and presented to the Operating Committee for approval. The Plan Processor will also define policies and procedures for handling and the communication of data feed delays to CAT Reporters, the SEC, and Participants’ regulatory staff that occur in the CAT. Any delays will be posted for public consumption, so that CAT Reporters may choose to adjust the submission of their data appropriately, and the Plan Processor will provide approximate timelines for when system processing will be restored to normal operations.

+

8.4 Technical Operations

+

The Plan Processor will develop policies, procedures, and tools to monitor and manage the performance of the Central Repository, to be approved by the Operating Committee. Such policies, procedures, and tools will include, at a minimum:

+

• Monitoring and management of system availability and performance, to include both Online Targeted Query Tool and User-Defined Direct Queries;

+

• Monitoring and management of query tool usage (e.g., to identify long-running or “stuck” queries); and

+

• Segregation of query queues by regulator or Participant (i.e., one regulator or Participant’s queries should not prevent another regulator or Participant’s queries from running).

+

8.5 System SLAs

+

Service Level Agreements for system and operational performance will be established for areas, including the following:

+

• Linkage and order event processing performance;

+

• Query performance and response times;

+

• System availability;

+

• User support/help desk performance;

+

• Application, network, and data security performance; and

+

• Development, change management, and implementation processes and timelines.

+

The actual terms of the SLAs will be negotiated between the Plan Participants and the eventual Plan Processor.

+

9. CAT Customer and Customer Account Information

+

9.1 Customer and Customer Account Information Storage

+

The CAT must capture and store Customer and Customer Account Information in a secure database physically separated from the transactional database. The Plan Processor will maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The following attributes, at a minimum, must be captured:

+

• Social security number (SSN) or Individual Taxpayer Identification Number (ITIN);

+

• Date of birth;

+

• Current name;

+

• Current address;

+

• Previous name; and

+

• Previous address.

+

For legal entities, the CAT must capture the following attributes:

+

• Legal Entity Identifier (LEI) (if available);

+

• Tax identifier;

+

• Full legal name; and

+

• Address.

+

The Plan Processor must maintain valid Customer and Customer Account Information for each trading day and provide a method for Participants’ regulatory staff and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes, etc.).

+

The Plan Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information, and must continue to process orders while investigating Customer information mismatches. Validations should:

+

• Confirm the number of digits on a SSN,

+

• Confirm date of birth, and

+

• Accommodate the situation where a single SSN is used by more than one individual.

+

The Plan Processor will use the Customer information submitted by all broker-dealer CAT Reporters to assign a unique Customer-ID for each Customer. The Customer-ID must be consistent across all broker-dealers that have an account associated with that Customer. This unique CAT-Customer-ID will not be returned to CAT Reporters and will only be used internally by the CAT.

+

Broker-Dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis. In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database. The Central Repository must support account structures that have multiple account owners and associated Customer information (joint accounts, managed accounts, etc.), and must be able to link accounts that move from one CAT Reporter to another (e.g., due to mergers and acquisitions, divestitures, etc.).

+

9.2 Required Data Attributes for Customer Information Data Submitted by Industry Members

+

At a minimum, the following Customer information data attributes must be accepted by the Central Repository:

+

• Account Owner Name;

+

• Account Owner Mailing Address;

+

• Account Tax Identifier (SSN, TIN, ITIN);

+

• Market Identifiers (Larger Trader ID, LEI);

+

• Type of Account;

+

• Firm Identifier Number;

+

o The number that the CAT Reporter will supply on all orders generated for the Account;

+

• Prime Broker ID;

+

• Bank Depository ID; and

+

• Clearing Broker.

+

9.3 Customer-ID Tracking

+

The Plan Processor will assign a CAT-Customer-ID for each unique Customer. The Plan Processor will determine a unique Customer using information such as SSN and DOB for natural persons or entity identifiers for Customers that are not natural persons and will resolve discrepancies. Once a CAT-Customer-ID is assigned, it will be added to each linked (or unlinked) order record for that Customer.

+

Participants and the SEC must be able to use the unique CAT-Customer-ID to track orders from any Customer or group of Customers, regardless of what brokerage account was used to enter the order.

+

9.4 Error Resolution for Customer Data

+

The Plan Processor must design and implement procedures and mechanisms to handle both minor and material inconsistencies in Customer information. The Central Repository needs to be able to accommodate minor data discrepancies such as variations in road name abbreviations in searches. Material inconsistencies such as two different people with the same SSN must be communicated to the submitting CAT Reporters and resolved within the established error correction timeframe as detailed in Section 8.

+

The Central Repository must have an audit trail showing the resolution of all errors. The audit trail must, at a minimum, include the:

+

• CAT Reporter submitting the data;

+

• Initial submission date and time;

+

• Data in question or the ID of the record in question;

+

• Reason identified as the source of the issue, such as:

+

o duplicate SSN, significantly different Name;

+

o duplicate SSN, different DOB;

+

o discrepancies in LTID; or

+

o others as determined by the Plan Processor;

+

• Date and time the issue was transmitted to the CAT Reporter, included each time the issue was re-transmitted, if more than once;

+

• Corrected submission date and time, including each corrected submission if more than one, or the record ID(s) of the corrected data or a flag indicating that the issue was resolved and corrected data was not required; and

+

• Corrected data, the record ID, or a link to the corrected data.

+

10. User Support

+

10.1 CAT Reporter Support

+

The Plan Processor will provide technical, operational and business support to CAT Reporters for all aspects of reporting. Such support will include, at a minimum:

+

• Self-help through a web portal;

+

• Direct support through email and phone;

+

• Support contact information available through the internet; and

+

• Direct interface with Industry Members and Data Submitters via industry events and calls, industry group meetings and informational and training sessions.

+

The Plan Processor must develop tools to allow each CAT Reporter to:

+

• Monitor its submissions;

+

• View submitted transactions in a non-bulk format (i.e., non-downloadable) to facilitate error corrections;

+

• Identify and correct errors;

+

• Manage Customer and Customer Account Information;

+

• Monitor its compliance with CAT reporting requirements; and

+

• Monitor system status.

+

The Plan Processor will develop and maintain communication protocols (including email messaging) and a secure website to keep CAT Reporters informed as to their current reporting status, as well as issues with the CAT that may impact CAT Reporters’ ability to submit or correct data. The website will use user authentication to prevent users for seeing information about firms other than their own, and will contain:

+

• Daily reporting statistics for each CAT Reporter,270 including items such as:

+

o SRO-Assigned Market Participant Identifier;

+

o Date of submission;

+

o Number of files received;

+

o Number of files accepted;

+

o Number of files rejected;

+

o Number of total order events received;

+

o Number of order events accepted;

+

o Number of order events rejected;

+

o Number of each type of report received;

+

o Number of each type of report accepted;

+

o Number of each type of report rejected;

+

o Number of total customer records accepted;

+

o Number of total customer records rejected;

+

o Order-IDs rejected;

+

o Reason for rejection;

+

o Number of records attempted to be matched;

+

o Number of records matched;

+

o Percentage of records matched;

+

o Number of customer records received;

+

o Number of unknown accounts;

+

o Latest view of statistics inclusive of re-submissions to get a trade-date view of exceptions and correction statistics available for CAT Reporters to know when everything for a given trade date has been completed; and

+

o Most recent CAT Reporter Compliance Report Card, as defined in section 12.4;

+

• CAT System status, system notifications, system maintenance, and system outages; and

+

• A mechanism for submitting event data and correcting and resubmitting rejections or inaccurate data.

+

The Plan Processor will develop and maintain a public website containing comprehensive CAT reporting information, including:

+

• Technical Specifications;

+

• Reporting guidance (e.g., FAQs);

+

• Pending rule changes affecting CAT reporting;

+

• CAT contact information;

+

• Availability of test systems;

+

• Testing plans;

+

• Proposed changes to the CAT; and

+

• Fee schedule.

+

The Plan Processor will develop and maintain a mechanism for assigning CAT Reporter-IDs. A mechanism will also be developed and maintained to change CAT Reporter-IDs should this be necessary (e.g., due to a merger), with the expectations that such changes should be infrequent. Changes to CAT-Reporter-IDs must be reviewed and approved by the Plan Processor.

+

Initially, non-Participant CAT Reporters will not have access to their data submissions through bulk data exports with the initial implementation of the Central Repository. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports. Non-Participant CAT Reporters will be able to view their submissions online in a read-only, non-exportable format to facilitate error identification and correction. Data Submitters will be able to export bulk file rejections for repair and error correction purposes.

+

The Plan Processor will define methods by which it will consult with and inform CAT Reporters and industry groups on updates and changes to user support.

+

The Plan Processor will define pre- and post-production support programs to minimize the Error Rate and help CAT Reporters to meet their compliance thresholds. Such pre-production support program shall include, but are not limited to, the following activities:

+

• Educational programs – Includes the following:

+

o Publication and industry-wide communication (including FAQs) of the Technical Specifications, including:

+

‧ Appropriate definitions / expected usages for each value in field format

+

‧ All available attribute values for each field

+

o Establishment of a dedicated help desk for Reporters to contact;

+

o Industry participation in order linkage methodologies;

+

‧ Include information on new order / trade types;

+

o Hosting of industry educational calls; and

+

o Hosting of industry-wide training.

+

• Registration – Requires all firms to:

+

o Register and be certified as CAT Reporters;

+

o Attend industry-wide training;

+

o Establish internal controls to capture potential misreporting scenarios; and

+

o Work with the Plan Processor to understand scenario-based reporting and expected outputs.

+

• Communications Plan – A strong communications plan of the timeline to reporting go-live shall:

+

o Include communication on how Error Rates and Compliance Thresholds are calculated; and

+

o Describe how errors will be communicated back to CAT Reporters.

+

• Industry-wide testing – Industry-wide test results must be available for all CAT Reporters.

+

o As mentioned in Appendix C, Objective Milestones to Assess Progress, appropriate time must be provided between Technical Specification publication and production go-live.

+

o Ample testing time must be provided.

+

o Appropriate scenario-based testing, including all three validation processes, shall be established.

+

o A separate test environment for CAT Reporters that mirrors the production environment shall be provided.

+

Post-production support program activities shall include, but are not limited to the following:

+

• Issuing a monthly Report Card on reporting statistics, with information on how reporters stand against similar entities;

+

• Publishing daily reporting statistics;

+

• Maintaining Technical Specifications with defined intervals for new releases/updates;

+

• Posting FAQs and other informational notices to be updated as necessary;

+

• Hosting of industry educational calls;

+

• Hosting of industry-wide training;

+

• Emailing outliers, meaning firms significantly reporting outside of industry standards;

+

• Conducting annual assessments of dedicated help desk to determine appropriate staffing levels;

+

• Using the test environment prior to releasing new code to production; and

+

• Imposing CAT Reporter requirements:

+

o Attendance/participation of industry testing sessions;

+

o Attendance in industry educational calls; and

+

o Attendance in industry-wide training.

+

10.2 CAT User Support

+

The Plan Processor will develop a program to provide technical, operational and business support to CAT users, including Participants’ regulatory staff and the SEC. The CAT help desk will provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability.

+

The Plan Processor will develop tools, including an interface, to allow users to monitor the status of their queries and/or reports. Such website will show all in-progress queries/reports, as well as the current status and estimated completion time of each query/report.

+

The Plan Processor will develop communication protocols to notify regulators of CAT System status, outages and other issues that would affect Participants’ regulatory staff and the SEC’s ability to access, extract, and use CAT Data. At a minimum, Participants’ regulatory staff and the SEC must each have access to a secure website where they can monitor CAT System status, receive and track system notifications, and submit and monitor data requests.

+

The Plan Processor will develop and maintain documentation and other materials as necessary to train regulators in the use of the Central Repository, including documentation on how to build and run reporting queries.

+

10.3 CAT Help Desk

+

The Plan Processor will implement and maintain a help desk to support broker-dealers, third party CAT Reporters, and Participant CAT Reporters (the “CAT Help Desk”). The CAT Help Desk will address business questions and issues, as well as technical and operational questions and issues. The CAT Help Desk will also assist Participants’ regulatory staff and the SEC with questions and issues regarding obtaining and using CAT Data for regulatory purposes.

+

The CAT Help Desk must go live within a mutually agreed upon reasonable timeframe after the Plan Processor is selected, and must be available on a 24x7 basis, support both email and phone communication, and be staffed to handle at minimum 2,500 calls per month. Additionally, the CAT Help Desk must be prepared to support an increased call volume at least for the first few years. The Plan Processor must create and maintain a robust electronic tracking system for the CAT Help Desk that must include call logs, incident tracking, issue resolution escalation.

+

CAT Help Desk support functions must include:

+

• Setting up new CAT Reporters, including the assignment of CAT-Reporter-IDs and support prior to submitting data to CAT;

+

• Managing CAT Reporter authentication and entitlements;

+

• Managing CAT Reporter and third party Data Submitters testing and certification;

+

• Managing Participants and SEC authentication and entitlements;

+

• Supporting CAT Reporters with data submissions and data corrections, including submission of Customer and Customer Account Information;

+

• Coordinating and supporting system testing for CAT Reporters;

+

• Responding to questions from CAT Reporters about all aspects of CAT reporting, including reporting requirements, technical data transmission questions, potential changes to SEC Rule 613 that may affect the CAT, software/hardware updates and upgrades, entitlements, reporting relationships, and questions about the secure and public websites;

+

• Responding to questions from Participants’ regulatory staff and the SEC about obtaining and using CAT Data for regulatory purposes, including the building and running of queries; and

+

• Responding to administrative issues from CAT Reporters, such as billing.

+

10.4 CAT Reporter Compliance

+

The Plan Processor must include a comprehensive compliance program to monitor CAT Reporters’ adherence to SEC Rule 613. The Chief Compliance Officer will oversee this compliance program, and will have responsibility for reporting on compliance by CAT Reporters to the Participants. The compliance program covers all CAT Reporters, including broker-dealers and Participants.

+

As a fundamental component of this program, the Plan Processor will identify on a daily basis all CAT Reporters exceeding the maximum allowable Error Rate established by the Participants. The Error Rate will initially be set by the CAT NMS Plan, and will be reviewed and adjusted on an ongoing basis by the Operating Committee. Error Rates will be based on timeliness, correctness, and linkages.

+

The Plan Processor will, on an ongoing basis, analyze reporting statistics and Error Rates and recommend to Participants proposed changes to the maximum allowable Error Rates established by the Participants. All CAT Reporters exceeding this threshold will be notified that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections).

+

The Plan Processor will develop and publish CAT Reporter compliance report cards on a periodic basis to assist CAT Reporters in monitoring overall compliance with CAT reporting requirements. The Plan Processor will also recommend criteria and processes by which CAT Reporters will be fined for inaccurate, incomplete, or late submissions. The compliance report cards will include the following information:

+

• Number of inaccurate transactions submitted;

+

• Number of incomplete transactions submitted; and

+

• Number of transactions submitted later than reporting deadlines.

+

The CAT Reporter compliance program will include reviews to identify CAT Reporters that may have failed to submit order events to the CAT, as well as to ensure CAT Reporters correct all identified errors even if such errors do not exceed the maximum allowable Compliance Threshold.

+

The Plan Processor will, on a monthly basis, produce and provide reports containing performance and comparison statistics as needed to each Participant on its members’ CAT reporting compliance thresholds so that Participants can monitor their members’ compliance with CAT reporting requirements and initiate disciplinary action when appropriate. The Plan Processor will also produce and provide, upon request from the Participants and the SEC, reports containing performance and comparison statistics as needed on each CAT Reporter’s compliance thresholds so that the Participants or the SEC may take appropriate action if a Participant fails to comply with its CAT reporting obligations.

+

The Plan Processor will produce and make available on a monthly basis reports for all CAT Reporters, benchmarking their performance and comparison statistics against similar peers. The reports will be anonymized such that it will not be possible to determine the members of the peer group to which the CAT Reporter was compared.

+

The Plan Processor will produce and make available to regulators on a monthly basis a report detailing Error Rates, transaction volumes, and other metrics as needed to allow regulators to oversee the quality and integrity of CAT Reporter reporting to the Central Repository.

+

11. Upgrade Process and Development of New Functionality

+

11.1 CAT Functional Changes

+

The Plan Processor must propose a process governing the determination to develop new functionality, which process must be reviewed and approved by the Operating Committee. The process must, at a minimum:

+

• Contain a mechanism by which changes can be suggested to the Operating Committee by Advisory Committee members, the Participants, or the SEC;

+

• Contain a defined process for developing impact assessments, including implementation timelines, for proposed changes; and

+

• Contain a mechanism by which functional changes which the Plan Processor wishes to undertake can be reviewed and approved by the Operating Committee.

+

The Plan Processor shall not unreasonably withhold, condition, or delay implementation of any changes or modifications reasonably requested by the Operating Committee.

+

11.2 CAT Infrastructure Changes

+

The Plan Processor must implement a process to govern changes to CAT. This process must contain provisions for:

+

• Business-as-usual changes (e.g., replacing failed hardware, adding capacity to deal with expected increases in transaction volumes) that would require the Plan Processor to provide the Operating Committee with a summary report (e.g., infrastructure changes, acquired costs, etc.); and

+

• Isolated infrastructure changes (e.g., moving components of the system from a self-hosted to an Infrastructure-as-a-Service provider) that would require the Plan Processor to provide a request to the Operating Committee for review and approval before commencing any actions.

+

11.3 Testing of New Changes

+

The Plan Processor must implement a process governing user testing of changes to CAT functionality and infrastructure, which process must be reviewed and approved by the Operating Committee. The process must:

+

• Define the process by which changes are to be tested by CAT Reporters;

+

• Define the criteria by which changes will be approved prior to their deployment into the production environment(s); and

+

• Define the environment(s) to be used for user testing.

+
+
fn +

1 This Error Rate includes errors by CAT Reporters and linkage validation errors. In addition, errors attributable to the Plan Processor will be memorialized and reported to the Operating Committee.

+
+
fn +

2 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 Fed. Reg. 45722, 45789 (Aug. 1, 2012) (“Adopting Release”).

+
+
fn +

3 See Adopting Release at 45790. Section B below includes discussions of reasonable alternatives to approaching the creation, implementation, and maintenance of the CAT that the Participants considered. See SEC Rule 613(a)(1)(xii).

+
+
fn +

4 See Adopting Release at 45793.

+
+
fn +

5 The initial RFP was amended in March 2014. See Consolidated Audit Trail National Market System Plan Request for Proposal (last updated Mar. 3, 2014), available at http://catnmsplan.com/web/groups/catnms/documents/catnms/p213400.zip (the “RFP”).

+
+
fn +

6 The SEC has approved two amendments to the Selection Plan. See Securities Exchange Act Rel. No. 75192 (June 17, 2015), 80 Fed. Reg. 36028 (June 23, 2015); and Securities Exchange Act Rel. No.75980 (Sept. 24, 2015), 80 Fed. Reg. 58796 (Sept. 30, 2015).

+
+
fn +

7 See Selection Plan, 78 Fed. Reg. 69910, Ex. A §§ I(Q) (defining “Qualified Bid”), VI(A) (providing the process for determining whether Bids are determined to be “Qualified Bids”).

+
+
fn +

8 See Selection Plan § 6; see also id. Article V.

+
+
fn +

9 See SEC Rules 613(a)(1)(xi) and 613(b)(7).

+
+
fn +

10 See original Exemptive Request Letter, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602383.pdf.

+
+
fn +

11 See Participants’ Proposed RFP Concepts Document (last updated Jan. 16, 2013) (the “Proposed RFP Concepts Document”). The Proposed RFP Concepts Document was posted on the Consolidated Audit Trail NMS Plan website, http:// catnmsplan.com (the “CAT NMS Plan Website”).

+
+
fn +

12 See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Sept. 2, 2015), available at the CAT NMS Plan Website. Separately, on April 3, 2015, the Participants filed with the Commission examples demonstrating how the proposed request for exemptive relief related to allocations would operate; this filing did not substantively update or amend the Exemptive Request Letter. See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Apr. 3, 2015), available at the CAT NMS Plan Website.

+
+
fn +

13 See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 Fed. Reg. 72252, 72275 n. 246 (Dec. 5, 2014) (adopting Reg SCI and citing the Adopting Release at 45774).

+
+
fn +

14 See Adopting Release at 45748 n.278 (noting that “the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf”). The Participants note that CAT Reporters using third party service providers to submit information on their behalf would still be responsible for all the data submitted on their behalf. The term “CAT Reporters” is generally used to refer to those parties that are required by SEC Rule 613 and the CAT NMS Plan to submit data to the CAT (i.e., national securities exchanges, national securities associations, and members thereof). The term “Data Submitters” includes those third-parties that may submit data to the CAT on behalf of CAT Reporters as well as outside parties that are not required to submit data to the CAT but from which the CAT may receive data (e.g., SIPs). Thus, all CAT Reporters are Data Submitters, but not all Data Submitters are CAT Reporters.

+
+
fn +

15 As noted, the Participants submitted the Exemptive Request Letters to facilitate compliance with the goals and purposes of the rule while minimizing the impact on existing market practices and reducing burdens on both Participants and broker-dealers.

+
+
fn +

16 See SIFMA Industry Recommendations for the Creation of the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) (“SIFMA Recommendations”), available at http://www.sifma.org/workarea/downloadasset.aspx?id=8589942773. Section 1.1 of the CAT NMS Plan includes OTC Equity Securities as “Eligible Securities.” As discussed in Appendix C, Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), inclusion of OTC Equity Securities in the initial phase of the CAT should facilitate the retirement of FINRA’s Order Audit Trail System (“OATS”) and reduce costs to the industry.

+
+
fn +

17 SEC Rule 613(e)(7).

+
+
fn +

18 See SEC Rule 613(c)(7).

+
+
fn +

19 RFP Question 49.

+
+
fn +

20 RFP Questions 59-60.

+
+
fn +

21 RFP Question 62.

+
+
fn +

22 RFP Question 63.

+
+
fn +

23 SEC Rule 613 and Sections 6.3 and 6.4 of the CAT NMS Plan permit certain other information to be reported by 8:00 a.m. Eastern Time on the Trading Day following the day the CAT Reporter receives the information. See SEC Rule 613(c)(4), (c)(7)(vi)-(viii).

+
+
fn +

24 SIFMA’s recommendations to the Participants regarding the CAT indicates support for the ability of Data Submitters to submit data in batch or near-real-time reporting. See SIFMA Recommendations, at 55.

+
+
fn +

25 As noted above, the term “customer” means “(i) [t]he account holder(s) of the account at a broker-dealer originating an order, and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different than the account holder(s).” SEC Rule 613(j)(3).

+
+
fn +

26 SEC Rule 613(c)(7)(i)(A).

+
+
fn +

27 SEC Rule 613(c)(7)(iv)(F).

+
+
fn +

28 SEC Rule 613(c)(8).

+
+
fn +

29 SEC Rule 613(j)(5).

+
+
fn +

30 SEC Rule 613(j)(4).

+
+
fn +

31 Where a validated LEI is available for a Customer or entity, it may obviate the need to report other identifier information (e.g., Customer name, address).

+
+
fn +

32 The Participants anticipate that Customer information that is initially reported to the CAT could be limited to only customer accounts that have, or are expected to have, CAT-reportable activity. For example, accounts that are considered open, but have not traded Eligible Securities in a given timeframe may not need to be pre-established in the CAT, but rather could be reported as part of daily updates after they have CAT-reportable activity.

+
+
fn +

33 Because reporting to the CAT is on an end-of-day basis, intra-day changes to information could be captured as part of the daily updates to the information. See SEC Rule 613(c)(3). To ensure the completeness and accuracy of Customer information and associations, in addition to daily updates, broker-dealers would be required to submit periodic full refreshes of Customer information to the CAT. The scope of the “full” Customer information refresh would need to be further defined, with the assistance of the Plan Processor, to determine the extent to which inactive or otherwise terminated accounts would need to be reported.

+
+
fn +

34 SIFMA Recommendations at 30-31; Financial Industry Forum (FIF) Consolidated Audit Trail (CAT) Working Group Response to Proposed RFP Concepts Document at 12 (Jan. 18, 2013), available at http://catnmsplan.com/industryFeedback/P197808 (“FIF Response”).

+
+
fn +

35 “Active accounts” are defined as accounts that have had activity within the last six months.

+
+
fn +

36 RFP Question 1.

+
+
fn +

37 FIF Response at 35.

+
+
fn +

38 Id.

+
+
fn +

39 SIFMA Recommendations at 62.

+
+
fn +

40 Data retention requirements by the Central Repository are discussed more fully in Appendix D, Functionality of the CAT System.

+
+
fn +

41 RFP § 2.3 at 19.

+
+
fn +

42 SEC Rule 613: Consolidated Audit Trail (CAT), Questions for Industry Consideration, available at http://catnmsplan.com/QuestionsforIndustryConsideration.

+
+
fn +

43 RFP Question 1.

+
+
fn +

44 RFP Question 49.

+
+
fn +

45 RFP Questions 59-60.

+
+
fn +

46 RFP Question 62.

+
+
fn +

47 RFP Question 63.

+
+
fn +

48 RFP Question 43.

+
+
fn +

49 RFP Question 50.

+
+
fn +

50 The industry supports receiving information on reporting errors as soon as possible to enable CAT Reporters to address errors in a timely manner. See FIF Response at 36.

+
+
fn +

51 See Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)), for additional details on cost studies.

+
+
fn +

52 See Section 6.1(c) of the CAT NMS Plan.

+
+
fn +

53 See SEC Rule 613(j)(1).

+
+
fn +

54 See SIFMA Recommendations at 13, 39-42; FIF Response at 19.

+
+
fn +

55 See RFP Questions 11 and 12.

+
+
fn +

56 A detailed example of the application of the daisy chain approach to an order routed to an exchange on an agency basis can be found in the Proposed RFP Concepts Document at 26.

+
+
fn +

57 This subcommittee included 21 Industry Members and 16 Participants. It met 11 times over the course of 13 months to discuss order handling and CAT reporting requirements. Examples of order handling scenarios that must be addressed include, in addition to the agency scenario referenced above: orders handled on a riskless principal basis, orders routed out of a national securities exchange through a broker-dealer router to another national securities exchange, orders executed on an average price basis and orders aggregated for further routing and execution. Detailed examples of these types of scenarios can be found in the Proposed RFP Concepts Document at 27-30.

+
+
fn +

58 These scenarios, and how the daisy chain approach could be applied, can be found in the Representative Order Proposal (Feb. 2013), available at http://catnmsplan.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=P197815.

+
+
fn +

59 Although the Plan Processor must account for multiple simultaneous queries, the Central Repository must also support the ability to schedule when jobs are run.

+
+
fn +

60 Initially, only the SEC and Participants will have access to data stored in the Central Repository.

+
+
fn +

61 The RFP required support for a minimum of 3,000 users. The actual number of users may be higher based upon regulator and Participant usage of the system.

+
+
fn +

62 SEC Rule 613(a)(1)(ii).

+
+
fn +

63 Adopting Release at 45790.

+
+
fn +

64 FIF Response at 35.

+
+
fn +

65 FIF Response at 35.

+
+
fn +

66 SIFMA Recommendations at 62.

+
+
fn +

67 One example of why the Participants believe a five day repair window is too long is that regulators may need access to the data as quickly as possible in order to conduct market reconstruction.

+
+
fn +

68 SEC Rule 613(a)(1)(ii).

+
+
fn +

69 Adopting Release at 45790.

+
+
fn +

70 RFP Question 81.

+
+
fn +

71 RFP Question 82.

+
+
fn +

72 RFP Question 83.

+
+
fn +

73 RFP Question 84.

+
+
fn +

74 RFP Question 85.

+
+
fn +

75 RFP Question 86.

+
+
fn +

76 RFP Question 87.

+
+
fn +

77 The SEC defined “off-line” analysis as “any analysis performed by a regulator based on data that is extracted from the [CAT] database, but that uses the regulator’s own analytical tools, software, and hardware.” Adopting Release at 45798 n.853.

+
+
fn +

78 Id.

+
+
fn +

79 Id.

+
+
fn +

80 Id.

+
+
fn +

81 Id.

+
+
fn +

82 Id.

+
+
fn +

83 Id.

+
+
fn +

84 As documented in Appendix D, each CAT Reporter will be issued a public key pair (“PKI”) that it can use to submit data, and access confirmation that their data has been received.

+
+
fn +

85 Adopting Release at 45799. See also RFP § 2.8.2.

+
+
fn +

86 Adopting Release at 45799.

+
+
fn +

87 Adopting Release at 45790-91, 45799.

+
+
fn +

88 RFP Section 2.2.4.

+
+
fn +

89 RFP Question 14.

+
+
fn +

90 RFP Question 15.

+
+
fn +

91 RFP Question 16.

+
+
fn +

92 RFP Question 17.

+
+
fn +

93 RFP Question 18.

+
+
fn +

94 SEC Rule 613(e)(4)(ii) and (iii).

+
+
fn +

95 SEC Rule 613(e)(4)(iii).

+
+
fn +

96 FIF Consolidated Audit Trail Working Group Processor Proposed Optimal Solution Recommendations at 6 (Sep. 15, 2014), available at http://www.sec.gov/comments/4-668/4668-16.pdf (the “FIF Optimal Solution Recommendations”).

+
+
fn +

97 FIF Response at 36.

+
+
fn +

98 SEC Rule 613(e)(6)(i) defines “Error Rate” to mean “[t]he percentage of reportable events collected by the central repository for which the data reported does not fully and accurately reflect the order event that occurred in the market.” All CAT Reporters, including the Participants, will be included in the Error Rate. CAT Reporters will be required to meet separate compliance thresholds, which will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance (the “Compliance Thresholds”). Compliance Thresholds will compare a CAT Reporter’s error rate to the aggregate Error Rate over a period of time to be defined by the Operating Committee. See infra note 109 and accompanying text (discussing Compliance Thresholds). A CAT Reporter’s performance with respect to the Compliance Threshold will not signify, as a matter of law, that such CAT Reporter has violated SEC Rule 613 or the rules of any Participant concerning the CAT.

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fn +

99 As indicated by FINRA in its comment to the Adopting Release, OATS compliance rates have steadily improved as reporters have become more familiar with the system. When OATS was first adopted compliance rates were 76%, but current compliance rates are 99%. See Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission (Aug. 9, 2010).

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+
fn +

100 Adopting Release at 45790-91.

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101 As required by SEC Rule 613(e)(6)(ii), the Error Rate will be calculated on a daily basis as the number of erroneous records divided by the total number of records received on any given day and will be inclusive of validation of CAT Data and linkage validations. Error Rates are calculated for reporting groups as a whole, not for individual firms. Individual firms within a reporting group may have higher or lower Error Rates, though they would still be subject to any penalties or fines for excessive Error Rates to be defined by the Operating Committee. Additionally, this Error Rate will be considered for the purpose of reporting metrics to the SEC and the Operating Committee and individual firms will need to maintain Compliance Thresholds as described below.

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102 The Participants expect that error rates after reprocessing of error corrections will be de minimis.

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103 See FINRA, OATS Phase III, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/PhaseIII/.

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fn +

104 See FINRA, OATS Reporting Requirements to OTC Equity Securities, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OTCEquitySecurities/.

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+
fn +

105 See FINRA, OATS Expansion to all NMS Stocks, https://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/.

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+
fn +

106 The initial rejection rates for OATS were 23% and a late reporting rate of 2.79%.

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+
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107 Error rate reporting will be bifurcated by reporter group (e.g., Large Broker/Dealers) rather than product type to minimize the complexity of Error Rate calculations

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+
fn +

108 As used in this table, “years” refer to years after effectiveness of the NMS Plan.

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109 Compliance Thresholds will be set by the Operating Committee. Compliance Thresholds for CAT Reporters will be calculated at intervals to be set by the Operating Committee. All CAT Reporters, including the Participants, will be subject to Compliance Thresholds. Compliance Thresholds will include, among other items, compliance with clock synchronization requirements.

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110 Events occurring within a single system that uses the same clock to time stamp those events should be able to be accurately sequenced based on the time stamp. For unrelated events, e.g., multiple unrelated orders from different broker-dealers, there would be no way to definitively sequence order events within the allowable clock drift as defined in Article 6.8.

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fn +

111 See Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Participant Representatives of the CAT (June 12, 2013), available at http://catnmsplan.com/industryFeedback/P284394 (“FIF Letter”).

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+
fn +

112 FIF Letter at 11.

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+
fn +

113 Letter from T.R. Lazo, Managing Director, SIFMA, and Thomas Price, Managing Director, SIFMA (June 11, 2013), available at http://catnmsplan.com/industryFeedback/P284395 (“SIFMA Letter”); FIF Letter at 10.

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+
fn +

114 FIF Letter at 10.

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+
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115 FIF Letter at 10; SIFMA Comments on Selected Topics at 11.

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+
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116 FIF Letter at 10.

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+
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117 FIF Letter at 10.

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+
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118 FIF Letter at 10; SIFMA Letter at 11.

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+
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119 Adopting Release at 45790 n.782.

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fn +

120 See Appendix C, Time and Method by which CAT Data will be Available to Regulators.

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+
fn +

121 Id.

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+
fn +

122 Id.

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123 Some trade data (e.g., trade data feeds disseminated by the SIPs) is public and therefore of little concern from a security standpoint. However, because this data may be linked to confidential order data or other non-public information, the Participants are requiring the Plan Processor to store this public data in the same manner as the non-public order and trade information submitted to the Central Repository by Data Submitters.

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+
fn +

124 RFP Question 65.

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125 RFP Question 66.

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+
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126 RFP Question 67.

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+
fn +

127 RFP Question 68.

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+
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128 RFP Question 69.

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+
fn +

129 RFP Question 70.

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+
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130 RFP Question 71.

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+
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131 RFP Question 72.

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+
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132 RFP Question 75.

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133RFP Question 76.

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+
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134RFP Question 77.

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+
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135RFP Question 78.

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+
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136RFP Question 79.

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+
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137RFP Question 80.

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138RFP Question 5.

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139RFP Question 6.

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+
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140 RFP Question 73. The Bidders were asked to include information pertaining to strategy, tools and techniques, and operational and management practices that will be used.

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+
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141 RFP Question 74.

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142 SEC Rule 613(e)(4). This section of Appendix C provides an outline of the policies and procedures to be implemented. When adopting this requirement, the Commission recognized “the utility of allowing the [Participants] flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.” Adopting Release at 45782. Additional detail is provided in Appendix D, Data Security.

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143 See Section 6.2(a)(v) of the CAT NMS Plan for a more detailed list of the activities to be performed by the Chief Compliance Officer.

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144 See SEC Rule 613(e)(5).

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145 As described in Appendix C, Reporting Data to the CAT, general queries can be carried out using the Customer-ID without the need to know specific, personally-identifiable information (i.e., who the individual Person associated with the Customer-ID is). The Customer-ID will be associated with the relevant accounts of that Person; thus, the use of Customer-ID for querying will not reduce surveillance.

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146 See, e.g., Google Cloud Platform, https://cloud.google.com/developers/articles/auto-scaling-on-the-google-cloud-platform/.

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fn +

147 All observations and costs as provided in this section include secondary offerings.

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148 SEC Rule 613(a)(1)(vi).

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fn +

149 Questions for Public Comment re the CAT NMS Plan (Apr. 22, 2013), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p246652.pdf (“April Request for Comment”).

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150 Adopting Release at 45792 n.792.

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151 See generally, Securities Act Release No. 8565, 70 Fed. Reg. 19672 (Apr. 13, 2005) (Commission guidance regarding prohibited conduct in connection with IPO allocations) (“IPO Allocation Release”).

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+
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152 Id.

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+
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153 See FIF Letter at 4.

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154 See FIF Letter; SIFMA Letter; Thomson Reuters (May 21, 2013) (“Thomson Reuters Letter”), available at http://catnmsplan.com/industryFeedback/; see also Thomson Reuters Letter, http://catnmsplan.com/industryFeedback/P284396 (systems used for primary market allocations differ from those used for secondary market transactions).

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155 FIF Letter at 4; SIFMA Letter at 3

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156 FIF Letter at 4. The Participants also understand that top account allocation systems do not generally have execution reporting capacity, since reporting of primary market transactions is not currently required under OATS and other transaction reporting systems. SIFMA Letter at 2.

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fn +

157 See DAG Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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+
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158 FIF Letter at 4.

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fn +

159 For example, commenters noted that “firms generally use the same clearance and settlement systems for clearing and settling final allocations in primary market transactions as they do for clearing and settling secondary market trades.” SIFMA Letter at 4.

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+
fn +

160 Adopting Release at 45792-93.

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+
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161 Id.

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+
fn +

162 Id.

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+
fn +

163 See supra note 157.

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164 Based upon an assumption of 12 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 12 person-months of analysis * 3 * 21.741 person-days per month * $1,200 daily FTE rate = $939,211 * 250 = $234.8 million.

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165 Based upon an assumption of 3 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 3 person-months of analysis * 3 * 21.741 person-days per months * $1,200 daily FTE rate = $234,802 * 250 = $58.7 million.

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166 See, e.g., Memorandum to File Re: Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (outlining foundational elements of regulatory economic analysis).

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167 A unique study link was distributed to 4,406 broker-dealers. For 381 of the broker-dealers, the distribution email either was undeliverable or the broker-dealer responded that the study did not apply to them.

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+
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168 See SEC Rule 613 – Consolidated Audit Trail (CAT) Cost Study Overview and Assumptions, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p535485.pdf.

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169 See Past Events and Announcements, SROs Launch Study to Analyze Implementation Cost of the Consolidated Audit Trail (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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170 See SEC Rule 613: Consolidated Audit Trail (CAT), SRO Hosted Consolidated Audit Trail Cost Study Webinar (July 9, 2014), available at http://catnmsplan.com/PastEvents/P551992.

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+
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171 Materially incomplete responses were those that provided responses for less than half of the cost-related questions.

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+
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172 Responses were outliers if their values were two times greater than the next highest value.

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+
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173 Section 5.2(b) of the CAT NMS Plan describes how the Participants selected the Shortlisted Bidders.

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+
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174 More specifically, Participants anticipate that technology costs and technological solutions may evolve over the bidding process and may affect the Bids. For instance, one Bidder recently provided an update to the Participants, noting “We expect continued cost reductions as Moore’s Law is applied to cloud pricing and to have this bring down total cost to the industry on an ongoing basis.” As another example, evolving technologies for data security may either increase or decrease estimated costs.

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+
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175 Due to the complexity of the cost estimation effort, all figures provided in this analysis section have been rounded to a reasonable degree of accuracy and should be considered approximate.

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+
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176 The discount factor represents an estimate of the average yield on AAA-rated corporate debt for the month period August 28, 2014 to September 27, 2014. Costs anticipated to be accrued after the first year (years 2 through 5) are discounted back to the first year to permit Participants to compare the anticipated costs associated with different Bids on a constant dollar basis.

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+
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177 Bidders indicated that user support costs primarily consisted of FTE costs.

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+
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178 Adopting Release at 45723.

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+
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179 See FINRA Rule 7410 et seq.

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180 Adopting Release at 45722.

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181 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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182 See FINRA Rule 7470.

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183 See FINRA Rule 7410(o).

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184 See FINRA Rule 7410(j).

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185 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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+
fn +

186 These costs are not mutually exclusive, and respondents may have included a combination of costs across all categories.

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+
fn +

187 Firms were requested to self-select as “small” if they would qualify under Exchange Act Rule 0-10(c) as a broker or dealer that:

+

(1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and

+

(2) is not affiliated with any Person (other than a natural Person) that is not a small business or small organization as defined in this section.

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+
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188 Participants recognize that 116 respondents stated that they do not currently report to OATS and this number is greater than the Participants’ estimate of the total number of broker-dealers with reporting obligations to SROs other than FINRA. Participants assume that some broker-dealers who are FINRA members and currently exempt or excluded from OATS reporting requirements identified themselves as having no OATS reporting requirement. Given that these study responses provided data that could not otherwise be presumed to be incomplete or inaccurate, the Participants have chosen to include these responses in the analysis.

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+
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189 The distinction between cost estimates for OATS and non-OATS reporters is being made so that Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that might arise from current reporting practices.

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+
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190 The distinction between cost estimates for OATS and non-OATS reporters is made so that Plan Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that may arise from current reporting practices.

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191 Some respondents provided no response to a specific question, i.e., left that response blank, while providing responses to the other questions in the study. The tables provided throughout this section provide a count of such blank responses for each question.

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+
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192 Participants assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release. Participants do note, however, that as part of the Costs to CAT Reporters Study, respondents were solicited to provide a cost for FTEs. Based on responses, the estimated annual cost per FTE would be $210,000 for large firms and $167,000 for small firms. Applying these estimates instead of the Commission’s assumed annual cost would lead to dollar costs for FTEs on the order of half as large as reported here.

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193 One anonymous small firm in the sample reported a total current regulatory reporting cost of $14 million. The Participants are not in a position to verify this number or determine whether it is due to an erroneous response (e.g., the respondent may not have recognized that the study collected responses to the cost questions in $1,000 increments). Therefore, Participants believe median numbers might better represent the typical costs across large and small firms instead of reported averages.

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194 See FINRA, OATS Frequently Asked Questions at D8 (last updated July 6, 1998), available at http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085541.

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195 See Hibah Yousuf, Only Half of All Americans Invested in Stocks, CNN Money (May 9, 2014), http://money.cnn.com/2013/05/09/investing/american-stock-ownership/ (includes Gallup Poll results).

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196 See, e.g., Andy Nybo, The Retail Options Renaissance, TABB Forum (Jan. 27, 2014), http://tabbforum.com/opinions/the-retail-options-reneissance.

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197 Cumming et al., Global Market Surveillance, 10(2) Am. Law & Econ. Rev. at 454-506 (July 24, 2008).

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198 See, e.g., La Porta, et al., Legal Determinants of External Finance, 52(3) J. Finance 1131-1150 (1997).

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199 Cumming et al., Exchange Trading Rules, Surveillance and Insider Trading (working paper, Oct. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101826.

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200 Where better surveillance identifies behaviors and practices that are manipulative and harmful to the investing public more quickly and more accurately, the Commission and Participants may be able to adopt rules to stop these practices more quickly and in a more tailored fashion.

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201 Cumming et al., Exchange Trading Rules and Stock Market Liquidity, 99(3) J. Financial Economics 651-71 (Mar. 2011).

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202 Christensen et al., Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement (Dec. 31, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1745105.

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203 Pursuant to Section 31 of the Exchange Act, Participants are required to pay transaction fees and assessments to the Commission that are designed to recover the costs related to the government’s supervision and regulation of the securities markets and securities professionals. Participants, in turn, may collect their Section 31 fees and assessments from their broker-dealer members. 15 U.S.C. § 78ee.

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204 The two approaches are described in detail in Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)).

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205 Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference between Approach 1 and Approach 2 costs is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level. The t-test rejects the null hypothesis for estimates of hardware / software costs, FTE costs, vendor costs, and total costs. The t-test also rejects any significant difference in estimated costs under the two approaches separately for large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

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206 See SIFMA Recommendations.

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207 See SEC Memorandum to File No. S7-11-10, Re: Staff Meeting with the Financial Information Forum (Feb. 29, 2012), available at http://www.sec.gov/comments/s7-11-10/s71110-112.pdf.

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208 See FIF, Comment Letter Re: Consolidated Audit Trail National Market System Plan Submission (Nov. 19, 2014), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601972.pdf.

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209 Small firm total estimated implementation costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for one year, from the beginning of CAT reporting in year 1 through the expected incurring of build costs by small firms in the year prior to the start of their reporting (i.e., year 2). Because large firms report a year earlier than small firms and would incur most implementation costs in year 1, a similar rate has not been applied to their implementation costs.

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210 Id.

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211 Large and small firm total estimated maintenance costs are estimated in year 5 to account for a steady state of reporting, and include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of CAT reporting in year 1 through year 5.

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212 Id.

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213 Id.

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214 Id.

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215 Vendor cost estimates assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release.

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216 The total estimated vendor maintenance costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of broker-dealer CAT reporting in year one through year five.

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217 Cost Survey Report on CAT Reporting of Options Quotes by Market Makers, conducted by the Financial Information Forum, Securities Industry and Financial Markets Association and Securities Traders Association (Nov. 5, 2013); available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf.

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fn +

218 Cost estimates provided by the DAG on topics where the Participants have requested exemptive relief can be found at: http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602494.pdf

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219 See Section 11.2 of the CAT NMS Plan.

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220 See id.

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221 See Section 11.3 (a)-(c) of the CAT NMS Plan.

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222 Market share for Execution Venues is defined as the total trade volume executed on an individual Execution Venue as a percentage of total trades executed across all Venues.

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223 See Section 11.3(d) of the CAT NMS Plan.

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224 See Section 11.1(b) of the CAT NMS Plan.

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225 See Section 4.1 and Section 11.5 of the CAT NMS Plan.

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226 See id.

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227 See Section 11.3(d) of the CAT NMS Plan.

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228 There is empirical evidence that firms’ order routing decisions respond to changes in trading fees. Such evidence finds that an increase in the level of an exchange’s net fee is associated with a decrease in trading volume and market share relative to other exchanges. This evidence suggests that there is sufficient competition among Execution Venues such that where the Participant’s costs for the CAT are material it may be difficult for Execution Venues to fully pass those costs to broker-dealers. This argument holds as long as broker-dealers are not able to pass such costs on to their customers. See Cardella et al., Make and Take Fees in the U.S. Equity Market (working paper, Apr. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2149302.

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229 Remarks of Robert Ketchum, Chairman and Chief Executive Officer, FINRA (Sept. 17. 2014), available at http://www.finra.org/Newsroom/Speeches/Ketchum/P600785.

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230 See, e.g., IIROC’s analysis of its market regulation fee model, available at http://www.iiroc.ca/Documents/2011/5f95e549-10d1-473e-93cf-3250e026a476_en.pdf and http://www.iiroc.ca/Documents/2012/bf393b26-7bdf-49ff-a1fc-3904d1de3983_en.pdf.

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fn +

231 Further discussion of the Participants’ consideration of the use of the Majority Vote and Supermajority Vote is contained in Appendix C, 11, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi)).

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+
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232 Adopting Release at 45787.

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233 The systems and rules identified for retirement (in full or in part) include: FINRA’s OATS Rules (7400 Series), the rules of other Participants that incorporate FINRA’s OATS requirements (e.g. NASDAQ Rule 7000A Series, BX Rule 6950 Series, PHLX Rule 3400 Series, NYSE Rule 7400 Series, NYSE Arca Equities Rule 7400 Series, and NYSE MKT Rule 7400 Series), COATS and associated rules, NYSE Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and associated rules, C2 Rule 8.7, and CHX BrokerPlex reporting (Rule 5).

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234 See SEC Rule 613 – Consolidated Audit Trail (CAT) Preliminary EBS-CAT Gap Analysis, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p450537.pdf.

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235 See FIF CAT WG: Preliminary Large Trader Rule (Rule 13h-1) – CAT (Rule 613) Gap Analysis (Feb. 11, 2014), available at https://fif.com/fif-working-groups/consolidated-audit-trail/member-resources/current-documents?download=1221:february-11-2014-fif-cat-wg-preliminary-large-trader-rule-rule-13h-1-cat-rule-613-gap-analysis&start=35.

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236 See FINRA Rule 7410(l).

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237 Other SROs have rules requiring their members to report information pursuant to the OATS Rules. See, e.g., NYSE Rule 7400 Series; NASDAQ Rule 7400 Series.

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238 This expansion of the CAT reporting requirements to OTC Equity Securities was generally supported by members of the broker-dealer industry and was discussed with the DAG on July 24, 2013.

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239 SEC Rule 613(c)(7) lists the minimum order information that must be reported to the CAT and specifies the information that must be included in the CAT NMS Plan. The Commission noted in the Adopting Release that “the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of [SEC Rule 613].” Adopting Release at 45750.

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240 Small broker-dealers are defined SEC Rule 0-10(c).

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241 These events are also described on the CAT NMS Plan Website at www.catnmsplan.com. See SEC Rule 613: Consolidated Audit Trail (CAT), Past Events and Announcements (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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242 See generally Industry Feedback on the Consolidated Audit Trail (last updated Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/.

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243 See FIF, Clock Offset Survey Preliminary Report (last updated Feb. 17, 2015), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (the “FIF Clock Offset Survey Preliminary Report”).

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244 See DAG, Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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245 See FIF Clock Offset Survey Preliminary Report.

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246 A summary of industry outreach events is included in Appendix C, General Industry Solicitation.

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247 When adopting the CAT, the Commission directed the Commission staff “to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail.” Adopting Release at 45744-5 n.241.

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248 See supra note 11.

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+
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249 Role Based Access Control (RBAC) is a mechanism for authentication in which users are assigned to one or many roles, and each role is assigned a defined set of permissions. Additional details are provided in Appendix D, Data Security.

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250 Multifactor authentication is a mechanism that requires the user to provide more than one factor (e.g., biometrics/ personal information in addition to a password) in order to be validated by the system.

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251 See Appendix C, Analysis of the CAT NMS Plan, for additional details on cost studies.

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252 See FIF Response.

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253 User management is a business function that grants, controls, and maintains user access to a system.

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254 RFP at 57.

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255 In a hot-hot disaster recovery design, both the production site as well as the backup site are live, and the backup can be brought online immediately.

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+
fn +

256 In a hot-warm disaster recovery design, the backup site is fully equipped with the necessary hardware. In the event of a disaster, the software and data would need to be loaded into the backup site for it to become operational.

+
+
fn +

257 NTP and PTP are protocols used to synchronize clocks across a computer network.

+
+
fn +

258 GPS is a radio navigation system that can be used to capture a precise determination of time.

+
+
fn +

259 FIF Clock Offset Survey Preliminary Report.

+
+
fn +

260 The Participants consider the estimates provided to be conservative as a majority of the study respondents fell into the category of large broker-dealers.

+
+
fn +

261 Equity markets currently have morning, primary, and evening sessions. It is possible that over time sessions may cross into the next calendar day.

+
+
fn +

262 References to data sizing refer to raw, uncompressed data and do not account for benefits of compression, overhead of data storage or indices. Data sizing estimates do not include meta-data and are based on delimited, fixed length data sets. The Plan Processor is responsible for calculating its platform capacity capabilities based on its proposed solution. Three years after the finalization of the CAT NMS Plan, when all CAT Reporters submit their data to the Central Repository, the Central Repository must be sized to receive process and load more than 58 billion records per day.

+
+
fn +

263 To be defined in the SLAs to be agreed to between the Participants and the Plan Processor, as detailed in Appendix D, Functionality of the CAT System.

+
+
fn +

264 Federal Financial Institutions Examination Council, Supplement to Authentication in an Internet Banking Environment (June 22, 2011), available at http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20(FFIEC%20Formated).pdf.

+
+
fn +

265 See Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System (Apr. 8, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.

+
+
fn +

266 If needed – data validation may be a process with an initial validation phase for data errors and a subsequent validation phase later in processing where more time is needed to assess the context of the record in relation to data that may be submitted to the CAT later in the submission window. The Plan Processor must have an additional “matching” process for the purposes of linking together order data passed between CAT Reporters.

+
+
fn +

267 A linkage validation error should only populate for the CAT Reporter that the Plan Processor determines to have broken the link.

+
+
fn +

268 See Appendix C, Error Communication, Correction, and Processing.

+
+
fn +

269 Specific performance requirements will be included in the SLA.

+
+
fn +

270 Each CAT Reporter or Data Submitter must only be able to view its own data and data it submits on behalf of others.

+
\ No newline at end of file diff --git a/spider/files/data000015.html b/spider/files/data000015.html index 242071e..954d9bd 100644 --- a/spider/files/data000015.html +++ b/spider/files/data000015.html @@ -1,331 +1,35 @@ - - jurisdiction: United States - authority: United States District Court, N.D. California, San Jose Division - content_type: Case - document_title: Hynix Semiconductor Inc. v. Rambus Inc. - source: Case Law -
pubdate: 2006-07-06T00:00:00 effdate: 2006-07-06T00:00:00 -

Hynix Semiconductor Inc. v. Rambus Inc.

- Topic: Banking Financial Services Review, Record Retention, Legal Standards - Compliance User: N/A + + jurisdiction: US + regulatory_authority: US/SEC + content_type: compilation + document_title: OATS to CAT Events Field Level Mapping + document_type: Specifications + source: US/SEC/Specifications/Technical Specifications + source_type: Technical Specifications + language: English + citation: N/A +
pubdate: August 15, 2018 effdate: N/A +

OATS to CAT Events Field Level Mapping

+ Topic: CAT NMS Plan, Technical Specifications, OATS to CAT Events Field Level Mapping + Compliance User: OATS Keywords: - Legal Standards, - Retention Policies, - Statutes of Limitations, + CAT Event Types, + Oats Retirement, + CAT Mapping, -

United States District Court, N.D. California, San Jose Division Jul 6, 2006

-

No. CV-00-20905 RMW, [Re Docket Nos. 1724, 1803, 1827, 1853]. (N.D. Cal. Jul. 6, 2006)

-

ORDER GRANTING SUMMARY ADJUDICATION OF HYNIX'S ANTITRUST AND UNFAIR COMPETITION CLAIMS BASED ON "RDRAM DOMINANCE" AND "DDR SUPPRESSION"

-

RONALD WHYTE, District Judge

-

Defendant Rambus Inc. ("Rambus") moves for summary judgment on the first and third claims for relief in the Second Amended Complaint ("SAC") filed by plaintiffs Hynix Semiconductor Inc., Hynix Semiconductor America Inc., Hynix Semiconductor U.K. Ltd., and Hynix Semiconductor Deutschland GmbH ("Hynix") to the extent such claims are premised upon Rambus's purported efforts to make RDRAM the dominant memory device and to suppress DDR SDRAM. In the alternative, Rambus seeks summary adjudication of these issues. Hynix opposes the motion. The court has reviewed the papers and arguments of counsel. For the reasons discussed below, the court treats Rambus's motion as one for summary adjudication and summarily adjudicates that the RDRAM never achieved sufficient market power in the alleged DRAM interface market to hold Rambus liable for monopolization or attempted monopolization because it allegedly sought dominance for the RDRAM technology and suppressed the DDR technology. However, nothing in this order is intended to imply that evidence concerning Rambus's efforts to make RDRAM dominant is inadmissible on Hynix's claim that Rambus's intent was to acquire monopoly power in the alleged DRAM interface market by assertion of patent rights covering RDRAMs and DRAMs incorporating JEDEC standards.

-

Hynix was formerly known as Hyundai Electronics Industries, Ltd. References to Hynix in this order refers also to Hyundai Electronics Industries, Ltd.

-

I. BACKGROUND

-

The court will not set forth the factual background as the parties are familiar with it, and it is contained in other orders of the court.

-

Rambus states, and Hynix does not dispute, that the market share of the RDRAM never exceeded 10% of the DRAM market. Rambus's Mot. Summ. J. at 5-6 (citing documents purportedly produced by Hynix).

-

II. ANALYSIS

-

Rambus seeks summary judgment or, in the alternative, summary adjudication of Hynix's first cause of action for monopolization and attempted monopolization under section 2 of the Sherman Act and its third cause of action for unfair competition under section 17200 of the California Business Professions Code, "if and to the extent that Hynix intends to pursue monopolization or attempted monopolization claims based upon Rambus's purported efforts to make RDRAM the `dominant' memory device and to `suppress' DDR SDRAM." Rambus's Mot. Summ. J. at 1. Since Rambus only seeks to summarily resolve certain aspects of Hynix's claims, the court will treat the motion as one for partial summary judgment (summary adjudication) rather than summary judgment.

-

Rambus argues RDRAM never achieved market power in the alleged DRAM interface technology market sufficient to raise a triable issue of fact as to Rambus's liability for either

-

monopolization or attempted monopolization. In opposition, Hynix argues that the relevant determination of market power it asserts includes all of Rambus's patents (including those asserted for SDRAM and DDR SDRAM) and Rambus's course of conduct associated with obtaining that patent power. Hynix appears to essentially argue the admissibility of Rambus's attempts to get market dominance by RDRAM on its claim that Rambus unlawfully acquired market power for its portfolio of patents (including those asserted against Hynix products incorporating JEDEC standards for SDRAM and DDR SDRAM). The court, however, reads Rambus's motion as expressly excluding questions of admissibility of evidence on Hynix's monopolization claim based upon Rambus's assertion of its portfolio of patents and Rambus's conduct related to that portfolio.

-

A. Legal Standard

-

Summary judgment is granted where there is no genuine issue as to any material fact. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In a motion for summary judgment the court draws all reasonable inferences that may be taken from the underlying facts in the light most favorable to the nonmovant. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Under Fed.R.Civ.P. 56(d) the court may "make an order specifying the facts that appear without substantial controversy, including to which . . . relief is not in controversy."

-

B. Minimum Market Share

-

Rambus argues that Hynix cannot base a monopolization or attempted monopolization claim on "Rambus's efforts to achieve `dominance' for the RDRAM device" because the RDRAM never achieved market share rising to the level of a monopoly. Rambus's Mot. Summ. J. at 4. Hynix does not appear to dispute that RDRAM's market share never achieved market power.

-

Section 2 of the Sherman Act states: " [e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize trade shall be guilty" of an antitrust violation. 15 U.S.C. § 2 (2004). To establish a section 2 violation for attempted monopolization, the plaintiff must show "specific intent to control prices or destroy competition, predatory or anticompetitive conduct directed at accomplishing that purpose, dangerous probability of achieving monopoly power, and causal antitrust injury." McGlinchy v. Shell Chem. Co., 845 F.2d 802, 811 (9th Cir. 1988).

-

In Rebel Oil Co., Inc. v. Atlantic Richfield Co., 51 F.3d 1421, 1438 (9th Cir. 1995), the Ninth Circuit explained that in an allegation of actualmonopolization, a market share below 50% is presumably insufficient to establish market power. For an attempted monopolization claim, a market share of 30% is presumably insufficient. Id. Another way to demonstrate market power for a section 2 claim is through direct evidence of the "injurious exercise of market power." Id. at 1434. Under this method, the plaintiff offers evidence of "restricted output and supracompetitive prices that is direct proof of the injury to competition which a competitor with market power may inflict." Id. Thus, under both methods, a showing of market power is a threshold requirement.

-

Hynix offers nothing to rebut the presumption as applied to the market share of the RDRAM alone. The court agrees that, as a matter of law, the RDRAM in and of itself never achieved market power sufficient to constitute a monopoly or an attempted monopoly within the meaning of the Sherman Act.

-

III. ORDER

-

For the foregoing reasons, the court GRANTS summary adjudication with respect to plaintiffs' first and third claims for relief as follows:

-

1. As a matter of law, the RDRAM never achieved sufficient market power to hold Rambus liable for monopolization or attempted monopolization because it allegedly sought dominance for the RDRAM technology and suppressed the DDR technology.

-

2. Nothing in this order is intended to preclude evidence concerning Rambus's attempts to gain market power in the alleged DRAM technology market.

+

NW_CAT_Mapping

+ +

RT_CAT_Mapping

+ +

EX_CAT_Mapping

+ +

DS_CAT_Maping

+ +

CL_CAT_Mapping

+ +

CR_CAT_Mapping

+ +

OM_CAT_Mapping

+
\ No newline at end of file diff --git a/spider/files/data000016.html b/spider/files/data000016.html index 149ccbd..67fb343 100644 --- a/spider/files/data000016.html +++ b/spider/files/data000016.html @@ -1,599 +1,880 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Joint Industry Plan (Notice of Plan Amendment No. 1 Release 34-74223) - document_type: Notices - source: US/SEC/Notices/Notice of Plan Amendment - source_type: Notice of Plan Amendment + document_title: Order Approving Joint Industry Plan (Release 34-71596) + document_type: Orders + source: US/SEC/Orders/Order Approving Joint Industry Plan + source_type: Order Approving Joint Industry Plan language: English - citation: Notice of Plan Amendment No. 1 Release 34-74223 -
pubdate: February 06, 2015 effdate: N/A -

Joint Industry Plan (Notice of Plan Amendment No. 1 Release 34-74223)

- Topic: SEC Release, Release No. 34-74223, Release No. 34-74223, Joint Industry Plan; Notice of Amendment + citation: Release 34-71596 +
pubdate: February 21, 2014 effdate: N/A +

Order Approving Joint Industry Plan (Release 34-71596)

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan Compliance User: Self-Regulatory Organization Keywords: - Joint Industry Plan, Selection Plan, + CAT NMS plan, -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-74223; File No. 4-668)

-

February 6, 2015

-

Joint Industry Plan; Notice of Amendment to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, and NYSE MKT LLC, NYSE Arca, Inc.

-
pubdate: February 07, 2015 effdate: N/A +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-71596; File No. 4-668)

+

February 21, 2014

+

Joint Industry Plan; BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and Topaz Exchange, LLC; Order Approving Proposed National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail

+
pubdate: February 22, 2014 effdate: N/A

I. Introduction

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Introduction + Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Introduction Compliance User: Self-Regulatory Organization Keywords: - Securities Exchange Act of 1934, - SEC Rule 608, - National Market System Plan, - Developing a Plan for the Consolidated Audit Trail, + SRO, + Securities Exchange Act - Section 11A, + CAT NMS plan, -

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 thereunder2, notice is hereby given that, on December 12, 2014, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”), filed with the Securities and Exchange Commission (the “Commission”) a proposal to amend the Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”).

+

On September 3, 2013, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc., and Topaz Exchange, LLC (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 a proposed National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Plan”).3 The Participants requested that the Commission approve the Plan.4 The Plan was published for comment in the Federal Register on November 21, 2013.5 The Commission received six comment letters from five commenters in response to the proposal.6 On January 31, 2014, the Participants to the Plan responded to the comment letters.7 This order approves the Plan.

-
pubdate: February 08, 2015 effdate: N/A +
pubdate: February 23, 2014 effdate: N/A

II. Background

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Background + Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Background Compliance User: Self-Regulatory Organization Keywords: - Sec Rule 613, CAT NMS plan, - SRO, - Selection Plan, + Sec Rule 613, -

On July 11, 2012, the Commission adopted Rule 613 to require the SROs to jointly submit a national market system (“NMS”) plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).3 To facilitate the development of the consolidated audit trail, following the adoption of Rule 613, the SROs created a working group consisting of representatives from each SRO. The SROs also decided to engage in a request for proposal (“RFP”) process to help them develop the CAT NMS Plan and to solicit bids (“Bids4”) for the role of Plan Processor to build, operate, administer, and maintain the consolidated audit trail.5 In addition, on September 3, 2013, the SROs filed, for approval, the Selection Plan to govern how the SROs would proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how the SROs would review, evaluate, and narrow down the Bids submitted in response to the RFP—and ultimately selecting the Plan Processor.6 The Selection Plan was approved on February 21, 2014.7

-

The SROs propose to amend the Selection Plan in two ways. First, the SROs propose to provide opportunities to accept revised Bids prior to approval of the CAT NMS Plan, and second, to allow the list of Shortlisted Bids to be narrowed prior to Commission approval of the CAT NMS Plan. A copy of the proposed amendment to the Selection Plan is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments from interested persons on the proposed amendment to the Selection Plan.

+

On July 11, 2012, the Commission adopted Rule 613 under the Act to require the SROs to jointly submit an NMS plan (“CAT NMS Plan”) to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail (“CAT”), with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.8 Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail. In instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the CAT NMS Plan in a way that best achieves the objectives of the Rule. Specifically, Rule 613 incorporates a series of twelve “considerations” that the Participants must address in the CAT NMS Plan, including:

+

• the specific details and features of the CAT NMS Plan;

+

• the Participants’ analysis of the CAT NMS Plan’s costs and impact on competition, efficiency, and capital formation;

+

• the process in developing the CAT NMS Plan;

+

• information about the implementation of the CAT NMS Plan; and

+

• milestones for the creation of the consolidated audit trail.9

+

As part of the discussion of these “considerations,” the Participants must include cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.10 In addition, Rule 613 requires that the Participants: (1) provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the CAT NMS Plan submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the CAT NMS Plan submitted; and (3) provide their own analysis of the submitted CAT NMS Plan’s potential impact on competition, efficiency, and capital formation.11 These detailed requirements are intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the CAT NMS Plan ultimately submitted by the Participants.12

+

In light of the numerous specific requirements of Rule 613, the Participants concluded that publication of a request for proposal (“RFP”) was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan.13 The Participants published the RFP on February 26, 2013, and requested that any potential bidders notify the Participants of their intent to bid by March 5, 2013. Thirty-one firms submitted an intent to bid in response to the publication of the RFP; four of the firms were Participants or Affiliates of Participants.14

-
pubdate: February 09, 2015 effdate: N/A -

III. Description of the Plan

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan +
pubdate: February 24, 2014 effdate: N/A +

III. Description of the Proposal

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, - Rule 608, - SRO, + CAT NMS plan, + Plan Processor, -

Set forth in this Section II is the statement of the purpose of the Selection Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,8 prepared and submitted by the SROs to the Commission.9

-
pubdate: February 10, 2015 effdate: N/A -

A. Background

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background +

The Participants filed the Plan to govern how the SROs will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how to review, evaluate, and narrow down the bids submitted in response to the RFP (“Bids”)15—and ultimately choosing the plan processor that will build, operate, and maintain the consolidated audit trail (“Plan Processor”).16

+
pubdate: February 25, 2014 effdate: N/A +

A. Governance

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Governance Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, + Selection Plan - Section III, CAT NMS plan, Sec Rule 613, + Operating Committee, + Voting Rights, + Voting Requirements, + Participants, + +

Section III of the Plan establishes the overall governance structure the Participants have chosen.17 Specifically, the Participants propose establishing an Operating Committee responsible for formulating, drafting, and filing with the Commission the CAT NMS Plan and for ensuring the Participants’ joint obligations under Rule 613 are met in a timely and efficient manner. As set forth in Section III(B) of the Plan, each Participant will select one individual and one substitute to serve on the Operating Committee; however, other representatives of each Participant are permitted to attend Operating Committee meetings. Section III of the Plan also establishes the procedures for the Operating Committee, including provisions regarding meetings, Participants’ voting rights, and voting requirements.

+
+
pubdate: February 26, 2014 effdate: N/A +

B. Conflicts of Interest

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Conflicts of Interests + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Bidders, + Plan Processor, + +

The Participants recognize their important regulatory obligations with respect to the development of the CAT NMS Plan, and ultimately the creation and operation of the consolidated audit trail.18 However, they also recognize that Participants or Affiliates of Participants may also be Bidders seeking to serve as the Plan Processor or may be a subcontractor to Bidders seeking to serve as the Plan Processor.19 Accordingly, the Participants have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions, which are described below, designed to balance these competing factors. The Participants believe that the Plan achieves this balance by allowing all Participants to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.20

+
+
pubdate: February 27, 2014 effdate: N/A +

C. Plan Processor Selection Process

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process + Compliance User: Self-Regulatory Organization + Keywords: + Bidder Shortlist, + Plan Processor, -

The Selection Plan governs the process for Participant review of Bids for the role of Plan Processor for the CAT NMS Plan, the procedures for evaluating the Bids, and ultimately, until approval of the CAT NMS Plan, the selection of the Plan Processor. The CAT NMS Plan was filed with the Commission for approval on September 30, 2014.

-

After gaining experience with the development process for the CAT NMS Plan, the Participants believe it is necessary to amend the Selection Plan to ensure that the Participants will be able to choose a Plan Processor within the timeframe provided in the Selection Plan and Rule 613. The Participants propose amending the Selection Plan to (1) provide for additional opportunities to accept revised Bids and (2) allow the set of Shortlisted Bids to be narrowed prior to Commission approval of the CAT NMS Plan.

-
pubdate: February 11, 2015 effdate: N/A -

1. The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background, The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids +
pubdate: February 28, 2014 effdate: N/A +

1. Bidder Shortlist Determination

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process, Bidder Shortlist Determination Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, - Shortlisted Bidders, - CAT NMS plan, + Selection Plan - Section V and VI, Plan Processor, - Selection Plan Section VI(B), + Voting Senior Officer, + Bidding Participant, + SRO, + Selection Committee, + Qualified Bid, + Participant, + Shortlisted Bid, + CAT NMS plan, -

Under the Selection Plan, Shortlisted Bidders are only eligible to revise Bids following Commission approval of the CAT NMS Plan. The Selection Plan specifies that, following approval of the CAT NMS Plan by the SEC, Shortlisted Bidders for the role of Plan Processor may be permitted to revise their Bids based on the provisions in the approved CAT NMS Plan, including further discussions if determined to be necessary by the Selection Committee described in the Selection Plan.10 The Selection Plan provides that a Shortlisted Bidder will be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to certain recusal provisions in the Selection Plan, that revisions are necessary or appropriate in the light of the content of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan.11

-

The Selection Plan also requires that selection of the Plan Processor occur from among the initial set of Shortlisted Bids.12 Under the current Selection Plan, the Participants are not permitted to narrow the list of Shortlisted Bids determined pursuant to Section VI(B) of the Selection Plan.

+

Sections V and VI of the Plan21 set forth the process for the Participants’ evaluation, and narrowing down, of the Bids, and choosing the Plan Processor.22 Pursuant to these Sections, the evaluation of Bids and selection of the Plan Processor will be performed by a Selection Committee composed of one senior officer from each Participant (“Voting Senior Officer”).23 The SROs noted that, because of the potential conflicts of interest noted above, the Plan includes multiple requirements to increase the independence of the Voting Senior Officer who participates on the Selection Committee on behalf of a Bidding Participant.24 The criteria set forth in Section V(D) of the Plan include requirements concerning the Voting Senior Officer’s job responsibilities, decision-making authority, and reporting, and require that the Bidding Participant establishes functional separation between its Plan responsibilities and its business/commercial (including market operations) functions. In addition, the criteria prohibit any disclosure of information regarding the Bid to the Voting Senior Officer and prohibit the Voting Senior Officer from disclosing any non-public information gained in his or her role as such. According to the SROs, these criteria are intended to insulate the Voting Senior Officer from any inside knowledge regarding the Bid (while also preventing any information about the evaluation process from being shared with staff preparing the Bidding Participant’s Bid) and to reduce any potential personal motivation that may exist that could improperly influence a Voting Senior Officer’s decisions.25

+

Any action requiring a vote by the Selection Committee under the Plan can only be taken in a meeting in which all Participants entitled to vote are present.26 All votes taken by the Selection Committee are confidential and non-public, and a Participant’s individual votes will not be disclosed to other Participants or to the public.27 For this reason, the Plan provides that votes of the Selection Committee will be tabulated by an independent third party approved by the Operating Committee.28 Moreover, the Participants do not anticipate that aggregate votes or anonymized voting distribution numbers will be provided to the Participants following votes by the Selection Committee.29

+

The Plan divides the processes for review and evaluation of Bids, and selection of the Plan Processor, into four separate stages. After Bids are submitted,30 Section VI(A) of the Plan provides that the Selection Committee will review them to determine which are Qualified Bids (i.e., Bids that contain sufficient information to allow the Voting Senior Officers to meaningfully assess and evaluate them).31 At this initial stage, if two-thirds or more of the Participants determine that a Bid does not meet the threshold for a Qualified Bid, the Bid will be eliminated from further consideration. The Participants believe this initial step will ensure that only those Bids meeting a minimum level of detail and sufficiency will move forward in the process, and insufficient Bids can be eliminated.32

+

Following the elimination of Bids that are not Qualified Bids, each Qualified Bidder will be provided the opportunity to present its Bid to the Selection Committee.33 After the Qualified Bidders have made their presentations, the Selection Committee will establish a subset of Bids that will move on in the process (“Shortlisted Bids”).34 The Plan provides that, if there are six or fewer Qualified Bids submitted, all of those Bids will be selected as Shortlisted Bids.35 If there are more than six but fewer than eleven Qualified Bids, the Selection Committee will choose five Shortlisted Bids, and, if there are eleven or more Qualified Bids, the Selection Committee will choose 50% of the Qualified Bids as Shortlisted Bids.36

+

When voting to select the Shortlisted Bids from among the Qualified Bids, each Voting Senior Officer must rank his or her selections, and the points assigned to the rankings increase in single-point increments.37 Thus, for example, if five Shortlisted Bids are to be chosen, each Participant will vote for its top five choices in rank order, with the first choice being given five points, the second choice four points, the third choice three points, the fourth choice two points, and the fifth choice one point. The Plan also provides that at least two Non-SRO Bids must be included as Shortlisted Bids, provided there are two Non-SRO Bids that are Qualified Bids.38 According to the SROs, this provision further reduces the impact of potential conflicts of interest in choosing Shortlisted Bids.39 If, following the vote, no Non-SRO Bids have been selected as Shortlisted Bids, the Plan requires that the two Non-SRO Bids receiving the highest cumulative votes be added as Shortlisted Bids.40 If, in this scenario, a single Non-SRO Bid was a Qualified Bid, that Non-SRO Bid would be added as a Shortlisted Bid.41 The Participants believe selecting Shortlisted Bids is appropriate both to ensure that Bidders submit a complete and thorough Bid initially and so that Qualified Bidders will know whether they have a realistic opportunity to be selected as the Plan Processor after the CAT NMS Plan is approved.42

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pubdate: February 12, 2015 effdate: N/A -

2. Allowing Revision(s) of Bids In Light of Additional Information Available to Shortlisted Bidders and Providing for Narrowing the Set of Shortlisted Bidders Will Allow the Participants to Select the Plan Processor More Effectively and Efficiently Within the Rule 613 Timeframe

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Background, The Selection Plan Currently Allows Bid Revisions Only Following CAT NMS Plan Approval, and Does Not Allow for Narrowing of the Set of Shortlisted Bids +
pubdate: March 01, 2014 effdate: N/A +

2. Bid Revision and Selection of Plan Processor

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process, Bid Revision and Selection of Plan Processor Compliance User: Self-Regulatory Organization Keywords: - Shortlisted Bidders, CAT NMS plan, - Plan Processor, + Shortlisted Bid, + Advisory Committe, Sec Rule 613, - Selection Plan Section VI(D), + Bidding Participant, + Vote, + Rule 608, -

The Participants believe that providing the Shortlisted Bidders with an additional opportunity or opportunities to revise their Bids prior to the approval of the CAT NMS Plan is critical to the timely and considered selection of the Plan Processor. Since the Bidders submitted their Bids, the Participants have expended substantial effort in analyzing potential solutions for the consolidated audit trail (“CAT”) by gathering and evaluating data and information from a variety of market participants, including Bidders, broker-dealers, vendors, regulators and others. As a result, since the original Bid date, the Participants have made substantial strides in identifying characteristics of an optimal solution and formalizing these determinations in the proposed CAT NMS Plan and related technical documents. Given the development of the requirements for an optimal solution for the CAT, the Participants believe that waiting until after the approval of the CAT NMS Plan to permit the Shortlisted Bidders to revise their Bids will shortchange the Bid process to the detriment of the final plan. Moreover, given the passage of time since the original Bids, Bidders have indicated that new technological and other beneficial solutions are now available that may further improve the Bids, and, ultimately, the proposed solutions.

-

In addition, the Participants believe that delaying the Bid revision process until after the approval of the CAT NMS Plan will prevent Bidders from submitting, and the Participants from adequately reviewing the most relevant, informative and fulsome Bids before selecting a Plan Processor. Specifically, Rule 613(a)(2)(i) requires the Participants to select the Plan Processor within two months after effectiveness of the CAT NMS Plan. The Participants anticipate permitting the Shortlisted Bidders to revise their Bids, pursuant to Section VI(D) of the Selection Plan, after approval of the CAT NMS Plan, if there are substantial changes to the CAT NMS Plan before the CAT NMS Plan is approved by the Commission. Therefore, the Participants will have only a short time period of two months to analyze the Shortlisted Bids – Bids that are likely to have substantial revisions after the approval of the CAT NMS Plan for the reasons discussed above. Given the very large amount of information to digest in the revised Bids and the importance of appropriately analyzing such information, the Participants do not believe that two months will be sufficient to select the Plan Processor given the limitations of the current Selection Plan. However, if the Shortlisted Bidders are able to revise their Bids to reflect the provisions of the proposed CAT NMS Plan and any draft technical materials, as well as any new technology or other relevant developments, prior to the approval of the CAT NMS Plan, then the Participants believe that they will be able to select the Plan Processor within the time limits imposed by Rule 613 in a more thoughtful and deliberative manner.

-

In addition, the Participants believe that providing the Selection Committee the discretion to further reduce the number of Shortlisted Bids, either before or after any revisions to Shortlisted Bids are accepted, would also facilitate the selection of the Plan Processor within the time limits imposed by Rule 613. Allowing the Selection Committee to reduce the number of Shortlisted Bids before approval of the CAT NMS Plan could allow the Participants to more efficiently select the Plan Processor by focusing attention on a more refined set of options during the limited two month time period for selection following approval of the CAT NMS Plan.

+

Following the selection of Shortlisted Bids, the Participants will identify the optimal proposed solution(s) for the consolidated audit trail for inclusion in the CAT NMS Plan for submission to the Commission.43 As a part of this process, and the overall review and evaluation of Shortlisted Bids, the Selection Committee may consult with the advisory committee required and established by Rule 613 (“Advisory Committee”). If the Commission approves the CAT NMS Plan, the Selection Committee will determine, by majority vote, which Shortlisted Bidders will have the opportunity to revise their Bids in light of the provisions in the final, approved CAT NMS Plan.44 In making a decision whether to permit a Shortlisted Bidder to revise its Bid, the Selection Committee will consider the provisions in the CAT NMS Plan as well as the content of the Shortlisted Bidder’s initial Bid. According to the SROs, to reduce potential conflicts of interest, the Plan also provides that, if a Bid submitted by or including a Bidding Participant or an Affiliate of a Bidding Participant is a Shortlisted Bidder, that Bidding Participant must recuse itself from all votes regarding whether a Shortlisted Bidder will be permitted to revise its Bid.45

+

Section VI(E) provides that, after the permitted Shortlisted Bidders submit any revisions, the Selection Committee will select the Plan Processor from the Shortlisted Bids in two rounds of voting where, subject to the recusal provision described below, each Participant has one vote. In the first round, each Participant will select a first and second choice, with the first choice receiving two points and the second choice receiving one point. The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.46 In the event of a tie resulting in more than two Shortlisted Bids advancing to the second round, the tie will be broken by assigning one point per vote to the tied Shortlisted Bids, and the one with the most votes will advance. If this procedure fails to break the tie, a revote will be taken on the tied Shortlisted Bids with each vote receiving one point. If the tie persists, the Participants will identify areas for discussion, and revotes will be taken until the tie is broken.47

+

Once two Shortlisted Bids have been chosen, the Participants will vote for a single Shortlisted Bid from the final two to determine the Plan Processor.48 If one or both of the final Bids is submitted by or includes a Bidding Participant or an Affiliate of a Bidding Participant, the Bidding Participant must recuse itself from the final vote.49 In the event of a tie, a revote will be taken. If the tie persists, the Participants will identify areas for discussion and, following these discussions, revotes will be taken until the tie is broken.50 As set forth in Section VII of the Plan, following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by Rule 608.

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pubdate: February 13, 2015 effdate: N/A -

B. Requirements Pursuant to Rule 608(a)

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) +
pubdate: March 02, 2014 effdate: N/A +

D. Implementation

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Implementation Compliance User: Self-Regulatory Organization Keywords: - Rule 608, + Approval of Plan, + CAT NMS plan, + Bids, + Selection Plan - Section VI, -
pubdate: February 14, 2015 effdate: N/A -

1. Description of the Amendments to the Selection Plan

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Description of the Amendments to the Selection Plan +

The terms of the Plan will be operative immediately upon approval of the Plan by the Commission. The Participants have announced that Bids must be submitted four weeks after the Commission’s approval of the Plan.51 The Participants will begin reviewing and evaluating the Bids pursuant to Section VI of the Plan upon receipt of the Bids, and anticipate that it will take seven months to evaluate the Bids and submit the CAT NMS Plan to the Commission pursuant to Sections VI(A) and (B) of the Plan.52 As noted above, upon approval of the CAT NMS Plan, the Plan will automatically terminate. The review of revised Shortlisted Bids and the selection of the Plan Processor will be undertaken as set forth in Sections VI(D) and (E) of the Plan as those sections are incorporated into the CAT NMS Plan.

+
+
+
pubdate: March 03, 2014 effdate: N/A +

IV. Comment Letters and Response Letter

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter + Compliance User: Self-Regulatory Organization + Keywords: + Comment Letter, + CAT NMS plan, + SRO, + +

The Commission received six comment letters from five commenters on the proposed Plan.53 Three of the commenters generally supported the Plan.54 All of the commenters had concerns with, and/or questions regarding, specific details on the terms of the Plan, collectively identifying three main issues – (1) industry participation in the evaluation of Bidders, the selection of the Plan Processor, and the drafting of the CAT NMS Plan; (2) transparency in SRO decision-making; and (3) conflicts of interest – and offering suggestions as to how those concerns and/or questions could be addressed.55 The Participants responded to the comments regarding the proposal.56

+
pubdate: March 04, 2014 effdate: N/A +

A. Industry Participation

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Industry Participation + Compliance User: Self-Regulatory Organization + Keywords: + Selection Process, + SRO, + Advisory Committee, + Operating Committee, + CAT NMS plan, + Shortlisted Bidder, + CAT Development Advisory Group, + +

As proposed in the Plan, only the SROs will participate in the selection process, and they may consult with the Advisory Committee when reviewing and evaluating the Shortlisted Bids.57 Three commenters believe that industry participation in the selection process is important, and they suggest varying solutions to ensure that such participation is required by the Plan.58

+

One commenter states that the process should include the integrated involvement and meaningful participation of representatives of the broker-dealer community.59 Specifically, the commenter states that there should be public representation on the Operating Committee, and that non-SRO, industry members should be involved in the evaluation of Bidders and the selection of the Plan Processor.60 The commenter believes that “[t]he unique expertise and insight of the broker-dealer community complements that of the SROs and would bring the perspective of the entities that will be providing the ‘lion’s share’ of the reported data to the CAT.”61 This commenter additionally recommends that the Participants amend the Plan to establish the Advisory Committee as part of this Plan, as opposed to waiting for the submission of the CAT NMS Plan, with safeguards and procedural protections to assure that the SROs fully consider the views of the committee.62 Another commenter states that it supports consultation with the Advisory Committee as part of the selection process so long as safeguards are put in place to ensure the confidentiality of the Bidders’ information is protected.63 A third commenter believes that the Advisory Committee’s scope of participation is extremely limited and should be expanded and it recommends that the SROs should be required to consult the Advisory Committee when reviewing the Shortlisted Bids to select the Plan Processor.64

+

In response to these comments, the SROs indicate how the Operating Committee has provided, and will continue to provide, for industry participation in the development of the CAT NMS Plan.65 In response to the comment that Advisory Committee consultation should be mandatory as part of the review of Shortlisted Bidders, the SROs noted that they will consult proactively with the industry for input on key aspects of the Bids, so long as the selection process is not impaired, especially with regard to maintaining Bidder confidential information.66 The SROs also note that they created the CAT Development Advisory Group (“DAG”) and that the DAG has been, and will continue to be, a valuable source of input for the development of the CAT NMS Plan.67 The SROs state that they will continue to engage the industry on key topics pertaining to aspects of the Bids that directly affect the industry.68 The SROs further state that, after Bids are received in response to the RFP, they are committed to providing the DAG with anonymized information taken from Bids that will provide the DAG members with enough specificity to allow them to understand the comparative advantages and disadvantages of the options being considered by the SROs, so that they can contribute in a meaningful way to the SROs’ analysis of such information.69 The SROs further note that they intend to work with the DAG to identify the particular sections of the RFP that will benefit from industry input during the evaluation of Bids.70 The SROs also explain that they understand that broad industry input during the development of the CAT NMS Plan is critical to selecting optimal proposed solutions, and that they will continue to hold discussions with the DAG at the greatest level of detail possible without compromising a fair selection process and confidential Bid information.71

+
+
pubdate: March 05, 2014 effdate: N/A +

B. Transparency

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Transparency + Compliance User: Self-Regulatory Organization + Keywords: + Bidder, + SRO, + CAT NMS plan, + CAT Reporter, + Plan Processor, + DAG, + NDA, + RFP Responses, + Shorlisted Bids, + Qualified Bids, + Sec Rule 613, + +

Several commenters stress the importance of transparency in the Bidder selection process and the standards the SROs will employ for review of Bids.72 One commenter states that the Commission should not approve the Plan unless it is amended to provide public disclosure of the selection process.73 The commenter recommends that the SROs publish the Bidders and the contents of the Bids, explaining that the Bids should be available to the public to inform the discussion regarding the costs and benefits, and technological feasibility of different solutions.74 The commenter believes that these responses to the RFP and the SROs’ rationale for eliminating them from consideration as the Plan Processor will be important for the industry to consider in commenting on the CAT NMS Plan.75

+

Another commenter recommends that the SROs share information contained in the Bids, specifically relating to the functions and interfaces of the entities (i.e., broker-dealers and SROs) that are required to report to the CAT (“CAT Reporters”), so that the industry can provide feedback to the SROs for assessment of Bidder responses.76 The commenter believes that broad input from the DAG during the CAT NMS Plan development process is critical to ensure that the SROs consider issues from the CAT Reporter perspective.77 The commenter maintains that this information would represent an external description of the Plan Processor and should not require any disclosure of internal implementations or proprietary information from the Bidders.78 Further, the commenter argues that this level of information will be public information once the CAT NMS Plan is published as Rule 613 requires that the CAT NMS Plan be sufficiently detailed to describe the alternatives to the solution selected by the SROs.79 The commenter also argues that because Bids cannot be revised prior to the submission of the CAT NMS Plan pursuant to the proposed Plan, information leakage should not be a concern.80

+

The commenter also opines that if the SROs deem it necessary to require DAG members to sign NDAs in order to share confidential portions of Bidders’ responses, any such NDAs should be targeted and finite in nature, specifically noting that DAG discussions on CAT Reporter functionality should not be subject to an NDA.81 The commenter states that only confidential portions of Bids should be covered by NDAs, and that to the greatest extent possible, information relating to Bidders’ responses should be publicly available to facilitate critical outreach from the DAG.82

+

In response to these comments, the SROs state that they do not intend to publish the content of the Bids in order to manage a fair process and to address Bidders’ concerns regarding the confidentiality of proprietary and other sensitive information during the selection process.83 The SROs represent that this is standard industry practice.84 The SROs further indicate that, as required by Rule 613, the CAT NMS Plan submitted will discuss appropriate and anonymized elements of the Bids that were not selected, including the relative advantages and disadvantages of each solution, an assessment of the costs and benefits, and the basis upon which the SROs selected the optimal proposed solutions in the CAT NMS Plan.85 The SROs also note that the CAT NMS Plan will be subject to notice and comment.86 However, the SROs state that they will seek industry feedback on proposed approaches and key themes of the RFP responses.87

+

The SROs also state that, prior to any consultation with the Advisory Committee or the DAG about information contained in a Bid, the SROs will require the execution of an NDA.88 In response to the comment regarding the scope of NDAs, the SROs state that NDAs will be appropriately drafted to protect confidential information while allowing for meaningful discussion between the SROs and members of the Advisory Committee or the DAG.89

+

Three commenters recommend that the selection criteria used to evaluate the Bids be publicly available.90 Specifically, one commenter states that, if the evaluation criteria are thorough and known to all parties (i.e., SROs, Bidders, the industry and the Commission), the process will be more transparent and fair.91 This commenter suggests that the evaluation process and criteria used in the final two rounds of voting be published prior to each round of voting, or at a minimum reviewed with the industry via the DAG.92 Another commenter requests clarification regarding the criteria that Voting Senior Officers will employ when reviewing and ranking Bids, both when selecting the Shortlisted Bids from the Qualified Bids and when selecting the Plan Processor from the Shortlisted Bids.93 A third commenter suggests that the SROs should publish information about the results of each round of voting (e.g., the total votes received by each Bidder or a ranking of the Bidders by voting result).94

+

In response to these comments, the SROs agree to publish more detailed descriptions of the evaluation criteria listed in the RFP, which will be used by each SRO as a guideline when evaluating Bids.95 The SROs note that the evaluation criteria can be broadly grouped into the following five areas: (1) technical architecture, (2) operations – technical (processing capability), (3) operations – non-technical, (4) company information, and (5) contract and terms. The SROs further provide lists of criteria within each of the five areas in the Response Letter.96 The SROs explain that each SRO’s assessment will be informed by the defined criteria noted above but that an individual SRO may determine that other factors are important in making its independent evaluation of a Bid.97 The SROs do not intend to publish voting results.98 The SROs state that this approach is considered standard industry practice and there is no articulated benefit to making this information publicly available. The SROs state that they are concerned that the public disclosure of such information may incorrectly and inaccurately suggest the relative strength of a particular Bid without any meaningful context.99

+

One commenter recommends that the minutes of the SRO Operating Committee meetings be made public, in order to further increase transparency and serve as a communications vehicle for informing the industry of the CAT governance actions and decisions.100 In response to this comment, the SROs indicate that the Operating Committee meeting minutes will not be made public either prior to or after approval of the CAT NMS Plan.101 The SROs state that, in managing a fair process and maintaining Bidder confidentiality as provided for in the NDA executed with the Bidders, the SROs will not publish Operating Committee minutes during the Bid evaluation and selection process.102 The SROs believe that this approach encourages effective and critical review of the Bids as well as open and frank discussions in light of all material considerations, including timing and complexity.103 The SROs explain that the decisions made by the Operating Committee regarding aspects of the Bids will be reflected in the CAT NMS Plan, which will be open to public comment, and will include an analysis of both the optimal proposed solutions and those solutions not selected, thus providing the public with the opportunity to consider the SROs’ decisions.104 The SROs further state that, once the CAT NMS Plan has been approved and the Advisory Committee has been established, members of that committee will have the right to attend CAT management committee meetings, except for executive sessions, and, as such, will have access to the minutes from such meetings, as well as the right to receive information concerning the operation of the central repository and to provide their views to the SROs.105

+

Finally, one commenter requests clarification on whether the optimal proposed solutions for the CAT NMS Plan will be the product of an individual Bid or a composite of select portions of multiple Bids.106 If it will be the latter, the commenter questions how the SROs will determine the costs and benefits of such solutions.107 In response to this comment, the SROs clarify that the optimal proposed solutions could include approaches from different Bids in order to identify a solution that best meets the requirements of Rule 613.108 The SROs recognize that there may be inherent challenges in combining elements of separate solutions, but they want to ensure the flexibility in the evaluation process to identify a holistic solution that is better suited to meet the requirements of Rule 613, while not being limited to the components of any individual Bid.109 The SROs intend to consult with the DAG and the industry as part of the review of anonymized solutions from the Bids, including, but not limited to, requesting input on the technical and operational specifications of the proposed solutions, and the associated cost-benefit analysis.110

+
+
pubdate: March 06, 2014 effdate: N/A +

C. Conflicts of Interest

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Conflicts of Interests + Compliance User: Self-Regulatory Organization + Keywords: + Bidder, + SRO, + CAT NMS plan, + Shorlisted Bids, + +

Two commenters express concerns that the provisions in the Plan that are intended to address conflicts of interest are insufficient.111 One commenter questions the genuineness of the separation through firewalls within the SROs intended to segregate individuals participating in the selection process from those participating in the bidding process.112 The commenter also expresses concern that it is challenging to enforce and monitor such restrictions.113 The commenter further recommends that the Plan either limit the Bidders to non-SROs or only to SROs.114 Another commenter recommends that the Plan require Bidding Participants to be recused from both rounds of voting on Shortlisted Bids, not just the second round of voting to select the Plan Processor.115

+

In response to these comments, the SROs note the important regulatory obligations that exist for each of them with respect to the creation and operation of the CAT, and that it is essential that each one contribute to the development of the CAT NMS Plan and the selection of the Plan Processor.116 However, the SROs recognize that SROs or Affiliates of SROs may also be Bidders seeking to serve as the Plan Processor or may be included as part of a Bid.117 The SROs represent that they have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions designed to balance these competing factors, and have established information barriers, which they believe are sufficient to maintain functional separation between employees representing a specific SRO as part of the consortium planning the CAT and employees developing Bids.118 The SROs state that the implementation of information barriers is considered a standard industry practice for mitigating the risks of conflicts of interests.119 The SROs continue to believe that the Plan achieves this balance by allowing all SROs to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor, while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.120

+

Distinct from the concern regarding potential conflicts of interest arising from an SRO that is also a Bidder, one commenter suggests that the Plan or NDA should be amended to require, even for SROs that are not Bidders or Affiliates of Bidders, the functional separation of employees representing an SRO for purposes of the selection process and its business or commercial functions to safeguard against misuse of Bidders’ confidential information.121

+

The SROs state that, although the Bidding Participants are required to maintain the functional separation suggested by the commenter, it will not be practical for all other SROs to isolate their employees that participate in the Bid evaluation and selection process, as varying skillsets will be required to fully evaluate the Bids, and many SROs are faced with resource constraints that would make them unable to wall off certain personnel without either decreasing the expertise available to evaluate Bids or having inadequate resources to manage their business/commercial functions.122 While the SROs state that it is not practical to isolate non-Bidding SRO employees participating in the Bid evaluation and selection process from other SRO employees, they represent that, to protect Bidders’ confidential information, all SROs will adhere to the section of the NDA executed with Bidders that restricts the distribution and use of Bid information by SROs, their affiliates, agents, advisors, and contractors by obligating such parties:

+

(i) to hold the Disclosing Party’s Confidential Information in strict confidence and to protect such Confidential Information from disclosure to others (including, without limitation, all precautions the Receiving Party employs with respect to its own Confidential Information), (ii) no [sic] to divulge any such Confidential Information … other than to its Representatives for the purpose of assisting the Receiving Party with respect to the CAT NMS Selection Process, and (ii) [sic] not to make use whatsoever at any time of Confidential Information except to evaluate and discuss the CAT NMS Selection Process … the Receiving Party shall ensure that its Representatives comply with this Agreement as if they were parties to this Agreement.123

+
+
pubdate: March 07, 2014 effdate: N/A +

D. Other Issues

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues + Compliance User: Self-Regulatory Organization + Keywords: + Revision of Bids, + Timing, + Quorum Standard, + +
pubdate: March 08, 2014 effdate: N/A +

1. Revision of Bids

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Revision of Bids Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, CAT NMS plan, - Selection Plan Section VI(D), - Shortlisted Bids, + Shortlisted Bidders, + Qualified Bidder, + SRO, -

The Participants propose amending the Selection Plan to permit the Shortlisted Bidders to revise their Bids one or more times prior to approval of the CAT NMS Plan if the Selection Committee determines, by majority vote, subject to the applicable recusal provisions, that such revisions are necessary and appropriate. The proposed amendment would not affect Section VI(D) of the Selection Plan, which allows for revisions to Shortlisted Bids following Commission approval of the CAT NMS Plan.

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The Participants also propose amending the Selection Plan to provide the Selection Committee discretion to narrow the set of Shortlisted Bids prior to approval of the CAT NMS Plan. Specifically, the proposed amendment would authorize another round of voting to narrow the set of Shortlisted Bids. This round of voting, which could occur either before or after any revisions to Shortlisted Bids are accepted, would be commenced upon at least a two-thirds vote of the Selection Committee, and would proceed in a manner similar to the initial round for voting for the Shortlisted Bids. Each Voting Senior Officer would choose a first, second, and third choice Shortlisted Bid, with each choice receiving a weight of, respectively, three points, two points, and one point. The three bids receiving the highest cumulative number of points would constitute the new set of Shortlisted Bids. In the event of a tie that would result in more than three final Shortlisted Bids, the votes would be recounted, excluding each Voting Senior Officer’s third choice. The three Shortlisted Bids receiving the largest number of cumulative votes in this recount would be the new Shortlisted Bids. If this recount were to result in a tie leading to a larger or equal number of final Shortlisted Bids than the initial count, the results of the initial count would constitute the new set of Shortlisted Bids. The proposed amendment also includes, for the sake of clarity, a provision ensuring that at least one Non-SRO Bid is included in the narrowed set of Shortlisted Bids. The individual scores and rankings under any vote to narrow the list of Shortlisted Bids shall be kept confidential.

-

Finally, the proposed amendment includes provisions with respect to the recusal of Participants that also are Shortlisted Bidders. Under this proposed provision, no Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders, if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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-
pubdate: February 15, 2015 effdate: N/A -

2. Governing or Constituent Documents

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Governing or Constituent Documents - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+

The proposed Plan provides that, following approval of the CAT NMS Plan, upon a majority vote of the Selection Committee, Shortlisted Bidders will be permitted to revise their Bids provided that revisions are necessary or appropriate in light of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan. One commenter recommends that the Selection Committee instead should only allow revised Bids: (1) after the first round of voting on the Shortlisted Bidders, at which time the list of Bidders would be narrowed to two; and (2) only for the purposes of confirming that the final two Bidders have proposals that meet the requirements of the approved CAT NMS Plan.124 The commenter also believes that, if revisions would require material changes to the Bid of either of the two remaining Bidders, both Bidders should be permitted to revise their Bids.125 This commenter is concerned that allowing Bidders to revise their Bids too early in the selection process could materially impact the depth and breadth of information that Bidders are willing to provide in their initial Bids.126 Under the Plan as proposed, the commenter believes that Bidders will not have a strong incentive to put forth their best ideas, processes, systems, and methods in response to the initial RFP, and will include only enough information to meet the Qualified Bidder threshold.127 Contrary to this position, another commenter believes that all Bidders should be permitted to revise their Bids, based on the provisions contained in the approved CAT NMS Plan, and recommends removing the requirement that the Selection Committee grant permission to revise Bids.128

+

In response to these comments, the SROs state that they recognize the value of allowing the Shortlisted Bidders to revise their Bids and expect that including this component in the Plan will result in better quality and more comprehensive Bids from all Bidders.129 Further, the SROs note that preserving their discretion to limit revision of Bids is important, particularly in the instance where there are six or fewer Bidders, all of whom would automatically become Shortlisted Bidders.130 The SROs believe that without SRO discretion to determine which Bidders can revise their Bids, Bidders may not provide detailed information in their initial Bids, but will await the final structure of the CAT NMS Plan to provide full information in their revised Bids.131 Therefore, the SROs believe they need discretion to not allow a Shortlisted Bidder to revise its Bid if the initial Bid did not clearly communicate a cogent, workable plan and evidence the ability to execute the plan.132 Accordingly, the SROs will assess whether revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions of the approved CAT NMS Plan.133 More specifically, the SROs anticipate permitting revision of Bids where the initial Bid clearly communicated a feasible CAT

+

approach and showed a substantial likelihood that the Bidder could implement the approach contained in the approved CAT NMS Plan.134 The SROs believe this is consistent with standard industry practices when managing an RFP process.135

-
pubdate: February 16, 2015 effdate: N/A -

3. Implementation of Amendment

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Implementation of Amendment +
pubdate: March 09, 2014 effdate: N/A +

2. Timing

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Timing Compliance User: Self-Regulatory Organization Keywords: - Amendment approval, + Bidding Participant, + CAT NMS plan, + SRO, + Shortlisted Bidder, -

The terms of the proposed amendments will be operative immediately upon approval of the amendments by the Commission.

-
-
pubdate: February 17, 2015 effdate: N/A -

4. Development and Implementation Phases

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Development and Implementation Phases - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+

Two commenters express concerns with timing related to the selection process.136 One commenter takes issue with the due date for Bids in response to the RFP being four weeks after approval of this Plan.137 Specifically, the commenter believes that Bidding Participants are likely to have information about the final selection process and associated timeline for approval before it is made publicly available, and that Bidders must have adequate time to modify their Bids to reengage subcontractors and product/service providers, as well as to update prices for technology components.138 Accordingly, the commenter recommends that the due date for Bids in response to the RFP be 12 weeks after approval of the Plan.139 Another commenter does not believe that two months after effectiveness of the CAT NMS Plan is sufficient time for the SROs to select a Plan Processor from among the Shortlisted Bidders, particularly if there are significant changes from the proposed and approved CAT NMS Plan.140 The commenter recommends a four- to six-month period to allow the Shortlisted Bidders time to revise their Bids to reflect the approved CAT NMS Plan, and to allow the SROs time to consider the Bids and seek industry and technical expertise to aid their evaluation process.141

+

In response to the comment regarding the due date for Bids, the SROs indicate that the anticipated deadline four weeks after the approval of the Plan is based on the current requirement to submit the CAT NMS Plan by September 30, 2014.142 However, the SROs note that, if the approved Plan has a material impact on the Bidders’ ability to respond to the RFP, then the due date may be extended.143 In response to the comment regarding the timeframe to select the Plan Processor, the SROs note that that requirement is mandated by Rule 613(a)(3)(i) and that they hope to meet the deadline.144 Going forward, the SROs indicate that they will continue to evaluate whether, and how much, additional time they may be required to seek from the Commission for the selection of the Plan Processor.145

-
pubdate: February 18, 2015 effdate: N/A -

5. Analysis of Impact on Competition

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Analysis of Impact on Competition +
pubdate: March 10, 2014 effdate: N/A +

3. Quorum Standard

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Quorum Standarad Compliance User: Self-Regulatory Organization Keywords: - Exchange Act, + Selection Committee, + Voting Senior Officers, SRO, - CAT NMS plan, - Sec Rule 613, + Plan Processor, -

The proposed amendments do not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The SROs believe that the amendments are reasonably designed to help assure that the SROs receive more updated and informed submissions from Shortlisted Bidders before the CAT NMS Plan is finalized, thereby helping to assure that the selection of the Plan Processor for the CAT NMS Plan proceeds efficiently within the timeframe provided by Rule 613. Moreover, the SROs believe that the amended process will facilitate the development of an audit trail that maximizes its regulatory utility while minimizing unnecessary costs, to the benefit of all market participants. Furthermore, providing the ability to narrow the list of Bidders at an earlier stage will prevent Bidders whose Bids are unlikely to be selected from misallocating their resources toward the further development of their Bid.

-
-
pubdate: February 19, 2015 effdate: N/A -

6. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan.

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+

One commenter is concerned that the quorum standard for the Selection Committee is too difficult and could lead to delays.146 Specifically, the commenter notes that each SRO’s Voting Senior Officer is a very unique employee and is concerned that such individuals may not always be available for meetings of the Selection Committee.147 The commenter further believes that, because all Voting Senior Officers are required to be present in order to have a quorum of the Selection Committee, delays in the evaluation and voting procedures could occur.148 Consequently, the commenter recommends that an alternate member, with less stringent qualifications, be considered as a voting substitute for the Voting Senior Officer, but any actions taken by the voting substitute would continue to be the direct responsibility of the Voting Senior Officer.149

+

In response to this comment, the SROs state that they will ensure that all Voting Senior Officers will be in attendance for all voting processes as part of the Plan Processor selection, either in person or telephonically, as permitted under operation of the CAT beyond the selection of the Plan Processor.150 The SROs further indicate that the Plan does not affect the operation of the CAT beyond the selection of the Plan Processor, and, as such, the SROs will include additional personnel with voting rights as part of the broader governance of the CAT.151

-
pubdate: February 20, 2015 effdate: N/A -

7. Statement that the Amendments Have Been Approved by the Plan Sponsors

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Statement that the Amendments Have Been Approved by the Plan Sponsors +
pubdate: March 11, 2014 effdate: N/A +

4. Information Sharing

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Information Sharing Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, - Rule 608, + Bidder, + DAG, + CAT NMS Plan Website, + NDA, + SRO, + CAT NMS plan, -

The Selection Plan provides that amendments to the Selection Plan shall be effected by means of a written amendment that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to Rule 608, or otherwise becomes effective under Rule 608.13

-

The proposed amendments have been executed by eighteen of the Participants, and have consequently been approved by the SROs. One Participant which is also a Shortlisted Bidder, abstained from the decision whether to adopt these amendments to avoid potential conflicts of interest.

-
-
pubdate: February 21, 2015 effdate: N/A -

8. Terms and Conditions of Access

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a), Terms and Conditions of Access - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

-
-
pubdate: February 22, 2015 effdate: N/A -

9. Method of Determination and Imposition, and Amount of, Fees and Charges

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

-
-
pubdate: February 23, 2015 effdate: N/A -

10. Method and Frequency of Processor Evaluation

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

-
-
pubdate: February 24, 2015 effdate: N/A -

11. Dispute Resolution

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan, Requirements Pursuant to Rule 608(a) - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+

Another commenter expresses a concern related to information sharing with Bidders.152 Specifically, the commenter believes that some Bidders may be affiliated or associated with members of the DAG and, therefore, may have access to information relating to DAG discussions that other Bidders do not.153 The commenter further believes that all Bidders should have uniform information relating to DAG discussions and recommends that a formal process be developed under which the SROs disseminate information to all Bidders relating to DAG discussions that are relevant to the Bidding process.154 Another commenter similarly stated that the Bidders and all other interested parties should have access to DAG discussions.155 The commenter recommended that all DAG meeting materials and minutes could be posted on the CAT NMS Plan Website to achieve this goal.156

+

In response to the concern that some Bidders will have access to the DAG discussions while others will not, the SROs state that, prior to consultation on any aspect of information included in a Bid, the SROs intend to require the execution of NDAs by members of the Advisory Committee or the DAG, thus facilitating communication and mitigating the confidentiality risks of proprietary Bidder information.157 Additionally, the SROs indicate that it will be a requirement that no member of the Advisory Committee or the DAG will have affiliations with Bidding entities, unless such members have functional separation between their representatives on the DAG and their representatives involved with entities preparing or participating in a Bid similar to those restrictions imposed on Bidding SROs under Section V(D) of the Plan.158

+

In response to comments recommending the dissemination of DAG materials, the SROs state that they are committed to holding an open dialogue with industry members during the development of the CAT NMS Plan and will host additional industry outreach events to communicate, among other updates, decisions and ongoing discussion topics from DAG meetings.159 The SROs state that they will post to the CAT NMS Plan Website those materials from DAG discussions that are deemed to be non-confidential information regarding the CAT NMS Plan development and Bidder evaluation process, such as gap analyses regarding the sunsetting of existing regulatory systems.160 However, the SROs state that not all DAG materials will be posted to the website in order to safeguard confidential information and maintain a fair process.161

-
pubdate: February 25, 2015 effdate: N/A -

IV. Solicitation of Comments

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Solicitation of Comments +
pubdate: March 12, 2014 effdate: N/A +

V. Discussion and Commission Findings

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan Compliance User: Self-Regulatory Organization Keywords: - Submission of Comments, - Electronic Comments, - Paper Comments, - File Number 4-668, - 5 U.S.C. 552, + Exchange Act - Section 11(A), + Rule 608, + SRO, + CAT NMS plan, + Comment Letters, + Response Letters, + RFP, + DAG, + Operating Committee, -

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Amendment to the Plan is consistent with the Act. Comments may be submitted by any of the following methods: Electronic comments:

-

• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

-

• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the

-

subject line.

-

Paper comments:

-

• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

-

All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Amendment to the Plan that are filed with the Commission, and all written communications relating to the Amendment to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

-

By the Commission.

-

Brent J. Fields

-

Secretary

+

After carefully considering the proposed Plan, the issues raised by the comment letters, and the Response Letter, including the commitments contained therein, the Commission has determined to approve the Plan pursuant to Section 11A(a)(3)(B) of the Act162 and Rule 608,163 in that it is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system.164 Rule 613 mandates that the SROs develop the CAT NMS Plan, and the SROs have voluntarily filed this Plan for the purpose of facilitating that development. The Commission believes the Plan is reasonably designed to govern the process by which the SROs will formulate and submit the CAT NMS Plan, including the review, evaluation, and narrowing down of Bids in response to the RFP, and ultimately choosing the Plan Processor that will build, operate, and maintain the consolidated audit trail. The Commission believes that the Plan should thereby help promote the goals of investor protection, and fair and orderly markets, by describing the process of developing the CAT NMS Plan, selecting a Plan Processor, and ultimately creating the consolidated audit trail, which will substantially enhance the ability of the SROs and the Commission to oversee today’s securities markets and fulfill their responsibilities under the federal securities laws.

+

The Commission notes that, in response to the comments regarding industry participation in the selection process,165 the SROs state that the DAG is a valuable source of input for the development of the CAT NMS Plan, and commit to provide the DAG with anonymized information taken from Bids with enough specificity to allow the DAG to understand the comparative advantages and disadvantages of the options being considered so that the DAG can contribute in a meaningful way to the SROs’ analysis of Bid information.166 The SROs also commit to continue to work with the DAG to identify the particular sections of the RFP that will benefit from industry input, and to solicit the views of the DAG and the industry for the required cost-benefit analysis, while adhering to their responsibility to maintain the confidentiality of the Bid submissions.167 The Commission believes that such an ongoing and open dialogue between the SROs and the DAG during the selection process is appropriate, and will facilitate the drafting of a detailed and thoughtful CAT NMS Plan, as contemplated by Rule 613. The Commission encourages the SROs to consult with and utilize the DAG to inform their decision making processes.

+

With respect to the comments on the transparency of the selection process,168 the SROs reiterate their commitment to provide transparency to the industry during the selection process and thereafter, and agree to provide more detailed descriptions of their evaluation criteria in the RFP.169 The SROs, however, recognize the need to balance full transparency with Bidder concerns about the confidentiality of proprietary information, in addition to more general concerns about inhibiting an open dialogue during the decision-making process. In light of these concerns, the SROs decline to publish the contents of the Bids, the Operating Committee minutes, or the SRO voting results.170 The Commission believes in the importance of a transparent process with respect to the development of the CAT NMS Plan and to the selection of a Plan Processor, but at the same time recognizes the legitimate concerns of Bidders regarding the confidentiality of proprietary and other sensitive information, and the desire by the SROs to encourage Bidders to provide sufficiently detailed Bids to facilitate the development of a robust CAT NMS Plan. The Commission believes that the SROs have appropriately balanced these competing goals as described above.

+

To address concerns regarding potential conflicts of interest in the selection process,171 the SROs included in the Plan multiple provisions that are intended to balance the need for SROs to participate in the process given the important regulatory obligations that exist for each of them with respect to the creation and operation of the CAT, with the potential for conflicts of interest that can arise when an SRO is a Bidding Participant.172 The Commission believes that the SROs have included reasonable steps to address the concerns about conflicts of interest.

+

With regard to the issue of when and under what circumstances Bidders should be permitted to revise their Bids, one commenter encourages the SROs to liberalize the proposed Plan’s approach to allowing revisions while another commenter suggests that the SROs increase restrictions on the ability of Bidders to revise their Bids.173 In their Response Letter, the SROs state that they will not modify their proposal to permit each Shortlisted Bidder the opportunity to revise its Bid only if a majority of the Selection Committee believes that revisions by the particular Bidder are “necessary or appropriate.” As noted above, the SROs believe that without SRO discretion to determine which Bidders can revise their Bids, Bidders may not provide detailed information in their initial Bids, but will await the final structure of the CAT NMS Plan to provide full information in their revised Bids.174 The Commission believes that the SROs’ approach is reasonably designed to help assure that the SROs receive sufficiently detailed information to develop the CAT NMS Plan.

+

With respect to the comments raised by a commenter relating to the due date for Bids175 (four weeks after Commission approval of the Selection NMS Plan), the Commission notes that the SROs explain that the timeframe is based on the current requirement to submit the CAT NMS Plan by September 30, 2014, and note that, if the approved Plan has a material impact on the Bidders’ ability to respond to the RFP, then the SROs may extend this date.176 Regarding the comments made by another commenter relating to the two-month period for the selection of the Plan Processor,177 the Commission notes that this is a deadline imposed by Rule 613(a)(3)(i)178 and that the SROs state that they hope to meet this deadline but will continue to evaluate whether, and, if so, how much, additional time may be required, and will seek additional time from the Commission for the selection of the Plan Processor if needed.179

+

With respect to the comment regarding the quorum requirement for Selection Committee meetings,180 the Commission notes that the SROs state that they will ensure that all Voting Senior Officers will be in attendance for all voting processes as part of the Plan Processor selection, either in person or telephonically.181 With respect to the concerns regarding information sharing,182 the Commission notes that, in addition to requiring NDAs, the SROs have indicated that no member of the Advisory Committee or the DAG will be permitted to have affiliations with Bidding entities, unless such members have functional separation between their representatives on the DAG and their representatives involved with entities preparing or participating in a Bid.183

+

The Commission finds that the Plan is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system and that it is reasonably designed to achieve its objective of facilitating the development of the CAT NMS Plan and the selection of the Plan Processor. Accordingly, the Commission expects that the Participants will implement the Plan as described, and complete the evaluation of the Bids and submission of the CAT NMS Plan as required by Rule 613.184

-
pubdate: February 26, 2015 effdate: N/A -

Exhibit A

- Topic: SEC Release, Release No. 34-74223, Joint Industry Plan; Notice of Amendment, Description of the Plan +
pubdate: March 13, 2014 effdate: N/A +

VI. Conclusion

+ Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan Compliance User: Self-Regulatory Organization Keywords: - Proposed Amendments, + Exchange Act - Section 11(A), + File No. 4-668, + Effectivity of Plan, -

Proposed new language is italicized; proposed deletions are in [brackets].

-

PROPOSED AMENDMENT TEXT

-

Plan Processor Evaluation and Selection Plan

-

I. Definitions

-

* * * * *

-

(X) “Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section VI(B) and, if applicable, pursuant to Section VI(C)(3) of the Plan.

-

* * * * *

-

III. Operating Committee

-

* * * * *

-

(E) Conflicts and Recusals

-

A Participant may recuse itself from voting on any matter under consideration by the Operating Committee if the Participant determines that voting on such matter raises a conflict of interest. Except as provided in Sections V(B)(2), and V(B)(3), and V(B)(4) of the Plan, no Participant is automatically recused from voting on any matter.

-

* * * * *

-

V. Selection Committee

-

* * * * *

-

(B) Voting

-

* * * * *

-

(2) No Bidding Participant shall vote on whether a Shortlisted Bidder will be permitted to revise its Bid pursuant to Section VI(C)(2) or Section VI(D)(1) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

-

(3) No Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders as set forth in Section VI(C)(3) if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

-

(4) No Bidding Participant shall vote in the second round set forth in Section VI(E)(4) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is part of the second round.

-

(5) All votes by the Selection Committee shall be confidential and non-public. All such votes will be tabulated by an independent third party approved by the Operating Committee, and a Participant's individual votes will not be disclosed to other Participants or to the public.

-

* * * * *

-

VI. RFP Bid Evaluation and Plan Processor Selection

-

* * * * *

-

(C) Formulation of the CAT NMS Plan

-

(1) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the consolidated audit trail and provide descriptions of such proposed solutions for inclusion in the CAT NMS Plan. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

-

(2) Prior to the approval of the CAT NMS Plan, all Shortlisted Bidders will be permitted to revise their Bids one or more times if the Selection Committee determines, by majority vote, that such revision(s) are necessary or appropriate.

-

(3) Prior to approval of the CAT NMS Plan, and either before or after any revisions to Shortlisted Bids are accepted, the Selection Committee may determine, by at least a two-thirds vote, to narrow the number of Shortlisted Bids to three Bids, in accordance with the process in this Paragraph (C)(3).

-

(a) Each Voting Senior Officer shall select a first, second, and third choice from among the Shortlisted Bids.

-

(b) A weighted score shall be assigned to each choice as follows:

-

• First—3 points

-

• Second—2 points

-

• Third—1 point

-

(c) The three Shortlisted Bids receiving the highest cumulative scores will be the new set of Shortlisted Bids.

-

(d) In the event of a tie that would result in more than three final Shortlisted Bids, the votes shall be recounted, omitting each Voting Senior Officer’s third choice, in order to break the tie. If this recount produces a tie that would result in a number of final Shortlisted Bids larger than or equal to that from the initial count, the results of the initial count shall constitute the final set of Shortlisted Bids.

-

(e) To the extent there are Non-SRO Bids that are Shortlisted Bids, the final Shortlisted Bids selected pursuant to this Section VI(C)(3) must, if possible, include at least one Non-SRO Bid. If following the vote set forth in this Section VI(C)(3), no Non-SRO Bid was selected as a final Shortlisted Bid, the Non-SRO Bid receiving the highest cumulative votes shall be retained as a Shortlisted Bid.

-

(f) The third party tabulating votes, as specified in Section V(B)(5), shall identify to the Selection Committee the new set of Shortlisted Bids, but shall keep confidential the individual scores and rankings of the Shortlisted Bids from the process in this Paragraph (C)(3).

-

(4) The Participants shall incorporate information on optimal proposed solutions in the CAT NMS Plan, including cost-benefit information as required by SEC Rule 613.

+

IT IS THEREFORE ORDERED, pursuant to Sections 11A of the Act,185 and the rules thereunder, that the Plan (File No. 4-668) is approved and declared effective, and the Participants are authorized to act jointly to implement the Plan as a means of facilitating a national market system.

+

By the Commission.

+

Kevin M. O’Neill

+

Deputy Secretary


fn

1 15 U.S.C. 78k-1.

fn -

2 17 CFR 242.608.

+

2 17 CFR 242.608.

-
fn -

3 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012).

+
fn +

3 See letter to Elizabeth M. Murphy, Secretary, Commission, from the SROs dated August 23, 2013 (“Submission Letter”).

fn -

4 Pursuant to Section I(C) of the Selection NMS Plan, a “Bid” is a proposal submitted by a Bidder in response to the RFP.

+

4 Id. at 1.

fn -

5 See Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013)(Notice of Selection NMS Plan).

-
-
fn -

6 Id.

+

5 See Securities Exchange Act Release No. 70892 (November 15, 2013), 78 FR 69910 (“Notice”).

-
fn -

7 See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014)(Approval Order).

+
fn +

6 See letters to Elizabeth M. Murphy, Secretary, Commission, from Marcia E. Asquith, Senior Vice President and Corporate Secretary, Financial Industry Regulatory Authority, Inc. (“FINRA”), dated December 20, 2013 (“FINRA Letter”); from Anonymous (“Anonymous 1”), dated December 23, 2013 (“Anonymous 1 Letter”); from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (“SIFMA”), dated December 23, 2013 (“SIFMA Letter”); from Manisha Kimmel, Executive Director, Financial Information Forum (“FIF”), dated December 23, 2013 (“FIF Letter”); Anonymous (“Anonymous 2”), dated December 23, 2013 (“Anonymous 2 Letter”) from Manisha Kimmel, Executive Director, FIF, dated January 24, 2014 (“FIF Letter II”).

+

FINRA notes that it has two roles with respect to the development of the consolidated audit trail: (1) a role as a Participant in developing the CAT NMS Plan (as defined below) (“SRO Side”) and (2) a role as an entity that has submitted an intent to submit a Bid (as defined below) in response to the RFP (as defined below) (“Bid Side”). FINRA notes that it has implemented a communications firewall between the SRO Side and the Bid Side, including policies and procedures designed to prevent the members of the SRO Side and the Bid Side from communicating with one another about non-public matters involving the consolidated audit trail. The FINRA Letter was submitted by the Bid Side. See FINRA Letter at 1.

+

Copies of all comments received on the proposed Plan are available on the Commission’s website, located at http://www.sec.gov/comments/4-668/4-668.shtml. Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. ET.

-
fn -

8 See 17 CFR 242.608(a)(4) and (a)(5).

+
fn +

7 See letter to Elizabeth M. Murphy, Secretary, Commission, from the Participants, dated January 31, 2014 (“Response Letter”).

fn -

9 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated December 12, 2014.

+

8 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2013) (“Adopting Release”).

+
+
fn +

9 See Rule 613(a)(1)(i)-(xii).

+
+
fn +

10 See Rule 613(a)(1)(vii); Rule 613(a)(1)(xii).

+
+
fn +

11 See Rule 613(a)(1)(viii).

+
+
fn +

12 See Adopting Release, supra note 8, at 45725.

fn -

10 See 78 FR 69910 at 69917.

+

13 See Submission Letter, supra note 3, at 3.

fn -

11 Id.

+

14 Since that time, 13 firms—including two Participants and one Affiliate of a Participant—have formally notified the Participants that they will not submit bids as primary bidders. A list of firms that submitted an intent to bid is located on the Participants’ website at www.catnmsplan.com (“CAT NMS Plan Website”). According to the Plan, “[a]n ‘Affiliate’ of an entity means any entity controlling, controlled by, or under common control with such entity.” See Section I(A) of the Plan.

+
+
fn +

15 See Section I(C) of the Plan.

+
+
fn +

16 See Submission Letter, supra note 3, at 4.

+
+
fn +

17 Section I sets forth the definitions used throughout the Plan, and Section II lists the Participants and establishes the requirements for admission of new, or withdrawal of existing, Participants. Each currently approved national securities exchange and national securities association subject to Rule 613(a)(1) is a Participant in the Plan. Section II(B) of the Plan provides that any entity approved by the Commission as a national securities exchange or national securities association under the Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new Participant’s name in Section II of the Plan) and submitting such amendment to the Commission for approval; and (2) providing each then-current Participant with a copy of such executed Plan.

+
+
fn +

18 See Notice, supra note 5, at 69911.

+
+
fn +

19 Id.

+
+
fn +

20 Id.

+
+
fn +

21 Section IV of the Plan governs amendments to the Plan. In general, except with respect to the addition of new Participants, any change to the Plan requires a written amendment that sets forth the change, is executed by over two-thirds of the Participants, and is approved by the Commission pursuant to Rule 608 of the Act or otherwise becomes effective under Rule 608.

+
+
fn +

22 Initial steps in the evaluation and selection process will be performed pursuant to the Plan; the final two rounds of evaluation and voting, as well as the final selection of the Plan Processor, will be performed pursuant to the CAT NMS Plan. The sections of the CAT NMS Plan governing these final two voting rounds are set forth in Sections VI(D) and (E) of the Plan and will be incorporated into the CAT NMS Plan. The Participants believe it is essential that the entire process be laid out in the Plan so that the Commission can consider and approve the entire evaluation and selection process, even though the final two voting rounds, including the selection of the Plan Processor, will not be conducted until after the approval of the CAT NMS Plan. See Submission Letter, supra note 3, at 4.

+
+
fn +

23 In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants.

+
+
fn +

24 The Plan defines a “Bidding Participant” broadly to include any Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Section I(E) of the Plan. A “Material Subcontractor” is “any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year.” See Section I(J) of the Plan. The Plan provides that “[a]n entity will not be considered a ‘Material Subcontractor’ solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.” See id.

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25 See Notice, supra note 5, at 69912. As described below, even with the independence criteria in place, the Plan also requires recusal by the Voting Senior Officer from certain votes.

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26 See Section V(C)(1) of the Plan.

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27 See Section V(B)(4) of the Plan.

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28 Id.

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29 See Notice, supra note 5, at 69912.

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30 The Participants anticipate that Bids must be submitted four weeks after the Commission approves the Plan. See id.

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fn +

31 The Plan defines a Qualified Bid as “a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee.” See Section I(Q) of the Plan. The Plan provides that, “[w]hen evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment.” See id.

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32 See Notice, supra note 5, at 69912.

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33 See Section VI(B)(1) of the Plan.

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34 See Section VI(B)(2) of the Plan.

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35 See id.

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36 See Sections VI(B)(3)-(4) of the Plan. The Plan provides that, if there is an odd number of Qualified Bids, the number of Shortlisted Bids to be chosen will be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, seven Shortlisted Bids will be selected). See Section VI(B)(4) of the Plan. In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids. See Section VI(B)(3)(c) of the Plan.

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37 See Section VI(B)(3) of the Plan.

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38 Id. The Plan defines a “Non-SRO Bid” as “a Bid that does not include a Bidding Participant.” See Section I(L) of the Plan.

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39 See Notice, supra note 5, at 69912-13

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40 See Section VI(B)(3)(d) of the Plan.

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41 Id.

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42 See Notice, supra note 5, at 69912.

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43 See Submission Letter, supra note 3, at 7; Section VI(D) of the Plan.

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44 See Section IV(D)(1) of the Plan.

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45 See Notice, supra note 5, at 69913. See Section V(B)(2) of the Plan.

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46 See Section VI(E)(3) of the Plan. Each round of voting throughout the Plan is independent of other rounds.

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47 Id.

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48 See Section VI(E)(4)(b) of the Plan.

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49 See Section V(B)(2) of the Plan.

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50 See Section VI(E)(4)(c) of the Plan.

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51 See Notice, supra note 5, at 69913.

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52 Id.

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53 See supra note 6.

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54 See FINRA Letter at 1; SIFMA Letter at 1; FIF Letter at 1.

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55 See FINRA Letter at 1-2; Anonymous 1 Letter at 1; SIFMA Letter at 1; FIF Letter at 1-2; Anonymous 2 Letter at 1; FIF Letter II at 2-3.

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fn +

56 See Response Letter, supra, note 7.

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fn +

57 See Sections II and VI(D)(2) of the Plan.

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fn +

58 See SIFMA Letter; FINRA Letter; and FIF Letter.

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fn +

59 See SIFMA Letter at 1.

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fn +

60 Id. at 2-4.

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61 Id. at 3.

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fn +

62 Id. at 4-5. In particular, the commenter suggests that the Plan should require the SROs: (1) to document and provide the Advisory Committee with a written statement, explaining the reasons for any SRO rejection of a written recommendation submitted by the committee; and (2) to prepare agendas for meetings and provide documents to be discussed at the meetings in advance to give committee members sufficient time to analyze information and formulate views. Id.

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63 See FINRA Letter at 4. The commenter requests clarification on whether members of the Advisory Committee would be required to sign a non-disclosure agreement (“NDA”) if they are given access to confidential information as part of any consultation with the Selection Committee. Id. at 3-4.

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fn +

64 See FIF Letter at 4.

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fn +

65 See Response Letter, supra note 7, at 2-4.

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fn +

66 Id. The SROs, however, note that the creation of the Advisory Committee that is required by Rule 613(b)(7) (“Rule 613 Advisory Committee”) is not germane to the Plan. The SROs state that the requirement in Rule 613(b)(7) is that the CAT NMS Plan establish an Advisory Committee to advise the SROs on the implementation, operation and administration of the consolidated audit trail. The SROs then state that the Rule 613 Advisory Committee will be established in the CAT NMS Plan, and that the CAT NMS Plan will provide specifics as to the role of the Rule 613 Advisory Committee in the process of reviewing and evaluating Bids. Id. at 2.

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67 Id. at 2-4. The SROs also note their previous engagement with industry through posting industry questions on the CAT NMS Plan Website and conducting open meetings. Id. at n.5.

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68 Id. at 2.

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69 Id. at 3. The SROs note that this information sharing will occur only after executed NDAs are in place with the appropriate industry members. Id. at n. 7.

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70 Id. at 3.

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71 Id.

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72 See FINRA Letter at 1-2; SIFMA Letter at 1-3; FIF Letter at 2-3; FIF Letter II at 2.

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73 See SIFMA Letter at 3.

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74 Id. at 2.

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75 Id.

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76 See FIF Letter at 2-3; and FIF Letter II at 2-3.

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77 See FIF Letter II at 3.

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78 See FIF Letter at 3.

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79 See FIF Letter II at 2-3.

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80 Id. at 2.

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81 See FIF Letter II at 3.

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82 Id.

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83 See Response Letter, supra note 7, at 9.

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84 Id.

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85 Id.

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86 Id.

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87 Id. at 8.

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88 Id.

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89 Id.

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90 See FINRA Letter at 2; SIFMA Letter at 3; FIF Letter at 2.

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91 See FIF Letter at 2.

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92 Id.

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93 See FINRA Letter at 2.

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94 See SIFMA Letter at 3.

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95 See Response Letter, supra note 7, at 4.

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fn +

96 Id. at 4-5.

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97 Id. at 5.

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98 Id. at 9.

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99 Id.

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100 See FIF Letter at 2.

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101 See Response Letter, supra note 7, at 10.

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+
fn +

102 Id.

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103 Id.

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104 Id.

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fn +

105 Id. The SROs state, however, that consistent with standard industry practices, the SROs will not share the minutes with the industry as a whole. Id.

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106 See FIF Letter at 2.

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107 Id.

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108 See Response Letter, supra note 7, at 8.

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fn +

109 Id.

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110 Id. at 4.

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111 See Anonymous 1 Letter at 1; Anonymous 2 Letter at 1.

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112 See Anonymous 1 Letter at 1.

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+
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113 Id.

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114 Id.

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115 See Anonymous 2 Letter at 1. The commenter has submitted an intent to bid on the RFP. Id.

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116 See Response Letter, supra note 7, at 7.

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+
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117 Id.

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118 Id.

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119 Id.

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120 Id.

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121 See FINRA Letter at 4.

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122 Id.

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123 See Response Letter, supra note 7, at 10-11.

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124 See FINRA Letter at 2-3.

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125 Id at 3.

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126 Id at 3.

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127 Id.

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128 See FIF Letter at 4.

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129 See Response Letter, supra note 7, at 6.

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+
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130 Id.

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131 Id.

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132 Id.

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133 Id.

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134 Id.

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135 Id.

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136 See Anonymous 2 Letter at 1; FIF Letter at 5.

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137 See Anonymous 2 Letter at 1.

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138 Id.

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139 Id.

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140 See FIF Letter at 5.

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141 Id.

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142 See Response Letter, supra note 7, at 11-12.

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+
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143 Id. at 12. Any such changes to the due date will be communicated to Bidders as soon as such a decision is made. Id.

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144 Id. at 11.

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145 Id.

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146 See FIF Letter at 2.

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147 Id.

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148 Id.

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149 Id.

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150 See Response Letter, supra note 7, at 7.

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151 Id. at 7-8.

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152 See FINRA Letter at 4.

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153 Id.

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154 Id at 4-5.

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155 See FIF Letter II at 2.

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156 Id.

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157 See Response Letter, supra note 7, at 8.

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158 Id. at 9.

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159 Id. at 9.

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160 Id.

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161 Id.

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162 15 U.S.C. 78k-1(a)(3)(B).

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163 17 CFR 242.608. In approving this Plan, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

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+
fn +

164 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k-1(a).

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165 See SIFMA Letter at 1-5; FINRA Letter at 4; and FIF Letter at 4.

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166 See Response Letter, supra note 7, at 2-4.

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167 Id.

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168 See FINRA Letter at 1-2; SIFMA Letter at 1-3; FIF Letter at 2-3.

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169 See Response Letter, supra note 7, at 4-5.

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170 Id. at 9-10. The Commission further notes that keeping voting information non-public can help address conflicts of interest by limiting the ability of outsiders to observe and reward certain voting behavior.

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171 See Anonymous 1 Letter at 1; Anonymous 2 Letter at 1.

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172 See Response Letter, supra note 7, at 7.

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173 See FIF Letter at 4; FINRA Letter at 2-3.

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174 See Response Letter, supra note 7, at 6.

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175 See Anonymous 2 Letter at 1.

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176 See Response Letter, supra note 7, at 11-12.

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177 See FIF Letter at 5.

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178 See Response Letter, supra note 7, at 11.

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179 Id.

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180 See FIF Letter at 2.

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181 See Response Letter, supra note 7, at 7.

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182 See FINRA Letter at 4-5.

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183 See Response Letter, supra note 7, at 9.

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fn -

12 Id. at 69917-18.

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184 Rule 613(a)(1) required the SROs to file the CAT NMS Plan 270 days from the date of publication of the Adopting Release in the Federal Register. See 17 CFR 242.613(a)(1). The Adopting Released was published on August 1, 2012, thus establishing April 28, 2013 as the initial deadline for the submission of the CAT NMS Plan. See Adopting Release, supra note 8. Since April 28, 2013, was a Sunday, in accordance with Rule 160(a) of the Commission’s Rules of Practice, the deadline for filing the CAT NMS plan was Monday, April 29, 2013. On March 7, 2013, the Commission granted a request from the SROs for a temporary exemption from this deadline until December 6, 2013. See Securities Exchange Act Release No. 69060, 78 FR 15771 (March 12, 2013); and letter to Elizabeth M. Murphy, Secretary, Commission, from Robert L.D. Colby, Executive Vice President and Chief Legal Officer, FINRA, dated February 7, 2013. On December 6, 2013, the Commission granted a second request from the SROs for a temporary exemption from the new deadline until September 30, 2014. See Securities Exchange Act Release No. 71018, 78 FR 75669 (December 12, 2013); and letter to Elizabeth M. Murphy, Secretary, Commission, from Robert L.D. Colby, Executive Vice President and Chief Legal Officer, FINRA, dated November 7, 2013.

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fn -

13 17 CFR 242.608.

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185 15 U.S.C. 78k-1.

\ No newline at end of file diff --git a/spider/files/data000017.html b/spider/files/data000017.html index 08549c0..20d7e29 100644 --- a/spider/files/data000017.html +++ b/spider/files/data000017.html @@ -1,572 +1,14666 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Joint Industry Plan (Notice of Plan Amendment No. 2 Release 34-75193) - document_type: Notices - source: US/SEC/Notices/Notice of Plan Amendment - source_type: Notice of Plan Amendment + document_title: Order Approving the Consolidated Audit Trail Plan Release 34-79318 + document_type: Orders + source: US/SEC/Orders/Order Approving the Consolidated Audit Trail Plan + source_type: Order Approving the Consolidated Audit Trail Plan language: English - citation: Notice of Plan Amendment No. 2 Release 34-75193 -
pubdate: June 17, 2015 effdate: N/A -

Joint Industry Plan (Notice of Plan Amendment No. 2 Release 34-75193)

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment + citation: Release 34-79318 +
pubdate: November 15, 2016 effdate: N/A +

Order Approving the Consolidated Audit Trail Plan Release 34-79318

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318 Compliance User: Self-Regulatory Organization - Keywords: - Joint Industry Plan, - Selection Plan, - -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-75193; File No. 4-668)

-

June 17, 2015

-

Joint Industry Plan; Notice of Filing of Amendment No. 2 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

-
pubdate: June 18, 2015 effdate: N/A + Keywords: +

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-79318; File No. 4-698)

+

November 15, 2016

+

Joint Industry Plan; Order Approving the National Market System Plan Governing the Consolidated Audit Trail

+

Supplementary Information

+
pubdate: November 15, 2016 effdate: N/A

I. Introduction

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Introduction + Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Introduction Compliance User: Self-Regulatory Organization Keywords: - Section 11A of Securities Exchange Act, + Section 11A of the Securities Exchange Act of 1934, SRO, - Selection Plan, + CAT NMS plan, -

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 Thereunder,2 notice is hereby given that, on March 6, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”), filed with the Securities and Exchange Commission (the “Commission”) a proposal to amend the Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”).

+

On February 27, 2015, pursuant to Section 11A of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”)1 and Rules 608 and 613 of Regulation NMS thereunder,2 BATS Exchange, Inc. (n/k/a Bats BZX Exchange, Inc.), BATS-Y Exchange, Inc. (n/k/a Bats BYX Exchange, Inc.), BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc. (n/k/a Bats EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Bats EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc. (“FINRA”), International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “self-regulatory organizations”, “SROs” or “Participants”), filed with the Securities and Exchange Commission (“Commission” or “SEC”) a National Market System (“NMS”) Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan,” “CAT Plan” or “Plan”).3 The SROs filed amendments to the CAT NMS Plan on December 24, 2015, and on February 8, 2016.4 The CAT NMS Plan, as amended, was published for comment in the Federal Register on May 17, 2016.5

+

The Commission received 24 comment letters in response to the CAT NMS Plan.6 On July 29, 2016, the Commission extended the deadline for Commission action on the CAT NMS Plan and designated November 10, 2016 as the new date by which the Commission would be required to take action.7 On September 2, 2016, the Participants submitted a response to the comment letters that the Commission received in response to the CAT NMS Plan.8 The Participants submitted additional response letters on September 23, 2016 and October 7, 2016.9 On November 2 and 14, 2016, the Participants submitted additional letters.10 This Order approves the CAT NMS Plan, with limited changes as described in detail below. The Commission concludes that the Plan, as amended, is necessary and appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act. A copy of the CAT NMS Plan, as adopted, is attached as Exhibit A hereto.

-
pubdate: June 19, 2015 effdate: N/A +
pubdate: November 15, 2016 effdate: N/A

II. Background

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Background + Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Background Compliance User: Self-Regulatory Organization Keywords: + Rule 613 of Regulation NMS, SRO, + CAT NMS plan, + Plan Processor, + Central Repository, + Shortlisted Bidders, Selection Plan, + +

The Commission believes that the regulatory data infrastructure on which the SROs and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system. In performing their oversight responsibilities, regulators today must attempt to pull together disparate data from a variety of existing information systems lacking in completeness, accuracy, accessibility, and/or timeliness11—a model that neither supports the efficient aggregation of data from multiple trading venues nor yields the type of complete and accurate market activity data needed for robust market oversight.

+

Currently, FINRA and the exchanges maintain their own separate audit trail systems for trading activity, which vary in scope, required data elements and format. In performing their market oversight responsibilities, SRO and Commission Staffs must rely heavily on data from these various SRO audit trails. However, each of these systems has shortcomings in completeness, accuracy, accessibility, or timeliness. Some of these shortcomings are a result of the disparate nature of the systems, which makes it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, re-routed, and disaggregated across multiple markets. These systems also lack key information useful for regulatory oversight, such as the identity of the customers who originate orders, or that two sets of orders may have been originated by the same customer.12 Although SRO and Commission Staffs also have access to sources of market activity data other than SRO audit trails, these sources likewise suffer from their own drawbacks.13

+

Recognizing these shortcomings, on July 11, 2012, the Commission adopted Rule 613 of Regulation NMS under the Act,14 which requires the SROs to submit an NMS plan to create, implement, and maintain a consolidated audit trail (“CAT”) that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single, consolidated data source.15 Specifically, Rule 613 requires the Participants to “jointly file … a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and Central Repository.”16 The purpose of the Plan, and the creation, implementation and maintenance of a comprehensive audit trail for the U.S. securities markets described therein, is to “substantially enhance the ability of the SROs and the Commission to oversee today’s securities markets and fulfill their responsibilities under the federal securities laws.”17 As contemplated by Rule 613, the CAT “will allow for the prompt and accurate recording of material information about all orders in NMS securities, including the identity of customers, as these orders are generated and then routed throughout the U.S. markets until execution, cancellation, or modification. This information will be consolidated and made readily available to regulators in a uniform electronic format.”18

+

The SROs filed the CAT NMS Plan pursuant to Rule 613,19 as modified by exemptive relief granted by the Commission, pursuant to Rule 0-12 under the Act,20 from certain requirements of Rule 613.21

+

The CAT NMS Plan filed by the SROs incorporates the SROs’ NMS plan approval process for reviewing, evaluating and ultimately selecting the Plan Processor,22 as set forth in a separate NMS plan submitted by the SROs and approved by the Commission (the “Selection Plan”).23 On February 26, 2013, the Participants published a request for proposal (“RFP”) soliciting Bids from parties interested in serving as the Plan Processor.24 As of the publication date of this Order, the Participants, through the process described in the Selection Plan, have narrowed the pool of Bidders to three remaining Shortlisted Bidders.25

+

The CAT NMS Plan also includes an economic analysis that, as required by Rule 613, was conducted by the SROs. The Commission notes that, in the Adopting Release for Rule 613, the Commission considered the economic effects of the actions the SROs were required to undertake pursuant to Rule 613, specifically the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research, that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.26 The Commission noted in the Adopting Release that Rule 613 provided the SROs with “flexibility in how they [chose] to meet the requirements of the adopted Rule,”27 allowing the SROs to consider a number of different approaches in developing the CAT NMS Plan. The Commission also noted that “the costs and benefits of creating a consolidated audit trail, and the consideration of specific costs as related to specific benefits, is more appropriately analyzed once the SROs narrow the expanded array of choices they have under the adopted Rule and develop a detailed NMS plan.”28 Accordingly, the Commission required the SROs to conduct an economic analysis and deferred the Commission’s own economic analysis of the actual creation, implementation, and maintenance of the CAT until after submission of the required NMS plan. In accordance with this approach, the Commission included its preliminary analysis and conclusions regarding the economic effects of the CAT NMS Plan when it published the CAT NMS Plan for public comment.

+
+
pubdate: November 15, 2016 effdate: N/A +

III. Description of the Proposed Plan

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan + Compliance User: Self-Regulatory Organization + Keywords: CAT NMS plan, + Exemption Order, -

On September 3, 2013, the SROs filed for approval the Selection Plan3 to govern how the SROs would proceed with formulating and submitting a national market system (“NMS”) plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).4 The Selection Plan sets forth the process for the SROs to review, evaluate, and narrow down the Bids submitted in response to the SROs’ request for proposals (“RFP”) for a Plan Processor to build, operate, administer, and maintain the consolidated audit trail, and ultimately for the SROs to select the Plan Processor.5 The Selection Plan was approved on February 21, 2014.6

-

The SROs now propose to amend the Selection Plan to require an SRO that is a Bidding Participant7 to be recused from voting in any round by the Selection Committee to select the Plan Processor in which a Bid from or including such Bidding Participant or its Affiliate is being considered. A copy of the proposed amendment to the Selection Plan (“Amendment No. 2”) is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments from interested persons on proposed Amendment No. 2 to the Selection Plan.

+

The Commission notes that this Section III describes the CAT NMS Plan, as filed by the Participants pursuant to Rule 613 and modified by the Exemption Order,29 that was published for public comment by the Commission.30 Section IV, below, discusses the comments received as well as amendments that the Commission is making to the Plan in light of some of the comments; these amendments are marked against the proposed Plan in Exhibit A to this Order.

+
pubdate: November 15, 2016 effdate: N/A +

1. LLC Agreement

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, LLC Agreement + Compliance User: Self-Regulatory Organization + Keywords: + Limited Liability Company Agreement, + Rule 600(b)(43) of NMS, + +

The Participants propose to conduct the activities related to the CAT in a Delaware limited liability company pursuant to a limited liability company agreement, entitled the Limited Liability Company Agreement (“LLC Agreement”) of CAT NMS, LLC (“Company” or “CAT LLC”).31 The Participants will jointly own on an equal basis the Company.32 The Company will create, implement and maintain the CAT.33 The LLC Agreement, itself, including its appendices, is the proposed Plan, which would be a national market system plan as defined in Rule 600(b)(43) of NMS.34

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pubdate: November 15, 2016 effdate: N/A +

2. Participants

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Participants + Compliance User: Self-Regulatory Organization + Keywords: + Participant of the Plan, + Majority Vote, + Operating Committee, + Initial Plan Processor, + Plan Processor, + GAAP, + Section 11A(b)(5) of the Exchange Act, + Application for Limited Access, + CAT NMS plan, + CAT System, + Participant of the Plan, + Permitted Transferee, + Permitted Legal basis, + Form X-15AA-1 Application, + Participant’s Capital Account, + Payment Date, + +

Each national securities exchange and national securities association currently registered with the Commission would be a Participant in the Plan.35 The names and addresses of each Participant are set forth in Exhibit A to the Plan.36 Article III of the Plan provides that any entity approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the Effective Date may become a Participant by submitting to the Company a completed application in the form provided by the Company and satisfying each of the following requirements: (1) executing a counterpart of the LLC Agreement as then in effect; and (2) paying a fee to the Company in an amount determined by a Majority Vote37 of the Operating Committee as fairly and reasonably compensating the Company and the Participants for costs incurred in creating, implementing and maintaining the CAT (including such costs incurred in evaluating and selecting the Initial Plan Processor38 and any subsequent Plan Processor) and for costs the Company incurs in providing for the prospective Participant’s participation in the Company, including after consideration of certain factors identified in Section 3.3(b) of the Agreement (“Participation Fee”).39 Amendment of the Plan reflecting the admission of a new Participant will be effective only when: (1) it is approved by the SEC in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608; and (2) the prospective Participant pays the Participation Fee.40

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A number of factors are relevant to the determination of a Participation Fee.41 Such factors are: (1) the portion of costs previously paid by the Company for the development, expansion and maintenance of the CAT which, under generally accepted accounting principles (“GAAP”), would have been treated as capital expenditures and would have been amortized over the five years preceding the admission of the prospective Participant; (2) an assessment of costs incurred and to be incurred by the Company for modifying the CAT or any part thereof to accommodate the prospective Participant, which costs are not otherwise required to be paid or reimbursed by the prospective Participant; (3) Participation Fees paid by other Participants admitted as such after the Effective Date; (4) elapsed time from the Effective Date to the anticipated date of admittance of the prospective Participant; and (5) such other factors, if any, as may be determined to be appropriate by the Operating Committee and approved by the Commission.42 In the event that the Company and a prospective Participant do not agree on the amount of the Participation Fee, such amount will be subject to review by the SEC pursuant to Section 11A(b)(5) of the Exchange Act.43

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An applicant for participation in the Company may apply for limited access to the CAT System44 for planning and testing purposes pending its admission as a Participant by submitting to the Company a completed Application for Limited Access to the CAT System in a form provided by the Company, accompanied by payment of a deposit in the amount established by the Company, which will be applied or refunded as described in such application.45 To be eligible to apply for such limited access, the applicant must have been approved by the SEC as a national securities exchange or national securities association under the Exchange Act but the applicant has not yet become a Participant of the Plan, or the SEC must have published such applicant’s Form 1 Application or Form X-15AA-1 Application to become a national securities exchange or a national securities association, respectively.46

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All Company Interests will have the same rights, powers, preferences and privileges and be subject to the same restrictions, qualifications and limitations.47 Once admitted, each Participant will be entitled to one vote on any matter presented to Participants for their consideration and to participate equally in any distribution made by the Company (other than a distribution made pursuant to Section 10.2 of the Plan).48 Each Participant will have a Company Interest equal to that of each other Participant.49

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Article III also describes a Participant’s ability to Transfer a Company Interest. A Participant may only Transfer any Company Interest to a national securities exchange or national securities association that succeeds to the business of such Participant as a result of a merger or consolidation with such Participant or the Transfer of all or substantially all of the assets or equity of such Participant (“Permitted Transferee”).50 A Participant may not Transfer any Company Interest to a Permitted Transferee unless: (1) such Permitted Transferee executes a counterpart of the Plan; and (2) the amendment to the Plan reflecting the Transfer is approved by the SEC in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608.51

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In addition, Article III addresses the voluntary resignation and termination of participation in the Plan. Any Participant may voluntarily resign from the Company, and thereby withdraw from and terminate its right to any Company Interest, only if: (1) a Permitted Legal Basis52 for such action exists; and (2) such Participant provides to the Company and each other Participant no less than thirty days prior to the effective date of such action written notice specifying such Permitted Legal Basis, including appropriate documentation evidencing the existence of such Permitted Legal Basis, and, to the extent applicable, evidence reasonably satisfactory to the Company and other Participants that any orders or approvals required from the SEC in connection with such action have been obtained.53 A validly withdrawing Participant will have the rights and obligations discussed below with regard to termination of participation.54

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A Participant’s participation in the Company, and its right to any Company Interest, will terminate as of the earliest of: (1) the effective date specified in a valid resignation notice; (2) such time as such Participant is no longer registered as a national securities exchange or national securities association; or (3) the date of termination for failure to pay fees.55 With regard to the payment of fees, each Participant is required to pay all fees or other amounts required to be paid under the Plan within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated) (the “Payment Date”).56 If a Participant fails to make such a required payment by the Payment Date, any balance in the Participant’s Capital Account will be applied to the outstanding balance.57 If a balance still remains with respect to any such required payment, the Participant will pay interest on the outstanding balance from the Payment Date until such fee or amount is paid at a per annum rate equal to the lesser of: (1) the Prime Rate plus 300 basis points; or (2) the maximum rate permitted by applicable law.58 If any such remaining outstanding balance is not paid within thirty days after the Payment Date, the Participants will file an amendment to the Plan requesting the termination of the participation in the Company of such Participant, and its right to any Company Interest, with the SEC.59 Such amendment will be effective only when it is approved by the SEC in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608.60

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From and after the effective date of termination of a Participant’s participation in the Company, profits and losses of the Company will cease to be allocated to the Capital Account of the Participant.61 A terminated Participant will be entitled to receive the balance in its Capital Account as of the effective date of termination adjusted for profits and losses through that date, payable within ninety days of the effective date of termination, and will remain liable for its proportionate share of costs and expenses allocated to it for the period during which it was a Participant, for obligations under Section 3.8(c) regarding the return of amounts previously distributed (if required by a court of competent jurisdiction), for its indemnification obligations pursuant to Section 4.1, and for obligations under Section 9.6 regarding confidentiality, but it will have no other obligations under the Plan following the effective date of termination.62 The Plan will be amended to reflect any termination of participation in the Company of a Participant, provided that such amendment will be effective only when it is approved by the SEC in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608.63

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pubdate: November 15, 2016 effdate: N/A +

3. Management

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Management + Compliance User: Self-Regulatory Organization + Keywords: + Operating Committee, + CAT NMS plan, + Plan Processor, + Majority Vote, + Chief Information Security Officer, + Material Contract, + Material Systems Change, + Technical Specifications, + Executive Session, + CAT NMS plan, + Section 3(a)(39) of the Exchange Act, + +

Article IV of the Plan establishes the overall governance structure for the management of the Company. Specifically, the Participants propose that the Company be managed by an Operating Committee.64

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The Operating Committee will consist of one voting member representing each Participant and one alternate voting member representing each Participant who will have a right to vote only in the absence of the Participant’s voting member of the Operating Committee.65 Each of the voting and alternate voting members of the Operating Committee will be appointed by the Participant that he or she represents, will serve at the will of the Participant appointing such member and will be subject to the confidentiality obligations of the Participant that he or she represents as set forth in Section 9.6.66 One individual may serve as the voting member of the Operating Committee for multiple Affiliated Participants, and such individual will have the right to vote on behalf of each such Affiliated Participant.67

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The Operating Committee will elect, by Majority Vote, one of its members to act as Chair for a term of two years.68 No Person may serve as Chair for more than two successive full terms, and no Person then appointed to the Operating Committee by a Participant that then serves, or whose Affiliate then serves, as the Plan Processor will be eligible to serve as the Chair.69 The Chair will preside at all meetings of the Operating Committee, designate a Person to act as Secretary, and perform such other duties and possess such other powers as the Operating Committee may from time to time prescribe.70 The Chair will not be entitled to a tie-breaking vote at any meeting of the Operating Committee.71

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Each of the members of the Operating Committee, including the Chair, will be authorized to cast one vote for each Participant that he or she represents on all matters voted upon by the Operating Committee.72 Action of the Operating Committee will be authorized by Majority Vote (except under certain designated circumstances), subject to the approval of the SEC whenever such approval is required under the Exchange Act and the rules thereunder.73 For example, the Plan specifically notes that a Majority Vote of the Operating Committee is required to: (1) select the Chair; (2) select the members of the Advisory Committee (as described below); (3) interpret the Plan (unless otherwise noted therein); (4) approve any recommendation by the Chief Compliance Officer (“CCO”) pursuant to Section 6.2(a)(v)(A); (5) determine to hold an Executive Session of the Operating Committee; (6) determine the appropriate funding-related policies, procedures and practices consistent with Article XI; and (7) act upon any other matter specified elsewhere in the Plan (which includes the Appendices to the Plan) as requiring a vote, approval or other action of the Operating Committee (other than those matters expressly requiring a Supermajority Vote or a different vote of the Operating Committee).74

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Article IV requires a Supermajority Vote75 of the Operating Committee, subject to the approval of the SEC when required, for the following: (1) selecting a Plan Processor, other than the Initial Plan Processor selected in accordance with Article V of the Plan; (2) terminating the Plan Processor without cause in accordance with Section 6.1(q); (3) approving the Plan Processor’s appointment or removal of the Chief Information Security Officer (“CISO”), CCO, or any Independent Auditor in accordance with Section 6.1(b); (4) entering into, modifying or terminating any Material Contract (if the Material Contract is with a Participant or an Affiliate of a Participant, such Participant and Affiliated Participant will be recused from any vote); (5) making any Material Systems Change; (6) approving the initial Technical Specifications or any Material Amendment to the Technical Specifications proposed by the Plan Processor; (7) amending the Technical Specifications on its own motion; and (8) acting upon any other matter specified elsewhere in the Plan (which includes the Appendices to the Plan) as requiring a vote, approval or other action of the Operating Committee by a Supermajority Vote.76

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A member of the Operating Committee or any Subcommittee thereof (as discussed below) shall recuse himself or herself from voting on any matter under consideration by the Operating Committee or such Subcommittee if such member determines that voting on such matter raises a Conflict of Interest.77 In addition, if the members of the Operating Committee or any Subcommittee (excluding the member thereof proposed to be recused) determine by Supermajority Vote that any member voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall be recused from voting on such matter.78 No member of the Operating Committee or any Subcommittee will be automatically recused from voting on any matter except matters involving Material Contracts as discussed in the prior paragraph, as otherwise specified in the Plan, and as follows: (1) if a Participant is a Bidding Participant79 whose Bid remains under consideration, members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants will be recused from any vote concerning: (a) whether another Bidder may revise its Bid; (b) the selection of a Bidder; or (c) any contract to which such Participant or any of its Affiliates would be a party in its capacity as Plan Processor; and (2) if a Participant is then serving as Plan Processor, is an Affiliate of the Person then serving as Plan Processor, or is an Affiliate of an entity that is a Material Subcontractor to the Plan Processor, then in each case members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (a) the proposed removal of such Plan Processor; or (b) any contract between the Company and such Plan Processor.80

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Article IV also addresses meetings of the Operating Committee.81 Meetings of the Operating Committee may be attended by each Participant’s voting Representative and its alternate voting Representative and by a maximum of two nonvoting Representatives of each Participant, by members of the Advisory Committee, by the CCO, by other Representatives of the Company and the Plan Processor, by Representatives of the SEC and by such other Persons that the Operating Committee may invite to attend.82 The Operating Committee, however, may, where appropriate, determine to meet in Executive Session during which only voting members of the Operating Committee will be present.83 The Operating Committee, however, may invite other Representatives of the Participants, of the Company, of the Plan Processor (including the CCO and the CISO) or the SEC, or such other Persons that the Operating Committee may invite to attend, to be present during an Executive Session.84 Any determination of the Operating Committee to meet in an Executive Session will be made upon a Majority Vote and will be reflected in the minutes of the meeting.85 In addition, any Person that is not a Participant but for which the SEC has published a Form 1 Application or Form X-15AA-1 to become a national securities exchange or national securities association, respectively, will be permitted to appoint one primary Representative and one alternate Representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer, but will not be permitted to have any Representative attend a special meeting, emergency meeting or meeting held in Executive Session of the Operating Committee.86

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The Operating Committee may, by Majority Vote, designate by resolution one or more Subcommittees it deems necessary or desirable in furtherance of the management of the business and affairs of the Company.87 For any Subcommittee, any member of the Operating Committee who wants to serve thereon may so serve.88 If Affiliated Participants have collectively appointed one member to the Operating Committee to represent them, then such Affiliated Participants may have only that member serve on the Subcommittee or may decide not to have only that collectively appointed member serve on the Subcommittee.89 Such member may designate an individual other than himself or herself who is also an employee of the Participant or Affiliated Participants that appointed such member to serve on a Subcommittee in lieu of the particular member.90 Subject to the requirements of the Plan and non-waivable provisions of Delaware law, a Subcommittee may exercise all the powers and authority of the Operating Committee in the management of the business and affairs of the Company as so specified in the resolution of the Operating Committee designating such Subcommittee.91

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Article IV requires that the Operating Committee maintain a Compliance Subcommittee for the purpose of aiding the CCO as necessary, including with respect to issues involving: (1) the maintenance of the confidentiality of information submitted to the Plan Processor or Central Repository pursuant to Rule 613, applicable law, or the Plan by Participants and Industry Members; (2) the timeliness, accuracy, and completeness of information submitted pursuant to Rule 613, applicable law or the Plan by Participants and Industry Members; and (3) the manner and extent to which each Participant is meeting its obligations under Rule 613, Section 3.11, and as set forth elsewhere in the Plan and ensuring the consistency of the Plan’s enforcement as to all Participants.92

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Article IV also sets forth the requirements for the formation and functioning of an Advisory Committee, which will advise the Participants on the implementation, operation and administration of the Central Repository, including possible expansion of the Central Repository to other securities and other types of transactions.93

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Article IV describes the composition of the Advisory Committee. No member of the Advisory Committee may be employed by or affiliated with any Participant or any of its Affiliates or facilities.94 The Operating Committee will select one member from representatives of each of the following categories to serve on the Advisory Committee on behalf of himself or herself individually and not on behalf of the entity for which the individual is then currently employed: (1) a broker-dealer with no more than 150 Registered Persons; (2) a broker-dealer with at least 151 and no more than 499 Registered Persons; (3) a broker-dealer with 500 or more Registered Persons; (4) a broker-dealer with a substantial wholesale customer base; (5) a broker-dealer that is approved by a national securities exchange: (a) to effect transactions on an exchange as a specialist, market maker or floor broker; or (b) to act as an institutional broker on an exchange; (6) a proprietary-trading broker-dealer; (7) a clearing firm; (8) an individual who maintains a securities account with a registered broker or dealer but who otherwise has no material business relationship with a broker or dealer or with a Participant; (9) a member of academia with expertise in the securities industry or any other industry relevant to the operation of the CAT System; (10) an institutional investor trading on behalf of a public entity or entities; (11) an institutional investor trading on behalf of a private entity or entities; and (12) an individual with significant and reputable regulatory expertise.95 The individuals selected to represent categories (1) through (12) above must include, in the aggregate, representatives of no fewer than three broker-dealers that are active in the options business and representatives of no fewer than three broker-dealers that are active in the equities business.96 In addition, upon a change in employment of any such Advisory Committee member, a Majority Vote of the Operating Committee will be required for such member to be eligible to continue to serve on the Advisory Committee.97 Furthermore, the SEC’s Chief Technology Officer (or the individual then currently employed in a comparable position providing equivalent services) will serve as an observer of the Advisory Committee (but not be a member).98 The members of the Advisory Committee will have a term of three years.99

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Members of the Advisory Committee will have the right to attend meetings of the Operating Committee or any Subcommittee, to receive information concerning the operation of the Central Repository, and to submit their views to the Operating Committee or any Subcommittee on matters pursuant to the Plan prior to a decision by the Operating Committee on such matters.100 A member of the Advisory Committee will not have a right to vote on any matter considered by the Operating Committee or any Subcommittee.101 In addition, the Operating Committee or any Subcommittee may meet in Executive Session if the Operating Committee or Subcommittee determines by Majority Vote that such an Executive Session is advisable.102 The Operating Committee may solicit and consider views of other stakeholders on the operation of the Central Repository in addition to those of the Advisory Committee.103 Although members of the Advisory Committee will have the right to receive information concerning the operation of the Central Repository, the Operating Committee retains the authority to determine the scope and content of information supplied to the Advisory Committee, which will be limited to that information that is necessary and appropriate for the Advisory Committee to fulfill its functions.104 Any information received by members of the Advisory Committee will remain confidential unless otherwise specified by the Operating Committee.105

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Article IV also describes the appointment of Officers for the Company. Specifically, the CCO and the CISO, each of whom will be employed solely by the Plan Processor and neither of whom will be deemed or construed in any way to be an employee of the Company, will be Officers of the Company.106 Neither such Officer will receive or be entitled to any compensation from the Company or any Participant by virtue of his or her service in such capacity (other than if a Participant is then serving as the Plan Processor, compensation paid to such Officer as an employee of such Participant).107 Each such Officer will report directly to the Operating Committee.108 The CCO will work on a regular and frequent basis with the Compliance Subcommittee and/or other Subcommittees as may be determined by the Operating Committee.109 Except to the extent otherwise provided in the Plan, including Section 6.2, each such Officer will have such fiduciary and other duties with regard to the Plan Processor as imposed by the Plan Processor on such individual by virtue of his or her employment by the Plan Processor.110

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In addition, the Plan Processor will inform the Operating Committee of the individual who has direct management responsibility for the Plan Processor’s performance of its obligations with respect to the CAT.111 Subject to approval by the Operating Committee of such individual, the Operating Committee will appoint such individual as an Officer.112 In addition, the Operating Committee by Supermajority Vote may appoint other Officers as it shall from time to time deem necessary.113 Any Officer appointed pursuant to Section 4.6(b) will have only such duties and responsibilities as set forth in the Plan, or as the Operating Committee shall from time to time expressly determine.114 No such Officer shall have any authority to bind the Company (which authority is vested solely in the Operating Committee) or be an employee of the Company, unless in each case the Operating Committee, by Supermajority Vote, expressly determines otherwise.115 No person subject to a “statutory disqualification” (as defined in Section 3(a)(39) of the Exchange Act) may serve as an Officer.116 It is the intent of the Participants that the Company have no employees.117

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pubdate: November 15, 2016 effdate: N/A +

4. Initial Plan Processor Selection

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Initial Plan Processor Selection + Compliance User: Self-Regulatory Organization + Keywords: + Initial Plan Processor, + Selection Plan, + Shortlisted Bids, + Section 3(a)(39) of the Exchange Act, + CAT NMS plan, + Exemption Order, + +

Article V of the Plan sets forth the process for the Participants’ evaluation of Bids and the selection process for narrowing down the Bids and choosing the Initial Plan Processor.118 The initial steps in the evaluation and selection process were and will be performed pursuant to the Selection Plan; the final two rounds of evaluation and voting, as well as the final selection of the Initial Plan Processor, will be performed pursuant to the Plan.119

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As discussed above, the Selection Committee has selected the Shortlisted Bids pursuant to the Selection Plan. After reviewing the Shortlisted Bids, the Participants have identified the optimal proposed solutions for the CAT and, to the extent possible, included such solutions in the Plan.120 The Selection Committee will determine, by majority vote, whether Shortlisted Bidders will have the opportunity to revise their Bids.121 To reduce potential conflicts of interest, no Bidding Participant may vote on whether a Shortlisted Bidder will be permitted to revise its Bid if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.122 The Selection Committee will review and evaluate all Shortlisted Bids, including any permitted revisions submitted by Shortlisted Bidders.123 In performing this review and evaluation, the Selection Committee may consult with the Advisory Committee and such other Persons as the Selection Committee deems appropriate, which may include the DAG until the Advisory Committee is formed.124

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After receipt of any permitted revisions, the Selection Committee will select the Initial Plan Processor from the Shortlisted Bids in two rounds of voting where each Participant has one vote via its Voting Senior Officer in each round.125 No Bidding Participant, however, will be entitled to vote in any round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such round.126 In the first round, each Voting Senior Officer, subject to the recusal provision in Section 5.2(e)(ii), will select a first and second choice, with the first choice receiving two points and the second choice receiving one point.127 The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.128 In the event of a tie, the tie will be broken by assigning one point per vote to the tied Shortlisted Bids, and the Shortlisted Bid with the most votes will advance.129 If this procedure fails to break the tie, a revote will be taken on the tied Bids with each vote receiving one point.130 If the tie persists, the Participants will identify areas for discussion, and revotes will be taken until the tie is broken.131

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Once two Shortlisted Bids have been chosen, the Voting Senior Officers of the Participants (other than those subject to recusal) will vote for a single Shortlisted Bid from the final two to determine the Initial Plan Processor.132 If the tie persists, the Participants will identify areas for discussion and, following these discussions, revotes will be taken until the tie is broken.133 As set forth in Article VI of the Plan, following the selection of the Initial Plan Processor, the Participants will file with the Commission a statement identifying the Initial Plan Processor and including the information required by Rule 608.134

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pubdate: November 15, 2016 effdate: N/A +

5. Functions and Activities of the CAT System

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Functions and Activities of the CAT System + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + CAT Data, + Upgrade Process and Development of New Functionality, + Participant Data, + Industry Member Data, Strongly Related, + SIP Data, + Operating Committee, + Central Repository, + CAT Help Desk, + CAT System, + Sec Rule 613, + Manual Order Events, + Business Clocks, + Compliance Rule, + NIST, + CCO, + Options Market Maker, + +

a. Plan Processor

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Article VI describes the responsibilities of the selected Plan Processor. The Company, under the direction of the Operating Committee, will enter into one or more agreements with the Plan Processor obligating the Plan Processor to perform the functions and duties contemplated by the Plan to be performed by the Plan Processor, as well as such other functions and duties the Operating Committee deems necessary or appropriate.135

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As set forth in the Plan, the Plan Processor is required to develop and, with the prior approval of the Operating Committee, implement policies, procedures, and control structures related to the CAT System that are consistent with Rule 613(e)(4), Appendix C and Appendix D.136 The Plan Processor will: (1) comply with applicable provisions of 15 U.S. Code §78u-6 (Securities Whistleblower Incentives and Protection) and the recordkeeping requirements of Rule 613(e)(8); (2) consistent with Appendix D, Central Repository Requirements, ensure the effective management and operation of the Central Repository; (3) consistent with Appendix D, Data Management, ensure the accuracy of the consolidation of the CAT Data137 reported to the Central Repository; and (4) consistent with Appendix D, Upgrade Process and Development of New Functionality, design and implement appropriate policies and procedures governing the determination to develop new functionality for the CAT including, among other requirements, a mechanism by which changes can be suggested by Advisory Committee members, Participants, or the Commission.138 Such policies and procedures also shall: (1) provide for the escalation of reviews of proposed technological changes and upgrades to the Operating Committee; and (2) address the handling of surveillance, including coordinated, Rule 17d-2 under the Exchange Act or Regulatory Surveillance Agreement(s) (“RSA”) surveillance queries and requests for data.139 Any policy, procedure or standard (and any material modification or amendment thereto) applicable primarily to the performance of the Plan Processor’s duties as the Plan Processor (excluding any policies, procedures or standards generally applicable to the Plan Processor’s operations and employees) will become effective only upon approval by the Operating Committee.140 The Plan Processor also will, subject to the prior approval of the Operating Committee, establish appropriate procedures for escalation of matters to the Operating Committee.141 In addition to other policies, procedures and standards generally applicable to the Plan Processor’s employees and contractors, the Plan Processor will have hiring standards and will conduct and enforce background checks (e.g., fingerprint-based) for all of its employees and contractors to ensure the protection, safeguarding and security of the facilities, systems, networks, equipment and data of the CAT System, and will have an insider and external threat policy to detect, monitor and remedy cyber and other threats.142

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The Plan Processor will enter into appropriate Service Level Agreements (“SLAs”) governing the performance of the Central Repository, as generally described in Appendix D, Functionality of the CAT System, with the prior approval of the Operating Committee.143 The Plan Processor in conjunction with the Operating Committee will regularly review and, as necessary, update the SLAs, in accordance with the terms of the SLAs.144 As further contemplated in Appendix C, System Service Level Agreements (SLAs), and in Appendix D, System SLAs, the Plan Processor may enter into appropriate service level agreements with third parties applicable to the Plan Processor’s functions related to the CAT System (“Other SLAs”), with the prior approval of the Operating Committee.145 The CCO and/or the Independent Auditor will, in conjunction with the Plan Processor, and as necessary the Operating Committee, regularly review and, as necessary, update the Other SLAs, in accordance with the terms of the applicable Other SLA.146 In addition, the Plan Processor: (1) will, on an ongoing basis and consistent with any applicable policies and procedures, evaluate and implement potential system changes and upgrades to maintain and improve the normal day-to-day operating function of the CAT System;147 (2) in consultation with the Operating Committee, will, on an as needed basis and consistent with any applicable operational and escalation policies and procedures, implement such material system changes and upgrades as may be required to ensure effective functioning of the CAT System;148 and (3) in consultation with the Operating Committee, will, on an as needed basis, implement system changes and upgrades to the CAT System to ensure compliance with applicable laws, regulations or rules (including those promulgated by the SEC or any Participant).149 Furthermore, the Plan Processor will develop and, with the prior approval of the Operating Committee, implement a securities trading policy, as well as necessary procedures, control structures and tools to enforce this policy.150

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In addition, the Plan Processor will provide the Operating Committee regular reports on the CAT System’s operation and maintenance.151 Furthermore, upon request of the Operating Committee or any Subcommittee, the Plan Processor will attend any meetings of the Operating Committee or such Subcommittee.152

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The Plan Processor may appoint such officers of the Plan Processor as it deems necessary and appropriate to perform its functions under the Plan and Rule 613.153 The Plan Processor, however, will be required to appoint, at a minimum, the CCO, the CISO, and the Independent Auditor.154 The Operating Committee, by Supermajority Vote, will approve any appointment or removal of the CCO, CISO, or the Independent Auditor.155

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In addition to a CCO, the Plan Processor will designate at least one other employee (in addition to the person then serving as CCO), which employee the Operating Committee has previously approved, to serve temporarily as the CCO if the employee then serving as the CCO becomes unavailable or unable to serve in such capacity (including by reason of injury or illness).156 Any person designated to serve as the CCO (including to serve temporarily) will be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the CCO and will dedicate such person’s entire working time to such service (or temporary service) except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the CCO.157 Article VI sets forth various responsibilities of the CCO. With respect to all of his or her duties and responsibilities in such capacity (including those as set forth in the Plan), the CCO will be directly responsible and will directly report to the Operating Committee, notwithstanding that she or he is employed by the Plan Processor.158 The Plan Processor, subject to the oversight of the Operating Committee, will ensure that the CCO has appropriate resources to fulfill his or her obligations under the Plan and Rule 613.159 The compensation (including base salary and bonus) of the CCO will be payable by the Plan Processor, but be subject to review and approval by the Operating Committee.160 The Operating Committee will render the CCO’s annual performance review.161

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In addition to a CISO, the Plan Processor will designate at least one other employee (in addition to the person then serving as CISO), which employee the Operating Committee has previously approved, to serve temporarily as the CISO if the employee then serving as the CISO becomes unavailable or unable to serve in such capacity (including by reason of injury or illness).162 Any person designated to serve as the CISO (including to serve temporarily) will be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the CISO under the Plan and will dedicate such person’s entire working time to such service (or temporary service) except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the CISO.163

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The Plan Processor, subject to the oversight of the Operating Committee, will ensure that the CISO has appropriate resources to fulfill the obligations of the CISO set forth in Rule 613 and in the Plan, including providing appropriate responses to questions posed by the Participants and the SEC.164 In performing such obligations, the CISO will be directly responsible and directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.165 The compensation (including base salary and bonus) of the CISO will be payable by the Plan Processor, but be subject to review and approval by the Operating Committee, and the Operating Committee will render the CISO’s annual performance review.166 Consistent with Appendices C and D, the CISO will be responsible for creating and enforcing appropriate policies, procedures, standards, control structures and real-time tools to monitor and address data security issues for the Plan Processor and the Central Repository, as described in the Plan.167 At regular intervals, to the extent that such information is available to the Company, the CISO will report to the Operating Committee the activities of the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) or comparable bodies to the extent that the Company has joined FS-ISAC or other comparable body.168

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The Plan Processor will afford to the Participants and the Commission such access to the Representatives of the Plan Processor as any Participant or the Commission may reasonably request solely for the purpose of performing such Person’s regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations or any contractual obligations.169 The Plan Processor will direct such Representatives to reasonably cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of any Participant or the Commission related to such purpose.170

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The Operating Committee will review the Plan Processor’s performance under the Plan at least once each year, or more often than once each year upon the request of two or more Participants that are not Affiliated Participants.171 The Operating Committee will notify the SEC of any determination made by the Operating Committee concerning the continuing engagement of the Plan Processor as a result of the Operating Committee’s review of the Plan Processor and will provide the SEC with a copy of any reports that may be prepared in connection therewith.172

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The Operating Committee, by Supermajority Vote, may remove the Plan Processor from such position at any time.173 However, the Operating Committee, by Majority Vote, may remove the Plan Processor from such position at any time if it determines that the Plan Processor has failed to perform its functions in a reasonably acceptable manner in accordance with the provisions of the Plan or that the Plan Processor’s expenses have become excessive and are not justified.174 In making such a determination, the Operating Committee will consider, among other factors: (1) the reasonableness of the Plan Processor’s response to requests from Participants or the Company for technological changes or enhancements; (2) results of any assessments performed pursuant to Section 6.6; (3) the timeliness of preventative and corrective information technology system maintenance for reliable and secure operations; (4) compliance with requirements of Appendix D; and (5) such other factors related to experience, technological capability, quality and reliability of service, costs, back-up facilities, failure to meet service level agreement(s) and regulatory considerations as the Operating Committee may determine to be appropriate.175

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In addition, the Plan Processor may resign upon two year’s (or such other shorter period as may be determined by the Operating Committee by Supermajority Vote) prior written notice.176 The Operating Committee will fill any vacancy in the Plan Processor position by Supermajority Vote, and will establish a Plan Processor Selection Subcommittee to evaluate and review Bids and make a recommendation to the Operating Committee with respect to the selection of the successor Plan Processor. 177

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b. Central Repository

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The Central Repository, under the oversight of the Plan Processor, and consistent with Appendix D, Central Repository Requirements, will receive, consolidate, and retain all CAT Data. 178 The Central Repository will collect (from a Securities Information Processor (“SIP”) or pursuant to an NMS plan) and retain on a current and continuing basis, in a format compatible with the Participant Data and Industry Member Data, all data, including the following: (1) information, including the size and quote condition, on quotes, including the National Best Bid and National Best Offer for each NMS Security; 179 (2) Last Sale Reports and transaction reports reported pursuant to an effective transaction reporting plan filed with the SEC pursuant to, and meeting the requirements of, Rules 601 and 608; 180 (3) trading halts, Limit Up-Limit Down price bands and LULD indicators; 181 and (4) summary data or reports described in the specifications for each of the SIPs and disseminated by the respective SIP.182

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Consistent with Appendix D, Data Retention Requirements, the Central Repository will retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of Rule 613 in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six years. Such data, when available to the Participants’ regulatory Staff and the SEC, will be linked.183 In addition, the Plan Processor will implement and comply with the records retention policy contemplated by Section 6.1(d)(i).184

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Consistent with Appendix D, Data Access, the Plan Processor will provide Participants and the SEC access to the Central Repository (including all systems operated by the Central Repository), and access to and use of the CAT Data stored in the Central Repository, solely for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules and regulations or any contractual obligations.185 The Plan Processor will create and maintain a method of access to the CAT Data stored in the Central Repository that includes the ability to run searches and generate reports.186 The method in which the CAT Data is stored in the Central Repository will allow the ability to return results of queries that are complex in nature, including market reconstructions and the status of order books at varying time intervals.187 The Plan Processor will, at least annually and at such earlier time promptly following a request by the Operating Committee, certify to the Operating Committee that only the Participants and the SEC have access to the Central Repository (other than access provided to any Industry Member for the purpose of correcting CAT Data previously reported to the Central Repository by such Industry Member).188

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c. Data Recording and Reporting by Participants

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The Plan also sets forth the requirements regarding the data recording and reporting by Participants.189 Each Participant will record and electronically report to the Central Repository the following details for each order and each Reportable Event,190 as applicable (“Participant Data;” also referred to as “Recorded Industry Member Data”, as discussed in the next Section):

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for original receipt or origination of an order: (1) Firm Designated ID(s) (FDIs) for each customer;191 (2) CAT-Order-ID;192 (3) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order;193 (4) date of order receipt or origination;194 (5) time of order receipt or origination (using time stamps pursuant to Section 6.8);195 and (6) the Material Terms of the Order.196

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for the routing of an order: (1) CAT-Order-ID;197 (2) date on which the order is routed;198 (3) time at which the order is routed (using time stamps pursuant to Section 6.8);199 (4) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order;200 (5) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed;201 (6) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed;202 and (7) the Material Terms of the Order.203

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for the receipt of an order that has been routed, the following information: (1) CAT-Order-ID;204 (2) date on which the order is received;205 (3) time at which the order is received (using time stamps pursuant to Section 6.8);206 (4) SRO-Assigned Market Participant Identifier of the Industry Member or Participant receiving the order;207 (5) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order;208 and (6) the Material Terms of the Order.209

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if the order is modified or cancelled: (1) CAT-Order-ID;210 (2) date the modification or cancellation is received or originated;211 (3) time at which the modification or cancellation is received or originated (using time stamps pursuant to Section 6.8);212 (4) price and remaining size of the order, if modified;213 (5) other changes in Material Terms, if modified;214 and (6) whether the modification or cancellation instruction was given by the Customer, or was initiated by the Industry Member or Participant.215

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if the order is executed, in whole or in part: (1) CAT-Order-ID;216 (2) date of execution;217 (3) time of execution (using time stamps pursuant to Section 6.8);218 (4) execution capacity (principal, agency or riskless principal);219 (5) execution price and size;220 (6) the SRO-Assigned Market Participant Identifier of the Participant or Industry Member executing the order;221 (7) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information;222 and (8) other information or additional events as may otherwise be prescribed in Appendix D, Reporting and Linkage Requirements.223

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As contemplated in Appendix D, Data Types and Sources, each Participant will report Participant Data to the Central Repository for consolidation and storage in a format specified by the Plan Processor, approved by the Operating Committee and compliant with Rule 613.224 As further described in Appendix D, Reporting and Linkage Requirements, each Participant is required to record the Participant Data contemporaneously with the Reportable Event.225 In addition, each Participant must report the Participant Data to the Central Repository by 8:00 a.m. Eastern Time (“ET”) on the Trading Day following the day that the Participant recorded the Participant Data.226 Participants may voluntarily report the Participant Data prior to the 8:00 a.m. ET deadline.227

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Each Participant that is a national securities exchange is required to comply with the above recording and reporting requirements for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.228 Each Participant that is a national securities association is required to comply with the above recording and reporting requirements for each Eligible Security for which transaction reports are required to be submitted to the association.229

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d. Data Reporting and Recording by Industry Members

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The Plan also sets forth the data reporting and recording requirements for Industry Members. Specifically, subject to Section 6.4(c), and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, each Participant, through its Compliance Rule, will require its Industry Members to record and electronically report to the Central Repository for each order and each Reportable Event the information referred to in Section 6.3(d), as applicable (“Recorded Industry Member Data”)—that is, Participant Data discussed above.230 In addition, subject to Section 6.4(c), and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, each Participant, through its Compliance Rule, will require its Industry Members to record and report to the Central Repository the following (“Received Industry Member Data” and, collectively with the Recorded Industry Member Data, “Industry Member Data”): (1) if the order is executed, in whole or in part: (a) an Allocation Report;231 (b) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and (c) CAT-Order-ID of any contra-side order(s); (2) if the trade is cancelled, a cancelled trade indicator; and (3) for original receipt or origination of an order, information of sufficient detail to identify the Customer.232

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With respect to the reporting obligations of an Options Market Maker with regard to its quotes in Listed Options, Reportable Events required pursuant to Sections 6.3(d)(ii) and (iv) will be reported to the Central Repository by an Options Exchange in lieu of the reporting of such information by the Options Market Maker.233 Each Participant that is an Options Exchange will, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, any subsequent quote modifications and/or cancellation time when such modification or cancellation is originated by the Options Market Maker).234 Such time information also will be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.235

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Each Participant will, through its Compliance Rule, require its Industry Members to record and report to the Central Repository other information or additional events as prescribed in Appendix D, Reporting and Linkage Requirements.236

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As contemplated in Appendix D, Data Types and Sources, each Participant will require its Industry Members to report Industry Member Data to the Central Repository for consolidation and storage in a format(s) specified by the Plan Processor, approved by the Operating Committee and compliant with Rule 613.237 As further described in Appendix D, Reporting and Linkage Requirements, each Participant will require its Industry Members to record Recorded Industry Member Data contemporaneously with the applicable Reportable Event.238 In addition, consistent with Appendix D, Reporting and Linkage Requirements, each Participant will require its Industry Members to report: (1) Recorded Industry Member Data to the Central Repository by 8:00 a.m. ET on the Trading Day following the day the Industry Member records such Recorded Industry Member Data; and (2) Received Industry Member Data to the Central Repository by 8:00 a.m. ET on the Trading Day following the day the Industry Member receives such Received Industry Member Data.239 Each Participant will permit its Industry Members to voluntarily report Industry Member Data prior to the applicable 8:00 a.m. ET deadline.240

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Each Participant that is a national securities exchange must require its Industry Members to report Industry Member Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.241 Each Participant that is a national securities association must require its Industry Members to report Industry Member Data for each Eligible Security for which transaction reports are required to be submitted to the association.242

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e. Written Assessment

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As described in Article VI, the Participants are required to provide the Commission with a written assessment of the operation of the CAT that meets the requirements set forth in Rule 613, Appendix D, and the Plan at least every two years or more frequently in connection with any review of the Plan Processor’s performance under the Plan pursuant to Section 6.1(n).243 The CCO will oversee this assessment and will provide the Participants a reasonable time to review and comment upon the written assessment prior to its submission to the SEC.244 In no case will the written assessment be changed or amended in response to a comment from a Participant; rather any comment by a Participant will be provided to the SEC at the same time as the written assessment.245

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f. Business Clock Synchronization and Timestamp

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Section 6.8 of the Plan discusses the synchronization of Business Clocks246 and timestamps.

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Each Participant is required to synchronize its Business Clocks (other than such Business Clocks used solely for Manual Order Events) at a minimum to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards.247 In addition, each Participant must, through its Compliance Rule, require its Industry Members to: (1) synchronize their respective Business Clocks (other than such Business Clocks used solely for Manual Order Events) at a minimum to within 50 milliseconds of the time maintained by the NIST, and maintain such a synchronization; (2) certify periodically that their Business Clocks meet the requirements of the Compliance Rule; and (3) report to the Plan Processor and the Participant any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.248 Furthermore, each Participant is required to synchronize its Business Clocks and, through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by the NIST, consistent with industry standards, and maintain such synchronization.249 Each Participant will require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for Manual Order Events meet the requirements of the Compliance Rule.250 The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for Manual Order Events to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.251 Pursuant to Section 6.8(c) of the CAT NMS Plan, the CCO, in conjunction with the Participants and other appropriate Industry Member advisory groups, annually must evaluate and make a recommendation to the Operating Committee as to whether the industry standard has evolved such that the clock synchronization standard should be tightened.252

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Appendix C discusses mechanisms to ensure compliance with the 50 millisecond clock offset tolerance.253 The Participants anticipate that they and Industry Members will adopt policies and procedures to verify the required clock synchronization each trading day before the market opens, as well as periodically throughout the trading day.254 The Participants also anticipate that they and Industry Members will document their clock synchronization procedures and maintain a log recording the time of each clock synchronization performed, and the result of such synchronization, specifically identifying any synchronization revealing any clock offset between the Participant’s or Industry Member’s Business Clock and the time maintained by the NIST exceeding 50 milliseconds.255 The CAT NMS Plan states that once both large and small broker-dealers begin reporting to the Central Repository, and as clock synchronization technology matures further, the Participants will assess, in accordance with Rule 613, tightening the CAT’s clock synchronization standards to reflect changes in industry standards.256

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Each Participant shall, and through its Compliance Rule require its Industry Members to, report information required by Rule 613 and the Plan to the Central Repository in milliseconds.257 To the extent that any Participant utilizes timestamps in increments finer than the minimum required by the Plan, the Participant is required to make reports to the Central Repository utilizing such finer increment when reporting CAT Data to the Central Repository so that all Reportable Events reported to the Central Repository could be adequately sequenced. Each Participant will, through its Compliance Rule: (1) require that, to the extent that its Industry Members utilize timestamps in increments finer than the minimum required in the Plan, such Industry Members will utilize such finer increment when reporting CAT Data to the Central Repository; and (2) provide that a pattern or practice of reporting events outside of the required clock synchronization time period without reasonable justification or exceptional circumstances may be considered a violation of SEC Rule 613 and the Plan.258 Notwithstanding the preceding sentences, each Participant and Industry Member will be permitted to record and report Manual Order Events to the Central Repository in increments up to and including one second, provided that Participants and Industry Members will be required to record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Participant or Industry Member (“Electronic Capture Time”) in milliseconds.259 In conjunction with Participants’ and other appropriate Industry Member advisory groups, the CCO will annually evaluate and make a recommendation to the Operating Committee as to whether industry standards have evolved such that the required synchronization should be shortened or the required timestamp should be in finer increments.260 The Operating Committee will make determinations regarding the need to revise the synchronization and timestamp requirements.261

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257 See id. at Section 6.8(b).

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g. Technical Specifications

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Section 6.9. of the Planestablishes the requirements involving the Plan Processor’s Technical Specifications. The Plan Processor will publish Technical Specifications that are at a minimum consistent withAppendices CandD, and updates thereto as needed, providing detailed instructions regarding the submission of CAT Data by Participants and Industry Members to the Plan Processor for entry into the Central Repository.262 The Technical Specifications will be made available on a publicly available web site to be developed and maintained by the Plan Processor.263 The initial Technical Specifications and any Material Amendments thereto will require the approval of the Operating Committee by Supermajority Vote.264

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The Technical Specifications will include a detailed description of the following: (1) the specifications for the layout of files and records submitted to the Central Repository; (2) the process for the release of new data format specification changes; (3) the process for industry testing for any changes to data format specifications; (4) the procedures for obtaining feedback about and submitting corrections to information submitted to the Central Repository; (5) each data element, including permitted values, in any type of report submitted to the Central Repository; (6) any error messages generated by the Plan Processor in the course of validating the data; (7) the process for file submissions (and re-submissions for corrected files); (8) the storage and access requirements for all files submitted; (9) metadata requirements for all files submitted to the CAT System; (10) any required secure network connectivity; (11) data security standards, which will, at a minimum: (a) satisfy all applicable regulations regarding database security, including provisions of Regulation Systems Compliance and Integrity under the Exchange Act (“Reg SCI”); (b) to the extent not otherwise provided for under the Plan (including Appendix C thereto), set forth such provisions as may be necessary or appropriate to comply with Rule 613(e)(4); and (c) comply with industry best practices; and (12) any other items reasonably deemed appropriate by the Plan Processor and approved by the Operating Committee.265

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Amendments to the Technical Specifications may be made only in accordance with Section 6.9(c).266 The process for amending the Technical Specifications varies depending on whether the change is material. An amendment will be deemed “material” if it would require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to the Plan, or if it is required to safeguard the security or confidentiality of the CAT Data.267 Except for Material Amendments to the Technical Specifications, the Plan Processor will have the sole discretion to amend and publish interpretations regarding the Technical Specifications; however, all non-Material Amendments made to the Technical Specifications and all published interpretations will be provided to the Operating Committee in writing at least ten days before being published.268 Such non-Material Amendments and published interpretations will be deemed approved ten days following provision to the Operating Committee unless two or more unaffiliated Participants call for a vote to be taken on the proposed amendment or interpretation.269 If an amendment or interpretation is called for a vote by two or more unaffiliated Participants, the proposed amendment must be approved by Majority Vote of the Operating Committee.270 Once a non-Material Amendment has been approved or deemed approved by the Operating Committee, the Plan Processor will be responsible for determining the specific changes to the Central Repository and providing technical documentation of those changes, including an implementation timeline.271

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Material Amendments to the Technical Specifications require approval of the Operating Committee by Supermajority Vote.272 The Operating Committee, by Supermajority Vote, may amend the Technical Specifications on its own motion.273

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h. Surveillance

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Surveillance requirements are described in Section 6.10. Using the tools provided for in Appendix D, Functionality of the CAT System, each Participant will develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the Central Repository.274 Unless otherwise ordered by the SEC, within fourteen months after the Effective Date, each Participant must initially implement a new or enhanced surveillance system(s) as required by Rule 613 and Section 6.10(a) of the Plan.275 Participants may, but are not required to, coordinate surveillance efforts through the use of regulatory services agreements and agreements adopted pursuant to Rule 17d-2 under the Exchange Act.276

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Consistent with Appendix D, Functionality of the CAT System, the Plan Processor will provide Participants and the SEC with access to all CAT Data stored in the Central Repository. Regulators will have access to processed CAT Data through two different methods: (1) an online targeted query tool; and (2) user-defined direct queries and bulk extracts.277 The online targeted query tool will provide authorized users with the ability to retrieve CAT Data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria.278 Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields.279 The user-defined direct queries and bulk extracts will provide authorized users with the ability to retrieve CAT Data via a query tool or language that allows users to query all available attributes and data sources.280

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Extraction of CAT Data will be consistent with all permission rights granted by the Plan Processor.281 All CAT Data returned will be encrypted, and PII data282 will be masked unless users have permission to view the PII contained in the CAT Data that has been requested.283

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The Plan Processor will implement an automated mechanism to monitor direct query usage.284 Such monitoring will include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or CAT Data extractions.285 The Plan Processor will provide the Operating Committee or its designee(s) details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.286

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The Plan Processor will reasonably assist regulatory Staff (including those of Participants) with creating queries.287 Without limiting the manner in which regulatory Staff (including those of Participants) may submit queries, the Plan Processor will submit queries on behalf of regulatory Staff (including those of Participants) as reasonably requested.288 The Plan Processor will staff a CAT help desk, as described in Appendix D, CAT Help Desk, to provide technical expertise to assist regulatory Staff (including those of Participants) with questions about the content and structure of the CAT Data.289

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i. Information Security Program

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As set forth in Section 6.12, the Plan Processor is required to develop and maintain a comprehensive information security program for the Central Repository that contains, at a minimum, the specific requirements detailed in Appendix D, Data Security. The information security program must be approved and reviewed at least annually by the Operating Committee.290

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pubdate: November 15, 2016 effdate: N/A +

6. Financial Matters

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Financial Matters + Compliance User: Self-Regulatory Organization + Keywords: + Industry Members, + Operating Committee, + CAT NMS plan, + Plan Processor, + NMS Stocks, + OTC Equity Securities, + +

Articles VIIandVIII of the Plan address certain financial matters related to the Company. In particular, the Plan states that, subject to certain special allocations provided for in Section 8.2, any net profit or net loss will be allocated among the Participants equally.291 In addition, subject to Section 10.2, cash and property of the Company will not be distributed to the Participants unless the Operating Committee approves by Supermajority Vote a distribution after fully considering the reason that such distribution must or should be made to the Participants, including the circumstances contemplated under Section 8.3,Section 8.6, andSection 9.3.292 To the extent a distribution is made, all Participants will participate equally in any such distribution except as otherwise provided in Section 10.2.293

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Article XI addresses the funding of the Company. On an annual basis the Operating Committee will approve an operating budget for the Company.294 The budget will include the projected costs of the Company, including the costs of developing and operating the CAT System for the upcoming year, and the sources of all revenues to cover such costs, as well as the funding of any reserve that the Operating Committee reasonably deems appropriate for prudent operation of the Company.295

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Subject to certain funding principles set forth inArticle XI, the Operating Committee will have discretion to establish funding for the Company, including: (1) establishing fees that the Participants will pay; and (2) establishing fees for Industry Members that will be implemented by Participants.296 In establishing the funding of the Company, the Operating Committee will seek to: (1) create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company; (2) establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations; (3) establish a tiered fee structure in which the fees charged to: (a) CAT Reporters that are Execution Venues, including Alternative Trading Systems (“ATSs”), are based upon the level of market share, (b) Industry Members’ non-ATS activities are based upon message traffic, and (c) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members); (4) provide for ease of billing and other administrative functions; (5) avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and (6) build financial stability to support the Company as a going concern.297 The Participants will file with the SEC under Section 19(b) of the Exchange Act any such fees on Industry Members that the Operating Committee approves, and such fees will be labeled as “Consolidated Audit Trail Funding Fees.”298

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To fund the development and implementation of the CAT, the Company will time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs.299 In determining fees for Participants and Industry Members, the Operating Committee shall take into account fees, costs and expenses (including legal and consulting fees and expenses) incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT, and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members.300 Consistent with Article XI, the Operating Committee will adopt policies, procedures, and practices regarding the budget and budgeting process, assignment of tiers, resolution of disputes, billing and collection of fees, and other related matters.301 As a part of its regular review of fees for the CAT, the Operating Committee will have the right to change the tier assigned to any particular Person pursuant to this Article XI.302 Any such changes will be effective upon reasonable notice to such Person.303

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The Operating Committee will establish fixed fees to be payable by Execution Venues as follows. Each Execution Venue that executes transactions, or, in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities.304 The Operating Committee will establish at least two and no more than five tiers of fixed fees, based on an Execution Venue’s NMS Stocks and OTC Equity Securities market share.305 For these purposes, market share will be calculated by share volume.306 In addition, each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue.307 The Operating Committee will establish at least two and no more than five tiers of fixed fees, based on an Execution Venue’s Listed Options market share, with market share calculated by contract volume.308 Changes to the number of tiers after approval of the Plan would require a Supermajority Vote of the Operating Committee and Commission approval under Section 19(b) of the Exchange Act, as would the establishment of the initial fee schedule and any changes to the fee schedule within the tier structure.309

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The Operating Committee also will establish fixed fees payable by Industry Members, based on the message traffic generated by such Industry Member.310 The Operating Committee will establish at least five and no more than nine tiers of fixed fees, based on message traffic.311 For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph will, in addition to any other applicable message traffic, include message traffic generated by: (1) an ATS that does not execute orders that is sponsored by such Industry Member; and (2) routing orders to and from any ATS system sponsored by such Industry Member.312

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Furthermore, the Operating Committee may establish any other fees ancillary to the operation of the CAT that it reasonably determines appropriate, including: fees for the late or inaccurate reporting of information to the CAT; fees for correcting submitted information; and fees based on access and use of the CAT for regulatory and oversight purposes (and not including any reporting obligations).313

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The Company will make publicly available a schedule of effective fees and charges adopted pursuant to the Plan as in effect from time to time.314 Such schedule will be developed after the Plan Processor is selected.315 The Operating Committee will review the fee schedule on at least an annual basis and will make any changes to such fee schedule that it deems appropriate.316 The Operating Committee is authorized to review the fee schedule on a more regular basis, but will not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.317

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The Operating Committee will establish a system for the collection of fees authorized under the Plan.318 The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator.319 Alternatively, the Operating Committee may use the facilities of a clearing agency registered under Section 17A of the Exchange Act to provide for the collection of such fees.320

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Each Participant will require each Industry Member to pay all applicable fees authorized underArticle XI within thirty days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated).321 If an Industry Member fails to pay any such fee when due, such Industry Member will pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (1) the Prime Rate plus 300 basis points; or (2) the maximum rate permitted by applicable law.322 Each Participant will pay all applicable fees authorized under Article XI as required by Section 3.7(b).323

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Disputes with respect to fees the Company charges Participants pursuant toArticle XI will be determined by the Operating Committee or a Subcommittee designated by the Operating Committee.324 Decisions by the Operating Committee on such matters shall be binding on Participants, without prejudice to the rights of any Participant to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.325 The Participants will adopt rules requiring that disputes with respect to fees charged to Industry Members pursuant to Article XI be determined by the Operating Committee or a Subcommittee.326 Decisions by the Operating Committee or Subcommittee on such matters will be binding on Industry Members, without prejudice to the rights of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.327

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pubdate: November 15, 2016 effdate: N/A +

7. Amendments

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Amendments + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Selection Plan, + LLC Agreement, + +

Section 12.3 of the CAT NMS Plan, which governs amendments to the Plan, states that, except with respect to the addition of new Participants (Section 3.3), the transfer of Company Interest (Section 3.4), the termination of a Participant’s participation in the Plan (Section 3.7), amendments to the Selection Plan (Section 5.3 [sic]) and special allocations (Section 8.2), any change to the Plan requires a written amendment authorized by the affirmative vote of not less than two-thirds of all of the Participants, or with respect to Section 3.8 by the affirmative vote of all the Participants.328 Such proposed amendment must be approved by the Commission pursuant to Rule 608 or otherwise becomes effective under Rule 608.329 Notwithstanding the foregoing, to the extent that the Commission grants exemptive relief applicable to any provision of the LLC Agreement, Participants and Industry Members will be entitled to comply with such provision pursuant to the terms of the exemptive relief so granted at the time such relief is granted irrespective of whether the LLC Agreement has been amended.330

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pubdate: November 15, 2016 effdate: N/A +

8. Compliance Rule Applicable to Industry Members

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Compliance Rule Applicable to Industry Members + Compliance User: Self-Regulatory Organization + Keywords: + Industry Members, + +

Under Article III, each Participant agrees to comply with and enforce compliance by its Industry Members with the provisions of Rule 613 and the Plan, as applicable, to the Participant and its Industry Members.331 Accordingly, the Participants will endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of Rule 613 and the Plan.332

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pubdate: November 15, 2016 effdate: N/A +

9. Plan Appendices

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Plan Appendices + Compliance User: Self-Regulatory Organization + Keywords: + Central Repository, + CAT Data, + CAT NMS plan, + Plan Processor, + CAT Reporters, + +

The Plan includes three appendices.333 Appendix A provides the Consolidated Audit Trail National Market System Plan Request for Proposal, as issued February 26, 2013 and subsequently updated. In addition, Rule 613(a)(1) requires that the Plan discuss twelve considerations that explain the choices made by the Participants to meet the requirements specified in Rule 613 for the CAT. In accordance with this requirement, the Participants have addressed each of the twelve considerations in Appendix C. Finally, Appendix D describes the technical requirements for the Plan Processor.

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As mentioned, Appendix C discusses the various “considerations” regarding how the Participants propose to develop and implement the CAT required to be discussed by Rule 613.334 These considerations, include: (i) the reporting of data to the Central Repository, including the sources of the data and the manner in which the Central Repository will receive, extract, transform, load, and retain the data; (ii) the time and method by which the data in the Central Repository will be made available to regulators; (iii) the reliability and accuracy of the data reported to and maintained by the Central Repository throughout its lifecycle; (iv) the security and confidentiality of the information reported to the Central Repository; (v) the flexibility and scalability of the systems used by the Central Repository to collect, consolidate and store CAT Data; (vi) the feasibility, benefits and costs of broker-dealers reporting certain information to the CAT in a timely manner; (vii) an analysis of expected benefits and estimated costs for creating, implementing, and maintaining the CAT pursuant to the proposed CAT NMS Plan; (viii) an analysis of the proposed CAT NMS Plan’s impact on competition, efficiency, and capital formation; (ix) a plan to eliminate rules and systems that will be rendered duplicative by the CAT; (x) objective milestones to assess progress toward the implementation of the proposed CAT NMS Plan; (xi) the process by which Participants solicited views of members and other parties regarding creation, implementation, and maintenance of CAT and a summary of these views and how the Participants took them into account in preparing the CAT NMS Plan; and (xii) a discussion of reasonable alternative approaches that the Participants considered to create, implement, and maintain the CAT.335

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The technical requirements discussed in Appendix D to the CAT NMS Plan, CAT NMS Plan Processor Requirements, include an outline of minimum functional and technical requirements established by the Participants of the CAT NMS Plan for the Plan Processor. Appendix D provides the Plan Processor with details and guidelines for compliance with the requirements contained in Article VI that are not expressly stated therein.

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Appendix D also outlines technical architecture, capacity and data retention requirements for the Central Repository,336 as well as describes the types of data that would be reported to the Central Repository and the sources of such information.337 The Appendix outlines specific requirements relating to reporting data, linking data, validating and processing data and timing for availability to regulators.338 Appendix D further discusses how regulators would be able to access and use the data.339 It also provides requirements related to data security, and specific requirements governing how Customer and Customer Account Information must be captured and stored, separate from transactional data.340 Appendix D outlines requirements for the Plan Processor’s disaster recovery and business continuity plans.341 Finally, Appendix D describes plans for technical, operational, and business support to CAT Reporters for all aspects of reporting, and describes how upgrades and new functionality would be incorporated.342

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pubdate: November 15, 2016 effdate: N/A +

10. Reporting Procedures

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Reporting Procedures + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Central Repository, + CAT-Order-ID, + Sec Rule 613, + Compliance Rule, + CAT Data, + +

The CAT NMS Plan requires CAT Reporters to comply with specific reporting procedures when reporting CAT Data to the Central Repository.343 Specifically, CAT Reporters must format CAT Data to comply with the format specifications approved by the Operating Committee.344 CAT Reporters must record CAT Data contemporaneously with the applicable Reportable Event345 and report such data to the Central Repository by 8:00 a.m. ET on the next Trading Day.346 The obligation to report CAT Data applies to “each NMS Security registered or listed for trading on [a national securities] exchange or admitted to unlisted trading privileges on such exchange,” and “each Eligible Security for which transaction reports are required to be submitted to such [national securities] association.”347 Further, the Participants are required to adopt Compliance Rules348 that require Industry Members, subject to their SRO jurisdiction, to report CAT Data.349

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The CAT NMS Plan requires specific data elements of CAT Data that must be recorded and reported to the Central Repository upon: (i) “original receipt or origination of an order,”350 (ii) “routing of an order,”351 and (iii) “receipt of an order that has been routed.”352 Additionally, the CAT NMS Plan requires that a CAT Reporter must record and report data related to an “order [that] is modified or cancelled,”353 and an “order [that] is executed, in whole or in part,”354 as well as “other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.”355 The CAT NMS Plan also requires Industry Member CAT Reporters to report additional data elements for (i) an “order [that] is executed, in whole or in part,”356 (ii) a “trade [that] is cancelled,”357 or (iii) “original receipt or origination of an order.”358 Further, each Participant shall, through Compliance Rules, require Industry Members to record and report to the Central Repository information or additional events as may be prescribed to accurately reflect the complete lifecycle of each Reportable Event.359

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pubdate: November 15, 2016 effdate: N/A +

11. Timeliness of Data Reporting

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Timeliness of Data Reporting + Compliance User: Self-Regulatory Organization + Keywords: + Central Repository, + Compliance Rule, + Industry Members, + CAT NMS plan, + +

Section 6.3(b)(ii) of the CAT NMS Plan requires each Participant to report Participant Data to the Central Repository by 8:00 a.m. ET on the Trading Day following the day the Participant records such data.360 Additionally, a Participant may voluntarily report such data prior to this deadline.361 Section 6.4(b)(ii) states that each Participant shall, through its Compliance Rule, require its Industry Members to report Recorded Industry Member Data to the Central Repository by 8:00 a.m. ET on the Trading Day following the day the Industry Member records such data, and Received Industry Member Data to the Central Repository by 8:00 a.m. ET on the Trading Day following the day the Industry Member receives such data.362 Section 6.4(b)(ii) of the CAT NMS Plan also states that each Participant shall, through its Compliance Rule, permit its Industry Members to voluntarily report such data prior to the applicable 8:00 a.m. ET deadline.363

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pubdate: November 15, 2016 effdate: N/A +

12. Uniform Format

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Uniform Format + Compliance User: Self-Regulatory Organization + Keywords: + Plan Processor, + Operating Committee, + CAT NMS plan, + Central Repository, + Plan Processor, + +

The CAT NMS Plan does not mandate the format in which data must be reported to the Central Repository.364 Appendix D states that the Plan Processor will determine the electronic format in which data must be reported, and that the format will be described in the Technical Specifications.365 Appendix C specifies that CAT Reporters could be required to report data either in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format, for consolidation and storage.366 Similarly, Sections 6.3(a) and 6.4(a) of the CAT NMS Plan require that CAT Reporters report data to the Central Repository in a format or formats specified by the Plan Processor, approved by the Operating Committee, and compliant with Rule 613.367

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The CAT NMS Plan requires that data reported to the Central Repository be stored in an electronic standard format.368 Specifically, Section 6.5(b)(i) of the CAT NMS Plan requires the Central Repository to retain the information collected pursuant to Rule 613(c)(7) and (e)(7) in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six (6) years.369 Such data must be linked when it is made available to the Participant’s regulatory Staff and the Commission.370

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pubdate: November 15, 2016 effdate: N/A +

13. Symbology

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Symbology + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Reporters, + +

The CAT NMS Plan also addresses the symbology that CAT Reporters must use when reporting CAT Data. The CAT NMS Plan requires CAT Reporters to report data using the listing exchange’s symbology. The CAT NMS Plan requires the Plan Processor to create and maintain a symbol history and mapping table, as well as provide a tool to regulators and CAT Reporters showing the security’s complete symbol history, along with a start-of-day and end–of-day list of reportable securities for use by CAT Reporters, in .csv format, by 6:00 a.m. on each trading day.371 The Participants will be responsible for providing the Plan Processor with issue symbol information, and issue symbol validation must be included in the processing of data submitted by CAT Reporters.372

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pubdate: November 15, 2016 effdate: N/A +

14. CAT-Reporter-ID

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, CAT-Reporter-ID + Compliance User: Self-Regulatory Organization + Keywords: + Industry Members, + CAT NMS plan, + SRO, + CAT-Reporter-IDs, + CAT Reporter’s, + Plan Processor, + SRO-Assigned Market Participant Identifier, + +

Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to record and report to the Central Repository an SRO-Assigned Market Participant Identifier373 for orders and certain Reportable Events to be used by the Central Repository to assign a unique CAT-Reporter-ID374 for purposes of identifying each CAT Reporter associated with an order or Reportable Event (the “Existing Identifier Approach”).375 The CAT NMS Plan requires the reporting of SRO-Assigned Market Participant Identifiers of: the Industry Member receiving or originating an order;376 the Industry Member or Participant from which (and to which) an order is being routed;377 the Industry Member or Participant receiving (and routing) a routed order;378 the Industry Member or Participant executing an order, if an order is executed;379 and the clearing broker or prime broker, if applicable, if an order is executed.380 An Industry Member would report to the Central Repository its existing SRO-Assigned Market Participant Identifier used by the relevant SRO specifically for transactions occurring at that SRO.381 Similarly, an exchange reporting CAT Reporter information would report data using the SRO-Assigned Market Participant Identifier used by the Industry Member on that exchange or its systems.382 Over-the-counter (“OTC”) orders and Reportable Events would be reported with an Industry Member’s FINRA SRO-Assigned Market Participant Identifier.383

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The CAT NMS Plan requires the Plan Processor to develop and maintain the mechanism to assign (and to change, if necessary) CAT-Reporter-IDs.384 For the Central Repository to link the SRO-Assigned Market Participant Identifier to the CAT-Reporter-ID, each SRO must submit, on a daily basis, all SRO-Assigned Market Participant Identifiers used by its Industry Members (or itself), as well as information to identify the corresponding market participant (for example, a CRD number or Legal Entity Identifier (“LEI”) to the Central Repository.385 Additionally, each Industry Member shall be required to submit to the Central Repository information sufficient to identify such Industry Member (e.g., CRD number or LEI, as noted above).386 The Plan Processor would use the SRO-Assigned Market Participant Identifiers and identifying information (i.e., CRD number or LEI) to assign a CAT-Reporter-ID to each Industry Member and SRO for internal use across all data within the Central Repository.387 The Plan Processor would create and maintain a database in the Central Repository that would map the SRO-Assigned Market Participant Identifiers to the appropriate CAT-Reporter-ID.388

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The CAT must be able to capture, store, and maintain current and historical SRO-Assigned Market Participant Identifiers.389 The SRO-Assigned Market Participant Identifier must also be included on the Plan Processor’s acknowledgment of its receipt of data files from a CAT Reporter or Data Submitter,390 on daily statistics provided by the Plan Processor after the Central Repository has processed data,391 and on a secure website that the Plan Processor would maintain that would contain each CAT Reporter’s daily reporting statistics.392 In addition, data validations by the Plan Processor must include confirmation of a valid SRO-Assigned Market Participant Identifier.393

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pubdate: November 15, 2016 effdate: N/A +

15. Customer-ID

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Customer-ID + Compliance User: Self-Regulatory Organization + Keywords: + Customer Information Approach, + CAT NMS plan, + Customer-ID, + CAT Reporter, + Central Repository, + Firm Designated ID, + Plan Processor, + Operating Committee, + +

a. Customer Information Approach

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Rule 613(c)(7)(i)(A) requires that for the original receipt or origination of an order, a CAT Reporter report the “Customer-ID(s) for each Customer.”394 “Customer-ID” is defined in Rule 613(j)(5) to mean “with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the Central Repository.”395 Rule 613(c)(8) requires that “[a]ll plan sponsors and their members shall use the same Customer-ID and CAT-Reporter-ID for each customer and broker-dealer.”396

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In Appendix C, the Participants describe the “Customer Information Approach,”397 an alternative approach to the requirement that a broker-dealer report a Customer-ID for every Customer upon original receipt or origination of an order.398 Under the Customer Information Approach, the CAT NMS Plan would require each broker-dealer to assign a unique Firm Designated ID to each Customer.399 As the Firm Designated ID, broker-dealers would be permitted to use an account number or any other identifier defined by the firm, provided each identifier is unique across the firm for each business date (i.e., a single firm may not have multiple separate customers with the same identifier on any given date).400 According to the CAT NMS Plan, broker-dealers would submit an initial set of Customer information to the Central Repository, including, as applicable, the Firm Designated ID, the Customer’s name, address, date of birth, individual tax payer identifier number (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with power of attorney) and LEI,401 and/or Large Trader ID (“LTID”), if applicable, which would be updated as set forth in the CAT NMS Plan.402

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Under the Customer Information Approach, broker-dealers would be required to report only the Firm Designated ID for each new order submitted to the Central Repository, rather than the “Customer-ID” as defined by Rule 613(c)(j)(5) and as required by Rule 613(c)(7)(i)(A), and the Plan Processor would associate specific Customers and their Customer-IDs with individual order events based on the reported Firm Designated IDs.403 Within the Central Repository, each Customer would be uniquely identified by identifiers or a combination of identifiers such as an ITIN/SSN, date of birth, and, as applicable, LEI and LTID.404 The Plan Processor would be required to use these unique identifiers to map orders to specific Customers across all broker-dealers.405 To ensure information identifying a Customer is updated, broker-dealers would be required to submit to the Central Repository daily updates for reactivated accounts, newly established or revised Firm Designated IDs, or associated reportable Customer information.406

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Appendix C provides additional requirements that the Plan Processor must meet under the Customer Information Approach.407 The Plan Processor must maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter, and must document and publish, with the approval of the Operating Committee, the minimum list of attributes to be captured to maintain this association.408 In addition, the Plan Processor must maintain valid Customer and Customer Account Information409 for each trading day and provide a method for Participants and the Commission to easily obtain historical changes to that information (e.g., name changes, address changes).410 The Plan Processor also must design and implement a robust data validation process for submitted Firm Designated IDs, Customer Account Information and Customer Identifying Information, and be able to link accounts that move from one CAT Reporter to another due to mergers and acquisitions, divestitures, and other events.411 Under the Customer Information Approach, Industry Members will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis.412 Finally, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database.413

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b. Account Effective Date vs. Account Open Date

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Rule 613(c)(7)(viii)(B) requires broker-dealers to report to the Central Repository “Customer Account Information” upon the original receipt or origination of an order.414 The CAT NMS Plan defines “Customer Account Information” to include, in part, the Customer’s account number, account type, customer type, date account opened and LTID (if applicable).415 The Plan, however, provides that in two limited circumstances, a broker-dealer could report the “Account Effective Date” in lieu of the date an account was opened.416 The first circumstance is where a relationship identifier—rather than an actual parent account—has been established for an institutional Customer relationship.417 In this case, no account open date is available for the institutional Customer parent relationship because there is no parent account, and for the same reason, there is no account number or account type available.418 Thus, the Plan provides that in this circumstance, a broker-dealer could report the “Account Effective Date” of the relationship in lieu of an account open date.419 Further, the Plan provides that where such an institutional Customer relationship was established before the broker-dealer’s obligation to report audit trail data, the “Account Effective Date” would be either (i) the date the broker-dealer established the relationship identifier, or (ii) the date when trading began (i.e., the date the first order was received) using the relevant relationship identifier, and if both dates are available and differ, the earlier date.420 Where such relationships are established after the broker-dealer’s obligation to report audit trail data is required, the “Account Effective Date” would be the date the broker-dealer established the relationship identifier and would be no later than the date the first order was received.421 Regardless of when the relationship was established for such institutional Customers, the Plan provides that broker-dealers may report the relationship identifier in place of Rule 613(c)(7)(viii)(B)’s requirement to report the “account number,” and report “relationship” in place of “account type.”422

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The second circumstance where a broker-dealer may report the “Account Effective Date” rather than the date an account was opened as required in Rule 613(c)(7)(viii)(B) is when particular legacy system data issues prevent a broker-dealer from providing an account open date for any type of account (i.e., institutional, proprietary or retail) that was established before the CAT’s implementation.423 According to the Plan, these legacy system data issues may arise because:

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(1) A broker-dealer has switched back office providers or clearing firms and the new back office/clearing firm system identifies the account open date as the date the account was opened on the new system;

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(2) A broker-dealer is acquired and the account open date becomes the date that an account was opened on the post-merger back office/clearing firm system;

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(3) Certain broker-dealers maintain multiple dates associated with accounts in their systems and do not designate in a consistent manner which date constitutes the account open date, as the parameters of each date are determined by the individual broker-dealer; or

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(4) No account open date exists for a proprietary account of a broker-dealer.424

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Thus, when legacy systems data issues arise due to one of the four reasons above and no account open date is available, the Plan provides that broker-dealers would be permitted to report an “Account Effective Date” in lieu of an account open date.425 When the legacy systems data issues and lack of account open date are attributable to above reasons (1) or (2), the “Account Effective Date” would be the date the account was established, either directly or via a system transfer, at the relevant broker-dealer.426 When the legacy systems data issues and lack of account open date are attributable to above reason (3), the “Account Effective Date” would be the earliest available date.427 When the legacy systems data issues and lack of account open date are attributable to above reason (4), the “Account Effective Date” would be (i) the date established for the proprietary account in the broker-dealer or its system(s), or (ii) the date when proprietary trading began in the account, i.e., the date on which the first order was submitted from the account.428

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c. Modification/Cancellation

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Rule 613(c)(7)(iv)(F) requires that “[t]he CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction” be reported to the Central Repository.429 Because the Customer Information Approach no longer requires, as permitted by the Exemption Order, that a Customer-ID be reported upon original receipt or origination of an order, and because reporting the Customer-ID of the specific person that gave the modification or cancellation instruction would result in an inconsistent level of information regarding the identity of the person giving the modification or cancellation instruction versus the identity of the Customer that originally received or originated an order, Section 6.3(d)(iv)(F) of the CAT NMS Plan modifies the requirement in Rule 613 and instead requires CAT Reporters to report whether the modification or cancellation instruction was “given by the Customer or was initiated by the Industry Member or Participant.”430

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pubdate: November 15, 2016 effdate: N/A +

16. Order Allocation Information

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Order Allocation Information + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan provides that each Participant through its Compliance Rule must require that Industry Members record and report to the Central Repository an Allocation Report that includes the Firm Designated ID when an execution is allocated in whole or part.431 The CAT NMS Plan defines an Allocation Report as “a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation.”432 The CAT NMS Plan explains, for the avoidance of doubt, that an Allocation Report shall not be required to be linked to particular orders or executions.433

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pubdate: November 15, 2016 effdate: N/A +

17. Options Market Maker Quotes

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Options Market Maker Quotes + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Options Market Maker, + +

Section 6.4(d)(iii) of the CAT NMS Plan states that, with respect to the reporting obligations of an Options Market Maker under Sections 6.3(d)(ii) and (iv) regarding its quotes434 in Listed Options, such quotes shall be reported to the Central Repository by the relevant Options Exchange in lieu of reporting by the Options Market Maker.435 Section 6.4(d)(iii) further states that each Participant that is an Options Exchange shall, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, the time of any subsequent quote modification and/or cancellation where such modification or cancellation is originated by the Options Market Maker).436 Such time information also shall be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.437

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pubdate: November 15, 2016 effdate: N/A +

18. Primary Market Transactions, Debt Securities and Futures

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Primary Market Transactions, Debt Securities and Futures + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

Rule 613 and the CAT NMS Plan do not require the reporting of audit trail data for Primary Market Transactions,438 debt securities, and futures. However, Rule 613(i) requires that, within six months after the effective date of the CAT NMS Plan, the SROs shall jointly provide to the Commission “a document outlining how such exchanges and associations could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities,439 debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.”440

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pubdate: November 15, 2016 effdate: N/A +

19. Error Rates

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Error Rates + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Primary Market Transactions, + OTC Equity Securities, + CAT Reporters, + OATS Route Reports, + Error Rate, + +

The CAT NMS Plan defines Error Rate as “the percentage of [R]eportable [E]vents collected by the [C]entral [R]epository in which the data reported does not fully and accurately reflect the order event that occurred in the market.”441 Under the CAT NMS Plan, the Operating Committee sets the maximum Error Rate that the Central Repository would tolerate from a CAT Reporter reporting data to the Central Repository.442 The Operating Committee reviews and resets the maximum Error Rate, at least annually.443 If a CAT Reporter reports CAT Data to the Central Repository with errors such that their error percentage exceeds the maximum Error Rate, then such CAT Reporter would not be in compliance with the CAT NMS Plan or Rule 613.444 As such, “the Participants as Participants or the SEC may take appropriate action for failing to comply with the reporting obligations under the CAT NMS Plan and SEC Rule 613.”445 The CAT NMS Plan, however, does not detail what specific compliance enforcement provisions would apply if a CAT Reporter exceeds the maximum Error Rate.446

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The CAT NMS Plan sets the initial maximum Error Rate at 5% for any data reported pursuant to subparagraphs (3) and (4) of Rule 613(c).447 The SROs highlight that “the Central Repository will require new reporting elements and methods for CAT Reporters and there will be a learning curve when CAT Reporters begin to submit data to the Central Repository” in support of a 5% initial rate.448 Further, the SROs state that “many CAT Reporters may have never been obligated to report data to an audit trail.”449 The SROs believe an initial maximum Error Rate of 5% “strikes the balance of making allowances for adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction.”450 In the CAT NMS Plan, the Participants compared the contemplated Error Rates of CAT Reporters to the error rates of OATS reporters in the time periods immediately following three significant OATS releases in the last ten years.451 The Participants state that for the three comparative OATS releases452: an average of 2.42% of order events did not pass systemic validations; an average of 0.36% of order events were not submitted in a timely manner; an average of 0.86% of orders were unsuccessfully matched to a trade reporting facility trade report; an average of 3.12% of OATS Route Reports were unsuccessfully matched to an exchange order; and an average of 2.44% of OATS Route Reports were unsuccessfully matched to a report by another reporting entity.453

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The Participants, moreover, anticipate reviewing and resetting the maximum Error Rate once Industry Members (excluding Small Industry Members) begin to report to the Central Repository and again once Small Industry Members report to the Central Repository.454

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The Participants thus propose a phased approach to lowering the maximum Error Rates among CAT Reporters based on the period of time reporting to the Central Repository and whether the CAT Reporters are Participants, large broker-dealers or small broker-dealers.455 The Plan sets forth a goal of the following maximum Error Rates456 where “Year(s)” refers to year(s) after the CAT NMS Plan’s date of effectiveness:

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Table 1

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Maximum Error Rates Schedule

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The CAT NMS Plan requires the Plan Processor to: (i) measure and report errors every business day;457 (ii) provide CAT Reporters daily statistics and error reports as they become available, including a description of such errors;458 (iii) provide monthly reports to CAT Reporters that detail a CAT Reporter’s performance and comparison statistics;459 (iv) define educational and support programs for CAT Reporters to minimize Error Rates;460 and (v) identify, daily, all CAT Reporters exceeding the maximum allowable Error Rate.461 To timely correct data-submitted errors to the Central Repository, the Participants require that the Central Repository receive and process error corrections at all times.462 Further, the CAT NMS Plan requires that CAT Reporters be able to submit error corrections to the Central Repository through a web-interface or via bulk uploads or file submissions, and that the Plan Processor, subject to the Operating Committee’s approval, support the bulk replacement of records and the reprocessing of such records.463 The Participants, furthermore, require that the Plan Processor identify CAT Reporter data submission errors based on the Plan Processor’s validation processes.464

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pubdate: November 15, 2016 effdate: N/A +

20. Retirement of Existing Trade and Order Data Rules and Systems

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Retirement of Existing Trade and Order Data Rules and Systems + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Central Repository, + OATS, + Sec Rule 613, + +

a. Duplicative or Partially Duplicative Rules and Systems

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As required by Rule 613(a)(1)(ix),465 the CAT NMS Plan provides a plan to eliminate rules and systems that will be rendered duplicative by the CAT.466 Under the CAT NMS Plan, each Participant will initiate an analysis of its rules and systems to determine which require information that is duplicative of the information available to the Participants through the Central Repository. The CAT NMS Plan states that each Participant has begun reviewing its rulebook and is waiting for the publication of the final reporting requirements to the Central Repository to complete its analysis. According to the Plan, each Participant should complete its analysis within twelve months after Industry Members (other than Small Industry Members) are required to begin reporting data to the Central Repository (or a later date to be determined by each Participant if sufficient data is not available to complete the analysis in that timeframe).467

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Similarly, the CAT NMS Plan provides that each Participant will analyze which of its rules and systems require information that is partially duplicative of the information available to the Participants through the Central Repository.468 According to the CAT NMS Plan, this analysis should include a determination as to: (i) whether the Participant should continue to collect the duplicative information available in the Central Repository; (ii) whether the Participant can use the duplicative information made available in the Central Repository without degrading the effectiveness of the Participant’s rules or systems; and (iii) whether the Participant should continue to collect the non-duplicative information or, alternatively, whether it should be added to information collected by the Central Repository. The CAT NMS Plan states that each Participant has begun reviewing its rulebook and is waiting for the publication of the final reporting requirements to the Central Repository to complete its analysis. According to the Plan, each Participant should complete this analysis within eighteen months after Industry Members (other than Small Industry Members) are required to begin reporting data to the Central Repository (or a later date to be determined by each Participant if sufficient data is not available to complete the analysis in that timeframe).469

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The CAT NMS Plan also discusses the elimination of specific trade and order data collection systems that may be duplicative or partially duplicative of CAT.470 With respect to FINRA’s OATS, the CAT NMS Plan notes that FINRA’s ability to retire OATS is dependent on whether the Central Repository contains complete and accurate CAT Data that is sufficient to ensure that FINRA can effectively conduct surveillance and investigations of its members for potential violations of FINRA rules and federal laws and regulations.471 Based on an analysis conducted by the Participants, there are 33 data elements currently captured in OATS that are not specified in SEC Rule 613. The Plan notes that the Participants believe it is appropriate to incorporate data elements into the Central Repository that are necessary to retire OATS, and that these additional data elements will increase the likelihood that the Central Repository will include sufficient order information to ensure that FINRA can continue to perform its surveillance with CAT Data rather than OATS data and can more quickly eliminate OATS. However, the Plan notes that OATS cannot be entirely eliminated until all FINRA members who currently report to OATS are reporting to the Central Repository, and that there will likely be some period of dual reporting until FINRA can verify that the data in the Central Repository is of sufficient quality for surveillance purposes and that data reported to the Central Repository meets the Error Rate standards set out in the CAT NMS Plan.472 With respect to rules and systems other than OATS, the CAT NMS Plan notes that based on preliminary industry analyses, broker-dealer recordkeeping and large trader reporting requirements under SEC Rule 17h-1 could potentially be eliminated. The Plan, however, notes that large trader self-identification and reporting responsibilities on Form 13H appear not be covered by the CAT.473

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Based on these analyses of duplicative or partially duplicative rules, the CAT NMS Plan provides that each Participant will prepare appropriate rule change filings to implement the rule modifications or deletions that can be made.474 The rule change filings should describe the process for phasing out the requirements under the relevant rule. Under the CAT NMS Plan, each Participant will file with the SEC the relevant rule change filing to eliminate or modify its rules within six months of the Participant’s determination that such modification or deletion is appropriate.475 Similarly, the CAT NMS Plan provides that each Participant will analyze the most appropriate and expeditious timeline and manner for eliminating duplicative and partially duplicative rules and systems. Upon the Commission’s approval of relevant rule changes, each Participant will implement this timeline. In developing these timelines, each Participant must consider when the quality of CAT Data will be sufficient to meet the surveillance needs of the Participants (i.e., to sufficiently replace current reporting data) before existing rules and systems can be eliminated.476

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b. Non-Duplicative Rules and Systems

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The CAT NMS Plan provides that each Participant will conduct an analysis to determine which of its rules and systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the CAT.477 Under the CAT NMS Plan, each Participant must analyze: (i) whether collection of such information remains appropriate; (ii) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and, (iii) if no longer appropriate, how the collection of such information could be efficiently terminated, the steps the Participants would need to take to seek Commission approval for the elimination of such rules and systems, and a timetable for such elimination. Each Participant should complete this analysis within eighteen months after Industry Members (other than Small Industry Members) are required to begin reporting data to the Central Repository (or a later date to be determined by each Participant if sufficient data is not available to complete the analysis in that timeframe).478

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c. Elimination of SEC Rules

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In addition, to the extent that the Commission eliminates rules that require information that is duplicative of information available through the Central Repository, the CAT NMS Plan provides that each Participant will analyze its rules and systems to determine whether any modifications to such rules or systems are necessary (e.g., to delete references to outdated SEC rules) to support data requests made pursuant to such SEC rules.479 Each Participant should complete its analysis within three months after the SEC approves the deletion or modification of an SEC rule related to the information available through the Central Repository. The CAT NMS Plan also provides that Participants will coordinate with the Commission regarding modification of the CAT NMS Plan to include information sufficient to eliminate or modify those Exchange Act rules or systems that the Commission deems appropriate.480

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pubdate: November 15, 2016 effdate: N/A +

21. Regulatory Access

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Regulatory Access + Compliance User: Self-Regulatory Organization + Keywords: + CAT Data, + SRO, + CAT NMS plan, + +

Under Section 6.5(c) of the CAT NMS Plan and as discussed above, the Plan Processor must provide regulators access to the Central Repository for regulatory and oversight purposes and create a method of accessing CAT Data that includes the ability to run complex searches and generate reports.481 Section 6.10(c) requires regulator access by two different methods: (1) an online targeted query tool with predefined selection criteria to choose from; and (2) user-defined direct queries and bulk extractions of data via a query tool or language allowing querying of all available attributes and data sources.482 Additional requirements concerning regulator access appear in Section 8 of Appendix D.483

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The CAT NMS Plan requires that the CAT must support a minimum of 3,000 regulatory users and at least 600 such users accessing the CAT concurrently without an unacceptable decline in performance.484 Moreover, the CAT must support an arbitrary number of user roles and, at a minimum, include defined roles for both basic and advanced regulatory users.485

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a. Online Targeted Query Tool

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Sections 8.1.1, 8.1.2, and 8.1.3 of Appendix D contain further specifications for the online targeted query tool.486 The tool must allow for retrieval of processed and/or validated (unlinked) data via an online query screen that includes a choice of a variety of pre-defined selection criteria.487 Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields listed in Section 8.1.1 (e.g., product type, CAT-Reporter-ID, and Customer-ID).488 Targeted queries would be logged such that the Plan Processor could provide monthly reports to the SROs and the SEC concerning metrics on performance and data usage of the search tool.489 The CAT NMS Plan further requires that acceptable response times for the targeted search be in increments of less than one minute; for complex queries scanning large volumes of data or large result sets (over one million records) response times must be available within 24 hours of the request; and queries for data within one business date of a 12-month period must return results within three hours regardless of the complexity of criteria.490 Under the CAT NMS Plan, regulators may access all CAT Data except for PII data (access to which would be limited to an authorized subset of Participant and Commission employees) and the Plan Processor must work with regulators to implement a process for providing them with access and routinely verifying a list of active users.491

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b. User-Defined Direct Queries and Bulk Extraction of Data

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Section 8.2 of Appendix D outlines the requirements for user-defined direct queries and bulk extraction of data, which regulators would use to obtain large data sets for internal surveillance or market analysis.492 Under the CAT NMS Plan, regulators must be able to create, save, and schedule dynamic queries that would run directly against processed and/or unlinked CAT Data.493 Additionally, CAT must provide an open application program interface (“API”) that allows use of analytic tools and database drivers to access CAT Data.494 Queries submitted through the open API must be auditable and the CAT System must contain the same level of control, monitoring, logging, and reporting as the online targeted query tool.495 The Plan Processor must also provide procedures and training to regulators that would use the direct query feature.496 Sections 8.2.1 and 8.2.2 of Appendix D contain additional specifications for user-defined direct queries and bulk data extraction, respectively.497

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c. Regulatory Access Schedule

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Section A.2 of Appendix C addresses the time and method by which CAT Data would be available to regulators.498 Section A.2(a) requires that data be available to regulators any point after the data enters the Central Repository and passes basic format validations.499 After errors are communicated to CAT Reporters on T+1, CAT Reporters would be required to report corrected data back to the Central Repository by 8:00 a.m. ET on T+3.500 Regulators must then have access to corrected and linked order and Customer data by 8:00 a.m. ET on T+5.501 Section A.2(b) generally describes Bidders’ approaches regarding regulator access and use of CAT Data and notes that although the SROs set forth the standards the Plan Processor must meet, they do not endorse any particular approach.502 Section A.2(c) outlines requirements the Plan Processor must meet for report building and analysis regarding data usage by regulators, consistent with, and in addition to, the specifications outlined in Section 8 of Appendix D.503

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pubdate: November 15, 2016 effdate: N/A +

22. Upgrades and New Functionalities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Upgrades and New Functionalities + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + CAT System, + +

Under Article VI of the CAT NMS Plan, the Plan Processor is responsible for consulting with the Operating Committee and implementing necessary upgrades and new functionalities. In particular, the Plan Processor would be required to, consistent with Appendix D, Upgrade Process and Development of New Functionality, design and implement appropriate policies and procedures governing the determination to develop new functionality for the CAT including, among other requirements, a mechanism by which changes can be suggested by Advisory Committee members, Participants, or the SEC.504 The Plan Processor shall, on an ongoing basis and consistent with any applicable policies and procedures, evaluate and implement potential system changes and upgrades to maintain and improve the normal day-to-day operating function of the CAT System.505 In consultation with the Operating Committee, the Plan Processor shall, on an as-needed basis and consistent with any applicable operational and escalation policies and procedures, implement such material system changes and upgrades as may be required to ensure effective functioning of the CAT System.506 Also in consultation with the Operating Committee, the Plan Processor shall, on an as-needed basis, implement system changes and upgrades to the CAT System to ensure compliance with applicable laws, regulations or rules (including those promulgated by the Commission or any Participant).507

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Appendix D provides additional detail about the obligations of the Plan Processor with respect to CAT Functional Changes, CAT Infrastructure Changes, and Testing of New Changes.508 In particular, the Plan Processor is required to propose a process for considering new functions, which must include a mechanism for suggesting changes to the Operating Committee from Advisory Committee members, the Participants and the Commission. The process must also include a method for developing impact assessments, including implementation timelines for proposed changes, and a mechanism by which functional changes that the Plan Processor wishes to undertake could be reviewed and approved by the Operating Committee.509

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The CAT NMS Plan also requires that the Plan Processor develop a similar process to govern the changes to the Central Repository—i.e., business-as-usual changes that could be performed by the Plan Processor with only a summary report to the Operating Committee, and infrastructure changes that would require approval by the Operating Committee.510 Finally, a process for user testing of new changes must be developed by the Plan Processor.511

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In addition, the CAT NMS Plan requires that the Plan Processor ensure that the Central Repository’s technical infrastructure is scalable (to increase capacity to handle increased reporting volumes); adaptable (to support future technology developments so that new requirements could be incorporated); and current (to ensure, through maintenance and upgrades, that technology is kept current, supported, and operational).512

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pubdate: November 15, 2016 effdate: N/A +

23. Business Continuity and Disaster Recovery

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Business Continuity and Disaster Recovery + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + +

The CAT NMS Plan provides that the Plan Processor must develop disaster recovery and business continuity plans to support the continuation of CAT business operations.513 The Plan Processor is required to provide the Operating Committee with regular reports on the CAT System’s operation and maintenance that specifically address Participant usage statistics for the Plan Processor and the Central Repository, including capacity planning studies and daily reports called for by Appendix D, as well as business continuity planning and disaster recovery issues for the Plan Processor and the Central Repository, taking into account the business continuity planning and disaster recovery requirements in the Business Continuity Planning/Disaster Recovery (“BCP/DR”) Process set forth in Appendix D.514

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The CAT NMS Plan requires the Business Continuity Plan to address protection of data, service for data submissions, processing, data access, support functions and operations.515 Additionally, the Plan Processor must develop a process to manage and report breaches.516 A secondary site that is fully equipped for immediate use must be selected to house critical staff necessary for CAT business operations, and planning should consider operational disruption and significant staff unavailability, but the Business Continuity Plan must also establish an effective telecommuting solution for critical staff which must ensure that CAT Data may not be downloaded to equipment that is not CAT-owned or compliant with CAT security requirements.517 The Business Continuity Plan will include a bi-annual test of CAT operations from the secondary site, and CAT operations staff must maintain and annually test remote access to ensure smooth operations in case of a “site un-availability event.”518 The Business Continuity Plan must also identify critical third-party dependencies to be involved in tests on an annual basis, and the Plan Processor will develop and annually test a crisis management plan to be invoked in specified circumstances.519 The Plan Processor must also conduct the following: an annual Business Continuity Audit using an Independent Auditor approved by the Operating Committee; and regular third party risk assessments to verify that security controls are in accordance with NIST SP 800-53.520 Appendix C mandates the use of a hot-warm structure for disaster recovery, where in the event of a disaster, the software and data would need to be loaded into the backup site for it to become operational.521

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Appendix D also requires that the Plan Processor provide an industry test environment that is discrete and separate from the production environment, but functionally equivalent to the production environment. The industry test environment must have end-to-end functionality meeting the standards of the production SLA, the performance metrics of the production environment, and management with the same information security policies applicable to the production environment.522 The industry test environment must have minimum availability of 24x6, and must support such things as: testing of technical upgrades by the Plan Processor, testing of CAT code releases impacting CAT Reporters, testing of changes to industry data feeds, industry-wide disaster recovery testing, individual CAT Reporter and Data Submitter testing of their upgrades against CAT interfaces and functionality, and multiple, simultaneous CAT Reporter testing.523 The Plan Processor must provide the linkage processing of data submitted during industry-wide testing, as well as support for industry testing.524

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pubdate: November 15, 2016 effdate: N/A +

24. Records and Accounting and Dissolution and Termination of the Company

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Records and Accounting and Dissolution and Termination of the Company + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + CAT System, + Business Continuity Planning/Disaster Recovery (“BCP/DR”), + +

Article IX of the CAT NMS Plan sets forth the Company’s obligations and policies related to books and records, accounting, company funds and tax matters.525 The CAT NMS Plan provides that the Company must maintain complete and accurate books and records of the Company in accordance with Rule 17a-1.526 The CAT NMS Plan further provides that books and records will be maintained and be made available at the office of the Plan Processor and/or such other Company designated locations.527 The CAT NMS Plan specifies that all CAT Data and other Company books and records are the property of the Company (and not the property of the Plan Processor), and to the extent in the possession of the Plan Processor, they will be made available to the Commission upon reasonable request.528

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Article IX also includes a confidentiality provision (subject to several express carve-outs) wherein the Receiving Party (the Company or a Participant) must hold in confidence information received from a Disclosing Party (the Company or any other Participant); and the Receiving Party may only disclose such information if prior written approval from the Disclosing Party is obtained.529 The confidentiality provision applies to information that is disclosed in connection with the CAT NMS Plan or the CAT System but expressly carves out the following: (i) CAT Data or information otherwise disclosed pursuant to the requirements of Rule 613530; (ii) any information that was already lawfully in the Receiving Party’s possession and, to the knowledge of the Receiving Party, free from any confidentiality obligation to the Disclosing Party at the time of receipt from the Disclosing Party; (iii) any information that is, now or in the future, public knowledge; (iv) any information that was lawfully obtained from a third party having the right to disclose it free from any obligation of confidentiality; or (v) any information that was independently developed by the Receiving Party prior to disclosure by a Disclosing Party.531 Finally, the CAT NMS Plan provides that the confidentiality provision does not restrict disclosures required by: (i) applicable laws and regulations, stock market or exchange requirements or the rules of any self-regulatory organization having jurisdiction; (ii) an order, subpoena or legal process; or (iii) for the conduct of any litigation or arbitral proceeding among the Participants (and their respective representatives) and/or the Company.532

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The CAT NMS Plan includes provisions relating to the dissolution of the Company.533 Any dissolution of the Company requires SEC approval and must be as a result of one of the following events (a “Triggering Event”): (i) unanimous written consent of the Participants; (ii) an event makes it unlawful or impossible for the Company business to be continued; (iii) the termination of one or more Participants such that there is only one remaining Participant; or (iv) a decree of judicial dissolution.534 If a Triggering Event has occurred and the SEC approves the Company’s dissolution, the Operating Committee would act as liquidating trustee and liquidate and distribute the Company pursuant to the following necessary steps under the CAT NMS Plan: (i) sell the Company’s assets; and (ii) apply and distribute the sale proceeds by first, paying the Company’s debts and liabilities; second, establishing reasonably necessary reserves for contingent recourse liabilities and obligations; and third, making a distribution to the Participants in proportion to the balances in their positive Capital Accounts.535

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pubdate: November 15, 2016 effdate: N/A +

25. Security of Data

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Security of Data + Compliance User: Self-Regulatory Organization + Keywords: + CAT Reporters, + Central Repository, + CAT Data, + CAT NMS plan, + 17 CFR 242.1000–1007, + Federal Information Systems and Organizations, + Contingency Planning Guide, + Cryptographic Key Generation, + Data Confidentiality, + +

The CAT NMS Plan provides that the Plan Processor is responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository, including during all communications between CAT Reporters and the Plan Processor, data extraction, data manipulation and transformation, loading to and from the Central Repository, and data maintenance by the Central Repository.536 The Plan Processor must, among other things, require that individuals with access to the Central Repository agree to use CAT Data only for appropriate surveillance and regulatory activities and to employ safeguards to protect the confidentiality of CAT Data.537

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In addition, the Plan Processor must develop a comprehensive information security program as well as a training program that addresses the security and confidentiality of all information accessible from the CAT and the operational risks associated with accessing the Central Repository.538 The Plan Processor must also designate one of its employees as CISO; among other things, the CISO is responsible for creating and enforcing appropriate policies, procedures, and control structures regarding data security.539 The Technical Specifications, which the Plan Processor must publish, must include a detailed description of the data security standards for CAT.540 Appendix D of the CAT NMS Plan sets forth minimum data security requirements for CAT that the Plan Processor must meet.541

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a. General Standards

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The CAT NMS Plan provides that the data security standards of the CAT System shall, at a minimum satisfy all applicable regulations regarding database security, including provisions of Reg SCI.542 Appendix D of the CAT NMS Plan contains a partial list of industry standards to which the Plan Processor will adhere, including standards issued by the NIST543; by the Federal Financial Institutions Examination Council,544 and the International Organization for Standardization.545

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The CAT NMS Plan specifies that the Plan Processor is responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository, including during all communications between CAT Reporters and the Plan Processor, data extraction, data manipulation and transformation, loading to and from the Central Repository, and data maintenance by the Central Repository.546 The Plan Processor must also designate one of its employees as the CISO; among other things, the CISO is responsible for creating and enforcing appropriate policies, procedures, and control structures regarding data security.547

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b. Data Confidentiality

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The CAT NMS Plan also requires that the Plan Processor must develop a comprehensive information security program, with a dedicated staff for the Central Repository, that employs state of the art technology, which program will be regularly reviewed by the CCO and CISO, as well as a training program that addresses the security and confidentiality of all information accessible from the CAT and the operational risks associated with accessing the Central Repository.548 The Plan Processor must also implement and maintain a mechanism to confirm the identity of all individuals permitted to access the CAT Data stored in the Central Repository; maintain a record of all instances where such CAT Data was accessed; and implement and maintain appropriate policies regarding limitations on trading activities of its employees and independent contractors involved with all CAT Data.549 The Technical Specifications, which will be published after the Plan Processor is selected, must include a detailed description of the data security standards for the CAT.550

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According to the CAT NMS Plan, the Plan Processor must require that individuals with access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to agree: (i) to use appropriate safeguards to ensure the confidentiality of the CAT Data stored in the Central Repository and (ii) to not use CAT Data stored in the Central Repository for purposes other than surveillance and regulation in accordance with such individual’s employment duties.551 A Participant, however, is permitted to use the CAT Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as permitted by applicable law, rule, or regulation.552 In addition, the CAT NMS Plan provides that all individuals with access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) must execute a personal “Safeguard of Information Affidavit” in a form approved by the Operating Committee providing for personal liability for misuse of data.553

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c. Data Security

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Appendix D of the CAT NMS Plan sets forth minimum data security requirements for CAT that the Plan Processor must meet, including various connectivity, data transfer, and encryption requirements.554

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Appendix D states that the CAT Systems must have encrypted internet connectivity, and that CAT Reporters must connect to the CAT infrastructure using secure methods such as private lines or, for smaller broker-dealers, Virtual Private Network connections over public lines.555 Remote access to the Central Repository must be limited to authorized Plan Processor Staff and must use secure “Multi-factor Authentication” (or “MFA”) that meets or exceeds Federal Financial Institutions Examination Council security guidelines surrounding authentication best practices.556 Appendix D also notes that CAT databases must be deployed within the network infrastructure so that they are not directly accessible from external end-user networks.557 If public cloud infrastructures are used, Appendix D states that network segments or private tenant segmentation must be used to isolate CAT Data from unauthenticated public access.558

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Regarding data encryption, Appendix D states that all CAT Data must be encrypted inflight using industry standard best practices (e.g., SSL/TLS).559 Appendix D provides that symmetric key encryption must use a minimum key size of 128 bits or greater (e.g., AES-128), though larger keys are preferable.560 Asymmetric key encryption (e.g., PGP) for exchanging data between Data Submitters and the Central Repository is desirable.561

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Appendix D further states that CAT Data stored in a public cloud must be encrypted at-rest.562 Non-personally identifiable information in CAT Data stored in a Plan Processor private environment is not required to be encrypted at-rest.563 If public cloud managed services are used that would inherently have access to the data (e.g., BigQuery, S3, Redshift), then the key management surrounding the encryption of that data must be documented (particularly whether the cloud provider manages the keys, or if the Plan Processor maintains that control).564 Auditing and real-time monitoring of the service for when cloud provider personnel are able to access/decrypt CAT Data must be documented, as well as a response plan to address instances where unauthorized access to CAT Data is detected.565 Key management/rotation/revocation strategies and key chain of custody must also be documented in detail.566

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Regarding CAT Data storage, the CAT NMS Plan states that data centers housing CAT Systems (whether public or private) must, at a minimum, be SOC 2 certified by an independent third-party auditor.567 The frequency of the audit must be at least once per year.568 Furthermore, CAT computer infrastructure may not be commingled with other non-regulatory systems (or tenets, in the case of public cloud infrastructure).569 Systems hosting the CAT processing for any applications must be segmented from other systems as far as is feasible on a network level (firewalls, security groups, ACL’s, VLAN’s, authentication proxies/bastion hosts and similar).570 In the case of systems using inherently shared infrastructure/storage (e.g., public cloud storage services), an encryption/key management/access control strategy that effectively renders the data private must be documented.571

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Appendix D further requires that the Plan Processor must include penetration testing and an application security code audit by a reputable (and named) third party prior to the launch of CAT as well as periodically as defined in the SLAs.572 Reports of the audit will be provided to the Operating Committee as well as a remediation plan for identified issues.573 The penetration test reviews of the Central Repository’s network, firewalls, and development, testing and production systems should help the CAT evaluate the systems’ security and resiliency in the face of attempted and successful systems intrusions.574

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The CAT NMS Plan also addresses issues surrounding access to CAT Data. Among other things, the CAT NMS Plan requires the Plan Processor to provide an overview of how access to PII and other CAT Data by Plan Processor employees and administrators is restricted.575 This overview must include items such as, but not limited to, how the Plan Processor will manage access to the systems, internal segmentation, MFA, separation of duties, entitlement management, and background checks.576 The Plan Processor must develop and maintain policies and procedures reasonably designed to prevent, detect, and mitigate the impact of unauthorized access or usage of data in the Central Repository.577 The CAT NMS Plan also specifically states that a Role Based Access Control (“RBAC”) model must be used to permission users with access to different areas of the CAT System.578 The Plan Processor must log every instance of access to Central Repository data by users.579 The CAT NMS Plan also has specific provisions related to passwords and logins, particularly as these relate to accessing PII in the Central Repository.580 Any login to the system that is able to access PII data must follow non-PII password rules and must be further secured via MFA.581

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Appendix D also addresses what should be done in the event there is a breach in the security systems protecting CAT Data. Appendix D requires the Plan Processor to develop policies and procedures governing its responses to systems or data breaches.582 Such policies and procedures will include a formal cyber incident response plan, and documentation of all information relevant to breaches.583 The cyber incident response plan will provide guidance and direction during security incidents, and the plan will be subject to approval by the Operating Committee.584

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d. Data Access and Use

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The CAT NMS Plan states that the Plan Processor shall provide Participants and the Commission with access to and use of the CAT Data stored in the Central Repository solely for the purpose of performing their respective regulatory and oversight responsibilities pursuant to federal securities laws, rules and regulations or any contractual obligations.585 The Plan specifies that Participants shall establish, maintain and enforce written policies and procedures reasonably designed to ensure the confidentiality of the CAT Data obtained from the Central Repository and limit the use of CAT Data obtained from the Central Repository to surveillance and regulatory purposes.586 The CAT NMS Plan provides that Participants must adopt and enforce policies and procedures that implement effective information barriers between each Participant’s regulatory and non-regulatory Staff with regard to CAT Data, permit only persons designated by Participants to have access to the CAT Data stored in the Central Repository; and impose penalties for Staff non-compliance with any of its or the Plan Processor’s policies and procedures with respect to information security.587 However, the Plan provides that a Participant may use the Raw Data588 it reports to the Central Repository for “commercial or other” purposes if not prohibited by applicable law, rule or regulation.589

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Article VI of the CAT NMS Plan requires that the Plan Processor provide regulators access to the Central Repository for regulatory and oversight purposes and create a method of accessing CAT Data that includes the ability to run complex searches and generate reports.590 Section 6.10(c) of the CAT NMS Plan requires regulator access by two different methods: (i) an online targeted query tool with predefined selection criteria to choose from; and (ii) user-defined direct queries and bulk extractions of data via a query tool or language allowing querying of all available attributes and data sources.591 Appendix D contains technical details and parameters for use by the Plan Processor in developing the systems that will allow regulators access to CAT Data.592

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Appendix C addresses the time and method by which CAT Data would be available to regulators.593 Specifically, Appendix C requires that data be available to regulators any point after the data enters the Central Repository and passes basic format validations.594 After errors are communicated to CAT Reporters on a T+1 basis, CAT Reporters would be required to report corrected data back to the Central Repository by 8:00 a.m. ET on T+3.595 Regulators must then have access to corrected and linked order and Customer data by 8:00 a.m. ET on T+5.596 Appendix C further outlines requirements the Plan Processor must meet for report building and analysis regarding data usage by regulators, consistent with, and in addition to, the specifications outlined in Appendix D.597

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e. Personally Identifiable Information

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According to the CAT NMS Plan, there are two separate categories of CAT Data for data security and confidentiality purposes: (i) PII; and (ii) other data related to orders and trades reported to the CAT.598 The Plan requires additional levels of protection for PII that is collected from Customers and reported to the Central Repository.599 For example, the CAT NMS Plan requires that all CAT Data provided to regulators must be encrypted, but that PII data shall be masked unless users have permission to view the CAT Data that has been requested.600 The Plan requires that all PII data must be encrypted both at-rest and in-flight, including archival data storage methods such as tape backup.601 Storage of unencrypted PII data is prohibited.602 The Plan Processor must describe how PII encryption is performed and the key management strategy (e.g., AES-256, 3DES).603

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An additional protection afforded to PII concerns specific requirements for access. The CAT NMS Plan specifies that by default, users entitled to query CAT Data are not automatically authorized for PII access, and that the process by which a person becomes entitled for PII access, and how they then go about accessing PII data, must be documented by the Plan Processor.604 Access to PII will be based on a Role Based Access Control (“RBAC”) model, and shall follow the “least privileged” practice of limiting access as much as possible.605 In this regard, the CAT NMS Plan states that access will be limited to a “need-to-know” basis, and it is expected that the number of people given access to PII associated with Customers and accounts will be much lower than the number granted access to non-PII CAT Data.606 The CAT NMS Plan further specifies that any login system that is able to access PII must follow non-PII password rules and must be further secured via MFA.607 MFA authentication for all logins (including non-PII) is required to be implemented by the Plan Processor.608

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The CAT NMS Plan also requires that a designated officer or employee at each Participant and the Commission, such as the chief regulatory officer, must, at least annually, review and certify that persons with PII access have appropriately been designated to access PII in light of their respective roles.609 The CAT NMS Plan requires that a full audit trail of access to the PII collected at the Central Repository—which would include who accessed what data and when—must be maintained, and that the CCO and CISO shall have access to daily PII reports that list all users who are entitled for PII access, as well as the audit trail of all PII access that has occurred for the day being reported on.610

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The CAT NMS Plan also restricts the circumstances under which PII can be provided to an authorized person. The CAT NMS Plan provides, for example, that PII must not be included in the result set(s) from online or direct query tools, reports or bulk data extraction.611 Instead, the CAT NMS Plan requires any such results, reports or extractions to be displayed with “non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID).”612 The CAT NMS Plan states that the PII corresponding to these non-PII identifiers can be gathered by using a separate “PII workflow.”613

+

Finally, the CAT NMS Plan further protects PII by requiring that PII data be stored separately from other CAT Data.614 The Plan specifies that PII cannot be stored with the transactional CAT Data, and it must not be accessible from public internet connectivity.615

+
+
pubdate: November 15, 2016 effdate: N/A +

26. Governing or Constituent Documents

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Governing or Constituent Documents + Compliance User: Self-Regulatory Organization + Keywords: + Plan Processor, + Implementation Phases, + 17 CFR 242.608(a)(4)(i), + CAT NMS plan, + +

Rule 608 requires copies of all governing or constituent documents relating to any person (other than a self-regulatory organization) authorized to implement or administer such plan on behalf of its sponsors.616 The Participants will submit to the Commission such documents related to the Plan Processor when the Plan Processor is selected.617

+
+
pubdate: November 15, 2016 effdate: N/A +

27. Development and Implementation Phases

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Development and Implementation Phases + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 608, + Central Repository, + Initial Plan Processor, + 17 CFR 242.613(a)(1)(x), + CAT Reporter, + Operating Committee, + Technical Specifications, + +

The terms of the Plan will be effective immediately upon approval of the Plan by the Commission (the “Effective Date”).618 The Plan sets forth each of the significant phases of development and implementation contemplated by the Plan, together with the projected date of completion of each phase.619 These include the following, each of which is subject to orders otherwise by the Commission:

+

Within two months after the Effective Date, the Participants will jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Article V. Following the selection of the Initial Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by Rule 608;

+

Within four months after the Effective Date, each Participant will, and, through its Compliance Rule, will require its Industry Members to, synchronize its or their Business Clocks and certify to the Chief Compliance Officer (in the case of Participants) or the applicable Participant (in the case of Industry Members) that it has met this requirement;

+

Within six months after the Effective Date, the Participants must jointly provide to the SEC a document outlining how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities,620 including Primary Market Transactions in securities that are not NMS Securities, which document will include details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate;

+

Within one year after the Effective Date, each Participant must report Participant Data to the Central Repository;

+

Within fourteen months after the Effective Date, each Participant must implement a new or enhanced surveillance system(s);

+

Within two years after the Effective Date, each Participant must, through its Compliance Rule, require its Industry Members (other than Small Industry Members) to report Industry Member Data to the Central Repository; and

+

Within three years after the Effective Date, each Participant must, through its Compliance Rule, require its Small Industry Members to provide Industry Member Data to the Central Repository.621

+

In addition, Industry Members and Participants will be required to participate in industry testing with the Central Repository on a schedule to be determined by the Operating Committee. Furthermore, Appendix C, A Plan to Eliminate Existing Rules and Systems (Rule 613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth additional implementation details concerning the elimination of rules and systems.

+

The CCO will appropriately document objective milestones to assess progress toward the implementation of the CAT.622

+

As required by Rule 613(a)(1)(x),623 the CAT NMS Plan also sets forth detailed objective milestones, with projected completion dates, towards CAT implementation.624 The milestones discussed in the Plan include timeframes for when the Plan Processor will publish Technical Specifications for Participants and Industry Members to report order and market maker quote data and Customer Account Information625 to the Central Repository, as well as timeframes for connectivity and acceptance testing for the reporting of this information.626 For example, the Plan Processor will publish Technical Specifications for Industry Member submission of order data one year before Industry Members are required to begin submitting this data to the Central Repository, and the Plan Processor will begin connectivity testing and accepting order data from Industry Members for testing purposes six months before Industry Members are required to begin submitting this data to the Central Repository.627 The Plan Processor will begin connectivity testing and accepting order and market maker quote data from Participants for testing purposes three months before Participants are required to begin reporting this data to the Central Repository and will publish Technical Specifications for Participant submission of this data six months before Participants are required to submit this data to the Central Repository.628 The CAT NMS Plan also includes implementation timeframes for the linkage of the lifecycle of order events, regulator access to the Central Repository, and the integration of other data (such as SIP quote and trade data) into the Central Repository.629

+
+
pubdate: November 15, 2016 effdate: N/A +

28. Written Understanding or Agreements Relating to Interpretation of, or Participation in, the Plan

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Written Understanding or Agreements Relating to Interpretation of, or Participation in, the Plan + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + Operating Committee, + +

The Participants have no written understandings or agreements relating to interpretations of, or participation in, the Plan other than those set forth in the Plan itself.630 For example, Section 4.3(a)(iii) states that the Operating Committee only may authorize the interpretation of the Plan by Majority Vote, Section 6.9(c)(i) addresses interpretations of the Technical Specifications, and Section 8.2 addresses the interpretation of Sections 8.1 and 8.2.631 In addition, Section 3.3 sets forth how any entity registered as a national securities exchange or national securities association under the Exchange Act may become a Participant.632

+
+
pubdate: November 15, 2016 effdate: N/A +

29. Dispute Resolution

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Description of the Proposed Plan, Dispute Resolution + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + Participation Fee, + Industry Members, + CAT NMS plan, + +

The Plan does not include a general provision addressing the method by which disputes arising in connection with the operation of the Plan will be resolved.633 The Plan does, however, provide the means for resolving disputes regarding the Participation Fee.634 Specifically, Article III states that, in the event that the Company and a prospective Participant do not agree on the amount of the Participation Fee, such amount will be subject to the review by the Commission pursuant to Section 11A(b)(5) of the Exchange Act.635 In addition, the Plan addresses disputes with respect to fees charged to Participants and Industry Members pursuant to Article XI. Specifically, such disputes will be determined by the Operating Committee or a Subcommittee designated by the Operating Committee.636 Decisions by the Operating Committee or such designated Subcommittee on such matters will be binding on Participants and Industry Members, without prejudice to the rights of any Participant or Industry Member to seek redress from the Commission pursuant to Rule 608 or in any other appropriate forum.637

+
-
pubdate: June 20, 2015 effdate: N/A -

III. Description of the Plan

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan +
pubdate: November 15, 2016 effdate: N/A +

IV. Discussion and Commission Findings

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings Compliance User: Self-Regulatory Organization Keywords: SRO, - Rule 608, - Amendment No. 2, + Rule 613 of Regulation NMS, + CAT NMS plan, + CAT Data, + 17 CFR 242.608(b)(2), -

Set forth in this Section III is the statement of the purpose of Amendment No. 2 to the Selection Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,8 prepared and submitted by the SROs to the Commission.9

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pubdate: June 21, 2015 effdate: N/A -

A. Background

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background +

In 1975, Congress directed the Commission, through the enactment of Section 11A of the Act,638 to facilitate the establishment of a national market system. Section 11A(a)(3)(B) of the Act authorizes the Commission, “by rule or order, to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities.”639 The Commission adopted Rule 613 of Regulation NMS under the Act,640 requiring the SROs to submit an NMS plan to create, implement, and maintain the CAT.641

+

Rule 613 tasks the Participants with the responsibility to develop a CAT NMS Plan that achieves the goals set forth by the Commission. Because the Participants will be more directly responsible for the implementation of the CAT NMS Plan, in the Commission’s view, it is appropriate that they make the judgment as to how to obtain the benefits of a consolidated audit trail in a way that is practicable and cost-effective in the first instance. The Commission’s review of an NMS plan is governed by Rule 608 and, under that rule, approval is conditioned upon a finding that the proposed plan is “necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act.”642 Further, Rule 608 provides the Commission with the authority to approve an NMS plan, “with such changes or subject to such conditions as the Commission may deem necessary or appropriate.”643 In reviewing the policy choices made by the Participants in developing the CAT NMS Plan, the Commission has sought to ensure that they are supported by an adequate rationale, do not call into question the Plan’s satisfaction of the approval standard in Rule 608, and reasonably achieve the benefits of a consolidated audit trail without imposing unnecessary burdens. In addition, because of the evolving nature of the data captured by the CAT and the technology used, as well as the number of decisions still to be made in the process of implementing the CAT NMS Plan, the Commission has paid particular attention to the structures in place to guide decision-making going forward. These include the governance of the Company, the provisions made for Commission and other oversight, the standards established, and the development milestones provided for in the Plan.

+

The Commission received 24 comment letters on the CAT NMS Plan.644 The commenters included, among others, national securities exchanges, technology providers, academics, broker-dealers, investors, and organizations representing industry participants. Of the comment letters received regarding the Plan, 13 expressed general support,645 3 comment letters expressed opposition to the Plan,646 and 8 comment letters neither supported nor opposed the Plan.647 Many of the commenters suggested modifications to certain provisions of the Plan or identified what they believed were deficiencies in the Plan.

+

The most significant areas raised in the comment letters pertained to: (i) the security and confidentiality of CAT Data (especially of PII); (ii) the cost and funding of the CAT; (iii) the timing of the retirement of duplicative regulatory reporting systems; (iv) the implementation time frame; (v) governance (particularly with respect to industry representation); (vi) the clock synchronization standard; (vi) error rates; and (vii) an overall lack of detail in the CAT NMS Plan.

+

As discussed in detail below, the Commission has determined to approve the CAT NMS Plan, as amended, pursuant to Section 11A of the Act648 and Rule 608.649 The Commission believes that the Plan is reasonably designed to improve the completeness, accuracy, accessibility and timeliness of order and execution data used by regulators. The Commission believes that the Plan will facilitate regulators’ access to more complete, accurate and timely audit trail data. The Plan will also allow for more efficient and effective surveillance and analysis, which will better enable regulators to detect misconduct, reconstruct market events, and assess potential regulatory changes. As a result, the CAT NMS Plan should significantly improve regulatory efforts by the SROs and the Commission, including market surveillance, market reconstructions, enforcement investigations, and examinations of market participants. The Commission believes that improved regulatory efforts, in turn, will strengthen the integrity and efficiency of the markets, which will enhance investor protection and increase capital formation.

+

As noted, commenters raised concerns about, and suggested alternatives to, certain Plan provisions. The Participants submitted five letters which responded to the comments and provided certain suggestions for amendments to the Plan, as discussed in detail below. After considering the proposed Plan, the issues raised by commenters, and the Participants’ responses, the Commission has amended certain aspects of the Plan and has determined that the proposed Plan, as amended by the Commission, satisfies the standard of Rule 608. The Commission finds that the CAT NMS Plan is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of a national market system, or is otherwise in furtherance of the purposes of the Act.650 The Commission does not believe that the remaining concerns identified by commenters individually or collectively call into question the Plan’s satisfaction of the approval standard in Rule 608, or otherwise warrant a departure from the policy choices made by the Participants.

+
pubdate: November 15, 2016 effdate: N/A +

A. Definitions, Effectiveness of Agreement, and Participation (Articles I, II, and III)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Definitions, Effectiveness of Agreement, and Participation (Articles I, II, and III) Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, CAT NMS plan, - Bidding, + SRO, + Operating Committee, + SEC Rule 600(b)(47), + Advisory Committee, + +

Article I of the CAT NMS Plan sets forth definitions for certain terms used in the CAT NMS Plan, as well as principles of interpretation. Article II of the CAT NMS Plan describes the corporate structure under which the Participants will build and maintain the CAT, and Article III addresses participation in the Plan, including admission of new Participants, resignation and termination of Participants, and the obligations and liability of Participants.651

+

The Commission did not receive any comments relating to Article II or III of the CAT NMS Plan, and is approving them as proposed, with certain technical conforming changes to reflect the Participants’ proposal to treat the Company as a non-profit and certain Exchange Act obligations.652 The Commission did receive comments on three definitions653: (1) Allocation Report;654 (2) Trading Day;655 and (3) Eligible Security.656

+

For the definition of Allocation Report,657 one commenter stated that “allocation time is not consistently defined or captured,” and that without further guidance, CAT Reporters may have difficulties reporting this data element.658 The Participants responded to this comment by explaining that the Participants have not yet determined how “time of the allocation” will be defined, but indicated that they would address this in the Technical Specifications.659

+

For the definition of Trading Day,660 one commenter stated that the cut-off time for Trading Day is not defined and argued that, consistent with OATS, the cut-off time should be 4:00 p.m., ET.661 The commenter argued a later cut-off time would compress the time CAT Reporters have to collect, validate, and report data in a timely manner.662 The Participants responded to this comment by explaining that a universal cut-off time for Trading Day is not recommended for the CAT because cut-off times may differ based on the different types of Eligible Securities (including the potential expansion of the security types covered in Eligible Securities). Rather, the Participants stated that the Operating Committee should determine cutoff times for the Trading Day and indicated that they would address this in the Technical Specifications.663

+

For the definition of Eligible Security,664 one commenter stated that “a full audit trail would include transactions both on and off exchange.” 665 The Participants noted that the CAT will capture on- and off-exchange transactions for NMS Securities and OTC Equity Securities, as the CAT would “capture orders and transactions in NMS Securities and OTC Equity Securities, even if they occur in ATSs/dark pools, other trading venues or internally within broker-dealers.”666

+

The Commission believes that the definitions and principles of interpretation set forth in Article I of the CAT NMS Plan are reasonably designed to provide clarity to the terms set forth in the CAT NMS Plan. In response to the commenters that recommended modifications to the definitions of Allocation Report and Trading Day, the Commission believes it is reasonable for the Participants to address the Allocation Report and Trading Day specifics raised by commenters in the Technical Specifications to provide the CAT with necessary flexibility during its implementation, and based on the Plan’s requirement that the Technical Specifications will be published no later than one year prior to when Industry Member reporting begins.667 With respect to Eligible Securities, the Commission believes that the commenter’s concern is addressed already in the Plan.

+

The Commission also notes that the Participants submitted a letter to the Commission indicating that the names of certain Participants had changed and that two new exchanges have been approved by the Commission.668 Specifically, the Participants stated that BATS Exchange, Inc. is now known as Bats BZX Exchange, Inc.; BATS Y-Exchange, Inc. is now known as Bats BYX Exchange, Inc.; EDGA Exchange, Inc. is now known as Bats EDGA Exchange, Inc.; EDGX Exchange, Inc. is now known as Bats EDGX Exchange, Inc.; NASDAQ OMX BX, Inc. is now known as NASDAQ BX, Inc.; and NASDAQ OMX PHLX LLC is now known as NASDAQ PHLX LLC.669 In addition, the Participants stated that two new exchanges were approved by the Commission: ISE Mercury, LLC and Investors’ Exchange, LLC.670 Thus, the Participants suggested that the Commission amend the Plan to reflect that ISE Mercury, LLC and Investors’ Exchange LLC are Participants to the CAT NMS Plan, and to include their names on the signature block for the CAT NMS Plan (including the Plan’s appendices).671 The Commission believes it is appropriate to amend the CAT NMS Plan to reflect the name changes of certain Participants because this will ensure that the names of those Participants are accurately reflected, and to amend the CAT NMS Plan to add ISE Mercury, LLC and Investors’ Exchange, LLC as Participants to the CAT NMS Plan because all SROs are intended to be Participants to the CAT NMS Plan.672

+
+
pubdate: November 15, 2016 effdate: N/A +

B. Management of the Company (Article IV)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Management of the Company (Article IV) + Compliance User: Self-Regulatory Organization + Keywords: + Article IV of the CAT NMS Plan, + Operating Committee, + Advisory Committee, -

The Selection Plan, filed with the Commission on September 3, 2013,10 and approved on February 21, 2014,11 governs the process for Participant review and vote for Bids for the role of Plan Processor for the CAT NMS Plan.12

-

After gaining experience with the development process for the CAT NMS Plan, the Participants believe it is advisable to amend the Selection Plan to ensure that the Participants will be able to choose a Plan Processor without any potential conflict of interest raised by having a Participant vote in any round in the selection process where that Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round. The Participants propose amending the Selection Plan to require recusal of that Bidding Participant in any of those situations.

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pubdate: June 22, 2015 effdate: N/A -

1. The Selection Plan Currently Requires Recusal on a Vote Only in the Second Round of the Selection Process

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background, The Selection Plan Currently Requires Recusal on a Vote Only in the Second Round of the Selection Process +

Article IV of the CAT NMS Plan describes the management structure of CAT NMS, LLC.673 Many commenters raised concerns related to the governance structure set forth in the CAT NMS Plan.674 Most of the governance comments focused on the role, composition, obligations and powers of the Operating Committee and the Advisory Committee.675 A few commenters identified potential conflicts of interest (both with respect to the Officers and the Participants) as well as other governance concerns, including whether the CAT should be under the Commission’s direct and sole control.676

+
pubdate: November 15, 2016 effdate: N/A +

1. Operating Committee

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Management of the Company (Article IV), Operating Committee Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, - Bidding Participant, - Section VI(E) Selection Plan, + Article IV of the CAT NMS Plan, + SRO, -

Under the Selection Plan, a Bidding Participant is recused from a vote only in the second round of voting by the Selection Committee to select the Plan Processor (as set forth in Section VI(E)(4) of the Selection Plan) where that Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round.

+

Article IV of the CAT NMS Plan provides that an Operating Committee will manage the CAT, where each Participant appoints one member of the Operating Committee, and each Participant appointee has one vote.677 Article IV also sets forth certain other provisions relating to the Operating Committee, including identification of those actions requiring a Majority Vote, a Supermajority Vote, or a unanimous vote; and the management of conflicts of interest. Commenters raised concerns about the composition, voting and independence of the Operating Committee.

+

Some commenters argued that the composition of the Operating Committee should not be limited to the SROs,678 arguing that non-SROs also should have full voting powers.679 Commenters recommended that the Operating Committee should include members who are broker-dealers,680 and other non-SRO and non-broker-dealer market participants,681 institutional investors, broker-dealers with a substantial retail base, broker-dealers with a substantial institutional base, a data management expert, and a federal agency representative with national security cybersecurity experience.682 Another commenter recommended including representatives of registered funds as members of the Operating Committee, noting their strong interest in ensuring the security of CAT Data and that CAT Reporter position information and trading strategies not be compromised. 683 Two commenters argued that no legal authority bars broker-dealers or other non-SROs from serving on the Operating Committee.684

+

In support of their recommendation to expand the Operating Committee’s membership, commenters stressed the need for meaningful input by stakeholders with specific expertise, which they believed would improve the implementation and maintenance of the CAT.685 One commenter described the CAT as “a uniquely complex facility”686 and another commenter described the CAT as “a critical market utility designed to benefit the national market system and all market participants,” and stated that as such “the governance and operation of the CAT NMS Plan should be structured to obtain meaningful input from the broker-dealer community.”687 One of these commenters noted broker-dealers would have complementary “expertise and insight” to the SROs, insofar as broker-dealers would be “providing the lion’s share of the reported data to the CAT.”688 This commenter clarified that, in recommending broker-dealer participation on the Operating Committee, the commenter “does not expect (or request) that broker-dealer representatives would have access to the surveillance patterns and other regulatory means by which the SROs will use the data collected by the CAT.”689

+

One commenter described the industry’s experience as part of the DAG as informing its belief that full industry participation on the Operating Committee is required.690 This commenter stated that “the SROs limited the Industry’s participation in important aspects of the development process” to an extent that direct engagement with Bidders “provided a more complete and relevant picture of the proposed CAT solution than had been received through involvement in the DAG.”691 This commenter argued the Operating Committee should include non-SRO industry participants because it would allow them to participate in selecting a Plan Processor and developing the CAT operating procedures.692

+

One commenter recommended that the allocation of voting rights among the Participants be reevaluated, noting that the Commission’s Equity Market Structure Advisory Committee (“EMSAC”) provided a similar recommendation regarding plan governance generally.693 This commenter also recommended limiting the number of Operating Committee actions that require unanimous voting.694

+

Commenters also recommended that the Operating Committee include “independent directors.”695 One commenter recommended that these independent directors be both non-industry and non-SRO.696 Other commenters argued that the “CAT governance structure should include independent directors, comprised of both non-[i]ndustry and [i]ndustry participants.”697

+

In response to comments regarding the composition of the Operating Committee, the Participants argued that the Operating Committee should remain as a committee solely of SROs because only SROs have a statutory obligation under the Exchange Act to create, implement and maintain the CAT and regulate securities markets, whereas broker-dealers do not.698 The Participants also identified potential conflicts of interest if the “subjects of surveillance [are] involved in decision-making of a plan that, at its core has SEC and [SRO] regulatory surveillance as its primary objective.”699 Finally, the Participants discussed their belief that the Advisory Committee, discussed below, is the appropriate forum for non-Participants to provide their views.700

+

In response to comments regarding the allocation of voting rights among the Participants, the Participants explained that each Participant has one vote to permit equal representation among the Participants.701 The Participants indicated their commitment to this allocation of voting rights because each Participant independently has obligations with regard to the CAT under Rule 613, and each Participant’s regulatory surveillance obligations are not constrained by revenues or market share. The Participants also noted that this voting model is common among other NMS plans.702

+

In response to the commenter suggesting that the CAT NMS Plan should limit the number of provisions requiring a unanimous vote, the Participants highlighted that only three extraordinary circumstances require a unanimous vote under the CAT NMS Plan: (i) obligating Participants to make a loan or capital contribution to the Company;703 (ii) dissolving the Company;704 and (iii) acting by written consent in lieu of a meeting.705

+

In response to comments recommending the CAT governance structure include independent directors, the Participants noted that many of the Participants have independent representation on their governing boards, such that each Participant’s input regarding the CAT would reflect independent views.706

+

The Commission notes that the Participants’ proposed governance structure—with both an Operating Committee and an Advisory Committee—is similar to the governance structure used today by other NMS plans, and the Commission believes that this general structure is reasonably designed to allow the Participants to fulfill their regulatory obligations and, at the same time, provide an opportunity for meaningful input from the industry and other stakeholders.707 The Commission believes that it is reasonable for the Operating Committee to be composed exclusively of SROs. As the Participants point out, the CAT NMS Plan is the vehicle through which they will fulfill key regulatory and oversight responsibilities. The Commission notes the Participants’ statutory obligations as SROs, the opportunity for Advisory Committee input on the CAT NMS Plan decisions, the opportunity for public comment on Plan amendments, and close Commission oversight, when reaching that determination.708

+

Furthermore, the Commission notes that the current provisions, which allocate voting rights such that each Participant has one vote, is consistent with other NMS plans and recognizes that the obligations imposed by Rule 613 on the SROs are also imposed on each SRO independently. With respect to the limited use of a unanimous voting standard, the Commission believes that the Plan is reasonably designed to facilitate effective governance and notes that only the three extraordinary Operating Committee actions specified above require unanimity, whereas all other Operating Committee actions can be accomplished with either a Majority Vote or Supermajority Vote.

+

The Commission notes that Commission Staff may observe all meetings (regular and special), including Executive Sessions, of the Operating Committee and Advisory Committee and receive all minutes.709 The Commission anticipates that only a few members of Commission Staff would observe any given meeting.

+

The Commission also notes that independent of its review of the CAT NMS Plan, the EMSAC has been reviewing, among other things, the issues surrounding NMS plan governance. On June 10, 2016, the EMSAC presented its recommendations in this area to the Commission.710

+

Finally, the Commission is amending Section 4.4(b) of the Plan to specify that the Operating Committee’s discretion to deviate from the treatment, as set forth therein, of persons submitting a Form 1 application to become a national securities exchange or persons submitting a Form X-15AA-A application to become a national securities association, must be reasonable and not impose any unnecessary or inappropriate burden on competition. The Commission is also amending Section 3.3(b)(v) of the Plan to specify that the Operating Committee’s discretion, in considering other factors in determining the Participation Fee of a new Participant, must be reasonable, equitable and not unfairly discriminatory. The Commission believes these amendments are appropriate because they set forth in the CAT NMS Plan specific limitations with respect to the Operating Committee’s discretion that are consistent with existing SRO obligations under the Exchange Act.711

-
pubdate: June 23, 2015 effdate: N/A -

2. Requiring Recusal on a Vote in all Rounds of the Selection Will Ensure that all Participants Voting on the Plan Processor Do Not Have any Conflict of Interest

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Background, Requiring Recusal on a Vote in all Rounds of the Selection Will Ensure that all Participants Voting on the Plan Processor Do Not Have any Conflict of Interest +
pubdate: November 15, 2016 effdate: N/A +

2. Advisory Committee

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Management of the Company (Article IV), Advisory Committee Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, + Rule 613, CAT NMS plan, - Participants, + Advisory Committee, + Operating Committee Executive Sessions, + +

Article IV of the Plan establishes an Advisory Committee charged with advising the SROs on the implementation, operation, and administration of the Central Repository.712 Under the Plan, the Advisory Committee has the right to attend Operating Committee and Subcommittee meetings—unless they are held in Executive Session—and submit its views prior to a decision by the Operating Committee.713 As proposed, the composition of the Advisory Committee includes (i) broker-dealers of varying sizes and types of business, including a clearing firm, (ii) an individual who maintains a securities account, (iii) an academic, (iv) institutional investors, and (v) the Commission’s Chief Technology Officer (or Commission equivalent), who while not formally a member of the Advisory Committee, serves as an observer.714

+

Most comments regarding the Advisory Committee recommended formalizing and expanding its role.715 Commenters made the following recommendations: (i) change the selection process of, and expand the membership of, the Advisory Committee;716 (ii) form the Advisory Committee before the CAT NMS Plan is approved;717 (iii) formalize procedures for Advisory Committee meetings, including requiring specific documentation and written correspondence; (iv) narrow the use of Operating Committee Executive Sessions, whereby the Advisory Committee is excluded from participating; and (v) adopt in the CAT NMS Plan, the EMSAC’s recommendations for NMS plan advisory committees.718

+

One commenter suggested that the process for selecting Advisory Committee members should change to ensure that the Advisory Committee membership is independent of the SROs.719 The commenter noted selection of Advisory Committee members independent from the Participants is critical in light of the inherent conflict of interest the Participants face as sponsors and overseers of a Plan that will, at the same time, impose obligations on the very same Participants.720 This commenter also recommended that the Advisory Committee members should be selected by broker-dealer representatives—not by the SROs—and in support of this position argued that the Advisory Committee’s purpose “should be to represent the interest of the industry and bring to bear the wide expertise of broker-dealers.”721

+

Those commenters that advocated expanding the membership of the Advisory Committee722 suggested including: (i) trade processing and order management service bureaus; (ii) registered funds; (iii) inter-dealer brokers; (iv) agency brokers; (v) retail brokers; (vi) institutional brokers; (vii) proprietary trading firms; (viii) smaller broker-dealers; (ix) firms with a floor presence; (x) and industry/trade associations.723 One commenter recommended expanding the Advisory Committee to 20 members, with a minimum of 12 broker-dealers.724 Another commenter suggested including two financial economists (preferably academic) with expertise in both econometrics and the economics of the primary market and market microstructure.725

+

Another commenter recommended forming the Advisory Committee prior to the CAT NMS Plan receiving the Commission’s approval to “allow representative participation in the selection of the [Plan] Processor and in developing [o]perating procedures.”726

+

Commenters suggested increasing the governance role of the Advisory Committee, with one commenter advocating that “the Advisory Committee should be involved in every aspect of the CAT,”727 such as budgets, fees and charges, and new requirements that may significantly burden broker-dealers.728

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To facilitate increasing the Advisory Committee’s role in the CAT’s governance, a few commenters offered concrete recommendations for procedural safeguards.729 Two commenters suggested that the Operating Committee be required to document a written rationale any time the Operating Committee rejects an Advisory Committee recommendation.730 One of these commenters recommended that all documents prepared for or submitted to the Operating Committee by the Plan Processor also be submitted to the Advisory Committee, to keep the Advisory Committee fully informed.731 One commenter recommended that agendas and documentation for Operating Committee meetings be distributed to Advisory Committee members in advance of meetings.732

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A commenter also recommended that all information concerning the operation of the Central Repository be made available to the Advisory Committee, except for limited information of a confidential regulatory nature.733 This commenter added that when information is deemed to be of a confidential regulatory nature, the SROs should maintain a written record of what is designated confidential (and excluded from the Advisory Committee) and include an explanation of such designation.734

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Two commenters recommended revising the confidentiality policies related to the CAT to permit Advisory Committee members to “share information from the [Advisory Committee] meetings with their colleagues and with other industry participants.”735 One commenter further suggested that an Advisory Committee member should be allowed to make other firm personnel available that may have relevant expertise if the Advisory Committee is “tasked with evaluating issues outside the members’ subject matter expertise.”736

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Two commenters suggested that the Advisory Committee should have a right to review proposed amendments to the CAT NMS Plan that would affect CAT Reporters.737 One of these commenters noted that “[i]t may not be obvious to the Operating Committee when a change to the Plan impacts CAT [R]eporters in a material way.”738 The other commenter suggested modifying the Plan’s definition of a Material Amendment739 to distinguish between amendments that are internal or external to the Plan Processor.740 This commenter recommended that both internal and external material amendments to the CAT NMS Plan be reviewed by the Advisory Committee, but be designated for different levels of review. This commenter suggested that material amendments that are “internal” to the Plan Processor would only be reviewed to ensure that that they do not materially affect CAT Reporters; whereas, amendments that are “external” to the Plan Processor would require Advisory Committee consultation and an implementation plan with reasonable time for development and testing.741

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A commenter recommended specific CAT NMS Plan governance changes to expand and clarify the role of the Advisory Committee.742 This commenter supported: (i) clarifying the process for selecting Advisory Committee representatives; (ii) expanding and formalizing the role of the Advisory Committee, such as providing it formal votes on matters before the Operating Committee and the ability to initiate its own recommendations; and (iii) significantly narrowing the use of Executive Sessions for the Operating Committee.743 Moreover, a commenter recommended that when the Operating Committee meets in Executive Session, the SROs should maintain a written record including an explanation of why an Executive Session is required.744

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One commenter, an SRO, stated that “the governance structure in the proposed CAT NMS Plan would establish an appropriate advisory role for the Advisory Committee that is consistent with the requirements specified by the Commission in Rule 613.”745 This commenter stressed that while the SROs have a legal obligation under Commission rules to create, implement and maintain a consolidated audit trail and central repository, non-SROs do not have this legal obligation. Accordingly, this commenter stated its belief that Advisory Committee members should not have a voting right with respect to Operating Committee actions.746 Finally, this commenter argued that having non-SRO Advisory Committee members vote in connection with the CAT NMS Plan would be incompatible with the requirements of the Exchange Act and Commission rules that squarely place the obligations to implement and enforce “the CAT NMS Plan on the shoulders of the SROs.”747 In this regard, the commenter highlighted the Rule 613(f) requirement that SROs “develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.”748

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Regarding the size and composition of the Advisory Committee, the Participants recommended amending the Plan to include a service bureau representative, because service bureaus “perform audit trail reporting on behalf of their customers . . . [and] would provide a valuable perspective on how the CAT and any enhancements thereto would affect the service bureau clients, which often include a number of small and medium-sized firms.”749 The Participants also recommended augmenting the institutional investor representation on the Advisory Committee by including institutional investor representation by an adviser from registered funds, and increasing from two to three institutional investor representatives with at least one of the institutional investor representatives trading on behalf of an investment company or group of investment companies registered pursuant to the Investment Company Act of 1940.750 The Participants also suggested removing references in the Advisory Committee eligibility requirements for those institutional investors “on behalf of a public entity … and on behalf of a private entity,” which is in response to a comment noting the vagueness of the terms “public” and “private” with respect to institutional investors.751

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The Participants, however, disagreed with commenters that the academic representative of the Advisory Committee should be limited to a financial economist because a general requirement that “a member of academia with expertise in the securities industry or any other industry relevant to the operation of the CAT System,” does not preclude a financial economist serving on the Advisory Committee so long as they have the relevant expertise.752 The Participants also disagreed with commenters that members of industry trade groups should also serve on the Advisory Committee, noting that the CAT NMS Plan includes a variety of representatives from the members of such trade groups and would provide “a meaningful opportunity for the representation of the views of industry trade groups.”753 Furthermore, the Participants disagreed with commenters who advocated increasing the number of broker-dealer representatives on the Advisory Committee from seven to twelve, and increasing the size of the Advisory Committee from twelve to twenty members. The Participants noted that, in “balancing the goal of having a sufficient cross section of representation with the goal of having a well-run committee,” seven broker-dealers of varying sizes and business types would provide “significant opportunity to provide [broker-dealers’] views” and increasing an Advisory Committee from twelve to twenty creates a committee structure that would “likely hamper, rather than facilitate,” discussion.754

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In response to commenters recommending a more active and participatory role in operation of the CAT for non-SRO stakeholders, the Participants stated that the Plan strikes an appropriate balance between providing the “industry with an active role in governance while recognizing the Participants’ regulatory obligations with regard to the CAT.”755 In response to a commenter recommending that Advisory Committee members be selected by broker-dealer representatives, the Participants stated their belief that the Operating Committee should select the members, but agreed with commenters that the Advisory Committee should be permitted to advise the Operating Committee regarding potential Advisory Committee members.756 The Participants suggested that the CAT NMS Plan be amended to permit the Advisory Committee to advise the Operating Committee on Advisory Committee member selection, provided however, that the Operating Committee in its sole discretion would select members of the Advisory Committee.757

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In response to comments recommending formalized modes of written communication between the Operating Committee and the Advisory Committee, the Participants recommended that the CAT NMS Plan remain unchanged.758 In support, the Participants stated their belief that the proposed structure adequately addresses the commenters’ concerns, while recognizing the need for the Participants to have the opportunity to discuss certain matters, particularly certain regulatory and security issues, without the participation of the industry.759 The Participants also noted that the Advisory Committee is permitted to attend all of the non-Executive Session Operating Committee meetings, where information concerning the operation of the CAT is received (subject to the Operating Committee’s authority to determine the scope and content of information supplied to the Advisory Committee).760 Further, the Participants stated that minutes, subject to customary exceptions for confidentiality and privilege considerations, will be provided to the Advisory Committee. Finally, the Participants did not support instituting formalized modes of written communication between the Operating Committee and the Advisory Committee because such “an overly formulaic approach to [Operating Committee] interactions” would “hamper, rather than enhance, [Operating Committee] interactions with the Advisory Committee.”761

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With respect to comments recommending narrowing the use of Operating Committee Executive Sessions, the Participants stated their belief that the Operating Committee’s capabilities to meet in Executive Session are appropriate and cited the Commission’s statement in the Adopting Release that: “meet[ing] in [E]xecutive [S]ession without members of the Advisory Committee appropriately balances the need to provide a mechanism for industry input into the operation of the central repository, against the regulatory imperative that the operations and decisions regarding the consolidated audit trail be made by SROs who have a statutory obligation to regulate the securities markets, rather than by members of the SROs, who have no corresponding statutory obligation to oversee the securities markets.”762 The Participants represented that their intended use of an Executive Session is for limited purposes requiring confidentiality and offered four examples: matters that present an actual or potential conflict of interest for Advisory Committee members (e.g., relating to member’s regulatory compliance); discussion of actual or potential litigation; CAT security issues; and personnel issues. The Participants also noted that Executive Sessions must be called by a Majority Vote and that the meeting minutes are recorded, subject to confidentiality and attorney-client privilege considerations.763

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Finally, in response to comments that the Advisory Committee should form before the approval of the CAT NMS Plan, the Participants noted that the Plan itself provides for the establishment of the Operating Committee and the Advisory Committee and thus cannot be formed until the Commission approves the Plan. The Participants also noted that the DAG provides the Participants with “advice regarding the development of the Plan from an industry perspective.”764

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For reasons discussed below, the Commission finds reasonable the Participants’ suggested modifications to add a service bureau representative, increase the number of institutional investor representatives on the Advisory Committee, remove terms that create vagueness for the institutional investor representative categories, and make the applicable conforming changes to Section 4.13 of the Plan. Accordingly, after considering the comments, the Commission is amending Section 4.13 of the Plan to include a service bureau representative, increase the number of institutional investor representatives from two (2) to three (3), and remove the terms that a commenter identified as creating vagueness with respect to the institutional investor category.

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The Commission understands that service bureaus frequently serve a core role in reporting CAT Data on behalf of broker-dealers, and as such, the Commission finds appropriate their inclusion as an Advisory Committee member. Further, the Commission finds the increase from two to three members on the Advisory Committee representing institutional investors, as well as removing the references to “on behalf of a public entity” and “on behalf of a private entity” due to the vagueness of such terms with respect to institutional investor Advisory Committee members, to be reasonable responses to commenters seeking additional representation and clarity. The Commission also agrees with the Participants that it is reasonable to not mandate inclusion of representatives on the Advisory Committee from industry and trade associations, given the existing substantial industry representation on the Advisory Committee, which is reasonably designed to ensure a wide range of meaningful industry perspectives.

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The Commission agrees with commenters who argued that the academic representative on the Advisory Committee should be a financial economist. The Commission acknowledges the Participants’ response that a financial economist is not precluded from serving as the academic representative of the Advisory Committee, but the Commission believes that specifying that the academic representative must be a financial economist is appropriate to ensure the Advisory Committee and the Operating Committee have access to such expertise in assessing the CAT’s operations and development. Accordingly, the Commission is amending Section 4.13(b)(ix) of the Plan to specify that the academic representative on the Advisory Committee must be a financial economist.

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The Commission agrees with the Participants’ suggestion, in response to commenters, to permit the Advisory Committee to recommend Advisory Committee candidates to the Operating Committee. Accordingly, the Commission is amending Section 4.13(d) of the Plan to permit the Advisory Committee to recommend Advisory Committee candidates to the Operating Committee, but notes that the Operating Committee still maintains the sole discretion to select members of the Advisory Committee.

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The Commission believes the amendment is reasonably designed to ensure a robust selection process for Advisory Committee membership that identifies candidates that best represent the industry perspective. With respect to the comment suggesting that the Advisory Committee be established before the approval of the CAT NMS Plan, the Commission notes it would be premature and technically not possible to establish an advisory committee to an NMS plan before such plan has been approved by the Commission. Moreover, the Commission notes that the interests of the industry and other stakeholders have been represented through the DAG, the public comment process, and through the SROs themselves as the CAT NMS Plan has been developed.

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The Commission is amending the Executive Sessions provision in Section 4.4(a) of the Plan, as well as the Advisory Committee provision in Section 4.13(b) of the Plan related to the Commission’s Chief Technology Officer (or equivalent) being an observer of the Advisory Committee. As the Commission is responsible for regulatory oversight of the Participants and the CAT NMS Plan, the Commission believes that it is appropriate for the Plan to expressly provide that Commission Staff may attend all CAT NMS Plan meetings, including those held in Executive Session. Similarly, because the Commission has broad regulatory responsibility for the Plan, the Commission does not believe it is appropriate to limit to the Commission’s Chief Technology Officer (or equivalent) the right to serve as an observer at Advisory Committee meetings. Accordingly, the Commission is amending Sections 4.4(a) and 4.13(b) to provide that Commission Staff may attend Executive Sessions, and to permit the Commission to select the Commission representative to observe Advisory Committee meetings. The Commission anticipates that only a few members of Commission Staff would observe any given meeting.

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The Commission also is amending Section 4.13(e) of the Plan in response to comments to provide that the Advisory Committee shall receive the same documents and information concerning the operation of the Central Repository as the Operating Committee. The Operating Committee may, however, withhold such information to the extent it reasonably determines such information requires confidential treatment. Although the Plan as filed permits Advisory Committee members to attend all of the non-Executive Session Operating Committee meetings, with respect to information concerning the operation of the CAT, it allows the Operating Committee broad discretion to determine the scope and content of information supplied to the Advisory Committee. The Commission believes it is important for the Advisory Committee to fulfill its role that its members receive full information on Plan operations (other than confidential information) and that it is therefore appropriate to amend Section 4.13(e) of the Plan accordingly.

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With respect to the other comments regarding authority, composition and role of the Advisory Committee, as well as the use of the Operating Committee Executive Sessions, the Commission notes that the Plan provisions relating to the Advisory Committee and the Operating Committee Executive Sessions are similar to those in other NMS plans and are, therefore, reasonable.765

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pubdate: November 15, 2016 effdate: N/A +

3. Officers of the Company

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Management of the Company (Article IV), Officers of the Company + Compliance User: Self-Regulatory Organization + Keywords: + CAT System, + Advisory Committee, + Investment Company Act of 1940, + SRO, + CAT NMS plan, + EDGAR system, + CAT NMS, LLC, + SEC Rule 17d-2, + +

The CAT NMS Plan requires the Company to appoint a CISO and a CCO, who shall be employees solely of the Plan Processor.766 The Plan acknowledges that the CISO and CCO may have fiduciary and other similar duties to the Plan Processor pursuant to their employment with the Plan Processor, and the Plan, as proposed, sets forth that to the extent permitted by law, the CISO and CCO will have no fiduciary or similar duties to the Company.767

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One commenter expressed concern that appointing a CISO and CCO who would both be officers of the Company and employees of the Plan Processor “creates a potential conflict of interest that would undermine the ability of these officers to effectively carry out their responsibilities under the CAT NMS Plan because they would owe a fiduciary duty to the Plan Processor rather than to the [Company].”768 This commenter recommended that the officers of the Company should be required to act in the best interest of the [Company] to avoid conflicts of interest in carrying out their oversight activities.769 In addition, this commenter suggested that the CAT NMS Plan impose a fiduciary duty on the CISO and CCO, or at a minimum require the Plan Processor to select individuals who do not have a fiduciary duty to the Plan Processor to serve in these roles.770

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In response to these comments, the Participants suggested that the CAT NMS Plan be changed so that all Officers of the Company, including the CISO and CCO, have fiduciary duties to the Company in the same manner and extent as an officer of a Delaware corporation.771 The Participants also represented that the Operating Committee, in an agreement with the Plan Processor, will have the Plan Processor acknowledge that the Officers of the Company will owe fiduciary duties to the Company, and to the extent that the duties owed to the Company by the Officers of the Company, including the CISO or CCO, conflict with any duties owed to the Plan Processor, the duties to the Company should control.772

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The Commission believes that the suggested modifications by the Participants in response to comments about potential conflicts of interest are reasonable. Accordingly, the Commission is amending Section 4.7(c) of the Plan so that each Officer shall have the same fiduciary duties and obligations to the Company as a comparable officer of a Delaware corporation and in all cases shall conduct the business of the Company and execute his or her duties and obligations in good faith and in the manner that the Officer reasonably believes to be in the best interests of the Company. Furthermore, the Commission is amending Section 4.6(a) of the Plan to codify the Participants’ representation that that the Operating Committee, in an agreement with the Plan Processor, will have the Plan Processor acknowledge that the Officers of the Company will owe fiduciary duties to the Company, and to the extent that the duties owed to the Company by the Officers of the Company, including the CISO or CCO, conflict with any duties owed to the Plan Processor, the duties to the Company should control.

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The Commission believes that amending the CAT NMS Plan to expressly affirm the Officers’ fiduciary duties or similar duties or obligations to the Company provides clarity and assurances that the Officers will act in the best interests of the Company.773 The Commission also believes it is reasonable, as the Participants have suggested in their response to comments, to have the Company and the Plan Processor enter into an agreement that specifies not only that Officers have fiduciary duties and obligations to the Company, but that if such Officers may have competing duties and obligations owed to the Company and to the Plan Processor, the duties and obligations to the Company should control. At this time, it is unclear what competing duties and obligations Officers may owe to the Company and the Plan Processor. While in many cases, the Officers’ duties towards the Plan Processor and the Company are likely to be aligned, there may be circumstances (e.g., related to the performance of the Plan Processor) where such duties may conflict and the Commission finds reasonable that in such circumstances, the duties to the Company should control in order to mitigate any conflict between the interests of the Plan Processor and those of the Company in administering the CAT. The Commission further notes that the CAT NMS Plan provides reasonable oversight of the Officers by the Operating Committee, for example, the Plan requires: (i) the Operating Committee to approve the CISO and CCO with a Supermajority Vote774; (ii) the CISO and CCO to devote, with minor exceptions, their entire working time to serving as the CISO and CCO775; (iii) the Operating Committee to oversee that the Plan Processor allocates appropriate resources for the CISO and CCO to fulfill their obligations776; (iv) the CISO and CCO to report directly to the Operating Committee with respect to their duties777; (v) the compensation of the CISO and CCO to be subject to the Operating Committee’s review and approval778; and (vi) an annual performance review of the CISO and CCO to be conducted by the Operating Committee.779

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pubdate: November 15, 2016 effdate: N/A +

4. Additional Governance Provisions

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Management of the Company (Article IV), Additional Governance Provisions + Compliance User: Self-Regulatory Organization + Keywords: + [O]perating [C]ommittee for the [P]lan, + CAT [D]ata, + SIFMA Letter, + ICI Letter, + Better Markets Letter, + DAG Letter, + STA Letter, + EDGAR system, + CAT NMS, LLC, + CAT System, + SEC Rule 17d-2, + CAT NMS plan, + Response Letter, + Rule 613, + Section 9.2(a), + Exchange Act Rule 17a-1, -

As noted in the Selection Plan Approval Order, the Selection Plan as currently drafted balances the competing goals of ensuring all Participants participate meaningfully in the process of developing the CAT NMS Plan and mitigating potential conflicts of interest related to the involvement of Bidding Participants through information barriers and the voting limitations.13 Based on their experience with these measures as currently set forth in the Plan, the Participants believe that the Plan has adequately addressed the potential conflicts of interest related to Bidding Participants. Nonetheless, the Participants believe that requiring recusal in all rounds of the selection process will further the Participants’ goal of ensuring the fair and impartial consideration and selection of the Plan Processor.

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Commenters raised additional governance concerns related to conflicts of interest for the Participants, whether there should be an audit committee, and whether the Participants should be required to coordinate the administration of the CAT from a legal, administrative, supervisory and enforcement perspective.780

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Some commenters expressed concern that the Participants would have a conflict of interest because of the various roles they perform with respect to the CAT. One commenter stated that the Participants are “sponsors and overseers of the Plan, while at the same time, the Plan will impose obligations on [them].”781 Another commenter raised concerns that the Participants would “control the [O]perating [C]ommittee for the [P]lan, use CAT [D]ata for regulatory purposes, and potentially commercialize the information that they report to the CAT.”782 This commenter suggested that these roles may “present conflicting incentives” for Participants.783

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One commenter argued that the Participants should not oversee and control the CAT and recommended instead that the Commission should build and host the CAT, which would then be under the Commission’s direct and sole control.784 In support of this view, the commenter stated the Commission’s statutory mission to protect investors would make it better positioned to operate the CAT, as compared to for-profit SROs, who would seek to maximize profits from the CAT Data.785 The commenter suggested that the Commission could outsource the building of the CAT and fund the CAT similar to how it funds its EDGAR system.786 The commenter stated that CAT NMS, LLC should reorganize as a not-for-profit entity and set forth an organizational purpose aligned with the Commission’s mission statement.787 Finally, the commenter argued that the Commission solely should control access to and usage of the CAT System.788

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Two commenters recommended that the Company governance structure include an audit committee.789 One commenter noted that the audit committee should be comprised of mostly independent directors.790 Another commenter stated the audit committee should be responsible for the oversight of how the CAT’s revenue sources are used for regulatory purposes, and that the costs and financing of the CAT must be fully transparent and publicly disclosed in annual reports, including audited financial statements.791

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Finally, one commenter suggested that the SROs should coordinate the administration of the CAT through a single centralized body from a legal, administrative, supervisory and enforcement perspective.792 The commenter recommended amending the Plan to require this coordination, and suggested that such coordination could be facilitated through agreements under SEC Rule 17d-2, regulatory service agreements or some combination thereof.793 In support of this view, the commenter noted that different CAT-related compliance requirements among the SROs might arise and subject firms to duplicative regulation and enforcement, with the accompanying inefficiencies, additional costs, and potential inconsistencies.794

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In response to commenters suggesting the formation of an audit committee, the Participants stated that they would have the ability to review CAT-related issues objectively because “members of the Operating Committee are not employed by the [Company] and are fulfilling mandated regulatory oversight responsibilities, and that the [Company] will not operate as a profit-making company, which may need more scrutiny as compared to a company that is operating on a break-even basis.”795 Further, the Participants noted that the CAT NMS Plan requires that a Compliance Subcommittee be established—and noted that the Operating Committee in the future could decide if an audit committee should be formed as a subcommittee.796

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In response to commenters regarding the coordinated compliance and enforcement oversight of the CAT, the Participants acknowledged the benefits of having a single Participant be responsible for enforcing compliance with Rule 613 and the CAT NMS Plan through Rule 17d-2 agreements, regulatory services agreements or some other approach and represented that they would consider such an arrangement after the CAT NMS Plan’s approval.797 As discussed in Section IV.H, the Commission is amending Section 6.6 of the Plan to require that the Participants provide the Commission within 12 months of effectiveness of the Plan, a report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into 17d-2 agreements or regulatory services agreements).798

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The Commission acknowledges the commenters’ concern about the conflicts inherent in having SROs performing various roles as overseers of the Plan and at the same time enforcing compliance with Rule 613. The Commission, however, highlights that the Participants are performing roles specified pursuant to obligations under the Exchange Act and the rules thereunder and remain under the direct oversight of the Commission. With respect to comments expressing concerns that the Participants may be in a position to commercialize the respective Raw Data reported by each SRO submitting to the CAT, order and execution information is already collected by SROs from its members and they are permitted under current law to commercialize this data (e.g., direct market feeds, provided that the terms are fair and reasonable and not unreasonably discriminatory799) subject to appropriate rule filings and oversight by the Commission.800 Thus, the Plan does not expand the Participants’ ability to commercialize their Raw Data beyond what is currently permitted.

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With respect to comments that suggested that the Participants should not oversee and control the CAT, but that instead it should be under the Commission’s direct and sole control, the Commission notes that in the Adopting Release, the Commission mandated that the Participants develop an NMS plan for the development and operation of the CAT. As such, the CAT NMS Plan, as noticed, whereby the Participants directly manage the CAT, was in furtherance of Rule 613 as adopted. Additionally, because the Participants, as SROs, currently serve as front-line regulators of many aspects of the securities markets, including administering the existing sources of regulatory data, the Commission believes they are well positioned to oversee the CAT. Moreover, the Commission believes that any potential conflicts arising from the status of certain Participants as for profit enterprises are reasonably addressed through the Plan provisions and Commission oversight.

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The Commission concurs with the Participants that it is reasonable for the Company not to have an audit committee at this time. Further, the Participants are permitted to form an audit committee, as a subcommittee of the Operating Committee. The Commission notes that the absence of a requirement for an audit committee is consistent with other NMS plans.

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Section 9.2(a) of the Plan states that the Operating Committee shall maintain a system of accounting for the Company established and administered in accordance with GAAP (or another standard if determined appropriate by the Operating Committee). Section 9.2(a) also requires, among other things, that the Company prepare and provide to each Participant an audited balance sheet, income statement and statement of cash flow, to the extent the Operating Committee deems advisable. In addition, Section 9.2(c) of the Plan states that all matters concerning accounting procedures shall be determined by the Operating Committee. The Participants recommended that the Commission amend Section 9.2(a) to eliminate the flexibility for the Company to administer a system of accounting in accordance with non-GAAP standards, thus requiring that all financial statements or information that may be supplied to the Participants shall be prepared in accordance with GAAP.801 In addition, the Participants recommended amending the Plan to eliminate the discretion of the Operating Committee to provide financials only if it deems advisable and instead to require that the Company’s audited annual balance sheet, income statement, and statement of cash flows be audited by an independent public accounting firm and made publicly available.802 The Commission believes that the changes recommended by the Participants are reasonable because they will promote greater accuracy and transparency with respect to the Company’s financial accounting and is therefore amending the Plan accordingly.

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Section 6.1(o)(vi) of the Plan states that financial statements of the Plan Processor, prepared in accordance with GAAP and audited by an independent public accounting firm or certified by the Plan Processor’s Chief Financial Officer, shall be provided to the Operating Committee no later than 90 days after the Plan Processor’s fiscal year end. The Participants recommended that the Commission amend the Plan to change this timeframe to 180 days after the Plan Processor’s fiscal year end to provide further flexibility to the Plan Processor with respect to the preparation of its financial statements.803 The Commission believes that it is reasonable to provide this additional flexibility and is therefore amending the Plan accordingly.

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The Commission also agrees with the commenters and Participants that a coordinated approach to self-regulatory oversight may have benefits, such as regulatory efficiencies and consistency, but believes that it is reasonable for such an arrangement to be considered by the Participants after the CAT NMS Plan’s approval rather than mandating a specific approach for SRO coordination under the Plan at this time—as the Plan Processor has not been selected nor has the CAT System been developed. The Commission nevertheless notes that, as described above, it is amending the CAT NMS Plan to require a written assessment by the Participants within 12 months of effectiveness of the Plan, considering coordinated surveillance (e.g., entering into Rule 17d-2 agreements, regulatory services agreements or other arrangements, to facilitate regulatory coordination).804

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Finally, the Commission notes that the CAT NMS Plan provides that books and records of the CAT LLC shall be made available to the Commission upon “reasonable request.”805 Because the CAT LLC is a facility of the Participants, the Commission has the right to the books and records of CAT LLC “upon request” under Exchange Act Rule 17a-1,806 and therefore is amending Section 9.1 of the Plan to delete the requirement that any request for the CAT LLC’s books and records be “reasonable.”

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pubdate: June 24, 2015 effdate: N/A -

B. Requirements Pursuant to Rule 608(a)

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a) +
pubdate: November 15, 2016 effdate: N/A +

C. Plan Processor Selection (Article V)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Plan Processor Selection (Article V) + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Selection Plan, + Response Letter, + Selection Plan Approval Order, + +

Article V of the CAT NMS Plan sets forth the process for selecting the Plan Processor following approval of the CAT NMS Plan.807 The Plan Processor selection provisions in Article V are identical to the selection process set forth in the Selection Plan.808

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The Commission received three comments suggesting that the Plan Processor selection process be accelerated,809 with some commenters suggesting that the Selection Plan be amended to require the selection of the Plan Processor prior to the approval of the CAT NMS Plan.810 According to one commenter, the earlier selection of a Plan Processor would advance the release and development of the Technical Specifications.811 Another commenter offered support for a specific Bidder, noting their regulatory and technical competencies.812 One commenter recommended that the Commission re-open the Plan Processor’s agreement with CAT NMS, LLC every five years to ensure that the Plan remains state-of-the-art, and to provide a process for public input.813 Another commenter stated that the Plan does not set forth sufficient incentives for the Plan Processor and the Participants to incorporate new technology into or to continuously innovate and strive to reduce the costs of the CAT System.814

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In response to the comments to accelerate the Plan Processor selection process, the Participants acknowledged that the selection of the Plan Processor will likely affect implementation issues and related costs,815 but that it is not feasible to accelerate the selection of the Plan Processor prior to the Commission’s approval of the Plan. The Participants noted that until the Plan is finalized and approved by the Commission, the requirements of the CAT could change, which could impact the selection of the Plan Processor.816 Moreover, the Participants noted that Rule 613’s requirement that the Plan Processor be selected within two months after effectiveness of the Plan ensures that the selection of the Plan Processor will occur expeditiously once the Commission approves the Plan.817

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In response to the comment in support for a specific Bidder, the Participants stated that they determined that utilizing a competitive bidding process to select the Plan Processor was the most appropriate way to promote an innovative and efficient CAT solution.818 Pursuant to that process, the Participants noted that they have reduced the number of Bidders to three Shortlisted Bidders.

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In response to the comment to re-open the Plan Processor’s agreement with the CAT LLC every five years and to provide a process for public input on the agreement, the Participants stated that they agree that it is important to ensure that the CAT solution remains effective and efficient going forward.819 Accordingly, the Participants noted that they have proposed a process for regularly reviewing the performance of the Plan Processor throughout the term of the Plan Processor’s agreement and for modifying it if necessary to avoid an outdated CAT solution. The Participants added that, as set forth in the Plan, the Operating Committee will review the Plan Processor’s performance under the Plan at least once each year, or more often than once each year upon the request of two or more Participants that are not Affiliated Participants.820 In addition, the Participants noted that the Plan sets forth the process for removing the Plan Processor. Specifically, the Participants noted that the Operating Committee, by Supermajority Vote, may remove the Plan Processor from such position at any time, and that the Operating Committee may, by Majority Vote, remove the Plan Processor from such position at any time if it determines that the Plan Processor has failed to perform its functions in a reasonably acceptable manner in accordance with the provisions of the Plan. The Participants stated that if they were to vote to remove the Plan Processor, the Operating Committee would select a new Plan Processor through a competitive bidding process.

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In approving the Selection Plan, the Commission stated that the Selection Plan is reasonably designed to achieve its objective of facilitating the development of the CAT NMS Plan and the selection of the Plan Processor.821 The Commission also found that the Selection Plan is reasonably designed to govern the process by which the SROs will formulate and submit the CAT NMS Plan, including the review, evaluation, and narrowing down of Bids in response to the RFP, and ultimately choosing the Plan Processor that will build, operate, and maintain the consolidated audit trail.822 The Commission believes that the process set out in the Selection Plan for selecting a Plan Processor remains a reasonable approach, which will facilitate the selection of Plan Processor through a fair, transparent and competitive process and that no modifications to the Selection Plan are required to meet the approval standard. In response to the commenters recommending that the Plan Processor selection process be accelerated, the Commission agrees with the Participants that changes to the CAT NMS Plan that are being made in this Order may be relevant to the selection of the Plan Processor. The Commission believes that selecting the Plan Processor within two months of Plan approval, rather than prior to Plan approval, will allow the remaining Bidders to consider the CAT NMS Plan, as amended and approved by the Commission, and to make any necessary modifications to their Bids, which will enable the Participants to make a more fully informed decision on the Plan Processor in light of the amended and approved CAT NMS Plan.823 The Commission believes this timeframe to select the Plan Processor—two months following Commission approval of the Plan—will not result in the untimely release of the Technical Specifications.

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In response to the comment that offered support for a specific Bidder, the Commission agrees with the Participants that the competitive bidding process to select the Plan Processor is a reasonable and effective way to choose a Plan Processor and thus believes that the process set forth in the Selection Plan should be permitted to continue. In response to the commenter that recommended that the Commission re-open the Plan Processor’s agreement with the CAT LLC every five years and provide a process for public input on the agreement, the Commission believes that the CAT NMS Plan already contains provisions that permit the reevaluation—and possible replacement—of the Plan Processor. Thus, the Commission is not amending the plan to require that the Plan Processor’s agreement with the CAT LLC be reevaluated every five years.

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Finally, in response to the commenter that stated that the Plan does not provide sufficient incentives for the Plan Processor and the Participants to incorporate new technology, innovate and reduce the costs of the CAT System, the Commission believes that requirements for regular evaluations of the operation of the CAT, the identification of potential improvements, and the delivery of a written assessment to the Commission, as well as the Plan’s provisions regarding the possible removal of the Plan Processor provide sufficient incentives for the Plan Processor and the Participants in these areas.824

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pubdate: November 15, 2016 effdate: N/A +

D. Functions and Activities of the CAT System (Article VI)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI) Compliance User: Self-Regulatory Organization Keywords: - Rule 608(a), + Article VI of the CAT NMS Plan, -
pubdate: June 25, 2015 effdate: N/A -

1. Description of the Amendments to the Selection Plan

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a) +

Article VI of the CAT NMS Plan sets forth the functions and activities of the CAT System.825

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pubdate: November 15, 2016 effdate: N/A +

1. Data Recording and Reporting Requirements

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Data Recording and Reporting Requirements Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, - Bidding Participant, - Shortlisted Bidders, + FINRA Rule 7470, + Exchange Act Rule 613, + Data Boiler Letter, + FIF Letter, + +

Article VI of the Plan imposes requirements regarding what data elements must be reported to the Central Repository and by when. The Commission received comments regarding to whom these requirements should apply and the appropriateness of the provisions.

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One commenter recommended that firms using manual orders that are currently exempt from OATS reporting pursuant to FINRA Rule 7470 should also be exempt from the CAT reporting obligations.826 This commenter argued that to qualify for such an exemption, a firm would need to “eliminate many practices of regulatory concern” and have a “perfect regulatory history,” and that the exemption would have little impact on the CAT because it would exclude only the reporting of events that take place prior to delivery of an order to a market venue. The commenter argued that the exemption is necessary to keep currently-exempt firms in business due to the high costs that CAT reporting would impose.827 This commenter further argued that the requested exemption for OATS-exempt firms would not be the same as an exemption for “small firms,” and that wrongdoers would not fall within this exemption because of the limitations on the level of market activity, the voluntary restrictions from operations such as market making and trading with customers, the use of manual orders, and the expected high levels of compliance.828

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Another commenter broadly stated that the data recording and reporting procedures described in the CAT NMS Plan are inappropriate and unreasonable.829 This commenter also stated that it may be easier for the Plan Processor to work directly with service bureaus, rather than with individual CAT Reporters, on data submission.830

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In response to the commenter’s request that OATS-exempt firms also be exempted from reporting to the CAT, the Commission believes that completely exempting any group of broker-dealers from reporting requirements would be contradictory to the goal of Rule 613, which is to create an accurate, complete, accessible and timely audit trail.831 To permit such an exemption would eliminate the collection of audit trail information from a segment of broker-dealers and would thus result in an audit trail that does not capture all orders by all participants in the securities markets. The Commission believes that the CAT should contain data from all broker-dealers, including those that may appear to be at low risk for wrong-doing based on their history of compliance or business model. Regulators will not only use the CAT for surveillance and investigations, but also for market reconstructions and market analyses. Therefore, data from all broker-dealers is necessary.832

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The Commission believes that the data recording and reporting procedures outlined in the CAT NMS Plan meet the requirements of Rule 613833 and are reasonable in that they are designed to ensure that data is recorded and reported in a manner that will provide regulators access to linked CAT Data that is timely, accurate, secure, and complete.834 Further, while under certain circumstances it might be efficient for the Plan Processor to work directly with service bureaus, the reporting requirements in the CAT NMS Plan apply to CAT Reporters, which are regulated entities, and therefore, it is necessary that the Plan Processor deal directly with CAT Reporters in determining matters related to reporting CAT Data.835

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pubdate: November 15, 2016 effdate: N/A +

2. Format

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Format + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Data Boiler Letter, + FIF Letter, + FIX Trading Letter, + Better Markets Letter, + Response Letter, + +

The CAT NMS Plan does not mandate the format in which data must be reported to the Central Repository.836 Rather, the Plan provides that the Plan Processor will determine the electronic format in which data must be reported, and that the format will be described in the Technical Specifications.837

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Two commenters expressed support for allowing the Plan Processor to determine the format for reporting data.838 One of these commenters stated that prescribing an approach in the Plan may hinder scalability and future system development.839

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Three commenters, however, recommended that the format be specified in the Plan.840 One commenter argued that mandating an approach in the Plan, rather than waiting for the Technical Specifications, would give the industry more time to develop approaches to reporting using that format.841 The commenter also argued that if the format is not known until the Technical Specifications are published, this would limit the opportunity to make changes to the format, if necessary, without disrupting the implementation schedule.842 The commenter suggested that at least guidelines for a messaging protocol be included in the Plan.843

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Commenters also expressed opinions about whether the Plan Processor should allow CAT Reporters to use multiple formats or one uniform format to report CAT Data. Four commenters generally supported an approach that would allow CAT Reporters to report CAT Data using a non-uniform format.844 Under such an approach, the Central Repository would be responsible for normalizing the data into a uniform format to link and store the data. These commenters noted that CAT Reporters should be permitted to use any of the currently existing industry protocols widely used by industry participants, such as OATS, SWIFT or FIX.845 One commenter advocated for the use of its own electronic communications protocol, FIX, stating that it would result in quicker implementation times and simplify data aggregation.846 This commenter noted that FIX is currently used by thousands of firms in the financial services industry and that it would not make sense to require firms to convert from a FIX format to a proprietary format designed by the Plan Processor and mandated for CAT reporting.847 The commenter stated that FIX already tracks the lifecycle of an order both within an organization and across organizations, thus making it good choice as the format for the CAT.848 It also noted that it is used globally and can be used for products beyond listed options and equities. Finally, the commenter represented that FIX can handle any identifier, including LEI, and can support the CAT NMS Plan’s use of Customer-ID, average price processing, options reporting, and the daisy chain approach for reporting.849

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One commenter stated that while mandating one uniform format would reduce the burden on the Central Repository for consolidating and storing data, it would impose a burden on CAT Reporters to accurately translate their current reporting format into a uniform CAT interface that could result in more errors than if the conversion to a uniform format occurred at the Central Repository.850 Conversely, another commenter cautioned that requiring one uniform format would create a monopoly.851

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One commenter argued that while data reported in a non-uniform format can be reliably converted into a uniform format, there are benefits to using a uniform format.852 Specifically, the commenter stated that using a uniform format can reduce data integrity issues within the Plan Processor, reduce data processing times, lower error correction rates between T+1 and T+3, reduce time and resources needed to on-board participants, and improve data accuracy and consistency across broker-dealers.853 The commenter also stated that use of a uniform format would improve data completeness because exact fields and standards would be defined.

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In their response, the Participants stated that they do not believe that the Plan should mandate a specific format for reporting to the Central Repository, but rather should allow the Bidders to use discretion in selecting the format that will work most efficiently with their solution.854 The Participants stated that the nature of data ingestion is key to the architecture of the CAT and therefore the Plan does not mandate a data ingestion format, but allows the Plan Processor to determine the format.855 The Participants also noted that the remaining three Bidders propose accepting existing messaging protocols (e.g., FIX), rather than requiring CAT Reporters to use a new format.856 The Participants stated that when they evaluate each Bidder’s solution, they will consider whether the Bidder’s proposed approach for a message format is easily understood and adoptable by the industry. The Participants also stated that they will take into consideration each Bidder’s ability “to reliably and accurately convert data to a uniform electronic format for consolidation and storage, regardless of the message formats in with the CAT Reporters would be required to report data to the Central Repository.”857

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The Commission believes it is reasonable to allow the Plan Processor to determine the electronic format in which data must be reported, and whether the format is uniform or whether multiple formats can be used to report CAT Data. The Commission recognizes that if a format were mandated in the CAT NMS Plan, CAT Reporters would have the information necessary to accommodate the format sooner than if they need to wait for the Plan Processor to choose the format. Although the Commission recognizes the benefit of early notice, mandating a particular format(s) in the Plan could limit the Plan Processor’s options for designing the operation of the CAT as envisioned. Moreover, the Commission notes that the Participants have stated that they will consider whether a Bidder has proposed a format that is easily understood and adoptable by the industry.858 Further, because the Plan contemplates there will be iterations of the Technical Specifications, as well as time between publication of the Technical Specifications and the time by which data reporting must begin, the Commission believes that Industry Members will have sufficient time to comply with the ultimate format chosen by the Plan Processor. Therefore, the Commission believes that, rather than mandating the decision regarding the format for reporting in the CAT NMS Plan, it is reasonable for the format to be determined by the Plan Processor as a component of the CAT design.

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pubdate: November 15, 2016 effdate: N/A +

3. Reporting Timelines

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Reporting Timelines + Compliance User: Self-Regulatory Organization + Keywords: + CAT Reporter, + CAT data reporting, + UnaVista Letter, + Options Price Reporting Authority (“OPRA”), + +

The CAT NMS Plan provides that CAT Reporters must report order event and trading information into the Central Repository by 8:00 a.m. ET on the Trading Day following the day the CAT Reporter records such information.859 A CAT Reporter must report post-trade information by 8:00 a.m. ET on the Trading Day following the day the CAT Reporter receives such information.860 The CAT NMS Plan provides that CAT Reporters may voluntarily report Participant Data prior to the 8:00 a.m. ET deadline.861

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Commenters expressed opinions about the timeframe in which data should be reported by CAT Reporters to the Central Repository. One commenter expressed general support for the proposed reporting deadline, but noted that without having detailed Technical Specifications and validation rules, it could not assess the feasibility of meeting this deadline.862 The commenter stated that more information is needed regarding the CAT data reporting requirements to determine whether collating and formatting for the required data fields is achievable within the deadlines.863

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In contrast, two commenters suggested that data should be reported in real-time, or near real-time, rather than at 8:00 a.m. ET the Trading Day following the day that the data was recorded.864 One commenter noted under the CAT NMS Plan’s reporting deadlines, if a trade were completed at 9:30 a.m. ET on a Friday on an exchange, it would not have to be reported until Monday at 8:00 a.m. ET.865 The commenter stated that the CAT NMS Plan does not present a convincing reason for the 8:00 a.m. ET deadline given that market participants have access to the data in real-time and should be able to report it in seconds or less.866 The commenter opined that real-time, or near real-time, reporting would allow for more robust surveillance and a “quicker reaction time.”867 Another commenter argued that data should be reported within 50 milliseconds so that regulators can conduct real-time surveillance.868 The commenter recommended that CAT support real-time ingestion, processing and surveillance.869

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This commenter also questioned the Plan Processor’s ability to receive data from all CAT Reporters at 8:00 a.m. ET, and suggested that receiving data in real-time would alleviate any potential problems in this regard.870 Another commenter also addressed concerns regarding CAT’s capacity if a significant number of CAT Reporters choose to submit data at or around the same time, and recommended that the Plan Processor model its methodology on a system that has proven it can successfully project and manage large amounts of data, such as the Options Price Reporting Authority (“OPRA”).871

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In response to these comments, the Participants noted that the Commission considered the idea of requiring real-time reporting in Rule 613, but instead imposed a reporting deadline of 8:00 a.m. ET.872 Therefore, the Participants are not required to file a plan containing real-time reporting.873 Further, in response to the commenter that stated that real-time, or near real-time, reporting would assist with surveillance and early warning of market events,874 the Participants noted that certain of them already have real-time surveillance tools in place that will not be affected by the implementation of the CAT.875

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As the Participants noted, the Commission considered whether CAT Reporters should be required to report data in real-time when it adopted Rule 613 under Regulation NMS.876 In response to the Proposing Release which proposed that data be collected in real-time, commenters questioned the accuracy, cost, and usability of data reported in real-time.877 The Commission concluded that there were practical advantages to taking a more gradual approach for an undertaking such as the CAT, and acknowledged that while there might be certain advantages to receiving data intraday, the greater majority of benefits to be realized from development of the CAT do not require real-time reporting.878 Further, the Commission recognized that not requiring real-time reporting upon implementation would result in significant cost savings for industry participants.879 After reviewing the CAT NMS Plan and considering the commenters’ statements, the Commission continues to adhere to that view.

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Further, in response to the commenter that questioned the feasibility of reporting data by the 8:00 a.m. ET reporting deadline without having detailed Technical Specifications and validation rules,880 the Commission notes that this reporting deadline is the same as that currently required for OATS reporting. Therefore, while again acknowledging the importance of timely delivery of Technical Specifications, the Commission believes many CAT Reporters already have the capability to report in compliance with the deadline proposed in the Plan and that such deadline is reasonable.

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Additionally, in response to the commenter that questioned the Plan Processor’s ability to simultaneously receive data from all CAT Reporters at 8:00 a.m. ET and suggested that receiving data in real-time would alleviate potential problems resulting from an influx of all the data at one time, the Commission notes that the CAT NMS Plan requires the Plan Processor to have the capacity to handle two times the historical peak daily volume to ensure that, if CAT Reporters choose to submit data all at one time, the Plan Processor can handle the influx of data.881 Furthermore, because CAT Reporters have the option to report data throughout the day, the Commission anticipates that CAT Reporters, consistent with certain reporting practices, such as OATs reporting, will stagger their reports, thus alleviating concerns that a flurry of activity shortly before the 8:00 a.m. ET deadline would impose unnecessary burdens on the Plan Processor.

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pubdate: November 15, 2016 effdate: N/A +

4. Data Elements

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Data Elements + Compliance User: Self-Regulatory Organization + Keywords: + Article VI of the CAT NMS Plan, + CAT Report, + Response Letter, + Data Boiler Letter, + SIFMA Letter, + +

The CAT NMS Plan requires that numerous data elements be reported to the Central Repository to ensure there is sufficient information to create the lifecycle of an order, and provide regulators with sufficient detail about an order to perform their regulatory duties.

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The Commission received a number of comments regarding specific data elements that CAT Reporters are required to report to the Central Repository. In addition, one commenter questioned generally if the SEC should reconsider the scope of Rule 613 and “ask whether a more broad and complete audit trail is really what regulators need to efficiently and effectively perform their duties.”882 This commenter also questioned whether the data being captured is “relevant to achieve the SEC’s goals, or whether the data is being collected for statistical purposes and would simply overwhelm usability of the audit trail.”883

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The Commission continues to believe that the overall scope of Rule 613 is appropriate. However, the Commission has considered comments on each data element contained in the CAT NMS Plan and its necessity to achieving the goal of creating a consolidated audit trail, and has determined to amend or eliminate certain of the requirements proposed in the CAT NMS Plan as detailed below.

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a. Customer-ID

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(1) Customer Information Approach Article VI of the CAT NMS Plan adopts the “Customer Information Approach” for creating and utilizing a Customer-ID and identifying a Customer, which reflects the exemptive relief granted by the Commission.884 Several commenters expressed general support for the Customer Information Approach.885 Two commenters, however, requested a modification to the Customer Information Approach to permit Customer Identifying Information and Customer Account Information to be reported as part of the “customer definition process”886 instead of upon the original receipt or origination of an order.887 One of these commenters also stated that this modification would improve the security of Customer Account Information and the CAT because sensitive customer PII data “would not need to [be] passed to order management systems or stored with the firm’s CAT Reporting systems, but would remain with Customer Information Repositories which would issue the ‘Customer definition’ CAT Report.”888 One commenter stated that a unique identifier for every client may not be necessary and a unique identifier could be applied to only those with a certain threshold of trading activity.889 Another commenter expressed general support for the Customer Information Approach, but suggested that the CAT system should tag related trade patterns with each identifiable customer and counterparties as a “fingerprint (unique ID) to a customer and/or counterparty.”890

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Several commenters commented on the specific data elements required to be reported under the Customer Information Approach. One commenter suggested that the definition of “account type” should be consistent with existing OATS definitions.891 Another commenter noted that it could not find the definition of “customer type” in the CAT NMS Plan or Rule 613.892 This commenter recommended using an existing field currently reported to the SROs or the SEC for “customer type” to minimize implementation effort.893 This commenter also stated that an individual’s “role in the account,” required to be reported as part of Customer Identifying Information, may not be consistently maintained across firms and that population and maintenance of this data field may be an issue.894 As a result, this commenter believed that the field for an individual’s role in the account should only be required to be reported when firms create new accounts after the implementation of reporting under the CAT.895

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One commenter requested clarification that Industry Members would only be required to report CAT Data for “active” accounts, and then offered that “active accounts would be defined as those with activity in CAT reportable securities.”896 One commenter discussed whether Customer Identifying Information and Customer Account Information should be “refreshed” (i.e., updated) by an Industry Member. This commenter suggested “having the functional support for a voluntary full refresh, but…eliminat[ing] the mandated requirement to provide full refreshes periodically,” and stated that, “the initial load, daily updates and standard error processing should be sufficient to maintain data integrity.”897 This commenter added that while eliminating the periodic refresh of the information used to identify a Customer “may slightly reduce the burden or cost on the broker-dealer community as well as the Plan Processor, it would eliminate the need for unneeded transmission and handling of sensitive PII data.”898

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Another commenter noted the different data elements that identify a Customer under the Customer Information Approach and recommended that “customer information fields be categorized based on degree of importance for market surveillance and market reconstruction, so that focus can be concentrated on ensuring accuracy of the most important fields from a surveillance viewpoint.”899 This commenter added that “[d]ifferent criteria could be established based on the customer data categorization for correction turn-around time; e.g., customer unique identifier (LTID or social security number) would be of highest priority; zip code may be of lesser importance and not impact regulators’ ability to surveil the marketplace.”900 This commenter requested clarification whether only “active” accounts are required to report customer identifying information as part of the customer definition process.901

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One commenter opposed the Customer Information Approach. This commenter stated that the Commission should require “a universal customer ID to aid in the accuracy, integrity, and consolidation of CAT Data” and that “[f]irm-based IDs will significantly increase the complexity and fragmentation of the dataset, slowing down consolidation.”902

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According to the Participants, the Customer Information Approach would not have an adverse effect on the various ways in which, and purposes for which, regulators would use, access, and analyze the audit trail data reported under Rule 613 nor would it compromise the linking of order events, alter the time and method by which regulators may access the data, or limit the use of the CAT audit trail data. The Participants noted the unique nature of the existing identifiers to be used under the Customer Information Approach, which would allow the Plan Processor to create customer linkages with the same level of accuracy as the Customer-ID. The Participants also stated that the reliability and accuracy of the data reported to the Central Repository under the Customer Information Approach is the same as under the approach outlined in Rule 613 with regard to Customer-IDs because the identifiers used under the proposed Customer Information Approach are also unique identifiers. In some cases, the Participants stated that the Customer Information Approach may result in more accurate data, as errors may be minimized because broker-dealers will not have to adjust their systems to capture and maintain the additional Customer-ID data element, and only a single entity will have to perform the mapping of firm-designated account information to Customer-ID. The Participants also noted that a universal identifier that is tied to personally identifiable information could create a substantial risk of misuse and of possible identify theft as the universal identifiers are passed between the Plan Processor and each CAT Reporter.

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The Participants further argued that the benefits of the Customer Information Approach outweigh any potential disadvantages.903 The Participants added that based upon their analysis of this issue and discussions with the industry, as detailed in the Exemptive Request Letter and the Plan, the Participants disagree that the Customer Information Approach will increase complexity or slow down consolidation. The Participants stated that utilizing a single Customer-ID within the CAT while allowing firms to report using existing identifiers would substantially reduce costs and speed implementation without limiting the regulatory use of the data. Indeed, the Participants noted that the additional cost required to comply with the Customer-ID approach set forth in the Rule, rather than with the Customer Information Approach as proposed in the CAT NMS Plan, would be at least $195 million for the largest CAT Reporters.904

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The Participants clarified in their response at what point Customer Account Information and Customer Identifying Information must be reported under the Plan.905 The Participants stated that the approach discussed in the Exemptive Request Letter was intended to require CAT Reporters to supply Customer Identifying Information and Customer Account Information as part of the customer definition process—that is, prior to the origination or original receipt of an order—rather than as information submitted with each order. The Participants noted that Section 6.4(d)(iv) of the Plan describes this customer definition process, which includes the process for submitting customer information and for assigning Customer-IDs for use within the CAT. According to the Participants, the operation of Sections 6.3(d)(i) and 6.4(d)(i) of the Plan clarify that a CAT Reporter is required to submit the Firm Designated IDs with the new order reports, but not the information to identify a Customer. The Participants recognized, however, that the language in Section 6.4(d)(ii)(C) of the Plan could be read to suggest that the customer identifying information must be provided with each new order report (i.e., that the Customer Account Information and Customer Identifying Information must be submitted contemporaneously with each order, rather than submitting such information pursuant to the customer definition process). The Participants proposed that the CAT NMS Plan be amended to make clear that customer information would be submitted pursuant to the customer definition process rather than with each original receipt or origination of an order.

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The Participants also noted that they do not believe that trading activity thresholds with respect to identifiers would be consistent with the requirements of Rule 613.906 The Participants stated that the use of unique IDs is essential to the effectiveness and usefulness of the CAT because these data elements will help regulatory users conduct surveillance across market centers and identify activity originating from multiple market participants.

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In their response, the Participants stated that they have not yet determined how “account type” and “customer type” will be defined for purposes of reporting to the Central Repository and anticipate that they will be defined in the Technical Specifications.907

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With respect to limiting the reporting of a Customer’s “role in the account” on a going-forward basis (i.e., after implementation of the CAT), the Participants stated that the Plan does not distinguish between legacy and new accounts with regard to this requirement and the Participants do not believe that this change is necessary.908

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The Participants stated in their response that the CAT NMS Plan currently anticipates that Industry Member CAT Reporters would only report information to identify a customer for “active accounts” as part of the customer definition process.909 Specifically, the Plan states that “broker-dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis,”910 and defines “active accounts” as “accounts that have had activity within the last six months.”911 Moreover, the Participants noted that the Plan states that “[t]he Participants anticipate that Customer information that is initially reported to the CAT could be limited to only customer accounts that have, or are expected to have, CAT-reportable activity. For example, accounts that are considered open, but have not traded Eligible Securities in a given timeframe may not need to be pre-established in the CAT, but rather could be reported as part of daily updates after they have CAT-reportable activity.”912 Accordingly, the Participants suggested that the CAT NMS Plan be amended to clarify that only active accounts are required to report Customer Identifying Information during the customer definition process.

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With respect to the Plan’s requirement to periodically refresh Customer Identifying Information and Customer Account Information, the Participants stated in their response that they believe that maintaining the accuracy of customer information is vital to the operation of the CAT.913 Therefore, the Participants noted that a periodic refresh of customer information is beneficial because it will help to ensure that all customer information remains accurate and up to date. The Participants further acknowledged the concern with maintaining the confidentiality of PII and other CAT Data.914 To that end, the Participants highlighted Section 6.12 of the Plan, which requires the Plan Processor to develop and maintain a comprehensive information security program that meets certain requirements set forth in the Plan, and the fact that the information security program must be approved and reviewed at least annually by the Operating Committee. The Participants stated that they continue to assess the Bidders’ proposed security solutions and believe that once the CAT is operational the information security program will address the commenters’ concerns regarding data security. Finally, the Participants noted that the Plan will define the scope of a “full” customer information refresh and the extent to which inactive or other accounts would need to be reported.915

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The Participants further stated that they do not agree that it would be appropriate to rank the importance of particular data elements reported to the Central Repository for data correction or other purposes for several reasons.916 First, the Participants pointed out that Rule 613 does not indicate that any data elements are more or less important for market surveillance or market reconstruction purposes. The Participants noted that Rule 613(c)(7) states that the Plan “shall require each national securities exchange, national securities association, and any member of such exchange or association to record and electronically report to the central repository details for each order and each reportable event, including, but not limited to [the information set forth in Rule 613(c)(7)(i)–(viii)]” (emphasis added). Second, the Participants noted that ranking the importance of data elements for market surveillance and market reconstruction purposes might inappropriately reveal the confidential, proprietary surveillance processes used by each Participant. Third, the Participants stated that with respect to data accuracy, the Participants have included provisions in the Plan to take into account minor and major inconsistencies in Customer information. In particular, the Participants noted that Appendix D explains that “[t]he Plan Processor must design and implement procedures and mechanisms to handle both minor and material inconsistencies in Customer information.”917 Additionally, material inconsistencies must be communicated to the submitting CAT Reporter(s) and resolved within the established error correction timeframe, as detailed in Sections 6–7 of Appendix D of the Plan.918 The Participants stated that the Central Repository also must have an audit trail showing the resolution of all errors.919 Finally, the Participants noted that they intend to monitor errors in the customer information fields and will consider, as appropriate, whether to prioritize the correction of certain data fields over others.

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The Commission believes that the clarification provided by the Participants that Customer Account Information and Customer Identifying Information are reported as part of the customer definition process, rather than with each original receipt or origination of an order, is reasonable. The Commission believes that this will clarify the process for submitting information to identify a Customer under the CAT NMS Plan and will remove any ambiguity as to the reporting responsibilities of Industry Members. The Commission further believes that this clarification also will reduce the prospect of unnecessarily passing sensitive customer PII data. Accordingly, the Commission is amending Section 6.4(d)(ii)(C) of the CAT NMS Plan to clarify that Customer Identifying Information and Customer Account Information will be reported as part of the Customer definition process, rather than upon original receipt or origination of an order.

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The Commission also agrees that creating a unique Customer-ID as contemplated by the CAT NMS Plan, regardless of the Customer’s trading activity threshold, is reasonable. The Commission notes that surveillance and enforcement efforts are necessary, even for accounts with low levels of trading activity.

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The Commission further believes that it is reasonable to allow the Plan Processor, in conjunction with the Operating Committee, to define the specific “account types” and “customer types” in the Technical Specifications for the CAT NMS Plan. This approach will allow the Plan Processor to assess the various definitions of “account type” and “customer type” that exist among the CAT Reporters, and then make a determination as to how to appropriately classify them for purposes of CAT reporting. The Commission expects the Plan Processor will define these terms with sufficient precision so that the reporting requirements will be clear.

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The Commission agrees that a Customer’s role in the account should be a data element that is reported as part of the customer definition process, regardless of whether the account existed prior to implementation of the CAT or was created thereafter. The CAT NMS Plan does not distinguish between legacy and new accounts, for purposes of reporting Customer Identifying Information, and the Commission believes identifying the Customer’s role in the account will facilitate surveillance and enforcement efforts.

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The Commission also believes that it is reasonable to limit the reporting of Customer Identifying Information and Customer Account Information to only those accounts that are “active,” defined as a Customer account that has had activity (i.e., received or originated an order), in an Eligible Security within the last six months. This will alleviate the need for CAT Reporters to update the Customer Identifying Information or Customer Account Information for accounts that have not received or originated an order for more than six months, but still ensures that the Central Repository will collect audit trail data for Customer accounts that have any Reportable Events. The Commission notes that pursuant to the Plan and the Customer Information Approach, a CAT Reporter must upload any Customer Identifying Information and Customer Account Information to the Central Repository prior to a Customer originating an order. Because of this requirement, even if a CAT Reporter has not been updating the Customer Identifying Information and Customer Account Information for a Customer with an account with no Reportable Events for six months, if the Customer decides to submit or originate an order, the CAT Reporter would upload the required information identifying the Customer on the same day the Customer submits the order, and upon submission of the order, the Central Repository will collect the audit trail data required by Section 6.4 of the Plan. Accordingly, the Commission is amending Section 1.1 of the CAT NMS Plan to add a definition of “Active Accounts” to mean an account that has received or originated an order in an Eligible Security within the last six months. In addition, the Commission will amend Section 6.4(d)(iv) of the Plan to require that Industry Members submit an initial set of Customer Identifying Information and Customer Account Information to the Central Repository only for Active Accounts; and require Industry Members to update Customer Identifying Information and Customer Account Information only for Active Accounts.

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The Commission also believes that it is reasonable for the CAT NMS Plan to require the periodic refresh of such information to ensure that the Central Repository has the most current information identifying a Customer. The Commission notes that both daily updates and periodic refreshes will require the uploading of PII, along with other CAT Data, to the Central Repository, but believes that the robust information security program to be implemented and maintained by the Plan Processor should sufficiently protect all CAT Data.920

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(2) Modification or Cancellation of an Order

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In connection with their proposal to adopt the Customer Information Approach, as discussed above, the Participants also suggested modification to Rule 613(c)(7)(iv)(F), which requires that “[t]he CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction” be reported to the Central Repository.921 In the CAT NMS Plan, the Participants proposed that CAT Reporters report whether a modification or cancellation instruction was given by the Customer associated with the order, or was initiated by the broker-dealer or exchange associated with the order.922 According to the Participants, it is most critical for regulatory purposes to ascertain whether the modification or cancellation instruction was given by the Customer or was instead initiated by the broker-dealer or exchange, rather than capturing the identity of the specific person who gave the instruction.923

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One commenter believed that modification and cancellation instructions are as important as other Reportable Events and, therefore, the identity of the person giving such instructions is “vital information for market surveillance purpose[s].”924 The commenter opposed the Participants’ approach of permitting CAT Reporters to report whether a modification or cancellation of an order was given by a Customer or initiated by a broker-dealer or exchange, in lieu of requiring the reporting of the Customer-ID of the person giving the modification or cancellation instruction.925

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In their response, the Participants noted that reporting a single, specific Customer-ID for all modifications and cancellations is not possible under the Customer Information Approach because broker-dealers would not maintain Customer-IDs; instead, each broker-dealer would provide Firm-Designated IDs to the Central Repository to identify a Customer.926 The Participants also stated that requiring CAT Reporters to report the Customer-ID of the specific individual initiating a cancellation or modification would introduce an inconsistent level of granularity in customer information between order origination and order modifications or cancellations, because Rule 613(c)(7)(i) does not require the reporting of the specific individual originating an order.

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The Commission has considered the commenter’s concern and the Participants’ response, and believes that requiring that CAT Reporters report whether a modification or cancellation instruction was given by the Customer associated with the order, or was initiated by the broker-dealer or exchange associated with the order, is a reasonable approach to providing useful audit trail data regarding the modification or cancellation of an order. The approach set forth in the Plan also will not result an inconsistent level of granularity between the Reportable Events of

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origination or receipt of an order, and the modification or cancellation of the order because it would not require the identity of the person that gave the modification or cancellation instruction—which is not required under the CAT NMS Plan nor Rule 613.

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(3) Reporting an Account Effective Date

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In connection with their proposal to adopt the Customer Information Approach, as discussed above, the Participants also proposed an alternative method for reporting the date an account was opened, as required by Rule 613(c)(7)(viii)(B).927 When reporting “Customer Account Information,” an Industry Member is required to report the date an account was opened.928 The SROs requested an exemption to allow an “effective date” be reported in lieu of an account open date in certain limited circumstances.929 As a result, an Industry Member will report the date an account was opened; except, however, that (a) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will (i) provide the Account Effective Date in lieu of the “date account opened”; (ii) provide the relationship identifier in lieu of the “account number”; and (iii) identify the “account type” as a “relationship”;930 and (b) in those circumstances in which the relevant account was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter and no “date account opened” is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances: (i) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system; (ii) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system; (iii) where there are multiple dates associated with an account in an Industry Member’s system, and the parameters of each date are determined by the individual Industry Member; and (iv) where the relevant account is an Industry Member proprietary account.931 Several commenters supported the Participants’ approach to reporting an account effective date rather than the date an account was opened, as set forth in the CAT NMS Plan, and which reflects the exemptive relief granted by the Commission.932 The Commission believes that the CAT NMS Plan’s approach to reporting an account effective date, rather than the date an account was opened, is reasonable and will not impact the quality or usefulness of the information available to regulators.

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(4) Identifying a Customer using LEI

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The Commission also received several comments stating that the Commission should mandate the use of LEIs whenever applicable.933 One commenter, also noting its support for using a global entity identifier in general and LEI specifically, stated that while it agrees that the system should provide for the capture and reporting of LEIs for customer identification, it would be appropriate to provide for a transitional approach to the collection of the LEIs. Under the commenter’s recommended transitional approach, broker-dealers would provide the LEI to the CAT in each instance where the LEI is already known and collected.934 This commenter also believed that it would be important to establish the CAT in a way that captures the LEI as part of the initial implementation of the system, rather than having to adapt the system at a future date, and that use of LEIs is important for both risk management and operational efficiency.935 Another commenter, however, did not recommend that the LEI be mandated for use by broker-dealers and argued that mandating the use of LEIs would disadvantage small broker-dealers who have no business requirement at this time to use LEI.936

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In their response, the Participants stated that based on discussions with the DAG, they agree with the commenters that it would be reasonable to require an Industry Member to report its LEI or the LEI of a Customer to the Central Repository as part of Customer Identifying Information if the Industry Member has or acquires an LEI.937 The Participants added that Industry Members that report LEIs would do so in addition to, rather than in lieu of, the other Customer Identifying Information required by the Plan.938 The Participants do not believe, however, that the Plan should require Industry Members or others to obtain an LEI for a Customer if they do not already have one.939

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The Participants further stated that, based on discussions with the DAG, they believe that Industry Members should be permitted to provide Customer LEIs in their possession without the imposition of any due diligence obligations beyond those that may exist today with respect to information associated with an LEI.940 The Participants noted that, although Industry Members should not be required to perform additional due diligence with regard to the LEIs for CAT purposes, Industry Members will be required to accurately provide the LEIs in their records and may not knowingly submit inaccurate LEIs to the CAT.941 In addition, the Participants stated that all of the remaining Bidders have indicated that their solutions will be able to support the use of LEIs.942 Moreover, although the Participants believed that there are costs related to requiring Industry Members to provide an LEI if they have one, the Participants believed that the benefits outweigh the costs.943

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The Commission has considered the commenters’ views on the merits of reporting an LEI to the Central Repository as part of Customer Identifying Information and the Participants’ response and believes that it is reasonable to require an Industry Member to report an LEI for its Customer if the Industry Member has or acquires the LEI for its Customer. Accordingly, the Commission is amending the definition of “Customer Identifying Information” in Section 1.1 of the Plan to require that an Industry Member report an LEI to identify a Customer that is a legal entity, if the Industry Member has or acquires the LEI of such Customer. However, the Commission is also making clear that the LEI is not reported in lieu of the other Customer Identifying Information for a legal entity (e.g., name, address, or employer identification number), but must be reported along with other Customer Identifying Information.

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The Commission believes use of the LEI enhances the quality of identifying information for Customers by incorporating a global standard identifier increasingly used throughout the financial markets. The Commission notes that according to the Plan, Industry Members will still be required to report other Customer Identifying Information even if the Industry Member reports an LEI to identify a Customer; thus the LEI supplements the other information that will be used by the Central Repository to identify a Customer.

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The Commission further believes that it is reasonable to not require an Industry Member to obtain an LEI for its Customer or for itself if the Industry Member does not already have an LEI for its Customer or itself because such a requirement would impose an additional burden. However, the Commission believes that requiring Industry Members to accurately provide the LEIs in their records and not knowingly submit inaccurate LEIs to the CAT is reasonable, because reporting accurate information to the CAT is a fundamental requirement of the Plan.944

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In response to the commenter that believed that such a requirement might disadvantage small broker-dealers, the Commission notes that the requirement to report LEIs does not mandate that a broker-dealer obtain an LEI to comply with the Plan; therefore, small broker-dealers that do not currently have an LEI will not be required to report one and thus will not be disadvantaged.

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b. CAT-Reporter-ID

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(1) Existing Identifier Approach

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Article VI of the CAT NMS Plan reflects the “Existing Identifier Approach” for purposes of identifying each CAT Reporter associated with an order or Reportable Event.945 Under the Existing Identifier Approach, CAT Reporters are required to record and report to the Central Repository an SRO-Assigned Market Participant Identifier for orders and certain Reportable Events to be used by the Central Repository to assign a unique CAT-Reporter-ID to identify CAT Reporters. An Industry Member is required to report its existing SRO-Assigned Market Participant Identifier used by the relevant SRO specifically for transactions occurring on that SRO to the Central Repository.946 Similarly, an exchange reporting CAT Reporter information is required to report data using the SRO-Assigned Market Participant Identifier used by the Industry Member on that exchange or its systems.947 Off-exchange orders and Reportable Events will be reported with an Industry Member’s FINRA SRO-Assigned Market Participant Identifier.948

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For the Central Repository to link the SRO-Assigned Market Participant Identifier to the CAT-Reporter-ID, each SRO will submit, on a daily basis, all SRO-Assigned Market Participant Identifiers used by its Industry Members (or itself), as well as information sufficient to identify the corresponding market participant (e.g. a CRD number or LEI) to the Central Repository.949 Additionally, each Industry Member will be required to submit to the Central Repository information sufficient to identify such Industry Member (e.g., CRD number or LEI, as noted above).950 The Plan Processor will use the SRO-Assigned Market Participant Identifiers and identifying information (i.e., CRD number or LEI) to assign a CAT-Reporter-ID to each Industry Member and SRO for internal use within the Central Repository.951

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The reporting of an existing SRO-Assigned Market Participant Identifier differs from Rule 613 in that under Rule 613(c)(8), CAT Reporters would be required to report a universal CAT-Reporter-ID for certain Reportable Events.952 In the Exemptive Request Letter, the SROs requested an exemption to permit a CAT Reporter to report an existing SRO-Assigned Market Participant Identifier in lieu of requiring the reporting of a universal CAT-Reporter-ID.953 Specifically, the Participants stated that the Existing Identifier Approach would not negatively impact regulators’ access, use, and analysis of CAT Data, and that it could allow additional levels of granularity compared to the universal CAT-Reporter-ID approach, in that SRO-Assigned Market Participant Identifiers may contain additional information not mandated by the CAT NMS Plan, such as the specific desk or department responsible for trades.954 The Participants also stated that they believe the reliability and accuracy of CAT Data under the Existing Identifier Approach would not be undermined,955 and represented that the Existing Identifier Approach could result in fewer errors and more reliable and accurate linkage of order information.956 Further, the Participants noted their belief – based upon discussion with the DAG – that the Existing Identifier Approach would reduce the cost and implementation burdens on CAT Reporters to comply with Rule 613,957 as it would allow them to continue using their current business practices and data flows instead of building new infrastructure to support the CAT-Reporter-ID requirement.958

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Several commenters expressed support for the Existing Identifier Approach.959 Two of the commenters listed benefits of the Existing Identifier Approach over the approach required in Rule 613.960 One of the commenters stated that the Existing Identifier Approach would be more efficient and cost-effective than the Rule 613 approach.961 The other commenter listed the following benefits: the Existing Identifier Approach would allow the industry to keep its current business processes and identifiers; coordination of a single CAT-Reporter-ID to be used across all Participants to identify broker-dealers would not be necessary; CAT Reporters would not have to expand their information repositories to store and manage a new CAT-Reporter-ID; the Plan Processor would manage the translation between the SRO-Assigned Market Participant Identifiers and the CAT-Reporter-ID; since the Plan Processor would be assigning CAT-Reporter-IDs, CAT Reporters would not be subject to errors with respect to the application of CAT-Reporter-IDs; a common information technology solution would be used; the Existing Identifier Approach would allow regulators to surveil on a more granular level; and the Existing Identifier Approach would save CAT Reporters the expense of maintaining and supplying a unique CAT-Reporter-ID for every Reportable Event.962 Both commenters stated that the Existing Identifier Approach would not affect the accuracy, accessibility, timeliness or security and confidentiality of CAT Data over the Rule 613 approach.963

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Three commenters offered recommendations for modifying the Existing Identifier Approach.964 Two commenters asked that the FINRA MPID be permitted for non-execution reports.965 One commenter stated that, regardless of whether the Existing Identifier Approach or the Rule 613 approach is used, the CAT should “tag” trade patterns with the trading desk and trader.966

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In response to the two commenters that requested that the FINRA MPID be used for non-execution reports,967 the Participants stated that the practices described by the two commenters would be acceptable under the Existing Identifier Approach, explaining that a broker-dealer CAT Reporter would be permitted to use any existing SRO-Assigned Market Participant Identifier (e.g., FINRA MPID, NASDAQ MPID, NYSE Mnemonic, CBOE User Acronym and CHX Acronym) when reporting order information to the Central Repository, regardless of the eventual execution venue.968

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Based on the Participants’ representations in the Plan, the Commission believes that the Existing Identifier Approach is designed to provide the same regulatory benefits in terms of identifying CAT Reporters as would be achieved under Rule 613, at a reduced cost and implementation burden on CAT Reporters.969 The Existing Identifier Approach is designed to link, within the Central Repository, all SRO-Assigned Market Participant Identifiers to the appropriate CAT-Reporter-ID, and ultimately to the CAT Reporter, in a manner that is efficient, accurate, and reliable.

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The Commission notes that one commenter recommended that the CAT be able to link trades to the responsible trading desk and trader.970 The Commission notes that an additional benefit of the Existing Identifier Approach is that, as the Participants have represented, it may allow for the voluntary collection of additional levels of granularity, such as responsible trading desk or trader.971

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(2) Use of LEI

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Section 6.3(e)(i) of the CAT NMS Plan requires each Participant to submit, on a daily basis, all SRO-Assigned Market Participant Identifiers used by its Industry Members or itself, as well as information to identify the corresponding market participant to the Central Repository, such as a CRD number or LEI, but does not require the reporting of LEIs. Section 6.4(d)(vi) of the CAT NMS Plan requires each Industry Member to submit to the Central Repository information sufficient to identify such Industry Member, such as a CRD number or LEI, but similarly does not require the reporting of LEIs.

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As discussed above in relation to the Customer-ID, several commenters recommended, or noted, the use of LEIs in lieu, or as part of the development of, a CAT-Reporter-ID.972 One commenter stated that it supported requiring Industry Members to provide their LEIs, as long as LEIs are already being captured by their systems.973 Another commenter supported the optional use of LEIs, believing that mandatory use of LEIs would unfairly burden small broker-dealers that may not currently accommodate LEIs in their systems.974

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In recognition of the comments that encouraged the use of LEIs in the CAT, and based on discussions with the DAG, the Participants have recommended that Sections 6.3(e)(i) and 6.4(d)(vi) of the CAT NMS Plan be amended to require a Participant to submit an Industry Member’s LEI if the Participant has (or acquires) an LEI for an Industry Member, and to require Industry Members to submit to the Central Repository their LEIs if they have LEIs.975 This information will be reported to the Central Repository as part as the information the Plan Processor will use to assign CAT-Reporter-IDs.

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The Commission considers the suggested modifications by the Participants to Section 6.3(e)(i) and Section 6.4(d)(vi) of the CAT NMS Plan to require the Participants and Industry Members to provide Industry Member LEIs, if known, by such Participant or Industry Member to be reasonable and an improvement in the information available in the CAT with respect to CAT Reporters. Accordingly, the Commission is amending these sections to require the Participants and Industry Members to provide Industry Member LEIs, if known, by such Participant or Industry Member; however, the Commission is also amending these sections to require the submission of Participant LEIs, if a Participant has an LEI, as well as Industry Member CRD numbers. Specifically, the amendment to Section 6.3(e)(i) would require a Participant (i) for purposes of reporting information to identify itself pursuant to Section 6.3(e)(i), to submit its LEI to the Central Repository, if the Participant has an LEI; and (ii) for purposes of reporting information to identify an Industry Member pursuant to Section 6.3(e)(i), to submit the CRD number for the Industry Member, as well as the LEI of the Industry Member if the Participant has collected such LEI of the Industry Member. The amendment to Section 6.4(d)(vi) with respect to Industry Members would require an Industry Member, for purposes of reporting information to identify itself pursuant to Section 6.4(d)(vi), to submit to the Central Repository the CRD number of the Industry Member as well as the LEI of the Industry Member (if the Industry Member has an LEI).

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The Commission believes these amendments are appropriate because they may enhance the quality of identifying information by requiring the submission of the LEI—a global standard identifier increasingly used throughout the financial markets—to the extent it has otherwise been obtained. Because the amendments only impose the requirement to report an LEI on Participants and Industry Members that currently have an LEI, and which is known by the CAT Reporter, it should not impose the additional burden on them to obtain an LEI. Further, the Participants have represented that the Bidders’ solutions can support the reporting of LEIs.976 Although Section 6.3(e)(i) and Section 6.4(d)(vi) currently permit the submission of CRD numbers, the Commission believes that requiring the submission of the Industry Member CRD numbers will provide regulators with consistent identifying information about Industry Members that is useful for regulatory investigations and has significant regulatory benefit. In addition, requiring CRD numbers to be provided should not impose additional burdens on Industry Members because, as registered broker-dealers, all Industry Members currently have CRD numbers.

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c. Open/Close Indicator

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Rule 613 and the CAT NMS Plan require CAT Reporters to report an open/close indicator as a “Material Term” on all orders.

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Three commenters objected to the requirement that CAT Reporters report an open/close indicator for equities transactions.977 One of these commenters requested additional cost-benefit analysis on the open/close indicator.978 Another commenter argued that the open/close indicator should be reported for options only, noting that this indicator is not currently used for equities.979 Another commenter noted that including an open/close indicator for equities would require “significant process changes and involve parties other than CAT Reporters, such as buy-side clients, OMS/EMS vendors, and others.”980 This commenter stated that, if the SROs and the Commission believe that there is value in obtaining the open/close indicator for surveillance purposes with respect to equities transactions, then a rule proposal covering this request and a thorough cost-benefit analysis should be filed for public comment.981 Another commenter characterized the requirement to report an open/close indicator as a “market structure change” and likewise stated that the requirement should be subject to its own rulemaking process, including a cost-benefit analysis, and subject to a public comment period.982

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In response, the Participants stated that they understand that Rule 613 requires that an “open/close indicator” be reported as part of the “material terms of the order” for both equities and options transactions, but recommended that CAT Reporters not be required to report an open/close indicator for equities transactions, or for options transactions, such as for market marker options transactions, in which the open/close indicator is not captured by current industry practice.983

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The Commission notes that Rule 613(c)(2) states only that “the plan submitted pursuant to this section” (emphasis added) must require reporting of a set of “material terms of the order,” including an open/close indicator. It does not state that the Plan as approved must include that data element. Now that the Participants have submitted a plan in compliance with Rule 613, that rule does not preclude the Commission from approving a Plan that implements the Participants’ recommendation to limit the set of transactions to which the requirement to report an open/close indicator would apply. After consideration, the Commission believes that limiting the requirement to provide an open/close indicator to listed options is reasonable. The open/close indicator will provide important information about whether an order is opening or increasing a position in the option, or closing or reducing a position. While this information is useful with respect to non-market maker options activity, the Commission acknowledges the concerns in other areas, including the lack of a clear definition of the term for equities transactions, and the lack of utility of that data at the time of quote entry for options market makers.

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Accordingly, as recommended by the Participants, the Commission is amending the Plan to remove the requirement that an open/close indicator be reported as part of the Material Terms of the Order for equities and Options Market Maker quotations.984

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d. Allocations

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(1) Use of Allocation Reports

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The CAT NMS Plan requires that broker-dealers submit an Allocation Report following the execution of an order if such order is allocated to one or more accounts or subaccounts (the “Allocation Report Approach”). An Allocation Report must contain the following information: (i) the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and the security that has been allocated; (ii) the identifier of the firm reporting the allocation; (iii) the price per share of shares allocated; (iv) the side of shares allocated; (v) the number of shares allocated to each account; and (vi) the time of the allocation.985

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The Allocation Report Approach differs from Rule 613 in that under Rule 613(c)(7)(vi)(A), each CAT Reporter would be required to record and report to the Central Repository “the account number for any subaccounts to which the execution is allocated (in whole or part).”986 Under Rule 613 regulators would be able to link the subaccount to which an allocation was made to a specific order. In contrast, under the Allocation Report Approach, regulators would only be able to link an allocation to the account to which it was made, and not to a specific order.

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In the Exemption Request, the Participants represented that, based on discussions with the DAG, broker-dealer systems do not presently link orders with allocations of the resulting executions, and building such functionality would be complex and costly. In addition, the Participants stated that the Allocation Report Approach would not affect the various ways in which, and purposes for which, regulators would use, access, and analyze CAT Data.987 The Participants represented that the Allocation Report Approach would still provide regulators with the ability to associate allocations with the Customers that received them and would provide regulators with useful information without imposing undue burden on the industry.988 The Participants also stated that they do not believe that this approach would compromise the linking of order events, alter the time and method by which regulators may access the data, or limit the use of the data as described in the use cases contained in the Adopting Release for Rule 613.989

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Moreover, the Participants stated that they, along with the industry, believe that linking allocations to specific executions, as mandated by Rule 613, would be artificial and would not otherwise serve a legitimate purpose.990 The Participants argued that because the Allocation Report Approach leverages existing business processes instead of creating new workflows, it could help improve the reliability and accuracy of CAT Data as well as reduce the time CAT Reporters need to comply with the CAT reporting requirements.991 The Participants also stated that complying with the requirements of Rule 613(c)(7)(vi)(A) would require additional system and process changes which could potentially impact the reliability and accuracy of CAT Data.992

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Four commenters expressed support for the Allocation Report Approach, noting that the approach would eliminate the need to re-engineer systems.993 One of the commenters stated that the information reported in an Allocation Report would provide regulators with sufficient information to link allocations through reference information to the Customer that placed the order, but noted that “there may not always be sufficient linkage information to relate a specific order, execution and allocation for a customer.”994 This commenter argued that it is not possible to link allocations to order lifecycles in the case of many-to-many orders.995

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One commenter, however, disagreed with the Allocation Report Approach, stating that it would impact the completeness, accessibility and timeliness of CAT Data, and foreseeing challenges in linking the accounts and subaccounts to which an execution is allocated.996 This commenter believed that broker-dealers can, and should, track order allocation information, including in the case of many-to-many orders.997

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In response to commenters, the Participants restated their belief that the Allocation Report Approach set forth in the CAT NMS Plan appropriately weights the costs and benefits, and that “linking allocations to executions could show artificial relationships between these order events.”998

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The Commission believes that the Plan’s Allocation Report Approach will provide regulators the necessary information to detect abuses in the allocation process without imposing undue burdens on broker-dealers. The use of Allocation Reports will provide the Central Repository the ability to efficiently, accurately, and reliably link the subaccount holder to those with authority to trade on behalf of the account, which will ultimately improve regulatory efforts by SROs and the Commission, including market surveillance, market reconstructions, enforcement investigations, and examinations of market participants.999 Additionally, by leveraging existing broker-dealer processes, the Plan’s Allocation Report Approach could potentially reduce the time CAT Reporters need to comply with CAT reporting requirements and lower costs by using existing business processes.

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(2) Time of Allocations

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Under the CAT NMS Plan, CAT Reporters would need to submit the time of an allocation on the Allocation Report which, with the exception of Manual Orders, must be at a millisecond level of granularity.1000

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Two commenters argued that the time of allocation should be reported with a timestamp granularity of no finer than one second.1001 Three commenters asserted that the timestamps should not be required at all as part of the Allocation Report.1002 One of those commenters noted that, because allocations are part of the post-trade process, the timing of such allocations is not critical, and requiring timestamps on allocations would represent “a potentially costly and misleading reporting requirement divorced from the goals of CAT.”1003 Another commenter similarly asserted that requiring a timestamp on allocations would be costly and “will not assist the SEC in achieving the expected regulatory benefit.”1004 This commenter explained that instructions for allocations can be communicated by phone, fax, or instant messaging or that standing instructions may be maintained for allocations.1005 Therefore, the commenter stated, the only consistent point at which to capture a timestamp for an allocation is the time the allocation is booked into an allocation processing system.1006

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In response, the Participants stated that allocation timestamps would “be a significant tool for detecting regulatory issues associated with allocations, including allocation fraud,” and supported requiring them in the Plan.1007 However, the Participants stated that the cost of changes that would be necessary to capture timestamps to the millisecond may not be justified, particularly in light of the fact that allocations tend to be a manual process. Therefore, the Participants suggested that Allocation Reports should have timestamps with a one second granularity, as is the case with similar Manual Order Events.1008

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The Commission agrees with the Participants that inclusion of the time of an allocation as part of the data submitted in the Allocation Report is reasonable to help detect abuse that may occur if executions are allocated among subaccounts at the same time. For example, the Commission believes that the time of allocation will assist regulators in assessing regulatory issues that might arise in the allocation process, such as “cherry-picking” (systematically favoring one customer over another in connection with specific allocation decisions).1009 Currently, investigations of potential cherry-picking require a manual, data-intensive process. The Commission believes that having access to data with the time of allocations should improve regulators’ ability to spot potential abuses and assess the prevalence of allocation practices industry-wide.1010 The Commission also believes that data with the time of allocations could assist in examining whether broker-dealers are making allocations in accordance with their policies and procedures.

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With regard to the appropriate level of granularity for the timestamps on Allocation Reports, the Commission agrees with the Participants that, given the manual nature of the allocation process, a timestamp granularity of one second is appropriate and would not reduce the regulatory value of the information. The Commission also believes that the clock synchronization standard for Business Clocks that capture the time of an allocation need only be to the second. This approach is consistent with the approach for Manual Order Events. The Commission does not believe that the regulatory benefit of requiring allocation times to be recorded in milliseconds (compared to seconds) and clock synchronization to 50 milliseconds (compared to one second) justifies the costs at this time.1011

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Accordingly, the Commission is amending Section 6.8(a)(ii) and (b) of the Plan to permit the Business Clocks used solely for the time of allocation on Allocation Reports to be synchronized to no less than within one second of the time maintained by the NIST and the time of allocation on an Allocation Report to the second.

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e. Market Maker Quotes

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Under the CAT NMS Plan, market maker quotations in Listed Options need to be reported as Reportable Events to the Central Repository only by the applicable Options Exchange1012 and not by the Options Market Maker.1013 However, under the Plan: (1) an Options Market Maker must submit to the relevant Options Exchange, along with any quotation, or any modification or cancellation thereof, the time it sent such message to the Options Exchange (“Quote Sent Time”); and (2) Options Exchanges must submit the Quote Sent Time received from Options Market Makers, along with the applicable message, to the Central Repository without change. 1014

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The requirements for reporting Options Market Maker quotes in the Plan differ from the requirements in Rule 613(c)(7), which provide that the CAT NMS Plan must require each CAT Reporter to record and electronically report to the Central Repository details for each order and each reportable event, including the routing and modification or cancellation of an order.1015 Rule 613(j)(8) defines “order” to include “any bid or offer;” so that the details for each Options Market Maker quotation must be reported to the Central Repository by both the Options Market Maker and the Options Exchange to which it routes its quote.1016

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In the Exemption Request, the Participants noted that requiring the applicable Options Exchange to report market maker quotations to the Central Repository would not degrade the reliability or accuracy of the CAT Data, or its security and confidentiality.1017 Further, the Participants stated that the proposed approach would not have an adverse effect on the ways in which, and purposes for which, regulators would use, access, and analyze the CAT Data.1018 The Participants included a cost-benefit analysis of options data reporting approaches in support of the Exemption Request.1019 This analysis noted that the volume of options market maker quotes would be larger than any other category of data to be reported to the Central Repository, generating approximately 18 billion daily records, and that requiring duplicative reporting of this large amount of data would lead to a substantial increase in costs.1020 The Participants argued in their cost-benefit analysis that eliminating the requirement of Rule 613(c)(7) that both Options Market Makers and Options Exchanges report nearly identical quotation data to the Central Repository would have the potential effect of reducing the projected capacity and other technological requirements of the Central Repository, which could result in significant cost savings.1021

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A few commenters expressed support for the provisions of the CAT NMS Plan regarding the reporting of Market Maker Quotations in Listed Options.1022 One of these commenters stated that permitting only Option Exchanges to report Options Market Maker quote information, instead of both Options Market Makers and Options Exchanges, would not affect the completeness, timeliness, accuracy, security or confidentiality of CAT Data, and would result in a cost savings.1023 One commenter suggested that equities market maker quotes should be handled in the same manner as Options Market Maker quotes.1024

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Another commenter, however, suggested that providing an exemption to Options Market Makers for reporting Options Market Maker quotes could be “detrimental to achieving the objective of capturing ‘complete audit trails’ of all the market activities.”1025 The commenter believed that exempting Options Market Makers from reporting their quotes to the CAT risked “overly discounted/distorted signals” for market surveillance and manipulation detection purposes.1026

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In their response, the Participants disagreed that requiring only the Options Exchanges to report market maker quotations to the Central Repository would be detrimental to the CAT.1027 The Participants noted that all data that would otherwise be reported by Options Market Makers will still be reported, including Quote Sent Time. The only difference between the requirement under Rule 613 and the approach in the Plan is the reporting party.1028

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With regard to the commenter that suggested equities market maker quotes should be handled in the same manner as Options Market Maker quotes, the Participants explained that they focused on Options Market Makers because of the significant volume of quotes they produce.1029 The Participants stated that the volume of equities market maker quotes is much smaller than the volume of options market maker quotes, noting that there are far fewer quote updates for every trade in the equities markets, with an approximate average ratio of quotes to trades of 18 to 1 in the equities markets as compared to ratio of 8,634 to 1 for options.1030

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The Commission believes the proposed approach is reasonable in providing the same regulatory benefits as would be achieved under Rule 613, at a reduced cost and implementation burden on CAT Reporters. The Commission notes that the information that Options Market Makers report to Options Exchanges must be reported to the Central Repository without change, and the information that regulators would receive if Options Market Makers reported their quotation information to the Central Repository would be identical to the information that they will receive under the requirements of the CAT NMS Plan. Therefore, there will be no degradation to the audit trail. The Commission disagrees with the comment that signals for market surveillance and manipulation detection purposes could be distorted if Options Market Makers are not required to report their quotation information1031 because the exact information that the Options Market Makers would report to the CAT will be reported on their behalf by the Options Exchanges. The Commission acknowledges the commenter who recommended that equity market makers also be exempt from reporting their quotes to the CAT, but does not believe that it is appropriate at this time to grant such an exemption. As noted above, equity market makers produce significantly fewer quotes that Options Market Makers, and the Commission has not been presented with evidence that reporting equity market maker quotes is unduly burdensome.1032

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f. Data Elements Not Included in the CAT

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One commenter recommended a re-examination of the data elements to be collected in the CAT NMS Plan, and questioned whether a “more broad and complete audit trail” is needed.1033 This commenter recommended that the CAT include data on the settlement of securities transactions (i.e., post-execution) from the DTCC and NSCC, short sale information, including lending/borrowing information and pre-execution short sale locate data, and creation/redemption information for Exchange Traded Funds (“ETFs”).1034

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In response to the commenter, the Participants described how the CAT NMS Plan aligns with the scope of required elements in Rule 613. The Participants generally expressed their view that the potential benefit of requiring additional elements, such as settlement information, lending/borrowing information, short sale locate data,1035 and ETF creation/redemption data,1036 would be outweighed by the design and implementation costs at this time.1037 The Participants committed generally to assess whether additional information should be reported to the CAT in the future.1038

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The Commission notes that, with regard to a locate identifier on short sales, data could be readily obtained from a follow-up request to a broker-dealer if the other data required to be reported to the CAT, particularly the information relating to the customer behind the order, is included in the consolidated audit trail. 1039 With regard to lending/borrowing information, the Commission understands that some of this data can be obtained through private sources, such as service providers. The Participants stated that they do not believe that the benefits of including this information in the CAT justify the costs for requiring them to be reported. The Commission similarly believes that it is not necessary to require this information in CAT. With regard to the inclusion of information on ETF creations and redemptions, the Commission agrees with the Participants that the relevant market participants may not be included in the current scope of CAT Reporters. Therefore, the Commission is not amending the Plan to include these data elements in the CAT at this time. Nor is it amending the Plan to include information on the settlement of securities transactions from DTCC and NSCC in the CAT, as it would require participation by entities not currently party to the CAT NMS Plan, and the regulatory benefits to the Participants and the Commission would not, at this time, justify the costs.

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The Commission appreciates the commenter’s perspective that additional data elements may offer some regulatory benefit. However, neither Rule 613 nor the CAT NMS Plan proposed including such data elements. After considering the comments, the Commission believes that it is reasonable to not mandate the reporting of new data elements to the CAT at this time. The Commission does not believe that the benefits to the Commission and Participants justify the cost for requiring additional data elements to be reported. The Commission or the Participants may consider additional data elements in the future.

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pubdate: November 15, 2016 effdate: N/A +

5. Symbology

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Symbology + Compliance User: Self-Regulatory Organization + Keywords: + CAT Reporters, + Data Boiler Letter, + OATS and Electronic Blue Sheets (“EBS”), + Response Letter, + OATS Reporting Technical Specifications, -

The Participants propose amending the Selection Plan to prohibit a Bidding Participant from voting in any round to select the Plan Processor from among the Shortlisted Bidders where that Bidding Participant has submitted a Bid, a Bid has been submitted by an Affiliate of that Bidding Participant, or a Bid has been submitted that includes that Participant or its Affiliate, and any such Bid is under consideration in that round.

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The CAT NMS Plan requires CAT Reporters to report data using the listing exchange’s symbology. The CAT NMS Plan requires the Plan Processor to create and maintain a symbol history and mapping table, as well as provide a tool for regulators and CAT Reporters showing a security’s complete symbol history, along with a start-of-day and end-of-day list of reportable securities for use by CAT Reporters.1040

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Three commenters objected to the Plan requiring listing exchange symbology to be used by CAT Reporters.1041 One commenter recommended that CAT Reporters be permitted to use the symbology standard they currently use and that the Central Repository should be responsible for normalizing the various standards.1042 The commenter stated that while it does not expect that allowing CAT Reporters to use existing symbology would result in a large cost savings, it believes that use of existing symbology would reduce errors.1043

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Another commenter expressed the view that it would be costly to use the listing exchange’s symbology for reporting to the CAT and instead advocated for a standardized nomenclature or symbology across the markets, stating that without a standardized data nomenclature, the integration of a data reporting system and surveillance will be significantly more difficult.1044 The commenter suggested use of a uniform, global, open, multi-asset identifier, such as the Financial Instrument Global Identifier (“FIGI”), a product developed by Bloomberg LP.1045 The commenter stated that use of a standard with the characteristics of FIGI would simplify cross-asset surveillance, lower error rates and potentially lower symbology licensing costs.1046

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The Participants responded that the Plan required CAT Reporters to submit data to the CAT using the listing exchange symbology based on their understanding of current reporting practices.1047 The Participants noted that Industry Members use solutions and systems that allow them to translate symbology into the correct format of the listing exchange when submitting data to exchanges or regulatory reporting systems, such as OATS and Electronic Blue Sheets (“EBS”).1048 The Participants further noted that all CAT Reporters subject to OATS or EBS reporting requirements use the symbology of the listing exchange when submitting such reports.1049 Accordingly, the Participants did not agree with the comment that advocated adopting a new symbology approach, concluding that it would add significant cost and complexity for the industry.1050 The Participants also noted that permitting CAT Reporters to use symbology other than the listing exchange symbology, and having the Plan Processor translate the symbology of different CAT Reporters to the listing exchange symbology, would require each CAT Reporter to submit regular mapping symbology information to the CAT, thereby increasing the complexity and the likelihood for errors in the CAT.1051 The Participants stated that the requirement to use exchange symbology is the most efficient, cost-effective and least error-prone approach.1052 The Participants, however, acknowledged that the Plan Processor may, in the future, determine whether the use of a standardized symbology, other than listing exchange symbology, would be appropriate.1053

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The Commission believes that the CAT NMS Plan’s requirement that CAT Reporters report data using the listing exchange’s symbol is reasonable. The Commission agrees with the Participants that allowing each CAT Reporter to determine its reporting symbology would impose burdens on, and add complexity for, the Plan Processor by requiring each CAT Reporter to regularly submit to the Plan Processor symbology mappings. Additionally, the Commission believes that using existing symbology may reduce errors, as noted by the Participants. The Commission also understands, based on the Participants’ representations, that CAT Reporters that report to OATS and EBS today already have the ability to translate to the listing exchange’s symbology.

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pubdate: June 26, 2015 effdate: N/A -

2. Governing or Constituent Documents

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Governing or Constituent Documents +
pubdate: November 15, 2016 effdate: N/A +

6. Security of CAT Data

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Security of CAT Data Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + CAT NMS plan, + CAT Data, + SIFMA Letter, + Response Letter, + Regulation P [Annual Privacy Notice Requirement under the Gramm-Leach-Bliley Act], + FISMA [Federal Information Security Management Act], + FedRAMP [Federal Risk and Authorization Management Program], + NIST Cyber Security Framework, NIST 800.53, + +

The CAT NMS Plan requires that the Plan Processor develop and, with the prior approval of the Operating Committee, implement, policies, procedures and control structures related to the security of the CAT System.1054 Appendices C and D describe the general security requirements for CAT data and outline minimum data security requirements that the Plan Processor must meet.1055

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a. CAT Information Security Program Details

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Several commenters believed that the CAT NMS Plan did not provide enough details regarding the security and confidentiality of CAT Data. One commenter noted that “explicit language indicating requirements for overall security of data transmission and storage, rather than suggestions, should be included in the finalized CAT requirements.”1056 Another commenter stated that the Plan does not provide enough granular details related to actual controls, service levels, and technical support that will be implemented by the Plan Processor.1057 Similarly, another commenter stated that the CAT NMS Plan lacks proper guidance concerning the requirements for security and confidentiality controls of the CAT System regarding, for example, network security, firewalls, systems management and library controls, IT personnel access to the CAT System and data, system logs and archives.1058 One commenter “urg[ed] the SEC to require the SROs to share more detailed information on [data loss prevention, business continuity plans and cyber incident response plans] as a Plan Processor is selected and the Central Repository is built.”1059 Other commenters suggested that certain market participants be provided another opportunity to provide feedback on the security controls, policies and procedures that will be adopted by the Plan Processor.1060 Another commenter supported having an information security officer be responsible for regular updates of the documents and processes, breach identification, and management and processes for periodic penetration tests of all applications.1061

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In response to commenters that requested more detail regarding the security controls for CAT Data, the Participants noted that in the Adopting Release for Rule 613, the Commission stated that “an outline or overview description of the policies and procedures that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule.” 1062 The Participants also reiterated the position of the Commission at the time of adoption of Rule 613 that “it is important for the NMS plan submitted to the Commission to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.”1063 The Participants noted that Section 6.12 of the CAT NMS Plan requires the Plan Processor to develop and maintain a comprehensive information security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee.1064

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The Participants also referred to Appendix D of the Plan, which discusses the fundamental framework of this program, including: (1) appropriate solutions and controls to ensure data confidentiality and security during all communications between CAT Reporters and Data Submitters and the Plan Processor, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the CAT System; (2) security controls for data retrieval and query reports by Participants and the SEC; and (3) appropriate tools, logging, auditing and access controls for all components of the CAT System.1065 The Participants further noted the Plan provisions addressing: (1) the physical assets and personnel of the CAT; (2) training of all persons who have access to the Central Repository; (3) encryption; (4) remote access to the CAT System; (5) the handling of PII; (6) data storage (including penetration testing and third party audits); (7) access to PII and other CAT Data; breach management; and (8) the minimum industry standards that must be followed by the Plan Processor in developing and implementing the security and confidentiality policies and procedures for the Plan.1066 The Participants also provided a high level description of the security requirements for the CAT System, which described the architecture controls, program level controls, and data usage and regulator controls applicable to the CAT.1067 Notably, the Participants also stated that they believe that “publicly releasing too many details about the data security and information policies and procedures of the CAT System presents its own security concerns and is not advisable.”1068

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The Participants stated that they do not believe that market participants such as experts from Industry Members should be permitted to review and provide feedback on the security controls, policies and procedures of the Plan Processor because each Bidder already has provided information on the various security issues discussed in the Plan and as a result, the Plan Processor will have sufficient information from which to formulate appropriate data security and information policies and procedures.1069 The Participants added that data security policies and procedures of the Plan Processor will be subject to the review and approval of the Operating Committee, which will seek the views of the Advisory Committee.1070 Therefore, the Participants do not believe that it is necessary to allow Industry Members to separately review the security controls, policies and procedures of the Plan Processor.1071

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The Participants also provided additional details concerning certain security controls and protocols required of the Plan Processor. Specifically, the Participants noted that the Plan Processor must establish a penetration testing protocol and that the Participants generally would expect penetration testing to occur following major changes to system architecture (e.g., changes in the network segmentation, major system upgrades, or installation of new management level applications), or when other specific new threats are identified.1072 The Participants also provided additional detail clarifying their threat monitoring program and stated that they expect that the Plan Processor will “adhere to industry practice for an infrastructure initiative such as the CAT, and, therefore, the Plan Processor will provide 24x7 operational monitoring, including monitoring and alerting for any potential security issues across the entire CAT environment.”1073 Related to threat monitoring, the Participants noted that the CISO also is required to establish policies and procedures to address imminent threats.1074 Specifically, the Participants stated that they expect the CISO to establish procedures for addressing security threats that require immediate action to prevent security threats to the CAT Data.1075

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The Commission fully recognizes the importance of maintaining the security of the CAT Data and the need to have sufficient information regarding the policies, procedures and control structures that will be adopted by the Plan Processor that will apply to the security of the CAT Data. The Commission also reiterates its view, as set forth in the Adopting Release and as noted by the Participants in their response, that an outline or overview description of the policies and procedures that would be implemented by the Plan Processor regarding data security satisfies the requirements of Rule 613 and that it is reasonable for additional detail about the controls, policies and procedures applicable to the CAT’s information security program to be determined and published after the Plan Processor is selected, including through the CAT’s Technical Specifications, which will be publicly available.1076 The Commission also shares the concerns articulated by the Participants that publicly releasing too many details about the technical security requirements, tools and techniques of the CAT NMS Plan could invite exploitation. The Commission believes that the CAT NMS Plan must strike a balance between setting out the fundamental framework for the security of the CAT Data while maintaining the ability of the Plan Processor to adopt additional security parameters as it sees fit, some of which the Plan Processor may not want to make public.

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The Commission has considered the security provisions in the CAT NMS Plan and finds that a reasonable level of detail regarding the security and confidentiality controls has been provided in the CAT NMS Plan. However, the Commission expects that the Participants will require the Plan Processor to continuously monitor the information security program of the CAT to ensure that it is consistent with the highest industry standards for the protection of data, and to proactively implement appropriate changes to the security program to guard against any unauthorized intrusions or breaches of the Plan Processor’s data security protocols and protections. The Commission also expects that, when the Plan Processor is chosen, the Plan Processor will provide more detail about the specific security requirements and attendant obligations placed on the Participants, including through the issuance of Technical Specifications, which will be publicly available; more explicit language indicating requirements for overall security of data transmission and storage; more granularity related to actual controls and service levels; and more details about the technical support that will be implemented by the Plan Processor. The Commission also notes that, as discussed in Section IV.H, the Commission is amending Section 6.6 of the Plan to require that the Participants provide the Commission with an annual evaluation of the information security program to ensure that the program is consistent with the highest industry standards for the protection of data.1077

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The Commission also believes that, based on the CAT NMS Plan and the Participants’ response, a reasonable level of detail and explicit requirements regarding the overall security of data transmission, storage, service levels, and technical support has been provided.1078 Similarly, the Commission believes that the Plan adequately addresses network security, firewalls, systems management, data loss prevention, business continuity plans and cyber incident response plans.1079 In response to the commenters that requested that market participants such as experts from Industry Members be permitted to review and provide feedback on the security controls, policies and procedures of the Plan Processor, the Commission believes that such review and feedback is not necessary, particularly in light of input by the Advisory Committee.

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In response to the commenter that supported having an information security officer be responsible for regular updates of the documents and processes, breach identification, and management and processes for periodic penetration tests of all applications, the Commission notes that the Plan provides for a CISO who has a broad range of responsibilities regarding the security of the CAT Data.

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b. Security Standards for the CAT System

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Several commenters put forth various industry security standards that should be adopted by the Plan Processor. One commenter stated that if the CAT System operates using a cloud infrastructure, the CAT should employ a cloud provider rated for security via the Cloud Controls Matrix from the Cloud Security Alliance.1080 This commenter further recommended that the CAT “be subject to existing data security and privacy standards like Regulation P [Annual Privacy Notice Requirement under the Gramm-Leach-Bliley Act], FISMA [Federal Information Security Management Act] and FedRAMP [Federal Risk and Authorization Management Program].”1081 One commenter stated that steps should be taken to ensure proper controls are in place to protect the data throughout its lifecycle using secure, authenticated and industry-accepted encryption mechanisms.1082 Another commenter recommended the use of “pre-defined extract templates and uniform global formats such as ISO [International Organization for Standardization] 2002.”1083 One commenter stated that at a minimum, connection to CAT infrastructure should be protected by transport layer security/secure sockets layer (“TLS/SSL”) through a secure tunnel.1084 Another commenter suggested that the CAT NMS Plan employ the cybersecurity framework developed by NIST and the cybersecurity assessment tool created by the Federal Financial Institutions Examination Council (“FFIEC”).1085

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One commenter noted the need for an ongoing assessment of the risks associated with the CAT System and data to meet the NIST industry standards referenced in the Plan.1086 In discussing the confidentiality and sensitivity of CAT Data, a commenter noted that “[t]he emphasis shouldn’t be favoring on [sic] a particular prescribed standard . . . but the key is: CAT needs independence [sic] privacy and security assessment at regular intervals. The assessment will include: vulnerability scan and identifying system nuisances that can cause or already caused privacy and security issues.”1087

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With respect to the industry standards applicable to the CAT System, in their response, the Participants noted that at the outset of operation of the CAT, the Plan Processor will adopt all relevant standards from the NIST Cyber Security Framework, NIST 800.53 or ISO 27001 that would be appropriate to apply to the Plan Processor.1088 The Participants added that because industry standards may evolve over time, the Participants will require that the CAT’s security program align with current industry standards and best practices as they evolve in the future.1089 To this end, the Plan requires that the Plan Processor’s information security program be reviewed at least annually by the Operating Committee.1090

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Regarding security standards applicable to the Participants that access CAT Data, the Participants noted that the Plan requires the Participants to “establish, maintain and enforce written policies and procedures reasonably designed . . . to ensure the confidentiality of the CAT Data obtained from the Central Repository.”1091 The Participants stated that “such policies and procedures will be subject to Reg SCI and oversight by the SEC.”1092 Moreover, in their response, the Participants stated that “[i]n the event that relevant standards evolve, the proposed Plan also requires that ‘[e]ach Participant shall periodically review the effectiveness of the policies and procedures. . . and take prompt action to remedy deficiencies in such policies and procedures.”1093

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In response to the commenters that believed that an ongoing assessment of the risks associated with the CAT System and data should meet the NIST standards in the Plan, the Participants stated that they agree that the CAT System should be regularly assessed for security risks,1094 and that the Operating Committee must conduct an annual review of the Plan Processor’s information security program.1095 The Participants further noted that Section 6.2(a)(v)(C) of the Plan provides that the CCO, in collaboration with the CISO, will retain independent third parties with appropriate data security expertise to review and audit on an annual basis the policies, procedures, standards and real-time tools that monitor and address data security issues for the Plan Processor and the Central Repository.1096

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In response to the commenter that believed that the Plan Processor should be FedRAMP certified, the Participants stated that they do not believe that the Plan Processor should be required to be certified FedRAMP.1097 The Participants stated that requiring FedRAMP certification could limit the portions of each cloud provider’s solutions that each Bidder may access, while also increasing costs for the CAT. The Participants stated that furthermore, FedRAMP certification itself does not provide for additional security controls beyond those contained in the NIST standards, but rather focuses on providing a certification and evaluation process for government applications.1098 Moreover, the Participants believe that the security controls required in the Plan and proposed by the Bidders, as well as those provided by the Bidders’ cloud providers, are robust and would not be materially enhanced by requiring them to be FedRAMP certified.1099 The Participants also pointed out that regular independent third party audits, as required by the Plan, also would help to ensure the security of the CAT and any cloud solutions in use.1100

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The Commission notes that Appendix D of the Plan addresses the security standards applicable to the CAT System. Specifically, Section 4.2 of Appendix D of the CAT NMS Plan, as proposed, states that “[t]he following industry standards, at a minimum, must be followed as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee (in the event of a conflict between standards, the more stringent standard shall apply, subject to the approval of the Operating Committee).”1101 The Plan then lists several NIST standards (e.g., NIST 800), FFIEC’s “Authentication Best Practices,” and ISO/IEC 27001’s “Information Security Management. Appendix D, Section 4.2, as proposed, also states that the CAT LLC shall join the Financial Services-Information Sharing and Analysis Center (“FS-ISAC”) and comparable bodies as the Operating Committee may determine.

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Moreover, in the Commission’s view, the Participants’ commitment in their response that, at the outset of the operation of CAT, the Plan Processor will adhere to the relevant standards from the NIST Cyber Security Framework is a reasonable step toward ensuring a robust security information program. At this time, the Commission believes that the NIST Cyber Security Framework provides a reliable and comprehensive approach to cybersecurity risks and threats, and helps to ensure that the Plan Processor will be abiding by appropriately rigorous industry standards to help identify, protect, detect, respond and recover from cyberattacks, whether internal or external, domestic or international. Accordingly, the Commission is amending Appendix D, Section 4.2 of the CAT NMS Plan to add the requirement that Plan Processor will adhere to the NIST Cyber Security Framework in its entirety.1102 The Commission believes that adherence to the standards of the NIST Cyber Security Framework provides a reasonable approach to ensuring that security standards applicable to the CAT System will reflect high industry standards regarding the protection of CAT Data.

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In light of the Participants’ commitment and ongoing requirement to adhere to the NIST Cyber Security Framework – which will address the security of the CAT cloud provided by the Plan Processor – and the limitations that FedRAMP certification might impose on the cloud provider’s solutions that each bidder might access should the bidder be chosen as the Plan Processor, the Commission believes that it is reasonable to not require that the Plan Processor be FedRAMP certified. In addition, the Commission believes that it is reasonable to allow the Plan Processor to evaluate whether it should adhere to the data security and privacy standards like Regulation P, FISMA and ISO 2002, and whether the connection to the CAT infrastructure should be protected by TLS/SSL.

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The Commission also notes that in their response, the Participants stated that with respect to partnerships with other private or public organizations and information sharing entities, the Participants do not intend to restrict the CAT LLC’s partnership only to the FS-ISAC; the Participants stated that the CAT LLC may seek to join other industry groups such as the National Cyber-Forensic & Training Alliance, the Department of Homeland Security’s National Cybersecurity & Communications Integration Center, or other reputable cyber and information security alliances.1103 The Commission believes the Participants have appropriately clarified that the provisions in Appendix D, Section 4.2 of the Plan listing the other organizations that the CAT LLC may join was not intended to be an exclusive list because the provision explicitly states that the CAT LLC shall endeavor to join other “comparable bodies as the Operating Committee may determine.”

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c. CAT User Access Administration

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Many commenters discussed issues related to the administration of CAT users. One commenter stated that “[a]ppropriate policies and procedures should be in place for user access administration, including provisioning of administrators, user data management, password management and audit of user access management.”1104 Another commenter noted the need to train employees and contractors with access to CAT Data on how to maintain the security and confidentiality of the data,1105 while another commenter supported the establishment of processes to prevent access to sensitive data by any individuals who have not attended compliance training.1106 One commenter stated that persons authorized to access CAT Data should have comprehensive background checks.1107

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Other commenters discussed the password authentication procedures in the CAT NMS Plan that are meant to ensure that CAT Data is only accessed by credentialed personnel. One commenter stated that all persons with access to the CAT System should have their access secured via multi-factor authentication as prescribed in OMB Memorandum M-06-16.1108 Another commenter suggested leveraging any authentication procedures at the entity that employs a person seeking access to CAT Data, stating that this approach would also allow for automated deactivation of users that leave the CAT Reporter or Participant.1109

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In its response to commenters, the Participants noted the provisions in Appendix D of the Plan that require the Plan Processor to develop and maintain policies and procedures reasonably designed to prevent, detect and mitigate the impact of unauthorized access or usage of data in the Central Repository.1110 The Participants further noted that the Plan requires that such policies and procedures include, at a minimum, (1) information barriers governing access to and usage of data in the Central Repository; (2) monitoring processes to detect unauthorized access to or usage of data in the Central Repository; and (3) escalation procedures in the event that unauthorized access to or usage of data is detected.1111 The Participants also note that the Plan requires that passwords be stored according to industry best practices and recovered by secure channels, and that all logins will be subject to MFA.1112 The Participants further note that the Plan Processor will have discretion to consider additional controls on user access in formulating the data security policies and procedures for the CAT System, including, without limitation, deactivating users who have not accessed the CAT System for a specified period of time.1113

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The Commission believes that monitoring the access to CAT to ensure that only authorized persons are allowed to access the CAT System and CAT Data is critical to ensuring the security of CAT Data. The Commission agrees with the Participants that the requirements set out in Appendix D, and other provisions of the CAT NMS Plan, provide a reasonable outline of CAT user access administration (including provisioning of administrators) in general, as well as user data management and password management.1114

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In response to specific commenters that believed that only individuals with appropriate training should be permitted access to CAT Data, Section 6.1(m) of the Plan states that “[t]he Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a training program, which will be made available to all individuals who have access to the Central Repository on behalf of the Participants or the SEC prior to such individuals being granted access to the Central Repository, that addresses the security and confidentiality of all information accessible from the CAT, as well as the operational risks associated with accessing the Central Repository.”1115 Appendix D of the Plan also states that the Plan Processor must provide to the Operating Committee a comprehensive security plan that covers all components of the CAT System, including physical assets and personnel, and the training of all persons who have access to the Central Repository consistent with Article VI, Section 6.1(m).1116 Thus, the Commission believes that these Plan provisions, taken together, indicate that the Plan Processor will require that all persons that have access to CAT Data will be required to complete training prior to accessing CAT Data, and expects that only those persons that have been adequately trained will have access to CAT Data.

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In response to the commenter that stated that persons authorized to access CAT Data should have comprehensive background checks, the Commission notes that the Plan provides that “in addition to other policies, procedures and standards generally applicable to the Plan Processor’s employees and contractors, the Plan Processor shall have hiring standards and shall conduct and enforce background checks (e.g., fingerprint-based) for all of its employees and contractors to ensure the protection, safeguarding and security of the facilities, systems, networks, equipment and data of the CAT System. . . .”1117 While the Commission believes that this provision sets out a reasonable approach to background checks for employees and contractors of the Plan Processor, the Commission believes that such a requirement generally should extend to Participants with respect to all of their users that have access to CAT Data and therefore is amending the Plan to require that each Participant conduct background checks for its employees and contractors that will use the CAT System.1118 The Commission believes that this amendment to the Plan is appropriate in order to ensure that only authorized and qualified persons are using the CAT System.

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The Commission also notes that the Participants have represented that all logins must be secured by MFA, in response to commenters concerns that authentication procedures for CAT users should ensure that only credentialed persons are accessing the CAT Data. In addition, in response to commenters that expressed concerns about the password authentication procedures of the Plan Processor, the Commission notes that the Plan addresses password guidelines such as, for example, the appropriate complexity of passwords and the recovery of lost passwords.1119 The Commission also believes that the Plan does not prohibit the Plan Processor from considering an approach to authenticating a CAT user that would leverage the authentication procedures at the entity (either a Participant or CAT Reporter) that employs a person seeking access to CAT Data, as suggested by a commenter. The Commission believes these provisions, taken together, provide reasonable protections around CAT user administration.

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Finally, with respect to another aspect of CAT user access administration, in their response the Participants noted that they do not believe that memoranda of understanding or similar agreements between the CAT LLC and the Participants are necessary since the Participants will be bound by both their participation in the Plan as well as the agreement between the CAT LLC and the Plan Processor.1120 However, the Participants stated they believe that it is important that information regarding CAT Data usage, such as contact points and escalation procedures, be shared between the Plan Processor and the Participants; therefore, the Participants state they expect to establish such information sharing agreements between the Plan Processor and the Participants once the Plan Processor is chosen. Moreover, the Participants stated, they expect that one of the CISO’s responsibilities would be to make sure that this information is captured and kept up to date appropriately.1121

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The Commission notes that the Plan Processor has not yet been chosen and thus the execution of such memoranda is not appropriate at this time. However, the Commission believes that explicitly memorializing issues relating to CAT Data usage between the Plan Processor and each Participant would be beneficial to the operation of the CAT System.

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The Commission also notes that, with respect to access, the CAT NMS Plan provides that the Plan Processor will provide to the Participants and the Commission access to the Representatives of the Plan Processor as any Participant or the Commission may reasonably request solely for the purpose of performing such Person’s regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations or any contractual obligations.1122 The Plan also provides that the Plan Processor will direct its Representatives to reasonably cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of any Participant or the Commission related to such purpose.1123 As filed, this provision would allow the Plan Processor to refuse access to the Commission and/or Participants upon its own determination of “unreasonableness.” The Commission believes that Commission or Participant requests for access to Representatives of the Plan Processor should be considered reasonable, absent other circumstances. It is therefore amending the Plan to delete the requirement that the access to Plan Processor Representatives be “reasonable” and that the Representatives of the Plan Processor only be required to “reasonably” cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of the Commission. The Commission expects that, even without the “reasonableness” qualifier, it and the Participants will be reasonable in requesting access to the Representatives of the Plan Processor.

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d. Downloading CAT Data By Regulators

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Several commenters discussed the security risks associated with the downloading of CAT Data by regulators. One commenter argued that CAT Data should never be extracted, removed, duplicated, or copied from the CAT, noting that such practices would introduce additional risk and render even the most advanced security measures ineffective.1124 Instead, this commenter recommended allowing data to be imported into a CAT query sub-system if surveillance is needed in conjunction with external data.1125 Another commenter similarly noted the security risk associated with extracting data from the Central Repository and stated its preference for an approach “where the data is accessible by the Regulators but the data is not extracted and stored outside the Central Repository, except for extraction of ‘comparable’ data that would facilitate exemption from duplicative reporting and retirement of high priority duplicative systems.”1126 This commenter added “if combined datasets surveillance is needed (with data external to CAT), the SROs should be allowed to upload external SRO data to a sandbox environment within CAT, in order to enable combined surveillance.”1127

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Another commenter stated that the CAT NMS Plan’s provision permitting the Commission and SROs to download entire data sets and analyze the data within the regulator’s systems or the regulator’s cloud, and the Plan’s proposal to allow broker-dealers to “verify certain data that they have submitted to the CAT,” represent security risks to CAT Data that the SEC and SROs should avoid.1128 This commenter further noted that having multiple points of access to CAT Data, and the ability to download CAT Data, raise “significant cybersecurity concerns and outweigh the benefit of access to processed CAT [D]ata.”1129 Another commenter believed that CAT Data should remain in the Central Repository, but noted that if the Commission determines to permit the downloading of CAT Data, the CAT NMS Plan should only allow a user to download CAT Data if the information security measures available at the user’s site equal or exceed those protecting the data at the Central Repository.1130

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In response to commenters, the Participants noted that Rule 613 requires regulators to develop and implement a surveillance system, or enhance existing surveillance systems to make use of CAT Data.1131 The Participants stated that regulators should have flexibility in designing such surveillance systems, including the ability to access and transfer data where necessary and consistent with appropriate data security safeguards.1132 Such access must be via secure channels (e.g., secure FTP, API or over encrypted lines) as required in the Plan.1133 The Participants further noted that the Plan requires that Participants have appropriate policies and procedures in place to protect such data.1134 Specifically, the Plan requires that Participants establish, maintain and enforce written policies and procedures reasonably designed to ensure the confidentiality of CAT Data.1135 The Participants also stated that they believed that all regulators, including the Commission, should be obligated to establish security measures to protect the security and confidentiality of CAT Data for security purposes.1136

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The Participants also noted that the CAT NMS Plan requires the Plan Processor to provide regulators with the ability to perform bulk data extraction and download of CAT Data.1137 The Participants stated they continue to believe that permitting regulators to download order/transaction data from the Central Repository for regulatory use (i.e., “bulk data extracts”) is important for their regulatory purposes, and that eliminating or limiting bulk data extracts of the CAT Data may significantly and adversely impact the Participants’ ability to effectively conduct surveillance of their markets using CAT Data. The Participants stated that they also plan to enrich their existing surveillance using bulk data extracts of CAT Data.1138

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Regarding the security of extracted CAT Data, the Participants stated that they “recognize the security concerns raised by bulk data extracts and any Participant-controlled systems (e.g., Participant sandboxes residing in the Plan Processor’s cloud or a Participant’s local system) used to store and analyze such data extracts, but the Participants believe that requiring the Participants to adopt and enforce policies and procedures to address these security issues appropriately addresses these concerns without diminishing the surveillance benefits of the CAT.”1139 The Participants noted that the Plan requires the Participants to “establish, maintain and enforce written policies and procedures reasonably designed . . . to ensure the confidentiality of the CAT Data obtained from the Central Repository.”1140 Accordingly, the Participants stated that Participants must have policies and procedures reasonably designed to ensure the confidentiality of CAT Data obtained through bulk data extracts and maintained in the Participants’ systems.1141 In their response, the Participants stated that their own security controls, not those of the Plan Processor, would apply to such systems as they would be outside the Plan Processor’s control.1142 The Participants’ represented that their security controls would be consistent with industry standards, including security protocols that are compliant with Regulation SCI, and the Participants would periodically review the effectiveness of such controls pursuant to their policies and procedures addressing data security.1143

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pubdate: June 27, 2015 effdate: N/A -

3. Implementation of Amendment

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Implementation of Amendment +

Regarding the Participants’ security controls, the Participants stated that the CISO would be obligated to escalate issues that could represent a security threat to CAT Data.1144 For example, the Participants stated that if the CISO observes activity from a CAT Reporter or Participant that suggests that there may be a security threat to the Plan Processor or the Central Repository, then the CISO, in consultation with the CCO, may escalate the matter to the Operating Committee.1145 The Participants stated, however, that they do not envision, that “such policy enforcement [by the CISO] would involve a regulatory enforcement role with regard to the Participants.”1146 The Participants further stated that “[t]he Plan does not give the CISO the authority to engage in such regulatory enforcement.1147 Moreover, although the Plan permits the Operating Committee to impose fees for late or inaccurate reporting of information to the CAT, it does not authorize the Participants to oversee, or serve enforcement actions against, each other via the Plan Processor. Only the SEC has such authority under the Securities Exchange Act of 1934.”1148

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The Commission believes that ensuring the security and confidentiality of CAT Data is of utmost importance, and also notes the Participants’ recognition that regulators should have flexibility in designing such surveillance systems, including the ability to access and transfer data where necessary and consistent with appropriate data security safeguards. As described above, the Plan Processor has the specific responsibility to develop and implement policies, procedures and control structures related to the security of the CAT System.1149 The Plan Processor also is responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository, including during all communications between CAT Reporters and the Plan Processor, data extraction, data manipulation and transformation, loading to and from the Central Repository, and data maintenance and storage by the Central Repository.1150 The Plan Processor also must require the establishment of secure controls for data retrieval and query reports for CAT Data reported to and stored in the Central Repository.1151

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While the Plan Processor is responsible for the security of the CAT Data collected by and stored in the Central Repository, the Commission agrees with commenters that once CAT Data is extracted into a Participant’s regulatory surveillance system, the Plan Processor can no longer assure the security of the CAT Data because the details, requirements and rigor of the policies and procedures regarding the security of CAT Data at each Participant are beyond the direct control of the Plan Processor. This is the case whether the CAT Data is downloaded to a Participant’s local server, or downloaded into a dedicated sandbox within the CAT cloud – and whether the CAT Data that is downloaded is a subset of all the CAT Data collected by the Central Repository, or the entirety of the CAT Data (i.e., cloning the entire CAT database).

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Therefore, the Commission believes that if a Participant chooses to extract CAT Data, whether into its own local server environment or into its own sandbox within the CAT cloud, the Participant must have policies and procedures regarding CAT Data security that are comparable to those implemented and maintained by the Plan Processor for the Central Repository, and that each Participant must certify and provide evidence to the CISO that its policies and procedures for the security of CAT Data meet the same security standards applicable to the CAT Data that is reported to, and collected and stored by, the Central Repository. Given the necessity of ensuring the security of CAT Data that is collected by and stored in the Central Repository, the Commission believes that this is a reasonable requirement that will ensure that CAT Data is subject to the same standards of security, whether the CAT Data is downloaded by a Participant onto the Participant’s local servers, or downloaded into the Participant’s sandbox within the CAT cloud,1152 and therefore, is amending the plan accordingly.1153

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The Commission believes that it is critical to the security of the CAT Data to assign responsibility to the CISO to review the data security policies and procedures of Participants that extract CAT Data into their own systems, whether on a local server or within a sandbox within the CAT cloud, to determine whether such policies and procedures are comparable to the data security policies and procedures applicable to the Central Repository. The Commission further believes that if the CISO, in consultation with the CCO, finds that any such information security policies and procedures of a Participant are not comparable to the policies and procedures applicable to the CAT System, and the issue is not promptly addressed by the applicable Participant, the CISO, in consultation with the CCO, will be required to provide notice of any such deficiency to the Operating Committee.1154

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e. Use of CAT Data for Regulatory and Surveillance Purposes

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One commenter stated that access to CAT Data should be restricted to Commission and SRO Staff with regulatory and oversight responsibilities.1155 Another commenter stated that the proposed model and timeframe for regulatory access to the reported data is consistent with the Commission’s broader regulatory objectives.1156 Another commenter noted that access should not be granted to the academic community.1157 On the other hand, one commenter believed that aggregated CAT Data should be made available to the public on a limited or time-delayed basis, so as to enable more creative approaches to market surveillance, foster industry collaboration, and augment regulatory efforts.1158

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The Participants stated that they do not plan to make CAT Data available for use by the public (or academics or other third parties) at this time.1159 The Participants noted that there may be certain benefits to this type of expanded access, such as promoting academic evaluations of the economic costs and benefits of regulatory policy.1160 Nevertheless, the Participants believed that the privacy and security concerns raised by such public access would outweigh the potential benefits.1161 The Participants stated that this conclusion is “in line with the SEC’s statements in the adopting release for SEC Rule 613 that, in light of the privacy and security concerns, ‘it is premature to require that the NMS plan require the provision of data to third parties.’”1162

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The Commission agrees with the Participants and believes that it is reasonable to continue to limit access to CAT Data to regulatory authorities for regulatory and surveillance use.1163 As previously noted, the CAT is designed to be a regulatory tool. While the Commission recognizes that there may be benefits to expanding the distribution of CAT Data, the Commission also believes that limiting the use of CAT Data for regulatory and surveillance purposes is reasonable at this time, given the vast scope of the CAT Data and need to ensure the security and confidentiality of the CAT Data.1164

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Although not raised by commenters, the Commission emphasizes that under the Plan the CCO must develop and implement a notification and escalation process to resolve and remediate any alleged non-compliance with the rules of the CAT by a Participant or Industry Member, which shall include appropriate notification and order of escalation to a Participant, the Operating Committee, or the Commission.1165 The Commission expects that any additional escalation procedures outlined by the CCO, once the CCO is selected, will adhere to this process.

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f. Regulation SCI

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Several commenters discussed the applicability of Regulation SCI to the Central Repository.1166 One commenter stated that because the CAT is an “SCI System” and an SCI System of each of the SROs, all obligations associated with Regulation SCI must be complied with by the SROs to ensure the security and integrity of the CAT.1167 One commenter stated that Industry Members are not subject to Regulation SCI and the CAT NMS Plan should “make clear that Regulation SCI would not be expanded to apply to an Industry Members [sic] by virtue of its reporting requirements under the CAT Plan.”1168 Another commenter stated that because the CAT NMS Plan provides that the Plan Processor must be compliant with Regulation SCI requirements, compliance with Regulation SCI requirements should be “an explicit evaluation criterion as part of the selection process for the CAT Processor.”1169

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The Participants noted that the Plan Processor will need to satisfy all applicable regulations involving database security, including Regulation SCI, and the Participants have discussed with the Bidders their responsibilities under Regulation SCI on numerous occasions.1170 They added they do not believe that it is appropriate that the Plan provide details on how the Plan Processor will ensure that the Central Repository will comply with Regulation SCI.1171

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The Central Repository, as a facility of each of the Participant SROs, is an SCI Entity1172 and the CAT System is an SCI system, and thus it must comply with Regulation SCI.1173 The CAT NMS Plan states that data security standards of the CAT System shall, at a minimum, satisfy all applicable regulations regarding database security, including provisions of Regulation SCI.1174 The Plan Processor thus must establish, maintain and enforce written policies and procedures reasonably designed to ensure that the CAT System has levels of capacity, integrity, resiliency, availability, and security adequate to maintain its operational capability to comply with Regulation SCI.

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According to Regulation SCI, the policies and procedures must require: (i) the establishment of reasonable current and future technology infrastructure capacity planning estimates; (ii) periodic capacity stress tests of such systems to determine their ability to process transactions in an accurate, timely, and efficient manner; (iii) a program to review and keep current systems development and testing methodology for such systems; (iv) regular reviews and testing, as applicable, of such systems, including backup systems, to identify vulnerabilities pertaining to internal and external threats, physical hazards, and natural or manmade disasters; (v) business continuity and disaster recovery plans that include maintaining backup and recovery capabilities sufficiently resilient and geographically diverse and that are reasonably designed to achieve next business day resumption of trading and two-hour resumption of critical SCI systems following a wide-scale disruption; (vi) standards that result in such systems being designed, developed, tested, maintained, operated, and surveilled in a manner that facilitates the successful collection, processing, and dissemination of market data; and (vii) monitoring of such systems to identify potential SCI events.1175 Compliance with Regulation SCI will also require the Plan Processor to periodically review the effectiveness of the policies and procedures and take prompt action to remedy deficiencies in such policies and procedures.1176

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For purposes of compliance with Regulation SCI, the Commission has stated that an SCI entity’s policies and procedures shall be deemed to be reasonably designed if they are consistent with current SCI industry standards, which are required to be comprised of information technology practices that are widely available to information technology professionals in the financial sector and issued by an authoritative body that is a U.S. governmental entity or agency, association of U.S. governmental entities or agencies, or widely recognized organization, although compliance with current SCI industry standards is not the exclusive means to comply with the requirements of Regulation SCI.1177 To assist SCI entities in developing policies and procedures consistent with “current SCI industry standards,” Staff of the Commission issued Staff Guidance which lists examples of publications describing processes, guidelines, frameworks, or standards that an SCI entity could look to in developing reasonable policies and procedures to comply with Regulation SCI.1178 The standards under the Staff Guidance address nine subject areas, including application control; capacity planning; computer operations and production environment controls; contingency planning; information security and networking; audit; outsourcing; physical security; and systems development methodology.1179

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The Commission believes that compliance with Regulation SCI will help to reduce the occurrence of systems issues; improve the resiliency of the technological infrastructure when systems problems do occur; and enhance the Commission’s oversight of the Central Repository. In response to a concern by a commenter about the potential of the Plan to expand the scope of Regulation SCI, the Commission clarifies that Industry Members will not be subject to Regulation SCI by virtue of reporting audit trail data to the Central Repository. In addition, in response to the commenter that stated that the Participants should use compliance with Regulation SCI as an explicit evaluation criterion as part of the selection process for the CAT Processor, the Commission expects that the Participants will evaluate a Bidder’s ability to comply with Regulation SCI as part of its Bidder evaluation process, as compliance with Regulation SCI is an explicit criteria of the CAT NMS Plan.

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g. Physical Security of CAT Systems

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The CAT NMS Plan requires the Plan Processor to provide a solution addressing physical security controls for corporate, data center and any leased facilities where any CAT Data is transmitted or stored.1180 One commenter stated that the data centers housing the CAT System must, at a minimum, be SOC 2 certified with such certification annually attested to by a qualified third-party auditor that is not affiliated with the SROs or the Plan Processor.1181 The Participants stated that they intended for data centers housing the CAT System to be AICPA SOC 2 certified.1182 In addition, the Participants recommended that the auditor provision should be amended to require a qualified third-party auditor that is not an affiliate of any of the Participants or the Plan Processor.1183

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The Commission believes that assuring the physical security of the data centers that house the CAT Data, including PII Data, is a critical component of the overall security program and the Commission believes that the Participants’ recommendation to amend the standards applicable to ensure the physical security of the CAT System to reflect that it will be AICPA SOC 2 certified and audited by a qualified third-party auditor that is not an affiliate of any Participant or the Plan Processor is reasonable. The Commission therefore is amending the Plan accordingly.1184

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h. Encryption of CAT Data

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Commenters discussed the CAT NMS Plan’s provisions regarding encryption of CAT Data, including CAT Data that is PII. One commenter stated that the CAT NMS Plan’s data encryption requirements alone were not sufficient to protect CAT Data at-rest and PII, and that many more detailed and technical issues must be considered for the encryption requirements for the CAT System and CAT Data to be sufficient.1185 The commenter also recommended that the CAT Plan require data to be encrypted both at-rest and in-flight, and that particularly sensitive pieces of data be isolated and compartmentalized.1186 Another commenter highlighted specific standards for in-transit data (e.g., asymmetric encryptions and transport layer security), data at-rest (e.g., NIST Special Publication 800-57), and data in-use (e.g., implementing data protection controls such as disclosing intended use and duration).1187

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One commenter requested that Section 4.1.2 of Appendix D of the Plan, which addresses the encryption of CAT Data, be amended to make clear that the monitoring, alerting, auditing, and any other requirements that apply with respect to CAT Data also apply to archival CAT Data.1188 Another commenter opined that the encryption and decryption standards used by the Plan Processor should be continuously updated to meet the most stringent data encryption requirements possible, and designed to support end-to-end data encryption, with data decrypted at the desktop level.1189

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Commenters also focused on the particular necessity of encrypting PII, both when in-transit and at-rest, to ensure it remains secure and confidential.1190 One commenter noted the CAT NMS Plan’s requirement that CAT Data provided to regulators that contains PII be “masked,”1191 and stated that PII should be masked unless users have permission to view the PII contained in the CAT Data that has been requested,1192 while another commenter believed that clarification is needed regarding the meaning of “masked” under the CAT NMS Plan.1193

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The Participants stated that “given that all three remaining bidders propose cloud based solutions, all data will be encrypted in-flight and at-rest.”1194

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The Commission notes that the CAT NMS Plan requires the Plan Processor to describe how PII encryption is performed and the key management strategy. The CAT NMS Plan also requires that PII encryption methods include a secure documented key management strategy such as the use of HSM(s).

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The Commission agrees with commenters that encryption of CAT Data is a necessary and critically important means of protecting CAT Data, including PII. Therefore, given the role that encryption plays in maintaining the security of CAT Data, the Commission believes that all CAT Data must be encrypted and is amending the Plan accordingly.1195

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In response to the commenter that believed that encryption alone was not sufficient to protect CAT Data at-rest and PII, the Commission notes that the CAT NMS Plan provides several means of protecting CAT Data in addition to encryption, including provisions addressing connectivity and data transfer requirements, parameters for the storage of CAT Data in general, and PII in particular, and limitations on access to CAT Data by authorized users only. In addition, the Plan states that the Technical Specifications, which will be published one year before Industry Members must report CAT Data to the Central Repository, will include more details about the data security for CAT.1196 Thus, in response to the commenter that believed that more detailed and technical issues must be considered for the encryption requirements for the CAT System and CAT Data to be sufficient, the Commission believes that preparation and publication of the Technical Specifications referenced above commits the Participants to undertaking an analysis of security requirements, in addition to and as a supplement to, the existing encryption requirements. With respect to the issues raised by the commenter regarding the specific standards for in-transit data (including asymmetric encryptions and transport layer security), data at-rest (e.g., NIST Special Publication 800-57), and data in-use (e.g., implementing data protection controls such as disclosing intended use and duration), the Commission notes that, as amended by the Commission, the Plan requires the Participants to adhere to all relevant standards in the NIST Cyber Security Framework, which includes standards regarding encryption.1197

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In response to the commenter that stated that encryption and decryption standards used by the Plan Processor should be continuously updated to meet the most stringent data encryption requirements possible, the Commission notes that the CAT NMS Plan provides that all CAT Data must be encrypted in-flight and at-rest using industry standard best practices, and that such industry standards may be replaced by successor publications, or modified, amended, or supplemented as approved by the Operating Committee.1198

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In response to commenters that discussed the need that PII be “masked,” the Commission notes that the CAT NMS Plan mandates that all CAT Data that is returned in response to a regulatory inquiry will be encrypted, and that PII data returned shall be masked unless users have permission to view the CAT Data that has been requested.1199 The Commission believes that this requirement adds an additional, reasonable requirement that protects PII from view, unless the person seeking PII is authorized to view the PII.

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i. Connectivity

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One commenter stated that accessing the CAT System must be done via secure methods, that the SROs should consider mandating the usage of private lines rather than encrypted internet connectivity, and that the CAT Processor’s systems should be air-gapped from the internet, thereby eliminating access to the internet and/or any internal non-CAT systems used by the Plan Processor.1200

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With respect to using private lines to connect to the CAT, the Participants stated that the Plan does not require CAT Reporters to use private lines to connect to the CAT due to cost concerns, particularly for smaller broker-dealers.1201 Noting that the Plan requires that CAT Reporters access the CAT via a secure, encrypted connection, the Participants also cited to Appendix D which states that “CAT Reporters must connect to the CAT infrastructure using secure methods such as private lines or (for smaller broker-dealers) Virtual Private Network connection over public lines.”1202

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The Participants noted that pursuant to the Bidders’ solutions, the core CAT architecture would not be accessible via the public internet.1203 The Participants cited to Appendix D, Section 4.1.1 of the Plan, which states that “[t]he CAT databases must be deployed within the network infrastructure so that they are not directly accessible from external end-user networks. If public cloud infrastructures are used, Virtual Private Networking and firewalls/access control lists or equivalent controls such as private network segments or private tenant segmentation must be used to isolate CAT Data from unauthenticated public access.”1204

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The Commission believes that the CAT NMS Plan’s provisions regarding connectivity to the Central Repository reflect a reasonable approach to ensuring secure access to the CAT Data residing within the Central Repository. The Commission believes that leaving the option for connection via Virtual Private Network for smaller broker-dealers is reasonable, given the potential cost of mandating use of a private line. The Commission also believes that prohibiting access to the CAT System via the public internet is appropriate, given the potential risk to the security of the CAT Data residing in the Central Repository that might be caused by allowing direct access into the CAT using an unsecure method by unauthenticated users.

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j. Breach of CAT Security

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Commenters also discussed the appropriate action to be taken in the event of a security breach. One commenter recommended that the Commission define a “reportable incident” that would trigger implementation of the cyber incident report plan.1205 Three commenters recommended that the CAT NMS Plan’s cyber incident report plan include notification procedures in the event of a cyber incident.1206 One commenter specifically stated that the Plan should require that notice of an incident be provided to the Operating Committee, affected broker-dealers, other market participants and law enforcement within a designated period of time (e.g., 24 hours).1207 Another commenter agreed, noting that the Plan should provide a clear mechanism for promptly notifying all victims of a CAT data breach, including Customers.1208 Similarly, another commenter recommended that the Plan Processor “release a protocol document describing the specific procedures it will take upon a breach of CAT, including the procedure for notifying [P]articipants and allowing them to suspend CAT submissions temporarily in the event of an ongoing breach.”1209 This commenter also requested that the data security plan include a process for reviewing data incidents to determine what corrective actions are required to reduce the likelihood of recurrence.1210

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Some commenters discussed who should bear the cost of a data breach. One commenter stated that Industry Members should not bear the cost of a security breach that occurs on the systems of the Commission, the Participants, the Plan Processor, Central Repository, or “in-transit” amongst the various parties.1211 Another commenter recommended that the CAT Processor, the SROs, and the Commission indemnify the broker-dealers from any and all liability in the event of a breach that is in no part the fault of the broker-dealers. 1212 Two commenters added that CAT NMS, LLC should purchase an insurance policy that covers potential breaches and extends to Industry Members and their obligations vis-à-vis their clients whose CAT Data is required to be reported by the CAT Plan.1213

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In response to commenters, the Participants noted that the Plan Processor is required to work with the Operating Committee to develop a breach protocol in accordance with industry practices.1214 However, the Participants also stated that they believe that providing more details on these processes or procedures raises security issues.1215 Moreover, the Participants noted, the CAT System will be subject to applicable regulations involving database security, including Regulation SCI and its requirement to provide notice to the Commission and to disseminate information about SCI Events to affected CAT Reporters.1216

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With respect to breaches of the CAT System and the accompanying protocols for dealing with breaches, the Commission notes that the CAT NMS Plan provides that the Plan Processor must develop policies and procedures governing its responses to systems or data breaches,1217 and the Participants added that the Plan Processor will work with the Operating Committee to develop a breach protocol in accordance with industry practices.1218 According to the CAT NMS Plan, such policies and procedures will include a formal cyber incident response plan and documentation of all information relevant to breaches.1219 The cyber incident response plan will provide guidance and direction during security incidents, and may include items such as guidance on crisis communications; security and forensic procedures; Customer notifications; “playbook” or quick reference guides that allow responders quick access to key information; insurance against security breaches; retention of legal counsel with data privacy and protection expertise; and retention of a public relations firm to manage media coverage.1220 The CAT NMS Plan further provides that documentation of information relevant to breaches should include a chronological timeline of events from the breach throughout the duration of the investigation; relevant information related to the breach (e.g., date discovered, who made the discovery, and details of the breach); response efforts, involvement of third parties, summary of meetings/conference calls, and communication; and the impact of the breach, including an assessment of data accessed during the breach and impact on CAT Reporters.1221

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In response to commenters that requested additional detail about the CAT NMS Plan breach management protocol, such as the definition of a “reportable incident,” the Commission notes that the Plan requires the Plan Processor to develop policies and procedures to govern its responses to systems or data breaches and the Commission expects the definition of a “reportable incident” will be clearly set forth in those policies and procedures. While the Plan does not explicitly require it, in response to the commenter that requested that notice of a breach be provided to the Operating Committee, the Commission expects that the CAT NMS Plan’s cyber incident response plan will incorporate notice of the breach to the Operating Committee, because the Operating Committee is the body that manages the CAT LLC. As a Regulation SCI System, the Plan Processor must also notify the Commission in the event of an SCI Event.1222

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As for commenters that opined on the other parties that should be notified upon a breach, including affected parties such as Customers, the Commission notes that the Plan explicitly requires customer notifications to be included in the cyber incident response plan, and that the cyber incident response plan may list other market participants that will be notified upon a breach of the CAT System and the procedure for notifying relevant participants of the breach.1223 In response to the commenter that requested that the breach protocol include a process for reviewing “data incidents” to determine what corrective actions are required to reduce the likelihood of recurrence, the Commission notes that the Plan requires that the impact of the breach be assessed, and the Commission expects that such assessment will also help identify the corrective actions that must be taken to reduce the likelihood of recurrence.

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In response to the several commenters that discussed issues surrounding the cost of a breach, including which parties should bear the cost of a breach, and whether the Plan Processor, the Participants and the Commission should indemnify the broker-dealers from all liability in the event of a breach that is no fault of the broker, the Commission notes that the Plan requires that the Plan Processor’s cyber incident response plan must address insurance issues related to security breaches and that as part of the discussions on insurance coverage and liability, further detail about the distribution of costs will be undertaken. The Commission believes that it is reasonable to require, at this stage, that the cyber incident response plan outline the key areas of breach management that must be addressed by the Plan Processor; further details on the breach management protocols, including details about who might bear the cost of a breach and under what specific circumstances, will follow once the Plan Processor is selected.

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k. Use of Raw Data for Commercial or Other Purposes

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Commenters also discussed the CAT NMS Plan’s provision permitting a Participant to use the Raw Data1224 it reports for commercial or other purposes as long as such use is not prohibited by applicable law, rule or regulation.1225 One commenter believed that the Plan should be amended to state specifically when a Participant may—or more importantly, according to the commenter, may not—use Raw Data or CAT Data for commercial purposes.1226 This commenter also noted inconsistencies in the Participants’ commercial use of data.1227 Specifically, the commenter noted that Section 6.5(f)(i)(A) of the Plan states that each SRO may use “the CAT Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as permitted by applicable law, rule or regulation,” and Section 6.5(h) permits a Participant to “use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as otherwise not prohibited by applicable law, rule or regulation.”1228 Another commenter stated that the CAT NMS Plan should be amended to clarify that Participants may not use data stored in the Central Repository—beyond the data that the SROs submit to the CAT—for their own commercial purposes.1229 One commenter provided two recommendations designed to ensure that Participants do not use the CAT NMS Plan to “enlarge the scope of data that they commercialize.”1230 First, the commenter believed that the Plan should specify that no Participant may commercialize customer identifying information, regardless of whether applicable law expressly prohibits its commercialization. Second, the Plan should limit the scope of data subject to commercialization by narrowing the definition of Raw Data to include only data that a Participant must report under Rule 613 or the Plan.1231

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In response to commenters, the Participants stated that they continue to believe that it is appropriate for the CAT NMS Plan to permit the Participants to use their Raw Data for commercial or other purposes.1232 Therefore, the Participants do not propose to prohibit such use.1233 Nevertheless, to address the concern raised by a commenter that the CAT NMS Plan inconsistently uses the terms “Raw Data” and “CAT Data” in Sections 6.5(f)(i)(A) Section 6.5(h) of the CAT NMS Plan, the Participants recommended that the term “Raw Data” replace the term “CAT Data” in Section 6.5(f)(i)(A) of the Plan.1234

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As an initial matter, the Commission finds that it is reasonable to amend the Plan to replace the term “CAT Data” with “Raw Data” in Section 6.5(f)(i)(A) of the Plan, to remove any inconsistency and potential confusion. The Commission also finds that the CAT NMS Plan’s provisions regarding the use of Raw Data by a Participant is a reasonable approach to the use of audit trail data that is reported by the Participant itself. In response to the commenter’s request that the Commission define the circumstances under which a Participant cannot use its Raw Data, the Commission finds that the CAT NMS Plan’s provision that the use must not be prohibited by applicable law, rule or regulation is sufficient guidance to Participants regarding their use of the Raw Data used for commercial or other purposes.1235 Similarly, the Commission believes that the CAT NMS Plan’s definition of “Raw Data” is sufficiently clear and further addresses the comments that the Participants may expand the audit trail data that Participants may use for commercial or other purposes. The Commission notes that the CAT NMS Plan’s definition of “Raw Data” limits such data to “Participant Data” or “Industry Member Data.”1236 In this regard, in response to the commenter with concerns about a Participant commercializing customer identifying information, the Commission notes that a Participant would never be in a position to report customer identifying information itself; therefore, a Participant could not use customer identifying information for commercial or other purposes. The Commission also believes that, pursuant to the CAT NMS Plan, the Participants may not use CAT Data for commercial purposes.

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l. Ownership of CAT Data

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Several commenters discussed the ownership of CAT Data. Two commenters believed that the CAT NMS Plan should be amended to indicate that broker-dealers retain ownership rights in all of the data they report to the CAT.1237 In response to commenters, Participants stated that Rule 613 does not address broker-dealer CAT Reporters’ ownership rights with respect to the CAT Data, and the Participants do not believe that it is appropriate to address such ownership rights in the Plan.1238

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The Commission believes that it is reasonable for the CAT NMS Plan not to address ownership rights to the data that broker-dealers report to the Central Repository. The resolution of legal questions regarding ownership rights to the data that is reported to the Central Repository by broker-dealers is not required by Rule 613; is outside the scope of Rule 613; and is not necessary to find that the Plan meets the approval standard of Rule 608.

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m. Bulk Access to an Industry Member’s CAT Data

+

A few commenters discussed whether Industry Members should be permitted access to their own reported audit trail data through bulk data exports. One commenter stated that it “would be highly beneficial for CAT Reporters to have access to their own data” to assist with error identification and correction, and stressed the importance of building such access into CAT as part of the initial design, even if CAT Reporters were not permitted such access during the initial phase of CAT.1239 To address security concerns, the commenter suggested that retrieval of PII data should be limited to a set of CAT Reporter personnel who are responsible for entering and correcting customer information.1240 Another commenter noted that broker-dealers should be permitted to access, export and use their data within the Central Repository at no charge and that “[a]llowing broker-dealers to access their own data will be beneficial for surveillance and internal compliance programs and may incentivize firms to make other internal improvements including, among other things, reducing potential errors.”1241 This commenter also argued that broker-dealers should not be subject to additional fees to simply retrieve data they already submitted to the CAT, noting that CAT is the only broker-dealer regulatory reporting service for which the SROs have proposed to impose system-specific fees on broker-dealers.”1242 Another commenter stated that “[a]llowing CAT Reporters to access their own data would be beneficial for surveillance and internal compliance programs. If data access is considered as part of the initial design of the Central Repository, we believe the benefits outweigh the cost.”1243 One commenter argued that independent software vendors also should have fair, reasonable, and nondiscriminatory access, at their client’s request, to the data submitted or stored at the Central Repository on their client’s behalf.1244 In support, this commenter noted that OATS permitted access to determine reporting accuracy by “matching in both directions,” so that reporters could address matching errors.1245

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In response to these comments, the Participants noted that during the development of the Plan, the SROs considered whether to provide Industry Members with access to their own data through bulk data exports.1246 Based on the data security and cost considerations, the Participants stated that they determined that such access was not a cost-effective requirement for the CAT.1247 Accordingly, the CAT NMS Plan was drafted to state that “[n]on-Participant CAT Reporters will be able to view their submissions online in a read-only, non-exportable format to facilitate error identification and correction.”1248

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In light of the comments that the Commission received and further evaluation of the issue, however, in their response, the Participants stated that they now believe that there may be merit to providing Industry Member and their vendors with bulk access to the CAT Reporters’ own unlinked CAT Data.1249 For example, the Participants stated that such access may facilitate the CAT Reporters’ error analysis and internal surveillance and that it may expedite the retirement of duplicative reporting systems.1250 However, the Participants noted, providing bulk data access also raises a variety of operational, security, cost and other issues related to the CAT.1251 The Participants stated that they would need to address this additional functionality with the Plan Processor; in addition, the Participants stated that inclusion of this functionality would create additional burdens on the CAT and the Plan Processor and, therefore, may require additional funding from CAT Reporters for such access to the CAT Data.1252 Therefore, the Participants stated that they will consider this issue once the CAT is operational.1253

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The Commission recognizes the commenters’ desire for bulk access to their own data for surveillance and internal compliance purposes, as well as possible error correction purposes. The Commission also recognizes the Participants’ initial approach of not permitting such access for security and cost purposes, as set forth in their response. Given the complexity of initially implementing the CAT, the Commission believes that the Participants’ approach that limits Industry Members to only being able to view their submissions online in a read-only, non-exportable format to facilitate error identification and correction is a reasonable approach at the present time. The Commission notes the Participants’ representation that they will consider offering bulk access to the audit trail data reported by Industry Members once CAT is operational. The Commission expects the Participants to fulfill this commitment and as part of their evaluation, the Commission expects that the Participants may consider whether a fee for such access would be appropriate and how such a fee might impact the funding of the CAT.1254

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The Commission disagrees with the commenters that recommended providing access to CAT Data for independent software vendors.1255 Given the highly sensitive nature of the CAT Data, the Commission believes that it is reasonable to not allow access to parties other than the SROs and the Commission. If the Participants decide to propose granting such access after gaining experience with CAT operations, and are able to ensure the security of data, the Commission will consider, based on the analysis presented, whether granting access to CAT Reporters and other non-regulator industry members is reasonable.

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The Commission also notes that, as discussed in Section IV.H, the Commission is amending Section 6.6 of the Plan to require that, within 24 months of effectiveness of the Plan, the Participants provide the Commission with a report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository.1256

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n. Regulator Use Cases

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One commenter noted that the Plan does not provide any details on how regulators will be able to perform their day-to-day analysis using CAT Data.1257 Specifically, this commenter analyzed the limitations of the CAT NMS Plan in light of the regulator use cases (“Regulator Use Cases”) contained in the Adopting Release, which provided further detail about how regulators envisioned using, accessing, and analyzing audit trail data under CAT.1258 This commenter made three recommendations that the commenter believed would provide additional clarity to the CAT NMS Plan: (i) the Plan should clearly specify the analytical capability requirements of the CAT to inform the SROs about the level and limits of the Central Repository’s analytical capabilities; (ii) the Plan should precisely describe the technology enhancements required by the SROs and the Commission to effectively and efficiently use the CAT Data; and (iii) the Regulator Use Cases should be a key criteria in the selection of the Plan Processor, which would require Bidders to prove that their solution is capable of facilitating regulators’ need to extract and analyze the data.1259

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The Commission recognizes the commenter’s concerns about the lack of details in the CAT NMS Plan regarding how regulators will be able to perform their day-to-day analysis using CAT Data, in light of the Regulator Use Cases. The Commission notes, however, that in the Adopting Release the Commission stated that it was not including the Regulator Use Cases and accompanying questions to endorse a particular technology or approach to the consolidated audit trail; rather, the Regulator Use Cases and accompanying questions were designed to aid the SROs’ understanding of the types of useful, specific information that the CAT NMS Plan could contain that would assist the Commission in its evaluation of the Plan.1260 The Commission noted that its description of Regulator Use Cases includes a non-exclusive list of factors that SROs could consider when developing the NMS plan.1261 Thus, the Commission believes that the Regulator Use Cases were not intended to serve as a list of specific requirements regarding analytical capability or technological enhancements that should be addressed by the Participants in the CAT NMS Plan. In response to the comment that the Regulator Use Cases should be a key criteria in the selection of the Plan Processor, the Commission reiterates that the Regulator Use Cases were not intended to be used as selection criteria for the Plan but were meant to elicit the types of useful information from the bidders that would assist in the Commission in its evaluation of the CAT NMS Plan.

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o. Obligations on Participants and the Commission Regarding Data Security and Confidentiality

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Under the CAT NMS Plan as noticed, certain obligations are imposed, or required to be imposed by the Plan Processor upon the Participants and the Commission regarding data security and confidentiality.1262 However, Commissioners and employees of the Commission are excluded from certain of these obligations.1263

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Two commenters opined on these provisions. One stated that “the security of the confidential data stored in the Central Repository and other CAT systems must be of the highest quality and that no authorized users with access to CAT Data should be exempt from any provisions regarding security requirements and standards set forth in the Plan.”1264 Another commenter expressed concern that the Plan does not require Commission Staff to abide by the same security protocols for handling PII that other users of CAT Data are required to follow and urged the Commission to adopt these safeguards.1265

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Specifically, one commenter objected to the exclusion of Commissioners and employees of the Commission from Section 6.5(f)(i)(A) of the Plan, which provides that the Plan Processor must require individuals with access to the Central Repository to use appropriate confidentiality safeguards and to use CAT Data only for surveillance and regulatory purposes.1266 In addition, the commenter argued that Section 6.5(g) of the Plan, which requires the Participants to establish and enforce policies and procedures regarding CAT Data confidentiality, should also apply to the Commission.1267 Similarly, another commenter sees no reason why the Commission should not have to follow the requirements of Section 6.5(g) and emphasized that the Commission needs to follow adequate policies and procedures when handling PII.1268 However, the first commenter noted that it “do[es] not believe that individuals performing their employment duties should be subject to personal liability and that such liability would not reduce security risks,” and objected to Section 6.5(f)(i)(B) of the Plan, which requires the submission of a “Safeguard of Information Affidavit” providing for personal liability for misuse of data.1269

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In response to these comments, the Participants stated that they agree that the Plan’s security program must take into consideration all users with access to CAT Data, including the Commission, and noted that Commission Staff had requested the exclusion of Commission employees and Commissioners from subsections (A) and (B) of Section 6.5(f)(i) of the Plan.1270 The Participants, nevertheless, recommended removing these exclusions and applying the requirements of Section 6.5(g) to the Commission.1271

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The Commission takes very seriously concerns about maintaining the security and confidentiality of CAT Data and believes that it is imperative that all CAT users, including the Commission, implement and maintain a robust security framework with appropriate safeguards to ensure that CAT Data is kept confidential and used only for surveillance and regulatory purposes. However, the Commission is not a party to the Plan.1272 By statute, the Commission is the regulator of the Participants, and the Commission will oversee and enforce their compliance with the Plan.1273 To impose obligations on the Commission under the Plan would invert this structure, raising questions about the Participants monitoring their own regulator’s compliance with the Plan.1274 Accordingly, the Commission does not believe it is appropriate for its security and confidentiality obligations, or those of its personnel, to be reflected through Plan provisions.1275 Rather, the obligations of the Commission and its personnel with respect to the security and confidentiality of CAT Data should be reflected through different mechanisms than those of the Participants. The Commission reiterates that in each instance the purpose of excluding Commission personnel from these provisions is not to subject the Commission or its personnel to more lenient data security or confidentiality standards. Despite these differences in the origins of their respective obligations, the rules and policies applicable to the Commission and its personnel will be comparable to those applicable to the Participants and their personnel.

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The Commission and its personnel are subject to a number of existing federal and Commission rules and policies regarding the security and confidentiality of information that they encounter in the course of their employment. These rules and policies apply with equal force to data that Commission personnel can access in the CAT. For example, existing laws and regulations prohibit Commission personnel from disclosing non-public information1276 without authorization.1277 CAT Data available to Commission personnel will contain non-public information. Thus, Commission personnel who disclose or otherwise misuse this data would potentially be subject to criminal penalties (including fines and imprisonment), as well as disciplinary action (including termination of employment), civil injunction, and censure by professional associations (for attorneys and accountants).1278 The Commission believes that the protections described above provide as strong a deterrent against the possible misuse of CAT Data by Commission personnel as would the submission of the “Safeguard of Information Affidavit” required by Section 6.5(f)(i)(B).1279

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In addition, the Commission already has robust information security policies and procedures developed in accordance with federal directives and NIST standards that prohibit the unauthorized disclosure and inappropriate use of confidential data. Moreover, the Commission will review and update, as necessary, its existing confidentiality and data use policies and procedures to account for access to the CAT, and, like the Participants, will periodically review the effectiveness of these policies and procedures and take prompt action to remedy deficiencies in such policies and procedures. Like other information security controls over information resources that support federal operations and assets, the Commission’s policies and procedures applicable to CAT must comply with the Federal Information Security Modernization Act of 2014 and the NIST standards required thereunder,1280 and will be subject to audits by the SEC Office of Inspector General and the GAO.

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Notwithstanding the existence of these protections, in light of the scope and nature of CAT Data, the Commission recognizes the need to ensure that it has in place a comprehensive framework for CAT data security. Accordingly, a cross-divisional steering committee of senior Commission Staff is being formed to design policies and procedures regarding Commission and Commission Staff access to, use of, and protection of CAT Data. The policies and procedures will consider, but not be limited to, access controls, appropriate background checks, usage and data protection, as well as incident response. In developing these policies and procedures, the steering committee will, of necessity, take into account how the data collection and other systems are developed in connection with the creation of the CAT. The Commission will ensure that its policies and procedures impose protections upon itself and its personnel that are comparable to those required under the provisions in the Plan from which the Commission and its personnel are excluded.

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For these reasons, the Commission does not believe that the Plan should be amended to remove the exclusion of “employees and Commissioners of the SEC” from Section 6.5(f)(i)(A)–(B) or to extend the requirements of Section 6.5(g) to the Commission. Similarly, the Commission does not believe that the requirements in Section 6.5(g) that Participants establish and enforce policies and procedures designed to ensure the confidentiality of CAT Data obtained from the Central Repository and to limit the use of such data to surveillance and regulatory purposes can or should be extended to the Commission. Moreover, the Commission is further amending the Plan, as set forth below, to remove the Commission from certain other obligations.

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First, the Commission is amending the Plan to provide that Section 6.5(f)(iii) does not apply to the Commission or its personnel. As proposed, this provision provided that the Participants and the Commission must, as promptly as reasonably practicable, but in any event within twenty-four hours, report instances of non-compliance with policies and procedures or breaches of the security of the CAT to the CCO. The Commission received no comments on this provision. The Commission notes that, consistent with presidential directives and guidance from the OMB and the Department of Homeland Security United States Computer Emergency Readiness Team (“US-CERT”), its existing incident response policies and procedures require Commission employees to promptly convey any known instances of non-compliance with data security and confidentiality policies and procedures or breaches of the security of its systems to the CISO of the Commission, and this policy will apply to any instances of non-compliance or breaches that occur with respect to the CAT. The Commission’s policies and procedures regarding the CAT will also address conveying information regarding any such incidents to the CCO when appropriate.

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Second, for the reasons discussed above, the Commission is amending the Plan to clarify that Section 6.5(f)(iv)(B) does not apply to the Commission or its personnel. As proposed, this provision stated that the Plan Processor must “require the establishment of secure controls for data retrieval and query reports by Participant regulatory Staff and the Commission.”1281 The Commission received no comments on this provision. The Commission will ensure that comparable controls governing data retrieval and query reports from the CAT will be included, as applicable, in its policies and procedures.

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Third, the Commission is amending the Plan to clarify that the requirement to test changes to CAT functionality in Appendix D, Section 11.3 applies only to the Participants. As proposed, this provision stated that, with respect to changes to CAT functionality and infrastructure, the Plan Processor must “[d]efine the process by which changes are to be tested by CAT Reporters and regulators.” The Commission received no comments on this provision. For the reasons discussed above, the Commission is narrowing this provision so that it is applicable only to the Participants. However, the Commission intends to take part in the testing of changes in CAT functionality or infrastructure that would affect the way Commission personnel access and use the CAT System.

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Fourth, for the reasons discussed above, the Commission is amending the Plan to exclude the Commission and its personnel from certain CAT user access provisions in Appendix D, Sections 4.1.4 and 4.1.6 of the CAT NMS Plan. The Plan, as proposed, provided that the Plan Processor shall “implement and maintain a mechanism to confirm the identity of all individuals permitted to access the CAT Data stored in the Central Repository and maintain a record of all instances where such CAT Data was accessed.”1282 Specifically, Appendix D, Section 4.1.4 of the CAT NMS Plan provides: that “[p]eriodic reports detailing the current list of authorized users and the date of their most recent access must be provided to Participants, the SEC and the Operating Committee,” that the “reports of the Participants and the SEC will include only their respective list of users,” that the “Participants and the SEC must provide a response to the report confirming that the list of users is accurate,” and that the “Plan Processor must log every instance of access to Central Repository data by users.”

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In addition, the CAT NMS Plan provides that “[a] full audit trail of PII access (who accessed what data, and when) must be maintained,” that “[t]he Chief Compliance Officer and the Chief Information Security Officer shall have access to daily PII reports that list all users who are entitled for PII access, as well as the audit trail of all PII access that has occurred for the day being reported on,” and that “[t]he chief regulatory officer, or other such designated officer or employee at each Participant and the Commission must, at least annually, review and certify that people with PII access have the appropriate level of access for their role.”1283

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For the reasons discussed above, the Commission is amending the Plan to exclude the Commission from the provisions that require the Commission to “provide a response to the report confirming that the list of users is accurate” and to “review and certify that people with PII access have the appropriate level of access for their role.”1284 However, in accordance with Commission information security policies and procedures, the Commission will periodically review the appropriateness of CAT access by personnel and work with the Plan Processor to ensure the list of SEC users authorized to access CAT Data in the Central Repository is appropriate.

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pubdate: November 15, 2016 effdate: N/A +

7. Personally Identifiable Information

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Personally Identifiable Information Compliance User: Self-Regulatory Organization Keywords: - Approval of Amendment, + CAT Customer-ID, + NYSE Letter, + NIST Special Publication 800-53, + FSR Letter, + AICPA SOC-2, -

The terms of the proposed amendment will be operative immediately upon approval of the amendment by the Commission.

+

a. Protections around PII, Regulatory Access to PII

+

A number of commenters discussed the Plan Processor’s provisions to protect the PII reported to and stored in the Central Repository. Two commenters noted that PII should be held to the “highest” or “most stringent” standards of information protection.”1285 However, one commenter stated that “the protection and security of PII in CAT is “good enough.”1286 Another commenter recommended that the Plan provide further details as to how PII data will be treated and confidentiality maintained, specifically during extraction and transmission of the data.1287

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Commenters also discussed the Plan’s provisions regarding access to PII. One commenter noted that “access to PII data should be provided only in the rarest of instances (i.e., SEC investigations for securities law violations), as regulators and other authorized users should be able to perform the majority, if not all, of their regulatory and oversight responsibilities by utilizing non-PII data, such as the CAT Customer-ID.”1288 Another commenter stated that there should be controls, policies and procedures to prohibit the downloading of certain sensitive information, such as PII, and suggested limiting Participant access to sensitive data only to specific enforcement actions.1289 One commenter recommended that PII data never be exported, extracted, copied or downloaded in any manner or form from the CAT environment.1290 This commenter added that PII data should not be included in e-mail or other electronic communications, and advocated for use of a special CAT information management tool.1291 Another commenter believed the PII should be excluded from direct query tools, reports or bulk data extraction.1292

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In their response, the Participants noted that Section 6.10(c)(i)(B) of the Plan provides that “[t]he user-defined direct queries and bulk extracts will provide authorized users with the ability to retrieve CAT Data via a query tool or language that allows users to query all available attributes and data sources.”1293 The Participants clarified that no customer-related information, including PII, will be included in response to queries of the broader order and transaction database, nor will it be available in bulk extract form.1294 Instead, the Participants stated that customer-related information, such as PII, will be stored in a separate database, which can be accessed only in accordance with heightened security protocols.1295 In such case, a regulatory user would have to be specifically authorized to access the database with PII and other customer-related information.1296 The Participants stated that they expect that the Plan Processor and the CISO will establish policies and procedures to identify abnormal usage of the database containing customer-related information, and to escalate concerns as necessary; and noted that the details regarding such policies and procedures will be determined once the Plan Processor has been selected.1297

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With respect to the standards of protection for PII, the Commission notes that the Plan Processor must adhere to the NIST Risk Management Framework and implement baseline security controls identified in NIST Special Publication 800-53, which the Commission believes, when applied properly, are sufficiently rigorous industry standards for the protection of sensitive data such as PII.1298 The Commission also believes that the Participants’ general approach to treating PII differently – and with more stringent protections – than other CAT Data is also reasonable, given the highly sensitive nature of PII, and the risk that an individual Customer’s orders and transactions could be identified should the Central Repository’s data security protections be breached. Thus, the Commission believes that the Plan’s provisions which limit who can access PII and how PII can be accessed are a reasonable means of ensuring the protection of PII. Specifically, the Commission believes that requiring access to PII to follow RBAC, adhering to the “least privileged” practice of limiting access,1299 restricting access to PII to those with a “need-to-know,” and requiring that any login system that is able to access PII must be further secured via MFA, are reasonable.1300

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The Commission also believes that the Participants’ approach to the use of PII is a reasonable means of protecting PII of Customers reported to the Central Repository. Specifically, the Commission believes that the Plan’s provisions setting out specific parameters applicable to the inclusion of PII in queries, as described by the Participants, is a reasonable approach to controlling the disclosure of PII and helps to ensure that PII will only be used by regulators for regulatory and surveillance purposes and, as set out in the Plan, for market reconstruction and analysis.

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The Commission notes that the Plan and the Participants’ response affirms that access to PII data will only be provided to a limited set of authorized individuals, and only for the limited purpose of conducting regulatory and surveillance activities.1301 The Plan also contains an explicit prohibition on the ability to bulk download sensitive information such as PII, and this protection must be reinforced through the Plan Processor’s controls, policies and procedures.

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Thus, the Commission believes that the Plan’s provisions addressing the protections of PII, and the limitations on its access and use, provide a reasonable framework for the protection of PII. While it is concluding that the Plan sets forth a reasonable framework for the protection of PII, the Commission notes that the Plan Processor will continually assess, and the CISO and Operating Committee will vigorously oversee, the adequacy of the security of CAT Data, and in particular PII, and will promptly and thoroughly address any deficiencies that are identified.1302

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b. PII Scope: Customer Identifying Information and Customer Account Information

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One commenter requested clarification on the scope of PII, stating “[t]he exact scope of PII should be defined, i.e., are all fields associated with a customer included as PII?”1303 In their response, the Participants provided additional clarification on their interpretation of PII, as well as on the scope of the Plan’s protections for all customer-related information.1304 Specifically, the Participants clarified that they view all customer-related information—not only PII, but also Customer Identifying Information and Customer Account Information—as the type of highly sensitive information that requires the highest level of protection under the Plan.1305 The Participants further stated that because there is some inconsistency in how these terms are used in the Plan, to the extent that any statement in the Plan, including Section 6.10(c) of the Plan, and Appendices C or D thereto, are inconsistent with the above description, the Participants recommend that the Commission amend the Plan to address any potential confusion.1306

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The Commission agrees with the Participants and believes that the security of Customer Identifying Information and Customer Account Information, irrespective of whether it meets a common understanding of the definition of PII, should be subject to the highest standards of protection. Accordingly, the Commission is amending the definition of PII in Section 1.1 of the CAT NMS Plan to provide that PII means “personally identifiable information, including a social security number or tax identifier number or similar information; Customer Identifying Information and Customer Account Information.” The Commission believes that this amendment is reasonable in that it will ensure that all information that identifies a Customer will be afforded the same high levels of protection as data that the Participants initially defined as PII.

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c. Storage of PII

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Commenters also discussed the policies and procedures addressing storage of PII as a means to enhance the security and confidentiality of PII reported to the Central Repository. A few commenters stated that PII should be stored separately from other CAT Data.1307 One commenter stated that “PII must be segregated from other transactional data that will be stored by the CAT Processor.”1308 Another commenter opined that, while it does not believe that the CAT NMS Plan should mandate a particular storage method, it supported requiring PII to be stored separately, given its sensitive nature and the potential for identify theft or fraud.1309

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In their response, the Participants clarified that they view all customer-related information (i.e., PII, including Customer Identifying Information and Customer Account Information) as highly sensitive information that requires the highest level of protection and, as such, all customer-related information will be stored in a different, physically separated architecture.1310

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The Commission believes that the CAT NMS Plan’s provisions regarding the storage of PII set forth a reasonable framework for the security of such data. The Plan further provides that the CAT infrastructure may not be commingled with other non-regulatory systems, including being segmented to the extent feasible on a network level, and data centers housing CAT systems must be AICPA SOC-2 certified by a qualified third party auditor that is not an affiliate of any Participant or the Plan Processor.1311

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pubdate: June 28, 2015 effdate: N/A -

4. Development and Implementation Phases

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Development and Implementation Phases +
pubdate: November 15, 2016 effdate: N/A +

8. Implementation Schedule

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Implementation Schedule Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + CAT NMS plan, + Plan Processor, + Technical Specifications, + Implementation Milestones, + OATS, + Appendix C, Section C.10, + Rule 613, + EBS, + Member Reporting, + broker-dealers, + FINRA, + Compliance Rules, + Small Industry Members, + Exchange Act Rule 0–10, + +

The CAT NMS Plan sets forth timeframes for key CAT implementation events and milestones, such as when the Plan Processor will release the Technical Specifications, begin accepting data from Participants, begin accepting data from Industry Members for testing purposes, and when Industry Members must begin reporting to CAT.1312

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a. Specificity and Timing of Implementation Milestones

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One commenter stated that the CAT NMS Plan does not provide sufficient detail to allow for implementation planning.1313 Another commenter argued that the CAT development milestones are unacceptable because they do not promote the objective of facilitating improved market surveillance.1314

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Other commenters suggested extending the implementation schedule for CAT.1315 One commenter suggested that there should be additional time to reassess and more carefully tailor the schedules and milestones that are included in the Plan to make the roll-out of the CAT as efficient as possible.1316 Another commenter suggested extending the implementation schedule for a period of at least six to twelve months beyond the timeframe in the Plan as filed, particularly in light of the fact that many Industry Members will be working to comply with the Department of Labor’s new fiduciary duty regulation as well as T+2 implementation during this same timeframe.1317 This commenter noted that such an extended implementation timetable would also allow for additional testing and synchronization, which would result in a more accurate reporting environment on the “go-live” date.1318 Another commenter noted that the CAT implementation schedule is more aggressive than the actual timeframes for implementing OATS for NMS or large trader reporting, which could lead to, among other things, poorly built systems and an inferior quality of data reporting.1319 This commenter also presented a detailed alternative implementation and milestone schedule that provides more time for Industry Members to prepare for CAT reporting.1320

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On the other hand, another commenter believed that the implementation schedule is too protracted, noting that the phased-in approach of requiring CAT reporting first from Participants and then from Industry Members, combined with the fact that market participants typically request additional time to create systems to comply with new recordkeeping requirements, will render the CAT system incomplete for several years.1321

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Several commenters addressed the CAT NMS Plan’s development and testing milestones. One commenter noted that a robust testing period should be included in the implementation schedule and that currently the Plan does not allow sufficient time for thorough testing for broker-dealers or third-party service providers.1322 This commenter also suggested a trial period to permit industry-wide testing of CAT readiness to ensure that the Plan Processor is capable of meeting reporting and linkage requirements outlined in the Plan.1323 Another commenter recommended that the CAT NMS Plan include “acceptance criteria” for the completion of each CAT development milestone to ensure that the implementation of the CAT and the completion of subsequent milestones are not hindered by poor quality at earlier development stages.1324

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This commenter further supported an earlier start to the development of the Technical Specifications and stated that the six-month period contemplated by the CAT NMS Plan for the industry to test software that will interface with the Plan Processor is insufficient, particularly for third-party service providers and service bureaus.1325 This commenter suggested, among other things, accelerating the availability of the CAT test environment to earlier in the implementation cycle and allowing a minimum of twelve months of access to the CAT test environment for the first group of Industry Member reporters.1326 Another commenter proposed a twelve-month testing period with clear criteria established before moving into production, including coordinated testing across industry participants and the vendors that support them.1327 This commenter also noted that the testing plans that will be used for any potential move to T+2 would be useful in developing industry testing for the CAT and that error rates should be consistent with OATS for reports that are currently reported to OATS.1328 This commenter further suggested that robust testing that mirrors production will be necessary to ensure that the Plan Processor is capable of meeting the reporting and linkage requirements outlined in the Plan.1329

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In response to these commenters, the Participants explained that in light of their experience with testing timelines for other system changes, discussions with the Bidders, and other considerations, they continue to believe that the Plan sets forth an achievable testing timeline.1330 The Participants also acknowledged the importance of the development process for the Technical Specifications for all CAT Reporters and noted that they have emphasized this as a high priority with the Bidders.1331

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The Participants stated that they “do not propose to amend the Plan to reflect an expedited schedule for the Industry Member Technical Specifications.”1332 In addition, the Participants indicated that while strategies to mitigate any risks in meeting the implementation milestones will be a necessary part of promoting the successful implementation of the CAT, they believe that formulating specifics regarding risk mitigation strategies will depend on the selected Plan Processor and its solution.1333 Therefore, the Participants stated their belief that such risk mitigation strategies will be addressed as a part of the agreement between the Plan Processor and the CAT LLC, and implemented thereafter.1334

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The Commission agrees that prompt availability of Technical Specifications that provide detailed instructions on data submission and a robust period of testing CAT reporting functionality are important factors in ensuring that Industry Members are able to timely transition to CAT reporting and accurately report data to the Central Repository. In this regard, the Commission expects the Participants to ensure that the Technical Specifications will be published with sufficient time for CAT Reporters to program their systems, and strongly encourages the Participants and the Plan Processor to provide the earliest possible release of the initial Technical Specifications for Industry Member reporting and to begin accepting Industry Member data for testing purposes as soon as practicable. In addition, the Commission is amending Appendix C, Section C.10 of the Plan to ensure that the completion dates for the Technical Specifications, testing, and other development milestones designate firm outer limits, rather than “projected” completion dates, for the completion of these milestones. For example, as amended, the Plan will provide that the Plan Processor will begin developing Technical Specifications for Industry Member submission of order data no later than fifteen months before Industry Members are required to begin reporting this data, and will publish the final Technical Specifications no later than one year before Industry Members are required to begin reporting. Moreover, the Commission is amending Appendix C, Section C.10 of the Plan to clarify that the CAT testing environment will be made available to Industry Members on a voluntary basis no later than six months prior to when Industry Members are required to report data to the CAT and that more coordinated, structured testing of the CAT System will begin no later than three months prior to when Industry Members are required to report data to the CAT.

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The Commission acknowledges that the transition to CAT reporting will be a major initiative that should not be undertaken hastily, that Industry Members and service bureaus will need sufficient time to make the preparations necessary to comply with the reporting requirements of the Plan and the Technical Specifications, and the importance of thorough testing. However, the Commission does not believe that the Plan’s Technical Specification and testing timeframes are unachievable. Therefore, the Commission believes it is premature—one year before the Technical Specifications for Industry Members will be finalized, eighteen months before testing will begin, and before any problem with achieving these milestones has actually arisen—to consider amending the CAT NMS Plan to mandate a more protracted implementation schedule.

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Similarly, the Commission continues to believe that the implementation dates that are explicitly provided in Rule 613—for example, that Industry Members and Small Industry Members will begin reporting Industry Member data to the Central Repository within two or three years, respectively, of Plan approval1335—are reasonable. As discussed above, the Plan provides appropriate interim milestones, such as iterative drafts of the Technical Specifications and a testing period, which will help prepare Industry Members to transition to CAT reporting pursuant to the implementation schedule set forth in the CAT NMS Plan. No issues complying with these dates have actually arisen, and the Commission is not altering these dates at this time.1336 In addition, with respect to the comment that strategies to mitigate the risks imposed by an “aggressive” implementation schedule—such as delays, poorly built systems, and an inferior quality of data reporting—should be included in the Plan, the Commission agrees with the Participants that formulating detailed risk mitigation strategies will depend upon the selected Plan Processor and its specific solution and will be addressed in the agreement between the Plan Processor and CAT NMS, LLC. Therefore, the Commission is not amending the Plan to require specific risk mitigation strategies at this time.

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b. Impact of Technical Specifications on Implementation Milestones

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In addition, several commenters suggested that reasonable timeframes for implementing the CAT can only be established once the Plan Processor publishes—and CAT Reporters review—the Technical Specifications.1337 Similarly, one commenter suggested that the CAT NMS Plan should establish a milestone for amending the CAT NMS Plan based on a review of the final Technical Specifications and that these amendments should set forth the CAT implementation schedule.1338 Another commenter argued that the Plan does not currently include critical information, such as interface details and other key technical specifications, and that broker-dealers must understand these specifications in order to establish a reasonable implementation schedule.1339

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Several commenters suggested that the implementation schedule should be designed to provide more time for iterative interactions between Industry Members and the Plan Processor in terms of developing and executing system specifications, particularly as those specifications relate to listed options transactions and customer information.1340 In addition, one commenter suggested that a technical committee should be established to work with the Plan Processor on refining the specifications and making necessary adjustments or accommodations as the specifications are developed and implemented.1341 Another commenter suggested including a “Specifications Date” in the NMS Plan, which would be the date by which final Technical Specifications are released, at which point the industry would work with the Plan Processor to assess implementation timeframes.1342 This commenter also urged the Commission to take a data-driven approach to implementation timing, leveraging prior experience with OATS, EBS and large trader reporting to fashion an implementation plan that is achievable.1343

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Two commenters suggested that the Participants and the Commission, prior to the creation of the Technical Specifications, should provide the Plan Processor with additional detail on how they intend to use trade and order data.1344 These commenters argued that this will ensure that the CAT is designed to provide all the functionality of existing systems with the initial implementation of CAT.1345

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In their response, the Participants explained that while the Technical Specifications will be important drivers of the implementation timeline, Rule 613 mandates certain compliance dates.1346 According to the Participants, delaying the assessment and definition of implementation milestones until the availability of the Technical Specifications would jeopardize the ability of the Participants to meet their obligations under Rule 613.1347 However, the Participants also explained that “the steps leading up to the compliance dates set forth in SEC Rule 613 can be tailored to the Technical Specifications” leaving room to accommodate specific developments related to the Technical Specifications.1348 The Participants also expect the Plan Processor to provide more specific guidance as to steps toward implementation with the Technical Specifications and, to the extent that such guidance would require an amendment to the Plan’s implementation timelines, the Participants will propose to amend the Plan accordingly.1349 With respect to the comments recommending an iterative process between broker-dealers and the Plan Processor in developing final Technical Specifications, the Participants noted that the Plan, as drafted, already contemplates the publication of iterative drafts as needed before the final Technical Specifications are published.1350

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As noted, the Commission does not believe it is necessary to tie completion dates for CAT implementation events or milestones to the release and review of Technical Specifications. The Commission believes that setting forth specific timeframes in the CAT NMS Plan for completing the various CAT implementation stages and tying these timeframes to the Effective Date rather than to subsequent events such as the release, review, or finalization of the Technical Specifications, is a reasonable approach to achieve a timely implementation of the CAT. Therefore, and the Commission is not deferring or reducing the specificity of these timeframes at this time.

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In response to the comments suggesting that the Plan should provide for a more iterative process between Industry Members and the Plan Processor in the development of the Technical Specifications, as the Participants’ response pointed out, the CAT NMS Plan provides that the Plan Processor will publish iterative drafts of the Technical Specifications as needed prior to the publication of the final Technical Specifications.1351 However, the Commission recognizes the importance of workable Technical Specifications, and notes that the Plan requires the Participants and the Plan Processor to work with Industry Members in an iterative process, as necessary, to develop effective final Technical Specifications.1352

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Regarding the comment that the Participants and the Commission should provide the Plan Processor, prior to the creation of the Technical Specifications, with additional details on how they use trade and order data, the Commission understands that the Participants have provided the Bidders with their use cases and those of the Commission1353 and have indicated that they will “work with the Plan Processor and the industry to develop detailed Technical Specifications.”1354 The Commission and its Staff will work with the Participants and the Plan Processor to facilitate the development and implementation of the Technical Specifications and the CAT System more broadly, including by providing the Plan Processor with appropriate information on its current and prospective use of trade and order data.

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c. Phasing of Industry Member Reporting

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The CAT NMS Plan provides that Small Industry Members—broker-dealers whose capital levels are below a certain limit defined by regulation—must report Industry Member Data to the Central Repository within three years of the Effective Date, as opposed to the two years provided to other Industry Members.1355

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Several commenters noted the impact the CAT NMS Plan’s implementation schedule would have on small broker-dealers, clearing firms, and service bureaus. One commenter emphasized the need for sufficient lead time to enable small firms previously exempt from OATS reporting to establish the internal structure, technical expertise, systems, and contractual arrangements necessary for CAT reporting.1356 Other commenters suggested that only those firms that are exempt or excluded from OATS reporting obligations—rather than Small Industry Member firms based on capital levels as set forth in the CAT NMS Plan—should have an additional year to begin reporting to CAT, arguing that such a change would allow existing systems to be retired earlier at a significant cost savings.1357 Similarly, another commenter noted the impact the phased implementation schedule would have upon third-party vendors, service bureaus, and correspondent clearing firms with both large and small clients, and suggested that dividing Industry Members based on whether or not they currently report to OATS is preferable to the capital level-based division proposed in the CAT NMS Plan.1358

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In response to these comments, the Participants explained their understanding that the Commission permitted additional compliance time for smaller firms because “small broker-dealers may face greater financial constraints in complying with Rule 613 as compared to larger broker-dealers” and that the Participants have based the implementation timeline on that framework.1359 However, the Participants explained that they believe that Rule 613 and the Plan already permit Small Industry Members to commence reporting to the CAT when large Industry Members begin reporting to the CAT on a voluntary basis.1360 In addition, the Participants stated that accelerating the reporting requirements for all Small Industry Members that are OATS reporters to require them to begin reporting to the Central Repository two years after Plan approval, when Large Industry Members are required to report, may enable FINRA to retire OATS on a more expedited basis and that the Participants will consider including in their Compliance Rules a requirement to accelerate reporting for Small Industry Members that are OATS reporters.1361

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The Commission acknowledges that the capital-level based definition contained in the Plan is not the only way to define Small Industry Members for the purposes of the implementation schedule. However, this definition is derived from Exchange Act Rule 0–10,1362 which defines small entities under the Exchange Act for purposes of the Regulatory Flexibility Act, and reflects an “existing regulatory standard that is an indication of small entities for which regulators should be sensitive when imposing regulatory burdens.”1363 In addition, the group of firms that do not currently report to OATS is diverse, and includes some large broker-dealers and entities that—although they are not FINRA members and hence do not have regular OATS reporting obligations—nevertheless engage in a significant volume of trading activity.1364 Therefore, the Commission continues to believe, at this time, that the definition of Small Industry Member in the Plan is a reasonable means to identify market participants for which it would be appropriate to provide, and that would benefit from, an additional year to prepare for CAT reporting due to their relatively limited resources.

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In addition, the Commission encourages the Participants and the Plan Processor to work with Small Industry Members that are also OATS reporters to enable them to begin reporting to CAT, on a voluntary basis, at the same time that large Industry Members are required to begin reporting, particularly if the Participants believe that this would facilitate more expeditious retirement of OATS. Accordingly, the Commission is amending Appendix C, Section C.9 of the Plan to require the Participants to consider, in their rule change filings to retire duplicative systems,1365 whether the availability of certain data from Small Industry Members two years after the Effective Date would facilitate a more expeditious retirement of duplicative systems. In addition, the Commission notes that FINRA is considering whether it can integrate CAT Data with OATS data in such a way that “ensures no interruption in FINRA’s surveillance capabilities,” and that FINRA will consider “exempting firms from the OATS Rules provided they report data to the Central Repository pursuant to the CAT NMS Plan and any implementing rules.”1366 The Commission encourages the other Participants to consider similar measures to exempt firms from reporting to existing systems once they are accurately reporting comparable data to the CAT and to enable the usage of CAT Data to conduct their regulatory activities.1367 The Commission believes that this approach will reduce or eliminate the duplicative reporting costs of Industry Members prior to the commencement of Small Industry Member reporting.

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The Commission remains open to other approaches to phasing in CAT reporting obligations that will promote the earlier retirement of reporting systems that will be rendered duplicative by the CAT. However, for the reasons discussed above, the Commission believes that, at this time, the Plan’s definition of Small Industry Member is reasonable, and is therefore not amending the Plan to change this definition or to otherwise change the phased approach to CAT implementation.

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pubdate: June 29, 2015 effdate: N/A -

5. Analysis of Impact on Competition

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Analysis of Impact on Competition +
pubdate: November 15, 2016 effdate: N/A +

9. Retirement of Existing Trade and Order Data Rules and Systems

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Retirement of Existing Trade and Order Data Rules and Systems Compliance User: Self-Regulatory Organization Keywords: - Exchange Act, + SRO Rules, CAT NMS plan, + OATS, + FINRA, + Rule 613, + Technical Specifications, + CBOE, + FINRA’s OATS Rules (7400 Series), + COATS, + NYSE Rule 410(b), + PHLX Rule 1022, + CBOE Rule 8.9, + EBS, + C2 Rule 8.7, + CHX BrokerPlex reporting (Rule 5), + SEC Rule 17a-25, + SEC Rule 13h-1, + Retirement, + Retirement Error Rate, + Record Retention, -

The proposed amendment does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The SROs believe that the amendment further helps assure the fair and impartial consideration and selection of the Plan Processor for the CAT NMS Plan.

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a. SRO Rules and Systems1368

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As discussed above, the CAT NMS Plan provides that the Participants will conduct analyses of which existing trade and order data rules and systems require the collection of information that is duplicative, partially duplicative, or non-duplicative of CAT.1369 Among other things, the Participants, in conducting these analyses, will consider whether information collected under existing rules and systems should continue to be collected or whether that information should be incorporated into CAT, and, in the case of retiring OATS, whether the Central Repository contains complete and accurate CAT Data that is sufficient to ensure that FINRA can effectively conduct surveillance and investigations of its members for potential violations of FINRA rules and federal laws and regulations.1370 Under the Plan, as proposed, each Participant should complete its analysis of which of its systems will be duplicative of CAT within twelve months of when Industry Members are required to report to the Central Repository, and should complete its analyses of which of its systems will be partially duplicative and non-duplicative of CAT within eighteen months of when Industry Members are required to report to the Central Repository, although these timeframes could be extended if the Participants determine that more time is needed.1371 In addition, the Plan requires each Participant to analyze the most appropriate and expeditious timeline and manner for eliminating duplicative and partially duplicative rules and systems and to prepare rule change filings with the Commission within six months of determining that an existing system or rule should be modified or eliminated.1372

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(1) Timing

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Several commenters addressed the timeframes proposed by the Participants for retiring systems that will be rendered duplicative by CAT. One commenter noted that the CAT NMS Plan does not contain a detailed approach for retiring duplicative reporting systems and thereby fails to meet the directives of Rule 613.1373 This commenter suggested that the CAT NMS Plan should be amended to provide a detailed framework for elimination of reporting systems that will be rendered duplicative and outdated by CAT implementation, and to set forth a prioritized timetable for retirement of such duplicative systems.1374 Similarly, another commenter expressed disappointment regarding the plan to eliminate duplicative systems, noting that the Plan merely sets forth a “loose commitment” from the Participants to complete their analyses of which rules and systems may be duplicative of CAT, rather than an actual retirement schedule.1375

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Several commenters emphasized the importance of eliminating duplicative systems as soon as possible and suggested that the current proposal to allow up to two and a half years for the Participants to consider system elimination is too long in light of the additional expenses that will be incurred during the period of duplicative reporting.1376 One commenter noted that without a regulatory obligation driving systems retirement, the Participants lack an incentive to retire existing systems, and that the Plan should not enable the Participants to move to planning for fixed income or primary market transaction reporting prior to mapping out the elimination of redundant systems.1377 Another commenter presented a detailed alternative schedule—with significantly more aggressive timelines—for analyzing and retiring duplicative systems.1378

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In addition, several commenters suggested replacing or modifying the duplicative reporting period with a “test period” or “trial period.”1379 In this regard, one commenter suggested modifying the CAT NMS Plan to include a trial period of no more than six months, after which duplicative systems are retired or firms are exempted from duplicative reporting if they have met certain error rate requirements.1380 Similarly, another commenter recommended replacing the duplicative reporting period with a trial period mirroring production, lasting no longer than six months, and providing that the actual launch of CAT functionality be linked to the retirement of existing systems and the end of the trial period.1381 Other commenters suggested that the launch of CAT should be linked to the retirement of existing reporting systems, noting that it is important to maintain a single audit trail of record to avoid duplicative reporting.1382

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One commenter suggested that the Participants should provide detailed requirements regarding retirement of existing systems to the Plan Processor after the Plan Processor is selected to ensure that the Technical Specifications include all functionality necessary to retire existing systems.1383 Similarly, other commenters noted that the CAT should be designed in the first instance to include all data field information necessary to allow prompt elimination of redundant systems.1384 One commenter noted that the CAT should be so designed even if it means that CAT includes information, products, or functionality not necessary to meet the minimum initial CAT requirements under Rule 613.1385 This commenter also proposed that the CAT should be designed to allow the ready addition of data fields over time to enhance the ability to retire other systems and capture additional necessary information.1386

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One commenter outlined the steps that it believes are necessary to retire OATS and COATS.1387 This commenter stated that these systems cannot be eliminated until FINRA and CBOE can seamlessly continue performing their current surveillance on their member firms and that the relevant data elements needed by FINRA and CBOE to perform the current surveillance would need to be retained as part of CAT’s Technical Specifications.1388

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In response to the comments recommending that the Participants accelerate the timeline to identify their existing rules and systems that are duplicative of CAT requirements and that CAT should be designed in the first instance to include all data field information necessary to allow prompt elimination of such redundant systems, the Participants explained that they recognize the importance of eliminating duplicative reporting requirements as rapidly as possible.1389 The Participants also stated that to expedite the retirement of duplicative systems, the Participants with duplicative systems have already completed gap analyses for systems and rules identified for retirement (in full or in part), and confirmed that data that would need to be captured by the CAT to support retirement of these systems will be included in the CAT.1390 Specifically, the relevant Participants have evaluated each of the following systems/rules: FINRA’s OATS Rules (7400 Series),1391 COATS and associated rules, NYSE Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and associated rules, C2 Rule 8.7 and CHX BrokerPlex reporting (Rule 5).1392 In addition, the Participants stated that a broader review of the Participants’ rules intended to identify any other impact that the CAT may have on the Participants’ rules and systems generally is ongoing.1393 The Participants also explained that once the Plan Processor is selected, the Participants will work with the Plan Processor and the industry to develop detailed Technical Specifications that ensure that by the time Industry Members are required to report to the CAT, the CAT will include all data elements necessary to facilitate the rapid retirement of these duplicative systems.1394

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To reflect these efforts, the Participants recommended an acceleration of the timelines for analyzing duplicative rules and systems by recommending amendments to Appendix C of the CAT NMS Plan to change the completion dates for their analyses of: (1) duplicative rules and systems to nine to twelve months from Plan approval (rather than 12 months from the onset of Industry Member reporting) and (2) partially duplicative and non-duplicative rules and systems to nine to twelve months from Plan approval (rather than 18 months from the onset of Industry Member reporting).1395 However, the Participants noted that these proposed timelines are based on the Plan Processor’s appropriate and timely implementation of the CAT and the CAT Data being sufficient to meet the surveillance needs of each Participant.1396

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In response to the comments recommending that duplicative systems be retired on a fixed date, the Participants explained that they cannot commit to retiring any duplicative systems by a designated date because the retirement of a system depends on a variety of factors.1397 For example, the Participants explained that they would need to ensure that the CAT Data is sufficiently extensive and of high quality before they could rely on it for regulatory oversight purposes and that they would be unable to retire any of their duplicative systems until any rule changes related to such systems retirements are approved by the Commission.1398 The Participants also noted that the elimination of potentially duplicative requirements established by the Commission (e.g., EBS reporting pursuant to SEC Rule 17a-25 and large trader reporting pursuant to SEC Rule 13h-1) are outside the Participants’ purview.1399 In addition, in response to the comment that the Participants lack an incentive to retire duplicative systems, the Participants explained that they are incented to eliminate systems that would be extraneous for regulatory purposes after CAT is operational due to the significant costs Participants face in running such systems.1400

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In response to the comments suggesting the use of a trial period to transition to the CAT, the Participants stated that they recognize the concerns regarding the potential for disciplinary actions during the commencement of reporting to the CAT when, despite good faith efforts, reporting errors may develop due to the lack of experience with the CAT.1401 Accordingly, the Participants stated that they will take into consideration the lack of experience with the CAT when evaluating any potential regulatory concerns with CAT reporting during the first months after such reporting is required.1402 In addition, the Participants stated that they intend to work together with Industry Members to facilitate their CAT reporting; for example, the CAT’s testing environments will provide an opportunity for Industry Members to gain experience with the CAT, and the Plan Processor will provide Industry Members with a variety of resources to assist them during onboarding and once CAT reporting begins, including user support and a help desk.1403

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The Commission acknowledges that a protracted period of duplicative reporting would impose significant costs on broker-dealers and recognizes the importance of retiring duplicative rules and systems as soon as possible and of setting forth an appropriate schedule to achieve such retirement in the CAT NMS Plan. As discussed above, although a broader review of the Participants’ rules intended to identify any other impact that the CAT may have on the Participants’ rules and systems generally is ongoing, the Participants have completed gap analyses for systems and rules identified for full or partial retirement, including larger systems such as OATS and COATS. The Participants have confirmed that the data needed to support the retirement of these key systems will be included in the CAT,1404 and have proposed to accelerate the projected dates for completing these analyses of duplicative, partially duplicative, and non-duplicative rules and systems to nine to twelve months after Plan approval.

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Although the Commission appreciates these efforts to accelerate the retirement of existing data reporting rules and systems that are duplicative of the CAT, the Commission believes that stronger Plan amendments than those recommended by the Participants should be made to ensure that such rules and systems are eliminated, modified, or retired as soon as practicable after the CAT is operational so that the period of duplicative reporting is kept short. Therefore, the Commission is amending Section C.9 of Appendix C of the Plan to reflect the Participants’ representation that their analyses of key duplicative systems are already complete and to provide that proposed rule changes to effect the retirement of duplicative systems, effective at such time as CAT Data meets minimum standards of accuracy and reliability, shall be filed with the Commission within six months of Plan approval.

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Based on the Participants’ statement in their response to comments that their gap analyses are complete with respect to the major existing trade and order data reporting systems, the Commission believes that the process of assessing which systems can be retired after CAT is operational is in an advanced stage. Rather than amending the Plan to state that these analyses for duplicative systems will be complete within nine to twelve months of the Commission’s approval of the CAT NMS Plan, as recommended by the Participants, the Commission believes that the milestones listed in Appendix C should include the Participants’ representation that they have completed gap analyses for key rules and systems and should enumerate those specific systems because this more accurately reflects, and more prominently and clearly conveys to market participants and the public, the status of the Participants’ planning for the transition from existing systems to CAT.

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For these reasons, the Commission is also amending Section C.9 of Appendix C of the Plan to require the Participants to file with the Commission rule change proposals to modify or eliminate duplicative rules and systems within six months of the Effective Date. These filings will not effectuate an immediate retirement of duplicative rules and systems—the actual retirement of such rules and systems must depend upon the availability of comparable data in CAT of sufficient accuracy and reliability for regulatory oversight purposes, as specified in the Participants’ rule change proposals. The Commission also is amending the Plan to require the Participants, in their rule change proposals, to discuss specific accuracy and reliability standards that will determine when duplicative systems will be retired, including, but not limited to, whether the attainment of a certain Error Rate should determine when a system duplicative of the CAT can be retired. Although these amendments were not suggested by the Participants, the Commission believes that the rule change filing milestone should be changed to six months from Plan approval given the status of the Participants’ gap analyses and because the actual retirement of rules and systems will only occur once CAT Data meets minimum standards of accuracy and reliability. In addition, the Commission believes that an explicit statement in the Appendix C milestones that the retirement of systems that are duplicative of CAT shall occur once CAT Data meets minimum standards of accuracy and reliability will provide greater clarity regarding how the transition from existing reporting systems to the CAT will proceed. In addition, these amendments will better align the systems retirement schedule with the broader CAT implementation schedule. For example, requiring rule change proposals to be submitted to the Commission within six months will ensure that public comments, and Commission review of these comments, which could inform the development of the Technical Specifications, will be in progress as the Technical Specifications for Industry Member data submission are being developed (i.e., at least fifteen months before Industry Members are required to report to CAT).

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The Commission believes that, taken together, these amendments may facilitate an accelerated retirement of existing data reporting rules and systems that are duplicative of CAT and thus reduce the length of the duplicative reporting period as compared to the Plan as filed. Given that their requisite analytical work is already substantially complete, the Commission believes that the milestones, as amended, are achievable without a substantial increase in the burdens imposed on the Participants. Given the importance of retiring existing systems as rapidly as possible to reduce the substantial burdens on Industry Members that come with an extended period of duplicative reporting, the Commission believes that these amendments are appropriate. The CAT NMS Plan, as amended, recognizes that the Participants’ requisite analytical work is already substantially complete and explicitly conditions the elimination of duplicative reporting only on the availability of accurate and reliable CAT Data that will enable the SROs to carry out their regulatory and oversight responsibilities. The amended Plan also accelerates the initiation of the formal process of retiring duplicative rules and systems by requiring that rule change filings be filed within six months of the Effective Date.

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The Commission believes that the CAT NMS Plan, as amended, contains an appropriate level of detail regarding the process of retiring duplicative rules and systems. However, the Commission is not amending the Plan to include fixed or mandatory dates for the retirement of existing rules and systems at this time. As the Participants noted in their response to comments, retiring a system depends upon many factors, including the availability of sufficiently extensive and high quality CAT Data.1405 The Commission and the SROs will continue to rely on the information collected through existing regulatory reporting systems to reconstruct market events, conduct market analysis and research in support of regulatory decision-making, and conduct market surveillance, examinations, investigations, and other enforcement functions until sufficiently complete, accurate, and reliable data is available through CAT. Therefore, precise dates for retiring these rules and systems cannot be determined prospectively. However, the Commission agrees with the Participants that they have incentives to retire extraneous systems after CAT is operational due to the desire to avoid the costs associated with maintaining such systems; the Commission believes that these incentives will mitigate any delay that would otherwise result from the difficulty of setting forth specific system retirement dates in advance.

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As discussed above, the gap analyses completed by the Participants regarding the key existing trade and order data systems have confirmed that the CAT contains the data fields necessary to retire these systems, and the Commission has amended the Plan to ensure that any additional analysis related to duplicative rule and system retirement is completed in a timely manner. The Participants also explained that once the Plan Processor is selected, the Participants will work with the Plan Processor and Industry Members to develop detailed Technical Specifications that ensure that by the time Industry Members are required to report to the CAT, the CAT will include all data elements necessary to facilitate the rapid retirement of duplicative systems.1406 The Commission agrees that the Participants should work with the Plan Processor and Industry Members in this manner and provide appropriate information about how they use trade and order data collected through existing rules and systems to ensure that the Technical Specifications are developed with these requirements in mind. In addition, with respect to the comment that CAT should be designed to permit the inclusion of additional data fields, the Commission notes that the Plan contains provisions regarding periodic reviews and upgrades to CAT that could lead to proposing additional data fields that are deemed important,1407 and does not believe any changes to the Plan are necessary.

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(2) Proposed Alternative Approaches to Systems Retirement

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Several commenters suggested linking the retirement of duplicative systems to the error rate or quality of data reported to CAT. For example, one commenter suggested that the CAT NMS Plan should be amended to include an exemption from duplicative reporting obligations for individual broker‐dealers based on meeting certain CAT reporting quality metrics.1408 Similarly, another commenter suggested that a “Retirement Error Rate” should be defined as the acceptable error rate for discontinuing reporting to a duplicative system, and that the Retirement Error Rate should be based on comparable data in CAT (e.g., OATS equivalent data reported to CAT should meet the reporting and quality criteria required by FINRA, but higher error rates associated with data elements that are outside the scope of existing systems should not prevent the retirement of such systems).1409 One commenter suggested reducing the error rate as quickly as possible to facilitate the elimination of duplicative systems by including a test period to bring reporting near a 1% error rate when CAT is launched in production.1410 This commenter also noted that disparities in error rate tolerance between CAT and other existing regulatory reporting systems should not serve as a pretext for prolonging the lifespan of those legacy systems.1411 Several commenters suggested that the error rates used for elimination of duplicative systems should be post-correction error rates and that when a firm meets the necessary standards, the Plan should allow for individual firm exemptions from duplicative reporting.1412

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One commenter also noted that the Participants have not adequately incorporated the 14-month milestone associated with the requirement that they enhance their surveillance systems1413 into their milestones for the retirement of existing systems, noting that if the Participants are prepared to use CAT Data after 14 months, there should be no obstacles to retiring existing systems once the Retirement Error Rates are met.1414 If the 14-month milestone is insufficient to obligate the Participants to use CAT Data in place of existing systems, this commenter would recommend a new milestone be created such that by the end of a trial period, the Participants must use CAT Data in place of existing systems.1415

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Several commenters expressed support for the Plan’s exemption from OATS reporting for CAT Reporters as long as there would be no interruption in FINRA’s surveillance capabilities and urged the SROs to consider a similar approach for firms that meet certain error rate thresholds.1416

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Similarly, one commenter suggested a “principles-based framework” for eliminating potentially duplicative systems.1417 This framework would include: (i) a “phased” elimination program in which reporters that have achieved sufficient accuracy in CAT reporting can individually retire their systems; (ii) designing the Central Repository from the outset to include the ability to implement all of the surveillance methods and functions currently used by SROs; (iii) rather than relying on a simple field-mapping exercise to determine which systems can be eliminated, considering whether all the data elements currently reported under existing systems are really needed for the types of surveillance and other analyses typically undertaken by the Participants, whether the Central Repository can use alternative methods of surveillance or analysis that do not rely on those data elements, and whether data elements currently collected by an existing reporting system that are not available in the Central Repository could be derived or computed from data that is in the Central Repository; and (iv) requiring that questions to broker-dealers regarding their reported data should be directed though the process created for the Central Repository, not through previously-established channels based on legacy systems.1418

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Several commenters suggested that the Commission should impose a moratorium on changes to existing systems to coincide with the launch of CAT to enable firms to dedicate resources to the successful launch and operation of CAT rather than the maintenance of legacy systems.1419 In addition, several commenters suggested that the Plan should allow for elimination of individual systems as they become redundant or unnecessary once production commences in CAT.1420

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In response to the comments recommending that exemptions be granted for individual Industry Member CAT Reporters from duplicative reporting obligations if they meet a specified data reporting quality threshold, the Participants explained that this would implicate the rules of the individual Participants and would be dependent upon the availability of extensive and high quality CAT Data, as well as Commission approval of rule change proposals by the Participants and the elimination of Commission data reporting rules such as Rules 17a-25 and 13h-1.1421 Therefore, the Participants did not recommend an amendment to the Plan to incorporate such an exemption from the individual Participants’ rules.1422

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Nevertheless, the Participants explained that they have been exploring whether the CAT or the duplicative systems would require additional functionality to permit cross-system regulatory analyses that would minimize the duplicative reporting obligations.1423 The Participants stated that FINRA remains committed to working with the Plan Processor to integrate CAT Data with data collected by OATS if it can be accomplished in an efficient and cost effective manner.1424 However, the Participants stated that FINRA anticipates that CAT Reporters who are FINRA members and report to OATS will need to report to both OATS and the CAT for some period until FINRA can ensure that CAT Data is of sufficient quality for surveillance purposes and FINRA is able to integrate CAT Data with the remaining OATS data in a way that permits it to continue to perform its surveillance obligations.1425 In addition, the Participants stated that FINRA believes that requiring all current OATS reporters to submit data to the Central Repository within two years after the Commission approves the Plan may reduce the amount of time that OATS and CAT will need to operate concurrently and may help facilitate the prompt retirement of OATS.1426

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In response to the comment that the CAT should be designed from the outset to include the ability to implement all of the surveillance methods and functions currently used by the Participants, the Participants explained that CAT is not intended to be the sole source of surveillance for each Participant, and, therefore, would not cover all surveillance methods currently employed by the Participants.1427 However, the Participants stated that, with the goal of using the CAT rather than duplicative systems for surveillance and other regulatory purposes, the Participants have provided the Bidders with specific use cases that describe the surveillance and investigative scenarios that the Participants and the Commission would require for the CAT, and that during the bidding process each Bidder has been required to demonstrate its ability to meet these criteria.1428 In addition, the Participants noted that they have had multiple discussions with the Bidders regarding the query capabilities that each Bidder would provide, and the Participants believe that the selected Plan Processor will have the capability to provide the necessary surveillance methods and functions to allow for the retirement of duplicative systems.1429 The Participants also stated that the Plan Processor will provide support, including a trained help-desk staff and a robust set of testing, validation, and error correction tools, to assist CAT Reporters as they transition to CAT reporting.1430

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In response to comments concerning a moratorium on changes to new systems, the Participants explained that they plan to minimize the number of changes that are rolled out to duplicative systems to the extent possible.1431 The Participants, however, cannot commit to making no changes to the duplicative systems as some changes may be necessary before these systems are retired—for example, changes to these duplicative systems may need to be made to address Commission initiatives, new order types or security-related changes.1432

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The Commission agrees with the commenters that the accuracy of the data reported to CAT, as in part measured by CAT Reporters’ Error Rate, should be a factor in determining whether and when duplicative trade and order data rules and systems should be eliminated. As discussed above, the rule change proposals regarding duplicative systems retirement that the Participants will file with the Commission within six months of the Effective Date must condition the elimination of existing data reporting systems on CAT Data meeting minimum standards of accuracy and reliability. The Commission believes that this approach may incentivize accurate CAT reporting because it could potentially allow Industry Members to retire redundant, and costly to maintain, systems sooner. The Commission believes that any such improvements in accuracy, together with the amended Plan’s reduction of the period for the Participants to complete their analyses of duplicative, partially duplicative, and non-duplicative rules and its acceleration of the requirement to file system elimination rule change proposals, should facilitate an earlier retirement of duplicative systems. However, the Commission does not believe that a specific Error Rate that would automatically trigger the elimination of the collection of data through an existing, duplicative system can be set in advance, through a Plan amendment at this time. Rather, the more flexible standard set forth in the Plan, as amended—that duplicative systems will be retired as soon as possible after data of sufficient accuracy and reliability to ensure that the Participants can effectively carry out their regulatory obligations is available in CAT—recognizes the primacy of ensuring that CAT Data can be used to perform all regulatory functions before existing systems are retired, and is therefore more appropriate.

+

In response to the comments regarding individual exemptions from reporting to duplicative systems for Industry Members whose CAT reporting meets certain quality thresholds, the Commission supports the Participants’ efforts to explore whether this can be feasibly accomplished by adding functionality to permit cross-system regulatory analyses that would minimize duplicative reporting obligations or, in the case of OATS, integrating CAT Data with data collected by OATS. Accordingly, the Commission is amending Section C.9 of Appendix C of the Plan to require that the Participants consider, in their rule filings to retire duplicative systems, whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy standards, including, but not limited to, ways in which establishing cross-system regulatory functionality or integrating data from existing systems and the CAT would facilitate such individual Industry Member exemptions. However, the Commission does not believe that it would be appropriate, at this time, to amend the Plan to require the Participants to grant such individual exemptions because, as noted by the Participants, it may not be feasible to implement the technological and organizational mechanisms that would obviate the need for duplicative reporting by ensuring that the Participants can effectively carry out their regulatory obligations using CAT Data.

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In response to the comment that the CAT should be designed from the outset to include the ability to implement all of the surveillance methods and functions currently used by the Participants, the Commission notes that the Participants have indicated that they have provided the Bidders with their surveillance and investigative use cases, that each Bidder has been required to demonstrate its ability to meet these criteria, and that the selected Plan Processor will have the capability to provide the necessary surveillance methods and functions to allow for the retirement of duplicative systems. Therefore, the Commission believes that the CAT is being designed to include the ability to implement all of the surveillance methods and functions currently used by the Participants, and is not amending the Plan in response to this comment.

+

In response to the commenter that suggested a specific principles-based framework for retiring duplicative systems,1433 the Commission believes that, in general, the principles outlined in the CAT NMS Plan for retiring potentially duplicative rules and systems are reasonable. The principles outlined in the Plan recognize that the Participants and the Commission will continue to rely on information collected through existing regulatory reporting systems to reconstruct market events, conduct market analysis and research in support of regulatory decision-making, and conduct market surveillance, examinations, investigations, and other enforcement functions until analogous information is available through CAT. Some period of duplicative reporting may be necessary to ensure that regulators can obtain accurate and reliable information through CAT to carry out these functions. However, the Commission also agrees that the CAT Reporter support, testing, and validation tools created for the CAT—rather than similar tools associated with legacy reporting systems—should be used to assist Industry Members as they transition to CAT reporting.1434

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The Commission agrees with the Participants that there cannot be a moratorium on changes to existing systems in connection with the launch of CAT. As discussed above, the Commission and the SROs use the information collected through existing regulatory reporting systems to carry out a variety of regulatory functions. Until these systems are fully retired, the Commission and the SROs will continue to rely upon these systems to obtain the information they need to perform these functions. Therefore, because changes to these systems may be necessary for the Commission or the SROs to obtain such information, the Commission does not believe a moratorium should be imposed on changes to these systems. However, the Commission supports the Participants’ commitment to minimizing changes to existing systems and encourages the Participants to consider the necessity of any such changes and any additional burden such changes would impose on their members during the period in which members are transitioning to CAT reporting. Accordingly, the Commission is amending Section C.9 of Appendix C of the Plan to state that between the Effective Date and the retirement of the Participants’ duplicative systems, each Participant, to the extent practicable, will attempt to minimize changes to those duplicative systems.

+

b. Retirement of Systems Required by SEC Rules

+

The CAT NMS Plan also discusses specific Commission rules that potentially can be eliminated in connection with CAT implementation. Specifically, the Plan states that, based on preliminary industry analyses, large trader reporting requirements under SEC Rule 13h-1 could be eliminated. In contrast, the Plan states that “[l]arge trader reporting responsibilities on Form 13H and self-identification would not appear to be covered by the CAT.”1435

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One commenter suggested that the Commission should eliminate requirements such as Rule 13h-1 and Form 13H regarding large trader filings, noting that Commission Staff will have access to the same information that they are receiving through Form 13H through CAT.1436 Another commenter recommended the elimination of the EBS system, under SEC Rule 17a-25,1437 with respect to equity and option data.1438

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In their response, the Participants noted that “the elimination of potentially duplicative requirements established by the SEC (e.g., SEC Rule 17a-25 regarding electronic submission of securities transactions [the EBS system] and SEC Rule 13h-1 regarding large traders) are outside the Participants’ purview.”1439

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The Commission acknowledges that duplicative reporting will impose significant burdens and costs on broker-dealers, that certain SEC rules require the reporting of some information that will also be collected through CAT, and that certain SEC rules may need to be modified or eliminated in light of CAT. Specifically, the Commission believes that, going forward, CAT will provide Commission Staff with much of the equity and option data that is currently obtained through equity and option cleared reports1440 and EBS,1441 including the additional transaction data captured in connection with Rule 13h-1 concerning large traders.1442 Accordingly, Commission Staff is directed to develop a proposal for Commission consideration, within six months of the Effective Date, to: (i) amend Rule 17a-25 to eliminate the components of EBS that are redundant of CAT, and (ii) amend Rule 13h-1,1443 the large trader Rule, to eliminate its transaction reporting requirements, in each case effective at such time as CAT Data meets minimum standards of accuracy and reliability. In addition, as part of this proposal, Commission Staff will recommend whether there will continue to be any need for the Commission to make requests for equity and option cleared reports, except for historical data, once CAT is fully operational and CAT Data meets minimum standards of accuracy and reliability.1444 The Commission notes that the EBS system will still be used to collect historical equity and options data—i.e., for executions occurring before CAT is fully operational—and data on asset classes not initially covered by CAT, such as fixed income, municipal, or other government securities, and that the components of the EBS system necessary to enable such usage will need to be retained. However, to the extent that CAT is expanded to include data on additional asset classes, the Commission will consider whether the components of the EBS system related to the retention and reporting of data on these asset classes can also be eliminated.1445

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The Commission does not agree with the comment that SEC Staff will have access through CAT to the “same information” that it receives through Form 13H.1446 Form 13H collects information to identify a large trader, its securities affiliates, and its operations, and does not collect audit trail data on effected transactions. The self-identification and other Form 13H filing requirements of Rule 13h-1 will not be duplicated by or redundant of CAT.

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c. Record Retention

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The CAT NMS Plan states that certain broker-dealer recordkeeping requirements could be eliminated once the CAT is operational.1447 The Plan also requires that information reported to the Central Repository be retained in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six years.1448

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One commenter suggested that record retention by the CAT should be established for periods long enough to satisfy regulatory requirements associated with other regulatory systems (e.g., the seven year record retention requirement for EBS) and that the Commission should consider the extent to which CAT reporting could fulfill recordkeeping obligations for a CAT Reporter.1449

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The Participants explained that the Plan’s six-year retention period exceeds the record retention period applicable to national securities exchanges and national securities associations under SEC Rules 17a-1(b) and 17a-6(a),1450 which require that documents be kept for at least five years.1451 The Participants further explained that they do not believe that the Plan’s record retention requirements should be expanded beyond six years since such expansion would impact Bidder solutions and the maintenance costs associated with the CAT.1452 With respect to the comment regarding CAT Reporters using the CAT to satisfy their recordkeeping obligations, the Participants maintained that it would be inappropriate for CAT Reporters to fulfill their recordkeeping obligations by relying on the Central Repository in the initial phase of CAT reporting because permitting this use of the Central Repository would impose additional regulatory and resource obligations on the Central Repository.1453 In the longer term, the Participants recognized that the Central Repository could be a useful tool to assist CAT Reporters in satisfying their recordkeeping and record retention obligations, and stated that after the implementation of CAT, the Operating Committee will review whether it may be possible for CAT Reporters to use the CAT to assist in satisfying certain recordkeeping and record retention obligations.1454

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The Commission disagrees with the suggestion from commenters that the CAT NMS Plan should be amended to extend its six-year record retention timeframe to satisfy the requirements of existing reporting systems. In addition to exceeding the five year retention period applicable to national securities exchanges and associations under Rules 17a-1(b) and 17a-6(a), as pointed out by the Participants, the Commission notes that the six-year timeframe set forth in the CAT NMS Plan reflects the six-year data retention requirement of Rule 17a-4(a).1455 The Commission does not anticipate that any variation between the retention periods for existing systems and the CAT system will hinder the potential retirement of existing systems that are duplicative of CAT. In addition, while the Commission believes it is important to implement the initial phases of CAT reporting first, once CAT is fully operational, the Participants, the Plan Processor, and the Commission can consider further enhancements to the CAT system, including enhancements that could potentially enable the Central Repository to satisfy certain broker-dealer recordkeeping requirements, such as those set forth in Rules 17a-3 and 17a-4.1456

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pubdate: June 30, 2015 effdate: N/A -

6. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan.

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan +
pubdate: November 15, 2016 effdate: N/A +

10. Primary Market Transactions and Futures

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Primary Market Transactions and Futures Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + Primary Market Transactions, + CAT NMS plan, + OATS, + Rule 613(a)(1)(vi), + SRO, + EBS, + Rule 613, + CFTC, + +

a. Primary Market Transactions

+

The CAT NMS Plan provides that the Participants jointly, within six months of the CAT NMS Plan’s approval by the Commission, will provide a document (the “Discussion Document”) to the Commission that will include a discussion of how Primary Market Transactions could be incorporated into the CAT.1457 In Appendix C of the CAT NMS Plan, the Participants conclude that the Discussion Document should be limited to sub-account allocations for Primary Market Transactions.1458 Moreover, the CAT NMS Plan does not require any specific timetable for Primary Market Transaction data to be reported to the CAT.

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The Participants explained that for Primary Market Transactions there are generally two key phases: a “book building” phase and an allocation phase (which includes top-account allocations and sub-account allocations).1459 According to the Participants, the “book building phase involves the process by which underwriters gather and assess investor demand for an offering of securities and seek information important to their determination as to the size and pricing of an issue. Using this and other information, the underwriter will then decide how to allocate IPO shares to purchasers.”1460 The Participants’ understanding is “that these are so-called ‘top account’ allocations—allocations to institutional clients or retail broker-dealers, and that such allocations are conditional and may fluctuate until the offering syndicate terminates. Sub-account allocations occur subsequently, and are made by top-account institutions and broker-dealers prior to settlement.” 1461

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In reaching their decision to limit Primary Market Transactions data for CAT reporting to sub-account allocations, the Participants noted that sub-account allocations are “maintained by broker-dealers in a manner that would allow for reporting to the Central Repository without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations.”1462 The Participants argued, however, that because top-account allocations are not firm and may fluctuate, reporting this information to the Central Repository “would involve significantly more costs which, when balanced against the marginal benefit, is not justified at this time.”1463

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The Commission received two comments advocating for delaying the inclusion of all Primary Market Transactions data in the CAT (and for excluding top-account allocation data),1464 and one comment supporting the inclusion of Primary Market Transaction data in the CAT, for both top-account and sub-account allocation data.1465 Specifically, the two commenters who advocated that Primary Market Transactions should be delayed until OATS and other regulatory reporting systems are retired cited “mounting regulatory expenses” and limited and different resources being required to address this element.1466 These commenters added that regulatory and surveillance requirements should be defined before adding Primary Market Transaction data to the CAT and disputed the Commission’s assessment in the Notice of the CAT NMS Plan that top-account allocation should be a CAT data element.1467 One of these commenters noted that significant analysis and data modelling would be required to effectively and efficiently include Primary Market Transaction data.1468 The other commenter cited a DAG recommendation that if Primary Market Transaction data were required that only sub-account allocation data should be included due to operational feasibility.1469 The same commenter also requested clarification as to what is meant by Primary Market Transaction “allocations,” and described its understanding that “allocations” under Rule 613(a)(1)(vi) only apply to the final step in the allocation process (i.e., not the preliminary book building allocations but the actual placement into a customer’s account).1470

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The third commenter, however, advocated for including Primary Market Transaction data (both top-account and sub-account) in the CAT.1471 The commenter believed that regulators would benefit from having both sub-account and top-account Primary Market Transaction data, noting that such data would help regulators understand the economics of the offering process and could promote efficient capital formation.1472 The commenter reviewed academic literature related to the book building allocation process and suggested that the collection and analysis of Primary Market Transaction data could address open questions as to potential capital formation inefficiencies, including potential manipulation and/or violations of Rule 105 and fund manipulation.1473 The commenter stated that Form 13F data cannot fully capture primary market allocations because it is limited to institutional investment managers with investment discretion over $100 million, and because secondary market transactions may occur before the filing of Form 13F is required.1474 The commenter also recommended that the SROs and the Commission require indications of interest during preliminary book building to be made available in an easily accessible format for both regulators and academics outside of CAT.1475

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The commenter advocating for the inclusion of both top-account and sub-account allocation Primary Market Transaction data also cited and disputed a FIF estimate that it would cost broker-dealers approximately $704,200 per firm to provide initial allocation information, stating that “manually entering top-account allocation information into CAT (if available) should cost substantially less than estimated.”1476 The commenter estimated costs to be $2,400 per offering for providing top-account allocation information, and argued such costs would be “de minimis with respect to the overall cost of issuance.”1477 The commenter also contested FIF’s cost estimate of $58.7 million for providing sub-account information, noting that if CAT were to replace EBS1478 then the incremental cost of providing sub-account allocation information should also be de minimis.1479

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In response to commenters, the Participants maintained their support for including in the CAT sub-account allocations but did not support reporting, or discussing in the Discussion Document, top-account allocations.1480 The Participants reiterated that top-account allocation reporting for Primary Market Transactions would “likely impose significant costs to CAT Reporters while only providing a marginal additional regulatory benefit over sub-account allocation data.”1481 The Participants further stated that they have not determined a timeline for reporting Primary Market Transaction allocations, but have committed to not require it during the initial implementation phase of CAT.1482

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Consistent with the reasoning stated in the adoption of Rule 613, the Commission believes that the Discussion Document should discuss the potential costs and benefits of expansion of CAT to include both top-account and sub-account allocations for Primary Market Transactions. At the same time, the Commission acknowledges that mandating the inclusion of Primary Market Transaction data, either top-account or sub-account, would require Commission action following public notice and comment. The Commission discusses the Primary Market Transaction cost comments in its economic analysis below.1483

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b. Futures

+

Rule 613 and the CAT NMS Plan do not require the reporting of audit trail data on the trading of futures. One commenter, noting that the CAT NMS Plan does not require any information about stock index futures or options on index futures, stated that incorporating futures data into CAT would “create a more comprehensive audit trail, which would further enhance the SROs’ and Commission’s surveillance programs.”1484

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As noted above, the Participants, within six months of the CAT NMS Plan’s approval by the Commission, will provide the Discussion Document that will include a discussion of how additional securities and transactions could be incorporated into CAT.1485 In their response, the Participants recognized that “the reporting of additional asset classes and types of transactions is important for cross-market surveillance.”1486 Further, the Participants stated their belief that the Commission also recognizes “the importance of gradually expanding the scope of the CAT,” and cited the Adopting Release, wherein the Commission directed the Commission Staff “to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail.”1487 Accordingly, the Participants stated that they intend to assess whether it would be appropriate to expand the scope of the CAT to include futures, at a later date.

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The Commission believes that the omission of futures data from the CAT NMS Plan is reasonable, particularly in light of limitations on the Commission’s jurisdiction.

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pubdate: July 01, 2015 effdate: N/A -

7. Statement that the Amendments Have Been Approved by the Plan Sponsors

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Statement that the Amendments Have Been Approved by the Plan Sponsors +
pubdate: November 15, 2016 effdate: N/A +

11. Error Rate

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Error Rate Compliance User: Self-Regulatory Organization Keywords: - Selection Plan, + CAT, + CAT NMS plan, + Error Rate, + OATS, + Error Correction Timeline, + Rule 613, -

The Selection Plan provides that amendments to the Selection Plan shall be effected by means of a written amendment that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to Rule 608, or otherwise becomes effective under Rule 608.14

-

The proposed amendment has been executed by all of the Participants, and has consequently been approved by the SROs.

+

CAT Data reported to the Central Repository must be timely, accurate and complete.1488 The CAT NMS Plan specifies the maximum Error Rate for CAT Reporters.1489 As noted in Section III.19, the term Error Rate is defined as “the percentage of [R]eportable [E]vents collected by the [C]entral [R]epository in which the data reported does not fully and accurately reflect the order event that occurred in the market.”1490 The Error Rate will apply to CAT Data as it is initially submitted to the Central Repository, before it has undergone the correction process.1491

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a. Definition of Error

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Some commenters sought additional information about the meaning of the term “Error Rate” and how Error Rates would be calculated. One commenter suggested that there should be clarification as to whether all errors would be treated equally.1492 Another commenter questioned whether there would be a minimum number of reports submitted before Error Rate calculations would take place, and whether all data submissions would be covered.1493 One commenter suggested that Error Rates be calculated daily on a rolling average, comparing a CAT Reporter’s error rate to an aggregate Error Rate, so as to take into account daily fluctuations in Error Rates.1494 One commenter did not believe that all errors should be treated with the same severity, noting that some errors can be auto-corrected by CAT, and some errors (such as late reporting) can be immediately resolved, while other errors, such as linkage errors, are more problematic.1495 Three commenters suggested that the Error Rate should apply only to post-correction, not pre-correction, data.1496 One of these commenters expressed support for the eventual goal of a de minimis post-correction Error Rate, but could not predict how long this would take to be achieved.1497

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The Participants responded by explaining that the CAT NMS Plan adopted the definition of Error Rate from Rule 613, which does not distinguish among order events and focuses on cases where data “does not fully and accurately reflect the order event that occurred in the market.”1498 The Participants stated that they believe this definition is appropriate.1499 The Participants disagreed with commenters who suggested that the maximum Error Rate should be based on post-correction data,1500 and noted that a maximum Error Rate based on pre-corrected data is intended to encourage CAT Reporters to submit accurate data initially and to reduce the need for error corrections, as well as allow regulators more timely access to accurate data.1501

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The Commission believes that the proposed, uniform definition of Error Rate is reasonable. The Commission also agrees with the Participants that Error Rates should be calculated based on pre-correction, and not post-correction, data. The Commission believes that assessing Error Rates on a pre-correction basis is important to ensure that CAT Reporters submit CAT Data in compliance with the Plan and applicable rules of the Participants, and develop and maintain their reporting systems in a way that minimizes errors. In addition, focusing on Error Rates for pre-corrected data should reduce reliance on the error correction process, and improve the accuracy of the “uncorrected” CAT Data available to regulators in circumstances where immediate action is required. The Commission also believes it critical that the error correction process be effective, so that errors in post-correction CAT Data will be de minimis, as contemplated by the Participants.

+

b. Maximum Error Rate

+

Several commenters expressed opinions regarding the initial maximum Error Rate. Two commenters supported a 5% initial maximum Error Rate.1502 One of these commenters believed that a 5% Error Rate would permit an appropriate level of flexibility for CAT Reporters while still ensuring that CAT Data would be useable for market reconstructions.1503 Another commenter, however, disagreed and argued that, given the industry’s experience with OATS, the maximum Error Rates should be lower than those proposed by the Participants.1504

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Several commenters expressed views on how the initial maximum Error Rate should be adjusted over time.1505 Two commenters supported the Plan’s requirement to evaluate Error Rates at least annually.1506 One of these commenters also believed that lowering the maximum Error Rate to 1% after one year of reporting was acceptable based on the current OATS error rates and the commenter’s own experience with regulatory reporting.1507 Another commenter stated that it was difficult to assess whether a maximum Error Rate of 1% after one year of reporting was appropriate, and indicated that it would prefer a more gradual rate decrease.1508 The commenter recommended that the Operating Committee establish maximum Error Rates for the second and third years of reporting after reviewing the first year’s Error Rate data.1509 Two commenters recommended that the maximum Error Rate be reviewed whenever there are significant changes to the CAT (e.g., the addition of security classes)1510 or applicable regulations.1511

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In response to concerns that the Participants do not have sufficient information or experience to determine the initial maximum Error Rate, 1512 the Participants explained that they established this maximum Error Rate after performing a detailed analysis of OATS error rates over time, and believed that such analysis provided a sound basis for their determination.1513 The Participants stressed the importance of evaluating a CAT Reporter’s actual experience, in setting an appropriate maximum Error Rate, and noted that the CAT NMS Plan requires the Operating Committee to review the maximum Error Rate at least annually.1514

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With respect to the comments recommending that the maximum Error Rate also be reviewed upon significant changes to the CAT or regulations, the Participants noted that the required testing and other management processes surrounding CAT systems changes should mitigate concerns about their impact on Error Rates, and that the periodic updates on Error Rates provided to the Operating Committee should alert them if there is a need to change the maximum Error Rate.1515

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The Commission believes that the proposed 5% initial maximum Error Rate is reasonable and strikes an appropriate balance between: (1) ensuring that the initial submissions to the Central Repository by CAT Reporters are sufficiently accurate for regulatory use; and (2) providing CAT Reporters with time to adjust to the new more comprehensive regulatory reporting mechanism. The Commission understands that the Participants considered relevant historical information related to OATS reporting error rates, particularly when new reporting requirements were introduced, and believes this is a reasonable basis for setting the initial maximum Error Rates for CAT Data.1516 The Commission understands that CAT Reporters who currently report to OATS report with a significantly lower Error Rate, but recognizes that more flexibility may be necessary during the transition, and notes the 1% maximum Error Rate applicable to each CAT Reporter one year after their reporting obligation has begun is comparable to current OATS reporting error rates.1517

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The Commission also believes that the process established by the CAT NMS Plan for reducing the maximum Error Rate over time is reasonable, and emphasizes the important roles of both the Plan Processor and the Operating Committee in ensuring that Error Rates are steadily reduced over time. The Plan requires the Plan Processor regularly to provide information and recommendations regarding Error Rates to the Operating Committee,1518 and requires the Operating Committee to review and reset the maximum Error Rate at least on an annual basis.1519 Given the importance to regulators of audit trail information that meets high standards of accuracy, the Commission expects the Plan Processor and Participants to closely monitor Error Rates, particularly in the early stages of CAT implementation, so that steps can be taken to reduce the maximum Error Rate as promptly as possible. The Commission also encourages the Plan Processor and Participants to assess the impact of significant changes to the CAT or applicable regulations on the maximum Error Rate, at least on a transitional basis, and provide additional flexibility as warranted. As described in Section IV.H, the Commission is amending Section 6.6 of the Plan to require that, prior to the implementation of any Material Systems Change, the Participants provide the Commission with an assessment of the projected impact of any Material Systems Change on the maximum Error Rate.

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c. Different Error Rates for Different Products and Data Elements

+

The CAT NMS Plan imposes the same Error Rate on all products and data elements. Commenters suggested differentiation in this area. One commenter recommended that the Error Rate only apply to equities.1520 Another commenter suggested that Error Rates for equities, options and customer data should be calculated separately.1521 A third commenter expressed the view that, as new products are covered by CAT, they should be subject to a more liberal Error Rate for an appropriate transition period.1522 Two commenters did not believe there is enough information to set an appropriate maximum Error Rate for options market making, customer information or allocations, given that there is little or no reporting history for them, and suggested applying the Error Rate on a post-correction basis for these products and data elements, at least for a transitional period.1523

+

In response, the Participants stated that they continue to believe that a single overall Error Rate for all products and data elements is appropriate.1524 They acknowledged the importance of gathering more granular information about Error Rates, including differences among products, and noted that the CAT NMS Plan requires the Plan Processor to provide the Operating Committee with regular reports that show more detailed Error Rate data.1525

+

The Commission believes that it is reasonable, at this time, to apply the same maximum Error Rate to all products and data elements, in the Plan filed by the Participants. The Commission notes that the initial 5% maximum Error Rate, which substantially exceeds the OATS error rates, was established in recognition of the fact that certain products (e.g., options) and data elements (e.g., market maker quotes, customer information) had not previously been reported in OATS. The Commission, however, notes that the Participants may assess, as the CAT is developed and implemented, whether it is appropriate to impose Error Rates that vary depending on the product, data element, or other criteria.1526 As discussed in Section IV.H, the Commission is amending the Plan to require that the Participants provide the Commission with an annual evaluation that addresses the application of Error Rates based on product, data elements or other criteria.

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d. Compliance with Maximum Error Rate During the Initial Implementation Period

+

Two commenters suggested that CAT Reporters not be required to comply with the maximum Error Rate during the initial implementation period for the CAT.1527 One of these commenters explained that this would provide CAT Reporters a window of time to better understand the types of errors that are being returned by the CAT, and adjust their processes accordingly, without incurring liability for exceeding the maximum Error Rate.1528 Another commenter stressed the importance of receiving feedback from the Plan Processor so that CAT Reporters can identify weaknesses and improve the accuracy of their CAT reporting.1529 This commenter recommended that the Plan Processor provide CAT Reporters with a detailed daily error report, as well as monthly report cards.1530

+

The Participants responded by noting that Rule 613(g) requires the Participants to enforce compliance by their members with the provisions of the Plan at all times it is in effect.1531 The Participants also pointed out that the Plan provides that CAT Reporters will be provided tools to facilitate testing and error correction, as well as have access to user support. With respect to the importance of feedback from the Plan Processor,1532 the Participants noted that the Plan requires the Plan Processor to provide CAT Reporters with error reports, including details on the reasons for rejection, as well as daily and monthly statistics from which CAT Reporters can compare their performance with their peers.1533 As discussed in Section IV.H, the Commission is amending the Plan to require that the Participants provide the Commission with an annual evaluation of how the Plan Processor and the Participants are monitoring Error Rates.

+

The Commission believes that the implementation period for Error Rates is reasonable and that it is not necessary to establish a grace period, as suggested by commenters, during which Error Rates would not apply. Ensuring the accuracy of CAT Data is critical to regulators and, as noted above, the initial maximum Error Rates have been set at levels to accommodate the fact that CAT Reporters will be adjusting to a new regulatory reporting system.1534 In addition, the Commission notes that the CAT NMS Plan provides for testing periods,1535 as well as tools and other support, to facilitate initial compliance by CAT Reporters. As noted by the Participants, the Plan Processor will provide regular feedback to CAT Reporters with respect to their reporting weaknesses to assist them in reducing their Error Rates.1536

+

e. Error Correction Timeline

+

The CAT NMS Plan sets forth a timeline with deadlines for providing raw data and corrected data to the CAT. CAT Reporters must submit data to the CAT by 8:00 a.m. ET on T+1.1537 By 12:00 p.m. ET on T+1, the CAT must perform checks for initial validations and lifecycle linkages, and communicate errors to CAT Reporters.1538 CAT Reporters must resubmit corrected data to the CAT by 8:00 a.m. ET on T+3.1539 The Plan Processor must ensure that regulators have access to corrected and linked order and Customer data by 8:00 a.m. ET on T+5.1540

+

Two commenters believed the error correction timeline was too aggressive, and that at least initially, the CAT should use the current error correction timelines for systems such as OATS, which is T+5.1541 One commenter specifically suggested that the timeline for error corrections should remain at T+5 for the first year of CAT reporting.1542 This commenter also noted that, because the Plan Processor is required to communicate errors to CAT Reporters by 5:00 p.m. ET on T+1, staffing adjustments may be necessary to ensure that the appropriate personnel are available after 5:00 p.m. ET to analyze and correct data, and if communications with a customer were necessary to correct an error, the CAT Reporter could not satisfy the 8:00 a.m. ET T+2 timeline for providing corrected data.1543 This commenter also recommended that the Plan Processor identify errors in customer information data by noon on T+1, the same time as the Plan Processor identifies errors in transaction reports, instead of by 5:00 p.m. ET on T+1, to assist with prompt analysis of linking errors.1544 Another commenter suggested that the use of “pre-validation checks,” prior to the formal submission of data to the CAT, could enhance the accuracy and integrity of the CAT Data.1545

+

In response to commenters who believed the timeframe for correction of CAT Data was too short, the Participants stressed the importance to regulators of the prompt availability of accurate data.1546 The Participants stated that the three day window for correction provided in the CAT NMS Plan appropriately balances the need for regulators to have prompt access to accurate data with the burdens imposed on the industry by the shorter error correction timeframe.1547 The Participants noted that the shorter three-day error correction timeframe would allow better regulatory surveillance and market oversight in accordance with Rule 613.1548 In response to the commenter that requested additional time to correct errors in customer data, the Participants expressed the view that the two-day timeframe provided by the Plan is sufficient to accommodate any communications with customers that might be necessary to correct errors in customer data.1549 With respect to the suggestion to use pre-validation checks, the Participants acknowledged their value, and stated that they have discussed with the Bidders making tools, such as pre-validation checks, available to CAT Reporters to assist with data submission.1550

+

The Commission believes that the error correction timeline set forth in the CAT NMS Plan is reasonable. Improved accuracy and timeliness of regulatory data are key goals of Rule 613 and the CAT NMS Plan.1551 In response to commenters that suggested that the error correction timeline is too aggressive, the Commission believes that the error correction tools and processes to be established by the Plan Processor, and the accommodations to facilitate the use of existing systems by CAT Reporters, should ease the burden of complying with shorter error correction timelines than exist today in OATS.1552 The Commission believes any incremental compliance burden in this area is offset by the benefits of faster availability to regulators of corrected CAT Data for important regulatory purposes, such as surveillance, oversight and enforcement, as well as market reconstructions, in today’s high-speed electronic markets.

+

In response to the commenter that stated that additional staffing may be needed to assist in addressing error correction information that is received from the Plan Processor at 5:00 p.m. ET on T+1, the Commission believes, as noted above, the regulatory benefits of a shorter error correction timeframe justify the incremental compliance costs, including the potential hiring of additional staff in some cases.1553 The Commission also believes that CAT Reporters would have sufficient time to contact customers in the event customer feedback was necessary to correct errors.1554 In this regard, the Commission notes that the CAT NMS Plan provides that corrected order data is not required to be reported until 8:00 a.m. ET on T+3, and corrected Customer data is not required to be reported until 5:00 p.m. ET on T+3.1555

-
pubdate: July 02, 2015 effdate: N/A -

8. Terms and Conditions of Access

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Terms and Conditions of Access +
pubdate: November 15, 2016 effdate: N/A +

12. Business Continuity and Disaster Recovery

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Business Continuity and Disaster Recovery Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + CAT NMS plan, + Plan Processor, + Regulation SCI, + SCI system, + +

The CAT NMS Plan requires the Plan Processor to implement efficient and cost-effective business continuity and disaster recovery capabilities that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the Central Repository.1556

+

Commenters discussed the CAT NMS Plan’s provisions regarding business continuity and disaster recovery for the CAT.1557 One commenter noted that the Plan does not include an explanation of how the primary and the secondary sites will remain synchronized at all times to provide a seamless transition from primary site to secondary site in the event of a failure.1558 This commenter suggested that the Plan should specify additional details regarding the expected elapsed time for the secondary site to become live if the primary site goes down due to a technical failure or a disaster.1559 The commenter also noted that the requirement for disaster recovery plans does not address whether regulators will have uninterrupted access to the CAT Data, although the commenter acknowledged that it can be inferred that the secondary site should provide all the functionalities of the primary site in the event of primary site outage.1560 Further, the commenter recommended that while the CAT NMS Plan states that the goal of disaster recovery is to achieve next day recovery after an event, the Plan should provide a list of scenarios and the expectation of the recovery times for each scenario.1561

+

One commenter recommended that the CAT NMS Plan state that the Plan Processor must support 24x7 production and test environments, provide test and validation tools to result in a higher quality audit trail, provide a consistent and comprehensive data security program, and provide an adequate level of help desk staffing, especially during industry testing and when Industry Members are being on-boarded.1562 This commenter also stated that large firms that already have the staffing capability for a 24x7 operating schedule could benefit from 24x7 production support, explaining that it would permit added flexibility in error processing or recovery scenarios, as well as the use of off-shore staffing.1563 Another commenter recommended that the CAT NMS Plan should not mandate a particular industry testing process, stating that “appropriate management flexibilities/discretions are needed.”1564

+

The Participants argued that the Plan provisions with respect to business continuity and disaster recovery are appropriate, but did note that they intend to discuss with the Bidders requiring test environments to be available 24x7 instead of 24x6.1565

+

The Commission has considered the business continuity and disaster recovery requirements set forth in the CAT NMS Plan, as well as the comments received addressing these requirements and believes that the Participants’ approach is reasonable. The Commission believes that the CAT NMS Plan’s business continuity and disaster recovery provisions establish a framework that is reasonably designed to ensure that the CAT business processes can continue despite a failure or disaster scenario.1566 In particular, the CAT will be subject to all applicable requirements of Regulation SCI, as it will be an “SCI system”1567 of each of the Participants, and the Participants, as “SCI entities”,1568 are required to establish, maintain and enforce written policies and procedures for their SCI systems that comply with the technology standards and other requirements of Regulation SCI, including with respect to the business continuity and disaster recovery plans for the CAT.1569 In addition, the CAT will be subject to certain additional requirements with respect to business continuity and disaster recovery that are set forth in the CAT NMS Plan.1570

+

With respect to the commenter that noted that the Plan does not explain how the primary and the secondary sites will remain synchronized,1571 and that additional detail should be provided regarding the failover times between primary and secondary sites,1572 the CAT NMS Plan expressly requires recovery and restoration of services within 48 hours, but with a goal of next-day recovery. While data will not be synchronized in real time, sufficient synchronization will be maintained to support these recovery timeframes. Although, as noted above, the Commission believes the Participants’ approach is reasonable, the Commission encourages the Plan Processor and Participants to strive to reduce the time it will take to restore and recover CAT Data at a backup site. As discussed in Section IV.H., the Commission is amending the Plan to require the Participants to submit to the Commission an annual evaluation of the time necessary to restore and recover CAT Data at a back-up site.

+

With respect to the commenter that recommended that the Plan Processor support 24x7 testing and production environments,1573 the Commission recognizes that this could facilitate disaster recovery and other important processes by Industry Members, and believes that the Participants’ commitment to discuss requiring test environments to be available 24x7 with the Bidders is reasonable.1574

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pubdate: July 03, 2015 effdate: N/A -

9. Method of Determination and Imposition, and Amount of, Fees and Charges

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Method of Determination and Imposition, and Amount of, Fees and Charges +
pubdate: November 15, 2016 effdate: N/A +

13. Business Clock Synchronization and Timestamp Granularity

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Business Clock Synchronization and Timestamp Granularity Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + Business Clock synchronization, + Rules 613(d)(1), + NIST, + Manual Order Events, + FIF, + CAT NMS plan, + OATS, + ATS, + CAT Reporter’s Business Clock, + Rule 613, + Electronic Capture Time, + +

a. Business Clock Synchronization

+

(1) Industry Standard

+

Rules 613(d)(1) and (2) require CAT Reporters to synchronize their Business Clocks1575 to the time maintained by NIST, consistent with industry standards. In the CAT NMS Plan, the Participants determined that the industry standard for the synchronization of Business Clocks is within 50 milliseconds of the time maintained by NIST, except for Manual Order Events.1576 For Business Clocks used solely for Manual Order Events, the Participants determined that the industry standard for clock synchronization is within one second of NIST. To ensure that clock synchronization standards remain consistent with industry standards, as they evolve, the CAT NMS Plan requires the Operating Committee to annually review the clock synchronization standard to determine whether it should be shortened.

+

In determining the current industry standard for clock synchronization, the Participants and Industry Members reviewed their respective clock synchronization technology practices,1577 and the results of a clock synchronization survey conducted by FIF.1578 After completing these reviews, the Participants concluded that a 50 millisecond clock synchronization standard represented an aggressive, but achievable, standard.1579

+

The Commission received a number of comments on the CAT NMS Plan’s provisions relating to clock synchronization. Several commenters agreed with the Participants that 50 milliseconds was a reasonable standard.1580 Four commenters specifically recommended that the clock synchronization standard for OATS—also 50 milliseconds—and CAT should be aligned for regulatory reporting purposes.1581 One commenter argued for a finer standard for Industry Members, noting that they accept data feeds from exchanges that have more precise clock synchronization, some to the microsecond.1582

+

Other commenters opposed mandating a standard finer than the 50 millisecond clock synchronization standard.1583 One commenter argued that a finer synchronization standard could not be met without dramatically increasing costs,1584 and expressed the view that the 50 millisecond standard is reasonable given the geographically dispersed market.1585 In particular, this commenter believed that, while a finer standard may create the illusion of a more accurate time sequence of events, in practice geographically dispersed market events could still be sequenced incorrectly.1586 This commenter stated that it is better to allow for clock synchronization standards to be tightened voluntarily, based on business needs rather than regulatory requirements.1587 Finally, one commenter expressed the view that clock synchronization was less important for certain types of orders, and suggested that the clock synchronization standard for manual orders, orders that have both a manual and electronic component, and orders that are not time-critical (e.g., post-trade events such as allocations) should be one second rather than 50 milliseconds.1588

+

One commenter noted that stricter clock synchronization standards are already in place at exchanges and ATSs.1589 Another commenter stated that, if exchanges maintained finer clock synchronization standards than currently required by the CAT NMS Plan, the ability to sequence Reportable Events that occur across markets could be improved.1590

+

In their response, the Participants stated that they continue to believe that the clock synchronization standard for Industry Members should be within 50 milliseconds of the time maintained by NIST, except for with regard to Manual Order Events.1591 The Participants noted that they discussed this topic with Industry Members and conducted a survey of Industry Members to better understand current clock synchronization practices.1592 The Participants represented that they considered various clock synchronization options, which ranged from microseconds to one second, before settling on a 50 millisecond standard, which they believe represents the current industry standard for Industry Members.1593 The Participants stated that, based on their analysis, imposing a finer clock synchronization standard for Industry Members as part of the initial implementation of the CAT would significantly increase the cost of compliance for some segments of the industry,1594 but emphasized that the Operating Committee will be reviewing the synchronization standard annually and will reduce the standard as appropriate.1595

+

The Participants, however, represented that they all currently operate pursuant to a clock synchronization standard that is within 100 microseconds of the time maintained by NIST, at least with respect to their electronic systems. Accordingly, the Participants recommended that the Commission amend the Plan to require that Participants adhere to the 100 microsecond standard of clock synchronization with regard to their electronic systems, but not their manual systems, such as the manual systems operated on the trading floor, manual order entry devices, and certain other systems.1596

+

After reviewing the CAT NMS Plan, and considering the commenters’ statements and the Participants’ response thereto, the Commission believes that it is appropriate for the Participants to consider the type of CAT Reporter (e.g., Participant, Industry Member), the type of Industry Member (e.g., ATS, small broker-dealer), and type of system (e.g., order handling, post-execution) when establishing appropriate industry standards. The Commission does not believe that one industry standard should apply across all CAT Reporters and systems. Therefore, the Commission is amending Section 6.8(c) of the Plan to state that industry standards for purposes of clock synchronization should be determined based on the type of CAT Reporter, type of Industry Member and type of system.

+

For the initial implementation of the CAT, however, the Commission believes a 50 millisecond clock synchronization standard for Industry Members is reasonable at this time. While the Commission believes that regulators’ ability to sequence orders accurately in certain cases could improve if the clock synchronization for Industry Members were finer, the Commission is sensitive to the costs associated with requiring a finer clock synchronization for Industry Members at this time, and believes that a standard of 50 milliseconds for Industry Members will allow regulators to sequence orders and events with a level of accuracy that is acceptable for the initial phases of CAT reporting.

+

Although the Commission understands that certain Industry Members, such as ATSs and broker-dealers that internalize off-exchange order flow, today adhere to a finer clock synchronization standard, the Commission is not imposing a finer standard than 50 milliseconds for such Industry Members at this time. The Commission believes that it is reasonable to expect that finer clock synchronization for Industry Members, or certain categories or systems thereof, will evolve over time. As described in Section IV.H, the Commission is amending the Plan to require that the Participants provide the Commission an assessment of clock synchronization standards, including consideration of industry standards based on the type of Industry Member or type of system, within six (6) months of effectiveness of the Plan.

+

With regard to the Participants, however, the Commission notes that the Participants have acknowledged that they currently synchronize their Business Clocks to within 100 microseconds of NIST, and recommended that the Commission amend the Plan to require the Participants to adhere to that finer standard for their non-manual systems.1597 Accordingly, the Commission is amending Section 6.8(a)(i) of the Plan, consistent with this recommendation, to impose a clock synchronization standard of 100 microseconds on exchanges’ electronic systems. The Commission believes that because the Participants already synchronize their clocks to this standard,1598 any costs to comply with this standard are not likely to be substantial.1599 In addition, the Commission believes that a finer clock synchronization requirement for exchanges generally should allow regulators to better sequence orders and order events across multiple exchanges.1600 The Commission agrees with the Participants that it would not be appropriate to impose this finer standard with regard to Participants’ manual systems, given that the timing of manual events is inherently less precise and the timestamp requirement for manual events is only to the second.1601 Accordingly, the Commission believes the one-second clock synchronization standard set forth in the Plan with respect to Manual Order Events, whether generated by the Participants or Industry Members, is reasonable.

+

The Commission believes the requirement that the Participants annually review the clock synchronization standard to determine whether it should be shortened, in light of the evolution of technology, is reasonable to ensure that clock synchronization standards remain as tight as practicable in light of technological developments. In particular, as technology advances over time, the Commission believes that it will be appropriate for the Participants to consider whether some CAT Reporters should be required to maintain a finer clock synchronization than required by the Plan today. As the Participants conduct their annual reviews, the Commission expects them to consider proposing new clock synchronization standards whenever they determine the industry standard for CAT Reporters, or certain categories or systems thereof, has become more granular than required by the Plan at that time.1602 As discussed in Section IV.H., the Commission is amending Section 6.6 of the Plan to require that the Participants provide the Commission with a copy of the annual assessment performed by the Plan Processor pursuant to Section 6.8(c) of the Plan.

+

Compliance with the clock synchronization standards is vital to the accuracy of the CAT. To this end, the Operating Committee is required to adopt policies and procedures, including standards, that require that the CAT Data reported be timely, accurate, and complete, and to ensure the integrity of CAT Data.1603 The Plan Processor is responsible for implementing these policies and procedures,1604 and the CCO is tasked with regularly monitoring them.1605 The Participants represented that they are developing their clock synchronization compliance rules, and will keep the industry informed as their efforts progress.1606

+

(2) Documentation Requirements

+

The CAT NMS Plan also requires CAT Reporters to document their clock synchronization procedures, and maintain a log of each time they synchronize their clocks and the results of such synchronization. This log must specifically identify each synchronization event and note whenever the time of the CAT Reporter’s Business Clock and the time maintained by the NIST differs by more than the permitted amount.1607

+

One commenter objected to the requirement that each instance of clock synchronization be logged, and took the position that doing so would be costly.1608 This commenter instead suggested that CAT Reporters should only be required to log instances of clock synchronization exceptions, and not all clock synchronization events.1609 In response, the Participants reaffirmed that the Plan requires each Participant and Industry Member to maintain a log of all instances of clock synchronization.1610

+

The Commission acknowledges that there could be cost savings if the Plan did not require CAT Reporters to log every clock synchronization event,1611 but it believes that having this information at the outset of the operation of the CAT should facilitate compliance with, and oversight of, the clock synchronization standards. To the extent the Participants find that a complete log of clock synchronization events is not required to effectively surveil for compliance with these standards, they may at a later date seek to amend the Plan to reduce the logging obligation as appropriate.

+

b. Timestamp Granularity

+

The CAT NMS Plan reflects the requirements in Rule 613 regarding timestamps, as modified by an exemption for Manual Order Events granted by the Commission.1612 Specifically, the Plan requires CAT Reporters to record and report the time of each Reportable Event using timestamps reflecting current industry standards (which must be at least to the millisecond) or, if a CAT Reporter uses timestamps in increments finer than milliseconds, such finer increments, when reporting to the Central Repository. For Manual Order Events, the Plan provides that such events must be recorded in increments up to and including one second, provided that CAT Reporters record and report the time the event is captured electronically in an order handling and execution system (“Electronic Capture Time”) in milliseconds (“Manual Order Event Approach”).1613 Under the CAT NMS Plan, the CCO, in conjunction with the Participants and Industry Member advisory groups, must annually review the timestamp granularity requirements of the CAT and determine whether to require finer timestamp granularity in light of the evolution of industry standards.1614

+

(1) Manual Order Event Approach

+

According to the Participants, the Manual Order Event Approach would not have an adverse effect on the various ways in which, and purposes for which, regulators would use, access, and analyze the CAT Data.1615 In particular, the Participants stated that they do not believe that the Manual Order Event Approach will compromise the linking of order events, or alter the time and method by which regulators may access the data.1616 The Participants also stated that the Manual Order Event Approach would not negatively impact the reliability and accuracy of the CAT Data.1617 Further, the Participants represented that one second is the industry standard for reporting the time of Manual Order Events.1618 The Participants conducted a cost-benefit analysis of the Manual Order Event Approach and concluded that this approach would impose a much smaller cost burden, if any, on market participants, than would transitioning to technology that has the capability to record timestamps for Manual Order Events to the millisecond.1619

+

Two commenters supported the CAT NMS Plan’s requirement that Manual Order Events be recorded and reported with a timestamp granularity of up to and including one second.1620 One commenter stated that the requirement to record timestamps at one-second levels for manual orders was appropriate, and that it was not logical to require a finer timestamp given that attempting to record Manual Order Events at subsecond increments would be inherently imprecise.1621 Another commenter stated that a manual order timestamped to the second coupled with a daisy chain of other order events timestamped to the millisecond should create “a fairly clear sequence of events with the order lifecycle for the regulator.”1622

+

One commenter expressed the view that there would be cost savings if a less stringent timestamp requirement for manual orders was imposed.1623 Another commenter suggested using a more relaxed timestamp initially for manual orders, and to consider tightening the standard in the future.1624 Another commenter suggested that anti-gaming provisions should be developed to ensure that CAT Reporters do not program their systems to generate orders that imitate manual orders to take advantage of the one second timestamp requirement.1625

+

The Commission believes it is reasonable to permit Manual Order Events to be timestamped to the second, provided that CAT Reporters record and report the Electronic Capture Time in milliseconds. The Commission understands that the timing of Manual Order Events is inherently imprecise, and believes that requiring a timestamp to a level of granularity finer than one second is not likely to provide any additional information that will be useful to regulators. The Commission believes, however, that requiring the timestamp for the Electronic Capture Time to be recorded to the millisecond would not be burdensome and would help facilitate the reconstruction of Manual Order Events once the order is handled by an electronic system. While the Commission is not aware of any credible means or rationale to disguise electronic orders as manual orders to take advantage of the one second timestamp granularity, as suggested by a commenter, the Commission believes that the Participants should address potential methods of avoiding compliance generally as they develop their Compliance Rules.1626

+

(2) Millisecond (or Finer) Timestamp Requirement for All Other Order Events

+

Commenters generally supported the proposed requirement that the timestamps for non-Manual Order Events be recorded to the millisecond.1627 Two commenters also agreed with the requirement to provide timestamps in increments finer than milliseconds, to the extent a CAT Reporter already uses more granular timestamps.1628 Two other commenters disagreed, however, arguing that costly systems changes would be required for regulatory reporting of these finer timestamps used in its normal practice, and that they would not be useful for regulatory purposes.1629 Finally, two commenters took the position that certain post-trade events should not be required to have a timestamp, or have a less granular timestamp than a millisecond, as this information is less time-sensitive than fully-electronic trading events.1630

+

In response, the Participants maintained that the Plan’s timestamp requirements for non-Manual Order Events were appropriate, but also noted that as CAT Reporters incorporate finer timestamps in their systems, the quality of CAT Data will increase correspondingly.1631

+

The Commission believes that requiring that non-manual Reportable Events be reported with timestamp of at least a millisecond in granularity will help ensure that regulators can sequence events with a reasonable degree of accuracy. Given the speed with which the industry currently handles orders and executes trades, it is important that the CAT utilize a timestamp that will enable regulators to reasonably sequence the order in which Reportable Events occur.1632 The Commission believes that timestamps in increments greater than a millisecond would undermine the improved ability to sequence events with any reasonable degree of reliability.1633 In response to commenters’ suggestions that timestamps should not be required on manual orders and other post-execution events,1634 the Commission notes that it has provided flexibility for Manual Order Events and for post-execution allocations to be reported with one second timestamps.1635

+

In response to the commenters that stated it would be costly for CAT Reporters to report using timestamps to the same granularity they use in their normal practice,1636 the Commission believes it is appropriate to make a clarifying change to the Plan. The CAT NMS Plan provides that to the extent that any CAT Reporter utilizes timestamps in increments finer than one millisecond such CAT Reporter must utilize such finer increment when reporting CAT Data to the Central Repository.1637 Rule 613(d)(3), however, required that a finer increment must be used only to the extent that “the relevant order handling and execution systems of any CAT Reporter utilizes timestamps finer that a millisecond.”1638 Accordingly, the Commission is amending Section 6.8(b) of the Plan to limit the circumstances in which a CAT Reporter must report using an increment finer than a millisecond to when a CAT Reporter utilizes a finer increment for its order handling and execution systems. The Commission finds that, this modification is appropriate in light of the increased burdens placed on CAT Reporters by the additional systems changes that would otherwise be required in order to report in finer increments. With this modification, reporting in a finer increment than a millisecond would not be a costly undertaking, and the Commission therefore believes that this approach will improve the accuracy of order event records, particularly those occurring rapidly across multiple markets, without imposing undue burdens on market participants.

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pubdate: July 04, 2015 effdate: N/A -

10. Method and Frequency of Processor Evaluation

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Method and Frequency of Processor Evaluation +
pubdate: November 15, 2016 effdate: N/A +

14. Upgrades and New Functionalities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Upgrades and New Functionalities Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + CAT NMS plan, + Plan Processor, + Industry Members, + SRO, + +

Under Article VI of the CAT NMS Plan, the Plan Processor is responsible, in consultation with the Operating Committee, for establishing policies and procedures for implementing potential changes and upgrades to the CAT System and infrastructure, including “business as usual” changes and the addition of new functionalities.1639 The CAT NMS Plan also requires that the Plan Processor ensure that the technical infrastructure is scalable from a capacity standpoint, adaptable to future technology developments, and technologically current.1640

+

The Commission received two comments on the Plan provisions pertaining to upgrades and new functionalities. The first commenter expressed concern that the Plan provisions apply only to infrastructure improvements and not also to regulatory tools.1641 The second commenter, noting the importance of scalability, suggested that the Plan Processor be required to meet certain capacity requirements recommended by Industry Members.1642 The Participants did not respond to these comments.

+

The Commission believes that the Plan’s provisions with respect to potential upgrades and new functionalities are reasonable. The Commission notes that the Plan Processor is responsible for overseeing the day-to-day operations of CAT and, as such, should be well-positioned and informed to consider whether and when systems changes or upgrades are necessary, subject to consultation and approval by the Operating Committee.1643 With respect to the development of new regulatory tools, the Commission notes that the Participants, as SROs, are responsible for developing appropriate regulatory tools and, to the extent they identify necessary enhancements to the CAT, the Commission expects the Participants to direct the Plan Processor to implement them.1644 With respect to a commenter’s recommendation that the Plan Processor be required to meet certain capacity requirements to assure scalability, the Commission notes that one of the key considerations for the CAT is that it be flexible and scalable,1645 and that the CAT NMS Plan already requires that the Plan Processor ensure that the Central Repository’s infrastructure is scalable to handle increased reporting volumes and enhancements to technology over time.1646 As discussed in Section IV.H, the Commission is amending Section 6.6 of the Plan to require the Participants to submit to the Commission an annual evaluation of potential technology upgrades based on a review of technological developments over the preceding year, drawing on internal or external technological expertise.

-
pubdate: July 05, 2015 effdate: N/A -

11. Dispute Resolution

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Desription of the Plan, Requirements Pursuant to Rule 608(a), Dispute Resolution +
pubdate: November 15, 2016 effdate: N/A +

15. Technical Specifications

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Functions and Activities of the CAT System (Article VI), Technical Specifications Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

+ Keywords: + CAT NMS plan, + Plan Processor, + Technical Specifications, + Central Repository, + CAT NMS plan, + SRO, + Rule 608, + +

The CAT NMS Plan provides that the Plan Processor will publish Technical Specifications regarding the submission of data to the Central Repository that must be consistent with the requirements of Appendices C and D of the Plan.1647 Under the Plan, as filed, the Plan Processor (i) will begin developing Technical Specifications for the submission of order data by Industry Members fifteen months before Industry Members are required to begin reporting to the Central Repository, (ii) will publish these Technical Specifications one year before Industry Members are required to begin reporting to the Central Repository, and (iii) will begin connectivity testing and accepting order data from Industry Members for testing purposes six months before Industry Members are required to begin reporting to the Central Repository.1648 With respect to Customer Account Information, the Plan Processor will publish the Technical Specifications six months before Industry Members are required to report data to the Central Repository, and will begin connectivity and acceptance testing three months before Industry Members are required to report data to the Central Repository.1649 The development of Technical Specifications for Participant submission of order data will commence ten months before Participants are required to report to the Central Repository, and will be published six months before Participants are required to report to the Central Repository.1650 Commenters raised several concerns regarding the Technical Specifications.1651

+

a. Industry Input and Timing of Technical Specifications

+

One commenter emphasized the importance of having comprehensive Technical Specifications that incorporate feedback from industry.1652 Another commenter stated that because CAT is new and complex, time should be built into the schedule to permit two iterative reviews of the Technical Specifications before they are considered final.1653 This commenter suggested that this review period should be no less than six months, arguing that the current timeframes to develop and test the Technical Specifications for the reporting of information to identify a Customer, in particular, are insufficient.1654 Another commenter suggested that the review process with respect to Technical Specifications for reporting order data and information to identify a Customer should begin two months after a Plan Processor is selected and continue for nine months.1655

+

One commenter recommended that the Technical Specifications for Industry Members be prepared concurrently with the Technical Specifications for Participants to provide them with more time to review and implement any necessary changes, particularly with regard to interfaces that the Participants and Industry Members will use.1656 The commenter also recommended that the implementation schedule address allocation reporting and suggested that Technical Specifications for allocation reporting be provided at the same time as those for reporting order data and information to identify a Customer.1657 The commenter also stated that very detailed and timely information regarding CAT interfaces, message, and file formats in the Technical Specifications are essential due to the aggressive timeline for implementation of CAT.1658

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In response to these commenters, the Participants acknowledged the importance of the development process for the Technical Specifications for all CAT Reporters and emphasized that in their discussions with the Bidders, they have made development of Technical Specifications a high priority.1659 Although the Participants noted that the Plan would not prohibit the Plan Processor from concurrently developing the Participant and Industry Member Technical Specifications, they explained that “in light of various practical issues raised by the pending decisions regarding the selection of the Plan Processor, the Participants do not propose to amend the Plan to reflect an expedited schedule for the Industry Member Technical Specifications.”1660

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In their response to comments regarding industry input on the Technical Specifications, the Participants stated that they believe that iterative interactions regarding the Technical Specifications would be beneficial in optimizing the efficiency and quality of the final Technical Specifications.1661 The Participants further explained that Appendix C of the Plan contemplates the publication of iterative drafts of the Technical Specifications, with respect to the submission of order data, as needed before the final Technical Specifications are published, noting that this language provides the flexibility for iterative drafts, as necessary.1662

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In their response to comments, the Participants also recommended amendments to the Plan to better align the milestones related to the submission of order data to the Central Repository with the milestones for the submission of Customer Account Information to the Central Repository. Specifically, the Participants recommended explicitly including milestones for the beginning of the Plan Processor’s development of Technical Specifications for the submission of Customer Account Information and for the publication of iterative drafts of such Technical Specifications.1663 However, the Participants did not recommend aligning the timeframe for the publication of Technical Specifications for the submission of Customer Account Information (six months prior to when Industry Members are required to begin reporting to the Central Repository) with the timeframe for the publication of Technical Specifications for the submission of order data (one year prior to when Industry Members are required to begin reporting to the Central Repository), explaining that reporting order data to the CAT will be a significantly more complex process than reporting Customer Account Information and that therefore it is appropriate to allow Industry Members more time to review Technical Specifications and to begin testing their systems with regard to order data.1664

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The Commission recognizes the importance of providing sufficient opportunity for CAT Reporters to provide input as the Technical Specifications are developed. As noted by the Participants, Appendix C of the CAT NMS Plan, as recommended to be amended by the Participants in their response to comments,1665 provides that, for the submission processes for both order data and information to identify a Customer, the Plan Processor will begin developing the Technical Specifications fifteen months prior to Industry Member reporting and will publish iterative drafts of the Technical Specifications as needed prior to the publication of the final Technical Specifications.1666 In addition, the Participants stated that they will “work with the Plan Processor and the industry to develop detailed Technical Specifications.”1667

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Based on these provisions of the Plan and the Participants’ statements in their response, the Commission understands that the Participants will work with and consider input from Industry Members during the Technical Specification drafting and development processes. The Commission further understands that the milestones in the Plan regarding the development of the Technical Specifications will keep Industry Members reasonably informed as to the status and content of the Technical Specifications and will permit Industry Members, whether through the Advisory Committee or other, more informal mechanisms, to provide input on the Technical Specifications as they are being developed. As discussed above, the Plan requires the Participants and the Plan Processor to work with Industry Members in an iterative process, as necessary, to develop effective final Technical Specifications.1668 However, the Commission believes that providing the Plan Processor with some flexibility regarding the mechanics of the Technical Specification development process is appropriate, and that it would be premature at this time to provide for mandatory iterative interactions or to require a specific number of iterations.

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In addition, the Commission believes it will be beneficial for the milestones for the submission of order data and information to identify a Customer to be as aligned as possible so that all stakeholders can identify issues and present solutions on these related processes simultaneously. The Commission believes that the Participants’ recommendations to include specific milestones for the commencement of the development of Technical Specifications for the submission of Customer Account Information and for the publication of iterative drafts of such Technical Specifications are reasonable, and is therefore amending the Plan accordingly.1669 Although not specifically recommended in the Participant’s response, the Commission is also amending the Plan to clarify that the milestones for the submission of information to identify a Customer apply to Customer Identifying Information as well as Customer Account Information.1670 The Commission understands that the term Customer Identifying Information was inadvertently omitted from Appendix C, Section C.10(a), and therefore believes it is appropriate to amend the Plan to add this term to the milestones applicable to the development of Technical Specifications for Customer data submission.

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The Commission agrees with the Participants that the reporting of order data to the Central Repository is likely to be significantly more complex than the reporting of Customer Account Information and Customer Identifying Information to the Central Repository because of the greater number of data elements and reporting requirements for order data.1671 Therefore, the Commission believes it is reasonable for the milestones in Appendix C of the Plan to state that the Plan Processor will publish the Technical Specifications for the submission of order data prior to the publication of Technical Specifications for the submission of Customer Account Information and Customer Identifying Information to permit Industry Members to spend additional time reviewing the order data Technical Specifications and testing their order data submission systems and processes.

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In response to the comments recommending that Technical Specifications for Participants and Industry Members be developed concurrently, the Commission agrees with the Participants that the completion dates associated with the development, iterative drafting, and final release of the Technical Specifications for both Participants and Industry Members set forth outer limits on when such milestones must be completed,1672 which would not preclude the concurrent development of Participant and Industry Member Technical Specifications. The Commission further agrees that such concurrent development could be beneficial since it would permit all stakeholders to be apprised of issues and to offer solutions simultaneously and, accordingly, encourages the Participants and the Plan Processor to develop the Technical Specifications in this manner, if feasible. However, given that the Plan Processor, which will be primarily responsible for developing the Technical Specifications, will not be selected until after the Plan is approved, and that the Plan Processor has a variety of other responsibilities related to the development of the CAT, the Commission believes that providing the Plan Processor with flexibility regarding the mechanics of the Technical Specification development process is reasonable and is not amending the Plan to require concurrent development of Participant and Industry Member Technical Specifications. Moreover, the Commission believes that the sequencing of Technical Specification milestones in the Plan—for example, that development of Technical Specifications for Participant reporting of order data to the Central Repository should begin ten months before Participants are required to begin reporting data to the Central Repository while development of Technical Specifications for Industry Member reporting of order data to the Central Repository should begin fifteen months before Industry Members are required to begin reporting data to the Central Repository1673—reflects a reasonable prioritization in light of the phased implementation of Participant and Industry Member reporting.

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Similarly, with respect to the period of time that Industry Members will have to review and provide input on the Technical Specifications for Industry Member data reporting, the Commission notes that, because the Plan Processor may begin developing the Technical Specifications earlier than fifteen months prior to Industry Member reporting, and because the Plan Processor may seek Industry Member comment on draft Technical Specifications, there may in effect be a period of Technical Specification review that is longer than suggested by a strict interpretation of the milestones in Appendix C. Therefore, the Commission is not amending the Plan to revise these timeframes.

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However, as discussed above, the Commission expects that the Technical Specifications will be published with sufficient time for CAT Reporters to program their systems to satisfy their reporting obligations under the Plan and is amending Appendix C, Section C.10 of the Plan to ensure that the completion dates for the Technical Specification development milestones designate firm outer limits, rather than “projected” completion dates, for the completion of these milestones.1674 Therefore, the Commission is amending the Plan to provide for a minimum period of three months during which the Plan Processor and Industry Members will work together to develop the Technical Specifications.1675

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b. Impact on Industry Members

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One commenter stated that changes that SROs require of their members’ systems and processes can be costly in terms of both dollars and human capital.1676 The commenter also noted that these changes are often subject to short implementation time periods and there is a lack of opportunity for discussion of concerns about the extent to which such new requirements can potentially expose the markets and investors to unnecessary risk.1677 This commenter recommended that any new CAT requirements that will be imposed by the Participants on broker-dealers should be done through the SRO rulemaking process to afford market participants the opportunity to discuss any proposed changes with the Participants and the Commission, and to provide a sufficient lead time to implement necessary systems and coding changes.1678

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The Participants explained in their response that they do not believe, generally, that the Technical Specifications are required to be filed with the Commission under Rule 608,1679 and cautioned that requiring rule filings may introduce significant delays in the process of developing the Technical Specifications. The Participants stated that in the normal course they do not intend to file the Technical Specifications with the Commission, but noted that to the extent that a change to the Technical Specifications is significant enough to require a change to the Plan, then such an amendment to the Plan would be filed pursuant to Rule 608.1680

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As discussed above, the Commission recognizes the importance of providing sufficient opportunity for all CAT Reporters to provide input as the initial Technical Specifications are developed, and believes that the Technical Specification development process outlined in the Plan, as amended—including the iterative interactions discussed above—will provide such an opportunity.1681 The Commission believes that the completion dates for the availability of final Technical Specifications—e.g., no later than one year before Industry Members are required to report data to the Central Repository for the release of Technical Specifications governing Industry Member reporting of order data—are reasonable and provide Industry Members with sufficient lead time to adjust their systems or make other preparations necessary to comply with the Technical Specifications, particularly since drafts of the Technical Specifications will likely have been available even earlier and Industry Members will have been involved in the process of developing the Technical Specifications.1682

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The Commission recognizes that there may be costs associated with complying with technical or operational changes in reporting requirements. The Commission notes that Material Amendments to the Technical Specifications—i.e., amendments that would “require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository”—must be approved by a Supermajority Vote of the Operating Committee, so the Plan provides additional controls with respect to changes to the Technical Specifications that could potentially be costly.1683 In addition, the Advisory Committee, which includes Industry Member representation, will be able to raise Industry Member concerns regarding any unexpected or costly requirements in the Technical Specifications with the Operating Committee. Moreover, while the Commission agrees with the Participants that changes to the Technical Specifications generally will not be required to be filed with the Commission, the Participants must comply with the CAT NMS Plan as approved by the Commission,1684 which constrains the ability of the Operating Committee to approve major changes that would alter the scope of the CAT NMS Plan through Technical Specifications. In addition, the Commission will oversee the Participants’ compliance with the Plan,1685 which provides an additional protection against the Participants or Plan Processor attempting to include changes in the Technical Specifications that properly should be filed as Plan amendments.

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c. Technical Specifications Content

+

Several commenters noted that the Technical Specifications for CAT must be robust and comprehensive.1686 Some commenters recommended that specific elements be included in the Technical Specifications.1687 One commenter recommended that the Participants ensure the Technical Specifications include provisions to ensure that multiple service providers are able to connect to CAT to report CAT Data.1688 Another commenter stressed the importance of including connectivity requirements in the Technical Specifications.1689 This commenter also stated that achievement of the CAT NMS Plan’s reporting requirement would be dependent on the details in the Technical Specifications.1690 Another commenter stated that while it supports the reporting procedures identified in the CAT NMS Plan, “clearly defined technical guidelines for field specifications under different trading scenarios” are also needed.1691 A different commenter stated that the items to be included in the Technical Specifications “inappropriately constrain” the design of the CAT system to “too rigidly follow a traditional SQL database design” to the exclusion of more sophisticated analytical approaches.1692

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In response, the Participants explained that they believe that each of these items are more appropriately addressed in the Technical Specifications, and should not be incorporated as requirements of the Plan. Nevertheless, the Participants explained that they believe that each of the elements identified by the commenters will be incorporated into the Technical Specifications developed by the Plan Processor.1693

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The Commission acknowledges the importance of timely, comprehensive, and detailed Technical Specifications that will provide all CAT Reporters with effective guidance on how to report data to the Central Repository. The Commission notes that the CAT NMS Plan specifies a number of parameters for what the Technical Specifications must contain, including specifications for the layout of files and records submitted to the Central Repository and the process for file submissions.1694 The Commission believes that it may be beneficial to include the elements referenced by the commenters, such as details regarding the submission of data for the Customer definition process and options order reporting, in the Technical Specifications, but believes that it is reasonable to allow the Plan Processor, with input from Industry Members during the iterative drafting process, to have some flexibility in determining these details of the Technical Specifications. In addition, the Participants have indicated that the elements referenced by the commenters will be incorporated into the Technical Specifications, and therefore the Commission does not believe it is necessary to amend the Plan to require these elements.

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In response to the comment that the Plan’s parameters regarding the content of the Technical Specifications are too rigid and limit the ability of the Plan Processor to offer certain design solutions, the Commission believes that the parameters strike an appropriate balance between providing the Bidders flexibility to offer a variety of solutions on the one hand and including some baseline requirements for the Technical Specifications on the other, and does not believe these parameters will inappropriately constrain the solutions that the Plan Processor can develop.

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pubdate: July 06, 2015 effdate: N/A -

IV. Solicitation of Comments

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Solicitation of Comments - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan, - Submission of Comments, - Electronic Comments, - Paper Comments, - File Number 4-668, - 5 U.S.C. 552, - -

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Amendment No. 2 to the Selection Plan is consistent with the Act. Comments may be submitted by any of the following methods:

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Electronic comments:

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• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

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• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the subject line.

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Paper comments:

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• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

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All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Amendment to the Plan that are filed with the Commission, and all written communications relating to the Amendment to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between 10:00 a.m. and 3:00 p.m. Copies of the submission will also be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

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By the Commission.

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Brent J. Fields

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Secretary

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pubdate: July 07, 2015 effdate: N/A -

Exhibit A

- Topic: SEC Release, Release No. 34-75193, Joint Industry Plan; Notice of Filing of Amendment, Exhibit A - Compliance User: Self-Regulatory Organization - Keywords: - Proposed Amendments, - -

Proposed new language is italicized; proposed deletions are in [brackets].

-

PROPOSED AMENDMENT TEXT

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Additions underlined; deletions bracketed15

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Plan Processor Evaluation and Selection Plan

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V. Selection Committee

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***

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(B) Voting

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***

-

(3) No Bidding Participant shall vote in any [the second] round set forth [in Section VI(E)(4)] below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a part of such [the second] round.

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***

-

VI. RFP Bid Evaluation and Plan Processor Selection

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***

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(E) Selection of Plan Processor Under the CAT NMS Plan

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***

-

(2) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in any [the second] round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such [the second] round. [Until the second round, Bidding Participants may vote for any Shortlisted Bid.]

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(3) First Round Voting by the Selection Committee

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(a) In the first round of voting, each Voting Senior Officer, subject to the recusal provisions in Paragraph (E)(2) above, shall select a first and second choice from among the Shortlisted Bids.

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***

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-
fn -

1 15 U.S.C. 78k-1.

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-
fn -

2 17 CFR 242.608.

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-
fn -

3 See Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (Notice of Selection Plan).

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-
fn -

4 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012) (Rule 613 Adopting Release).

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-
fn -

5 See Notice of Selection Plan, supra note 3.

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-
fn -

6 See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (Selection Plan Approval Order). On December 12, 2014, the SROs filed a proposed amendment to the Selection Plan, which was published for notice and comment in the Federal Register on February 11, 2015, to allow the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan, and to narrow the list of Shortlisted Bidders prior to Commission approval of the CAT NMS Plan (“Amendment No. 1”). See Securities Exchange Act Release No. 74223 (Feb. 6, 2015), 80 FR 7654 (Feb. 11, 2015) (Notice of Amendment No. 1 to the Selection Plan). The Commission is separately issuing an approval order for Amendment No. 1 concurrently with this Notice. See Securities Exchange Act Release No. 75192 (June 17, 2015).

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-
fn -

7 The Selection Plan defines “Bidding Participant” as a Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Notice of Selection Plan, supra note 3, Exhibit A at 2. The Selection Plan defines “Participant” as a party to the Selection Plan (i.e., an SRO). See id., Exhibit A at 3.

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-
fn -

8 See 17 CFR 242.608(a)(4) and (a)(5).

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-
fn -

9 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated March 4, 2015.

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-
fn -

10 See Notice of Selection Plan, supra note 3.

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-
fn -

11 See Selection Plan Approval Order, supra note 6.

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-
fn -

12 The Participants also have filed a proposed amendment to the Selection Plan (Amendment No. 1) that would allow the Participants to accept revised Bids prior to the Commission’s approval of the CAT NMS Plan, and to narrow the list of Shortlisted Bidders prior to the Commission’s approval of the CAT NMS Plan. See Notice of Amendment No. 1 to the Selection Plan, supra note 6. Amendment No. 1 also requires recusal of a Bidding Participant from voting in the narrowing process if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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fn -

13 See Selection Plan Approval Order, supra note 6 at 11157.

+
pubdate: November 15, 2016 effdate: N/A +

E. Capital Accounts, Allocations of Income and Loss, and Distributions (Articles VII and VIII)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Capital Accounts, Allocations of Income and Loss, and Distributions (Articles VII and VIII) + Compliance User: Self-Regulatory Organization + Keywords: + Capital Accounts, + Allocations of Income, + Section 501(c)(6) of the Internal Revenue Code, + Funding of the Company, + +

As filed, the CAT NMS Plan provides that the Operating Committee must approve by Supermajority Vote a distribution of cash and property of the Company to the Participants.1695 To the extent a distribution is made, all Participants must participate equally in any such distribution, except as otherwise provided in the CAT NMS Plan.1696 The CAT NMS Plan, as filed, also includes provisions relating to each Participant’s Capital Account, and how net profits and net losses (and any other item allocable to the Participants) shall be allocated to the Participants.1697

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Three commenters raised concerns about the CAT NMS Plan’s proposed allocations of profit and loss, particularly concerning the ability of the Participants to profit from CAT.1698 Two commenters argued that the CAT NMS Plan should be amended to state that any profits arising out of the CAT may not be used to fund the Participants’ other operations.1699 One of the commenters also stated that the CAT should operate at-cost1700 and that funding related to the CAT should not create a surplus for the Participants.1701

+

Another commenter noted that the proposed funding model would allocate net profits or net losses only to Participants, even though both Participants and broker-dealers would be funding the Central Repository.1702 The commenter deemed this inequitable and suggested that any profits should be distributed back to all entities that fund the CAT, not just the Participants.1703 This commenter believed that the CAT should function as a non-profit industry utility, distributing profits to all entities funding the CAT and raising fees if there are any losses.1704

+

In response, the Participants stated that the Company is expected to be operated on a “break-even” basis, with fees imposed to cover costs and an appropriate reserve, and explained that any surpluses would be treated as an operational reserve to offset future fees and would not be distributed to the Participants as profits.1705 In addition, the Participants stated that they received advice from counsel to CAT NMS, LLC that the Company could qualify for tax exempt status as a “business league” under Section 501(c)(6) of the Internal Revenue Code and decided to have the Company apply for such status to allow it to establish reserves from the fees paid to the Company without incurring income taxes on those amounts.1706 Accordingly, to ensure that the Company can qualify for the business league exemption, the Participants proposed that the Commission amend the Plan so that the Company is treated as a corporation for U.S. tax purposes, that distributions, if any, are made consistent with the purposes of Section 501(c)(6) of the Internal Revenue Code, and that certain other Plan provisions related to distributions to the Participants or to the taxation of the Company as a partnership for U.S. tax purposes be eliminated.1707 In particular, the Participants suggested that the Commission amend the Plan to delete in its entirety Article VII, which pertains to Capital Accounts maintained by the Company for each Participant, and to replace Article VIII, which pertains to allocations of income and loss and distributions, with a provision stating that the Company intends to operate in a manner such that it qualifies as a business league within the meaning of ">Section 501(c)(6) of the Internal Revenue Code, and requiring the Operating Committee to submit an application to the Internal Revenue Service to attain such status for the Company.1708

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The Commission believes that the Participants’ stated intent to operate the CAT on a break-even basis is appropriate. Inasmuch as the CAT is a regulatory tool mandated under Rule 613, it should not be used to fund the SROs’ other operations. To ensure the CAT is operated in this manner, the Commission is amending Section 11.1(c) of the CAT NMS Plan to require that any surplus of the Company’s revenues over its expenses will be treated as an operational reserve to offset future fees. The Commission believes this amendment is reasonable because it formalizes the representation made by the Participants, and provides certainty that the Participants’ operation of the CAT will not contribute to the funding of their other operations. The Commission notes that, under the Exchange Act, any fees proposed to be charged by the Participants to fund the CAT must be filed as proposed rule changes pursuant to Rule 19b-4(f)(2) or filed pursuant to Rule 608(b)(3)(i)1709 with the Commission, published for public comment, and meet statutory standards with respect to reasonableness, equitable allocation, and other matters.1710

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The Commission believes that it is reasonable to amend the Plan as filed by the Participants to treat CAT NMS, LLC as a tax exempt business league under Section 501(c)(6) of the Internal Revenue Code.1711 The Commission believes that allowing the Company to establish reserves from the fees paid to the Company without incurring income taxes on those reserves would be more efficient and could potentially make more funding available to pay for the development and operation of the CAT or reduce fees. Further, the Commission believes that that the Company’s application for Section 501(c)(6) business league status addresses issues raised by commenters about the Plan’s proposed allocations of profit and loss by mitigating concerns that the Company’s earnings could be used to benefit individual Participants.1712 Accordingly, the Commission is amending the Plan as filed by the Participants to delete in its entirety Article VII, which pertains to Capital Accounts maintained by the Company for each Participant, and to replace Article VIII, which pertains to allocations of income and loss and distributions, with a provision stating that the Company intends to operate in a manner such that it qualifies as a business league and that the Operating Committee will apply to attain such status for the Company. The Commission is also amending the Plan to make the conforming amendments to Articles I–III, IX, X, and XII and Appendix C as suggested by the Participants.1713

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+
pubdate: November 15, 2016 effdate: N/A +

F. Funding of the Company (Article XI)

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI) + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Execution Venues, + NMS Stock, + Funding Model, + SRO, + +

The CAT NMS Plan contemplates a bifurcated funding model, where costs associated with building and operating the Central Repository would be borne by (1) Participants and Industry Members that are “Execution Venues”1714 through fixed tier fees, and (2) Industry Members (other than ATSs), through fixed tier fees based on message traffic.1715 With respect to Execution Venues, the Operating Committee will establish at least two, and no more than five, tiers of fixed fees based on the Execution Venue’s NMS Stock and OTC Equity Securities market share, as calculated by share volume.1716 Execution Venues that execute transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of such Execution Venue, with the Operating Committee establishing at least two, and no more than five, tiers of fixed fees based on an Execution Venue’s Listed Options market share, as calculated by contract volume.1717 With respect to Industry Members, the Plan provides that the Operating Committee will establish fixed fees to be payable by Industry Members based on the message traffic generated by such Industry Member. In addition to the message traffic fees for the non-ATS activities of Industry Members, the Plan provides that message traffic fees will be assessed on message traffic generated by: (i) an ATS that does not execute orders and that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member. The Operating Committee will establish at least five, and no more than nine, tiers of fixed fees based on message traffic.1718

+
pubdate: November 15, 2016 effdate: N/A +

1. Funding Model Generally

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI), Funding Model Generally + Compliance User: Self-Regulatory Organization + Keywords: + Industry Members, + Participants, + CAT, + CAT NMS plan, + Sec Rule 613, + SRO, + +

Several commenters argued that the proposed funding model unfairly or inappropriately allocates costs to Industry Members and away from Participants.1719 One commenter believed

+

that the Commission should consider whether Industry Members should fund the costs of CAT at all.1720

+

Some commenters stated that requiring the creation and maintenance of a Participant-owned and -operated system like CAT to be partially funded by Industry Members would be a significant departure from the funding models currently used for existing regulatory systems.1721 One of these commenters believed that the Participants should justify the need for Industry Members to fund the creation and ongoing costs of the CAT.1722 The commenter opposed any Participant-imposed fee for the CAT,1723 and stated that the CAT NMS Plan does not distinguish between the costs of the CAT that are associated with Industry Member data reporting and costs associated with the Participants’ regulatory uses.1724 This commenter further stated that the funding authority of the CAT should extend only to expenses directly related to the reasonable implementation and operating costs of the CAT system, such as costs related to the management of the business of the CAT, and the direct costs of building and maintaining of the Central Repository.1725 The commenter specifically opposed the Participants’ proposal to recover the costs of the creation or development of the CAT NMS Plan, such as legal and consulting costs, and expressed the view that these costs are solely the responsibility of the Participants as part of their regulatory cost of doing business.1726 Further, this commenter suggested that the governance structure include an audit committee to assure that the CAT’s revenue is used for regulatory purposes.1727

+

Finally, two commenters believed that, to the extent the CAT generates cost savings for the Participants, that cost savings should be used first to fund the CAT before fees are imposed on Industry Members.1728

+

In response, the Participants stated that Rule 613 specifically contemplated the allocation of the costs of the creation, implementation and maintenance of the CAT among both the Participants and their members, and that the Adopting Release for Rule 613 discussed and permitted the recovery of such costs by Participants from their members.1729 Additionally, with respect to the comments that objected to Participants using fees under the Plan to recover development costs of the Plan, and in particular legal and consulting costs, the Participants explained that Rule 613 permitted the Participants to propose to recover such costs.1730 The Participants stated their belief that it is equitable that the Industry Members as well as Participants contribute to the funding of the CAT, including the development of the Plan governing the CAT,1731 because both benefit from the enhanced market oversight afforded regulators by the CAT,1732 and noted that adopting CAT-specific fees would provide greater transparency for market participants than a general regulatory fee.1733

+

In response to the commenters that suggested that the CAT be funded, at least in part, by cost savings,1734 the Participants acknowledged that cost savings from retiring existing systems will partially offset their expenses associated with the CAT, but declined to make any specific funding commitments.1735

+

The Participants, as SROs, have traditionally recovered their regulatory costs through the collection of fees from their members, and such fees are specifically contemplated by the Exchange Act.1736 The Participants currently collect certain regulatory and other fees, dues and assessments from their members to fund their SRO responsibilities in market and member regulation; such fees must be consistent with applicable statutory standards under the Exchange Act, including being reasonable, equitably allocated1737 and not unfairly discriminatory.1738

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The Commission believes that the proposed funding model reflects a reasonable exercise of the Participants’ funding authority to recover the Participants’ costs related to the CAT. The CAT is a regulatory facility jointly owned by the Participants and, as noted above, the Exchange Act specifically permits the Participants to charge members fees to fund their self-regulatory obligations. The Commission further believes that the proposed funding model is designed to impose fees reasonably related to the Participants’ self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services. The Commission emphasizes that the CAT NMS Plan does not set forth, and the Commission is not hereby approving, the specific fees to be charged by the Participants; rather, such fee proposals later will be separately filed with the Commission by the Participants, published for public comment, and assessed by the Commission for consistency with applicable Exchange Act standards, including whether they are reasonable and equitably allocated,1739 and not unfairly discriminatory.1740

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+
pubdate: November 15, 2016 effdate: N/A +

2. Funding Model’s Allocation of Costs

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI), Funding Model’s Allocation of Costs + Compliance User: Self-Regulatory Organization + Keywords: + Industry Members, + Participants, + CAT, + CAT NMS plan, + FINRA, + +

Several commenters expressed concern about the proposed allocation of CAT costs between the Participants and Industry Members.1741 Some expressed concern that the majority of the costs of the CAT would be allocated to Industry Members, with some estimating that Industry Members would pay approximately 88% of the ongoing annual costs of the CAT.1742 One commenter stated that the funding model is “excessively and unjustifiably weighted to broker-dealers,”1743 and requested to review proposed CAT fees to ensure they are reasonable and equitable.1744 Another commenter expressed concern that the costs and funding of CAT might not be allocated equitably among Industry Members and Participants, given that the Participants are sole voting members of the Plan.1745

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More generally, two commenters believed that the CAT NMS Plan’s funding model lacks sufficiently detailed information.1746 One of the commenters stated that the Plan’s funding model does not adequately represent the industry feedback that the group provided to the Participants, and noted that the CAT NMS Plan lacks an analysis of how a CAT fee would fit into the existing funding model for regulation, including whether FINRA trading activity fees would be reduced after OATS is retired.1747 Another commenter stated that the information made publicly available in the CAT NMS Plan is insufficient for it to provide meaningful analysis on the funding model.1748

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The Participants disputed the estimate quoted by several commenters that Industry Members would bear 88% of the costs of the CAT, stating that this calculation referred to Industry Member compliance costs, and does not directly reflect CAT fees to be imposed pursuant to the Plan.1749

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In response to the commenter that asked whether existing regulatory fees would be reduced once the CAT is implemented,1750 the Participants stated that each SRO will consider potential revisions to its existing regulatory fees once the CAT begins operation and legacy systems are retired.1751 The Participants also disagreed with the commenters that expressed concern that the funding model does not adequately reflect industry input,1752 and stressed that the funding model was discussed with the DAG many times and that the funding model was developed taking into account their input.1753

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The Commission believes that the proposed funding model is reasonably designed to allocate the costs of the CAT between the Participants and Industry Members. The Commission notes that the proposed funding model set forth in the Plan does not specify that the Participants or Industry Members would bear any particular percentage allocation of the costs associated with building and operating the Central Repository. As noted above, the Participants are permitted to recoup their regulatory costs under the Exchange Act through the collection of fees from their members, as long as such fees are reasonable, equitably allocated1754 and not unfairly discriminatory, and otherwise are consistent with Exchange Act standards.1755 The Commission will have the opportunity, at a later date, to review, and Industry Members and other interested persons will have the opportunity to comment upon, the specific fees the Participants intend to impose pursuant to the general funding model discussed herein.1756

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pubdate: November 15, 2016 effdate: N/A +

3. Message Traffic and Market Share Distinction

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI), Message Traffic and Market Share Distinction + Compliance User: Self-Regulatory Organization + Keywords: + Exchange-Traded Products, + Industry Members, + CAT NMS plan, + Participants, + Execution Venues, + ATS,, + +

Two commenters addressed the proposed allocation of costs between Execution Venues and Industry Members based on market share and message traffic, respectively.1757 One of the commenters questioned the allocation of costs to Industry Members by message-traffic tiers, noting that market makers in exchange-traded products (“ETPs”) could incur much greater allocated costs than market makers in corporate stocks, given that market makers in ETPs may generate ten times the amount of message traffic per executed trade as market makers in corporate stocks.1758 The commenter also noted that Industry Members that primarily take liquidity do not generate significant quote-message traffic, so that “any mechanism that allocates costs to broker-dealers strictly based on message traffic would unfortunately disadvantage broker-dealers that typically provide liquidity compared to those that may only take liquidity,”1759 thereby discouraging the display of quotes. The commenter expressed concern that the Plan does not explain how much the Participants would charge per message or per market share percentage, or how they would assign the fixed-fee tiers to exchanges and Industry Members.1760

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This commenter also noted that the CAT NMS Plan does not distinguish between costs of the CAT that are related to Industry Member data collection and processing, and costs of the CAT related to SRO surveillance and research, and expressed the view that allocating CAT costs simply based on message traffic or market share would make Industry Members subsidize Participant surveillance systems and other regulatory functions that currently are funded by the Participants through other regulatory fees imposed on Industry Members.1761 Finally, this commenter stated that the CAT NMS Plan does not explain why the SROs propose to allocate costs by message-traffic tiers for non-ATS Industry Members and by market share for exchanges and ATSs, and expressed concern that the market share approach applicable to exchanges and ATSs is primarily driven by their ability to pay, as opposed to the actual costs they impose on the Central Repository.1762

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Another commenter expressed the view that the proposed allocation of fees among Participants, other types of Execution Venues and Industry Members is not fair,1763 and that assessing fees based on message traffic and market share is not appropriate or reasonable.1764 This commenter stated that charging for message traffic would amount to a “financial transaction tax” that would negatively impact the financial markets, and recommended that charges instead be based on “quarantine or red-flag of suspicious trade messages.”1765

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In response, the Participants explained that “[i]n designing a funding model, the Participants have sought to ensure an equitable allocation of fees such that large broker-dealers or broker-dealer complexes and large Participants or Participant complexes pay more than small broker-dealers and small exchanges.”1766 The Participants believe that there is a strong correlation between message traffic and the size of an Industry Member, and that Industry Members increase their message traffic volume as they grow.1767 The Participants stated that message traffic is a key component of the costs of operating the CAT, so they believe that message traffic is an appropriate criterion for placing Industry Members in a certain fee tier.1768 The Participants also expressed the view that the correlation between message traffic and size does not apply to Execution Venues, which they describe as producing similar amounts of message traffic regardless of size. They explained that charging Execution Venues based on message traffic would make large and small Execution Venues pay comparable fees, which they believe would be an inequitable result,1769 so the Participants decided to treat Execution Venues differently from Industry Members in the funding model.1770 The Participants estimated that the result of the funding model would be that fees for the smallest Execution Venues would be comparable to the largest Industry Members, and that aggregate fees for Participant complexes1771 would be at least comparable to those of large Industry Members.1772

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In response to the commenter that stated that the funding model should distinguish between the costs of Industry Member data collection and processing and the costs related to SRO surveillance and research,1773 and to the commenter that recommended that fees be based on suspicious trade messages,1774 the Participants noted that the Bidders cited data ingestion and processing as the primary driver of CAT costs and thus believe that data collection and processing requirements are a reasonable basis for allocating costs to CAT Reporters.1775 As to concerns that a fee based on message traffic would discourage the display of quotes,1776 the Participants explained that “one of the reasons for proposing a tiered, fixed fee funding model was to limit the disincentives to providing liquidity to the market,” as might be the case with a strictly variable funding model.1777

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The Commission expressed concern in the Notice that the structure of the funding model could provide a competitive advantage to exchanges over ATSs.1778 Under the proposed funding model, for an execution occurring on an exchange, the exchange would pay an Execution Venue fee based on its market share to the CAT. For an execution that occurs on an ATS, the Industry Member operating the ATS would pay an Execution Venue fee based on its market share1779 and the national securities association also would pay an Execution Venue fee based on its market share when the ATS trade is reported to it.1780 In the Notice, the Commission expressed concern that, under the Plan, ATS volume would effectively be charged once to the Industry Member operating the ATS and a second time to FINRA, which would result in ATS volumes contributing twice as much to CAT funding as exchange volumes. The Commission further inquired whether the funding model would disadvantage ATSs relative to registered exchanges, and whether trading volume could migrate to exchanges in response.1781

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To address this concern, the Participants recommended modifying the proposed funding model to exclude from the charges applicable to a national securities association any market share attributable to transactions reported to it by an ATS.1782

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The Commission finds reasonable the suggested modification to the funding model by the Participants and, accordingly, is amending Section 11.3(a)(i) of the CAT NMS Plan so that the share volume of trades in NMS Stocks or OTC Equity Securities reported by an ATS to a national securities association shall not be included in the calculation of the national securities association’s market share for purposes of determining its Execution Venue fee. The Commission believes this amendment helps to mitigate concerns that this aspect of the proposed funding model, by effectively double-counting ATS transactions, would result in an inequitable allocation of fees, unfair discrimination and an unnecessary burden on competition.

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With this change, the Commission believes that the funding model set forth in the CAT NMS Plan is reasonable. The Participants have offered a credible justification for using different criteria to charge Execution Venues (market share) and Industry Members (message traffic). The Participants also have offered a reasonable basis for establishing a funding model based on broad tiers, in that it may be easier to implement and less likely to have an incremental deterrent effect on liquidity provision.1783

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In response to concerns that the funding model could make Industry Members subsidize Participant surveillance systems and functions that currently are funded through regulatory fees on Industry Members,1784 the Commission reiterates that the Exchange Act permits the Participants to assess fees among their members to recoup their regulatory costs, as long as such fees meet the applicable Exchange Act standards, including that they be reasonable and equitably allocated,1785 and are not unfairly discriminatory.1786 When such fee proposals are filed with the Commission, they will be published for public comment,1787 and the Commission will have the opportunity to assess the fees.

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pubdate: November 15, 2016 effdate: N/A +

4. Transparency and Alternatives to the Funding Model

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI), Transparency and Alternatives to the Funding Model + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Operating Committe, + CAT Reporters, + Participants, + CAT LLC, + Rule 613, + +

Five commenters advocated for greater transparency into CAT funding.1788 One commenter recommended that the CAT’s costs and financing be completely transparent and that the CAT should have “publicly disclosed annual reports, audited financial statements, and executive compensation disclosure.”1789 The commenter also recommended that the Participants engage an independent third party to design the funding model, determine any CAT fees to be charged by Participants,1790 and audit their regulatory revenues and the allocation thereof. It also believed that the Commission should publish the results of the audit.1791 Another commenter similarly recommended that the Commission require the Participants to engage an independent third party to review and make recommendations for a transparent and equitable funding model.1792 Another commenter urged transparency in the process of calculating any fees assessed on Participants to make sure they are related to the costs to build, operate, and administer the CAT.1793 One commenter suggested a greater role in CAT NMS Plan governance for Industry Members and institutional investors to help ensure that the costs and funding of CAT are allocated equitably among Industry Members and SROs.1794

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Two commenters offered alternative funding models.1795 One commenter suggested that CAT fees be set by an independent advisory committee, rather than by the Operating Committee.1796 The other commenter recommended a centralized funding mechanism for the CAT, with the Participants collectively charging Industry Members a single CAT fee instead of each creating their own independent fees, believing it to be the most efficient and consistent way to collect CAT fees.1797 The commenter also suggested that, before the Participants impose any CAT fees on Industry Members, they should provide a public accounting of their current revenues and how that money is spent.1798

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Four commenters recommended imposing certain specific fees to fund the CAT.1799 Three of the commenters suggested that the Participants and the Commission pay a user fee for the CAT, since they are direct beneficiaries of the system.1800 Another commenter suggested that the costs of building and maintaining the CAT should be borne by CAT Reporters through a filing or technology fee,1801 and recommended charging CAT Reporters with high cancellation rates and those that add “noise” to the CAT system a special usage fee.1802

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In response, the Participants stated that they did not believe that an independent third party should be hired to evaluate CAT fees, noting that all CAT fees would be filed with the Commission pursuant to the Exchange Act, so that Industry Members and other interested persons would have an opportunity to comment, and the Commission would evaluate whether they are consistent with the statutory standards.1803 The Participants also noted that the funding model is intended to operate the CAT on a break-even basis, without creating profits for individual Participants.1804 In addition, the Participants stressed that they are prohibited from using regulatory fees for commercial purposes.1805 The Participants concluded that employing an independent third party would be unnecessary in light of these provisions.1806

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In response to the commenter that recommended a centralized funding mechanism,1807 the Participants indicated that they intend for fees to be billed and collected centrally through the CAT LLC, so that each Industry Member will receive one invoice instead of separate invoices from each Participant.1808 In response to the suggestion that the Participants charge a regulatory usage fee, the Participants noted that the CAT NMS Plan authorizes the imposition of such a fee, and stated that they plan to evaluate the implementation of usage fees within a year after the Participants begin using the CAT.1809

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The Commission believes that the funding model proposed by the Participants, as amended by the Commission, is consistent with Rule 613(a)(1)(vii)(D) and is reasonable. Rule 613(a)(1)(vii)(D) requires the Participants to discuss in the CAT NMS Plan how they propose to fund the creation, implementation and maintenance of the CAT, including the proposed allocation of estimated costs among the Participants, and between the Participants and Industry Members.1810 In the CAT NMS Plan, the Participants set forth a funding model that establishes a framework for the allocation of CAT costs across Participants and Industry Members. At this time, the Commission believes that the Exchange Act rule filing process, described above, will

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provide sufficient transparency into the fees charged by the Participants that are associated with CAT.1811

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With respect to the suggested imposition of a regulatory user fee,1812 a fee for high cancellation rates and “noise,”1813 or a specific technology fee, 1814 the Commission notes that nothing in the Plan prohibits such fees from being charged and, if the Participants determine such fees to be appropriate, they may file a proposed rule change that would be subject to public comment and Commission review.1815

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pubdate: November 15, 2016 effdate: N/A +

5. Miscellaneous

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Funding of the Company (Article XI), Miscellaneous + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Operating Committee, + +

The Commission notes that it is amending Section 11.1(d) of the CAT NMS Plan, which currently states that the Operating Committee shall adopt policies, procedures, and practices regarding, among other matters, the assignment of fee tiers, and that, as part of its regular review of fees for the CAT, the Operating Committee shall have the right to change the tier assigned to any particular Person in accordance with Article XI, and such changes will be effective upon reasonable notice to such Person. The Commission is amending this section to provide that the Operating Committee shall have the right to change the tier assigned to any particular Person in accordance with fee schedules previously filed with the Commission by the Operating Committee that are reasonable, equitable and not unfairly discriminatory and subject to notice and comment. The Commission believes this amendment to Section 11.1(d) is appropriate because it limits the discretion of the Operating Committee to change the tier assigned to a particular Person to objective standards previously filed with the Commission that are consistent with Exchange Act standards, and provides notice of any changes to the objective standards and the opportunity for public comment.

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pubdate: November 15, 2016 effdate: N/A +

G. Dispute Resolution

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Dispute Resolution + Compliance User: Self-Regulatory Organization + Keywords: + Participation Fee, + Articles III and XI, + Exchange Act - Section 11A, + CAT, + +

As noted above, the Plan does not include a general provision addressing the method by which disputes arising in connection with the operation of the Plan will be resolved.1816 The Plan does, however, provide the means for resolving disputes regarding the Participation Fee in Articles III and XI of the Plan.1817 The Commission did not receive any comments regarding these general dispute resolution provisions. However, the Commission is amending Article III to make it consistent with Article XI.

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Specifically, Article III, Section 3.3(b) of the Plan states that, in the event that the Company and a prospective Participant do not agree on the amount of the Participation Fee, such amount will be subject to the review by the Commission. The Plan currently cites to Section 11A(b)(5) of the Exchange Act1818 as the authority by which the Commission can review such disputes. However, Section 11A(b)(5) of the Exchange Act is not the appropriate authority for Commission review under these circumstances because the CAT is not a “registered securities information processor.” Accordingly, the Commission is making a technical amendment to the Plan (consistent with Article XI, Section 11.5) to provide that in the event that the Company and a prospective Participant do not agree on the amount of the Participation Fee, such amount will be subject to review by the Commission pursuant to SEC Rule 6081819 or in any other appropriate forum.

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pubdate: November 15, 2016 effdate: N/A +

H. Written Assessments, Audits and Reports

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Discussion and Commission Findings, Written Assessments, Audits and Reports + Compliance User: Self-Regulatory Organization + Keywords: + Rule 613, + CAT, + Plan Processor, + Participants, + CAT Reporters, + Reports, + CAT Data, + Material Systems Change, + Maximum Error Rate, + +

Section 6.6 of the Plan as filed, pursuant to Rule 613(b)(6), requires the Participants to provide the Commission with a written assessment of the operation of the CAT at least every two years or more frequently in connection with any review of the Plan Processor’s performance.1820 The Plan requires that such written assessment include, at a minimum: (i) an evaluation of the Plan Processor’s performance; (ii) a detailed plan for any potential improvements to its performance; (iii) an estimate of the costs associated with any such potential improvements; and (iv) an estimated implementation timeline for any such potential improvements.1821

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The Commission believes that it is important that the CAT keep pace with technological developments and changes to industry business practices, which can occur very rapidly. As such, the Commission believes that assessments more frequent than biannually of the CAT’s standards and processes could ensure that the Plan Processor and the Participants remain current in their knowledge of technological and business developments and facilitate enhancements to the CAT as appropriate. The Commission believes that the preparation of reports and assessments on an annual basis, rather than a biannual basis, will help ensure that CAT technology and operations continue to provide timely, accurate, complete and accessible data, and that it is collected in a cost-effective manner. Accordingly, the Commission is amending Section 6.6 of the Plan to change the frequency of the assessment contemplated by Rule 613(b)(6) from biannual to annual.

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The Commission is also amending Section 6.6 of the Plan to provide further detail regarding elements of the written assessment to be conducted by the Participants. Specifically, as amended, the Participants’ annual written assessment must also include: (1) an evaluation of the information security program of the CAT to ensure that the program is consistent with the highest industry standards for protection of data;1822 (2) an evaluation of potential technological upgrades based upon a review of technological developments over the preceding year, drawing on necessary technological expertise, whether internal or external;1823 (3) an assessment of efforts to reduce the time to restore and recover CAT Data at a back-up site;1824 (4) an assessment of how the Plan Processor and SROs are monitoring Error Rates and addresses the application of Error Rates based on product, data element or other criteria; 1825 (5) a copy of the evaluation required by Section 6.8(c) of the Plan as to whether industry standards have evolved such that: (i) the clock synchronization standard in Section 6.8(a) should be shortened; or (ii) the required timestamp in Section 6.8(b) should be in finer increments; and (6) an assessment of whether any data elements should be added, deleted or changed.1826 The Commission believes that requiring these specific issues to be addressed in the Participants’ annual assessment will focus the Plan Processor and Participants on critical technological and other developments, and should help ensure that CAT technology is up-to-date, resilient and secure, and provides accurate CAT Data.

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Section 6.6 of the Plan as filed also requires the Participants to provide an estimate of the costs associated with any potential improvements to the performance of the CAT, including an assessment of the potential impact on competition, efficiency and capital formation. The Commission believes, however, that it is important that the Participants consider not just the costs but also the potential benefits associated with any improvements to the performance of the CAT, including the impact on investor protection. Accordingly, the Commission is also amending Section 6.6 of the Plan to require the annual assessment to consider the benefits of potential improvements to the CAT, including to investor protection.

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The Commission is further amending Section 6.6 of the Plan to require that the Participants provide the Commission with certain written reports on a one-time basis. First, the Participants must provide the Commission, and make public, at least one month prior to submitting any rule filing to establish initial fees for CAT Reporters, an independent audit of the fees, costs, and expenses incurred by the Participants on behalf of the Company prior to the Effective Date of the Plan.1827 The Commission notes that any such filing will be published for public notice and comment. As the Commission understands that the Participants intend to recover through CAT fees the amounts spent on the development of the CAT to date, to facilitate public comment and Commission review of such fee filings,1828 the Commission believes it is appropriate for the Participants to obtain an audit of the fees, costs and expenses incurred by the Participants on behalf of the Company prior to the Effective Date.

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Second, the Commission is amending the Plan to require the Participants to provide the Commission with a written assessment of the clock synchronization standards in the Plan1829 within six months of effectiveness of the Plan. As noted above, the Commission believes that the Participants should consider the type of CAT Reporter, the type of Industry Member, and type of system when determining industry standards, and is amending the Plan to clarify this more granular approach. The Commission believes the Participants should consider the Plan’s clock synchronization standards in light of this clarification promptly, and propose any appropriate amendments, and that a six-month timeframe to do so is reasonable.

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Third, the Commission is amending the Plan to require the Participants to provide the Commission with a written report that discusses the Participants’ assessment of implementing coordinated surveillance, whether through 17d-2 agreements, RSAs, or some other approach, within 12 months of effectiveness of the Plan.1830 The Commission notes that the CAT is designed to facilitate the ability of regulators to conduct cross-market surveillances and to review conduct that occurs across the market. As a result, the Commission believes that it may be efficient for the Participants to coordinate to conduct cross-market surveillances.

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Fourth, the Commission is amending the Plan to require the Participants to submit to the Commission a written report, within 24 months of effectiveness of the Plan, discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data that it has submitted to the Central Repository.1831 Commenters expressed a desire to have bulk access to their own data for surveillance and internal compliance purposes, as well as to facilitate the error correction process. While, the Participants did not permit such access in the Plan, citing security and cost concerns, they did represent that they would consider allowing bulk access to the audit trail data reported by Industry Members once CAT is operational. The Commission believes it is important to consider the potential efficiencies of allowing Industry Members bulk access to their own CAT data, so long as such access does not impact the security of the CAT Data, and accordingly believes that requiring a report discussing this issue by the date Industry Members first begin reporting to the CAT, is appropriate.

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Fifth, the Commission is amending the Plan to require the Participants to provide the Commission with a written assessment, within 36 months of effectiveness of the Plan, of the nature and extent of errors in the Customer information submitted to the Central Repository and whether the correction of certain data fields over others should be prioritized.1832 The Commission believes that requiring such an assessment, which will coincide with the date all Industry Members are reporting to the CAT, could help ensure that the accuracy of CAT Data is achieved in the most prompt and efficient manner.

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Sixth, the Commission is amending the Plan to require the Participants to provide the Commission with a written report, 36 months after effectiveness of the Plan, on the impact of tiered fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity.1833 One commenter expressed concern that use of a tiered fee structure could discourage displayed quotes and, in response, the Participants explained that one of the reasons they chose to use a tiered-fee funding model was to limit disincentives to provide liquidity. To help determine whether the Plan’s funding model actually achieves the Participants’ stated objective, the Commission believes it appropriate to require them to prepare such an assessment of the impact of tiered fees once the CAT becomes fully operational.

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Finally, the Commission is amending the Plan to require the Participants to provide the Commission a written assessment of the projected impact of any Material Systems Change on the Maximum Error Rate, prior to the implementation of any Material Systems Change.1834 The Commission believes that Material Systems Changes either could result in new challenges for CAT Reporters or simplify the means for reporting data. In either case, the appropriateness of the Maximum Error Rate could be impacted, and thus warrant a change. Accordingly, the Commission believes it appropriate to require the Participants to provide the Commission an assessment of the projected impact on the Maximum Error Rate, including any recommended changes thereto, prior to the implementation of any Material Systems Change.

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pubdate: November 15, 2016 effdate: N/A +

V. Economic Analysis

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis + Compliance User: Self-Regulatory Organization + Keywords: + Economic Analysis, + +
pubdate: November 15, 2016 effdate: N/A +

A. Introduction

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Introduction + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Economic Effects, + +

The Commission is sensitive to the economic effects of the CAT NMS Plan,1835 including its costs and benefits and its impact on efficiency, competition and capital formation. In accordance with the approach articulated by the Commission in the Adopting Release, the Commission published its preliminary economic analysis of the CAT NMS Plan in the Notice, and solicited comment on its analysis and on all aspects of the proposed Plan. The Commission has considered the comments received, along with the Participants’ responses, and has modified certain aspects of the Plan, as discussed above.

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This Section reflects the Commission’s analysis and conclusions regarding the economic effects of the creation, implementation and maintenance of the CAT pursuant to the details in the CAT NMS Plan, as amended and hereby approved by the Commission. The analysis is divided into seven topics: (1) a summary of the expected economic effects of approving the CAT NMS Plan; (2) a description of the economic framework for analyzing the economic effects of approving the CAT NMS Plan; (3) a discussion of the current, or “Baseline,” audit trail data available to regulators, and the sources of such data; (4) a discussion of the potential benefits of approving the CAT NMS Plan; (5) a discussion of the potential costs of approving the CAT NMS Plan; (6) a discussion of the CAT NMS Plan’s potential impact on efficiency, competition, and capital formation; and (7) a discussion of alternatives to various features of the CAT NMS Plan and to the CAT NMS Plan itself.

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pubdate: November 15, 2016 effdate: N/A +

B. Summary of Expected Economic Effects

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Summary of Expected Economic Effects + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + SRO, + CAT Reporters, + +

The Commission has analyzed the expected economic effects of the CAT NMS Plan in light of the existing shortcomings in the regulatory data infrastructure and the goal of improving the ability of SROs and the Commission to perform their regulatory activities to the benefit of investors and the markets.1836 In general, the Commission believes that the CAT NMS Plan will result in benefits by improving the quality of the data available to regulators in four areas that affect the ultimate effectiveness of core regulatory efforts—completeness, accuracy, accessibility and timeliness.1837 The Commission believes that the improvements in these data qualities that will be realized from approval of the CAT NMS Plan will substantially improve regulators’ ability to perform analysis and reconstruction of market events, market analysis and research to inform policy decisions, and other regulatory activities including market surveillance, examinations, investigations, and other enforcement functions. Regulators depend on data for many of these activities and the improvements in the data qualities will thus improve the efficiency and effectiveness of such regulatory activities. As explained further below, these improvements could benefit investors by giving regulators more and better regulatory tools to provide investors with a more effectively regulated trading environment,1838 which could increase capital formation, liquidity, and price efficiency. Data improvements could enhance regulators’ ability to provide investors and the public with more timely and accurate analysis and reconstruction of market events, and to develop more effective responses to such events. Improved understanding of emerging market issues resulting from enhanced market analysis and research could inform regulatory policies that improve investor protection through better market quality, more transparency, and more efficient prices. Improvements in quality and quantity of order events could lead to improvements in developing and targeting policy approaches to ensure a fair and orderly market.

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In terms of completeness, the Plan requires the reporting of certain additional data fields, events, and products.1839 More importantly, the CAT NMS Plan requires data elements useful for regulatory analysis to be available from a single data source. Having relevant data elements available from a single source will simplify and expedite regulators’ data collection process and facilitate more efficient analyses and surveillances that incorporate cross-market and cross-product data.

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With respect to the accuracy of available data, the Commission believes that the requirements in the Plan will improve data accuracy significantly. For example, the Commission expects that the requirements to store the CAT Data in a uniform linked format and the use of consistent identifiers for customers and market participants will result in fewer inaccuracies as compared to current data sources. These accuracy improvements should significantly reduce the time regulators spend processing the data and finding solutions when faced with inaccurate data. The Commission believes that the requirements in the Plan for clock synchronization and timestamp granularity will improve the accuracy of data with respect to the timing of market events. The Commission believes that the Plan will improve regulators’ ability to determine the sequence of some market events relative to all surrounding events.1840

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The Commission also believes that the Plan will increase the accessibility of data for SROs and the Commission, because regulators will be able to access the CAT Data directly.1841 This, coupled with the improvements in completeness, will vastly increase the scope of information readily available to regulators and significantly reduce the number of data requests from the several hundred thousand requests regulators make each year. The increased scope of readily available information should facilitate more data-driven regulatory policy decisions, broaden the potential surveillances, expand the opportunities for SRO and Commission analysis to help target broker-dealers and investment advisers for examinations and help to perform those examinations.

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Finally, the Commission believes that the CAT NMS Plan will improve the timeliness of available data. Because regulators will be able to access uncorrected data the day after an order event and will be able to access corrected and linked data five days after an order event,1842 many data elements will be available to regulators more quickly than they are currently. Accordingly, the amount of time regulators would need to acquire and process data before running analyses would be reduced. For example, the corrected and linked data available on T+5 will identify the customer account associated with all order events, information that currently takes ten days or longer for regulators to obtain and then need to link to other data sources for use. These improvements in timeliness, combined with improvements in completeness, accessibility, and accuracy discussed above, will improve the efficiency of regulatory analysis and reconstruction of market events, as well as market analysis and research that informs policy decisions, and make market surveillance, examinations, investigations, and other enforcement functions more efficient, allowing, for example, the SROs and the Commission to review tips and complaints more effectively.

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The Commission notes that the Plan lacks information regarding the details of certain elements of the Plan likely to affect the costs and benefits associated with it, primarily because those details have not yet been determined, and this lack of information creates some uncertainty about the expected economic effects. As discussed further below, lack of specificity surrounding the processes for converting data formats and linking related order events creates uncertainty as to the anticipated improvements in accuracy because such processes have the potential to create new data inaccuracies. Lack of specificity surrounding the process for regulators to access the CAT Data also creates uncertainty around the expected improvements in accessibility. For example, while the Plan indicates that regulators would have an online targeted query tool and a tool for user-defined direct queries or bulk extraction,1843 the Plan itself does not provide an indication for how user-friendly the tools would be or the particular skill set needed to use the tools for user-defined direct queries. However, the Commission has analyzed the expected economic effects of the Plan to the extent possible with the information available, noting areas of uncertainty in its analysis where applicable. The Commission has also considered whether certain provisions related to the operation and administration of the Plan could mitigate some of the uncertainties.1844

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The Commission also believes that more effective and efficient regulation of securities markets and market participants resulting from implementation of the CAT NMS Plan could significantly benefit investors and the integrity of the market. For example, the Commission believes that more effective and efficient surveillance and enforcement should detect a higher proportion of violative market activity. This additional detection could not only reduce violative behavior through potential enforcement actions, but through deterrence if market participants believe violative activities are more likely to be detected. Because violative activity degrades market quality and imposes costs on investors and market participants, reductions in violative activity would benefit investors and market integrity. Likewise, more effective and efficient risk assessment and risk-based examinations should facilitate the selection of market participants for examination who have characteristics that elevate their risk of violating the rules. Decreasing the amount of violative activity by targeting exams in this way should provide investors with a more effectively regulated trading environment and hence better market quality. Further, access to audit trail data that is comprehensive, accurate, and timely should improve regulatory reconstruction of market events, market analysis, and research, resulting in an improved understanding of emerging market issues and regulatory policies that better encourage industry competition, thus improving investor protection through better transparency and more efficient prices.1845 Regulatory initiatives that are based on a more thorough understanding of underlying events and their causes, and that are narrowly tailored to address any market deficiency, should improve market quality and benefit investors. Access to more complete and linked audit trail data will improve regulators’ ability to analyze and reconstruct market events, allowing regulators to provide investors and the public with more accurate explanations of market events, to develop more effective responses to such events, and to use the information to assist in retrospective analyses of their rules and pilots.

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The Commission has also evaluated the potential costs that will result from the approval of the CAT NMS Plan. The Commission’s cost analysis is based on the preliminary analysis in the Notice, which analyzed information included in the Plan, information gathered from market participants through discussions, surveys of market participants, and other relevant information to estimate the potential costs associated with building and maintaining the Central Repository as well as the costs to report data to the Central Repository. The Commission has considered the comments received on its preliminary analysis, the Participants’ response to the comments, and the impact of the Commission’s modifications to the Plan and has revised its analysis and estimates accordingly.1846 Currently, the 21 Participants spend $170.3 million annually on reporting regulatory data and performing surveillance, while the approximately 1,800 broker-dealers anticipated to have CAT reporting responsibilities spend $1.6 billion annually on regulatory data reporting, for total current industry costs of $1.7 billion annually for regulatory data reporting and surveillance by SROs. Having considered the comments, the Participants’ response and the Commission’s modifications to the Plan, the Commission now estimates the cost of the Plan as approximately $2.4 billion in initial aggregate implementation costs and recurring annual costs of $1.7 billion.1847 Furthermore, the Commission acknowledges that during the period of duplicative reporting, during which CAT Reporters will report to both current regulatory data reporting systems and CAT, industry will face duplicative reporting costs that the Commission estimates at $1.7 billion per year, the cost of industry’s current data reporting.

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Commenters had numerous comments on individual estimates of costs, particularly as they related to requirements to report allocation timestamps in milliseconds, the costs of duplicative reporting, and generally about the uncertainty surrounding cost estimates. The primary driver of the annual costs is the data reporting cost for broker-dealers, which is estimated to be $1.5 billion per year. For both large and small broker-dealers, the primary driver of both the current $1.6 billion reporting costs and projected $1.5 billion CAT reporting costs is costs associated with staffing. Bidder estimates of the costs to build the Central Repository vary from $37.5 million to $65 million and annual operating costs range from $36.5 to $55 million. The eventual magnitude of Central Repository costs depends on the Participants’ selection of the Plan Processor, and may ultimately differ from estimates discussed above if Bids are revised as the bidding process progresses. Furthermore, the Plan anticipates a period of duplicative reporting responsibilities preceding the retirement of potentially duplicative regulatory data reporting systems; these duplicative reporting costs are likely to be significant.1848

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Drawing from the discussion in the CAT NMS Plan, the comments received, and the Participants’ response to the comments,1849 the Commission expects that the Plan will have a number of additional economic effects, including effects on efficiency, competition, and capital formation. The Commission believes that the Plan generally promotes competition. However, the Commission recognizes that the Plan could increase barriers to entry because of the costs to comply with the Plan. Further, the Commission’s analysis identifies several limiting factors to competition; however, Plan provisions and Commission oversight could mitigate such limiting factors. The Commission believes that the Plan will result in significant improvements in efficiency related to how regulatory data is collected and used. Specifically, the approval of the Plan will result in improved data becoming available to regulators, which will increase the efficiency of regulatory activities such as market surveillance, examinations, investigations, and other enforcement functions that could enhance market efficiency by reducing violative activity that harms market efficiency. In addition, the availability of this data should improve regulatory analysis and reconstruction of market events, as well as market analysis and research that informs policy decisions. Finally, the Commission believes that the Plan could have positive effects on capital formation and allocative efficiency and that the threat of a security breach at the Central Repository is unlikely to significantly harm capital formation. The Commission recognizes that the Plan’s likely effects on competition, efficiency and capital formation are dependent to some extent on the performance and decisions of the Plan Processor and the Operating Committee in implementing the Plan, and thus there is necessarily some uncertainty in the Commission’s analysis. Nonetheless, the Commission believes that the Plan contains certain governance provisions, as well as provisions relating to the selection and removal of the Plan Processor, that mitigate this uncertainty by promoting decision-making that could, on balance, have positive effects on competition, efficiency, and capital formation.

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As part of its economic analysis, the Commission has also considered the likely economic effects of a number of alternatives to the approaches taken in the CAT NMS Plan. The Commission has analyzed certain alternatives that could have a direct and significant impact on costs or benefits deriving from at least one of the four data qualities discussed above: accuracy, completeness, accessibility, and timeliness. This analysis includes alternatives proposed by commenters.

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pubdate: November 15, 2016 effdate: N/A +

C. Framework for Economic Analysis

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Framework for Economic Analysis + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + SRO, + +

As discussed above, the Commission has conducted an economic analysis of the CAT NMS Plan, including the modifications made by the Commission, as anticipated in the Adopting Release for Rule 613.1850 In particular, the Commission has carefully evaluated the information in the CAT NMS Plan, including the twelve considerations required by Rule 6131851 and the details of the decisions left to the discretion of the SROs. The Commission has also considered information drawn from outside the Plan, but that was included in its preliminary economic analysis in the Notice and subject to public comment,1852 in order to assess potential economic effects not addressed therein. Finally, the Commission considered comments submitted in response to its Notice. To provide context for this analysis, this Section describes the economic framework for the analysis and seeks to identify uncertainties within that framework.

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The framework for the Commission’s final economic analysis is largely the same as the framework set out in the economic analysis of the Notice,1853 though the Commission has revised its discussion of uncertainty to recognize comments.1854 This Section includes a high-level summary of those comments, which are addressed in the economic analysis to follow.

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pubdate: November 15, 2016 effdate: N/A +

1. Economic Framework

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Framework for Economic Analysis, Economic Framework + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + SRO, + Rule 613, + +

a. Benefits

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The CAT NMS Plan will create a new data source that should modernize and eventually replace the use of some disparate current data sources for many regulatory activities. As such, the economic benefits of the CAT NMS Plan will come from any expanded and more efficient regulatory activities facilitated by improvements to the data regulators use. Therefore, the framework for examining benefits in this economic analysis involves first considering whether and to what degree the CAT Data will improve on the Baseline of current trading and order data in terms of the four qualities of accuracy, completeness, accessibility, and timeliness.1855

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Through these improvements in the data, the economic analysis then considers the degree to which the Plan will result in improvements to regulatory activities such as the analysis and reconstruction of market events, in addition to market analysis and research conducted by SROs and Commission Staff, as well as market surveillance, examinations, investigations, and other enforcement functions. These potential improvements, based on the regulatory objectives of the CAT NMS Plan described in the Adopting Release,1856 relate to the overall goal of substantially enhancing the ability of the SROs and the Commission to oversee securities markets and fulfill their regulatory responsibilities under the securities laws. The economic framework explores how the improvements to these regulatory activities provide economic benefits to investors and the market. Among other things, potential benefits that could result from the CAT NMS Plan include benefits rooted in changes in the behavior of market participants. For example, requirements to report certain data elements or events to the CAT could have the beneficial effect of detecting and deterring rule violations because the inclusion of certain data fields and improvements in the ability to surveil for violations could increase the perceived costs of violating rules and regulations. Potential benefits could also stem from improved investor protection, such as from more effective surveillance and more informed, data-driven rulemaking. In addition, potential benefits could stem from future reduced costs due to more targeted, data-driven policy choices.

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(1) Data Qualities

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In assessing the potential benefits of the CAT NMS Plan, the Commission’s economic analysis compares the data that will be available under the Plan to the trading and order data currently available to regulators to determine whether and to what degree the Plan will improve the available data with respect to the four qualities of accuracy, completeness, accessibility, and timeliness. 1857

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(2) Regulatory Activities

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Any economic benefits will derive from how such improved data will affect regulatory activities. Therefore, to analyze the potential benefits of the CAT NMS Plan, the economic analysis also evaluates the potential of the CAT NMS Plan to meet the regulatory objectives set out in the Adopting Release for Rule 613. The objectives are: improvements in the analysis and reconstruction of broad-based market events; improvements in market analysis in support of regulatory decisions; and improvements in market surveillance, investigations, and other enforcement activities.1858

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A. Analysis and Reconstruction of Broad-based Market Events

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The economic analysis considers whether and to what extent the CAT NMS Plan will facilitate regulators’ performance of analysis and reconstruction of market events, potentially helping to better inform both regulators and investors about such market events and speeding the regulatory response following market events. Regulators perform reconstructions of market events so that they and the public can be informed by an accurate accounting of what happened (and, possibly, why it happened). As discussed in the Benefits Section,1859 market reconstructions currently can take a significant amount of time, in large measure due to various deficiencies in the currently available trading and order data.1860 The sooner regulators complete a reconstruction and analysis of a market event, the sooner investors can be informed and the sooner regulators can begin reviewing the event to determine what happened, who was affected and how, and whether the analysis supports potential regulatory responses.1861 In addition, the improved ability for regulators to generate prompt and complete market reconstructions could provide improved market knowledge, which could assist regulators in conducting retrospective analysis of their rules and pilots.

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B. Market Analysis in Support of Regulatory Decisions

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The economic analysis considers whether and to what extent the CAT NMS Plan will enhance the ability of the SROs and the Commission to conduct market analysis and research, including analysis of market structure, and the degree to which it will improve regulators’ market knowledge and facilitate consideration of policy questions of interest. The SROs and Commission Staff conduct data-driven analysis on market structure, in direct support of both rulemaking and other regulatory decisions such as SRO rule approvals. The Commission also relies on such analysis to improve understanding of market structure in ways that could inform policy. Finally, SROs conduct market analysis and research on their own regulatory initiatives. Improvements in the ability to conduct market analysis could further improve analysis related to regulatory decisions and potentially influence those regulatory decisions to the benefit of investors and the markets more generally.

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C. Market Surveillance and Investigations

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The economic analysis examines whether the CAT NMS Plan will improve market surveillance and investigations, potentially resulting in more effective oversight of trading, better investor protection, and deterrence of violative behavior. As described in more detail in the Baseline Section,1862 both SROs and the Commission conduct market surveillance, examinations, investigations, and other enforcement functions targeting illegal activities such as insider trading, wash sales, or manipulative practices. Improvements in market surveillance and investigations could come in the form of “facilitating risk-based examinations, allowing more accurate and faster surveillance for manipulation, improving the process for evaluating tips, complaints, and referrals . . ., and promoting innovation in cross-market and principal order surveillance.”1863

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b. Costs

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The economic analysis evaluates the costs of building and operating the Central Repository; the costs of CAT reporting for Participants, broker-dealers, and service bureaus; and other CAT-related costs. Where the CAT NMS Plan provides estimates of these costs, the economic analysis evaluates those estimates and re-estimates them when necessary. The economic analysis also discusses the drivers of these costs, and whether broker-dealers may or may not pass these costs down to their customers. As a part of its consideration of the costs of the CAT NMS Plan, the economic analysis considers costs from duplicative reporting for some period of time as well as potential cost savings from the retirement of duplicative regulatory reporting systems.1864

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The economic analysis also considers whether the CAT NMS Plan could result in second order effects, such as changes to the behavior of market participants, that impose certain costs. For example, the CAT NMS Plan’s tiered funding model could lead to efforts by market participants to try to control their tiers in order to affect their fee payments, such as reducing activity levels near the end of an activity level measuring period to avoid being classified as a higher activity level firm. In addition, Participants, their members, and investors could incur costs if their private information were accessed in the event of a security breach of the Central Repository. The economic analysis considers these and other elements of the Plan that could lead to distortions in behavior by market participants.

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pubdate: November 15, 2016 effdate: N/A +

2. Existing Uncertainties

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Framework for Economic Analysis, Existing Uncertainties + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + Central Repository, + Rule 613, + +

In the Notice, the Commission described how it analyzed the information in the CAT NMS Plan, as well as other relevant data,1865 in order to assess the economic effects of the Plan. As discussed throughout the analysis in the Notice, in certain cases the Commission lacked information needed to evaluate all of the potential economic effects of the CAT NMS Plan, creating uncertainty in some potential benefits and costs. The primary drivers of uncertainty included the fee schedule applicable to funding the Central Repository (the “Funding Model”), which has not yet been finalized, the deferral of decisions on certain discretionary elements including the Technical Specifications applicable to the CAT, and a lack of detailed information that would enable the Commission to assess certain economic effects with greater precision.1866 The Notice discussed implications of each primary area of uncertainty.1867

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First, the economic analysis in the Notice evaluated information provided in the CAT NMS Plan on the economic effects of the Plan, as well as information drawn from outside of the Plan. However, the Commission lacked detailed information regarding some of the individual costs and discretionary decisions in the Plan, including the Funding Model. Specifically, the Plan does not outline the proportion of CAT costs that will be allocated to Participants versus broker-dealers. This uncertainty limited the Commission’s ability to evaluate the economic effects of the Plan in some cases. However, the Commission analyzed the expected economic effects of the Plan to the extent possible with the information available, and where the Commission identified such areas of uncertainty, the economic analysis addressed this uncertainty.

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Second, the Commission pointed out that certain elements of the CAT NMS Plan will not be finalized until after the selection of a “Plan Processor.”1868 Among these are the security and confidentiality procedures of the Central Repository,1869 the precise methods by which regulators will access data in the Central Repository,1870 and the complete Technical Specifications.1871 The Plan also provides the Plan Processor the “sole discretion” to publish interpretations of the Technical Specifications, including interpretations of permitted values in data elements.1872

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Because these and other elements of the Plan had not yet been finalized, the Commission could not assess how and to what extent the elements could affect the overall economic effects of the Plan. The Commission’s economic analysis was therefore limited to the extent that the economic effects of the Plan depend on decisions that will be made after approval of the Plan. However, the Commission identified these areas of uncertainty and assessed the economic effects of the Plan to the best of its ability in light of these existing uncertainties.

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Given the range of possible outcomes with respect to both the costs and benefits of the CAT NMS Plan that depend on future decisions, the Commission also recognized in the Notice the importance of provisions of the Plan related to the operation and administration of the CAT. In particular, the Commission stated that governance provisions of the Plan related to voting by the Operating Committee and the involvement of the Advisory Committee may help promote better decision-making by the relevant parties. Such provisions could mitigate concerns about potential uncertainty in the economic effects of the Plan by giving the Commission greater confidence that its expected benefits would be achieved in an efficient manner and that costs resulting from inefficiencies will be avoided. Nevertheless, commenters rightly observed that uncertainties remain, and will continue to remain until selection of the Plan Processor, the publication of Technical Specifications, and/or the implementation of CAT reporting.1873

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The Commission has considered the comments it received relevant to the potential uncertainties in its analysis of the economic effects of the CAT NMS Plan, the Participants’ response, and the effect of Plan modifications on such uncertainties and has revised its economic analysis accordingly. Throughout this economic analysis, the Commission recognizes these uncertainties, including the ones raised by commenters. In particular, the economic analysis described below recognizes uncertainties as they relate to the baseline, benefits, and costs and as they relate to the analysis of alternatives, efficiency, competition, and capital formation. In some cases, the Plan modifications and the Participants’ response letters reduce the uncertainty in the Commission’s analysis. However, the Commission continues to believe that governance provisions of the Plan could mitigate concerns about many of the sources of potential uncertainty in the economic effects of the Plan.1874

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pubdate: November 15, 2016 effdate: N/A +

D. Baseline

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Baseline + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + +

To assess the overall economic impact of the CAT NMS Plan, the economic analysis in the Notice used as the Baseline the current state of regulatory activity and the current state of trade and order data.1875 The Baseline discussed the currently available sources of data, limitations in available data that could impact regulatory activity, how regulators currently use the available data, and the burden that producing that data imposes on SROs and broker-dealers. As discussed in more detail below, the Commission has revised certain aspects of its Baseline to incorporate new information from commenters, but the Baseline remains largely the same as that described in the Notice.

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pubdate: November 15, 2016 effdate: N/A +

1. Current State of Regulatory Activities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Baseline, Current State of Regulatory Activities + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + OTC, + Rule 613, + Securities Exchange Act Release No. 76640, + +

As addressed in detail in the Notice, SROs and the Commission use data to analyze and reconstruct market events, conduct market analysis and research in support of regulatory decision-making, and conduct market surveillance, examinations, investigations, and other enforcement functions.1876 The trend in this area is to use more automated and data-intensive methods as regulators’ activities adjust to the data and technology available. The Notice described these regulatory activities and how regulators currently use data. While the Commission did not receive any comments on its description of the current state of regulatory activities, the Participants did confirm the use of real-time surveillance and monitoring tools by SROs. The Commission continues to believe that the current state of regulatory activity, as described in detail in the Notice and as summarized below, reflects the Baseline for the CAT NMS Plan.

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a. Analysis and Reconstruction of Market Events

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In the Notice, the Commission discussed how regulators currently analyze and reconstruct market events.1877 In terms of market reconstructions, currently, regulators aim to provide an accurate and factual accounting of what transpired during a market event of interest by conducting a thorough analysis of the available market data.1878 Market events often encompass activity in many securities across multiple trading venues, and analysis and reconstruction of these market events requires linking data from multiple sources.1879 Examples of recent market reconstructions include the Commodity Futures Trading Commission (“CFTC”) and SEC’s analysis of the May 6, 2010 “Flash Crash,”1880 analysis of equity market volatility on August 24, 2015,1881 and the multi-agency report on the U.S. Treasuries market on October 15, 2014.1882

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b. Market Analysis and Research

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In the Notice, the Commission discussed how regulators currently perform market analysis and research.1883 In terms of market analysis and research, as addressed in detail in the Notice, the Commission and SRO Staffs currently conduct data-driven analysis on market structure, in direct support of both rulemaking and other regulatory decisions such as SRO rule approvals as well as retrospective analyses of rules and pilots.1884 The Commission relies on data analysis to inform its market structure policy, and SROs also conduct market analysis and research on their own regulatory initiatives. Examples of data-driven market analysis include reports on OTC trading,1885 small capitalization stock trading,1886 the Limit Up-Limit Down Pilot,1887 short selling,1888 and high frequency trading.1889

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c. Market Surveillance and Investigations

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As explained in detail in the Notice, regulators perform market surveillance and investigation functions that rely on access to multiple types of market data.1890 The following Sections summarize the discussion from the Notice describing the current state of SRO surveillance and SRO and Commission examinations and enforcement investigations.

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(1) Current SRO Surveillance

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Rule 613(f) requires the SROs to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the CAT Data.1891 For the purposes of the economic analysis in the Notice, the Commission considered surveillance to involve SROs running automated processes on routinely collected or in-house data to identify potential violations of rules or regulations.1892 For instance, SROs use surveillance systems, developed internally or by a third party, to detect violations of trading rules, market abuse, or unusual behavior, in real time, within one day, or within a few weeks of the activity in question. As discussed in the Notice, SRO surveillance can help protect investors by detecting fraudulent behavior and anomalous trading.

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Currently, exchange-operating SROs use surveillance systems and are responsible for surveillance of their own market. As discussed in the Notice, FINRA conducts off-exchange and cross-market surveillance1893 and oversees and regulates OTC trading of exchange-listed and non-exchange-listed securities, as well as trading in corporate and municipal debt instruments and other fixed income instruments. FINRA also provides surveillance services to U.S. equity and options exchanges through regulatory services agreements with nearly every equity market and all options exchanges. Additional surveillance is conducted by exchange-operating SROs and some of this additional surveillance is conducted as trading activity occurs. This surveillance can include detection of market manipulation, violations of trading rules, and other unusual behavior.

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While there were no explicit comments pertaining to the current practices regarding SRO surveillance, the Participants’ responses confirm that they have real-time surveillance and monitoring tools in place for their respective markets.1894

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(2) Examinations

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In the Notice, the Commission discussed how regulators currently perform examinations.1895 As addressed in detail in the Notice, SROs currently conduct exams of broker-dealers for violations of trading-related federal laws, rules, and regulations and for violations of SRO rules and regulations.1896 In 2015, FINRA’s Member Regulation Department conducted approximately 2,400 broker-dealer examinations.1897 Currently, the Commission conducts exams of broker-dealers, transfer agents, investment advisers, investment companies, municipal advisers, clearing agencies, the national securities exchanges, other SROs such as FINRA and the Municipal Securities Rulemaking Board, and the Public Company Accounting Oversight Board (“PCAOB”).1898 For example, the Commission conducted 493 broker-dealer examinations in 2014 and 484 in 2015, and 70 exams of the national securities exchanges and FINRA in 2014 and 21 in 2015. In addition, the Commission conducted 1,237 investment adviser and investment company examinations in 2014 and 1,358 in 2015. Virtually all investment adviser examinations and a significant proportion of the Commission’s other examinations involve analysis of trading and order data. Examinations of broker-dealers and investment advisers involve intensive analysis of trading data. Examinations seek to determine whether the entity being examined is: conducting its activities in accordance with the federal securities laws, rules adopted under these laws, and SRO rules; adhering to the disclosures it has made to its clients, customers, the general public, SROs and/or the Commission; and implementing supervisory systems and/or compliance policies and procedures that are reasonably designed to ensure that the entity’s operations are in compliance with the applicable legal requirements.1899 In order to select candidates for examination, the Commission and certain SROs, including FINRA,1900 use a risk-based approach. “Risk-based examinations” seek to increase regulatory efficiency by using preliminary data analysis to direct examination resources towards entities and activities where risks of violative or illegal activity are the highest. The Commission uses risk and data analysis before opening an exam to identify broker-dealers and investment advisers for areas of focus such as suspicious trading, as well as during an exam to identify the particular activities of a broker-dealer or investment adviser that could trigger certain compliance and supervisory risks.

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(3) Enforcement Investigations

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In the Notice, the Commission discussed how regulators currently approach enforcement investigations.1901 As explained in detail in the Notice, the Commission and SROs undertake numerous investigations to enforce the securities laws and related rules and regulations, including investigations of market manipulation, insider trading, and issuer repurchase violations.1902 The Commission estimates that 30-50% of enforcement investigations use trade and order data. In 2015, the Commission filed 807 enforcement actions, including 39 related to insider trading, 43 related to market manipulation, 124 related to broker-dealers, 126 related to investment advisers/investment companies, and one related to exchange or SRO duties. In 2014, the Commission filed 755 enforcement actions, including 52 related to insider trading, 63 related to market manipulation, 166 related to broker-dealers, and 130 related to investment advisers/investment companies, many of which involved trade and order data.

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The Commission initiates enforcement investigations when SROs or others submit reliable tips, complaints, or referrals, or when the Commission becomes aware of anomalies indicative of manipulation. After the detection of potential anomalies, a tremendous amount of time and resources are expended in gathering and interpreting trade and order data to construct an accurate picture of when trades were actually executed, what market conditions were in effect at the time of the trade, which traders participated in the trade, and which beneficial owners were affected by the trade. The Commission also explained in the Notice that SROs rely primarily on surveillance to initiate investigations based on anomalies in the trading of securities. FINRA brought 1,397 disciplinary actions in 2014 and 1,512 in 2015.

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(4) Tips and Complaints

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In the Notice, the Commission discussed how regulators currently analyze and investigate tips and complaints.1903 Market participants or those with experience in analyzing market data sometimes notice atypical trading or quoting patterns in publicly available market data, and these observations sometimes result in a tip or complaint to a regulator. As the Commission discussed in the Notice, regulators investigate thousands of tips and complaints each year.1904 In fiscal years 2014 and 2015, the Commission received around 15,000 entries in its Tips, Complaints and Referrals (“TCR”) system, approximately one third of which related to manipulation, insider trading, market events, or other trading and pricing issues. Analysis of tips and complaints generally follow three stages. First, regulators ensure that the tip or complaint contains sufficient information to facilitate analysis. Second, regulators use directly accessible data or make phone calls and other informal queries to determine if the tip or complaint is credible. Third, for tips and complaints that seem credible, regulators then perform a more in-depth investigation or examination, which follows the processes described above for examinations and enforcement investigations.

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pubdate: November 15, 2016 effdate: N/A +

2. Current State of Trade and Order Data

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Baseline, Current State of Trade and Order Data + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + FINRA Rule 7440, + Rule 7450, + Rule 17a-25, + Rule 13h-1, + OATS, + Response Letter, + FIF Letter, + CAT Data, + Rule 613, + FINRA Rule 7470, + +

To assess how and to what degree the CAT NMS Plan would affect the trade and order data available to regulators, the economic analysis in the Notice considered what data regulators use currently and the limitations in that data. The Commission did not receive any comments on its description of the current sources of trade and order data. The Commission received some comments on its description of the current limitations on trade and order data, which are discussed below. However, the Commission continues to believe that the current state of trade and order data, as described in detail in the Notice and as summarized below, reflects the relevant baseline for its economic analysis of the CAT NMS Plan.

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a. Current Sources of Trade and Order Data

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In the Notice, the Commission stated that SROs and the Commission currently use a range of trading and order data sources1905 for their regulatory activities. The types of data and ease of use of these sources of data can vary widely. The Notice reviewed the primary sources of data currently available to regulators, describing the content of the data provided and examples of their specialized uses.

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(1) SRO Data

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As discussed in detail in the Notice, SROs maintain audit trails that contain trade and order data that they obtain from their members. Currently, regulators have access to at least three sources of audit trail data. First, the National Association of Securities Dealers (“NASD”) established its OATS in 1998, which required NASD (n/k/a FINRA) members to report certain trade and order data regarding NASDAQ-listed equity securities. OATS was later expanded to include OTC Equity Securities and all NMS stocks. Second, beginning in 2000, several of the current options exchanges implemented the Consolidated Options Audit Trail System (“COATS”). Finally, each equities and options exchange keeps an audit trail of orders and trades that occur on its market.1906

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The Commission explained that for each of these stages in the life of an order, FINRA Rule 7440 requires the recording and reporting of the following information, as applicable, including but not limited to: for the receipt or origination of the order, the date and time the order was first originated or received by the reporting member, a unique order identifier, the market participant symbol of the receiving reporting member, and the material terms of the order; for the internal or external routing of an order, the unique order identifier, the market participant symbol of the member to which the order was transmitted, the identification and nature of the department to which the order was transmitted if transmitted internally, the date and time the order was received by the market participant or department to which the order was transmitted, the material terms of the order as transmitted, the date and time the order was transmitted, and the market participant symbol of the member who transmitted the order; for the modification or cancellation of an order, a new unique order identifier, original unique order identifier, the date and time a modification or cancellation was originated or received, and the date and time the order was first received or originated; and for the execution of an order, in whole or in part, the unique order identifier, the designation of the order as fully or partially executed, the number of shares to which a partial execution applies and the number of unexecuted shares remaining, the date and time of execution, the execution price, the capacity in which the member executed the transaction, the identification of the market where the trade was reported, and the date and time the order was originally received. FINRA Rule 7440 also requires reporting of the account type, the identification of the department or terminal where an order is received from a customer, the identification of the department or terminal where an order is originated by a reporting member, and the identification of a reporting agent if the agent has agreed to take on the responsibilities of a reporting member under Rule 7450.1907

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The Commission also explained that a majority of options exchanges require their members to provide the following information with respect to orders entered onto their exchange: (1) the material terms of the order; (2) order receipt time; (3) account type; (4) the time a modification is received; (5) the time a cancellation is received; (6) execution time; and (7) the clearing member identifier of the parties to the transaction.1908

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As discussed in the Notice, SRO audit trail data is used for market reconstructions and market analyses, and to inform policy decisions, both by the Commission and by SROs. Regulators also use SRO audit trail data extensively for surveillance, examinations, investigations, and other enforcement functions. Current SRO market surveillance relies primarily on data from the SRO audit trails, generated directly from the exchange servers and from OATS. Likewise, SRO examinations and investigations pull information from their own audit trails before seeking data from others. Commission examinations and investigations also rely heavily on SRO audit trails to start the process of tracing a particular trade from its execution to the order initiation and customer information, and the audit trails can be useful for manipulation investigations or other regulatory activities that require analyses of microcap securities trading activity.1909

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(2) Equity and Option Cleared Reports

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The SROs and the Commission also have access to equity and option cleared reports. In the Notice, the Commission noted that clearing broker-dealers report their equity and option cleared data on a daily basis and the NSCC and the OCC aggregate the data across the market and generate the reports.1910 Equity and option cleared reports provide a way for regulators to directly access a dataset to see how much trading volume is accounted for by a particular clearing broker. As such, these data are often used at the beginning of an examination or investigation to start identifying the market participants that may have additional data needed to pinpoint a particular activity.

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(3) Electronic Blue Sheets

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As the Commission discussed in the Notice, broker-dealers also provide detailed data to regulators in the form of Electronic Blue Sheets (“EBS”). The EBS data, provided pursuant to Rule 17a-25 under the Act, facilitate investigations by the SROs and Commission Staff, particularly in the areas of insider trading and market manipulations. The EBS system provides certain detailed execution information in its electronic format upon request by SRO or Commission Staff. This information often includes the employer of the beneficial owner of an account, which can be important to insider trading investigations, and in some cases, a tax identification number.1911

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The EBS system also provides additional information on market participants who meet the definition of “large traders” and have self-identified to the Commission as required by Rule 13h-1. Large trader data provide the Commission with a way to acquire information about the activities of large traders and allow the activities of large traders to be more readily aggregated across or partitioned by multiple broker-dealers.1912

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(4) Trade Blotters and Order Tickets

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As the Commission addressed in detail in the Notice, investment advisers and broker-dealers also maintain data in the form of order tickets and trade blotters that regulators can obtain on request. Order tickets are in-house records maintained by investment advisers and broker-dealers that provide order details, including timestamps of order initiation and placement, special order types, any special instructions for the order, and plans for the allocation of shares and prices across accounts and subaccounts. Order tickets also identify account owners. Commission Staff collects order tickets regularly for examinations, and occasionally also for market manipulation investigations.1913

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The Commission discussed the fact that broker-dealers maintain data in trade blotters that are similar to EBS. However, the trade blotters also contain more information, including the commissions paid in executing each order, timestamps of when an order is received and when it is executed (and the number of fills), and the pricing information for all executions in the order. SROs use trade blotters in examinations of their members. Commission Staff uses trade blotters frequently for examinations, including in almost every broker-dealer, investment adviser, and hedge fund examination, as well as for insider trading and market manipulation investigations. Regulators use trade blotter data to determine the order entry time and execution time for trades by a particular customer in examinations and enforcement investigations. Trade blotters are also the primary data source used in regulatory investigations for which subaccount allocation information is important for determining violative behavior, such as cherry-picking and front-running cases.1914

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As the Commission discussed in the Notice, broker-dealers and exchanges collect and maintain records of activity in their order handling systems and internal matching systems.1915 Some of the data that is collected and maintained in these systems exceeds the scope of information captured in EBS, SRO audit trail, trade blotter, or order ticket data and may include data on order receipt, modification or routing information not otherwise reported to SROs. Regulators use these trading and order handling system data in investigations and examinations to further analyze issues discovered during their analysis of data from other sources.1916

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(5) Public Data

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As discussed in detail in the Notice, exchanges and SROs make some data available to the public and regulators can access these data for their regulatory activities. One type of public data is “consolidated” data feeds that are disseminated by registered Securities Information Processors (“SIPs”) pursuant to joint SRO plans. For a fee, the SIPs distribute consolidated market data on recent equity and option transactions and the prevailing best quotes at each exchange to market data subscribers. Additionally, all exchanges also make data available through direct data feeds. These feeds contain all data included in the SIP feed, but also include depth of book information and, depending on the exchange, may include additional data, such as the submission, cancellation and execution of all displayed orders and auction imbalance information on the exchange, among other things. Furthermore, at the request of Commission Staff, most equities exchanges also produce and make public two datasets with information on short sales: a file of short selling volume by stock, which contains the short selling and total volume on that exchange by symbol, and a file of short selling transactions, which contains trade information such as time, volume, and price for each transaction involving a short sale.1917

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The Commission and SROs use these publicly available trade and order data to conduct market analyses, market reconstructions, examinations, and investigations. Due to the accessibility and ease of use of the public data, regulators often use it as a starting point or a basis of comparison to other data sources. For example, real-time surveillance can rely on SIP data, and some insider trading surveillance relies on information from other publicly available sources such as news sources. Further, investigations into short sale market manipulation sometimes start with an analysis of the short selling data.1918

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b. Current Limitations of Trade and Order Data

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As the Commission addressed in detail in the Notice, while regulators have access to trade and order data from the sources described above,1919 the available data are, for various reasons, limited in terms of the four qualities discussed above.1920 In terms of completeness, current sources do not represent all of the market activity of interest in sufficient detail in one consolidated audit trail. In terms of accuracy, current sources may reflect data errors, insufficiently granular clock synchronization and timestamps, errors introduced in the process of combining data from different sources, a lack of consistent customer and broker-dealer identifiers, and data that is too aggregated at the record level to provide the information regulators need. In terms of accessibility, the SROs and Commission lack direct access to most of the data sources described above, and with respect to timeliness, obtaining trade and order data from current sources and converting the data into a form in which they can be analyzed can involve a significant delay from the time of a particular event of interest. Due to these limitations on current data sources, as the Commission addressed in detail in the Notice, regulators are limited in their ability to perform the activities outlined in Section V.D.1, above. Table 1 summarizes the key characteristics of the currently available data sources, the limitations of which are discussed in more detail below.

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Table 1

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(1) Completeness

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“Completeness” refers to whether the data represents all market activity of interest or just a subset, and whether the data is sufficiently detailed to provide the required information.1925 As addressed in detail in the Notice, while current data sources provide trade and order data specified by existing rules and regulations, those sources do not contain all market activity that might be required for certain market inquiries, in sufficient detail, within one consolidated audit trail. The Commission explained in the Notice that, to obtain information regarding a particular market event, regulators may have to piece together information from different data sources and that some data is not required to be reported at all under existing regulations. Therefore, as described below, current data sources either cover only a limited number of events and products, or lack some data fields that would be useful to regulators, each of which impedes effective market surveillance.1926

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One commenter agreed with the Commission’s analysis by stating that “[t]he fragmented nature of current data sources does pose significant challenges to regulators seeking complete data.”1927

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A. Events and Products

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As the Commission addressed in detail in the Notice, there is currently no single data source that covers all market activities. EBS data contains executed trades but does not contain information on orders or quotes (and thus does not provide information on routes, modifications, or cancellations). Similarly, trade blotters and order tickets contain only information recorded by the particular broker-dealer or investment adviser that generated them and may contain limited information about full order lifecycles. SRO audit trail data are limited to identifying the activity of their members, can have incomplete information concerning their members, lack order lifecycle information occurring prior to receipt by an exchange, and may not contain information regarding principal trading. Furthermore, although public consolidated and direct data feeds provide data about the entire market, they lack information regarding non-displayed orders and do not provide sufficient information to identify the different lifecycle events of a single order.1928

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The Commission also discussed individual SRO audit trails. While extensive, they contain only activity of their own members, and many SRO audit trails are incomplete in their coverage of the activities of those members. For example, FINRA’s OATS data does not include proprietary orders originated by a trading desk in the ordinary course of a member’s market making activities, or options data. And while OATS collects data from FINRA members with respect to orders and trades involving NMS and OTC stocks, OATS does not include trade or order activity that occurs on exchanges or at broker-dealers that are not FINRA members. In addition, while broker-dealers who are not members of FINRA must be members of an exchange SRO, an individual exchange SRO’s audit trail data is generally limited to activity taking place on that exchange. The Commission noted that because broker-dealers who are not members of FINRA may engage in trading activity in off-exchange markets, a substantial portion of the trading activity that an exchange SRO supervises is not reported to the supervising SRO.1929 The Commission also discussed the fact that not all FINRA members are obligated to report to OATS. FINRA’s rules exclude from reporting certain members that engage in a non-discretionary order routing process. Additionally, FINRA has the authority to exempt the manual orders of other members who meet specific criteria from the OATS recording and reporting requirements.1930

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The Commission also explained that some SRO audit trails do not include and are not required to include activity associated with principal trading, such as market-making activity. This may result in the exclusion of a significant amount of activity, particularly for firms with substantial market-making business activities.1931

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Finally, the Commission discussed the fact that no single current data source integrates both equities and options, and that the lack of any combined equity and options audit trail data is a significant impediment to regulators performing cross-product surveillance.1932

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B. Data Fields

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As addressed in detail in the Notice, each of the currently available data sources discussed above is missing certain data fields that are useful for conducting a variety of regulatory activities. Furthermore, certain valuable data fields are not contained in any of the data sources discussed above.1933

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Most notably, as the Commission explained in detail in the Notice, the identity of the customer is not available from any of the current data sources that are reported to regulators on a routine basis. As discussed in the Notice, a unique customer identifier could be useful for many types of investigations and examinations such as market manipulation investigations and examinations of investment advisers. The Commission also explained that although some data sources—specifically large trader reports, EBS, trade blotters, and order tickets—identify customers, these data sources are not reported on a routine basis, provide only one part of the order lifecycle, and have other inherent limitations.1934

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The Commission explained that because there is currently no data source that includes customer identities across multiple parts of an order lifecycle, regulators must seek and link multiple sources of data, which can be a burdensome and imperfect process. For example, trade blotter and order ticket data that identify customers from one broker-dealer may only include customer names and thus may not be readily matched to similar data from another broker-dealer, or may require substantial time, effort, and uncertainty to reconcile across firms. Further, EBS data’s limited coverage of trading activity and lack of some detailed trade information raises costs and reduces the timeliness of insider trading investigations.1935

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As the Commission addressed in detail in the Notice, some valuable data fields, such as modifications that make an order non-displayed and other special handling instructions are consistently available on only a few data sources or require linking different data sources.1936 The Commission explained that the lack of direct, consistent access to order display information and special handling instructions creates inefficiencies in surveillances, examinations, and investigations that examine hidden liquidity and the treatment of customer orders.1937

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The Commission noted that data that are not directly accessible by regulators at all include buy-to-cover information and subaccount allocation information, including the allocation time. The Commission explained that regulators could use buy-to-cover information to better understand short selling and for investigations of short sale manipulation. However, no current data source allows regulators to directly identify when someone is buying to cover a short sale.1938

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As the Commission discussed in the Notice, subaccount allocation information needed for regulatory activities can be difficult for regulators to collect and compile because SRO audit trails currently do not require allocation reports and broker-dealers may not have records of the time of a subaccount allocation. The Commission explained that when regulators require an understanding of subaccount allocations for a regulatory task, they generally request and sift through trade blotter or EBS data in an attempt to identify allocations and the details of those allocations. However, current trade blotter data contains limited customer information on allocations and is not required to contain allocation time information at the subaccount level.1939

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The Commission explained that the difficulty in obtaining allocation information and the difficulty in reconstructing allocations with data from broker-dealers limits the efficiency of certain surveillances and examinations. In particular, allocation time at the subaccount level is critical for determining whether some customers are systematically given more favorable allocation treatment than others. For example, when a broker-dealer places an order or series of orders for multiple customer accounts that generates multiple executions at multiple prices, it is possible that different customers receive different prices in the allocation process. However, if some customers systematically receive less favorable prices than others when they should be receiving the same prices for their executions, this could indicate that the broker-dealer is handling allocations improperly.1940

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Three commenters noted that the open/close indicator is currently not captured for equities.1941 In their response, the Participants agreed with this assessment.1942 In addition, the Participants indicated that, pursuant to current industry practice, the open/close indicator is also not captured for some options transactions.1943

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The Commission has considered the comments it received regarding the current limitations of trade and order data in terms of completeness. The open/close indicator would provide information about whether a transaction is undertaken to open or increase a position in the security, or to close or reduce a position in the security, such as a buy-to-cover a short sale, which the Commission in the Notice stated was information not directly accessible to regulators today. Therefore, the commenters expressing that the open/close indicator is not currently captured for equities are consistent with the baseline discussed in the Notice; the open/close indicator is one type of a broader category of information that the Commission recognized is lacking from current audit trails.1944 In addition, although the Commission did not discuss this issue in the Notice, the Commission now recognizes that the open/close indicator is currently not captured for certain options transactions.

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(2) Accuracy

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In the Notice, the Commission carefully considered the accuracy of data currently used by regulators in order to consider whether and to what degree the CAT NMS Plan would provide more accurate data.1945 As discussed in more detail below, the Commission considered several forms of data inaccuracy, including data errors, inaccurate event sequencing, the inability to link data accurately, inconsistent identifiers, and obfuscating levels of irreversible data aggregation.

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A. Data Errors

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With respect to data errors,1946 the Commission stated its preliminary belief that data errors affect most current data used by regulators and can persist even after corrections. The Commission specifically noted instances where information was inaccurately reported by broker-dealers and discussed various errors in data translated from back-office systems, errors in data from trading systems, and errors in audit trail data.1947 Furthermore, the Commission noted that the CAT NMS Plan reports that 2.42% of order events submitted to OATS fail validation checks. Although FINRA sends these records back to its members to correct, significant error rates in event linking post-correction are common because OATS limits error correction requests to records with internal inconsistencies within a given member’s submission and there is no cross-participant error resolution process. FINRA estimates that 0.5% of OATS routing reports directed to another FINRA member broker-dealer cannot currently be linked.1948 Also, as stated in the Notice, the CAT NMS Plan reports that, following the rollouts of three major updates to OATS, 0.86% of Trade Reporting Facility reported trades could not be matched to OATS execution reports, 3.12% of OATS route reports could not be matched to exchange orders, and 2.44% of inter-firm routes could not be matched to a record of the receiving firm’s receipt of a routed order.1949

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The Commission received several comment letters that discussed the current state of errors in data used by regulators.1950 One commenter did not believe that OATS data currently achieves “de minimis” errors.1951 The commenter further stated that there are instances where errors cannot be corrected in OATS and gave true duplicates and non-reportable symbols as examples.1952 The commenter further detailed the classification scheme currently used to categorize OATS errors. According to the commenter, these errors are currently classified as: rejects; unmatched executions; unmatched exchange routes; inter firm received unmatched; inter firm sent unmatched; out of sequence; and late reports.1953

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Another commenter stated in two separate letters that there are OATS reporters that are repeatedly non-compliant, both in omitting to report required data and reporting inaccurate data to FINRA.1954 The commenter contended that the extent of this non-compliance is significant and is magnified by the lengthy period of time before the errors are discovered and corrected by FINRA. Also, there is no way to know the magnitude of noncompliance that is never detected and therefore never corrected. The non-compliance by reporters may cause the error rates reported by OATS to be higher than reported.

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The Commission has considered the comments received. The Commission agrees with the commenter that stated there are instances where OATS data does not fail validation checks, but does contain errors. As mentioned in the Notice, OATS validation checks are limited to detecting errors that can be discovered by a concise set of logical rules and OATS limits error correction requests to records with internal inconsistencies within a given member’s submission.1955 The Commission also recognizes the comment that some OATS reporters fail to send and/or send inaccurate reports to FINRA and is updating its analysis to take into account that current data errors in OATS may be larger than initially considered due to this noncompliance. Finally, the Commission now considers the error classifications provided by a commenter in its baseline.

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B. Event Sequencing

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With respect to event sequencing, as the Commission addressed in detail in the Notice, the ability to sequence market events is crucial to the efficacy of detecting and investigating some types of manipulation, and the sequencing of order events requires both sufficient clock synchronization across market participants and timestamps that are granular enough for accurate sequencing, but the current clock synchronization standards make this process difficult.

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In the Notice, the Commission discussed that current rules require most broker-dealers to synchronize their system clocks to within one second.1956 The Commission further noted that “in practice” some broker-dealers currently synchronize their clocks to smaller clock offset tolerances. The Commission cited the FIF Clock Offset Survey1957 where 29% of respondents report they currently synchronize their clock to permit a maximum clock offset of one second from NIST, 10% of respondents permit a maximum offset of 50 milliseconds to one second, 21% of respondents permit a 50 millisecond maximum offset, and 18% of respondents permit a maximum offset less than 50 milliseconds. The remaining 22% of respondents report they utilize multiple clock offset tolerances across their systems ranging from five microseconds to one second. In addition, the Commission discussed that FINRA had filed a proposed rule change that would reduce the clock offset tolerance for members’ computer clocks that are used to record events in NMS securities from within one second of the NIST atomic clock to within 50 milliseconds of the NIST atomic clock.1958 Furthermore, the Commission discussed that if the rule change was approved, more entities would record timestamps with data at a 50 millisecond clock offset tolerance regardless of whether the CAT NMS Plan is approved.1959

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For clock synchronization on exchanges, the Commission discussed in the Notice that exchanges trading NASDAQ securities currently adhere to clock synchronization standards at or below 100 microseconds, and the Commission understands that the NYSE, the options exchanges, and the SIAC SIP have comparable clock synchronization standards. In addition, the Commission noted that Participants stated “that absolute clock offset on exchanges averages 36 microseconds.”1960

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Also in the Notice, Commission Staff conducted an analysis of the frequency of order events using MIDAS data which identified whether for each order event, an event in the same security at another venue occurred within a given time range. 97.95% of order events for listed equities and 91% of order events for listed options occurred within one second of another unrelated order event in the same security. 14.44% of the unrelated order events for listed equities and 3.12% of the unrelated order events for listed options in the same security occurred within 5 microseconds of another order event in the same security. The Commission noted that the analysis underestimates the true frequency of unrelated events within the given time frames because it includes only order events that are included in the MIDAS data, and furthermore stated that the analysis illustrates how the current frequency of order events makes sequencing unrelated order events difficult. With respect to the granularity of timestamps, the Commission discussed in the Notice that regulators need sufficiently granular timestamps to sequence events across orders and within order lifecycles, and that the current lack of uniform and granular timestamps can limit the ability of regulators to sequence events accurately and link data with information from other data sources.1961 In addition, the Commission discussed that current data sources have different timestamp granularity standards, and that many public data sources report time in seconds or milliseconds, and some, including direct data feeds, report time in microseconds or nanoseconds. As examples, the Commission stated that OPRA allows for timestamps in nanoseconds and that the other SIPs require timestamps in microseconds for equity trades and quotes, whereas the short sale transactional data released by exchanges contains timestamps in seconds.1962 In addition, the Commission stated that OATS requires timestamps in milliseconds for firms that capture time in milliseconds, but does not require members to capture time in milliseconds.1963

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One commenter discussed the Commission’s analysis of the frequency of order events in the context of the Commission’s baseline assessment of clock synchronization and timestamp granularity.1964 The commenter pointed out that the Commission’s analysis “used primarily SIP data, reflecting exchange only recording of events, which is a tightly controlled, co-located and specialized environment” and that the analysis “does not reflect the broader broker-dealer communities’ recording of events … in a distributed environment, a much less controlled and less precise environment.”1965 That commenter also stated that “[w]ithin every order lifecycle, the events leading up to the execution can be [sequenced] due to daisy chaining.”1966

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As noted above, commenters recognized that lower tolerances were already mandated by some exchanges as well as ATSs that maintain an order book.1967 One commenter noted that some firms receive direct feeds from exchanges as precise as 1 microsecond.1968 The Participants and another commenter explained that the marketplace is segmented such that broker-dealers operate under a different business model and regulatory environment than ATSs and exchanges. 1969 While microsecond tolerances for exchanges and ATSs are already standard practice, broker-dealers have no standard practice across the industry and are precluded from using matching engines, which are capable of the lowest level of granularity.1970

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One commenter noted the imprecise business process of handling manual orders.1971 Another commenter noted that manual intervention can take over a second because it involves several steps, which impact timestamp capture.1972

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The Participants’ response provided new information on the current clock synchronization standards of Participants.1973 Specifically, the response clarified that all Participants currently operate pursuant to a clock synchronization standard of 100 microseconds with regard to their electronic systems.1974

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The Commission has considered these comments and, as discussed below, has updated its analysis of the baseline of clock synchronization as set out in the Notice.

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In the Notice, the Commission explained that its analysis of the frequency of order events used MIDAS data, recognized the limitations that its use of MIDAS data could impose, and explained how the limitations reflected the Commission’s assessment of the baseline.1975 The Commission therefore agrees with the commenter that its analysis reflects a disproportionate number of exchange events relative to off-exchange events. But because the commenter did not explain how the limitations of the Commission’s analysis could make the analysis less useful or what statistical biases could result from these limitations, the Commission believes that, despite its limitations, the analysis “still provides useful insights” and “illustrates how the current frequency of order events makes sequencing unrelated order events difficult.”1976

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The Commission generally agrees that events can be sequenced due to daisy chaining, but notes that for most regulatory activities,1977 it is crucial for the regulators to be able to accurately sequence events from different orders. Furthermore, the Commission believes that such sequencing requires both sufficient clock synchronization across market participants and sufficiently granular timestamps.

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With respect to comments regarding manual orders, the Commission believes the new insights provided by commenters are consistent with the baseline in the Notice.

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The Commission is updating its economic baseline to include the new information provided by the Participants and also to include the approval of a FINRA rule amendment. Specifically, the Commission now believes that all Participants currently operate pursuant to a clock synchronization standard of 100 microseconds. Also, the Commission approved the proposed rule change by FINRA that was discussed in the Notice that reduces the synchronization tolerance for computer clocks to 50 milliseconds for member firms that record events in NMS Securities.1978 Accordingly, FINRA members that record events in NMS Securities currently operate, or in the near future will operate, pursuant to a clock synchronization standard of 50 milliseconds for their computer clocks.

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C. Data Linking and Combining

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Regarding data linking, as the Commission addressed in detail in the Notice, regulators analyzing an event or running a surveillance pattern often need to link data.1979 As examples, the Commission stated that cross-market examinations require the cumbersome and time-consuming task of linking many different data sources; that regulators that are determining whether rule violations have occurred will combine trading data from sources such as public feeds, SRO audit trails, EBS data, and trade blotters; and that the analysis and reconstruction of market events could require linking many different data sources, such as a dozen SRO audit trails.1980

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The Commission discussed that merging different data sources often involves translating the data sources into the same format, which can be a complex process that is prone to error.1981 In addition, the Commission discussed that linking records within or across data sources requires the sources to share “key fields” that facilitate linkage, but that regulators may be unable to link some data source combinations accurately because the data sources do not have key fields in common or the key fields are not sufficiently granular; also, different data sources may have key fields in common but the relationship between the fields is not straightforward so the algorithm to link them may be necessarily complex and not entirely successful.1982 Furthermore, the Commission discussed that within a single order lifecycle, the order number may change when a broker-dealer routes the order to another broker-dealer or exchange or even to another desk at the same broker-dealer. Finally, the Commission discussed that the inability to link all records affects the accuracy of the resulting data and can force an inefficient manual linkage process that would delay the completion of the data collection and analysis portion of an examination, investigation, or reconstruction.1983

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D. Customer and Broker-Dealer Identification

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With respect to market participant identifiers (“MPIDs”), the Commission explained that trade and order data currently available to the Commission lack consistent customer and broker-dealer identifiers, which limit regulators’ ability to track the activity of one client or broker-dealer across the market.1984 In the case of broker-dealers, the Commission stated that identifiers are inconsistent and that no centralized database exists. In addition, although SROs generally identify their members using MPIDs, those MPIDS are not standardized across venues.1985 The Commission further stated that aggregating a broker-dealer’s activity across venues requires verifying the MPIDs assigned to a broker-dealer on each venue, usually referencing the broker-dealer by its Central Registration Depository (“CRD”) number. Finally, the Commission stated that in the course of manual data analysis, Commission Staff have experienced challenges in identifying broker-dealers using CRD numbers, but that the Commission and the SROs have generally overcome these challenges in the context of automated regulatory data analysis.

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In the case of broker-dealer customers, the Commission stated that identifying customer account owners across multiple broker-dealers is difficult and prone to error.1986 As an example, the Commission discussed that although the EBS system provides the names associated with each account traded, these names are drawn from separate records of each broker-dealer providing data to the EBS system, and the same party may be identified by a different name across multiple broker-dealers.

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One commenter discussed the difficulty in tracking market participant activity using MPIDs, stating that “[w]ith regard to trade identifiers used by market access providers, some clearing firms have used one or more MPIDs to conceal the identity of other participants/clients using these services to manipulate markets.”1987 The Commission agrees that tracking market participant activity using MPIDs can be difficult because of sponsored or direct market access arrangements whereby broker-dealers allow customers to trade electronically using the broker-dealer’s MPID. In cases where the sponsored or direct market access customer is not a FINRA member, the EBS system allows regulators to observe the identity of trading parties that may be concealed by MPIDs, but, as discussed in the Notice, it is difficult to consistently identify trading parties across multiple broker-dealers because they may use different names across these broker-dealers. In addition, as discussed in the Notice, EBS data is cumbersome to use for broad analysis because of fragmentation of the data.1988 However, in cases where the sponsored or direct market access customer is a FINRA member, OATS reporting obligations require both the customer broker-dealer and the sponsoring broker-dealer to generate reports that, when linked correctly, allow regulators to observe the identity of the trading party.1989

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E. Aggregation

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Regarding data aggregation, as addressed in detail in the Notice, the practice used in some data records of bundling together data from different orders and trades can make it difficult to distinguish the different orders and trades in a given bundle. That aggregation reduces the usefulness of equity and options cleared reports, because the reports do not have detailed trade information and do not include activity that does not require clearing.1990 In the Notice, the Commission presented as an example the frequent use of average-price accounts by brokers to execute and aggregate multiple trades for one or more customers. The Commission discussed that for these cases, and with EBS data, the system does not reflect the details of each individual trade execution.1991 Furthermore, the Commission discussed that information on trade allocations aggregate the trade information to such an extent that it is difficult for regulators to identify when particular clients may be afforded preferential treatment because it is challenging to link subaccount allocations to orders and trades.1992

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In addition, as the Commission discussed in the Notice, issuer repurchase information is aggregated at the monthly and quarterly level, and this level of aggregation limits the use of such data in investigations of the timing of issuer repurchases and issuer stock price manipulation and in analysis of the use of the Rule 10b-18 issuer repurchase safe harbor.

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(3) Accessibility

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As addressed in detail in the Notice, the SROs and the Commission also lack direct access—i.e., the ability to log into a system in a manner that would allow them to gather and analyze the data they need—to many of the data sources described above. SROs generally have direct access only to their own audit trails and the public data feeds.1993 The Commission has direct access only to the public data feeds and the equity and option cleared data; it lacks direct access to information provided in EBS or contained in trade blotters, order tickets, order handling data, SRO audit trails, and OATS data.1994

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The Commission explained that if a regulator does not have direct access to data it needs, the regulator would request it, and that this can result in many burdensome requests to broker-dealers, SROs, and others. The Commission recognized that data requests could impose burdens on the entities responding to the requests, in addition to the burden on the regulators making the requests. In particular, broker-dealers, investment advisers, and SROs responding to a data request must incur costs in order to produce, store, and transmit the data for the Commission or SRO.1995

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The Commission explained that, to complete just one analysis, regulators may need to request data from many different data providers because of fragmentation in the data. The Commission discussed the fact that fragmentation in trade and order data can take many forms. First, an analysis may require the same type of data from many market participants. For example, while ATSs and dealers report order events in equities to OATS, each of the 12 equities exchanges has its own audit trail. As a result, a market reconstruction for a single security may involve data requests to multiple exchanges as well as to FINRA.1996

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Second, the required data fields for an analysis may be reflected in different types of data. For example, for investigations that require tracing a single trade or a set of trades back to an investor or investors, regulators would first need to request data from the exchanges or market participants executing trades to find out which members, subscribers, or broker-dealers sent the orders that led to the executions. Then, regulators would need to ask the members, subscribers, and broker-dealers for information on the orders and repeat that process until they get to the broker-dealer who initiated the order to see the customer behind the order.1997

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Third, an analysis may require data on different products covered in separate data sources. For example, some regulatory activities require data on both equities and options. And because current data sources do not contain information regarding both equities and options, regulators needing data on both types of securities would need to make several data requests.1998

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As the Commission discussed in the Notice, data fragmentation also results in disparate requirements for industry members to record and report the same information in multiple formats. Because each SRO has its own data requirements, a market participant that is a member of multiple SROs may be required to report audit trail data in numerous formats and interact with multiple regulators in response to normal data queries.1999

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(4) Timeliness

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As addressed in detail in the Notice, currently, obtaining trade and order data and converting the data into a form in which they can be analyzed can involve a significant delay from the time of a particular event of interest. In some cases the length of time from when an event occurs until regulators can use relevant data in an investigation or analysis can be weeks or months. This is especially true for trading data that includes customer information.2000

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The Commission explained in the Notice that corrected FINRA OATS data may be available less than two weeks after an event and uncorrected data on T+1. In particular, FINRA members submit OATS data on a daily basis, submitting end-of-day files by 8:00 a.m. ET the following day or they are marked late by FINRA. FINRA acknowledges receipt of the data an hour after the member submits it, before running its validation process. FINRA then takes approximately four hours after acknowledging receipt of OATS data to determine if the data contain any syntax errors. In addition to the four hours needed to identify errors within a report, it takes another 24 hours for context checking, which identifies duplicates or secondary events without an originating event. Once a context rejection is available, the member has up to five business days to repair the rejection. Reports for files that contain internally inconsistent information about processing, linking, and routing orders may be available within two business days. FINRA attempts to match the inconsistent information against any additional data received up to T+2 for linking errors and T+3 for routing errors. The timing for surveillance programs varies depending on the type of surveillance being performed; data is assumed to be completely processed and corrected at T+8.2001

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The Commission also explained that because market participants generally do not report or compile datasets immediately after an order event, there is a delay before regulators may access some data sources. For example, the compilation of equity and option cleared reports occurs on T+1 for options and T+3 for equities (i.e., the clearing day) and the electronic query access for equities is available from the Securities Information Automation Corporation (“SIAC”) on T+3. Additionally, when broker-dealers receive a request for EBS, the firm must first fill in the EBS report and then, if it does not self-clear, pass the reports on to its clearing firm to compile and send to SIAC. The EBS submission process can take up to ten business days. More immediate requests for cleared options data can be submitted to FINRA, but even this process takes up to two days. Because EBS data do not contain order entry time and order execution time, regulators must obtain this information from firms and brokers using either data requests or subpoenas, and this process generally can take from two to four weeks depending on the size of the request.2002

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In addition, the Commission noted that the lack of direct access to most data sources may further delay the ability of regulators to use data in certain cases. When regulators have direct access to a data source, the time needed to receive data is only the time it takes for a query to run. On the other hand, when regulators lack direct access, their data requests can consume significant time, including both the time required to put the request together and response times from the SROs, broker-dealers, and others producing the data. For example, obtaining complete responses from each broker-dealer for an EBS request can take days or weeks depending on the scope of the request. Likewise, responses from the Intermarket Surveillance Group (“ISG”) for SRO audit trail data can take days or weeks.2003 As the Commission discussed in the Notice, once regulators receive the requested data, the data often have to be processed into a form in which they can be analyzed. The Commission explained that it can take considerable time for regulators to combine data from different sources and link records from within or across data sources. Furthermore, the lack of consistency in format adds complexity to projects involving data from multiple data sources, even when the project does not involve linking of these different data.2004

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The Commission further discussed that those who use regulatory data also typically take time to ensure the accuracy of the data. The Commission explained that when regulators question the accuracy of data, they often check several alternative sources until they are comfortable that their data are accurate. This checking of data accuracy and augmentation process adds time to an investigation or analysis.2005

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pubdate: November 15, 2016 effdate: N/A +

E. Benefits

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Benefits + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + Rule 613, + +

In the Notice, the Commission discussed its belief that the economic benefits of the CAT NMS Plan would come from any expanded or more efficient regulatory activities facilitated by improvements to the data regulators use.2006 This is because the Plan will create a new consolidated data source—CAT Data—that should replace the use of some current data sources for many regulatory activities. Therefore, the Benefits Section described how CAT Data compares to data regulators currently use for regulatory activities, how the CAT Data would improve regulatory activities, and how these improvements would benefit investors, market participants, and markets in general.2007

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In the Notice, the Commission discussed its preliminary belief that the CAT NMS Plan would produce data that would improve on current data sources because CAT Data would result in regulators having direct access to consolidated audit trail data, which would in turn improve many of the regulatory activities discussed in the Baseline Section.2008 As summarized in Table 2, the Commission preliminarily concluded that the Plan would generate improvements in the quality of data that regulators would have access to in the areas of completeness, accuracy, accessibility, and timeliness. The Commission discussed its preliminary belief that the improvements in the quality of regulatory data within these categories would significantly improve the ability of regulators to perform a wide range of regulatory activities, which would lead to benefits for investors and markets. In addition, the Commission preliminarily believed that certain provisions in the Plan—those related to future upgrades of the Central Repository, the promotion of the accuracy of CAT Data, the promotion of the timeliness of CAT Data, and the inclusion of specific governance provisions identified by the Commission in the Adopting Release for Rule 613—would increase the likelihood that the potential benefits of the CAT NMS Plan would be realized.

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In the category of completeness, the Commission discussed its belief that the ability for regulators to access more material data elements from a consolidated source would enable regulators to more efficiently carry out investigations, examinations, and analyses because regulators could acquire data from a single source that they would otherwise need to compile from many data sources. In the category of accuracy, the Commission discussed its belief that the Plan would substantially improve data accuracy by requiring CAT Data to be collected, compiled, and stored in a uniform, linked format using consistent identifiers for customers and market participants. In the category of accessibility, the Commission discussed its belief that the Plan would substantially improve the access to data for regulators because the Plan requires regulators to have direct access to CAT Data and this direct access would dramatically reduce the hundreds of thousands of requests that regulators must make each year in order to obtain data, thus reducing the burden on the industry. Finally, in the category of timeliness, the Commission discussed its belief that the Plan, if approved as noticed, would significantly improve the timeliness of data acquisition and use, which could improve the timeliness of regulatory actions that use data.

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The Commission discussed its expectation that regulatory activities such as surveillance, investigations, examinations, analysis and reconstruction of market events, and analysis in support of rulemaking initiatives would benefit from improved data quality as part of CAT.2009 The Commission explained that data is essential to all of these regulatory activities, and therefore substantial improvements in the quality of the regulatory data should result in substantial improvements in the efficiency and effectiveness of these regulatory activities, which should translate into benefits to investors and markets. For example, improved data could lead to more effective and efficient surveillance that better protects investors and markets from violative behavior and facilitates more efficient and effective risk-based investigations and examinations that more effectively protect investors. The Commission stated that together, these improved activities could better deter violative behavior of market participants, which could improve market efficiency. Furthermore, this increase in directly accessible data should improve regulators’ understanding of the markets, leading to more informed public policy decisions that better address market deficiencies to the benefit of investors and markets. The Commission also discussed the fact that the Plan lacked information regarding the details of certain elements of the Plan likely to affect the benefits of the Plan, primarily because many of those details had not yet been determined, which creates some uncertainty about the expected economic effects.2010

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The Commission has considered the comments it received regarding the likely benefits of the CAT NMS Plan and continues to believe that the CAT NMS Plan would generate improvements in the quality of data that regulators would have access to in the areas of completeness, accuracy, accessibility, and timeliness. The Commission also continues to believe that improvements in the quality of regulatory data within these categories would significantly improve the ability of regulators to perform a wide range of regulatory activities, which would lead to benefits for investors and markets. In addition, the Commission continues to believe that certain provisions in the Plan—those related to future upgrades of the Central Repository, the promotion of the accuracy of CAT Data, the promotion of the timeliness of CAT Data, and the inclusion of specific governance provisions identified by the Commission in the Adopting Release for Rule 613—increase the likelihood that the potential benefits of the CAT NMS Plan described below will be realized. As set out in more detail below, the Commission has taken into account the modifications that have been made to the Plan where they are relevant to the Commission’s analysis of the benefits of the Plan, and has updated its analysis accordingly.

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Table 2

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pubdate: November 15, 2016 effdate: N/A +

1. Improvements in Data Qualities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Benefits, Improvements in Data Qualities + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + CAT Data, + Sec Rule 613, + FIF Letter, + OATS, + Rule 105, + Rule 204, + Plan Processor, + CAT Reporter, + +

Consistent with the Adopting Release, the Commission identified in the Notice four qualities of trade and order data that impact the effectiveness of core SRO and Commission regulatory efforts: accuracy, completeness, accessibility, and timeliness.2015 In assessing the potential benefits of the CAT NMS Plan, the Commission’s economic analysis compared the data that would be available under the Plan to the trading and order data currently available to regulators.2016 The Commission preliminarily believed that the Plan would improve data in terms of all four qualities, but that uncertainty remained as to the expected degree of improvement in some areas.2017 The Commission has considered the comments received, the Participants’ response, and the modifications to the Plan, and continues to believe that the Plan will improve accuracy, completeness, accessibility, and timeliness of trade and order data relative to the Baseline, with some uncertainty as to the degree of improvement.

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a. Completeness

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In the Notice, the Commission discussed how the CAT NMS Plan, if approved, would result in regulators having direct access to a single data source that would be more complete than any current data source.2018 The Commission discussed its belief that the CAT Data2019 would be more complete than other data sources because, compared to existing SRO audit trails and other data sources, the CAT Data would contain data from a greater number of broker-dealers on more event types, products, and data fields. While some current data sources contain many of the elements that would be included in CAT Data, the Commission explained that CAT Data would consolidate that data into one source that would be much more complete than any existing source, and that CAT Data would also include some elements that are not available from any current data source. In the Commission’s view, having this data consolidated in a single source would provide numerous benefits.

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(1) Events and Products

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In the Notice, the Commission discussed the fact that the CAT Data would include events and products from all current SRO audit trails, combined into a single data source. In addition, it would include some off-exchange activity not captured on current SRO audit trails,2020 as well as proprietary orders originated by a trading desk in the ordinary course of a member’s market making activities (or “principal activity”),2021 and information on equities, options and OTC Equity Securities.2022

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Four commenters believed that the CAT NMS Plan would result in a data source that is not complete enough and argued that CAT should be significantly expanded in scope to include additional event types, such as additional short selling information, clearing information, and ETF creation and redemption data; additional product types, such as stock index futures and options on index futures; or other types of regulatory submissions or metrics reports, such as CCAR/DFAST, TLAC, Volcker, Basel III, or BCBS-283.2023

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The Commission recognizes that at least some of these expansions could potentially make CAT Data more complete and responds to each of the suggestions above in Section IV.D.4.f. At the same time, the Commission continues to believe that the CAT NMS Plan will result in regulators having direct access to a single data source that will be more complete than any current data source. Furthermore, the Commission continues to believe that the CAT Data will be more complete than other data sources because it will contain data from a greater number of broker-dealers on more event types and products when compared to existing SRO audit trails and other data sources.

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(2) Data Fields

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In the Notice, the Commission also explained that the Plan would consolidate, in a single source, fields that currently may not be available from all data sources, including some fields that are difficult for regulators to compile.2024 It discussed its belief that, in particular, the inclusion of consistent, unique customer information in the CAT Data represents a significant improvement over current SRO audit trails in terms of completeness because very few current data sources contain customer information, and those that do are limited in terms of the completeness and accuracy of this information, which significantly limits regulatory efficiency.2025 As proposed in the Notice, CAT Data would also include other data fields not available from current SRO audit trails, including allocation information such as allocation time, open/close information, Quote Sent Time,2026 and information on whether a Customer gave a modification or cancellation instruction. With respect to the rest of the data fields included in CAT Data, the Commission discussed the fact that certain of them are included in some or all current SRO audit trails but that no single current source contains all of them. For example, the inclusion of order display information (i.e., whether the size of the order is displayed or non-displayed) and special handling instructions in CAT Data improve completeness because they are not always mandatory in SRO audit trail data and therefore may not be consistently available without data requests to broker-dealers.

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The Commission discussed its belief that, while the costs and benefits of including particular fields can change due to technological advances and/or changes in the nature of markets, the Plan contains provisions regarding periodic reviews and upgrades to CAT that could lead to proposing additional data fields that are deemed important.2027 In addition, the Commission noted that it had reviewed gap analyses that examine whether the CAT Data would contain all important data elements in current data sources, and that the Commission identified some potential data gaps.2028 However, the Commission discussed the fact that the Plan provides that prior to the retirement of existing systems, CAT Data must contain data elements sufficient to ensure the same regulatory coverage provided by existing systems that are anticipated to be retired.2029 The Commission discussed its expectation that, therefore, any missing elements that are material to regulators would be incorporated into the CAT Data prior to the retirement of the systems that currently provide those data elements to regulators.

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Three commenters questioned the benefits of timestamps in the Allocation Report.2030 One of the commenters stated that a requirement to report allocation time would be “divorced from the goals of CAT.”2031 Similarly, another commenter noted that allocation time would not provide the regulatory completeness benefit that the Commission is seeking because one likely definition would not capture what regulators would want.2032 This commenter further argued that if the main regulatory purpose of including allocation timestamps is to detect cherry-picking, there could be alternate approaches that achieve the same result using existing data fields.2033

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Three commenters suggested that the open/close indicator for equities would be a new data field.2034 However, these comments did not address the benefits of the open/close indicator that the Commission discussed in the Notice.

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One commenter discussed possible data gaps between CAT and current data sources.2035 The commenter indicated that the OATS-CAT Gap Analysis, published in May 2015, is out of date because it does not reflect changes that have been incorporated into OATS since 2015 including additional fields to accommodate the Tick Size Pilot and ATS Order Book Reporting. The commenter also argued that gaps between OATS and CAT may widen further if changes to OATS continue to be made without corresponding changes to the CAT Plan for the initial phase. Furthermore, the commenter noted that other regulatory systems may indirectly impact CAT reporting requirements; for example, recent NYSE changes to the Account Type Indicator will require EBS changes, which in turn impacts CAT.2036

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In their response, the Participants agreed with the Commission’s analysis in the Notice and expressed their belief that there are benefits associated with including time-stamps in the Allocation Report, including the detection of allocation fraud.2037 With respect to the open/close indicator, the Participants noted that this data field is not captured pursuant to current industry practices for equities or some options transactions.2038 The Participants also responded to the comment regarding the OATS-CAT Gap Analysis, stating that the gap analysis has been updated by including newly-added data fields in these duplicative systems, such as the new OATS data fields related to the Tick Size Pilot and ATS Order Book Reporting changes.2039

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The Commission has considered the comments it received and the Participants’ response regarding the potential benefits of the CAT NMS Plan in terms of data completeness. The Commission disagrees with the comments that allocation timestamps are outside the goal of CAT and that they will not provide the Commission with the regulatory benefit that it is seeking. As discussed in the Notice and below, the Commission believes that allocation time is an important data field because it is critical in investigations of violations such as market manipulation and cherry-picking, and because allocation time is currently more difficult to acquire than the other information on the Allocation Report.2040 The inclusion of this data field will improve the efficiency and efficacy of enforcement investigations for regulators, and this benefit is one of the goals of the CAT NMS Plan. With respect to the commenter who argued that alternate approaches that do not rely upon allocation timestamps can be used to detect cherry picking, the Commission notes that the commenter’s example requires an allocation time.

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Regarding the possibility of data gaps between CAT and current data sources, the Commission recognizes that there may be other gaps between current regulatory data sources and the Plan, in addition to those that the Commission mentioned in the Notice. The Commission also recognizes that the number and the scope of these gaps can change over time due to new regulatory developments. However, as discussed above, the Participants have stated that they have completed the gap analysis.2041 As set out in the Notice (and discussed above), the Plan specifically provides that, prior to the retirement of existing systems, CAT Data must contain data elements sufficient to ensure the same regulatory coverage as the coverage provided by these systems. Therefore, the Commission continues to believe that any missing elements that are important to regulators would be incorporated into the CAT Data prior to the retirement of the systems that currently provide these data elements.

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The Commission is updating its analysis of these benefits to recognize two modifications to the Plan. First, modifications to the Plan to require the reporting of LEIs for Customers and Industry Members in certain circumstances2042 should result in regulators having access to more complete information identifying Customers and Industry Members. Second, the Plan has been modified to eliminate the requirement to report an open/close indicator for equities and Options Market Markers. The inclusion of this indicator for equities and Options Market Makers would have assisted regulators in determining when an investor was buying to cover a short sale in equities or identifying whether options market makers engage in aggressive risk-taking trading. Such information would have been useful in detecting certain market manipulations, violations of rules such as Rule 105, short sale marking rules, and Rule 204. The Commission now notes that, due to the elimination of the requirement to report an open/close indicator for equities and Option Market Makers as part of CAT, these benefits will no longer be realized. However, the Commission is approving the Plan with this modification for the reasons discussed in Section IV.D.4.c, above.

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b. Accuracy

+

In the Notice, the Commission analyzed the expected effect of the CAT NMS Plan on the accuracy of data available to regulators.2043 The Commission preliminarily believed that the requirements in the CAT NMS Plan for collecting, consolidating, and storing the CAT Data in a uniform linked format, the use of consistent identifiers for Customers, and the focus on sequencing would promote data accuracy. However, in regard to certain Plan requirements, the Commission preliminary believed that improvements in data accuracy would be limited. For example, the Commission discussed its belief that the proposed clock synchronization requirements in the Plan would only lead to modest improvements in the percentage of sequenceable order events.2044 Also, the Commission noted that the full extent of improvement that will result from the Plan was uncertain, because the Plan defers many decisions relevant to accuracy until the Plan Processor publishes the Technical Specifications and interpretations.2045

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(1) Definitions

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As previously stated, the Plan defers many decisions relevant to accuracy until the Plan Processor publishes the Technical Specifications and interpretations. In particular, the CAT NMS Plan specifies that the “Technical Specifications shall include a detailed description of . . . each data element, including permitted values, in any type of report submitted to the Central Repository”2046 and “the Plan Processor shall have sole discretion to amend and publish interpretations regarding the Technical Specifications.” 2047 In the Notice, the Commission explained that this leaves open precise definitions and parameters for the data fields to be included in CAT Data. 2048 Nonetheless, the Commission discussed its preliminary belief that the Plan provides some procedural protections to mitigate this uncertainty and help promote accuracy. For example, the Plan requires that, at a minimum, the Technical Specifications be “consistent with [considerations and minimum standards discussed in] Appendices C and D,” and that the initial Technical Specifications and any Material Amendments thereto must be provided to the Operating Committee for approval by Supermajority Vote.2049 Further, all non-Material Amendments and all published interpretations must be provided to the Operating Committee in writing at least ten days before publication, and shall be deemed approved unless two or more unaffiliated Participants call the matter for a vote of the full Operating Committee.2050

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The Commission received comments about the lack of definitions for data fields in the Plan such as the open/close indicator,2051 allocation time,2052 account type,2053 and customer type.2054 Commenters argued that it is currently uncertain whether the Plan Processor will select definitions that are the most beneficial to regulators. For example, one commenter suggested that allocation time may be challenging to define, stating that “the industry does not have a standard business flow which consistently captures time at the same point in the allocation process.”2055 This commenter further pointed out that if allocation time is defined as the time the allocation is booked, “it will not provide the regulatory benefit expected by the SEC,” and provided an example of a way to detect allocation fraud using the time “when the allocation was submitted to move the shares into the intended subaccounts.”2056 The Participants responded to the comments regarding the definitions of allocation time, account type, and customer type by saying that the definitions will be addressed in the Technical Specifications.2057

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The Commission has considered the comments and believes they are consistent with the Commission’s assessment in the Notice that leaving open precise definitions, parameters, and interpretations for the data fields to be included in CAT Data creates uncertainty about the full extent of improvements in data accuracy. The Commission is cognizant of the complexity of certain data fields, such as allocation time. These complexities mean that the accuracy of the data fields depends on Plan Processor discretion, because the Plan Processor would have responsibility for defining the permitted values and interpreting when CAT Reporters would use such permitted values, and sometimes would not have guidance from previous data sources on how to define or interpret such a field.2058 Although the Commission agrees that uncertainty exists in the selection of data definitions and that definitions ultimately selected may not promote accuracy as much as certain alternatives, as discussed in Section V.G.4.a.(2), the Commission continues to believe that the existing process trades off the need for certainty with the benefits of an efficient process going forward. Further, for reasons discussed above in Section IV.B. and below in Section V.E.3.d, the Commission continues to believe that the Plan provides some procedural protections to mitigate this uncertainty and help promote accuracy.

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(2) Data Errors

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In the Notice, the Commission discussed the fact that the CAT NMS Plan specifies a high-level process for handling errors that includes target Error Rates for data initially submitted by CAT Reporters and a correction process and timeline, but explained that it is difficult to conclude whether the Error Rates and processes in the CAT NMS Plan would constitute an accuracy improvement as compared to current data sources. Specifically, because the current OATS error rate is below 1% and the Plan states that 5% is an appropriate initial Error Rate, the Commission preliminarily believed that the initial percentage of errors in CAT would be higher than the current percentage of errors in OATS, though the OATS error rate may not be directly comparable to the Error Rate in the Plan.2059 As discussed in the Notice, Error Rates for CAT Data may not be comparable to error rates in OATS because of the increased scope and level of linkages specified in the Plan and the new, large, and untested system.2060

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In the Notice, the Commission also discussed that the Plan contains some uncertainty about the level of the maximum Error Rate because the initial 5% rate is subject to a quality assurance testing period and subject to change again before each new batch of CAT Reporters are brought online. The Commission noted that in time, the rate could be lowered, but it also could be raised.2061 Finally, the Commission discussed that the Plan specifies an error correction process and indicates that practically all errors identifiable by the validations used would be corrected by 8:00 a.m. ET on T+5, but that the Plan does not provide the level of detail necessary to verify whether the CAT validation process would run the same validations as OATS, whether current validations would be relevant, and what validations, if any, would be added.2062

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Although the Commission received several letters regarding data error rates,2063 only a few letters discussed the effect of Error Rates on the accuracy of CAT Data.2064 While supporting the goal of a “de minimis” post correction error rate, one commenter suggested that the errors in CAT Data would not be “de minimis” even after the error correction process because OATS currently does not achieve “de minimis” errors.2065 For example, this commenter stated that there are instances where errors cannot be corrected in OATS and gave true duplicates and non-reportable symbols as examples.2066 The commenter stated that it is unreasonable to expect CAT Data to be any different than OATS data, especially because the industry has no experience with reporting and error correcting the new data types required by the Plan.2067 Another commenter expanded on this concern by questioning why accuracy problems persist in OATS today and argued that the improvements to accuracy from the Plan depend on eliminating the inaccurate/problematic reporting that exists today.2068

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Other commenters expressed uncertainty regarding whether CAT Reporters would be able to achieve the initial Error Rate of 5%.2069 One commenter indicated that there is not enough information at this time to assess the Error Rate and that “Error Rate” is not specifically defined.2070 Another commenter echoed this sentiment saying that there is no history of reporting error rates for options, market making, customer information, or allocations and the Plan provides “little or no information … regarding the types of errors that will be identified, and if and how those errors can be corrected.”2071 The commenter also cited uncertainties related to the inexperience of some CAT Reporters, unknown interfaces, a lack of information on test tools and correction tool kits, and an unknown linkage logic.2072

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Finally, one commenter agreed with the Commission’s analysis that OATS error rates may not be directly comparable to a CAT Error Rate.2073 In particular, this commenter stated that OATS would be a sufficient comparison base for equities data only, but not for options, allocations, Customer Information, or market making reporting.

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In response to the comments on uncertainty in the definition of Error Rate, the Participants disagreed, pointing to the current definition in the Plan and in Rule 613(j)(6).2074 The Participants further stated that they intend to keep the definition of Error Rate the same as in Rule 613 and noted that it is the Compliance Thresholds2075 that relate to the CAT reporting performance of individual CAT Reporters. In response to commenters expressing uncertainty about the ability to achieve the Error Rates, the Participants explained that they performed a detailed analysis that not only considered current and historical OATS error rates, but also considered the magnitude of the new reporting requirements and the fact that many CAT Reporters had never previously been obligated to report data for audit trail purposes.2076 The Participants, however, acknowledged that actual experience with CAT itself will provide more accurate and applicable data for determining the appropriate Error Rate and pointed out that the Plan provides for various opportunities for the Error Rate to be reevaluated and reset.2077

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The Commission has considered the comment letters received and the Participants’ response and continues to believe that it is difficult to determine whether the Error Rates and processes in the Plan would constitute an accuracy improvement compared to current data. The Commission recognizes the uncertainty regarding the ability to achieve a “de minimis” post-correction Error Rate discussed by a commenter and notes that post-correction errors are the ones more pertinent to the accuracy of data used in regulatory activities. While the Commission is concerned with the effect of the post-correction Error Rate on accuracy, it notes that, while uncertain, the Plan does require the Plan Processor to perform validations within three specific categories: File Validations (confirmation that the file is received in the correct format); Validation of CAT Data (checks of format, data type, consistency, range/logic, data validity, completeness, and timeliness); and Linkage Validation (checking the “daisy chain”).2078 Specifically, in regard to Linkage Validation, the Plan seems to require validations that are more comprehensive than what FINRA runs on OATS data, where, as stated in the Notice, significant error rates in event linking are common because there is no cross-participant error resolution process.2079 Further, the OATS error types described in the Baseline above2080 also suggest that the Plan’s validations will be more comprehensive than the validations run on OATS data.

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The Commission agrees with the commenters that expressed uncertainty about whether CAT would be able to achieve the 5% initial Error Rate, but also agrees with the Participants’ response. In the Participants’ analysis, the Participants considered the magnitude of the new reporting requirements and the fact that many CAT Reporters had never previously been obligated to report data for an audit trail when they set the initial Error Rate. Furthermore, as mentioned in the Notice, the Plan provides for various opportunities for the Error Rate to be reevaluated and reset after CAT Reporters have more experience with CAT.2081

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Finally, the Commission agrees with the comment that OATS error rates may not be comparable to a CAT Error Rate because there is currently no reporting regime comparable to OATS for options, allocations, Customer Information, or market making reporting. In the Notice, the Commission discussed uncertainty in comparing OATS error rates to CAT Error Rates due, in part, to the increased scope of the CAT NMS Plan.2082

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(3) Event Sequencing

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A. Timestamp Granularity

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In the Notice, the Commission discussed its preliminary belief that the minimum timestamp granularity required by the Plan would result in some improvement in data accuracy, but that the level of improvement could be limited. The CAT NMS Plan requires timestamps to the millisecond.2083 This is consistent with Rule 613, which requires timestamps to reflect current industry standards and be at least to the millisecond.2084 Further, pursuant to Rule 613, if a CAT Reporter’s system already utilizes timestamps in increments less than the minimum required by the Plan, the CAT Reporter must record timestamps in such finer increments.2085

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As the Commission discussed in the Notice, many of the systems from which regulators currently obtain data already capture timestamps in increments of milliseconds or less, meaning that there would be no improvement in timestamp granularity as compared to those systems.2086 However, to the extent that some current data sources report timestamps in increments coarser than a millisecond, which is the case for 12% of OATS records and all EBS records,2087 the Commission noted that it expected the CAT millisecond timestamp requirement to improve data granularity, and thereby allow regulators to more accurately determine the sequence of market events relative to surrounding events. However, the Commission also explained that the benefits from the more granular timestamps could be limited by the level of clock synchronization required by the Plan. In particular, the Commission explained that timestamp granularity would not be the limiting factor in sequencing accuracy, because recording events with timestamps with resolutions of less than one millisecond cannot help to sequence events occurring on different venues with clocks that may be 100 milliseconds out of sync due to clock synchronization offsets.2088 Therefore, the benefits of timestamping order events at increments finer than a millisecond would be limited without also improving the clock synchronization standards of the Plan.

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The Commission discussed the benefits of the one second timestamp on manual orders and stated that it preliminarily believed that timestamp granularity of one second would be appropriate for manual orders, rather than a millisecond granularity, because recording Manual Order Events at the millisecond level would be ultimately arbitrary or imprecise due to human interaction.2089

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Two commenters thought that a millisecond timestamp would be sufficient to achieve improvements in event sequencing.2090 One of these commenters suggested that requiring timestamps that are more granular than one millisecond for CAT Reporters who capture timestamps more granular than a millisecond would not yield regulatory benefits as it will result in a false sense of accuracy on event sequencing.2091 An additional commenter did not support this requirement, stating that it would be inequitable and would not serve a regulatory purpose.2092 On the other hand, two commenters supported the requirement that CAT Reporters report sub-millisecond timestamps if they capture them.2093 One commenter stated their belief that timestamp granularity “should go hand-in-hand with how fast a market participant is allowed to conduct their HFT activities.”2094 The other commenter stated that a “significant portion of today’s trades occur at microsecond intervals,” and that the Plan’s timestamp resolution “will be insufficient to show the precise time of the reportable activities.”2095 The commenter further stated that “[f]or some practices, such as cancellations, stuffing, and other “noisy” behaviors, the Plan should “require a more precise granularity to more comprehensibly and accurately capture the frequency and scale of such practices.”2096 One commenter stated their belief that stricter tolerances for the granularity of timestamps are already in effect at exchanges and ATSs that maintain an orderbook and did not believe it necessary to mandate timestamp tolerances for these entities since they already adhere to stricter tolerances for commercial reasons.2097

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Two commenters indicated that timestamp granularity and clock-offset tolerance for allocation timestamps should be at one second.2098 One commenter argued that the benefits of allocation time would not require millisecond precision while three commenters argued that allocations are not time-critical.2099

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One commenter expressed that the irregularity in manual orders made it difficult to set a tolerance applicable to all manual orders and suggested that initially a timestamp tolerance of more than one second be allowed for manual orders.2100 However, several other commenters stated that one second is a reasonable standard for manual orders.2101

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In their response, the Participants stated their belief that CAT Reporters should be required “to report timestamps to the CAT at the granularity at which they are captured, even if that is more granular than that required by the Plan.” They further stated their belief that capturing such granularity would increase the quality of data reported to the CAT.2102 With respect to the timestamps on Allocation Reports, the Participants recognized the practical issues raised by requiring timestamps for Allocation Reports and proposed to amend the Plan to permit CAT Reporters to report allocation timestamps with a granularity of one second.2103 With respect to manual order timestamps, the Participants stated that they continued to believe their proposed approach to Manual Order Events is appropriate.2104

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The Commission has considered the comment letters received and the Participants’ response, and as discussed in more detail above,2105 has amended the Plan so that Participants are required to adhere to a more stringent clock synchronization standard of 100 microseconds and allocation timestamps need only be reported in seconds instead of milliseconds. The Commission is updating its economic analysis to incorporate these modifications to the Plan. The Commission agrees with the commenter who pointed out that millisecond timestamps are insufficient to show the precise timestamp of certain activities and disagrees with commenters who stated that millisecond precision is sufficient to sequence events. As stated in the Notice, the Commission believes that a 1 millisecond timestamp granularity offers benefits over the Baseline, but that a more granular timestamp requirement, coupled with a more stringent clock synchronization requirement, would be needed to completely sequence the majority of unrelated market events. In response to the commenters who questioned the benefits of reporting the sub-millisecond timestamps if CAT Reporters capture them, the Commission agrees with the Participants that such a requirement will increase the quality of data reported to the CAT.

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Modifications to the Plan now require Participants to adhere to a more stringent clock synchronization standard of 100 microseconds (or less), and CAT Reporters to record timestamps in finer increments than 1 millisecond if their systems utilize timestamps in such finer increments. Because, as discussed above,2106 Participants already operate pursuant to a clock synchronization standard of 100 microseconds with regard to their electronic systems, and because many Participants already report timestamps in microseconds and nanoseconds in their direct feeds and are currently required to report timestamps in microseconds for equity trades and quotes, the Commission does not believe the clock synchronization amendment to the Plan will result in large accuracy improvements over current standards for timestamp granularity. However, the Commission is approving the Plan without further modifications for the reasons discussed in Section IV.D.13, above.

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In the Notice, the Commission did not explicitly consider timestamp granularity or clock synchronization standards for timestamps in Allocation Reports. However, in response to comments and modifications to the timestamp on Allocation Reports, the Commission now analyzes whether the modifications limit the improvements to accuracy. Based on the experience of its Staff, the Commission understands that allocations are conducted after a trade and that the allocation time can aid regulators in ways that do not require millisecond-level timestamps (or 50 millisecond clock offset tolerance). Further, the Commission agrees with the commenter’s argument that allocations are not time-sensitive and the benefits from allocation timestamps do not require millisecond precision. Therefore, the Commission believes that requiring allocation times to be recorded in milliseconds (with 50 millisecond offset tolerance) compared to seconds (with one second tolerance) would provide little, if any, additional regulatory benefit. Therefore, the Commission does not believe that this modification materially reduces the improvements to accuracy.

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B. Clock Synchronization

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In the Notice, the Commission discussed its belief that the clock synchronization standards in the CAT NMS Plan are reasonably designed to improve the accuracy of market activity sequencing, but that the improvements to the percentage of sequenceable order events by Plan standards are modest and the requirements of the Plan may not be sufficient to completely sequence the majority of market events relative to all other events. In particular, the Commission conducted an analysis using MIDAS data that found that the current FINRA one-second clock offset tolerance allows only an estimated 1.31% of unrelated order events2107 for listed equities and 6.97% of unrelated order events for listed options to be sequenced.2108 By comparison, the proposed 50 millisecond clock offset tolerance could accurately sequence an estimated 7.84% of unrelated order events for listed equities and 18.83% of unrelated order events for listed options.2109 Also, by comparison, the analysis found that a 100 microsecond clock offset tolerance, if applied to all reporters, could accurately sequence an estimated 42.47% of unrelated order events for listed equities and 78.42% of unrelated order events for listed options.2110 In the Notice, the Commission discussed its preliminary belief that the analysis suggests the standards required by the Plan do represent an improvement over the current standard but that the majority of unrelated market events would remain impossible to sequence based on the Plan’s required clock synchronization standards.2111

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The Commission also discussed in the Notice that, independent of the potential time clock synchronization benefits, order linking data captured in CAT should increase the proportion of order events that are accurately sequenced.2112 This is because some records pertaining to the same order can be sequenced by their placement in an order lifecycle (e.g., an order submission must have occurred before its execution) without relying on timestamps.

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Although the Commission received several comment letters related to clock synchronization, which are discussed in detail in Section IV.D.13.a above, only two letters commented on the effects of clock synchronization standards on event sequencing.2113 Both commenters agreed with the Commission’s assessment that provisions in the CAT NMS Plan related to event sequencing would provide improvements in accuracy compared to what is currently achievable.2114 However, one of these commenters further stated their belief that unrelated events may not be sequenceable and stated that it is unclear what the regulatory relevance is of sequencing unrelated events across market centers.2115 The commenter went on to say that there was no evidence that lower clock synchronization tolerances would increase the accuracy of the audit trail;2116 however, the commenter also stated that “more precise timestamps provided by exchanges may be of benefit to the audit trail as corroborating evidence when sequencing events that terminate at an exchange.”2117

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The Commission has considered the comment letters received, the Participants’ response, and amendments to the Plan. As explained below, the Commission continues to believe that requirements in the Plan related to event sequencing would provide improvements in accuracy compared to what is currently achievable, but that improvements are modest and the requirements to the Plan may not be sufficient to completely sequence the majority of market events relative to all other events. Orders sent from different broker-dealers to different CAT Reporters can only be sequenced in CAT Data according to their timestamp. If the clocks of CAT Reporters are not synchronized with sufficient precision, it is impossible to definitively sequence these events. The Plan acknowledges this limitation and states, “[f]or unrelated events, e.g., multiple unrelated orders from different broker-dealers, there would be no way to definitively sequence order events within the allowable clock drift as defined in Article 6.8.”2118 The Commission disagrees with the comment that sequencing unrelated market events has no regulatory relevance. As discussed in the Notice, the ability to sequence market events is crucial to the efficacy of detecting and investigating some types of manipulation, particularly those involving high frequency trading, those in liquid stocks in which many order events can occur within microseconds, and those involving orders spread across various markets. The Commission also disagrees with this commenter’s assessment that more stringent clock synchronization standards would not increase the accuracy of the audit trail. As demonstrated by the Commission’s analysis in the Notice, if clock synchronization standards were made more stringent, some of the many market events at separate market centers that occur within small time windows would become sequenceable, which would increase the accuracy of the audit trail.

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As discussed in more detail above,2119 the Commission has amended the Plan so that Participants are required to adhere to a more stringent clock synchronization standard of 100 microseconds with regard to electronic systems, excluding certain manual systems. In the Participants’ response, they noted that all Participants currently operate pursuant to a clock synchronization standard of 100 microseconds with regard to their electronic systems, so that the amended requirement is already met by the Participants.2120 In addition, as discussed in more detail above,2121 the Commission has approved a proposed rule change by FINRA that reduces the synchronization tolerance for computer clocks of firms that record events in NMS Securities to 50 milliseconds.2122 Because broker-dealers that are FINRA members are currently required to adhere to a clock synchronization standard of 50 milliseconds, and because Participants already adhere to a clock synchronization standard of 100 microseconds, the Commission does not believe the 50 millisecond clock synchronization requirement of CAT Reporters and the more stringent clock synchronization requirement of 100 microseconds for Participants, as specified in the amended Plan, would substantially change the ability of regulators to accurately sequence unrelated market events over what is currently achievable using timestamps alone.2123 However, the Commission is approving the Plan without further modifications for the reasons discussed in Section IV.D.13, above. Further, to the extent CAT captures more events than are currently captured, such as CAT Reportable Events by broker-dealers that are not FINRA members (see Section V.E.1.a.(1)), regulators will be able to accurately sequence a proportion of those events, which will increase the overall number of sequenced events.2124 In addition, the Commission continues to believe that, independent of the potential clock synchronization benefits, the order linking data that would be captured by the CAT should increase the proportion of events that could be sequenced accurately.2125

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(4) Linking and Combining Data

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In the Notice, the Commission discussed its preliminary belief that the requirements of Rule 613 and the Plan related to data linking would result in improvements to the accuracy of the data available to regulators, but the extent of the improvement would depend on the accuracy of the linking algorithm and the reformatting process that the Plan Processor would eventually develop. Specifically, the Commission discussed its belief that the requirement that data be stored in a uniform format would eliminate the need for regulators to reformat the data, and that storing data in a linked format removes the need for regulators to link information from multiple lifecycle events of an order or orders themselves, which could further reduce errors and increase the usability of the data. Furthermore, the Commission discussed its belief that the Plan would significantly improve the ability of regulators to link order events compared to OATS, and would link this activity to specific customers, unlike current audit trail data. However, the Commission also noted that the CAT NMS Plan does not provide sufficiently detailed information for the Commission to estimate the likely error rates associated with the linking process required by the CAT NMS Plan.2126 Accordingly, while the centralized linking should generally promote efficiencies and accuracies, the Commission stated that these uncertainties make it difficult to gauge the degree to which the process for linking orders across market participants and SROs would improve accuracy compared to existing data, including OATS.2127

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The Commission also explained that uncertainties prevented it from determining whether the process for converting data into a uniform format at the Central Repository would improve the accuracy of the data over existing audit trail accuracy rates.2128 The Plan includes two alternative approaches to data conversion. In the first, called Approach 1, CAT Reporters would submit data to the Central Repository in an existing industry standard protocol of their choice such as the Financial Information eXchange (“FIX”) protocol. In Approach 2, CAT Reporters would submit data to the Central Repository in single mandatory specified format, such as an augmented version of the OATS protocol. Under Approach 1, the data must be converted into a uniform format at the Central Repository in a second step. Under Approach 2, the data is already in a uniform format at the time of submission. The Plan defers the decision regarding which approach to take until the selection of a Plan Processor and the development of Technical Specifications. The Commission explained its preliminary belief that Approach 1 would likely result in a lower Error Rate than Approach 2 because of increased efficiency and accuracy due to specialization by the Plan Processor.2129 However, because of uncertainties regarding expected Error Rates and error rates in current data, the Commission was unable to evaluate the degree to which the approach would improve data accuracy relative to currently available data.2130

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The Commission also discussed its belief that the Plan’s requirement for standardized Allocation Reports that consistently and uniquely identify Customers and CAT Reporters should improve the linkability of allocation information compared to current data, despite the limitation of direct linkage to order lifecycles, particularly in scenarios where potentially violative conduct is carried out by market participants operating through multiple broker-dealers.2131 The Commission stated that this moderate improvement in the linkability of allocation data should improve regulators’ ability to identify market participants who commit violations related to improper subaccount allocations.

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The Commission received two comment letters that agreed with the Commission’s assessment that Plan provisions related to data linking would increase the overall accuracy of data available to regulators. One of these commenters stated that, “the provisions in the CAT NMS Plan (linkage requirements, daisy chains, Firm Designated ID) will result in a more complete and accurate linking of order events across market participants and SROs.”2132 The other commenter agreed that data accuracy would improve.2133

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Commenters also opined on whether data should be stored in a standardized format and on the relative economic effects of different approaches to data ingestion formats. One commenter stated that the Plan’s requirement to store data in a standardized format would increase accuracy within that format, but on the other hand, transformation by CAT Reporters could introduce errors during the data submission process.2134 The commenter further stated that using original data reduces the chance of introducing noise.2135 Several commenters indicated that existing and widely used formats or protocols for data ingestion would promote better data accuracy.2136 Some also noted that without a uniform data ingestion format, data quality would suffer.2137

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The Commission received one comment related to the ability to link allocations under the Plan. Specifically, the commenter stated that an allocation report is “undeniably useful for analytic[al] purpose[s],” but noted challenges in linking account and subaccount information to which an execution is allocated.2138

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The Commission has considered the comment letters received, and continues to believe that the requirements of the Plan related to data linking would result in improvements to the accuracy of the data available to regulators. The Commission agrees with the commenter who stated that transforming data into a uniform format can introduce errors, but the Commission believes such errors will be less common and severe than those introduced currently by multiple regulators independently linking together many different data sources with different formats.2139 The Commission agrees with the commenters that stated requiring existing and widely used formats for data ingestion would promote the accuracy of data. Because the Plan does not mandate an ingestion format, uncertainty exists as to what ingestion format (or formats) will be required and whether the ingestion format(s) ultimately selected will promote accuracy as much as alternatives. The Commission acknowledges this uncertainty. In response to the commenters that stated that data quality would suffer without a uniform data ingestion format, as specified in Approach 2, the Commission continues to believe that the benefits to data accuracy are potentially greater using Approach 1, where data is ingested in an existing industry standard protocol of the submitter’s choice and subsequently converted to a uniform format at the Central Repository. The Commission believes this approach is more likely to benefit data accuracy because, as stated by a commenter, allowing the use of original data eliminates the introduction of errors and specialization by the Plan Processor should keep to a minimum the number of errors introduced during the conversion process.

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With regards to the commenter who noted the challenges in linking allocation and subaccount information with executions using the Plan’s approach, the Commission agrees that this approach may result in certain drawbacks, such as having access to less accurate allocation linkages compared to the approach under Rule 613, which required a link between allocations and executions.2140 However, the Commission continues to believe, as set out in the Notice, that the Plan’s Allocation approach will provide regulators with the necessary information to detect abuses in the allocation process without placing undue burdens on broker-dealers.

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(5) Customer and Reporter IDs

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In the Notice, the Commission discussed its preliminary belief that the inclusion of the unique Customer and CAT Reporter Identifiers described in the CAT NMS Plan would increase the accuracy of customer and broker-dealer information in data regulators use and provide benefits to a broad range of regulatory activities that involve audit trail data. 2141 The Commission explained that it is currently difficult for regulators to identify the trading of a single customer across multiple market participants because many existing data sources use inconsistent definitions and mappings across market centers.2142 In addition, the Commission discussed how the Customer Information Approach specified in the CAT NMS Plan requires the Plan Processor to create a unique Customer-ID that would be consistent across that Customer’s activity regardless of the originating broker-dealer.2143 The Commission discussed its preliminary belief that the Customer-ID approach constitutes a significant improvement relative to the Baseline because it would consistently identify the Customer responsible for market activity, obviating the need for regulators to collect and reconcile Customer Identifying Information from multiple broker-dealers.

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Also, in the Notice, the Commission discussed the challenges that regulators face in tracking broker-dealers’ activities across markets due to inconsistent identifiers and a lack of a centralized database.2144 The CAT NMS Plan calls for the use of CAT-Reporter-IDs, which would be assigned to each CAT Reporter by the Plan Processor in the CAT Data.2145 In the Notice, the Commission stated that it preliminarily believed that the existing identifier approach specified in the CAT NMS Plan would improve the accuracy of tracking information regarding entities with reporting obligations, namely broker-dealers and SROs.

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One commenter stated that there are “flaws to the approaches of CAT Customer and Reporter Identifiers, thus it has little benefit to improve the accuracy of information.”2146 The commenter, however, did not list these flaws and did not provide specific reasons why the identifiers would not improve data accuracy. Another commenter stated that assigning a unique ID to “every person that ever trades a security” could render the data difficult to use, and that greater difficulties could arise from allowing broker-dealers to assign their own unique customer IDs.2147 However, the commenter did not specify in detail what difficulties would arise or why the data would be difficult to use. That commenter noted that unique IDs for every client might be unnecessary, and suggested applying them only to those with a certain threshold of trading activity.2148 Two commenters suggested that the use of the LEI would improve the accuracy of Customer Identifying Information. One commenter suggested that using LEIs would allow market participants to be “easily identified,” and also suggested that the LEI should be used to identify customers in conjunction with other recognized personal identifiers, to promote accurate identification.2149 Another stated that using the LEI would allow for “unambiguous identification” of entities submitting information to the CAT system and would allow the SEC “to be clear about the identity of entities it is monitoring.”2150

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In their response, the Participants stated that, based on discussions with the DAG, they agreed with the commenters that it would be reasonable to require an Industry Member to provide its own LEI and the LEIs of its customers to the CAT if the Industry Member has or acquires such LEIs.2151 As discussed above, the Commission agrees with the commenters and the Participants and has modified the Plan to require the reporting of LEIs for Customers and Industry Members in certain circumstances.2152

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The Commission has considered the comment letters received, the Participants’ response, and modifications to the Plan. The Commission believes that limiting unique customer IDs to clients meeting a certain threshold of trading activity would significantly limit the benefits of the Plan in terms of accuracy.2153 As discussed in more detail below, the Commission expects consistent Customer IDs to improve the ability of regulators to identify insider trading, manipulation and other potentially violative activity.2154 The commenter that stated that assigning a unique ID to “every person that ever trades a security” could render the data difficult to use2155 did not explain in detail what difficulties might arise. Similarly, the commenter that suggested that the accuracy benefits of the Plan would be limited due to “flaws to the approaches of CAT Customer and Reporter Identifiers”2156 likewise did not provide any details as to these flaws or how they would affect the accuracy of the CAT Data. In light of the lack of specificity in these comment letters, the Commission continues to believe that the inclusion of unique Customer and Reporter Identifiers as described in the CAT NMS Plan would increase the accuracy of customer and broker-dealer information in data used by regulators.

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The Commission is, however, updating its economic analysis to recognize modifications to the Plan to require the reporting of LEI as part of the Customer Identifying Information if the Customer has an LEI and the Industry Member has collected it, and as a part of identifying information for Industry Members in addition to the CRD number, if the Industry Member has an LEI.2157 Currently, none of the sources of trade and order data discussed above in the Baseline include LEIs for Customers or Industry Members. Based on information provided by commenters who suggested the inclusion of LEI,2158 supplemented by Commission Staff experience, the Commission believes that the inclusion of an LEI in CAT Data will improve the accuracy of CAT Data by enabling the linking of the data to other data sources such as foreign jurisdictions and domestic data not included in CAT at this time (e.g., futures and security-based swaps), as LEIs become more widely used by regulators and the financial industry. In addition, the Commission expects the modification to improve the accuracy of the data by providing more information about the identities of Industry Members and Customers, including – as the LEI system starts to collect parent and subsidiary information – their relationships with other entities.2159 The Commission notes, however, that the benefits of the LEI information will be limited insofar as the reporting of an LEI is required for Industry Members only where the Members already have an LEI, and for Customers only where the Customer has an LEI and the Industry Member has or acquires the LEI.2160

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(6) Aggregation

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In the Notice, the Commission discussed its belief that most CAT Data would be disaggregated data and that therefore the CAT Data would not suffer from the limitations of the aggregated data sources that regulators must currently use.2161 Currently, subaccount allocation data and issuer repurchase data exist in forms that are aggregated and thus these data sources are limited for use in certain regulatory activities and interests.2162 In particular, neither data type may necessarily indicate the individual executions. The Commission discussed its preliminary belief that the CAT NMS Plan would improve the accuracy of allocation data compared to existing data available to regulators, because it would provide disaggregated information on the identity of the security, the number of shares and price allocated to each subaccount, when the allocation took place, and how each Customer subaccount is associated with the master account. This would more accurately reflect which Customer ultimately received the shares that were purchased in a particular trade. The Commission anticipated that regulators may use CAT Data for some purposes that they use cleared data for now because the CAT Data would be significantly less aggregated. Finally, the Commission discussed its belief that because the Plan would require that the Plan Processor link Customer information to the order lifecycle and the report would identify as Customers those issuers that are repurchasing their stock in the open market,2163 CAT Data would be more accurate and more granular and there would be more data than what is available currently for open market issuer repurchases, which consists of monthly aggregations of those issuer repurchases.

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The Commission did not receive any comments regarding its analysis of data aggregation in the Notice, the Participants’ response did not specifically address its analysis of data aggregation, and the Commission does not believe that modifications to the Plan warrant changes to this aspect of the economic analysis. The Commission continues to believe that CAT Data would constitute an improvement over current data sources because it would be disaggregated data that would not suffer from the limitations that characterize some of the aggregated data sources that regulators must currently use. Specifically, the Commission continues to believe that the Plan would promote more effective and efficient investigation by regulators of subaccount allocation issues and issuer repurchase activity.

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c. Accessibility

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In the Notice, the Commission discussed its belief that the Plan, if approved, would substantially improve the accessibility2164 of regulatory data by providing regulators with direct access to the consolidated CAT Data, including some data elements that currently take weeks or months to obtain. However, the Commission also explained that there is some uncertainty regarding the process for regulatory access under the Plan, which creates uncertainty as to the degree of the expected improvement.2165

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(1) Direct Access to Data

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The Commission recognized in the Notice that improving accessibility of regulatory data relative to the Baseline requires ensuring that enough SRO and Commission Staff members are able to use the direct access system supplied by the Central Repository when they need it. The Commission discussed its belief that the ability to use the direct access system depends, among other things, on how user-friendly the system is, whether it has enough capacity for the expected use of the system, and whether it contains the functionality that the SRO and Commission Staff require. However, the Commission preliminarily believed that “the minimum requirements for the direct access system ensure that the Plan will improve on the Baseline of access to current data, including the process of requesting data.2166

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In the Notice, the Commission discussed in detail the minimum functional and technical requirements, as set out in Appendix D of the Plan.2167 In terms of capacity, the Commission noted, among other things, that the Central Repository must be able to support a minimum of 3,000 regulatory users within the system, 600 of which might be accessing the system concurrently (which must be possible without an unacceptable decline in system performance). In terms of functionality, the Commission noted that two types of query interfacing must be supported—an online targeting query tool and a user-defined direct query tool that allows for bulk extraction.2168 The Commission further noted that all queries must be able to be run against raw (i.e., unlinked) or processed data, or both, and that a variety of minimum performance metrics apply to those queries.

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The Commission noted that the direct access facilitated by provisions of the CAT NMS Plan is reasonably designed to substantially reduce the number of ad hoc data requests and provide access to substantial data without the delays and costly time and knowledge investments associated with the need to create and respond to data requests.2169 The Commission believed that this would dramatically reduce the hundreds of thousands of requests that regulators must make each year in order to obtain data, thus reducing the burden on the industry. For example, the Commission noted that regulators do not have direct access to EBS or trade blotter data and therefore they must request such data when needed for regulatory tasks. As a result, in 2014 the Commission made 3,722 EBS requests that generated 194,696 letters to broker-dealers for EBS data. Likewise, the Commission understood that FINRA requests generate about half this number of letters. In addition, the Commission noted that for examinations of investment advisers and investment companies, it makes approximately 1,200 data requests per year. The Commission also discussed its belief that, in addition to decreasing the amount of time currently required for regulators to access data sources, direct access to the CAT Data should decrease the costs that many regulators and market participants incur in either requesting data or fulfilling requests for data. Furthermore, the Commission discussed its belief that the Plan would also permit regulators to directly access customer information, which could improve the ability of SROs to conduct surveillance.2170

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The Commission also discussed its belief that in some dimensions of accessibility, uncertainties exist that could affect the degree of the expected improvement to accessibility. In particular, while the Plan provides detail on the method of access and the types of queries that regulators could run, many of the decisions regarding access have been deferred until after the Plan Processor is selected and finalizes the Technical Specifications.2171 For instance, decisions regarding exactly how regulators would access the data beyond providing them with query tools; how user-friendly these tools will be; whether the Plan Processor would host a server workspace that regulators could use; and whether regulators can perform dynamic searches, data extraction, and offline analysis have not yet been decided. Nonetheless, the Commission stated that the requirements included in the Plan describe a system that, once implemented, would result in the ability to query consolidated data sources, which represents a significant improvement over the currently available systems. This substantial reduction in data delays and costly data investments would permit regulators to complete market reconstructions, analyses, and research projects, as well as investigations and examinations, more effectively and efficiently, and would lead to improved productivity in the array of regulatory matters that rely on data, which should lead to improved investor protection.2172

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One commenter argued that “the online targeted query tool and user-defined direct queries and bulk extracts methods will not enable regulatory staff to use the data.”2173 This is because these methods do not embed real-time analytics that would allow the system to automatically red-flag suspicious trade activities.2174 The same commenter agreed that the direct access regulators will have to CAT Data “would help reduce the number of ad-hoc data requests.”2175 The commenter estimated that such a reduction in the number of data requests would result in cost savings of “about 5%, but definitely not over 10%.”2176 However, the commenter did not provide any additional information or details to support that estimate.

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A second commenter also agreed that the reduction in ad hoc data requests would result in cost savings, stating that the costs associated with responding to EBS requests “will be reduced over time as regulators would no longer need to make EBS inquiries for data that already resides in CAT.”2177 However, that commenter did not provide any specific estimates of these savings.

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Two commenters agreed with the Commission that there is some uncertainty regarding the process for regulatory access to CAT Data.2178 In particular, one commenter stated that the Plan does not provide details of the technical or procedural mechanisms on how the regulators will access the online targeted query tool or submit user-defined direct queries.2179 The commenter noted that the Plan does not provide any specifics on the types of technologies or systems that would be required for regulators to download the data or connect to the API to be made available by the Plan Processor.2180 Furthermore, the commenter pointed out that although the Plan Processor is required to support a minimum of 300 simultaneous query requests with no performance degradation, the Plan does not define a baseline performance for dynamic search against which the performance degradation could be compared.2181 The commenter noted that the Plan requires the Plan Processor to provide such details at least six months before the Participants begin reporting data to the Central Repository.2182 The commenter stated that there is a risk that six months will be insufficient for regulators to implement any changes necessary in order to be able to use the tools offered by the Plan Processor, and that this could delay regulators’ ability to access the CAT Data.2183 The other commenter noted generally that there are insufficient details regarding how regulators would access, use and analyze CAT Data, and how regulators’ end-use requirements would be addressed.2184

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In their response, the Participants argued that the Plan does provide sufficient detail regarding regulatory access to CAT Data.2185 In particular, the Participants noted that Section 8 of Appendix D of the Plan describes various tools that will be used for surveillance and analytics. In addition, the Participants noted that the Plan states that the Plan Processor will provide an open API that allows regulators to use analytic tools and will permit regulators to use ODBC/JDBC drivers to access the CAT Data.2186

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The Commission has considered the comments it received regarding the potential benefits of the CAT NMS Plan in terms of the accessibility of regulatory data, as well as the Participants’ response. Commenters did not provide any additional information or analysis that changes the Commission’s conclusions as set out in the Notice, and there have been no modifications to the Plan that would warrant changes.

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With respect to the comment that an online targeted query tool and a user-defined direct query tool will not enable regulatory Staff to use CAT Data,2187 the Commission disagrees with the commenter’s assertion that regulators cannot benefit from direct access to CAT Data unless CAT embeds real-time analytics. In the Notice, the Commission discussed two ways in which regulators could benefit from having direct access to CAT Data facilitated by the availability of an online targeted query tool and a user-defined direct query tool.2188 First, direct access to CAT Data could substantially reduce the number of ad hoc data requests and decrease the costs that many regulators currently incur in requesting data. Second, the Plan would permit regulators to directly access customer information, which could improve the ability of SROs to conduct surveillance, among other benefits discussed below.2189 Because these benefits of direct access do not depend on the ability of CAT to embed real-time analytics, the Commission continues to believe that the methods of direct access specified in the Plan will improve the accessibility of regulatory data relative to the Baseline.

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With respect to the comment that the reduction in the number of data requests would result in cost savings to SROs of “about 5%,” but “definitely not more than 10%,”2190 the Commission notes that the commenter did not explain the basis for its estimate. The Commission acknowledged in the Notice that it lacks the necessary information to estimate the magnitude of these cost savings, and this continues to be the case, as the Commission has not received any additional information it can use to estimate the savings. However, the Commission continues to believe that direct access to CAT Data should decrease the costs that many regulators and market participants incur in either requesting data or fulfilling requests for data.

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With respect to the comments about uncertainties regarding the process for regulatory access to CAT Data,2191 the Commission agrees with the commenter that, as discussed in the Notice, there is some uncertainty regarding the process for regulatory access under the Plan. The Commission notes that while the Plan provides detail on the method of access and the type of queries that regulators could run, many of the decisions regarding access have been deferred until after the Plan Processor is selected and finalizes the Technical Specifications. In particular, as discussed in the Notice, the details of functionality and performance of the final CAT System are still to be determined.2192 The Commission continues to believe that these functionality and performance uncertainties create some uncertainty regarding the degree of improvement in regulatory access that will result from the Plan. The Commission agrees that is possible that, as one commenter noted,2193 the deferral of these decisions could result in a delay in regulators’ ability to access the CAT Data. However, the Commission continues to believe that the Plan will substantially improve the accessibility2194 of regulatory data relative to the Baseline by providing regulators with direct access to the CAT Data.

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(2) Consolidation of Data

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In the Notice, the Commission stated that it preliminarily believed that the Plan would improve accessibility by consolidating various data elements into one combined source, reducing data fragmentation.2195 Currently, audit trail data for securities that are traded on multiple venues (multiple exchanges or off-exchange venues) is fragmented across multiple data sources, with each regulator generally having direct access only to data generated on the trading venues it regulates.2196 The Commission explained that the Plan would bring audit trail data related to trading on all venues into the Central Repository where it could be accessed by all regulators. Additionally, the Commission noted that Rule 613 requires that the Plan include both equity and options data.2197 Because no existing regulatory audit trail data source includes both options and equities data, the Notice discussed the fact that collecting this data and providing access would allow regulators to monitor and run surveillance on the activity of market participants in related instruments, such as when a market participant has activity in both options and the options’ underlying assets. The Commission noted that the Plan would also marginally increase the accessibility of historical exchange data. In particular, Section 6.5(b)(i) of the Plan requires that the Central Repository make historical data available for not less than six years, in a manner that is directly accessible and searchable electronically without manual intervention by the Plan Processor.2198

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The Commission did not receive any comments on this aspect of accessibility, and there have not been any modifications to the Plan related to this aspect of the Commission’s analysis. The Commission therefore continues to believe that the Plan will improve accessibility relative to the Baseline by consolidating various data elements into one combined source, reducing data fragmentation.

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d. Timeliness

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In the Notice, the Commission discussed its belief that, if approved, the CAT NMS Plan would significantly improve the timeliness2199 of reporting, compiling, and accessing regulatory data, which would benefit a wide array of regulatory activities that use or could use audit trail data. The Commission discussed its belief that the timeline for compiling and reporting data pursuant to the Plan would constitute an improvement over the processes currently in place for many existing data sources and that, relative to some data sources, the improvement would be dramatic. Specifically, under the Plan, CAT Data would be compiled and made ready for access faster than is the case today for some data, both in raw and in corrected form; regulators would be able to query and manipulate the CAT Data without going through a lengthy data request process; and the data would be in a format to make it more immediately useful for regulatory purposes.2200

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In terms of initial access to the data, the Commission discussed its belief that the Plan would require CAT Reporters to report data to the Central Repository at times that are on par with current audit trails that require reporting, but the Central Repository would compile2201 the data for initial access sooner than some other such data.2202 For example, equity and option clearing data currently are not compiled and reported to the NSCC and the OCC until T+3, and data in EBS reports are not compiled and reported to a centralized database until a request is received.2203 OATS data is initially reported to FINRA by 8:00 a.m. ET on the calendar day following the reportable event, and it takes approximately 24 hours for FINRA to run validation checks on the file, though SROs do not currently access OATS information for regulatory purposes until after the error correction process is complete.2204

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Furthermore, the Commission discussed the fact that, to the extent that access to the raw (i.e., uncorrected and unlinked) data would be useful for regulatory purposes, the CAT NMS Plan provides a way for SROs and the Commission to access the uncorrected and unlinked data on T+1 by 12:00 p.m. ET at the latest.2205 Under the Plan, this access would be at least several days sooner than OATS is available to non-FINRA regulators. In the Notice, the Commission acknowledged that the Plan would not necessarily improve the timeliness of audit trail data in every case or for every regulator. For example, exchange SROs already have real-time access to their own audit trail data.2206 However, regulators at other SROs or the Commission do not have real-time access to that audit trail data, and therefore the Commission stated that it preliminarily believed that CAT Data could be more timely for these other regulators to access and use than obtaining that exchange’s audit trail data through other means.2207

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In terms of timeliness of access to error-corrected data, the Commission stated in the Notice that it preliminarily believed that the error correction process required by the CAT NMS Plan is reasonably designed to provide additional improvements in timeliness for corrected data. The Plan specifies that the initial data validation and communication of errors to CAT Reporters must occur by noon on T+1 and that corrections of these errors must be submitted by the CAT Reporters to the Central Repository by 8:00 a.m. ET on T+3, with the corrected data made available to the regulators by 8:00 a.m. ET on T+5.2208 During this interim time period between initial processing and corrected data availability, “all iterations” of processed data must be available for regulatory use.2209 The Central Repository must be able to receive error corrections at any time, even if late;2210 if corrections are received after T+5, the Plan Processor must notify the SEC and SROs of this fact and describe how re-processing of the data (to be determined in conjunction with the Operating Committee) would be completed.2211 Customer information (i.e., information containing PII) is processed along a slightly different timeline, but the outcome—corrected data available by 8:00 a.m. ET on T+5—is the same.2212 One exception to this timeline is if the Plan Processor has not received a significant portion of the data, as determined according to the Plan Processor’s monitoring, in which case the Plan Processor could determine to halt processing pending submission of that data.2213 The Commission noted that the error resolution process for OATS is limited to five business days from the date a rejection becomes available.2214 The CAT NMS Plan requires a three-day repair window for the Central Repository.2215 Accordingly, the Commission stated that if the Plan were approved, regulators would generally be able to access partially and fully corrected data earlier than they would for OATS.2216

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In the Notice, the Commission discussed its belief that improvements to timeliness would also result from the ability of regulators to directly access CAT Data.2217 The Commission discussed the fact that most current data sources do not provide direct access to most regulators and explained that data requests can take as long as weeks or even months to process. Other data sources provide direct access with queries that can sometimes generate results in minutes—for example, running a search on all MIDAS message traffic in one day can take up to 30 minutes2218—but only for a limited subset of the data to be available in CAT and generally only for a limited number of regulators. Accordingly, the Commission stated that it preliminarily believed that the ability of regulators to directly access and analyze the scope of audit trail data that would be stored in the Central Repository should reduce the delays that are currently associated with requesting and receiving data. Furthermore, the Commission discussed its belief that direct access to CAT Data should reduce the costs of making ad hoc data requests, including costs arising from extensive interactions with data liaisons and IT staff at broker-dealers, SROs, and vendors, developing specialized knowledge of varied formats, data structures, and systems, and reconciling data.

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The Commission also stated that it preliminarily expected that the CAT NMS Plan would reduce the time required to process data before analysis.2219 The Commission explained that currently, regulators can spend days and up to months processing data they receive into a useful format.2220 Part of this delay is due to the need to combine data across sources that could have non-uniform formats and to link data about the same event both within and across data sources. These kinds of linking processes can require sophisticated data techniques and substantial assumptions and can result in imperfectly linked data. The Commission noted that the Plan addresses this issue by stating that the Plan Processor must store the data in a linked uniform format.2221 Specifically, the Commission discussed how the Central Repository will use a “daisy chain” approach to link and reconstruct the complete lifecycle of each Reportable Event, including all related order events from all CAT Reporters involved in that lifecycle. Therefore, regulators accessing the data in a linked uniform format would no longer need to take additional time to process the data into a uniform format or to link the data.2222 Accordingly, the Commission stated that it preliminarily believed that the Plan would reduce or eliminate the delays associated with merging and linking order events within the same lifecycle and that the Plan would improve the timeliness of FINRA’s access to the data it uses for much of its surveillance by several days because the corrected and linked CAT Data would be accessible on T+5 compared to FINRA’s T+8 access to its corrected and linked data combining OATS with exchange audit trails.2223

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The Commission also discussed its belief that the expected improvements to data accuracy could result in an increase in the timeliness of data that is ready for analysis, although uncertainty exists regarding the extent of this benefit. The Commission explained that regulators currently take significant time to ensure data is accurate beyond the time that it takes data sources to validate data and that, in some cases, data users may engage in a lengthy iterative process involving a back and forth with the staff of a data provider in order to obtain accurate data necessary for a regulatory inquiry. Accordingly, the Commission stated that, to the extent that the Central Repository’s validation process is sufficiently reliable and complete, the duration of the error resolution process regulators would perform with CAT Data may be shorter than for current data. Further, to the extent that the Central Repository’s linking and reformatting processes are sufficiently successful, the SROs and Commission may not need a lengthy process to ensure the receipt of accurate data. However, the Commission noted that it lacked sufficient information on the validations, linking, and reformatting processes needed to draw a strong conclusion as to whether users would take less time to validate CAT Data than they take on current data. Nonetheless, the Commission preliminarily believed that the linking and reformatting processes at the Central Repository would be more accurate than the current decentralized processes such that it would reduce the time that regulators spend linking and reformatting data prior to use.

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The Commission received comments on the improvements in timeliness from the Plan. Two commenters suggested that CAT Data would not be timely enough because it is reported too late.2224 One commenter called the reporting deadline (8:00 a.m. ET on T+1) an “extraordinarily lax reporting time frame.” 2225 Another commenter argued that the T+5 schedule for regulatory access to corrected CAT Data is “useless in terms of effective market surveillance in prevention of threats to the U.S. financial stability” because a “huge loss can be accumulated within [a] split-second” and “market collapse does not take more than one day.”2226 Furthermore, although the commenter agreed that “CAT offers the regulators on-demand query of delayed data that saves them multiple trips to request data from the financial institutions,” he opined that this “does not necessarily mean timeliness improvement.”2227

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The Participants’ response provided additional information on error correction timelines for customer information and PII. Specifically, the Participants’ response identified an errant discussion of these error correction timelines in the Plan, and clarified that the Plan Processor must validate customer data and generate error reports no later than 5:00 p.m. ET on T+1, and stated that they believe the two day period for error correction is sufficient for CAT Reporters to correct errors in customer data.2228

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The Commission has considered the comments it received regarding the potential of the Plan to improve timeliness. As discussed below, the commenters did not provide any additional information or analysis that the Commission believes would warrant changes to its analysis or conclusions as set out in the Notice.

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The Commission disagrees with the commenter that characterized the next day reporting of CAT Data as an “extraordinarily lax reporting time frame,” and with the commenter that argued that the T+5 schedule for regulatory access to corrected CAT Data is insufficient.2229 As discussed further above,2230 the Commission considered whether CAT Reporters should be required to report data in real-time when it adopted Rule 613 under Regulation NMS.2231 While the Commission acknowledged that there might be advantages to receiving data intraday, the Commission stated that the greater majority of benefits that may be realized from development of the CAT do not require real-time reporting.2232 Furthermore, many SROs have real-time access to data generated on exchanges they operate, and can and do use this data for real-time surveillance of activity occurring on those exchanges As discussed in the Notice, the T+5 schedule improves the timeliness of regulatory access to corrected data relative to the Baseline in two ways.2233 First, corrected OATS data is currently available to FINRA at T+8.2234 Under the Plan, regulators will be able to access corrected CAT Data three days earlier than that (i.e., T+5). Second, the ability of regulators to directly access CAT Data will improve timeliness.2235 Most current data sources do not provide direct access to most regulators, and data requests can take as long as weeks or even months to process. Therefore, for many purposes, the T+5 schedule for regulatory access to corrected CAT Data will be up to many weeks more timely relative to the Baseline.

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The Commission also disagrees with the comment that the ability of regulators to directly access CAT Data will not result in improvement in timeliness.2236 The comment does not dispute that data requests can take time to process and it does not provide any specificity in arguing that direct access would not improve timeliness that undermines the Commission’s belief that direct access will make CAT Data up to many weeks more timely. This represents an important improvement in timeliness over the Baseline.

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Regarding the Participants’ response, the Commission does not believe the clarification regarding the timeline for communication of errors for customer and account information would warrant changes to its analysis or conclusions regarding timeliness. The Commission notes that the Plan states that 5:00 p.m. ET on T+1 is the deadline for communication of errors for customer and account information, including PII.2237 In separate exposition, the Plan mistakenly discussed 12:00 p.m. ET on T+3 as the deadline for validation of data and generation of error reports for CAT PII data.2238 These two statements are in conflict because they describe different reporting deadlines for the same types of errors. However, the Commission is amending the Plan to correct that error.2239 In the Notice, the Commission states that customer information has a separate error correction timeline with the same outcome in terms of the availability of corrected data to regulators; this analysis was not dependent on the time at which error messages were sent to CAT Reporters.2240 Consequently, the clarification of this timeline does not affect the Commission’s analysis. Furthermore, the Commission notes that commenters did not raise questions on the mistake and seem to have understood that the deadline for error reports on PII was 5:00 p.m. ET on T+1.

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pubdate: November 15, 2016 effdate: N/A +

2. Improvements to Regulatory Activities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Benefits, Improvements to Regulatory Activities + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + Market Events, + EBS, + Customer-IDs, + CAT-Reporter-IDs, + Reportable Events, + NIST, + Market Analysis and Research, + ETF trading, + Rule 613(f), + +

In the Notice, the Commission discussed its preliminary belief that improvements in the quality of available data have the potential to result in improvements in the analysis and reconstruction of market events; market analysis and research in support of regulatory decisions; and market surveillance, examinations, investigations, and other enforcement functions.2241 The Commission discussed its belief that the ability of regulators to perform analyses and reconstruction of market events would likely improve if the CAT NMS Plan were approved, because it would allow regulators to provide investors and other market participants with more timely and accurate explanations of market events, and to develop more effective responses to such events. Furthermore, availability of CAT Data would benefit market analysis and research in support of regulatory decisions, by facilitating an improved understanding of markets that will inform potential policy decisions. The Commission also discussed how regulatory initiatives that are based on an accurate understanding of underlying events and are narrowly tailored to address any market deficiency should improve market quality and benefit investors.

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The Commission also explained that, in its preliminary view, the Plan would substantially improve both the efficiency and effectiveness of SRO broad market surveillance, which could benefit investors and market participants by allowing SROs to more quickly and precisely identify and address a higher proportion of market violations that occur, as well as prevent violative behavior through deterrence.

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The Commission discussed in the Notice its expectation that CAT Data would enhance the SROs’ and the Commission’s abilities to effectively target risk-based examinations of market participants who are at elevated risk of violating market rules, as well as their abilities to conduct those examinations efficiently and effectively, which could also contribute to the identification and resolution of a higher proportion of violative behavior in the markets. Accordingly, the reduction of violative behavior in the market should benefit investors by providing them with a safer environment for allocating their capital and making financial decisions, and it could also benefit market participants whose business activities are harmed by the violative behavior of other market participants. The Commission further discussed how more targeted examinations could benefit market participants by resulting in proportionately fewer burdensome examinations of compliant market participants.

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The Commission also explained that a significant percentage of Commission enforcement actions involve trade and order data,2242 and that it preliminarily believed CAT Data would significantly improve the efficiency and efficacy of enforcement investigations by the Commission and SROs, including insider trading and manipulation investigations.

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The Commission also stated that it as well as the SROs anticipated additional benefits associated with enhanced abilities to handle tips, complaints and referrals, and improvements in the speed with which they could be addressed, particularly in connection with the significant number of tips, complaints, and referrals that relate to manipulation, insider trading, or other trading and pricing issues.2243 The Commission explained that the benefits to investor protection of an improved tips, complaints, and referrals system would largely mirror the benefits to investor protection that would accrue through improved surveillance and examinations efficiency.

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As discussed more fully below, the Commission has considered the comments it received regarding the likely benefits to regulatory activities, the Participants’ response, and modifications to the Plan, and continues to believe that the CAT NMS Plan would generate improvements to regulatory activities, particularly in the analysis and reconstruction of market events; market analysis and research in support of regulatory decisions; and market surveillance, examinations, investigations, and other enforcement activities.

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a. Analysis and Reconstruction of Market Events

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In the Notice, the Commission discussed the reasons for its preliminary belief that the Plan would improve regulators’ ability to perform analysis and reconstruction of market events.2244 As noted in the Adopting Release, the sooner regulators can complete a market reconstruction, the sooner regulators can begin reviewing an event to determine what happened, who was affected and how, if any regulatory responses might be required to address the event, and what shape such responses should take.2245 Furthermore, the improved ability for regulators to generate prompt and complete market reconstructions could provide improved market knowledge, which could assist regulators in conducting retrospective analysis of their rules and pilots.

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The Commission discussed how the fragmented nature of current audit trail data and the lack of direct access to such data renders market reconstructions cumbersome and time-consuming.2246 Currently, the information needed to perform these analyses is spread across multiple audit trails, with some residing in broker-dealer order systems and trade blotters. Requesting the data necessary for a reconstruction of a market event often takes weeks or months and, once received, regulators then need weeks to reconcile disparate data formats used in different data sources. Some of the most detailed data sources, including sources like EBS and trade blotters that identify customers, are impractical for broad-based reconstructions of market events. In particular, including EBS data for a reconstruction of trading in the market for even one security on one day could involve many, perhaps hundreds, of requests, and would require linking that to SRO audit trail data or public data.2247 Further, because EBS data lacks timestamps for certain trades,2248 the Commission discussed how the use of EBS data in market reconstructions requires supplementation with data from other sources, such as trade blotters.

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The Commission stated that it expected that improvements in data completeness and accuracy from the Plan would enhance regulators’ ability to perform analyses and to reach conclusions faster in the wake of a market event by reducing the time needed to collect, consolidate and link the data.2249 Specifically, the inclusion of Customer-IDs and consistent CAT-Reporter-IDs in the CAT Data would allow regulators to more effectively and efficiently identify market participants that submit orders through several broker-dealers and execute on multiple exchanges and whose activity may warrant further analysis. The Commission discussed its belief that this would be useful if regulators were interested in determining if a particular trader or category of traders had some role in causing the market event, or how they might have adjusted their behavior in response to the event, which could amplify the effects of the root cause or causes. Furthermore, the Commission discussed how the clock synchronization requirements of the Plan would improve the ability of regulators to sequence some events that happened in different market centers to better identify the causes of market events. Overall, the Commission stated that it preliminarily believed that the CAT NMS Plan would dramatically improve the ability of regulators to identify the market participants involved in market events.

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The Commission also preliminarily believed that better data accessibility from the Plan would significantly improve the ability of regulators to analyze and reconstruct market events. Because CAT Data would link Reportable Events, the Plan could allow regulators to respond to market events more rapidly because they would not need to process corrected and linked data before starting their analyses.

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The Commission received one comment on the fragmented nature of current audit trail data and the potential benefits of CAT Data to improve the ability of regulators to perform analysis and reconstructions of market events. That commenter agreed with the Commission that the fragmented nature of current data sources poses challenges to regulators seeking complete data,2250 however, the commenter also stated that the potential benefits that CAT Data would provide regulators in terms of conducting analysis and market reconstructions are minimal.2251 The Participants did not provide responses to these concerns.

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In the Commission’s view, this comment did not provide any additional information or analysis that warrants changes to the analysis or conclusions in the Notice. The commenter stated that “the plan is majoring in the minors (i.e., overemphasis on storage, and not enough coverage of pattern recognition).”2252 The Commission disagrees. While the Commission has emphasized aspects of storage as in the Notice,2253 the Commission has also emphasized that improvements in data completeness and accuracy would greatly assist regulators in performing analyses and reconstructing market events. The inclusion of Customer-IDs and CAT-Reporter-IDs would assist regulators in determining if particular traders had some role in causing a market event, and further, inclusion of these IDs could help regulators study patterns in customer-specific trading behavior. Further, enhanced clock synchronization requirements would assist regulators in sequencing events that happened in different market centers and help them to better identify the causes of market events. As such, the Commission continues to believe that the CAT NMS Plan would provide benefits in terms of performing analysis and reconstructing market events.

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Changes to the Plan do affect data completeness and accuracy, as well as regulators’ ability to analyze and reconstruct market events. First, the Commission has modified the Plan to require the reporting of LEIs for Customers and Industry Members in certain circumstances.2254 These requirements will result in a greater ability of regulators to accurately identify traders that cause market events.2255 Second, removing the open/close indicator for equities and Options Market Makers may reduce the completeness of CAT Data and may reduce the benefits that this potentially provides in terms of analysis and market reconstructions. Third, requiring exchanges to synchronize their clocks within 100 microseconds of NIST should enhance regulators’ abilities to sequence events and reconstruct market events to a greater degree than initially stated in the Notice, though as discussed above in Section V.E.1.b.(3), the Commission does not expect a large improvement relative to what was described in the Notice.

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b. Market Analysis and Research

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In the Notice, the Commission discussed the reasons for its preliminary belief that the CAT NMS Plan would benefit the quality of market analysis and research that is produced to increase regulatory knowledge and support policy decisions and would lead to a more thorough understanding of current markets and emerging issues.2256 The Commission discussed how improvements in regulatory market analysis and research aimed at informing regulatory decisions would benefit investors and market participants by improving regulators’ understanding of the intricacies of dynamic modern markets and how different market participants behave in response to policies and information. These more nuanced and more thorough insights would help regulators to identify the need for regulation that specifically tailors policy to the diverse landscape of market participants and conditions that characterize current financial markets, as well as assist them in conducting retrospective analysis of their rules and pilots.

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As described in the Notice, the lack of direct access to necessary data, along with inaccuracies in the data that are available, currently limits the types of analyses that regulators can conduct. These data limitations constrain the information available to regulators when they are considering the potential effects of regulatory decisions. The CAT NMS Plan would provide direct access to data that currently requires an often lengthy and labor-intensive effort to request, compile, and process, including data that regulators could use to more directly study issues such as high frequency trading, maker-taker pricing structures, short selling, issuer repurchases, and ETF trading. Furthermore, the Commission discussed how CAT Data would better inform SROs and the Commission in rulemakings and assist them in conducting retrospective analysis of their rules and pilots, and how it would allow SROs to examine whether a rule change on another exchange was in the interest of investors and whether to propose a similar rule on their own exchange.

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The Commission received two comments regarding the potential benefits of the CAT NMS Plan to help the Commission perform market analyses and conduct research. One commenter misinterpreted what accessibility to CAT Data means for the Commission, stating that access to the CAT system and data is limited to its regulatory functions and could exclude analytical or academic needs.2257 Another commenter disagreed with the Commission’s findings and stated that the CAT Plan would provide little benefit to facilitating market analysis and research absent real-time access to intra-day feeds.2258

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Commenters did not provide any additional information or analysis, however, and the Participants did not provide responses providing information relevant to this issue. The Commission is not changing its analysis and conclusions in light of the aforementioned comments for several reasons. First, one of the commenters assumes a narrow definition of “regulatory functions” but that CAT Data would serve the Commission and SROs in their analytical needs to conduct market analysis and academic research.2259 Second, the Commission believes that even without real-time access to intra-day feeds, access to CAT Data would nonetheless benefit regulators since the quality of market analysis and research that is produced to increase regulatory knowledge would improve relative to the Baseline. Furthermore, the Commission continues to believe its statement in the Adopting Release that the majority regulatory benefits gained from the creation of a consolidated audit trail, as described in the Proposing Release,2260 do not require real-time reporting.2261 Specifically, the Commission notes that market analysis and research does not require contemporaneous access to CAT Data, and therefore, it is not necessarily the case that real-time access to CAT Data, as opposed to the Plan requirement of access to corrected data at T+5, would provide more benefit to market analysis and research by regulators. As such, the Commission continues to believe that CAT Data would provide significant improvements to market analysis and research conducted by regulators.

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The Commission notes, however, that changes to the CAT NMS Plan do alter the analysis regarding the benefits for regulators in terms of conducting market analysis and research. In our view, the modifications to the Plan to require the reporting of LEIs for Customers and Industry Members in certain circumstances2262 should result in a greater ability of regulators to conduct analysis and research involving individual market participants.2263 Specifically, the reporting of LEI would also make it possible to merge CAT Data with other data sources that are currently not part of CAT (e.g., futures and security-based swaps), and this could potentially help with market reconstructions involving these products. Furthermore, more granular clock synchronization requirements for exchanges would mean that regulators could sequence events with greater granularity, which could potentially benefit analysis that requires sequencing events and research surrounding high frequency traders. However, because the Plan no longer contains an open/close indicator for equities, regulators will not be able to distinguish buying activity that covers short positions from buying activity that establishes or increases long positions and, therefore, regulators would not be able to examine, for example, how long particular types of traders hold a short position, as indicated in the Notice.2264

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c. Surveillance and Investigations

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In the Notice, the Commission explained the reasons for its preliminary belief that the enhanced surveillance and investigations made possible by the implementation of the CAT NMS Plan could allow regulators to more efficiently identify and investigate violative behavior in the markets and could also lead to market participants that currently engage in violative behavior reducing or ceasing such behavior, to the extent that such behavior is not already deterred by current systems.2265 The Commission discussed how potential violators’ expected probability of being caught influences their likelihood of committing a violation.2266 If market participants believe that the existence of CAT, and the improved regulatory activities that result from improvements in data and data processes, increase the likelihood of regulators detecting violative behavior, they could reduce or eliminate the violative activity in which they engage to avoid incurring the costs associated with detection, such as fines, legal expenses, and loss of reputation. Such a reduction in violative behavior would benefit investor protection and the market as investors would no longer bear the costs of the violative behavior that would otherwise exist in the current system. Many of the improvements that would result from CAT could also allow regulators to identify violative activity, such as market manipulation, more quickly and reliably, which could improve market efficiency by deterring market manipulation and identifying and addressing it more quickly and more often when it occurs.2267

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The Commission received several comments on the potential benefits of the CAT NMS Plan to improve SRO surveillance, risk-based examinations, enforcement activity, and the process for evaluating tips and complaints; and the Participants also responded to some of the comments raised in the comment letters. As discussed below, the Commission is not changing its analysis and conclusions in light of these comments and the Participants’ responses; however, changes to the Plan affect the analysis that the Commission laid out in the Notice.

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(1) SRO Surveillance

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Rule 613(f) requires SROs to implement surveillances reasonably designed to make use of the CAT Data.2268 Further, data improvements resulting from the Plan would improve regulators’ ability to perform comprehensive and efficient surveillance. As the Commission explained in detail in the Notice, these benefits would encompass a number of improvements including: detection of insider trading; surveillance of principal orders; and cross-market and cross-product surveillance; and other market surveillance activities, which are each described in more detail below.

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First, the Commission noted that CAT Data would include additional fields not currently available in data used for surveillance. Since currently available data does not include customer identifiers, SROs performing insider trading and manipulation surveillance are unable to identify some suspicious trading2269 and must undertake multiple steps to request additional information after identifying suspect trades. The inclusion of Customer-IDs in the CAT would significantly improve these surveillance capabilities. The ability to link uniquely identified customers with suspicious trading behavior would provide regulators with a better opportunity to identify the distribution of suspicious trading instances by a customer as well as improve regulators’ ability to utilize customer-based risk assessment.

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Second, the Commission noted that some current data sources used for SRO surveillance exclude unexecuted principal orders, limiting the surveillance for issues such as wash sales. As a result, many surveillance patterns are unable to detect certain rule violations involving principal orders. The inclusion of principal orders of Industry Members in the CAT would therefore enable regulators to better identify rule violations by broker-dealers that have not previously had to provide audit trail data on unexecuted principal orders.

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Third, the Commission noted that the Plan would improve regulators’ efficiency in conducting cross-market and cross-product surveillance, and enable any regulator to surveil the trading activity of market participants in both equity and options markets and across multiple trading venues without data requests. Regulators would also have access to substantially more information about market participants’ activity,2270 and the requirement that the data be consolidated in a single database would assist regulators in detecting activity that may appear permissible without evaluating data from multiple venues.2271 The Commission explained that because market data are fragmented across many data sources and because audit trail data lacks consistent customer identifiers, regulators currently cannot run cross-market surveillance tracking particular customers.2272 Furthermore, routine cross-product surveillance is generally not possible with current data. The Commission concluded that the potential enhancements in market surveillance enabled by the CAT NMS Plan are likely to result in more capable and efficient surveillance which could reduce violative behavior and protect investors from harm.

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Two commenters stated that the Commission is overly optimistic as to the benefits that the Plan would provide to SRO surveillance activities,2273 with one of the commenters also mentioning that the Commission is overly optimistic with respects to the benefits to surveillance. 2274 One of the commenters argued that benefits are exaggerated because the Plan lacks an analytical framework embedded in its design.2275 The same commenter mentioned that the lack of an analytical framework embedded in the design of CAT reduces the ability to identify false positives (i.e., detection of behaviors that are not violative), and false negatives (i.e., not detecting behaviors that are violative).2276 The commenter also specifically raised concerns that the current accessibility and functionality requirements of CAT Data would be rendered unusable for regulators because the methods for querying data and performing bulk extracts are “generic” and not fit for financial market surveillance.2277

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Two commenters stated that CAT should encompass real-time reporting functionality, because without it, it is hard to conduct meaningful surveillance.2278 Additionally, one commenter mentioned that the Plan does not provide details on how regulators would use CAT Data.2279

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The Participants responded to these comments and noted that they already have real-time surveillance and monitoring tools in place for the respective markets that will not be affected by CAT.2280 Furthermore, the Participants noted that the Plan Processor will provide sufficient data access tools as well as analytical tools in the CAT for the Participants to satisfy their obligations as set forth in Rule 613(f).2281 But the Participants did note that surveillance methods and techniques could vary over time and across Participants,2282 potentially yielding some degree of uncertainty in how benefits to surveillance activities would accrue to SROs, investors and market participants. The Participants also noted that CAT is not intended to be the sole source of surveillance for each Participant, and therefore, would not cover all surveillance methods currently employed by the Participants.2283

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The Commission considered these comments and the Participants’ responses and believes that they would not warrant changes to the Commission’s preliminary conclusions of the benefits that the Plan would provide to SRO surveillance. But the Commission does acknowledge that there is some uncertainty particularly regarding how exactly the SROs will incorporate CAT into their surveillance activities. First, while the Commission agrees that surveillance methods differ across Participants and this could generate uncertainty in the benefits, the Commission disagrees with the commenters that stated that the Commission is overly optimistic as to the benefits. Access to CAT Data would result in substantial benefits to SRO surveillance for the reasons mentioned earlier in this Section, none of which are undermined by the comments. Second, the Commission disagrees with the commenter that stated that the benefits that would accrue to surveillance are exaggerated due to the Plan’s lack of an analytical framework embedded in its design. The commenter assumes that if the Plan had an analytical framework, the benefits of CAT would be more realistic. The Commission notes that the Plan does have an analytical framework embedded in its design. The Plan states specifically that the Plan Processor will provide the following analytical framework—namely an API that allows regulators to use analytical tools (e.g., R, SAS, Python, Tableau) and permit regulators to use ODBC/JDBC drivers to access CAT Data.2284 This analytical framework would benefit SROs in conducting surveillance, which would benefit investors and market participants by allowing regulators to more quickly and precisely identify and address a higher proportion of market violations that occur, as well as prevent violative behavior through deterrence. Third, this analytical framework could allow regulators to code computer programs using CAT Data to detect trading patterns indicative of violative behavior. While there might be potential errors in detecting violative behavior using these programs, that is, false positives (detecting non-violative behavior) and false negatives (not detecting violative behavior), having access to more detailed CAT Data in a consolidated source including timestamps, principal orders, non-member activity, and subaccount allocations could minimize those errors. Fourth, the Commission disagrees with the commenter that the methods for querying data and performing bulk extracts are “generic” and not fit for financial market surveillance. The Commission expects these query methods, generic or not, will facilitate the direct access necessary for SROs to build improved surveillances. For instance, the Plan states that CAT will support two types of query interfacing,2285 and specifies that all queries must be able to be run against raw (i.e., unlinked) or processed data, or both.2286 Furthermore, by using the query interfacing supported by CAT, regulators would be able to directly query Customer-IDs, which could improve the ability for SROs to conduct surveillance, contrary to what the commenter stated.

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The Commission considered the comments on real-time surveillance, and understands that from the Participants’ response, some SROs already have real-time surveillance. Further, the Commission expects the Plan to improve on SROs’ real-time surveillances because the Plan will result in exchanges receiving, even at a later date, additional fields in the Material Terms of the Order, such as special order handling instructions, and additional order events, such as principal orders, that some SROs currently do not have available for any surveillance, real-time or otherwise.2287

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Finally, in response to the commenter that claimed the Plan did not provide enough details on how regulators would use CAT Data, the Commission acknowledges that there is uncertainty as to how the SROs will incorporate CAT Data into their surveillance activities. The Commission believes that even if there is uncertainty in this regard, the SROs nonetheless would still be able to conduct “meaningful” surveillance with the opportunity to improve on their current surveillances. In this regard, the Commission notes that Rule 613(f) states that national securities exchanges should create surveillances that are “reasonably designed to make use of consolidated information in the consolidated audit trail.”2288 In addition, the Plan will improve the ability of regulators to perform cross-market and cross-product surveillance because regulators will have direct access to consistent data that includes comprehensive trade and order data in markets for multiple products.

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The Commission also notes that the changes to the Plan to require the reporting of LEIs for Customers and Industry Members in certain circumstances2289 should facilitate improved SRO surveillance by enabling SROs to identify traders and their clients with more accuracy.2290 The reporting of LEIs would also make it possible to merge CAT Data with markets not included in CAT at this time (e.g., futures and security-based swaps), which could potentially assist with surveillance activities involving these products. Therefore, the inclusion of LEI for Customers and Industry Members could result in greater benefits to SRO surveillance than those described in the Notice.

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(2) Examinations

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In the Notice, the Commission discussed its preliminary belief that the availability of CAT Data would also improve examinations by the Commission and SROs and that these improvements would benefit investor protection, and the market in general, by resulting in more effective supervision of market participants.2291 The Commission conducted 493 broker-dealer examinations in 2014 and 484 in 2015, 70 exams of the national securities exchanges and FINRA in 2014 and 21 in 2015. In addition, the Commission conducted 1,237 investment adviser and investment company examinations in 2014 and 1,358 in 2015. Virtually all investment adviser examinations and a significant proportion of the Commission’s other examinations involved analysis of trading and order data. Currently some data that would be useful to conduct risk-based selection for examinations, such as trade blotters, are not available in data sources available for pre-exam analysis.2292 Further, the Commission explained that data available during exams often require regulatory Staff to link multiple data sources to analyze customer trading. For example, some customer identities are present in EBS data, but timestamps are not. To evaluate the execution price a customer received, it is necessary to know the time of the trade to compare the price of the customer’s execution with the prevailing market prices at that time, which requires linking the EBS data with another data source that contains trades with timestamps (such as the trade blotter). These linking processes can be labor-intensive and require the use of algorithms that may not link with 100% accuracy.

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The Commission explained in the Notice that the expected improvements in the data qualities discussed above would enhance the ability of regulators to select market participants for focused examinations on the basis of risk. Having direct access to consolidated data in the Central Repository would improve regulators’ ability to efficiently conduct analyses in an attempt to select broker-dealers and investment advisers for more intensive examinations based on identified risk. Additionally, the Commission discussed its belief that regulators would be able to conduct certain types of exams more efficiently because of the inclusion of Customer-IDs in CAT. Moreover, the clock synchronization provisions of the Plan could aid regulators in sequencing some events more accurately, thereby facilitating more informed exams. The Commission believed that the Plan would allow the data collection portion of examinations to be completed more quickly with fewer formal data requests, and that more efficient examinations would help regulators better protect investors from the violative behavior of some market participants and could reduce examination costs for market participants who would have otherwise faced examinations that are less focused and more lengthy.

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One commenter suggested that without “red-flagging” suspicious activities using the commenter’s recommended approach (using real-time analytics),2293 it would not be possible to facilitate the ability of regulators to conduct risk-based examinations.2294 The same commenter stated that the Commission has an overly optimistic assessment of the economic effects to examinations, mainly due to the Plan lacking an analytical framework embedded in its design.2295 The Participants did not provide a response to this comment.

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The Commission considered these comments, but believes that they do not warrant changes to the Commission’s preliminary conclusions of the benefits that the Plan would provide to performing risk-based examinations. First, the Commission disagrees with the commenter that stated “red-flagging” suspicious activity using their recommended approach (using real-time analytics) is the only way to facilitate risk-based examinations. As discussed above, having access to Customer-IDs would assist the Commission in flagging suspicious activity for their risk-based examinations, and assist the Commission in effectively targeting risk-based examinations of market participants who are at elevated risk of violating market rules. Furthermore, the Commission could also conduct more informed risk-based exams under the Plan because enhanced clock synchronization provisions could aid the Commission in sequencing some events more accurately. Second, regarding the commenter who stated that the Commission’s assessment of the effects to examinations are optimistic because the Plan lacks an analytical framework, the Commission disagrees with this commenter for similar reasons to those stated above.2296

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While the commenters did not provide any additional information that would warrant changes to the Commission’s analysis or conclusions as set out in the Notice, changes in the Plan do alter the Commission’s preliminary analysis. Requiring CAT Reporters to report their LEI for Customers and Industry Members in certain circumstances2297 should result in a greater ability for regulators to identify traders for the purposes of risk-based examinations.2298 Additionally, more stringent clock synchronization requirements for exchanges should enhance regulators’ abilities to sequence events, thereby facilitating more informed risk-based exams. As such, the Commission believes that changes to the Plan could generate additional benefits over and above those stated in the Notice.

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(3) Enforcement Investigations

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In the Notice, the Commission explained that the improvements in data qualities that would result from the CAT NMS Plan would significantly improve the efficiency and efficacy of enforcement investigations, including insider trading and manipulation investigations.2299 The Commission discussed how more efficient and effective enforcement activity is beneficial to both investors and market participants because it deters violative behavior that degrades market quality and that imposes costs on investors and market participants.

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The Commission discussed its expectation that dramatic benefits would come from improvements to the accessibility, timeliness, accuracy, and completeness of the data. First, compiling the data to support an investigation often requires a tremendous amount of time and resources, multiple requests to multiple data sources and significant data processing efforts, for both SROs and the Commission. While SROs have direct access to the data from their own markets, their investigations and investigations by the Commission often require access to the data of other SROs because firms trade across multiple venues. Some enforcement investigations, including those on insider trading and manipulation, require narrow market reconstructions that allow investigators to view actions and reactions across the market. Data fragmentation and the time it takes to receive requested data currently make these market reconstructions cumbersome and time-consuming. The Commission discussed its view that having access to CAT Data would help regulators analyze and reconstruct market events, and could in turn help them detect violative behavior during enforcement investigations.

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Second, the Commission explained that it currently takes weeks or longer to process, link and make data available for analysis in an enforcement investigation. Under the CAT NMS Plan, data for an enforcement investigation initiated five days or more after an event would be processed, linked, and available for analysis within 24 hours of a query. The Commission discussed how the enhanced timeliness of data can improve the Commission’s chances of preventing asset transfers from manipulation schemes, because regulators could use even uncorrected data (between T+1 and T+5) to detect the manipulation and identify the suspected manipulators.

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Third, the Commission explained in the Notice that currently, identifying the activity of a single market participant across the market is cumbersome and prone to error. The inclusion and expected improvement in the accuracy of Customer Identifying Information in the CAT NMS Plan could allow regulators to review the activity of specific market participants more effectively. The Commission also explained that this information would be helpful in identifying insider trading, manipulation and other potentially violative activity that depends on the identity of market participants. Additionally, the Commission explained that improved accuracy with respect to timestamp granularity could increase the proportion of market events that could be sequenced under the CAT NMS Plan. This could yield some benefits in enforcement investigations, including investigations of insider trading, manipulation, and compliance with Rule 201 of Regulation SHO and Rule 611 of Regulation NMS.2300

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Finally, the Commission explained that the expected improvements in completeness could also benefit investigations by allowing regulators to observe in a consolidated data source relevant data that are not available in some or all current data sources, including timestamps, principal orders, non-member activity, customer information, allocations, and an open/close indicator, which would identify whether a trade increases or decreases an existing position. This data could be important, for example, when investigating allegations of market manipulation or cherry-picking in subaccounts.

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One commenter agreed that the CAT Plan would slightly improve the efficiency of regulators’ enforcement activities because CAT will save them multiple trips to request data from financial institutions;2301 however, this commenter argued that such benefits would be minimal because they do not help to identify misconduct and/or recognize patterns of market manipulation in real-time.2302 The commenter mentioned that the CAT Plan would not effectively and efficiently deter violative behavior, thereby only resulting in marginal improvements to enforcement.2303 The Commission also received a comment stating that the Plan is overly-focused on best execution, which requires parsing bid and offer information on a minute scale, and that this may overwhelm the system and thereby prevent the capture of relevant information and frustrate the generally stated goals of CAT.2304 One commenter also stated that the Commission is overly optimistic with respect to the benefits of CAT to enforcement activity, mainly due to the Plan lacking an analytical framework embedded in its design.2305 The Participants did not specifically provide a response to the commenters’ concerns.

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The Commission considered these comments and believes that they do not warrant changes to the Commission’s preliminary conclusions of the benefits that the Plan would provide to enforcement investigations. First, while the Commission acknowledges that CAT Data will not assist the Commission in recognizing patterns of market manipulation in real-time, the Commission nonetheless believes that the benefits of CAT Data to performing enforcement activities relative to the Baseline are significant. For instance, Customer Identifying Information in CAT Data would be particularly helpful in identifying a single market participant across the market, which would be useful in identifying insider trading, manipulation and other potentially violative activity that depends on the identity of market participants. Second, in light of the comment on best execution, the Commission believes that while the Plan will facilitate enforcement of best execution, including on Rule 611, this will not prevent the Plan from improving regulators’ ability to investigate other types of violations, including market manipulation and insider trading. Furthermore, by parsing information on a granular scale, the Commission believes that the CAT Plan would increase the proportion of events that can be sequenced, yielding benefits in enforcement investigations. Third, regarding the commenter who stated that the Commission’s assessment of the effects to enforcement investigations are optimistic because the Plan lacks an analysis framework, the Commission disagrees with this commenter for similar reasons to those stated above.2306

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While the Commission is not altering its analysis of the benefits in response to the comments it received, the Commission is updating its analysis to recognize modifications to the Plan. Requiring CAT Reporters to report LEIs for Customers and Industry Members in certain circumstances2307 should result in a greater ability for regulators to identify traders for the purposes of enforcement activity.2308 This potentially improved data completeness could result in greater benefits to enforcement than stated in the Notice. Benefits to data completeness could also be potentially diminished by Plan modifications that remove the open-close indicator for equities and Options Market Makers. Such information would have been useful in detecting certain market manipulations and violations of rules such as Rule 105, short sale marking rules, and Rule 204 in equities and in identifying whether options market makers engage in aggressive risk-taking trading. The Commission now notes that due to the elimination of the requirement to report an open/close indicator for equities and Options Market Makers as part of CAT, these benefits will no longer be realized. However, the Commission is approving the Plan with this modification for the reasons discussed in Section IV.D.4.c, above. With regards to modifications to the timestamps on Allocation Reports, the Commission now understands that allocations are conducted after a trade and that the allocation time can aid regulators in ways that do not require millisecond-level timestamps. Therefore, modifications to the Plan that now require second-level timestamps would not result in a significant loss of benefits to the Commission. In spite of these modifications to the Plan, the Commission nonetheless believes that the efficiency and efficacy of enforcement investigations will be improved to a greater degree than anticipated in the Notice.

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(4) Tips and Complaints

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In the Notice, the Commission explained why it believed that the CAT NMS Plan, would improve the process for evaluating tips and complaints by allowing regulators to more effectively triage tips and complaints, which could focus resources on behavior that is most likely to be violative.2309 Specifically, the availability of CAT Data would drastically increase the detail of data available to regulators for the purposes of tip assessment. This would assist the SROs and Commission in identifying which tips and complaints are credible, would help ensure that regulators open investigations or examinations on credible tips and complaints, and would limit regulatory resources spent on unreliable tips and complaints.

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The Commission did not receive any comments regarding the benefits that would accrue to investors with regards to how regulators respond to tips and complaints. However, changes to the Plan affect the Commission’s analysis from the Notice; namely, requiring LEI reporting; enhanced clock synchronization requirements for exchanges; less granular timestamps for allocation reports; and removing the open/close indicator for equities and for Options Market Makers. As discussed above in Sections V.E.2.c.(2) and (3), these changes could affect risk based examinations and enforcement investigations, and could thereby affect the ability of regulators to effectively triage tips and complaints. In light of these modifications to the CAT NMS Plan, the Commission continues to believe that benefits would accrue to regulators allowing them to more effectively triage tips and complaints by focusing resources on behavior that is most likely to be violative, thereby resulting in benefits that would also accrue to investors and market participants.

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pubdate: November 15, 2016 effdate: N/A +

3. Other Provisions of the CAT NMS Plan

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Benefits, Other Provisions of the CAT NMS Plan + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Future Upgrades, + Reportable Events, + CCO, + SRO, + Rule 17d-2, + Rule 613, + EMSAC, + Advisory Committee, + Rules 608, + non–SRO, + +

In the Notice, the Commission noted that there are a number of provisions of the CAT NMS Plan that provide for features that are uniquely applicable to a consolidated audit trail or otherwise lack a direct analog in existing data systems.2310 Therefore, rather than analyze the benefits of these provisions as compared to existing NMS Plans or data systems, the Commission analyzed these provisions in comparison to a CAT NMS Plan without these features. The Commission preliminarily believed that these provisions of the CAT NMS Plan would increase the likelihood that the potential benefits of the CAT NMS Plan described above would be realized.

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As discussed below, the Commission has revised its analysis in response to comments, the Participants’ response, and the Commission’s modifications to the Plan.

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a. Future Upgrades

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In the Notice, the Commission discussed several Plan provisions that seek to ensure that the CAT Data would continually be updated to keep pace with technological and regulatory developments.2311 For example, the Plan would require that the CCO review the completeness of CAT Data periodically,2312 that the Central Repository be scalable to efficiently adjust for new requirements and changes in regulations,2313 and that Participants provide the Commission with a document outlining how the Participants could incorporate information on select additional products and related Reportable Events.2314 The Commission preliminarily believed these provisions would allow the CAT to be updated if and when the applicable technologies and regulations change.

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The Commission noted that these provisions are designed to ensure that the Participants consider enhancing and expanding CAT Data shortly after initial implementation of the CAT NMS Plan and that the Participants consider improvements regularly continuing forward. The Commission preliminarily expected that, in addition to these provisions, the CCO review would further facilitate proactive expansion of CAT to account for regulatory changes or changes in how the market operates, or in response to a regulatory need for access to new order events or new information about particular order events. To the extent that the Participants determine that an expansion is necessary and it is approved by the Commission, the Plan’s scalability provision promotes the efficient implementation of that expansion such that it could be completed at lower cost and/or in a timely manner.

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Taken together, the Commission believed that these provisions could also provide a means for the Commission to ensure that improvements to CAT functionality are considered so as to preserve its existing benefits, or that the expansion of CAT functionality is undertaken in order to create new benefits. The Commission recognized some uncertainty with respect to how effectively these provisions would operate to ensure that improvements to CAT functionality are considered in a way that would maximize the benefits of the Plan, but noted that the Commission does retain the ability to modify the Plan, if such a step becomes necessary to ensure that future upgrades are undertaken as necessary.2315 Moreover, the focus on scalability, adaptability, and timely maintenance and upgrades promotes a system that could be readily adapted over time. The Commission preliminarily believed that the provisions outlined above would allow the CAT Data to be continually updated to keep pace with technological and regulatory developments.

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The Commission received one comment disagreeing that future upgrades would increase the likelihood that potential future benefits would be realized. The commenter stated that the provisions about future upgrades are infrastructure related, rather than quality improvements in the sense of timely insights to regulators.2316 Another commenter stated that the proposal for the CCO to be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest that would undermine the ability of this officer to carry out his or her responsibilities effectively under the Plan because he or she would owe a fiduciary duty to the Plan Processor rather than the CAT LLC. 2317 The Commission notes that the Plan accords the CCO certain responsibilities related to future upgrades; for example, as noted above, the CCO is responsible for reviewing the completeness of CAT Data periodically and providing the SEC with a document outlining how the Participants could incorporate information on select additional products and related Reportable Events.2318

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In response to that comment, the Participants recommended a change to the Plan that would require that the CCO have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation, and that, to the extent those duties conflict with duties the CCO has to the Plan Processor, the duties to the CAT LLC should control.2319 As discussed in more detail in the Discussion Section, the Commission agrees with this suggestion and has modified the Plan to incorporate this change.

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The Commission has considered the comments received, the Participants’ response, and the modifications the Commission has made to the Plan. The Commission disagrees with the commenter that stated that the future upgrades would not help to provide “timely insights to regulators” because the provisions are “infrastructure related.”2320 As discussed above, the upgrades should improve the completeness of the CAT Data by potentially allowing for its expansion to include information on select additional products and related Reportable Events, and access to more complete data should improve regulatory activities.2321 Additionally, the required scalability of the Central Repository infrastructure and the mechanism to accept suggested changes from the Advisory Committee and regulators will permit the CAT to meet the needs of the regulators—such as enhancements benefiting their oversight of the markets—and be modifiable and adaptable to future technology changes.2322

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In response to the comment noting that the proposal for the CCO to be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest,2323 the Commission notes that the potential for a conflict of interest would create additional uncertainty as to whether the provisions of the Plan requiring the CCO to review the completeness of CAT Data periodically and to provide the Commission with a document outlining how the Participants could incorporate information on select additional products and related Reportable Events will be carried out in a way that will maximize the benefits of the Plan. However, the modification to the Plan requiring the CCO to have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation should reduce that uncertainty. Therefore, the Commission continues to believe that those provisions will allow the CAT to be updated efficiently if and when the applicable technologies and regulations change.

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Furthermore, the Plan has been modified to require an annual evaluation of potential technological upgrades based upon a review of technological advancements over the preceding year, drawing on Participants’ technology expertise, whether internal or external.2324 The Plan has also been modified to require an annual assessment of whether any data elements should be added, deleted or changed to the CAT Data. Because these amendments result in more frequent evaluations (compared to biannually), and require the evaluations to review technological advancements as well as the usefulness of the data elements in CAT, these amendments should further allow the Participants to consider the appropriate time to make technological upgrades and decisions regarding the inclusion, deletion or modification of data elements.

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In summary, the Commission continues to believe that the Plan provides a means for the Commission to ensure that improvements to CAT functionality are considered so as to preserve its existing benefits, or that the expansion of CAT functionality is undertaken in order to create new benefits.

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b. Promotion of Accuracy

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In the Notice, the Commission discussed specific Plan provisions designed to generally promote the accuracy of information contained in the Central Repository.2325 The CCO is required, among other responsibilities, to perform reviews related to the accuracy of information submitted to the Central Repository and report to the Operating Committee with regard thereto,2326 and there is a special Compliance Subcommittee of the Operating Committee, which is established to aid the CCO with regard to, among other things, issues involving the accuracy of information.2327 The Plan also contains certain other provisions intended to monitor and address Error Rates.2328

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The Commission discussed its preliminary belief that the provisions were reasonably designed to improve the overall accuracy of CAT Data relative to the exclusion of such provisions. It noted, however, that certain procedures outlined in the Plan might not incentivize all firms to further improve the quality of the data they report. Specifically, because the Plan only discusses penalties or fines for CAT Reporters with excessive Error Rates, the Commission explained that it is not clear what incentive, if any, would be provided to firms with median Error Rates to improve their regulatory data reporting processes, and that this lack of incentive could collectively limit industry’s incentives to reduce Error Rates.2329

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In addition, the Commission noted that the Plan includes provisions requiring the establishment of a symbology database that will also foster accuracy. The Commission noted that Participants and their Industry Members will each be required to maintain a five-year running log documenting the time of each clock synchronization performed and the result of such synchronization, and that these requirements should provide a clearer foundation for evaluating the standards set in the Plan upon which future improvements could be considered.

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The Commission received several comments regarding the promotion of accuracy in the Plan. One comment letter stated that there are insufficient incentives provided by the Plan for CAT Reporters to reduce Error Rates.2330 The commenter did not provide any additional information as to why the existing incentives are insufficient or any specific suggestions to improve the incentives. Another commenter recommended a “positive reinforcement” approach to incentivize the reduction of Error Rates, where firms would be exempted from duplicative reporting systems if their Error Rate for “comparable” data in CAT reaches a certain threshold.2331 In addition, the commenter suggested that customer information fields should be categorized based on the degree of their importance for market surveillance and market reconstruction purposes, so that CAT Reporters can focus on ensuring accuracy of the fields most important for market surveillance.2332 That commenter seemed to agree that an annual review of error rates would promote accuracy, stating that an annual review is “reasonable.”2333 The same commenter also noted that detailed error reporting statistics for CAT Reporters will assist in minimizing the error rate over time.2334 Another commenter stated their belief that CAT Reporters should have an opportunity to reduce their error rate prior to onboarding on CAT, and furthermore, should receive a grace period before error correction rates are disseminated to regulators.2335 The commenter stated that such provisions, “would provide them [CAT Reporters] with a window to better understand the data being returned by the CAT, and how it is evaluating data submissions.”2336 An additional commenter stated that error rate monitoring is an effective way of ensuring firms put in place pre-validation checks, and that such checks can be an effective method of protecting the integrity and accuracy of the data being reported.2337 The Commission received three comment letters that appeared to support the idea that the annual review of clock synchronization and timestamp standards would promote accuracy.2338 One commenter noted that the annual review would permit a consideration of “the current state and cost of clock synch technology, and what the current industry practices are regarding adoption of these technologies,”2339 and a second generally agreed with that observation.2340 A third supported regular review to assess whether the standard might be introducing “noise and/or overly distorted signals.”2341 In their response, the Participants stated that with respect to data accuracy, the Participants have included provisions in the Plan to take into account minor and major inconsistencies in customer information. In particular, the Participants noted that Appendix D explains that “[t]he Plan Processor must design and implement procedures and mechanisms to handle both minor and material inconsistencies in customer information.”2342 They also noted that material inconsistencies must be communicated to the submitting CAT Reporter(s) and resolved within the established error correction timeframe.2343 The Participants stated that the Central Repository also must have an audit trail showing the resolution of all errors.2344 Finally, the Participants noted that they intend to monitor errors in the customer information fields and will consider, as appropriate, whether to prioritize the correction of certain data fields over others.

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Another commenter suggested that a CAT Reporter’s performance of pre-validation checks prior to submitting data to the CAT can be an effective way to preserve data integrity and accuracy.2345 In their response, the Participants noted that, in recognition of their potential value in ensuring accurate data submissions, they have discussed with the Bidders various tools that will be made available to CAT Reporters to assist with their data submission, including pre-validation checks.2346

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Finally, as discussed in more detail above,2347 another commenter stated that the proposal for the CCO to be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest.2348 The Commission notes that the Plan accords the CCO certain responsibilities related to the promotion of accuracy; for example, as noted above, the CCO is responsible for reviews related to the accuracy of information submitted to the Central Repository and reporting to the Operating Committee with regard thereto. In response to that comment, the Participants proposed a change to the Plan which would require that the CCO have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation.2349 As discussed in more detail in the Discussion Section, the Commission agrees with this suggestion and has modified the Plan to incorporate this change.

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The Commission has considered the comments and the Participants’ response and is revising its economic analysis as indicated below. In response to the commenter that suggested the prioritization of customer information fields, the Commission notes that it is amending the Plan to require the SROs to submit an assessment of errors in the customer information fields and whether to prioritize the correction of certain data fields over others, within 36 months of Plan Approval.2350 The Commission agrees with the Participants, however, that the provisions of the Plan requiring the Plan Processor to design and implement procedures and mechanisms to handle both minor and material inconsistencies2351 in customer information, requiring material inconsistencies to be resolved within the established error correction timeframe, and requiring the Central Repository to have an audit trail showing the resolution of all errors should help to promote accuracy, as well. Nonetheless, the Commission believes that, the assessment will help to identify any unanticipated issues with the accuracy of the customer information fields and, in addition to the provisions discussed in the Notice and summarized above, should promote the overall accuracy of CAT Data.

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In response to the commenter that suggested CAT Reporters should have an opportunity to reduce their error rate prior to onboarding on CAT, the Commission agrees and believes that such an opportunity exists during the testing periods, particularly as specified in the amended Plan.2352 The Commission is also amending the Plan to require that the CAT testing environment will be made available to Industry Members on a voluntary basis no later than six months prior to when Industry Members are required to report and that more coordinated, structured testing of the CAT System will begin no later than three months prior to when Industry Members are required to report data to CAT.2353 The ability to use a testing environment prior to reporting will promote accuracy of data going forward.

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In response to the comment noting that the proposal for the CCO be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest,2354 the Commission notes that the potential for a conflict of interest would create additional uncertainty as to whether the reviews related to the accuracy of information submitted to the Central Repository and reports to the Operating Committee with regard thereto, both of which are delegated to the CCO under the Plan, will be carried out in a way that will maximize the benefits of the Plan. However, the modification to the Plan requiring the CCO to have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation should reduce that uncertainty.

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The Commission also believes that, if they are made available to CAT Reporters, pre-validation checks could promote the accuracy of data in the Central Repository prior to T+5 by reducing errors. However, the Commission notes that the availability of these tools is uncertain.

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While the Commission continues to believe that the lack of incentives for firms with median Error Rates to improve their regulatory data reporting processes could collectively limit industry’s incentives to reduce Error Rates, the Commission agrees with the commenter that suggested that positive reinforcement with respect to error rates may help promote accuracy.2355 The Commission notes that, as discussed above,2356 the overall elimination of existing data reporting systems will be conditioned on the availability of quality data in CAT, which may incentivize accurate CAT reporting. While the Commission agrees that allowing CAT Reporters to stop reporting to existing data systems on an individual basis according to their error rates would incentivize CAT Reporters to reduce their error rates, the Commission notes that this approach may not promote the accuracy of CAT Data as a whole, because it could entail a division of market data across multiple data sources that would obligate regulators to merge multiple data sources to conduct their regulatory activities. However, as discussed above, the Commission has amended the Plan to require Participants to consider, in their rule filings to retire duplicative systems, whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy standards. This should provide further analysis regarding whether individual reporting exemptions based on meeting data quality standards can incentivize fewer errors while, ensuring that regulators can effectively carry out their obligations using CAT Data.2357

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The Commission believes that three additional reports and reviews will further promote lower data error rates by focusing attention on the sources of data errors. First, the Plan has also been modified to require an annual evaluation of how the Plan Processor and SROs are monitoring Error Rates and exploring the imposition of Error Rates based on product, data element or other criteria.2358 By increasing the frequency of the evaluation and specifically including this Error Rate information, this analysis will enable the SROs to better understand the factors that generate Error Rates. Second, the Plan has been amended to require an assessment in connection with any Material Systems Changes to the CAT of its potential impact on the maximum Error Rate.2359 This will facilitate understanding of how a particular Material Systems Change would impact Error Rates and whether to temporarily adjust the Error Rates around that Material Systems Change. Third, the Plan has been modified to require the SROs to provide an assessment of the feasibility, benefits and risks and advisability of permitting Industry Members to have bulk access to their reported data. Such an assessment would provide further information on the tradeoffs of bulk extracts, which could allow Industry Members to more efficiently identify and correct data errors.

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The Plan has also been modified to require a report detailing the SROs’ consideration of engaging in coordinated surveillance (e.g., entering into Rule 17d-2 agreements, RSAs or some other approach to coordinate compliance and enforcement oversight of the CAT), within 12 months of Plan Approval.2360 This analysis will promote accuracy by focusing the SROs on ensuring that their members comply with requirements in the Plan.

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Other amendments could promote accuracy by promoting finer timestamps and shorter clock offset tolerances. The Plan has been modified so that the SROs should apply industry standards related to clock synchronization based on the type of CAT Reporter, type of Industry Member, or type of system, rather than the industry as a whole. In addition, the Plan has been amended to require that the Plan Processor review clock synchronization standards by type of entity and system type six months after effectiveness of the Plan and on an annual basis thereafter. These amendments to the Plan should focus attention on areas where improvements to the clock synchronization and timestamp standards could improve the accuracy of the data at lower cost.

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c. Promotion of Timeliness

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In addition to the specific timeliness benefits discussed in the foregoing Sections, in the Notice the Commission discussed some Plan provisions that promote performance of the Central Repository, and that therefore could indirectly improve the timeliness of regulator access to or use of the CAT Data. These are found in capacity requirements for the Plan Processor, disaster recovery requirements to ensure the availability of the system, and in supervision and reporting of timeliness issues.

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First, the Plan Processor must measure and monitor Latency within the Central Repository’s systems, must establish acceptable levels of Latency with the approval of the Operating Committee, and must establish policies and procedures to ensure that data feed delays are communicated to CAT Reporters, the Commission, and Participants’ regulatory Staff.2361 Second, the Plan Processor must develop disaster recovery and business continuity plans to support the continuation of CAT business operations.2362 Third, the Chief Compliance Officer of the Plan Processor must conduct regular monitoring of the CAT System for compliance with the Plan, including with respect to the reporting and linkage requirements in Appendix D.2363 Moreover, the Plan Processor must provide the Operating Committee with regular reports on the CAT System’s operations and maintenance, including its capacity and performance, as set out in Appendix D.2364

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Furthermore, the Commission discussed that one caveat on the foregoing discussion is that system performance would in part be dependent on a series of SLAs to be negotiated between the Plan Participants and the eventual Plan Processor, including with respect to linkage and order event processing performance, query performance and response times, and system availability.2365 As these have not yet actually been negotiated, some of the key timeliness benefits anticipated to accrue from implementation of the Plan could be subject to negotiation.

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The Commission received several comments on the development of disaster recovery and continuity plans. One commenter stated that it is not clear that the current disaster recovery plan would provide uninterrupted access to CAT data in the case of an event that calls for the plan to be activated.2366 Another commenter requested clarification that the bi-annual disaster recovery test of CAT operations at its secondary facility would be conducted twice a year, rather than once every two years.2367 In their response, the Participants clarified that disaster recovery tests would be conducted twice a year.2368

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As discussed in more detail above,2369 another commenter stated that the proposal for the CCO to be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest.2370 The Commission notes that the Plan accords the CCO certain responsibilities related to the promotion of timeliness; for example, as noted above, the CCO is responsible for conducting regular monitoring of the CAT System for compliance, including with respect to compliance with the timelines for reporting and linkage of the data set out in Appendix D of the Plan, which could help ensure that the CAT Data is made available to regulators in accordance with the timelines discussed in Section V.E.1.d.2371 In response to that comment, the Participants proposed a change to the Plan which would require that the CCO have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation. As discussed in more detail in the Discussion Section, the Commission agrees with this suggestion and has modified the Plan to incorporate this change. The Commission has considered the comments, the Participants’ response and the modification to the Plan, and continues to believe that the provisions discussed in the Notice and summarized above promote performance of the Central Repository, and therefore could indirectly improve the timeliness of regulator access to or use of the CAT Data.

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In response to the comment noting that the proposal for the CCO to be an officer of the CAT LLC as well as an employee of the Plan Processor creates a conflict of interest,2372 the Commission notes that the potential for a conflict of interest would create additional uncertainty as to whether regular monitoring of the CAT System for compliance, which is the responsibility of the CCO under the Plan, will be carried out in a way that will maximize the benefits of the Plan. However, the modification to the Plan requiring the CCO to have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation should reduce that uncertainty.

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In response to the comment regarding the frequency of testing,2373 the Commission notes that the Participants have clarified that testing will take place twice a year, which will promote the effectiveness of the disaster recovery plan relative to less frequent testing. In response to the comment regarding uninterrupted access to CAT Data in the case of an event that calls for the disaster recovery plan to be activated,2374 the Commission recognizes that regulators may not have uninterrupted access to CAT Data in the event the disaster recovery plan is activated, which may limit the extent to which the disaster recovery plan promotes timeliness relative to a plan that provided for uninterrupted access. However, the Commission notes that the CAT NMS Plan states that the disaster recovery capability will ensure no loss of data and that a secondary processing site must be capable of recovery and restoration of services within 48 hours, but with the goal of next-day recovery.2375 As noted in the Discussion Section, the Commission also expects that, given the importance of the Central Repository, the Plan Processor will strive to reduce the time it will take to restore and recover CAT Data at a backup site. Further, the Commission’s amendment to the Plan to require an annual review of efforts to reduce the time to restore and recover CAT Data at a back-up site should promote timeliness. Specifically, any enhancements with respect to restoration and backup of data resulting from these reviews will help to further ensure that access to CAT Data after an outage would be timely.

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d. Operation and Administration of the CAT NMS Plan

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In the Notice, the Commission stated its preliminary belief that certain elements of the CAT NMS Plan’s governance are uniquely applicable to a consolidated audit trail and that, as compared to a CAT NMS Plan without these features, these provisions of the CAT NMS Plan increase the likelihood that the potential benefits of the CAT NMS Plan would be realized.2376

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(1) Introduction

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In the Notice, the Commission stated that, in adopting Rule 613, the Commission established certain requirements for the governance of the CAT NMS Plan, stating that those “requirements are important to the efficient operation and practical evolution of the [CAT] and are responsive to many commenters’ concerns about governance structure, cost allocations, and the inclusion of SRO members as part of the planning process.”2377 Moreover, the Commission did not establish detailed parameters for the governance of the CAT NMS Plan, but rather allowed the SROs to develop specific governance arrangements, subject to a small number of requirements.2378 For those requirements, the Commission stated that the governance provisions identified in the Adopting Release—relating to Operating Committee voting and the Advisory Committee—continue to be important to the efficient operation and practical evolution of the Plan, particularly given that there are a range of possible outcomes with respect to both the costs and benefits of the Plan that depend on future decisions.2379 Further, the way in which the identified governance provisions have been incorporated into the Plan could help facilitate better decision-making by the relevant parties. This, in turn, means that the Commission could have greater confidence that the benefits resulting from implementation of the Plan would be achieved in an efficient manner and that costs resulting from inefficiencies would be avoided.2380

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(2) Key Factors Relating to Governance

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Two factors identified by the Commission in the Rule 613 Adopting Release as “important to the efficient operation and practical evolution of the [CAT]” are voting within the Operating Committee and the role and composition of the Advisory Committee.2381 Specifically, voting thresholds that result in Operating Committee decision-making that balances the ability of minority members to have alternative views considered with the need to move forward when appropriate to implement needed policies can promote achievement of the Plan’s benefits in an efficient manner. Similarly, an Advisory Committee that is balanced in terms of membership size and composition, as well as in its ability to present views to the Operating Committee, can result in better performance of its informational role, and thus more efficient achievement of the benefits of the Plan.2382

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A. Voting

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In adopting Rule 613, the Commission stated that “an alternate approach” to voting involving “the possibility of a governance requirement other than unanimity, or even supermajority approval, for all but the most important decisions” should be considered, as it “may be appropriate to avoid a situation where a significant majority of plan sponsors—or even all but one plan sponsor—supports an initiative but, due to a unanimous voting requirement, action cannot be undertaken.”2383 The Notice states that the Plan generally eschews a unanimous voting threshold, except for three clearly-defined circumstances—and that by contrast “[m]ajority approval of the Operating Committee is sufficient to approve routine matters, arising in the ordinary course of business, while non-routine matters, outside the ordinary course of business, would require a supermajority (two-thirds) vote of the Operating Committee to be approved.” 2384 As the Notice discusses, majority voting avoids the hold-out problem of unanimity, but can result in decisions that bear less concern for the interests of the minority members—which in turn may depend on the ease with which a majority coalition can be formed, whether those coalitions are fluid or static, and whether in practice decision-making is collegial or contentious.2385 The Notice also recognizes that “Participant SROs that are affiliated with one another could vote as a block by designating a single individual to represent them on the Committee,” thereby permitting those individuals to exercise more influence, but still short of control over voting outcomes.2386 And the Notice states that the Plan’s supermajority voting requirement for more important matters represents an intermediate ground between majority and unanimous voting.2387

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One commenter stated that it supports the EMSAC recommendations regarding changes to NMS Plan governance, which include limiting NMS Plan provisions requiring a unanimous vote and instead requiring two-thirds supermajority voting for substantive changes, plan amendments, and fees, with a simple majority vote for administrative or technical matters and argued that the recommendations should be included in the CAT NMS Plan.2388 The same commenter also supported the recommendation that would involve “revisit[ing] allocation of voting rights among SROs” to replace the “one vote per exchange registration” model with a model of one vote per exchange family (except if the exchange family has a consolidated market share of 10% or more, then two votes) and recommended that it be applied to the CAT NMS Plan.2389

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With respect to unanimous voting, the Participants’ response noted that the Plan already significantly limits the use of unanimous voting to three well-defined circumstances, and that the Plan differs from other NMS Plans in this regard.2390 With respect to allocation of voting to exchanges or exchange families, the Participants stated that because each Participant has obligations under Rule 613, each Participant should receive a vote.2391 The Participants also noted that this approach is consistent with other NMS Plans.

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The Commission has analyzed the comments received and discusses them in turn below, focusing on the CAT NMS Plan, and specifically on the question of whether the governance structure as amended in this Notice would decrease Plan uncertainty for purposes of the Commission’s approval of the CAT NMS Plan.2392

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With respect to voting thresholds, the Commission believes that the CAT NMS Plan already anticipated the need for a voting structure that differs from other NMS Plans in following the Commission’s recommendation to seek an “alternative approach.” The CAT NMS Plan requires unanimous voting only in three specific instances and otherwise relies on supermajority or majority votes,2393 which the Commission notes is generally consistent with the suggestions made by the commenters. With respect to allocation of votes, the Commission believes that the exchange family approach could potentially give smaller or unaffiliated exchanges a more significant voice in Operating Committee decision-making, but it is already the case under the Plan that no single exchange family or even pair of exchange families can themselves control voting outcomes, even at a majority voting threshold.2394 Thus, the determinants of whether majority voting would result in adequate attention to the rights of minority members continues to turn on the factors set out in the economic analysis accompanying the Notice.

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B. Advisory Committee

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The Commission in the Notice further stated that in implementing the requirements of Rule 613—which requires that the Plan designate an Advisory Committee to advise plan sponsors on the implementation, operation, and administration of the Central Repository, and which must include representatives of member firms of the Plan sponsors (broker-dealers)—the Plan requires the Advisory Committee to have diverse membership: a minimum of six broker-dealers of diverse types and six representatives of entities that are not broker-dealers.2395 The Notice elaborates that, given the primary purpose of the Advisory Committee as a forum to communicate important information to the Operating Committee, which the Operating Committee could then use to ensure its decisions are fully-informed, the Plan’s choices in implementing Rule 613 do reflect some tradeoffs.2396 Specifically, one factor in the ability of the Advisory Committee to collect relevant information for the Operating Committee is the quality and depth of the expertise, and the diversity of viewpoints, of the Advisory Committee’s membership.2397 The Notice states that the Plan balances these considerations by providing the Advisory Committee with sufficient membership to be able to generate useful information and advice for the Operating Committee, while being at a sufficiently low size and diversity level to permit the members to be able to work together.2398 Moreover, another factor in the ability of the Advisory Committee to advise the Operating Committee is whether the Advisory Committee, having assembled a diverse set of views, could effectively communicate those views to the Operating Committee.2399 The Notice states that two Plan provisions, relating to the staggering of member terms and the limits on participation of the Advisory Committee under Rule 613, bear on this communication.2400 Finally, one other determinant bears on the effectiveness of the Advisory Committee in ensuring that the Operating Committee makes decisions in light of diverse information—whether the Operating Committee actually takes into account the facts and views of the Advisory Committee before making a decision.2401 Here, the Notice states that the Plan does not contain a mechanism to ensure that the Operating Committee considers the views of the Advisory Committee.2402

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A number of commenters raised concerns about the extent of input from entities other than plan sponsors into the governance of the Plan. Several of these commenters cited what they perceived to be governance shortcomings with other NMS Plans that have a governance structure similar to that of the CAT NMS Plan — i.e., those that also have an Operating Committee limited to SRO members, and an Advisory Committee for generating input from a broader set of interested parties.2403 In addition to generalized concerns about Advisory Committees having a lack of “visibility,” “voice,” or “authority,”2404 commenters raised a number of ways in which they believe Advisory Committees’ ability to provide effective input into Operating Committees’ decision-making has been limited: executive sessions of Operating Committees are overused to exclude Advisory Committee participation;2405 robust information-sharing was not practiced;2406 and other similar obstacles.2407These and other commenters expressed the view that voting representation for certain types of entities2408 on the Plan’s Operating Committee was necessary to promote fully-informed and high-quality decision-making,2409 to enhance transparency and mitigate plan sponsor conflicts of interest,2410 or to ensure adequate incentives exist to drive future improvements to the CAT.2411

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Some commenters argued for improving the effectiveness of the Advisory Committee—on its own merits, in addition to changes to the Operating Committee, or as a second-best alternative to Operating Committee changes.2412 Along these lines, several commenters asserted that the membership of the Advisory Committee should be expanded to include more or additional types of entities.2413 Commenters also suggested that the Advisory Committee should be involved in every aspect of CAT decision-making, with procedural protections put in place to ensure a robust role for the Advisory Committee in the operation and administration of the CAT.2414 Finally, some commenters called for additional enhanced governance features, such as independent directors, an audit committee, or publicly-released financial and other disclosures.2415

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One commenter objected wholesale to the governance structure of the Plan, asserting that the “governance of the CAT must not be riddled with conflicts of interest” and that therefore the CAT should either be controlled entirely by the Commission, or that the CAT governance structure should be radically altered, in order for it to be more consistent with the public interest and the SEC’s mission.2416

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On the other hand, one commenter expressed a view that the CAT NMS Plan’s governance structure, including the provision limiting Operating Committee voting membership to Plan sponsors, was appropriate, given that Rule 613 places the responsibility for creating and maintaining the CAT NMS Plan on the Plan sponsors,2417 and that the Plan sponsors, as SROs, are subject to obligations under Rules 608 and 613, as well as Section 6(b)(1) and 15A(b)(2) of the Exchange Act—obligations to which Advisory Committee members are not subject.2418

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In their responses, Participants responded to many of the concerns raised by the commenters. First, the Participants stated that the composition of the Operating Committee is consistent with Rule 613, and including non-SROs on the Committee could give rise to conflicts of interest as entities that are the subject of market surveillance would be given a role in determining how such market surveillance would operate.2419 Moreover, the Advisory Committee would provide non-SROs with an “appropriate and meaningful forum” in which to make their views known.2420

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With respect to the Advisory Committee, the Participants agreed with certain commenters who had called for additional entities to be added to the membership of the Advisory Committee, and therefore proposed a Plan amendment to add a service bureau representative, along with an additional institutional investor representative (while requiring one of the three institutional investor representatives to represent registered funds).2421 However, the Participants disagreed with adding financial economists, as there is already an academic who could be a financial economist; trade groups, as there are already individual members thereof represented; or additional broker-dealers, as there are already several representatives from different segments of the industry — and adding so many additional people would “likely hamper, rather than facilitate, discussion.”2422 With respect to the appointment of Advisory Committee members, the Participants rejected the suggestion that the broker-dealer members of the Advisory Committee be permitted to make appointments, but determined to amend the Plan to provide the Advisory Committee an opportunity to advise the Operating Committee on candidates before the Operating Committee makes an appointment.2423

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With respect to the activities of the Advisory Committee, the Participants stated that the existing structure provided under Rule 613 already provides the Advisory Committee with an appropriate, active role in governance, and that no changes are needed.2424 Similarly, the Participants did not believe that a change to provisions governing consideration of Material Amendments was necessary to provide the Advisory Committee with a more robust role.2425

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With respect to the additional procedural protections for the effectiveness of the Advisory Committee, the Participants asserted that, first, with respect to Executive Sessions, Rule 613 and the Plan strike the right balance, as the Plan Participants need the opportunity to discuss certain matters, including certain regulatory and security issues, without the participation of the industry, and that maintaining flexibility in determining when to meet in Executive Session is important. But Participants nonetheless clarified that they intend to limit Executive Sessions to “limited purposes requiring confidentiality.” Second, Participants asserted that similarly the right balance has been struck with respect to the treatment of Advisory Committee requests and recommendations, as the commenters’ proposed procedural protections are formulaic, and could hamper interactions.2426 The Participants also affirmed their belief that “as a matter of good corporate governance, the Operating Committee should take into consideration the Advisory Committee’s input regarding the CAT.”2427

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Finally, with respect to the other governance features requested by commenters, the Participants declined to make any changes. With respect to independent directors, according to Participants, the composition of the Operating Committee as set forth in the Plan is consistent with Rule 613, and adding independent directors is unnecessary, given existing independent representation on SRO boards.2428 Moreover, they asserted that an audit committee is unnecessary, because the CAT will operate on a break-even (versus for-profit) basis, the Operating Committee members can act objectively, and the Compliance Subcommittee can aid the CCO in much the same way as an independent audit committee would.2429 Finally, the Participants noted that financial transparency is accomplished through Advisory Committee members’ right to access information about the operation of the CAT and their receipt of minutes from meetings; also, financial information related to the CAT will be disclosed in fee filings with the Commission.2430

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The Commission has considered the comments it received regarding governance issues but believes that the economic benefits and tradeoffs of the CAT NMS Plan governance structure examined in the Notice continue to apply. The Commission in the Notice stated that the governance provisions of the CAT could “help promote better decision-making by the relevant parties” and thereby “could mitigate concerns about potential uncertainty in the economic effects of the Plan by giving the Commission greater confidence that its expected benefits would be achieved in an efficient manner and that costs resulting from inefficiencies would be avoided.”2431 While commenters have not raised issues that would cause the Commission to fundamentally reconsider that assessment, commenters have called attention to ways in which they believe NMS Plan governance could be improved to increase the likelihood that the benefits of the plan would be achieved in an efficient manner and that costs resulting from inefficiencies would be avoided. These are discussed in turn below, along with the changes the Participants recommended making to the Plan, and which the Commission has made, in response to certain comments. As above, the discussion is specific to the CAT NMS Plan, and specifically, the question of whether the governance structure as amended would decrease Plan uncertainty for purposes of the Commission’s approval of the CAT NMS Plan.

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The Notice did not expressly address the possibility of adding non-SRO members to the Operating Committee, given that the Commission in the Adopting Release for Rule 613 cited the “regulatory imperative” that the operations and decisions regarding the CAT be made by SROs, who have the statutory obligation to oversee the securities markets.2432 The Commission believes that adding non-SROs to the Operating Committee, as advocated by some commenters, could give rise to the types of tradeoffs that are similar to those the Commission identified in the Notice with respect to expanding or diversifying the Advisory Committee: a larger and more diverse Operating Committee could result in better–informed Operating Committee decision-making, but it could also decrease the ability of Operating Committee members to coordinate effectively in decision making.2433 In particular, non–SROs may have significantly different interests than SRO members, given that non–SROs lack the statutory obligation to oversee the securities markets, and their inclusion could give rise to potential conflicts of interest or recusal issues if the Operating Committee were to discuss regulatory surveillance issues. Thus, the Commission believes that adding non-SRO members to the Operating Committee at this time would increase rather than decrease the uncertainty around achieving the benefits of the Plan.

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Commenters did not challenge the nature of the tradeoffs that apply to the membership of the Advisory Committee, but rather where the particular balance was struck. A larger, more diverse committee as advocated by some commenters could provide additional views that could lead to better-informed decision-making; however, such a committee could also lack cohesion and have difficulty making decisions in a timely manner, which would impede the efficiency of the decision-making process under the CAT NMS Plan.2434 Adding a small number of diverse voices as Participants propose to do in response to comments could enhance the quality of Advisory Committee decision-making by increasing the diversity of views that are represented, but risks decreasing the quality of decision-making by making the Advisory Committee larger and less cohesive. It is difficult to determine where the exact tipping point lies, but the changes the Participants propose making to the Plan we believe would on net increase the quality of Plan decision-making: the value of the additional diverse viewpoints appears likely to justify any additional unwieldiness the two additional members might cause. Along these same lines, the Commission further believes that adding the unique perspectives of a financial economist would also increase the quality of the Advisory Committee discussions without unduly burdening its operations, and the Commission has therefore amended the Plan to add to the Advisory Committee an academic who is a financial economist. However, adding a large number of additional members, or members whose views could be expected to largely coincide with those of existing members, as certain commenters sought, makes it more likely that the marginal benefits of expansion would be outweighed by the increase in coordination difficulties.2435

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With respect to the Advisory Committee membership, one commenter suggested that the appointments be made by the broker-dealer members of the Advisory Committee, rather than by the Operating Committee; Participants asserted that the Operating Committee should have selection responsibility. The question of who to vest with appointment power embodies certain tradeoffs: increasing the independence of the Advisory Committee by vesting appointment power in Advisory Committee members may promote more diverse or robust presentation of views to the Operating Committee. On the other hand, it increases the possibility that the Advisory Committee would operate in a manner adversarial to the Operating Committee, and could diminish the likelihood that the Operating Committee would be open to persuasion following consideration of the Advisory Committee’s views. Moreover, vesting appointment powers solely in the broker-dealer members of the Advisory Committee, as opposed to all members of the Advisory Committee, could result in Advisory Committee membership that overweighs the views of broker-dealers. As a compromise position, the Participants propose to formalize a role for the Advisory Committee in advising the Operating Committee on membership selections. This is not the only compromise position that could balance the interests of SROs and non-SROs and ensure the representation of a diverse set of views to promote well-informed decision-making — for example, one commenter’s alternative would provide slightly more power to the Advisory Committee by vesting nominating authority in the Advisory Committee, while providing a veto right to the Operating Committee through the majority vote it would take to confirm a new member. But the Plan, as amended, would promote better-informed decision-making by ensuring the views of existing Advisory Committee members are considered as part of the selection of new members. This should promote membership in the Advisory Committee that is more independent, rather than intellectually-aligned with either the Operating Committee or Advisory Committee (or some subset thereof), and thereby better-able to bring diverse views to the Operating Committee’s attention in Plan decision-making.

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While, as amended, the Plan would provide a role with respect to Advisory Committee membership selection to the Advisory Committee, the Participants did not propose an additional expansion of the activities of the Advisory Committee, as some commenters had sought. It is not clear that procedural changes such as having the Advisory Committee formally vote on matters that the Operating Committee is voting on, as opposed to a less formal way of providing the Operating Committee with the Advisory Committee’s views with respect to those votes, would materially improve Plan decision-making and thereby reduce uncertainty that benefits would be achieved.2436 Similarly, the Plan’s current definition of Material Amendment seems appropriately calibrated to bring the most robust decision-making processes to bear on the matters of the greatest importance. Altering the balance to add more process under Section 6.9(c) (i.e., to require affirmative approval by Supermajority Vote (Material Amendments) versus a right of objection vested solely in Participants plus a Majority Vote (non-Material Amendments)) could improve the quality of those decisions by making them better-informed—i.e., by requiring debate and subjecting them to a Supermajority Vote, versus only triggering debate at the option of Participants2437—but the additional delay imposed on decision-making with respect to less significant matters would likely not justify any marginal gains in decisional quality.

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Similarly, the Notice discussed several of the issues raised by commenters, including that the Advisory Committee members are permitted to attend Operating Committee meetings but are excluded from Executive Sessions; that the Advisory Committee’s access to information is subject to scope and content determinations made by the Operating Committee; and that there is no mechanism under the Plan to ensure that the Operating Committee does in fact consider the views of the Advisory Committee when engaged in Plan decision-making.2438 Changing any of these features as commenters suggested would pose certain economic tradeoffs. Commenters did not assert that the Advisory Committee system as currently constructed is unable to function appropriately, but rather in their experience that it does not — and therefore that additional protections are needed. Cooperation in good faith under the existing structure of the Plan could ensure that Advisory Committee members have access to the information they need to contribute meaningfully to discussions and that Advisory Committee members’ recommendations are taken seriously; absent good faith cooperation, processes would be needed to promote these outcomes. While additional processes could provide protections, they would also increase inflexibility. Thus, adding formal mechanisms where informal mechanisms would have sufficed would add costs, delay, and lack of adaptability with little or no corresponding benefit.

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In their response, Participants stated that they “recognize the benefit and purpose of the Advisory Committee and intend to use the Executive Session for limited purposes requiring confidentiality” and further that “as a matter of good corporate governance, the Operating Committee should take into consideration the Advisory Committee’s input regarding the CAT.”2439 The Commission agrees, and in light of the Participants’ assurances, believes that the protections sought by some commenters are generally not necessary to achieve the Plan’s benefits and could be counterproductive at this time.

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However, the Commission is amending the Plan in two ways that respond, at least in part, to certain of commenters’ concerns. First, the Commission is amending the Plan to require that SEC Staff be able to attend Executive Sessions. In addition to the direct oversight benefits that would accrue from SEC Staff attendance at Executive Sessions, SEC Staff would be able to monitor whether Participants are complying with their stated intent of limiting Executive Sessions to purposes requiring confidentiality. The direct and indirect costs of permitting SEC Staff attendance should be low, but potential indirect costs do exist. For example, it may chill the free exchange of ideas in an executive session if the presence of the Participants’ regulator causes the Participants to engage in a less robust conversation, which could diminish the effectiveness of the Plan’s governance. Similarly, the additional imposition on Executive Sessions may prompt the Participants to seek alternative, informal methods of communication and debate outside the formal governance mechanisms established by the Plan, which could ultimately disadvantage Advisory Committee members if decisions are made informally, without the benefit of their input.

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Second, the Commission is amending the Plan to require that the Advisory Committee members receive the same materials and information as the Operating Committee receives (absent confidentiality concerns with respect to such information). This new procedural protection will put Advisory Committee members on an equal informational footing with the Operating Committee, and should thereby allow the Advisory Committee to produce recommendations that are better-informed. The procedural protection should have low direct costs: it does not require the preparation of new materials but simply the dissemination of information that is already prepared for the Operating Committee. However, there could be indirect costs and tradeoffs. Principally, Operating Committee members who are no longer able to exclude certain materials from dissemination to the Advisory Committee members (e.g., materials that are sensitive in some way but do not fall within the confidentiality exception in the Plan) could choose to withhold such materials entirely, thereby making the Operating Committee’s deliberations less well-informed, or they could seek to hold sensitive discussions in a less formal or less well-documented venue, which could pose the same problems as discussed above with respect to SEC presence in Executive Sessions.

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With respect to the remaining requested protections for which no Plan amendment is being made, the Commission will be alert to future suggestions that cooperation between the Advisory Committee and the Operating Committee is lacking, and will assess, as appropriate, whether additional procedural protections are needed.

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With respect to the additional governance features for which some commenters advocated —an independent board, audit committee, and financial transparency — the economic analysis in the Notice did not specifically discuss these items. The Commission believes that, on balance, commenters advocating for these issues have not raised concerns that would cause the Commission to alter its economic analysis. Having an independent board or audit committee would add an additional layer of complication to Plan decision-making — triangulating among the Operating Committee, Advisory Committee, and the independent board, thereby increasing the likelihood of untimely decision-making. There do not appear to be significant offsetting benefits at this time, as alternative mechanisms already exist to advance the purposes that these governance enhancements would seek to serve. If the purpose is that there be an external check on potential conflicts of interest, the Advisory Committee can serve in that role, given its ability to receive documents.2440 Similarly, to the extent that independent board members or an audit committee could serve a monitoring function, such a monitoring function could already be accomplished through the Compliance Subcommittee that the Plan establishes to aid the CCO.2441 Because the functions that the additional governance features would fulfill are already performed, at least in some extent, by existing features of Plan governance, adding them does not appear necessary at this time to ensure that the Plan’s governance is such that uncertainties under the Plan would be diminished.

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With respect to the commenter who advocated a radically different method for Plan governance, where the CAT would be controlled by the Commission to avoid conflicts of interest, the Commission notes that SROs are entrusted with regulatory and oversight responsibilities by the Exchange Act; to the extent their commercial interests create an actual or potential conflict of interest, the Advisory Committee is able to monitor and advise the Operating Committee on Plan decision-making, acting as a counter-weight; and to the extent there are any residual unmitigated conflicts, the Commission has authority to intervene. The Commission believes that the CAT NMS Plan approach to balancing and offsetting the conflicts of interest can achieve the regulatory benefits of the CAT.

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At this time, given the analysis above, the Commission believes that the governance structure in the Plan as modified increases the likelihood that the benefits of the Plan will be achieved. The Commission notes that more significant changes to NMS Plan governance structures could potentially produce better overall Plan outcomes, but could also lead to additional coordination problems or have unintended consequences. Thus, while the Commission believes that the reduction in uncertainty relating to the achievement of Plan benefits can at this time best be achieved through the Plan’s approach to governance, the Commission will continue to assess the governance of NMS Plans generally and the tradeoffs between the quality and efficiency of the decision-making processes of NMS Plans.2442

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Finally, one commenter asserted that the CAT should be administered by a single centralized body from a legal, administrative, supervisory, and enforcement perspective, rather than by nineteen separate SROs.2443 According to that commenter, while the Plan “contains permissive language” that would allow the SROs to enter into agreements with one another, nothing requires the SROs to enter into 17d-2 agreements, Regulatory Services Agreements, or some combination thereof. Thus, SROs could interpret the CAT’s requirements differently, or apply them to duplicative enforcement, which would be “inefficient and unworkable for firms that are members of several of the SROs.” Coordination, by contrast, “will create efficiencies and avoid regulatory duplication, potential inconsistent interpretations and interpretive guidance, and unnecessary compliance costs.”2444 The Participants stated that they recognize the potential efficiencies to be achieved through coordination, and plan to consider a Rule 17d-2 agreement.2445 The Commission agrees that coordination of efforts can produce efficiencies, but notes that alternative mechanisms for coordination of efforts, including the Operating Committee, also exist. Requiring delegation of authority to one SRO also would not necessarily lead to a better outcome, if such a one-size-fits-all approach were to inhibit the ability to tailor programs to a particular SRO or its members. However, in light of the potential efficiencies, the Commission believes it important that the Participants consider mechanisms for regulatory cooperation, and has therefore amended the Plan to require a report detailing the Participants’ considerations. Thus, the permissive approach taken in the Plan—where SROs can execute agreements but are not required to do so, particularly where coupled with the Participants’ assertion that they are exploring whether it would in fact be efficient to enter into those agreements and the Plan’s requirement that they report on whether they have done so—still promotes the achievement of the Plan’s regulatory benefits.

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(3) Conclusion

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In the Notice, the Commission concluded by stating its preliminary belief that the governance provisions discussed therein could help promote better decision-making by the relevant parties and, in turn, could mitigate concerns about potential uncertainty in the economic effects of the Plan by giving the Commission greater confidence that its expected benefits would be achieved in an efficient manner and that costs resulting from inefficiencies would be avoided.2446 For the reasons discussed above, the Commission continues to believe that this is the case after considering the comments on its analysis, the Participants’ response, and modifications to the Plan.

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pubdate: November 15, 2016 effdate: N/A +

F. Costs

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs + Compliance User: Self-Regulatory Organization + Keywords: + CAT Data, + CAT NMS plan, + Central Repository, + Shortlisted Bidders, + Industry Members, + Rule 613, + +

In the Notice, the Commission preliminarily estimated current costs related to regulatory data reporting, anticipated costs associated with building and maintaining the Central Repository, and the anticipated costs to report CAT Data to the Central Repository.2447 These preliminary estimates were calculated from information provided in the CAT NMS Plan as amended on February 27, 2015 as well as supplemental information. The Commission discussed the Plan’s estimate that the 20 Participants spend $154.1 million annually on reporting regulatory data and performing surveillance.2448 The Notice also reported that the approximately 1,800 broker-dealers anticipated to have CAT reporting responsibilities currently spend $1.6 billion annually on regulatory data reporting. The Commission estimated that the cost of the Plan would be approximately $2.4 billion in initial aggregate implementation costs and $1.7 billion in ongoing annual costs. Furthermore, the Notice discussed that market participants would have duplicative audit trail data reporting responsibilities for a period of up to a maximum of 2.5 years preceding the retirement of potentially duplicative regulatory data reporting schemes. The Commission estimated that duplicative audit trail data reporting could cost broker-dealers $1.6 billion per year or more and could cost the Participants up to $6.9 million per year. The Notice also treated all costs of developing the Plan (estimated at $8.8 million at the time the Plan was filed) as sunk costs, excluding them from costs to industry if the Plan were adopted.

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In the Notice, the Commission discussed its belief, however, that there is significant uncertainty surrounding the actual implementation costs of CAT and the actual ongoing broker-dealer data reporting costs if the Plan were approved. The Commission explained that the methodology and data limitations used to develop these cost estimates could result in imprecise estimates that may significantly differ from actual costs.

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In the Notice, the Commission considered which elements of the CAT NMS Plan are likely to be among the most significant contributors to CAT costs.2449 The Commission discussed its preliminary belief that significant sources of costs would include the requirement to report customer information, the requirement to report certain information as part of the Material Terms of the Order, the requirement to use listing exchange symbology, and possibly, the inclusion of Allocation Reports.

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The Commission also recognized that a number of second-order effects could result from the approval of the Plan. 2450 These included market-participant actions designed to avoid direct costs of a security breach; changes to CAT Reporter behavior due to increased surveillance; changes in CAT Reporter behavior to switch from one funding tier to another to qualify for lower fees; and changes in broker-dealer routing practices related to fee differentials across Execution Venues. The Commission also recognized that investors and market participants could face significant costs if CAT Data security were breached.2451

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The Commission has considered the comments received, the Participants’ response, and the modifications to the Plan, and has updated and revised its analysis of costs accordingly. The Commission’s updated cost estimates presented below consider a change in the number of Participants, updated cost information for the Central Repository provided by the Participants, and modifications to the Plan that include: a requirement that exchanges synchronize their clocks to within 100 microseconds of NIST2452; changes to the Funding Model regarding the manner in which ATSs are assessed Central Repository costs; and updated milestones regarding the retirement of duplicative systems. The updated estimates also recognize that the Participants plan to recover some portion of their Plan development costs from industry.

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The Commission’s revised cost estimates cover 21 Participants, rather than 19 as were covered by the Participants Study. Consequently, the Commission has increased its estimate of the Participants’ aggregate implementation costs from $41.1 million to $47.7 million, and increased its estimate of the Participants’ ongoing annual costs from $102.4 million to $118.9 million.2453 Although these changes also increase the Commission’s estimate of the implementation and ongoing costs of the Plan to industry, the increases do not change the rounded totals presented in the Notice. The Commission now estimates that the cost of the Plan is approximately $2.4 billion in initial aggregate implementation costs, $55 million in system retirement costs, and $1.7 billion in ongoing annual costs.

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The Commission expands on the analysis of the estimated costs above by exploring individual components of the CAT NMS Plan. In general, the CAT NMS Plan does not break down its cost estimates as a function of particular CAT NMS Plan requirements. Therefore, the Commission discusses the costs of particular requirements separately from the aggregate costs and costs by Participant, and qualitatively discusses costs the Commission is unable to estimate. The Commission has revised its analysis of particular requirements from that in the Notice in three ways. First, the Commission now discusses the uncertainty in its analysis of these costs in more detail. Second, in response to information provided by commenters, the Commission now recognizes that some costs, namely costs associated with reporting Allocation Time and Quote Sent Time, were not included in the estimated costs in the Notice. The Commission now includes these costs in the total costs for broker-dealers where estimates are available or otherwise recognizes them as additional to the existing estimates.2454 Third, the Commission no longer judges whether quantified costs attributable to specific elements of the Plan represent a significant contribution to total costs. The Commission is cognizant that some of the costs for particular elements may be significant in isolation even if they are not a large proportion of the aggregate costs of the Plan.

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The Commission continues to believe that direct costs in the event of a CAT security breach could be significant, but that certain provisions of Rule 613 and the CAT NMS Plan appear reasonably designed to mitigate the risk of a security breach. Furthermore, the Commission notes that the Plan amendments and the Participants’ response provide more details about the required security provisions and more clarity on the applicability of Regulation SCI standards. The Commission believes that these clarifications address some commenters’ concerns by providing more assurances that the security procedures are reasonably designed to prevent security breaches and that customers will be notified in the event of a breach; nevertheless, the Commission acknowledges that the costs of a breach could be quite large.

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As discussed further below, the Commission’s analysis of the second-order effects that could result from the approval of the Plan is largely unchanged from what was published in the Notice. However, the Commission has revised its analysis to reflect that the Plan will change so that ATS volume is not charged first to broker-dealers operating the ATS and then again to FINRA, which would pass through the fee costs to their members (which include ATSs). Further, the Commission recognizes certain second-order effects that it did not address in the Notice.

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pubdate: November 15, 2016 effdate: N/A +

1. Analysis of Expected Costs

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs, Analysis of Expected Costs + Compliance User: Self-Regulatory Organization + Keywords: + CAT, + Shortlisted Bidders, + Plan Processor, + CAT NMS plan, + CAT Data, + Industry Members, + +

The Plan divided the analysis of CAT cost estimates into costs associated with: building and operating the Central Repository; data reporting and surveillance performed by Participants; data reporting by broker-dealers; and CAT implementation costs borne by service providers. The Notice’s analysis of the cost estimates of the Plan followed this approach, and the Commission’s updated analysis presented here also divides the analysis of costs in this way, incorporating comments, the Participants’ responses, and Plan amendments into each analysis.

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There were a number of comments on the Commission’s cost estimates, which are discussed below in their appropriate subsections. However, one commenter had general comments on uncertainties in cost estimates and the scope of what was covered by cost estimates presented in the Plan, stating, “…the overarching theme throughout the analysis is that these estimates may not be an accurate reflection of actual costs.” 2455 The commenter further stated, “the Proposal does not adequately explain what is included in the calculation of “costs” of the system.” The Commission continues to believe that the cost estimates it provided in the Notice were reliable,2456 though it acknowledges that uncertainties related to the scope and magnitude of the estimated costs remain.2457 The Commission further acknowledges that many cost estimates from the Notice reflect market participants’ estimates of total costs of implementing and maintaining CAT reporting; the Commission agrees with the commenter that the Plan lacks a certain amount of detail on the cost of individual elements that contribute to the total costs of the Plan that will be borne by market participants.

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The Commission attempts to address the individual components of the costs separately below in the Further Analysis of Costs Section.2458 The Commission has also updated and revised certain cost estimates in response to comments and modifications in the Plan, and explains each of those changes below. The Commission acknowledges that, in light of the predictive nature of the analysis and limitations in the available data, uncertainties remain. The Commission believes, however, that the estimates are reliable in that the methodology used to create the estimates is representative of the costs industry will actually incur, and that the magnitude of the estimates appears to be reasonable. The Commission also notes that, while a commenter criticized the uncertainty in the estimates provided in the Notice, the commenter did not offer additional data and did not fault the Commission’s analysis of the information it did have.

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a. Costs of Building and Operating the Central Repository

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In the Notice, the Commission’s estimates of costs to build and operate the Central Repository relied on information presented in the Plan as amended on February 27, 2015. At the time of the Notice, the Plan’s estimates of the costs to build the Central Repository were based on Bids that varied in a range as high as $92 million.2459 The Plan’s estimates of annual operating costs at that same time were based on Bids that varied in a range up to $135 million. To estimate the one-time total cost to build the Central Repository, the Plan used the Bids of the final six Shortlisted Bidders.2460 The eventual magnitude of Central Repository costs is dependent on the Participants’ selection of the Plan Processor, and may ultimately differ from estimates discussed in the Plan if Bids are revised as the bidding process progresses. The Plan as filed also provided information based on the Bids on the total five-year operating costs for the Central Repository because the annual costs to operate and maintain the Central Repository are not independent of the build cost. Across the six Shortlisted Bidders, the total five-year costs to build and maintain CAT, according to the Plan at the time of the Notice, ranged from $159.8 million to $538.7 million.2461 In the Notice, the Commission stated its preliminary belief that estimating Central Repository costs using estimates from the Bids was reliable because they are the result of a competitive bidding process, although the Commission recognized that the Bids are not legally binding on Bidders.2462

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As discussed in the Notice,2463 the Commission believed that a range of factors will drive the ultimate costs associated with building and operating the Central Repository and who will bear those costs. Furthermore, the Commission was mindful that the cost estimates associated with building and operating the Central Repository were subject to a number of additional uncertainties. First, the Participants had not yet selected a Plan Processor, and the Shortlisted Bidders had submitted a wide range of cost estimates for building and operating the Central Repository. Second, the individual Bids submitted by the Shortlisted Bidders were not yet final, as Participants could allow Bidders to revise their Bids before the final selection of the Plan Processor. Third, neither the Bidders nor the Commission could anticipate the evolution of technology and market activity with complete prescience.

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One commenter provided an alternate estimate for Central Repository ongoing costs.2464 The commenter stated, “[w]e estimate the on-going costs for the CAT infrastructure (inclusive of [Business Continuity Plan/Disaster Recovery] costs), to be about $28 million to $36 million annually assuming a low-latency platform running at about 50 millisecond speed.” The commenter did not provide additional information or analysis to support this estimate, but the Commission believes it is possible it was derived based on comparisons to costs expected from the Volcker Rule because the commenter cited a study of those costs in support of estimates for costs to broker-dealers.2465 As discussed below,2466 the requirements of the Plan are significantly different than the requirements of the Volcker Rule, which is primarily focused on restricting certain trading activities and investments of banking entities, rather than the centralization and standardization of regulatory data reporting. The Commission also notes that the estimates provided in the Notice and updated in the Participants’ response are the result of a competitive bidding process specific to CAT and the Commission deems them reliable.

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The Commission is updating and revising its economic analysis to incorporate updated estimates in the Participants’ Response Letter III, a modification to the Plan to establish the Company as a 501(c)(6) non-profit entity, and a requirement that the Company’s financials be in compliance with GAAP and audited by an independent public accounting firm.2467 The Participants’ Response Letter III contains estimates of the costs of building and operating the Central Repository from those discussed in the Notice to reflect the fact the that Participants have narrowed the number of Bidders to the final three and the range of potential cost estimates is therefore narrower as well. Based on this updated information, the Commission now believes that the costs to build the Central Repository range from $37.5 million to $65 million and annual operating costs range from $36.5 million to $55 million.2468 The Participants also clarified that costs from Bids do not include additional expenses that might be incurred such as insurance, operating reserves or third-party costs such as accounting and legal expenses.2469 The Commission further acknowledges that these cost estimates for the Central Repository do not include Quote Sent Time reporting by Option Market Makers and the capture of Allocation Time in Allocation Reports.2470 The Commission does not have cost estimates of, and lacks sufficient information to estimate, the costs to the Central Repository of these fields and the Plan does not include this information and commenters did not offer estimates. The Commission does not believe these costs will significantly impact the costs of building or operating the Central Repository because the addition of these fields does not significantly impact the size or scope of the Central Repository. Further, the Commission notes that costs from the Company that will be passed on to Industry Members will be slightly reduced by organizing the Company as a nonprofit entity because reserve funds will not be taxable as they would have been under the Plan as filed. The Commission notes, however, that CAT fees—the sole revenue source for the Company—are not expected to exceed the Company’s expenses, so the Commission believes these savings will be minor.

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Overall, the Commission continues to believe that estimating Central Repository costs using estimates from the Bids is reliable and is therefore updating its cost estimates to reflect updates provided in the Participants’ Response Letter III.2471

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b. Costs to Participants

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In the Notice, the Commission stated its preliminary belief that the Plan’s estimates of costs for Participants to report CAT Data and of surveillance costs were reasonable and explained the reasoning behind this determination.2472 At the time, the Plan estimated costs for the Participants as an aggregate across all Participants (the five2473 single-license Participants and the five Affiliated Participant Groups).2474 The implementation cost estimate for Participants was $17.9 million.2475 Annual ongoing costs were estimated to be $14.7 million.2476

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In the Notice, the Commission estimated that the Participants that filed the Plan currently spend $6.9 million annually on data reporting, based on estimates the Participants provided in the Plan. The Notice also states that Participants currently spend approximately $154 million per year on data reporting and surveillance activities. The Participants estimate that they would incur $41 million in CAT implementation costs, and $14.7 million in annual ongoing costs to report CAT Data. In addition to data reporting costs, Participants face costs associated with developing and implementing a surveillance system reasonably designed to make use of the information contained in CAT Data as required by Rule 613(f).2477 The Notice discussed the Plan’s estimates of the costs to Participants to implement surveillance programs using data stored in the Central Repository. The Plan provided an estimate of $23.2 million to implement surveillance systems for CAT, and ongoing annual costs of $87.7 million.2478 At the time, the Plan did not provide information on why Participants’ data reporting costs would substantially increase nor did it provide information on why surveillance costs would decrease.

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Finally, in the Notice, the Commission assumed that cost estimates presented in the Plan were limited to costs the Participants would incur if the Plan is approved, and that the cost estimates did not include other costs related to development of the Plan that the Participants have incurred previously, or will incur regardless of approval.2479 The Plan separately reports that Participants have spent $8.8 million in development costs to date.2480 Because these development costs do not depend on approval of the Plan, the Commission treated them as sunk costs in the Notice and did not include them in the costs to the Participants.2481

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The Commission received several comments regarding the estimates of Participants’ data reporting costs in the Notice. One commenter stated that estimates of current data reporting costs to Participants are “grossly underestimated,” but did not provide further detail or alternate estimates.2482 The same commenter stated the implementation cost estimate of $17.9 million for Participants was “not too far off,” but felt the Participants’ estimated costs for legal and consulting services and additional employees were not reliable. The Commenter stated that these costs could be far lower with different technological approaches to capturing audit trail data.

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The Commission also received comments on the estimates of surveillance costs the Participants would incur to incorporate the CAT Data into their surveillance. One commenter implied that savings on surveillance were unlikely, and stated that the lack of an analytical framework did not facilitate the identification of suspicious activities.2483 The commenter seemed to express doubt that CAT would reduce ad hoc data requests, calling this idea “hype.” The commenter further seemed to imply that the comparable magnitude of annual CAT reporting costs and current regulatory data reporting costs raised questions about the reliability of the Commission’s analysis of costs. A second commenter, however, stated that “[t]he consolidated nature of the CAT also should allow the SROs to conduct their market surveillance activities more efficiently, allowing for additional cost savings ….”2484 The commenter did not provide additional detail on what the source of additional efficiencies or cost savings would be. Another commenter noted that uncertainties in the manner in which regulators will access data in the Central Repository create significant cost uncertainties, especially if SROs must use bulk extraction to create copies of CAT Data for analysis within their own infrastructure.2485

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A few commenters questioned the apparent inclusion or exclusion of certain costs related to the fee model and development costs. One commenter noted that the Participant cost estimates do not include the “per-message toll charge in the CAT funding model.” 2486 The Commission received several comments on the $8.8 million Participants incurred in developing the Plan. One Commenter stated that treating all costs related to the development of the Plan as sunk costs “…may sound conservative”, and is a preferred approach if a broad alternative to the Plan is adopted instead of the Plan as noticed.2487

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The Participants restated their intention to recoup implementation costs in Participants’ Response Letter II.2488 Furthermore, they cited an expectation of $10.6 million in savings from retiring existing systems. The Participants further stated that these savings would offset costs of implementing CAT.

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The Commission considered the comments, the Participants’ responses, and modifications to the Plan and, as explained below, is updating its analysis of Participants’ CAT costs. These changes acknowledge a change in the number of Participants, the addition of Quote Sent Times for option market maker quotes, requirements to produce additional reports and add more specificity in current reports, as well as producing current reports more frequently, the requirement to conduct an independent audit of expenses for the development of the Plan, annual audit expense for the Company, and a modification to the clock synchronization requirement for exchanges. The Commission is also acknowledging system retirement costs that the Participants will incur when duplicative reporting systems are retired. Further, in response to a comment and the Participants’ response, the Commission is also revising its cost estimates to change how it treats the costs already incurred by Participants to develop the Plan.

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The Commission has considered the comments it received regarding cost estimates for Participants in the Plan and continues to believe that Participant cost estimates presented in the Plan are reliable. As discussed in the Notice, all 19 SROs2489 responded to the Participants Study, and most SROs have experience collecting audit trail data, familiarity with the requirements of CAT, and expertise in their business practices. The commenter that challenged the current data reporting costs provided no reasoning or estimates to indicate that the Participants are unable to reasonably estimate their own costs. Regarding the comment that its estimates did not fully incorporate the “per-message” fees that Participants will face, the Commission notes that the Plan’s funding model does not charge Participants for message-traffic. Further, the Commission’s analysis acknowledged that Central Repository costs will be passed on to both Participants and Industry Members by an unidentified formula, thus it accounted for funding model costs separately in its analysis of total costs of the Plan.

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Regarding the comment concerning the inclusion of an analytical framework in surveillance cost estimates in the Plan, the Plan does incorporate an analytical framework.2490 Therefore, the Commission believes that Participant cost estimates already account for an analytical framework. Regarding the uncertainties in Participant costs related to bulk extraction causing SROs to host their own copies of CAT Data, while the Plan requires a bulk extraction tool, it also requires analytical tools for manipulating and analyzing data within the Central Repository.2491 The Commission believes that the requirement for a method of bulk downloading data does not necessarily imply that multiple copies of CAT Data will be hosted on SRO systems. The Commission acknowledges that if SROs use the bulk download feature to replicate some or all CAT Data on their own systems, their costs are likely to increase because hosting large databases is costly. However, the Commission believes that SROs are likely to consider the cost implications when contemplating replicating large portions of the Central Repository within their IT infrastructure and presumably will only do so when it is efficient for them to do so.

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The Commission recognizes, however, that the Plan calls for recovery of some or all of the CAT development costs from Industry Members. And, based on the Participants’ response, the Commission now believes that the expectation the Participants will recoup these costs will effectively reduce the SROs’ future costs while increasing future costs of Industry Members. The Commission therefore is adding the development costs for CAT to the implementation costs of broker-dealers, as indicated in the following Section, and subtracting them from Participants’ implementation costs as in Table 3 below. Overall, as detailed in the Aggregate Costs Section below, the Commission also believes the recovery of these costs from Industry Members would constitute a transfer from Industry Members to Participants, but would not affect the total cost of CAT to market participants in aggregate.

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The Commission is revising its Participant cost estimates to account for additional requirements that result from modifications made to the Plan by the Commission. These requirements include a number of reports, some produced one time, some produced on an ongoing basis. Each of these requirements is discussed briefly below. In aggregate, the Commission estimates they have a one-time cost of $1.1 million and annual, ongoing costs of $1.1 million.

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First, the Plan as amended requires a written assessment of the operation of the CAT on an annual, rather than biannual basis, and requires the assessment to provide more specificity.2492 The Commission estimates the production of this report will cost $870,000 annually.2493

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Second, the Plan now requires an independent audit of expenses incurred prior to the Effective Date. The Commission believes that this one-time audit will cost approximately $5,000.2494

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Third, the Plan now requires a review of clock synchronization standards, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system within six months of the Effective Date. The Commission estimates that the production of this study will have a one-time cost of approximately $133,000.2495

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Fourth, the Plan now requires the Participants to submit a report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into Rule 17d-2 agreements or regulatory services agreements), within 12 months of effectiveness of the Plan. The Commission estimates this report will entail a one-time cost of $445,000.2496

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The Plan now also requires the Participants to provide a report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository, within 24 months of effectiveness of the Plan. The Commission estimates this requirement will entail a total one-time cost of approximately $147,000.2497

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The Plan now also requires the Participants to submit an assessment of errors in the customer information submitted to the Central Repository that considers whether to prioritize the correction of certain data fields over others, within 36 months of effectiveness of the Plan. The Commission estimates this requirement will entail an approximate one-time cost of $186,000.2498

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The Plan now requires the Participants to submit a report to study the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity, within 36 months of effectiveness of the Plan. The Commission estimates this requirement will have a one-time external cost of $110,000.2499

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The Plan now requires an assessment of the impact on the maximum Error Rate in connection with any Material Systems Change to the CAT; the Commission assumes that the CAT may have four Material Systems Changes per year. The Commission estimates this requirement will entail an ongoing annual cost of $138,000.2500

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The Plan now requires that the Advisory Committee members receive the same materials as the Operating Committee absent confidentiality concerns with respect to such information. The Commission estimates this will require an aggregate annual cost of $2,400.2501

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The Plan now requires that the CAT LLC financials (i) be in compliance with GAAP, (ii) be audited by an independent public accounting firm, and (iii) be made publicly available.2502 The Commission estimates these requirements to entail costs of $65,000 annually.2503

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Finally, the Plan now requires that each Participant conduct background checks of its employees and contractors that will use the CAT System. The Commission estimates that this requirement would entail an initial cost of $60,000, with ongoing annual costs of $14,000.2504

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The Commission is also revising its Participant cost estimates to account for the addition of two additional Participants that were not covered by the Participants Study.2505 The Commission assumes the new Participants will have similar costs to the 19 Participants that provided cost estimates summarized in the Plan. Consequently, the Commission has increased its estimates of Participants costs by 10.53%.2506 The Commission now estimates that the 21 Participants spend $8 million annually for data reporting, and $162.7 million for surveillance. The Commission estimates that implementation of CAT Data reporting will cost the Participants $19.8 million, and implementation of surveillance using data in the Central Repository will cost the Participants $25.6 million. The Commission estimates that Participants will spend $16.2 million annually to maintain CAT Data reporting, and $96.9 million annually on surveillance. The Commission is also recognizing that the Participants will recoup $8.8 million in Plan development costs, as discussed above. The Commission estimates that Participants will spend approximately $1.1 million to produce one-time reports required by amendments to the Plan, and $1.1 million annually to produce additional periodic reports required by amendments to the Plan. Furthermore, the Commission is recognizing $343,000 in system retirement costs, as discussed below.2507 The Commission is unable to update cost estimates to account for the modifications to the clock synchronization standards for exchanges, but, as discussed below, the Commission does not believe that the modifications will result in substantial cost increases for exchanges.2508 The Commission acknowledges that the addition of quote sent times to option market maker quotes may increase costs to options exchanges. Based on comments received, the Commission believes that Participant cost estimates from the Participants Study are unlikely to include the additional expense Participants will incur capturing and processing the Quote Sent Time field. The Commission lacks information to estimate these costs for Participants because the Plan does not include this information and commenters did not offer estimates. Table 3 reflects the Commission’s estimates after taking these adjustments into consideration.

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Table 3: Estimates of Participants’ Costs

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c. Costs to Broker-Dealers

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(1) Summary of Notice and Comments and Commission’s Response

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In the Notice, the Commission provided an analysis of the compliance cost estimates for broker-dealers that included analyzing whether estimates provided in the Plan and based on a Reporters Study survey were reliable.2509 The Commission preliminarily believed that the cost estimates for small broker-dealers were not reliable. The Commission described the details of the analysis supporting that conclusion. The Commission then developed and calibrated a model (“Outsourcing Cost Model”) to estimate average current data reporting costs and average Plan compliance costs for broker-dealers that the Commission expects will rely on service bureaus to perform their CAT Data reporting responsibilities (“Outsourcers”). For other broker-dealers, the “Insourcers,” the Commission continued to rely on the large broker-dealer estimates from the Plan. Using this framework, the Commission estimated approximate one-time implementation costs for broker-dealers of $2.1 billion, and annual ongoing costs of CAT reporting of $1.5 billion.

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The Commission received comments on the reliability of its Outsourcing Cost Model and its re-estimation of costs. One commenter stated that the Commission’s estimates of service bureau charges for a small firm “sound reasonable.”2510 Another commenter noted that even when Outsourcers rely on their service providers (service bureaus or clearing firms) to accomplish current data reporting, the Outsourcers must expend internal resources as well.2511 A third commenter stated that broker-dealers that clear for other broker-dealers may face higher implementation costs because they may support more broker-dealers than they did before implementation of the Plan.2512 This commenter also stated that the Commission has not analyzed the cost implications of the phased implementation of small and large Industry Members.2513 The Commission did not receive comments on its analysis or conclusion that the Reporters Study did not provide reliable cost estimates for small broker-dealers.

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The Commission also received several comments on uncertainties in broker-dealer cost estimates. Three of these comments related to the selection of the Plan Processor. One commenter stated, “not knowing who the CAT Processor is introduces a significant amount of uncertainty. . . . We believe the Commission discounts the importance of the choice of Plan Processor as it relates to implementation costs. While the bids to build the Processor may be within a sufficiently narrow range so as to negate those costs, the choice of Processor may have a significant impact on broker-dealer implementation costs.”2514 A commenter stated that the differences in Bids prevented broker-dealers from “…provid[ing] more definitive cost estimates and other projections related to CAT implementation.”2515 Other commenters noted that the Plan’s lack of specific details creates uncertainty around what costs broker-dealers will incur to implement these provisions.2516 Other comment letters discussed the general uncertainties that result from not having the technical specifications.2517

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The Commission has considered these comments, the Participants’ response, and modifications to the Plan and is updating and revising its cost estimates. As discussed below, the Commission now acknowledges that its estimates exclude some additional costs that would be faced by Outsourcers or new reporters that clear for other broker-dealers, or that provide support for introducing broker-dealers. The Commission further acknowledges that broker-dealer costs presented in its analysis are subject to significant uncertainties and recognizes additional sources of uncertainty. The Commission is also updating its analysis of the costs to recognize the effects of modifications to the requirement to report an open/close indicator and allocation time, and is revising its analysis to indirectly account for the Participants’ development costs. However, the Commission is not revising the structure of its Outsourcing Cost Model, its conclusions regarding the reliability of the Reporters Study, or estimates of the broker-dealers’ current, implementation or ongoing costs.

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With respect to the comment that the Outsourcing Cost Model does not account for internal expenses that support outsourced activities, the Commission notes that its cost estimates explicitly assume that Outsourcers have employee expenses that cover these activities.2518 With respect to the commenters concerned that the Commission’s estimates do not account for an increase in costs for broker-dealers that clear for other broker-dealers or provide support to introducing broker-dealers, the Commission continues to believe the analysis of broker-dealer implementation costs presented in the Notice is generally reliable, and notes that Reporters Study estimates for large broker-dealers are likely to include these expenses because survey respondents are likely to include broker-dealers that provide these services. The Commission acknowledges, however, that there are some broker-dealers – such as one of the commenters – that would be classified as Outsourcers or new reporters for which the Commission’s cost estimates rely on the Outsourcing Cost Model, and the additional implementation costs that these firms face due to clearing for other broker-dealers or supporting introducing broker-dealers are not captured by the Outsourcing Cost Model. Costs that Outsourcers and new reporters that continue to clear for other broker-dealers will face include, but are likely not limited to, additional costs associated with reporting customer information to the Central Repository and costs associated with receiving customer information from their broker-dealer clients. Outsourcers and new reporters that currently clear for other broker-dealers or support introducing broker-dealers that elect to outsource their clearing or regulatory data reporting will face costs that include, but are not limited to, costs associated with establishing service provider relationships with other broker-dealers; and lost revenues from providing services for other firms if those firms cease providing clearing services or supporting introducing broker-dealers, although the Commission believes that they might be able to establish “piggyback” arrangements that allow them to retain their relationships with current customers.2519 The Commission, however, cannot estimate the number of broker-dealers that would bear these costs because the Commission lacks data on the number of broker-dealers that clear for other broker-dealers that would be classified as new reporters or Outsourcers. Furthermore, the Commission lacks data to estimate the magnitude of these costs because the Plan does not provide this data and the Commission is unaware of any data available to it that it could use to estimate these costs.

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In response to comment letters that identified sources of uncertainties related to the costs Industry Members will incur, the Commission acknowledges that such costs depend on the Technical Specifications, which will be published no later than one year before Industry Member reporting begins. The Commission now believes that the sources of uncertainty include both how Technical Specifications would vary across Bids, and what costs of CAT are included in cost estimates obtained from market participants and presented in the Plan and included in the Commission’s analysis.2520 However, the Commission notes that final Bids will not be submitted until after the Plan is approved, so the Commission is unable to quantify the degree of variation in broker-dealer implementation costs across Bids.

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The Commission has also revised its analysis of its cost estimates to account for the following things: the clarification that Participants intend to recoup their development costs; modifications to the Plan regarding reporting the open/close indicator for equities and Options Market Makers; costs for Options Market Makers to provide Quote Sent Time; and costs related to providing allocation times on Allocation Reports. The Participants’ response clarified that the Participants intend to recoup some of the more than $8.8 million they have already spent to develop the CAT NMS Plan by collecting fees from broker-dealers.2521 In the Notice, the Commission treated such costs as sunk costs incurred by the Participants and did not include them in its analysis of the Plan, but is now recognizing that these costs will be transferred to broker-dealers.2522 Therefore, the Commission adds the development costs to the costs to broker-dealers.2523 The Commission recognizes that the modification that removes the open/close indicator for equities and Options Market Makers will reduce the implementation and potentially ongoing costs for Industry Members. However, as discussed in the further analysis of costs Section below,2524 the Commission is not certain whether Industry Members included these costs in their cost survey results, and the Commission does not have sufficient information on these costs to remove them from its estimates.2525 With regard to Quote Sent Time, the Commission is incorporating estimates discussed in the Notice but not included separately in cost estimates published in the Notice.2526 The Commission recognizes that the modifications related to including allocation times will reduce costs to Industry Members, but also recognizes that the Commission did not previously account for these costs in estimates of their costs.2527 Therefore, the Commission is adding the estimated costs of including allocation time as required under the Plan as amended to its cost estimates. The Commission notes that this increase in broker-dealer costs is small relative to the other estimated costs of broker-dealers and therefore does not change the rounded estimates.

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Therefore, in its final analysis, the Commission estimates approximate one-time implementation costs for broker-dealers of $2.2 billion, and annual ongoing costs of CAT reporting of $1.5 billion.

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(2) Commission’s Final Analysis

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The discussion that follows provides a synopsis of the Commission’s final analysis of the compliance costs of broker-dealers. Because the Commission is not revising the structure of its Outsourcing Cost Model or its conclusions regarding the reliability of the Costs to CAT Reporters Study (“Reporters Study”)2528, the final analysis regarding these below provides a summary of the more detailed discussions in the Notice.

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A. Estimates in the Plan

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The Plan, as amended on February 27, 2015, estimates total costs for those broker-dealers expected to report to CAT. In particular, the Plan relies on the Reporters Study. Based on the Reporters Study survey data, the Plan estimates implementation costs of less than $740 million for small firms2529 and approximately $2.6 billion for large firms, for a total of $3.34 billion in implementation costs for broker-dealers.2530 For annual ongoing costs, the Plan estimates costs of $739 million for small firms and $2.3 billion for large firms, for a total of $3.04 billion in annual ongoing costs for broker-dealers.2531

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The Commission believes, however, that the cost estimates for small broker-dealers provided in the Plan, which are based upon responses set forth in the Reporters Study, do not provide reliable estimates of smaller CAT Reporter costs for a number of reasons discussed in detail in the Notice and summarized herein.2532 First, some respondents classified as small in the Reporters Study appear to have responded numerically with incorrect units, with such responses resulting in annual estimated cost figures that would be 1,000 times too large. Second, maximum responses in certain categories of costs suggest that some large broker-dealers may have misclassified themselves as small broker-dealers.2533 Third, methods used to remove outliers are likely to have introduced significant biases. Finally, the response rate to the Reporters Study survey was low and is likely to have oversampled small broker-dealers who currently have no OATS reporting obligations.2534

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Although the Commission concludes that the small broker-dealer cost estimates presented in the Plan are unreliable, the Commission also believes, for reasons discussed in detail in the Notice and summarized herein, that the cost estimates in the Plan for large broker-dealers are reliable.2535 The Plan estimates that an OATS-reporting large broker-dealer has current data reporting costs of $8.7 million per year.2536 A non-OATS reporting large broker-dealer is currently estimated to spend approximately $1.4 million annually.2537 The Plan estimates that OATS-reporting large broker-dealers would spend approximately $7.2 million to implement CAT Data reporting, and $4.8 million annually for ongoing costs.2538 For non-OATS reporting large broker-dealers, the Plan estimates $3.9 million in implementation costs and $3.2 million in annual ongoing costs.2539

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B. Commission Cost Estimates

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As discussed in detail in the Notice, the Commission believes that the small firm cost estimates presented in the Reporters Study are unreliable. Therefore, the Commission has re-estimated the costs that broker-dealers likely would incur for CAT implementation and ongoing reporting. 2540 The Commission’s broker-dealer cost estimates incorporate some broker-dealer data from the Plan, but to address issues in the Plan’s Reporters Study data, the Commission’s cost estimates also include other data sources described in the Notice.2541 As with the Plan’s cost estimates, the Commission’s re-estimation relies on classifying broker-dealers based on whether they currently report OATS data. However, the re-estimation further classifies broker-dealers based on whether the firm is likely to use a service bureau to report its regulatory data, or, alternatively, whether the firm may choose to self-report its regulatory data. In this re-estimation, the Commission estimates that the 1,800 broker-dealers expected to incur CAT reporting obligations spend approximately $1.6 billion annually to report regulatory data.2542 The Commission believes that these broker-dealers will incur approximately $2.2 billion in implementation costs and $1.5 billion in ongoing data reporting costs.2543 As explained in more detail in the Notice, the Commission believes classifying broker-dealers based on their manner of reporting provides a more accurate estimate of the costs firms will incur because costs differ based on whether the firm insources or outsources reporting responsibilities and insourcing/outsourcing does not necessarily correlate with firm size.2544 The Commission maintains the Plan’s approach of separating broker-dealer costs of OATS reporting firms from those that have no OATS reporting obligations, recognizing that the group of non-OATS reporting firms are diverse in size and scope of activities. As discussed in detail in the Notice, the Commission believes this is appropriate because firms that do not currently report to OATS will face a different range of costs to implement and maintain CAT reporting because firms that do not report to OATS are likely to have little to no regulatory data infrastructure in place.

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The Commission’s framework for estimation of broker-dealers costs, as presented in the Notice and adopted here without alteration, is based on analysis of data provided by FINRA and discussions with broker-dealers and service providers that were detailed in the Notice.2545 Analysis of data reported by FINRA confirms that there are two primary methods by which broker-dealers accomplish data reporting: insourcing, where the firm reports data to regulators directly; and outsourcing, where a third-party service provider performs the data reporting, usually as part of a service agreement that includes other services. Based on data from FINRA and conversations with market participants discussed in the Notice, the Commission believes that the vast majority of broker-dealers outsource most of their regulatory data reporting functions to third-party firms. A broker-dealer’s decision to insource/outsource these functions and services can be complex, and different broker-dealers reach different solutions based on their business characteristics. To illustrate, some broker-dealers self-clear trades but outsource regulatory data reporting functions; some broker-dealers have proprietary order handling systems, self-clear trades, and outsource regulatory data reporting functions. Other broker-dealers outsource order-handling, outsource clearing trades, and self-report regulatory data. The most common insource/outsource service configuration, however, for all but the most active-in-the-market broker-dealers is to use one or more service bureaus to handle all of these functions.

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The framework for the Commission’s re-estimation, which is described in more detail in the Notice, is as follows.2546 First, the Commission identifies those OATS-reporting firms that insource (“Insourcers”) and those that outsource based on an analysis of the number of OATS Reportable Order Events (“ROEs”) combined with specific data provided by FINRA on how firms report OATS data. Furthermore, the Commission separately identifies firms that do not report to OATS but are likely to insource based on their expected activity level by identifying Options Market Makers and Electronic Liquidity Providers (“ELPs”). Based on that analysis, the Commission estimates that there are 126 OATS-reporting Insourcers and 45 non-OATS reporting Insourcers.2547 The Commission’s re-estimation classifies the remaining 1,629 broker-dealers that the Plan anticipates will have CAT Data reporting obligations as “Outsourcers,” based on outsourcing practices observed in data obtained from FINRA.2548 Next, to determine costs for Insourcers, the Commission relies upon cost estimates for firms classified as “large” in the Reporters Study.

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For Outsourcers, the Commission uses a model of ongoing outsourcing costs (“Outsourcing Cost Model”) to estimate both current regulatory data reporting costs and CAT-related data reporting costs Outsourcers will incur if the CAT NMS Plan is approved. The Commission analyzed data provided by FINRA to establish a count of CAT Reporters likely to outsource their regulatory data reporting functions. The Commission’s analysis of FINRA reporting data, which is discussed in the Notice, allowed the Commission to examine how broker-dealers’ current outsourcing activities varied with the number of ROEs reported to OATS. Based on this analysis, the Commission believes that the 126 broker-dealers that reported more than 350,000 OATS ROEs between June 15 and July 10, 2015 made the insourcing-outsourcing decision strategically based on the broker-dealer’s characteristics and preferences, while the remaining OATS reporters were likely to utilize a service bureau to accomplish their regulatory data reporting.2549

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The Commission estimates ongoing costs for outsourcing firms using a model which, as discussed in more detail in the Notice, was based on data gleaned from discussions with service bureaus and broker-dealers and implementation costs using information learned in conversations with industry.2550 Based on discussions with market participants, the Commission assumes that the cost function for outsourcing is concave2551 and applies the same assumption to its final analysis. This type of function is appropriate when costs increase as activity level increases, but the cost per unit of activity (e.g., cost per report) declines as activity increases. For reasons indicated in the Notice, the Commission relies on a schedule of average charges to access liquidity and rebates to provide liquidity from four non-inverted exchanges to estimate the concavity of the exchange pricing function, which the Commission uses to approximate the concavity of the outsourcing cost model.2552 The model’s output, which the Commission relies on in its final analysis, is an estimate of a broker-dealer’s cost to outsource data reporting services as part of a bundle of services from a service bureau; for smaller broker-dealers, it is assumed to include provision of an order management system and market connectivity.2553

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To estimate costs of CAT Data reporting by the service bureaus, the Commission assumes that the pricing function used to estimate current costs will apply for CAT Data reporting, but the costs in relation to the number of ROEs will increase because some events that are excluded from OATS (like proprietary orders originated by a trading desk in the ordinary course of a member’s market making activities), will be included in CAT.2554

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As discussed in detail in the Notice, application of the model to data provided by FINRA allows the Commission to estimate pre-CAT outsourcing costs for broker-dealers, as well as projected costs under the CAT NMS Plan. The Commission estimates that the 806 broker-dealers that each report fewer than 350,000 OATS ROEs monthly spend an aggregate $100.1 million on annual outsourcing costs. Under the CAT NMS Plan, the Commission estimates that these 806 broker-dealers will spend $100.2 million on annual outsourcing costs. As in the Notice, the Commission recognizes that the magnitude of this increase is quite small, but this is driven by the fact that the vast majority of firms that are assumed to outsource had very low regulatory data reporting levels at the time the estimates were made.2555

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As discussed in the Notice, firms that outsource their regulatory data reporting face additional internal staffing costs associated with this activity. Based on conversations with market participants described in the Notice, the Commission estimates that these firms currently have 0.5 full-time employees devoted to regulatory data reporting activities. The Commission further estimates that these firms will need one full-time employee for one year to implement CAT reporting requirements, and 0.75 full-time employees on an ongoing basis to maintain CAT reporting.2556

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As discussed in the Notice, in addition to broker-dealers that currently report to OATS, the Commission estimates that there are 799 broker-dealers that are excluded from OATS reporting rules due to firm size, or exempt because all of their order flow was routed to a single OATS reporter, such as a clearing broker, that will have CAT reporting responsibilities.2557 The Commission assumes that these broker-dealers will have low levels of CAT reporting, similar to those of the typical Outsourcers that currently report to OATS.2558 For these firms, the Commission assumes that under CAT they will incur the average estimated outsourcing cost of firms that report fewer than 350,000 OATS ROEs per month, which is $124,373 annually. Furthermore, because these firms have more limited data reporting requirements than other firms, the Commission assumes these firms have only 0.1 full-time employees dedicated to regulatory data reporting activities. The Commission assumes that these firms will require 2 full-time employees for one year to implement the CAT NMS Plan and 0.75 full-time employees annually to maintain CAT Data reporting.2559

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The Commission, however, believes for reasons described in more detail in the Notice that there are three other categories of broker-dealers not reflected in the above detailed cost estimates that do not currently report OATS data but could be CAT Reporters. First, there are at least 14 ELPs that did not carry customer accounts; these firms are not FINRA members and thus have no regular OATS reporting obligations.2560 The Commission believes that it is likely that these broker-dealers already have self-reporting capabilities in place because each is a member of an SRO that requires the ability to report to OATS on request. The second group of broker-dealers that are not encompassed by the cost estimates of FINRA member broker-dealers discussed above are those that make markets in options and not equities. Although not required by the CAT NMS Plan to report their option quoting activity to the Central Repository,2561 these broker-dealers may have customer orders and other activity that will cause them to incur a CAT Data reporting obligation. As explained in the Notice, based on CBOE membership data, the Commission believes that there are 31 options market-making firms that are members of multiple SROs but not FINRA.2562 The third group comprises 24 broker-dealers that have SRO memberships only with CBOE; the Commission believes that this group is comprised primarily of CBOE floor brokers and, further, believes these firms will incur CAT implementation and ongoing reporting costs similar in magnitude to small equity broker-dealers that currently have no OATS reporting responsibilities because they will face similar tasks to implement and maintain CAT reporting. As explained in the Notice, the Commission assumes the 31 options market-making firms and 14 ELPs are typical of the Reporters Study’s large, non-OATS reporting firms because this group encompasses large broker-dealers that are not FINRA members, a category that excludes any broker-dealer that carries customer accounts and trades in equities. As in the Notice, for these 45 firms, the Commission relies on cost estimates from the Reporters Study.2563

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As discussed in detail in the Notice, pre-CAT Data reporting cost estimates range from $167,000 annually for floor brokers and firms that are exempt from OATS reporting requirements to $8.7 million annually for firms that report more than 350,000 OATS ROEs per month (“Insourcers”). Estimates of one-time implementation costs range from $424,000 for OATS reporters that are assumed to outsource (“OATS Outsourcers”) to $7.2 million for Insourcers, and ongoing annual costs range from $443,000 annually for firms that are assumed to outsource (OATS Outsourcers, New Outsourcers and Floor Brokers) to $4.8 million for Insourcers.

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Table 4 summarizes the Commission’s updated estimates of costs to broker-dealers expected from the approval of the CAT NMS Plan. The Commission estimates that broker-dealers spend, in aggregate, approximately $1.6 billion annually on current regulatory data reporting activities. The Commission estimates approximate one-time implementation costs of $2.2 billion, and annual ongoing costs of CAT reporting of $1.5 billion.2564 The Commission notes that its estimate of ongoing CAT reporting costs of $1.5 billion is slightly lower than current data reporting costs of $1.6 billion. As explained in the Notice, this differential is driven by expectations of reductions in data reporting costs reported by large OATS-reporting broker-dealers in the Reporters Study survey.2565 The Commission estimates that all other categories of broker-dealers will face significant increases in annual data reporting costs. Also, the Commission acknowledges that there are some broker-dealers that would be classified as Outsourcers or new reporters for which the Commission’s cost estimates rely on the Outsourcing Cost Model, and the additional implementation costs that these firms face due to clearing for other broker-dealers or supporting introducing broker-dealers are not captured by these estimates.

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Table 4: Estimated Broker-Dealer Costs for CAT NMS Plan2566

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The Commission recognizes both that there is uncertainty in these cost estimates and that these cost estimates do not include additional costs that Outsourcers and new reporters that clear for other broker-dealers or support introducing broker-dealers will incur. As explained above, because the Commission’s Outsourcing Cost Model does not and cannot incorporate these costs, the cost estimates here could underestimate the costs for these firms and, as a result, the total broker-dealer costs. Because Bids are not yet final, the Commission believes that its cost estimates, while reliable in light of available data and information, could differ from actual costs the broker-dealers will incur and that broker-dealers will not know the true magnitude of their costs until they can analyze the Technical Specifications.

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d. Costs to Service Bureaus

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In the Notice, the Commission considered whether to include the implementation and ongoing costs to service bureaus in the aggregate costs of the Plan.2567 The Commission preliminarily believed that costs that service bureaus would face to implement CAT should be included as part of the aggregate costs of CAT. While the CAT NMS Plan does not require the use of service bureaus to report CAT Data, the Commission recognized that the most cost effective manner to implement the Plan likely will be for most market participants to continue their current practice of outsourcing their regulatory data reporting to one or more service bureaus. By doing so, the roughly 1,600 broker-dealers predicted to outsource would avoid incurring a significant fraction of CAT implementation costs; instead, service bureaus would incur implementation costs on their behalf. Based on conversations with market participants, the Commission believed that these implementation costs are likely to pass-through to broker-dealers that outsource data reporting, because service contracts between broker-dealers and service bureaus are renegotiated periodically, and approval of the CAT NMS Plan could trigger renegotiation as the bundle of services provided would materially change.

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The Commission, however, preliminarily believed that the ongoing costs of CAT Data reporting by service bureaus would be duplicative of costs incurred by broker-dealers. The aggregate fees paid by Outsourcers to service bureaus cover the service bureaus’ costs of ongoing data reporting. To include ongoing service bureau costs as a cost of CAT would double-count the costs that broker-dealers incur for CAT Data reporting.

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The CAT NMS Plan estimates aggregate implementation costs of $51.6 million to $118.2 million for service bureaus, depending on the particular data ingestion format.2568 Aggregate ongoing annual cost estimates ranged from $38.6 million to $48.7 million. To provide a conservative estimate of aggregate cost estimates for CAT, the Commission included only the maximum implementation cost that vendors would likely face of $118.2 million.

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One commenter provided additional information regarding service bureau implementation costs.2569 The commenter stated that these firms will face $1.3 million in implementation costs related to providing allocation timestamps, and that these costs were not covered by the Vendors Study conducted by the Participants. The Commission believes this estimate is reliable because the commenter is an industry trade group with members that can provide cost estimates to the commenter. Furthermore, the Commission believes it is possible that at the time the Vendor’s Study was conducted, industry members may not have been aware that allocation timestamps would be required in CAT. Consequently, the Commission is updating its analysis to account for these costs.

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The Commission continues to believe that the only relevant cost for service bureaus to include in the aggregate costs of complying with the Plan is the estimated implementation cost which as adjusted is $119.5 million.

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pubdate: November 15, 2016 effdate: N/A +

2. Aggregate Costs to Industry

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs, Aggregate Costs to Industry + Compliance User: Self-Regulatory Organization + Keywords: + Central Repository, + OATS, + CAT, + CAT NMS plan, + Data Boiler Letter, + +

a. Estimated Costs of Compliance

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In the Notice, the Commission preliminarily estimated that industry would spend $2.4 billion to implement CAT, and $1.7 billion per year in ongoing annual costs. 2570 The Commission calculated these numbers as the sum of its estimates for the Central Repository, Participants, broker-dealers, and service bureaus. These compare to Plan estimates of initial aggregate costs to industry of $3.2 billion to $3.6 billion and annual ongoing costs of $2.8 billion to $3.4 billion.2571

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In terms of magnitudes of aggregate costs, the Notice discussed that costs to the 126 largest broker-dealers that currently report OATS data would be the largest driver of implementation costs, accounting for 38.3% of CAT implementation costs. Although these broker-dealers would face significant costs in implementing CAT, the Reporters Study survey results suggest that they anticipate lower ongoing reporting costs than they currently incur ($599 million annually in expected aggregate costs versus $1.1 billion annually in current aggregate regulatory data reporting costs). For all other categories of broker-dealers, the Commission estimated ongoing annual costs to be higher than current reporting costs. While broker-dealers are anticipated to bear the greatest share of costs associated with CAT, the Commission discussed the possibility that these costs would be passed on to investors.

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The Commission received comments on its preliminary estimates of aggregate costs to the industry. One commenter provided alternative cost estimates, citing costs for financial institutions of $2 to 40 million during initial years of CAT, and ongoing costs for CAT infrastructure of $28 to 36 million annually based on an analysis released by the Office of Comptroller of the Currency related to the Volcker Rule.2572 Another commenter noted that while aggregate costs are not certain, they will be measured in billions of dollars.2573 The same commenter also noted that the costs of CAT would be passed on to investors.2574

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The Commission does not believe, however, that these comments require revision of its analysis of the aggregate costs of the Plan.

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With respect to the comment that suggested that the Commission use Volcker Rule cost estimates to estimate the costs of the Plan, the Commission believes that these estimates are not relevant to the Plan.2575 The requirements of the Plan are significantly different than the requirements of the Volcker Rule, which is primarily focused on restricting certain trading activities and investments of banking entities, rather than the centralization and standardization of regulatory data reporting. Further, while the Commission acknowledges that some market participants will be subject to both the Volcker Rule and CAT, the Commission notes that market participants affected by the Plan are not necessarily comparable to banking entities affected by the Volcker Rule, and thus cost estimates for changes to their business processes would not be applicable to typical CAT reporters, which tend to be smaller institutions. The commenter’s suggested estimate of $2 million per year for affected market participants that are not large financial institutions does not seem reasonable because the majority of data that must be collected under CAT is already hosted by many of these firms’ service providers, and much of this data is already reported to a regulatory data reporting system (OATS) for a far lower cost than the $2 million estimate.2576

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The Commission agrees with the comment regarding the uncertainty of the cost estimates,2577 and notes that it recognized in the Notice the significant uncertainty surrounding the actual implementation costs of CAT and the actual ongoing broker-dealer data reporting costs if the Plan were approved and is cognizant of the magnitude of the aggregate costs.2578 The Commission continues to recognize that the methodology and data limitations used to develop these cost estimates could result in imprecise estimates that may significantly differ from actual costs. The Commission continues to believe, however, that it is using its best judgment to assess available information and data to provide analysis and estimates of the costs of the CAT NMS Plan. With regard to the comment that CAT costs will be passed on to investors,2579 the Commission acknowledged in the Notice and continues to believe that it is possible that some or most of the costs of CAT will be passed on to investors.

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The Commission has, however, updated its aggregate cost estimates to account for the updates to Central Repository, Broker-Dealer, Participant and Service Bureau cost estimates which incorporate updates due to modifications of the Plan. In aggregate, the Commission believes that that industry will spend $2.4 billion to implement CAT, and $1.7 billion per year in ongoing annual costs. Table 5 below shows these new cost estimates and aggregate costs to industry. Some individual estimates have changed from estimates presented in the Notice for a number of reasons. First, the Commission is now recognizing system retirement costs of $55 million. Also, estimates for Participant costs have increased to account for two additional Participants that were not covered by the Participants Study, and to account for the cost of additional reporting required by amendments to the Plan. Finally, estimates for Central Repository implementation and ongoing costs have been updated to reflect the Participants’ current estimates. As Table 5 shows, however, the changes to the cost estimates do not affect the rounded estimates of implementation and ongoing costs presented in the Notice. The Commission recognizes that these cost estimates do not specifically itemize the costs of certain modifications to the Plan or respond to information provided by certain Commenters related to the costs of individual elements of the Plan. The Commission discusses these in detail in Section VI.F.3 below.

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Table 5

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Commission's Estimate

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b. System Retirement and Duplicative Reporting Costs

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In the Notice, the Commission considered whether to include in its estimates of aggregate compliance costs the costs of system retirement and the costs of duplicative reporting if Participants and broker-dealers need to maintain and report to current systems after commencing reporting to the Central Repository.

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The Commission considered the costs for system retirement provided in the Plan, which discussed significant costs ($2.6 billion) for retirement of current regulatory reporting systems.2580 The Commission did not include those costs in its estimate of the aggregate costs of the Plan, for several reasons. First, the Commission preliminarily believed that the cost estimates provided in the Plan were unlikely to accurately represent the actual costs industry would face in retiring duplicative reporting systems. 2581 In particular, for the majority of broker-dealers that outsource, system retirement would affect few in-house systems; these broker-dealers would likely adapt the systems that interface with service bureaus for current regulatory data reporting to interface for CAT Data reporting. Further, for broker-dealers that self-report regulatory data, the Commission could not determine the source of the costs of system retirement that were estimated in the Plan and the magnitude of estimated costs led the Commission to doubt that estimates included only costs of retiring systems.2582 Second, the retirement of current regulatory reporting systems was not a requirement of the Plan and the timeline and process for their retirement was uncertain.

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While the Commission’s cost estimates did not recognize explicit system retirement expenses, they also did not explicitly recognize savings from elimination of these systems, though they were recognized qualitatively. In the Notice, the Commission discussed its preliminary belief that this approach was conservative in the sense that system retirement costs would likely be mitigated by incorporation of current reporting infrastructure into CAT reporting infrastructure, while cost savings associated with industry’s need to maintain fewer regulatory data reporting systems were not explicitly recognized. While the Commission did not include explicit system retirement costs, the Commission did recognize that industry would experience a costly period of duplicative reporting if the CAT NMS Plan were approved, and the Commission stated that it believed it was possible that these costs could be conflated with actual retirement costs estimated in the Plan.

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In the Notice, the Commission stated its preliminary belief that the period of duplicative reporting would likely constitute a major cost to industry for several reasons.2583 These reasons included the length of the duplicative reporting period; constraints on the capacity of industry to implement changes to regulatory reporting infrastructure that might cause market participants to implement changes using less cost-effective resources;2584 and the inability of some market participants to implement duplicative reporting in house, necessitating that they seek service bureau relationships to accomplish their CAT reporting requirements.

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Based on data provided in the Plan, the Commission preliminarily believed that the period of duplicative reporting anticipated by the Participants would likely last for 2 to 2.5 years.2585 This time period involved four steps. Step 1, which could take 12 to 18 months, involves the SROs identifying duplicative SRO Rules and systems and Commission rulemaking. Step 2, which would last six months, involves preparations by the SROs to file rule changes, followed by Step 3, lasting three months, for the Commission to approve such rule changes. The last step, Step 4, involves implementation, and the Commission estimated it could last from 90 days to six months, during which time the Plan stated that the Participants could consider when the quality of CAT Data would be sufficient to meet surveillance needs.

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In the Notice, the Commission discussed its preliminary belief that the current data reporting costs of $1.7 billion per year constituted an estimate of the cost per year to industry of duplicative reporting requirements, as it represents the cost of duplicative reporting to industry if there are no efficiencies that arise when a market participant has to report a subset of already centralized regulatory data to other regulatory data reporting systems.2586 The Commission did not believe that duplicative reporting costs should be added to the estimated aggregate costs of the CAT NMS Plan. The Commission discussed its belief that that the aggregate costs above represent the total costs of the Plan, and do not account for the differential between these costs and the costs the industry currently incurs for regulatory data reporting and maintenance. During the period of duplicative reporting, industry would incur the aggregate costs of accomplishing CAT reporting described above, plus the costs of current data reporting, which the Commission used as an estimate of duplicative reporting costs. The Commission noted that market participants would incur costs equal to current data reporting costs before system retirement and CAT implementation (because current regulatory data reporting would continue), or as duplicative reporting costs from Plan implementation until system retirement. Consequently, the Commission preliminarily believed these costs should not be considered as costs attributable to approval of the Plan, because market participants would bear these costs whether the Plan is approved or not.

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The Commission received comments on the costs of duplicative reporting. Several commenters agreed with the Notice that duplicative reporting would constitute a major cost to industry,2587 with a few of these commenters providing examples of the types of costs.2588 Examples of burdens provided by these commenters include dual reporting complexities such as conflicting reporting requirements,2589 varied corrections to the same errors across different systems,2590 legal and compliance confusion,2591 costs of maintenance of duplicative reporting systems such as infrastructure, storage, technical, and staffing resources,2592 and costs associated with making changes to redundant systems.2593 No commenters agreed with the Commission’s preliminary belief2594 that reporters might experience efficiencies during duplicative reporting, with one commenter claiming that its costs would double.2595

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The Commission received comments on the measurement of the duplicative reporting period as well as the necessity and impact of the length of the duplicative reporting period. Some commenters indicated that the lengthy expected duplicative reporting period was unnecessary, redundant and/or avoidable2596 and two commenters indicated that the length of the duplicative reporting period was a major factor in the duplicative reporting costs.2597 A commenter suggested that it was feasible for the Commission and SROs to complete Step 1 before the milestone for the publication of Technical Specifications (one year before Industry Members other than Small Industry Members are required to begin reporting), which would speed up systems retirement by 18 to 24 months relative to the Commission’s estimate.2598 The same commenter also suggested that Step 4 was longer than necessary to achieve acceptable data quality.2599 One commenter indicated that the length of the duplicative reporting period was actually 3 to 3.5 years instead of the Commission’s estimate of 2 to 2.5 years for firms that do not meet the definition of Small Industry Member.2600

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The Commission also received comments discussing the system retirement costs presented in the Plan and discussed by the Commission in the Notice. One Commenter disagreed with the Plan’s estimate that it should cost $2.6 billion to retire redundant systems. 2601 Instead, the commenter suggested that a more accurate cost estimate would range from $10,000 to $100,000 per firm. This commenter did not provide an explanation of the how the commenter derived this estimated range and sought more information on the Plan’s estimate.

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The Participants’ Response Letter II discussed comments related to system retirement.2602 The Participants noted that Small Industry Members can begin reporting earlier on a voluntary basis, and stated that the Participants will consider a rule change that would accelerate reporting for small Industry Members that are OATS reporters. The Participants also discussed their commitment to eliminating duplicative reporting systems as quickly as possible.2603 They stated that they are incented to eliminate duplicative systems because maintaining the systems is costly.

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The Participants also outlined a revised timetable for system retirement that differs from the Plan as filed.2604 Under the Participants’ proposal, Step 1 would be completed within 9-12 months after the Plan’s approval. Step 2, in which Participants file rule changes with the Commission, would end six months after the conclusion of Step 1. The Participants also discussed an exemption for individual CAT reporters from duplicative reporting.2605

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The Commission has considered the comments received, the Participants’ response, and the modifications to the Plan, and is revising its analysis of the costs of duplicative reporting and system retirement as described below. The Commission acknowledges additional uncertainty regarding duplicative reporting due to its revised belief that efficiencies in duplicative reporting are less likely than it believed at the time of the Notice, but continues to believe that duplicative reporting could cost up to $1.7 billion per year. However, as discussed below, the Commission now believes that the period of duplicative reporting is likely to be shorter than was anticipated in the Notice, and that the cost will therefore be reduced. Based on comments received, the Commission has revised its estimate of system retirement costs and now believes the aggregate cost to industry will be approximately $55 million.

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Consistent with its position in the Notice, the Commission agrees with commenters that duplicative reporting will constitute a major cost to industry, and recognizes that conflicting reporting requirements, varied corrections to the same error across different systems, legal and compliance confusion will all contribute to these costs. Further, the Commission agrees that maintenance of duplicative reporting systems will entail commitment of additional resources such as infrastructure, storage, technical, and staffing resources, as well as costs associated with making changes to redundant systems. However, the Commission notes that modifications to the Plan that minimize changes to potentially duplicative systems during the period of duplicative reporting may mitigate some of these costs.2606 Regarding the comment that some market participants will see their data reporting costs double during the period of duplicative reporting, the Commission agrees and believes that calculation is reflected in the estimates in the Notice, as its estimate of duplicative reporting costs of $1.7 billion per year is in line with the projected industry costs of ongoing CAT reporting of $1.7 billion per year.2607

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In response to the comment that duplicative reporting does not create efficiencies, the Commission, in the Notice, explained that it expected some cost efficiencies, but expressed uncertainty about those efficiencies. Because of that uncertainty and in light of the comment, the Commission acknowledges that duplicative reporting may not result in efficiencies.

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Based on the changes to the Plan, the Commission now believes that the duplicative reporting period may be shorter than estimated in the Notice. As discussed previously, the Commission has revised the milestones for system retirement, which may decrease the duplicative reporting period compared to the period anticipated at the time of the Notice.2608 Specifically, the gap analyses for major duplicative systems (Step 1) have been substantially completed 3-3.5 years sooner2609 than was envisioned in the Notice.2610 Furthermore, the Plan as amended now calls for the Participants to file with the Commission within 6 months after Plan approval (Step 2) rule change proposals.2611 Consequently, Step 3 (Commission review of rule modification filings) is expected to commence six months after Plan approval, and, as discussed in the Notice, is expected to take three months to one year. As a result, Step 4 (Participant implementation of rule changes) is the only system retirement step that the Commission expects to extend past when Large Industry Members begin reporting to the Central Repository.

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The Commission recognizes that there remains significant uncertainty as to when system retirement will occur, because the actual retirement of such rules and systems will depend upon several factors. In particular, the Commission notes that the retirement of systems will not occur until the CAT Data is of sufficient quality and when the CAT system has been fully implemented for all reporters.2612

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With respect to the quality of the CAT Data, as discussed above, in the Notice the Commission estimated that the period of duplicative reporting was likely to last for 2 to 2.5 years. At the time of the Notice, the Commission’s estimate suggested that the length of the rule modification steps within the four step process discussed above would primarily determine the length of the overall duplicative reporting period, although it recognized that data quality could delay the retirement of duplicative systems.2613 The Commission recognized in the Notice that Step 4 (implementation of system retirement plans) required not only the completion of Steps 1 through 3 but also that data quality within the Central Repository had to be adequate for the SRO’s regulatory needs.

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The Commission now believes that, while the revision of the system retirement milestones may decrease the length of the duplicative reporting period, this change will also increase the probability that Industry Member data quality might delay system retirement because Industry Members will have less experience reporting CAT Data when the four step process reaches the point where data quality could delay system retirement.

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Additionally, the Commission believes it is possible that, as one commenter suggested,2614 the phased implementation of CAT reporting for Small Industry Members could result in up to one year of duplicative reporting expense for Large Industry Members. Specifically, Large Industry Member data quality may reach a level that is sufficient for SRO regulatory needs prior to the commencement of reporting by Small Industry Members to the Central Repository, but retirement of systems might not occur until after those Small Industry Members begin reporting.2615 Further, it is possible that, as a result of having commenced reporting at a later date, Small Industry Members’ data may not reach an acceptable quality threshold for some period after Large Industry Members’ data has reached an acceptable quality threshold. The phased implementation schedule may therefore limit the extent to which the Plan amendments accelerating the timeframe for initial rule change proposals shorten the duplicative reporting period and thereby reduce the costs of duplicative reporting. Despite this caveat, for reasons explained below, the Commission believes that the amendments could significantly shorten this period and reduce costs.

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In particular, at least four amendments or other factors might mitigate the impact of phased implementation on duplicative reporting and costs. First, the Commission has amended the Plan to require the Participants’ to include, in their filings to retire systems, specific standards of data accuracy and reliability, including, but not limited to, whether the attainment of a certain Error Rate is reached, 2616 which should incentivize accurate data reporting by both Large and Small Industry Members and reduce the duplicative reporting period. Second, an amendment to the Plan requires Participants’ rule change proposals to consider whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards.2617 If the Participants determine to grant such individual exemptions to some Industry Members prior to all Industry Members’ data reaching an acceptable quality threshold, the economic impact of the phased implementation schedule could be less. Third, the Participants have indicated that OATS-reporting Small Industry Members can begin voluntarily reporting at the same time as Large Industry Members, and the Commission encourages the Participants and the Plan Processor to work with these Small Industry Members to enable them to begin reporting to CAT, on a voluntary basis, at the same time that Large Industry Members are required to begin reporting or as soon as practicable. The Commission recognizes, however, that incentives for Small Industry Members to begin reporting voluntarily at an earlier time are limited because accelerating CAT reporting imposes costs on CAT reporters, while the benefits of earlier system retirement accrue primarily to Large Industry Members that face a longer period of duplicative reporting. As a result, the extent to which accelerating commencement of voluntary reporting mitigates the economic impact of the phased implementation schedule may be limited. Therefore, the Commission believes that the amendment to require that the Participants consider whether the availability of Small Industry Member data two years after Plan approval would facilitate more expeditious systems retirement2618 could help to avoid an extension of the duplicative reporting period attributable to the phased implementation schedule.

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The Commission has also considered the comment that proposed alternative estimates for system retirement costs2619 and has revised its economic analysis accordingly. Specifically, the Commission believes that this commenter has the expertise to provide reliable estimates because this industry group’s members can inform it of their costs; furthermore, the Commission believes the estimates this commenter provided seem more reasonable than estimates provided in the Plan because estimates provided in the Plan exceeded the Commission’s estimate of costs of implementing the Plan.2620

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To estimate the aggregate costs of system retirement, the Commission assumes that the $100,000 estimate would be appropriate for Insourcers and the $10,000 estimate would be appropriate for Outsourcers.2621 The Commission assumes that for firms that do not currently report to OATS, firms that were considered large for cost estimates (ELPs and Options Market Makers) will have similar system retirement costs to Insourcers because they are more similar in size and scope of operations to Insourcers than Outsourcers.2622 The Commission further assumes that non-OATS reporting firms that were considered small for cost estimates (new small firms and options floor brokers) will face similar system retirement costs to Outsourcers because they are more similar in size and scope of operations to Outsourcers than Insourcers.2623 With these assumptions, the Commission now estimates that broker-dealer system retirement costs would be $33.4 million, as described in Table 6. The Commission draws its estimates of system retirement costs for Participants and service providers from the Plan, which estimates aggregate costs of $343,0002624 across all Participants, and $21.3 million across all service providers. The Commission now estimates total industry costs for system retirement will be $55 million.

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Table 6: Estimate of System Retirement Costs

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pubdate: November 15, 2016 effdate: N/A +

3. Further Analysis of Costs

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs, Further Analysis of Costs + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Options Market Makers, + OTC Equity Securities, + CAT Data, + Costs to Broker-Dealers, + Initial Order Report, + +

a. Costs Included in the Estimation

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In the Notice, the Commission noted that, in general, the CAT NMS Plan does not break down its cost estimates as a function of particular CAT NMS Plan requirements. However, the Commission considered which elements of the CAT NMS Plan were likely to be among the most significant contributors to the estimated CAT costs.2625 The Commission discussed its preliminary belief that significant sources of costs would include: the requirement to report customer information;2626 the requirement to report certain information as part of the Material Terms of the Order; the requirement to use listing exchange symbology; and the inclusion of Allocation Reports.

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In addition, the Commission discussed its preliminary belief that while certain costs could generally be quantifiably estimated, they were unlikely to be significant contributors to the overall costs of the Plan. These factors included: clock synchronization requirements; Plan requirements that include the requirement that Options Market Makers send quote times to the exchanges; the requirement that the Central Repository maintain six years of CAT Data; and the inclusion of OTC Equity Securities in the initial phase of the implementation of the CAT NMS Plan. Furthermore, the Commission also explained that there were other sources of costs, namely costs associated with meeting certain targets such as error rates and management of PII, that could not be quantified by the Commission.

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The Commission noted that it believed that its estimates of the implementation costs and ongoing costs to industry included each of the costs discussed, because the provisions encapsulate major parts of the Plan. The Commission explained that it lacked the necessary information to estimate what portion of the costs of the Plan is attributable to some of these aforementioned elements because the Plan does not provide information on the costs attributable to reporting of this information, and the Commission had no other data from which it can independently estimate these costs.

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As discussed more fully below, the Commission has considered the comments it received regarding its analysis of these aforementioned costs, the Participants’ response, and modifications to the Plan, and is updating its analysis in three ways. First, the Commission’s analysis fully acknowledges the uncertainty in its cost estimates. Second, several comments disagreed with the Commission’s belief that certain costs were included in the Commission’s cost estimates. The Commission has analyzed each of these instances below and now believes that some costs, namely costs associated with Allocation Time and Quote Sent Time, were not included in the estimated costs in the Notice. As indicated in the Costs to Broker-Dealers, Costs to Participants, and the Costs of Building and Operating the Central Repository Sections above, the Commission has added these costs to the total costs for broker-dealers where estimates are available or otherwise recognizes them as additional to the existing estimates.2627 Third, several commenters disagreed with which costs the Commission noted as significant contributors to CAT costs. In response to comments, the Commission no longer judges whether quantified costs represent a significant contribution to total costs. Instead, it describes only the costs it cannot quantify in terms of whether the Commission believes such costs are a substantial proportion of costs of the CAT NMS Plan, and addresses those individually below. The Commission is cognizant that some of the costs for particular elements may be significant in isolation even if they are not a large proportion of the aggregate costs of the Plan. The following Sections expand on the analysis of the estimated costs above by exploring individual components of the CAT NMS Plan.

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(1) Customer Information

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In the Notice, the Commission discussed its belief that the requirement in the CAT NMS Plan to report customer information for each transaction represents a significant source of costs.2628 The Commission explained that adapting systems to report customer information that is not included in current regulatory data on a routine basis could require significant and potentially difficult reprogramming because it could require gathering information from separate systems within a broker-dealer’s infrastructure and consolidating it in one location, and redesigning an IT infrastructure to satisfy this requirement could interrupt other workflows within the broker-dealer, expanding the scope of systems that must be altered to accomplish CAT reporting.

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The Commission received comments regarding the costs associated with reporting customer information. One commenter mentioned that the costs for providing customer information to the Central Repository represent a significant proportion of costs to the total industry.2629 One commenter requested clarification that only active accounts are reported as part of the customer definition process, and as a result of such clarification, this could reduce costs incurred for reporting customer information.2630 Two commenters stated that including Customer Identifying Information on the Initial Order Report would result in significant costs for the industry.2631

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The Participants responded to the comment regarding clarification of reporting only active accounts, stating that they have proposed to add a definition of “Active Account”, defined as an account that has had activity in Eligible Securities within the last six months. Additionally, the Participants propose amending Section 6.4(d)(iv) of the Plan to clarify that each Industry Member must submit an initial set of customer information for Active Accounts at the commencement of reporting to the Central Repository, as well as any updates, additions, or other changes in customer information, including any such customer information for any new Active Accounts.2632 In response to the comments regarding the expense associated with reporting Customer Identifying Information in the Initial Order Report, the Participants recommended modifications to the Plan to clarify that Customer Identifying Information and Customer Account Information does not need to be included on the Initial Order Report.2633

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The Commission considered these comments, the Participants’ response and modifications to the Plan, and continues to believe that the requirement in the CAT NMS Plan to report customer information represents a significant proportion of total costs to the industry. No commenter provided cost estimates that would allow the Commission to estimate the costs, however. Further, the economic analysis did not explicitly account for Customer Identifying Information and Customer Account Information on the Initial Order Report, and the modification clarifies that the Plan does not require this information on order origination.

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(2) Material Terms of the Order

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In the Notice, the Commission preliminarily explained that the requirement to report Material Terms of the Order that include an open/close indicator for equities, order display information, and special handling instructions represent a significant source of cost. The Commission observed that not all broker-dealers are required to report these elements on every order and no market participants report an open/close indicator on orders to buy or sell equities. Thus, adapting some market participants’ systems to report this information for each transaction could require significant and potentially difficult reprogramming that requires centralizing or copying information from multiple IT systems within the broker-dealer, which could dramatically increase the costs associated with implementing the changes required by CAT.

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The Commission received comments on the costs of the open/close indicator, but did not receive comments on other components of the Material Terms of the Order. Three commenters agreed with the Commission’s analysis that an open/close indicator represents a significant proportion of costs of the Plan.2634 Two commenters indicated that it would require significant process changes across multiple systems,2635 and one provided a list of the different types of systems impacted by the open/close indicator.2636 Three commenters mentioned that currently, the open/close indicator is not populated for equities.2637 One of these commenters mentioned the inclusion of the open/close indicator for equities represents a “market structure change.”2638 Further, several commenters implied that the costs of the open/close indicator were not included in the cost estimates in the Notice.2639 The Participants did not directly address the costs of the open/close indicator but did indicate that it is currently only captured on certain options orders, implying that including this field in the Plan would be costly.2640 In particular, the Participants’ response indicates that the open/close indicator is not captured on equities or on certain options transactions such as Options’ Market Maker transactions.

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The Commission considered these comments, the Participants’ response, and modifications to the Plan and is updating and revising its economic analysis regarding the costs of the open/close indicator for equities and certain options transactions below.

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The modifications to the Plan eliminating the requirement to report an open/close indicator for equities will reduce the compliance costs for broker-dealers, Participants, and the Central Repository, but the Commission cannot quantify the savings. While several commenters implied that the cost estimates in the Notice did not account for the open/close indicator in equities, the Commission notes that this data field was proposed in Rule 613 and discussed in the Proposing Release and Notice. Nonetheless, the commenters represent many broker-dealers and, therefore, the comments may indicate that a number of broker-dealers indeed did not include these costs when responding to the cost survey. This raises uncertainty regarding how many broker-dealers did or did not account for these costs. Because of this uncertainty and the absence of comments detailing the costs, the Commission cannot update its cost estimates to recognize the Plan modifications. However, both the Commission and commenters agree that, absent a modification, market participants would have needed to adapt their systems to report open/close information for each order because this indicator is not populated for equities today.

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The Participants’ statement in the response letter that open/close indicators are not reported on some options orders is consistent with Commission experience and the analysis in the Notice. While the economic analysis in the Notice did not explicitly separate the costs associated with an open/close indicator for equities and an open/close indicator for options, the Commission continues to believe that the costs of the open/close indicator for options are included in the cost estimates above because the commenters who implied that the cost estimates do not include estimates of the open/close indicator specifically mentioned equities and not options. But because the Plan will no longer require the reporting of the open/close indicator for Options Market Maker transactions, the Commission now believes there will be additional cost savings associated with not having to report this indicator as part of CAT.

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(3) Listing Exchange Symbology

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In the Notice, the Commission explained its preliminary belief that the requirement to use listing exchange symbology could represent a significant source of costs.2641 The Commission explained that because broker-dealers do not necessarily use listing exchange symbology when placing orders on other exchanges or off-exchange, this requirement could require broker-dealers to perform a translation process on their data before they submit CAT Data to the Central Repository.2642 The translation process could be costly to design and perform, and result in errors that would be costly for the broker-dealers to correct. If other elements of the Plan were to necessitate a translation, then the listing exchange symbology could be fairly low cost because it would be just another step in the translation. However, if the Plan has no other requirement that would necessitate a translation, the Commission explained that the costs of including listing exchange symbology on all CAT reports would include the costs of designing and performing the translation as well as the costs of correcting any errors caused by the translation.

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The Commission received several comments regarding costs associated with CAT Reporters using listing exchange symbology. One commenter stated that they did not expect the use of listing exchange symbology to be much more costly than the use of existing symbology.2643 Another commenter suggested that accepting only listing exchange symbology is costly and invasive.2644 One other commenter stated that listing exchange symbology would also be a significant source of costs for options.2645

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The Participants’ response provided information on current practices relevant to the Commission’s economic analysis. In particular, the Participants stated that based on discussions with the DAG, it was their understanding that all Industry Members subject to OATS or EBS reporting requirements currently use the symbology of the listing exchange when submitting such reports.2646 These Industry Members may use proprietary symbols when recording events internally, but the Participants stated that based on their understanding of current practices, Industry Members currently employ technical solutions and/or systems that allow them to translate symbology into the correct format of the listing exchange when submitting data to exchanges or when submitting to regulatory reporting systems such as OATS or EBS.2647

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The Commission considered the comments and the Participants’ response and is revising its analysis and conclusion. Specifically, the Commission is incorporating the information from the Participants’ response into its baseline of current broker-dealer practices. Because the Commission believes that broker-dealers already translate their order messages when routing orders, they should be able to apply those translations to other types of messages before recording the events or reporting them to CAT at a relatively low cost. Therefore, the Commission now believes that the incremental cost for CAT Reporters to translate from their existing symbology to listing exchange symbology would be smaller than as discussed in the Notice and would not be a substantial contributor to aggregate costs. This revised conclusion is consistent with commenters who indicated there would be costs, but did not indicate they would be large and did not provide cost estimates.

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(4) Allocation Reports

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In the Notice, the Commission recognized that industry would bear certain costs associated with Allocation Reports, particularly the requirement that the reports include allocation times. The Commission understood that currently some broker-dealers already record allocation times, but that the broker-dealers that do not currently record these times will face implementation costs associated with changing their business processes to record them. The Commission explained that implementation costs for allocation reporting may include significant costs associated with incorporating additional systems into firms’ regulatory data reporting infrastructure to facilitate this reporting, if such systems would not already be involved in recording or reporting order events. Furthermore, the Commission explained that Outsourcers could face significant implementation and ongoing costs associated with reporting Allocation Reports if their service bureaus do not extend their services to manage the servers that handle allocations.

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Three commenters noted that there would be costs associated with reporting allocation timestamps.2648 One of these commenters mentioned that the requirement to report allocation timestamps means that industry members would need to incur unnecessary costs to acquire additional resources, and that these resources could be better served implementing other critical requirements of the CAT Plan.2649 One commenter also provided cost estimates for reporting allocation timestamps at a granularity of one millisecond, as would be required in the Plan, and at a granularity of one second.2650 In particular, the commenter reported that it conducted a survey of a set of broker-dealers to estimate the additional costs of the CAT NMS Plan that would be associated with the timestamp requirement on CAT Allocation Reports. Based on the results of the survey, the commenter estimated that the currently proposed allocation timestamp requirement, with a one millisecond timestamp granularity and a 50 millisecond clock offset, would cost the industry $88,775,000 in initial implementation costs and $13,925,000 in ongoing annual costs. The commenter further estimated that a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset, would cost the industry $44,050,000 in initial implementation costs and $5,035,833 in ongoing annual costs.2651 The commenter also indicated that neither the survey of broker-dealers used to estimate the cost estimates in the Plan nor the survey used to estimate the costs of clock synchronization requirements included the requirement of timestamps on Allocation Reports.2652

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The Participants’ response recommended a modification to the Plan that would specify a one-second timestamp for allocation time on Allocation Reports,2653 and the Plan has been amended to reflect this recommendation.

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The Commission considered these comments, the Participants’ response, and modifications to the Plan and is updating its analysis stated in the Notice. The comments that acknowledged that providing allocation timestamps represents a significant proportion of costs of the Plan are consistent with the Commission’s analysis in the Notice. The Commission has analyzed the cost estimates received and believes them to be reliable because they are based on a survey of industry participants who are informed of the Allocation Time requirement and the changes that broker-dealers would need to make to comply with the requirement. Further, the Commission has analyzed the public information on the dates of the CAT Reporter survey and the release of public information on the inclusion of Allocation Time. In recognition of the modification to the timestamp granularity and the realization that Allocation Time costs were not included in the cost estimates in the Notice, the Commission is now adding the commenter’s estimate of $44,050,000 in implementation costs and $5,035,833 in ongoing costs to the estimates of costs to broker-dealers.2654

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(5) Clock Synchronization

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In the Notice, the Commission discussed its preliminary belief that the clock synchronization requirements represented a less significant source of costs. The CAT NMS Plan estimated industry costs associated with the original 50 millisecond clock synchronization requirement, based on the FIF Clock Offset Survey.2655 The FIF Clock Offset Survey stated that broker-dealers currently spend $203,846 per year on clock synchronization activities, including documenting clock synchronization events. 2656 The FIF Clock Offset Survey stated that firms expected the proposed 50 millisecond requirement to increase those costs by $109,197 per firm.2657 Based on discussions with industry, the Commission preliminarily believed that the majority of broker-dealers (Outsourcers) would not face significant direct costs for clock synchronization because timestamps for CAT Data reporting would be applied by service bureaus.2658 However, the Commission preliminarily estimated there are 171 firms that make the insourcing-outsourcing decision on a discretionary basis;2659 if these firms decided to insource their data reporting under CAT, they would likely face costs associated with complying with new clock synchronization requirements. The Commission preliminarily estimated that industry-wide implementation costs for the 50 millisecond clock synchronization requirement would be $268 million, with $25 million annually in ongoing costs.2660 The Commission preliminarily believed that approximately $18.7 million in broker-dealer ongoing costs would be attributable to clock synchronization requirements.2661 The Commission also preliminarily believed that service bureaus would face similar clock synchronization costs if the CAT NMS Plan is approved. Using 13 as an estimate of the number of service bureaus, approximately $6 million in service bureau ongoing costs would be attributable to clock synchronization requirements in the Plan.2662

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In addition, the Commission solicited comment in the Notice on alternatives to the Plan’s one-size-fits all definition of “industry standard.”2663 Under these alternatives, “industry standard” would be defined in terms of the standard practices of different segments of the CAT Reporters. The Commission explained that these alternative approaches could result in clock offset tolerances shorter than the CAT NMS Plan’s proposed 50 millisecond standard for some or all CAT Reporters, Using information from a survey,2664 the Commission estimated broker-dealer costs under various alternative standards.

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The Commission received several comments regarding costs associated with clock synchronization requirements. One commenter mentioned that managing multiple clock synchronization structures across report types would present unnecessary difficulties for broker-dealers and unnecessary reconciliation issues for the Commission and SROs.2665 Another commenter stated that clock synchronization will cost the industry $268 million for initial implementation of a 50 millisecond clock offset and $25 million for annual monitoring/maintenance, and that this represents a significant proportion of overall industry costs of the CAT NMS Plan. 2666 Furthermore, as discussed in Section V.F.3.a.(4), the commenter also indicated that the survey of broker-dealers used to estimate the costs of clock synchronization requirements did not include the requirement of timestamps on Allocation Reports.2667 The commenter estimated that the proposed allocation timestamp requirement would cost the industry $88,775,000 in initial implementation costs and $13,925,000 in ongoing annual costs and that a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset, would cost the industry $44,050,000 in initial implementation costs and $5,035,833 in ongoing annual costs.2668 Finally, this commenter highlighted several limitations in the Commission’s cost estimates that result in these estimates understating industry cost. 2669 First, the commenter said that the costs in the FIF survey do not represent “insourcer” implementation costs as the Commission assumed because the survey was skewed toward smaller broker-dealers. Second, the commenter said that the Commission stated that the FIF Clock Offset Survey underestimated the costs per firm because of the methodology used to select a “midpoint” for the top cost range. Finally, the commenter said that the Commission should not have assumed staffing of ¼ full time employee (“FTE”) for initial implementation because it is incorrect to assume that all of the costs would be borne by a service bureau for all broker-dealers.

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The Participants’ response recommended a modification to the Plan changing the clock synchronization to 100 microseconds with regards to electronic systems, excluding certain manual systems; but stated that having multiple clock synchronization standards across an order lifecycle would complicate the linking process at the Central Repository, implying an increase in costs.2670 In addition, the Participants’ response recommended a modification to the Plan that would specify a one-second timestamp for allocation time on Allocation Reports2671 and that would permit Industry Members to synchronize their Business Clocks used solely for reporting the time of allocation on Allocation Reports to within one second.2672 The Plan has been amended to reflect each of these recommendations. The Commission is also amending the Plan to state that the Participants should apply industry standards based on the type of CAT Reporter or system, rather than the industry as a whole.2673

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The Commission has considered the comments received, the Participants’ response, and modifications to the Plan regarding clock synchronization and is revising its analysis of the costs attributable to this element of the Plan. In response to the commenter that stated the Commission’s estimate for clock synchronization costs represents a significant portion of overall costs, the Commission did not intend to imply in the Notice that the magnitude of the clock synchronization costs were trivial, but instead that these costs were less significant contributors to overall costs than other costs.

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In response to the commenter that stated the Commission’s cost estimates associated with clock synchronization requirements were understated, the Commission recognizes the limitations in its analysis. However, the Commission lacks sufficient information to derive a more precise estimate. Although the participants in the FIF Clock Offset Survey2674 were skewed towards smaller firms that did not match the “insourcer” model, as the commenter mentioned, it is unclear that the inclusion of such firms would bias the Commission’s cost estimates downward. Also, the Commission’s estimate of ¼ FTE for the clock synchronization implementation costs for Outsourcers is in line with its estimate of 1 FTE for the overall implementation costs for Outsourcers whereas multiplying the estimate from the survey results by the number of Outsourcers would yield a result that would be approximately 87% of the Commission’s estimates for total implementation costs for outsourcers.2675 The Commission agrees, however, that the average cost calculated in the FIF Clock Offset Survey included an inherent downward bias due to the selection of the minimum value in the highest cost response range when calculating the average.2676 In conclusion, while the Commission recognizes a degree of uncertainty in its clock synchronization cost estimates, which may be downward biased, the commenter does not offer an alternative cost estimate, and the Commission does not have enough information to change its estimate.

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The Commission agrees with the commenter that stated cost estimates in the Plan did not include the requirement of timestamps on Allocation Reports. In recognition of the modification to the Plan regarding timestamp requirements of Allocation Reports, and in realization that Allocation Time costs were not included in the cost estimates in the Notice, the Commission is now adding the commenter’s estimate of $44,050,000 in implementation costs and $5,035,833 in ongoing costs for the inclusion of timestamps on Allocation Reports to the estimated costs of broker-dealers.2677

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The Commission is unable to update cost estimates to account for the modifications to the clock synchronization standards for exchanges, but the Commission does not believe that the modifications will result in substantial cost increases for exchanges. The Commission does not have sufficient information to estimate clock synchronization costs for exchanges. However, based on information cited in the Notice2678 and the Participants’ response,2679 the Commission understands that exchanges already maintain clock offsets of 100 microseconds or less. While the Commission recognizes that exchanges may still incur costs in additional logging and other actions to ensure they maintain clock offsets in compliance with the Plan, the Commission does not believe these additional costs will be substantial.

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The Commission does not agree with the Participants that having multiple clock synchronization standards within the same order lifecycle will complicate the linkage process at the Central Repository. As indicated in Section V.D.2.b.(2), the industry already operates with multiple clock synchronization standards. Therefore, regardless of whether the clock synchronization standards apply a one-size-fits-all definition of industry standard or apply a different standard to exchanges, the linking process is already complicated by the fact that exchanges and many broker-dealers already synchronize some or all of their business systems to less than 50 milliseconds. The Commission therefore believes that the modifications to the Plan to set the clock synchronization standard for exchanges at 100 microseconds and base industry standards on the type of CAT Reporter or system will not increase the costs of the Central Repository.

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The Commission acknowledges that the requirement for the Participants to perform an assessment of clock synchronization standards, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, will impose additional costs on the Participants.2680 Furthermore, it is possible that the requirement to base industry standards on the type of CAT Reporter or system will ultimately lead to additional costs from more granular clock synchronization standards for some Industry Members in the future. However, any resulting proposed amendments to the Plan regarding clock synchronization standards would be subject to notice and comment.2681

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(6) Quote Sent Time and OTC Equity Securities

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In the Notice, the Commission stated its preliminarily belief that other Plan requirements such as the requirement that Options Market Makers report Quote Sent Time to the exchanges would cost between $36.9 million and $76.8 million over five years;2682 and the requirement to maintain six years of data at the Central Repository would cost approximately $5.59 million.2683 The cost to include OTC Equity Securities in the initial phase of the implementation of the Plan could not be estimated.2684 The Commission preliminarily concluded that these requirements did not represent a significant source of costs.

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The Commission received a comment regarding the costs incurred by Option Market Makers regarding reporting Quote Sent Times. According to the FIF/SIFMA/STA Cost Survey Report on CAT Reporting of Options Quotes by Market Makers, the estimated 5-year cost to Options Market Makers for adding a timestamp to the quote times was between “$39.9” million and $76.8 million.2685 The commenter further stated that this is “not a trivial cost for providing one data element to the consolidated audit trail.”2686 The Commission did not receive any comments on the requirement to retain an extra year of data in the Central Repository and the inclusion of OTC Equity Securities in the initial implementation phase of CAT. Furthermore, the issues were not addressed in the Participants’ response and there were no changes in the Plan that would affect the Commission’s conclusions.

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As such, in light of the comments received, the Commission continues to believe that the estimates in the Notice are reliable estimates for the costs for Option Market Makers to send the Quote Sent Time field to exchanges. In response to the comment that the five year costs of adding a timestamp to the quotes is not trivial, the Commission notes that the implied annual costs would be much lower than the five year costs and the Commission agrees that the costs of quote sent time are large. The Commission is no longer referring to quantified costs as significant or less significant contributors to overall costs.

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As noted above, in response to comments, the Commission acknowledges that the Allocation Time data field was not included in its cost estimates in the Notice.2687 For similar reasons, the Commission now also believes that the Quote Sent Time is also not included in the cost estimates in the Notice. Therefore, the Commission now adds these costs to the total costs to be incurred by broker-dealers.2688 The Commission recognizes that Participants and the Central Repository will also incur costs to comply with the Quote Sent Time requirements; however the Commission lacks sufficient information to quantify these costs, and therefore, does not add them to the cost estimates above for Participants or the Central Repository.

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The Commission also recognizes that the modifications to the Plan to require the submission of the LEI for Customers, if an Industry Member has or acquires its Customer’s LEI, and the LEI for Industry Members, if the Industry Member has one, could be an additional source of costs for broker-dealers. The Commission however does not believe that these costs will be substantial, because the Plan does not require Industry Members or others to obtain or submit an LEI if they do not already have an LEI.

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(7) Other Costs

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In the Notice, the Commission stated its preliminary belief that there were other categories of costs in addition to the items discussed above, but that these categories were unlikely to represent significant contributions to the overall costs of the Plan. For example, in addition to providing CAT Reporters data on their Error Rates, the Plan stated that the Participants believed that in order to meet Error Rate targets, industry would require certain resources, including a stand-alone testing environment, and time to test their reporting systems and infrastructure. There were also likely to be costs related to the Plan Processor’s management of PII,2689 as well as related compliance costs associated with minimizing the costs and risks of a security breach.

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The Commission received a comment stating that the costs associated with the management of the PII included in the customer information reported could increase the costs of the CAT Plan.2690 Another commenter mentioned that underlying customer data is PII information and moving this sensitive data requires extreme precaution, which could also increase these costs.2691

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The Commission considered these comments, as well as modifications to the Plan’s security provisions, and is updating its analysis. While the Commission cannot quantify these costs, the Commission believes that costs associated with the management of PII, and related security costs associated with minimizing the costs and risks of a security breach, would increase in light of modifications to the Plan discussed above. 2692 Specifically, the Commission believes the costs would increase in light of the requirement that the Plan Processor adhere to the NIST Cyber Security Framework in its entirety, the requirement that the CAT System be AICPA SOC 2 certified and audited by a qualified third-party auditor, the requirement that all CAT Data be encrypted, and the requirement that Customer Identifying Information and Customer Account Information, irrespective of whether it meets a common understanding of the definition of PII, should be considered PII for security purposes. The Commission believes these costs would represent a significant proportion of the total costs of the CAT Plan.

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As discussed above,2693 the Participants’ response provided clarifying information on error correction timelines for customer information and PII, and identified an errant discussion of these error correction timelines in the Plan. The Commission is amending the Plan to incorporate the Participants’ clarification. The Commission does not believe the clarification regarding the timeline for communication of errors for customer and account information would warrant any changes to its analysis and conclusions regarding costs.

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The Commission is also amending the Plan require that the CAT testing environment will be made available to Industry Members on a voluntary basis no later than six months prior to when Industry Members are required to report and that more coordinated, structured testing of the CAT System will begin no later than three months prior to when Industry Members are required to report data to CAT.2694 These amendments could increase the costs of the Plan as they relate to the provision of a testing environment.

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b. Fees

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In the Notice, the Commission discussed a source of costs due to ancillary fees on both broker-dealers reporting to, and regulators accessing, the Central Repository.2695 The Commission preliminarily believed that ancillary fees levied on broker-dealers were unlikely to be levied broadly, because discussion in the Plan associated these fees with late and/or inaccurate reporting. The Plan also discussed ancillary fees possibly levied on regulators associated with the use of Central Repository data. The Commission recognized that costs estimated in Bids for constructing and operating the Central Repository already anticipate use of the CAT Data by regulators, and that additional fees to access the data might give regulators incentives to make less use of the data than anticipated in the Benefits Section. However, any fee schedule proposed by the Participants would be filed with the Commission. Consequently, the Commission preliminarily did not believe that the provisions for ancillary fees would likely significantly impact the costs or benefits of CAT.

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Three commenters supported levying fees on regulators that access CAT Data.2696 One commenter mentioned that any costs imposed in connection with a usage fee for the CAT will be offset by the costs that the SROs will save in retiring systems. In fact, imposing a user fee could create an incentive to eliminate those systems in a timely fashion.2697 While the Participants agreed there are potential benefits to charging a usage fee, they also stated that it is premature to establish such a fee until the Participants gain a better understanding of how the Plan will be used by the regulators and how such usage will impact the operational costs of the Plan.2698

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The Commission considered these comments, but does not believe that they would warrant changes to the Commission’s preliminary analysis and conclusions regarding the ancillary fees under the Plan. Furthermore there were no modifications to the Plan that would warrant changes to this aspect of the economic analysis. The Commission disagrees with the comment that the usage fees would create an incentive for SROs to retire their systems earlier. In fact, the Commission notes that the usage fees could have the opposite effect – it could encourage the SROs to not use CAT for regulatory activities other than surveillance, which could incentivize them to retain these systems longer. The Commission continues to believe that ancillary costs do not represent a significant proportion of costs of the CAT NMS Plan.

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pubdate: November 15, 2016 effdate: N/A +

4. Expected Costs of Security Breaches

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs, Expected Costs of Security Breaches + Compliance User: Self-Regulatory Organization + Keywords: + CAT Data, + CAT NMS plan, + Central Repository, + Plan Processor, + +

In the Notice, the Commission recognized that investors and market participants could face significant costs if CAT Data security were breached.2699 The Commission explained its belief that it is difficult to form reliable economic expectations for the costs of security breaches because there are few examples of security breaches analogous to the type that could occur under the CAT NMS Plan. However, the Commission provided a qualitative analysis of the expected costs of security breaches in the Notice by separating the expected costs of security breaches into two components: the risk of a security breach and the cost resulting from a security breach.2700

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The Commission acknowledged in the Notice2701 that because many of the decisions that define security measures for the Central Repository are coincident with the selection of the Plan Processor, there is a degree of uncertainty with regards to security measures that would be implemented by the Plan Processor.2702 Consequently, there is uncertainty about the significance of the risks, the expected costs of a breach when considering the likelihood of a data breach, and the second-order effects.2703

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a. Costs of a Security Breach

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The Commission discussed its belief in the Notice2704 that the form of the direct costs resulting from a security breach will vary across market participants and could be significant. It listed the following four types of costs. First, for broker-dealers, investment advisers, and other similar institutions, a security breach could leak highly-confidential information about trading strategies or positions,2705 which could be deleterious for market participants’ trading profits and client relationships. Second, a data breach could also expose proprietary information about the existence of a significant business relationship with either a counterparty or client, which could reduce business profits.

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Third, a data breach could also potentially reveal PII of customers. Because some of the CAT Data stored in the Central Repository will contain PII such as names, addresses, and social security numbers, a security breach could raise the possibility of identity theft, which currently costs Americans billions of dollars per year.2706 Because PII will be stored in a single, centralized location rather than stored across multiple locations, a breach in the Central Repository could leak all PII, rather than a subset of PII that could be leaked if the information were stored in multiple locations. As such, these costs associated with the risk of a security breach could be substantial in aggregate.

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Fourth, a breach that reveals the activities of regulators within the Central Repository, such as data on the queries and processes run on query results, could compromise regulatory efforts or lead to speculation that could falsely harm the reputation of market participants and investors.

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The Commission received several comments regarding the costs of a security breach, which are summarized in more detail in Section IV.D.6. Some commenters asserted that the potential costs of a breach exceed those described by the Commission in the Notice because a breach could negatively affect not just individual firms and investors but also the broader financial markets. One commenter wrote that a bad actor gaining access to the Central Repository “may pose tremendous threat to the U.S. financial stability.”2707 Another wrote that a breach could be a “threat to market stability or national security” and “would have serious impacts on the global economy.”2708 The same commenter stated that “we believe the CAT Data is on par with, and meets, the standards for classified information as set in Executive Order 13526 on Classified National Security Information. . . . We think that unauthorized disclosure or use of CAT Data could destabilize the U.S. and world financial markets by causing investor panic, mass selling and runs on financial institutions. The potential extent of damage to the U.S. markets and economy would be a matter of national security.” Another commenter cited the Government Accountability Office, stating “the ineffective protection of cyber assets can result in the loss or unauthorized disclosure or alteration of information, [which] could lead to serious consequences and result in substantial harm to individuals and to the federal government.”2709

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Commenters also asserted that the potential costs of a breach exceed those described by the Commission in the Notice because the Notice did not discuss costs related to breach management. One commenter stated that “the Proposal fails to address who is responsible for the cost of the breach that occurs at the Central Repository,”2710 and another commenter suggested that “[because] the Plan Processor is responsible for constructing and operating the CAT . . . the Plan Processor should bear responsibility in the event of a data breach.”2711 One commenter wrote that “the cost of complying with the notification requirements under the Privacy Laws may be exorbitant.”2712 Two commenters recommended the purchase of insurance by the Plan Processor or CAT NMS, LLC to cover the costs of a breach.2713 One commenter argued that the Plan Processor must promptly notify a customer of security breaches of his data because “a security breach of a customer’s trading data could compromise the customer’s investment strategies even if the customer’s PII was not compromised.” 2714 Another commenter observed that breach notification may take longer if the data breach happens at the site of a Participant, “which could greatly harm registered funds and other victims of the breach.2715

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The Commission acknowledges that the costs of a breach, including breach management, could be quite high, especially during periods of market stress. Furthermore, the Commission understands that a breach could seriously harm not only investors and institutions but also the broader financial markets. The Commission is unable to provide quantitative estimates of those costs because there are few examples of security breaches analogous to the type that could occur under the Plan and because the Plan Processor has some discretion in developing its breach management plan.2716 The Commission notes, however, that the Plan Processor is responsible for CAT Data,2717 and it will develop a breach protocol and cyber incident response plan that will include notification of breach victims such as Customers, insurance coverage and liability, and details about the distribution of costs.2718

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b. Risk of a Security Breach

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The Commission discussed in the Notice2719 its belief that the risks of a security breach may not be significant because certain provisions of Rule 613 and the CAT NMS Plan appear reasonably designed to mitigate these risks. However, the Commission noted that the considerable diversity in the potential security approaches of the Bidders creates some uncertainty about the effectiveness of the eventual security procedures and hence, the risk of a security breach.2720

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In the Notice,2721 the Commission discussed the provisions of both Rule 613 and the Plan that provide safeguards designed to prevent security breaches.2722 First, governance provisions of the CAT NMS Plan could mitigate the risk of a security breach.2723 Second, the Plan includes specific provisions designed to ensure the security of data in-flight.2724 Third, Section 6.7(g) of the Plan requires that the Participants establish, maintain, and enforce written policies and procedures reasonably designed to (1) ensure the confidentiality of the CAT Data obtained from the Central Repository; and (2) limit the use of CAT Data obtained from the Central Repository solely for surveillance and regulatory purposes. Finally, the Plan includes further provisions designed to provide security for PII.2725

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Commenters made four types of comments about the Notice’s economic analysis of the risk of a security breach. The first type of comment relates to protecting CAT Data that are extracted or downloaded from the Central Repository. Several commenters expressed strong concerns about allowing any entity, including regulators, to extract or download data from the Central Repository because the risk of any data breach would greatly increase as the data are maintained at more sites.2726 One commenter suggested that allowing anyone to download the entire CAT database might threaten U.S. financial stability.2727 Some commenters also objected to excluding the Commission or its Staff from certain security-related parts of the CAT NMS Plan.2728

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The second type of comment relates to tailoring security requirements to the security risk of the particular data element. Several commenters argued that at-rest data and in-use data needs to have some of the same security measures that are required for in-flight data in order to keep risk at an acceptable level.2729 Another commenter wrote that maintaining different security standards for PII data and non-PII data “creates the misimpression that all non-PII data merits less information security protection than PII data” and recommended more accurately matching security requirements to the underlying risk through the imposition of “additional levels of data classification to protect adequately commercially sensitive non-PII data.”2730

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The third type of comment relates to the overall risks of the system due to the unique nature of the database. Several commenters suggested that the Commission impose additional security requirements beyond what appears in the Notice because the scale and scope of the Central Repository will make it a particularly attractive target for well-funded hackers, individuals, and nation-states with objectives ranging from theft to insider trading to market disruption.2731 Additionally, a number of commenters recommended that the Plan include additional detail concerning the security of CAT Data.2732

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The fourth type of comment relates to data governance. One commenter stated that the proposal for the CCO and CISO to be officers of the Company as well as employees of the Plan Processor creates a conflict of interest that would undermine the ability of these officers to carry out their responsibilities effectively under the Plan because they would owe a fiduciary duty to the Plan Processor rather than the CAT LLC. 2733 The same commenter noted that the Notice did not specify the entity liable in the event of a data breach.2734 The commenter suggested that because the Plan Processor is responsible for constructing and operating the CAT, with the oversight of the Operating Committee, and will be solely in control of the system’s information security, the Plan Processor should bear responsibility in the event of a data breach.2735

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The Participants have responded to these comments. In response to the commenters that expressed concern about allowing any entity to extract or download CAT Data, the Participants noted that Rule 613 requires regulators to develop and implement a surveillance system, or enhance existing surveillance systems to make use of CAT Data.2736 The Participants stated that “eliminating or limiting bulk data extracts of the CAT Data may significantly and adversely impact the Participants’ ability to effectively surveil their markets using CAT Data.”2737 The Participants further noted that the Plan also requires that Participants have appropriate policies and procedures in place to protect all of the CAT Data they extract or download. 2738 In response to the comments about excluding the Commission or its Staff from certain security requirements of the Plan, the Participants stated that they agreed that the Plan’s security program must take into consideration all users with access to CAT Data, including the SEC, and they recommended removing the exclusions.2739

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In response to the commenter that suggested adding additional levels of data classification, the Participants determined that “it is [not] necessary to expand the categories of other CAT Data.”2740 In response to commenters that requested more detail regarding the security controls for CAT Data, the Participants noted that in the Adopting Release for Rule 613, the Commission stated that “an outline or overview description of the policies and procedures that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule.” 2741 In their response, the Participants also provided additional information about security procedures, including a high level description of the security requirements for the CAT System and additional details concerning certain security controls and protocols required of the Plan Processor. 2742 The Participants also stated that they believe that “publicly releasing too many details about the data security and information policies and procedures of the CAT System presents its own security concerns and is not advisable.”2743 In response to comments about governance, the Participants agreed that the Plan should explicitly state that the CCO and CISO of the LLC should have fiduciary duties to the LLC in the same manner and extent as an officer of a Delaware corporation and recommended the Plan be amended accordingly.2744 Additionally, the Participants stated that they are “in the process of negotiating an agreement with potential Plan Processors. This agreement will cover liability, insurance, and indemnification.”2745

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The Commission has considered the comment letters and the Participants’ response letters. In response to the commenters that expressed concern about allowing any entity to extract or download CAT Data, the Commission notes that it believes that regulators need access to CAT Data outside the Central Repository to perform their duties effectively. As discussed above in Section IV.D.6.d, Participants that choose to extract or download CAT Data must have policies and procedures regarding CAT Data security that are equivalent to those of the Plan Processor for the Central Repository. And as discussed in Section IV.D.6.o, the rules and policies applicable to the Commission and its Staff will be different yet substantively as rigorous as those applicable to the Participants and their personnel. The Commission therefore believes that, due to these precautions, the regulatory use of CAT Data outside the Central Repository should not increase the security risks to the CAT system.

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In response to the commenters that expressed concern about the security requirements for particular data elements, the Commission notes that it believes that the best use of limited resources is to tailor security requirements to the security risk of the particular data element. No commenter quantified the relative risk of a breach that comes from in-flight data versus at-rest data or in-use data, and the Commission continues to believe that the largest risk of a breach comes from in-flight data. Thus, the adopted Plan will maintain higher security standards for inflight data than for at-rest data or in-use data. The Commission also continues to believe that PII data warrants more security considerations than non-PII data, but it disagrees with the one commenter that recommended multiple levels of security for non-PII data.2746 In this case, the Commission does not believe that the benefits justify the costs of creating additional levels of data classification within non-PII data.

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In response to the commenters that expressed concern about the risks of aggregating confidential data from disparate sources into one location, the Commission notes that it agrees that the CAT Data will be a particularly attractive target for bad actors. However, the Commission believes that the extensive, robust security requirements in the adopted Plan, as outlined in Section IV.D.6, provide appropriate, adequate protection for the CAT Data.

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In response to the comments regarding the lack of security details in the Plan, the Commission continues to believe that, as discussed in the Notice, there is a degree of uncertainty with respect to the security measures that would be implemented by the Plan Processor, and consequently, uncertainty about the risk of a data breach.2747 As discussed in more detail above,2748 the Commission notes that the Participants have provided some additional information regarding security procedures. Additionally, as discussed above, the Commission is amending the Plan to require that the Participants conduct background checks for the employees and contractors of the Participants that will use the CAT System,2749 and to require that the Participants provide the Commission with an evaluation of the information security program to ensure that the program is consistent with the highest industry standards for the protection of data.2750 The Commission believes that this additional information mitigates some of the uncertainty, but continues to believe that there is significant uncertainty with respect to the risk of a breach. However, the Commission also recognizes that publicly releasing too many details about security requirements could create additional risk, and as discussed in Section IV.D.6, believes a reasonable level of detail has been provided.2751

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In response to comments about governance, the Commission notes that it has modified the Plan to address the concern regarding potential conflicts of interest on the part of the CCO and CISO. Specifically, as discussed in more detail above in Section IV.B.3, the CCO and CISO will have fiduciary duties to the CAT LLC in the same manner and extent as an officer of a Delaware corporation, and to the extent those duties conflict with duties the CCO and CISO have to the Plan Processor, the duties to the CAT LLC will control.2752 As discussed above in Section IV.D.6, the CCO and CISO each have responsibilities related the security of CAT Data, and the potential for a conflict of interest could create uncertainty as to whether these responsibilities will be carried out in a way that will minimize the risk of a security breach. The Commission believes that the modifications to the Plan should reduce this uncertainty.

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In response to the commenter who noted that the Notice did not specify the entity liable in the event of a data breach, the Commission notes that the Plan requires the Plan Processor’s cyber incident response plan to address insurance issues related to security breaches, and that as part of the discussions on insurance coverage and liability, further detail about the distribution of costs will be undertaken, including details about who might bear the cost of a breach and under what specific circumstances. The Commission believes that these provisions in the Plan should provide incentives for the Plan Processor to manage security risks. However, because the cyber incident response plan will not be developed until after the Plan Processor has been selected, the Commission does not know whether or under what circumstances the Plan Processor will bear the cost of a breach. While the Commission recognizes that this creates some uncertainty with respect to the incentives on the Plan Processor to minimize the risk of a security breach, the Commission is approving the Plan without further modification for the reasons discussed in Section IV.D.6.j, above.

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pubdate: November 15, 2016 effdate: N/A +

5. Second Order Effects

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Costs, Second Order Effects + Compliance User: Self-Regulatory Organization + Keywords: + CAT Reporter, + +

In the Notice, the Commission recognized that a number of second-order effects could result from the approval of the Plan.2753 These included market-participant actions designed to avoid direct costs of a security breach; changes to CAT Reporter behavior due to increased surveillance; changes in CAT Reporter behavior to switch from one funding tier to another to qualify for lower fees; and changes in broker-dealer routing practices related to fee differentials across execution venues.

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a. Security-Related Second Order Effects

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In the Notice, the Commission recognized that the desire to avoid direct costs of a security breach could motivate actions that would cause second order effects.2754 The Commission illustrated this in the Notice by considering two specific examples of actions that Participants might take. First, if service bureaus perceive the costs and risks of a security breach to be great enough because of the addition of PII in the data, which is not included in current data, some could decide not to provide CAT Data reporting services.2755 Second, investors or other market participants could move their activity off-shore or cease market participation altogether to avoid having sensitive information stored in the Central Repository.2756 The Commission stated that it did not believe that the effect of the Plan on the risk or costs of a data breach would be great enough to result in significant second order effects.2757

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The Commission received two comments on this issue. Both comments suggested that industry members would have to purchase insurance or cease domestic operations if the Plan Processor was not required to purchase an insurance policy that covers potential security breaches and extends to industry members to reimburse them for costs related to the breach.2758 Comments on another potential second order effect related to capital formation are addressed in more detail below in Section V.G.3.b.2759

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In their response to comments, the Participants indicated that they are working on an agreement between themselves and the potential Plan Processors to cover liability, insurance, and indemnification, which would also make it less likely that industry members would move off-shore or cease operations.2760

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The Commission recognizes that the purchase of insurance to cover these costs is a potential second order effect. As such, the Commission is revising its economic analysis to acknowledge this additional second order effect, but otherwise continues to believe that the security-related second order effects will be as anticipated in the Notice.

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b. Changes to CAT Reporter Behavior

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In the Notice, the Commission also acknowledged that increased surveillance could impose some costs by altering the behavior of market participants. The Commission stated that benefits could accrue to the extent that improved surveillance, investigation, and enforcement capabilities allow for regulators to better identify and address violative behavior when it occurs, and to the extent that common knowledge of improved capabilities deters violative behavior.2761 In particular, the Commission acknowledged that some market participants could reduce economically beneficial behavior if those market participants believe that, because of enhanced surveillance, their activities would increase the level of regulatory scrutiny that they bear. Furthermore, the Commission stated that costs could accrue to the extent that some forms of market activity, which are permissible and economically beneficial to the market and investors, could come under greater scrutiny, which could create a disincentive to engage in that activity. For example, regulators could increase the number of inspections, examinations and enforcement proceedings that they initiate. To the extent that these activities result in a reduction in violative behavior, the market benefits by avoiding the costs of this behavior. To the extent, however, the additional regulatory activity increases the number of inspections, examinations and enforcement on permissible activities, market participants would incur the increased costs of facilitating these regulatory inquiries.

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Although the Commission did not receive any comments on the second order effects it discussed in the Notice, it did receive two comments on a second order effect related to the granularity of timestamps. As discussed in the Notice, the Plan requires CAT reporters to report sub-millisecond timestamps when the CAT reporter uses such timestamps internally.2762 Two commenters noted that this requirement may discourage CAT reporters from using sub-millisecond timestamps internally, since this would require finer timestamp resolution in CAT reporting.2763 The Commission also received a comment on a second-order effect that could result from the tiered fee structure of broker-dealers based on message traffic.2764 The commenter suggested that the structure of the funding model might cause second-order effects related to the differential message traffic of different activities, and these effects may vary across securities based on their liquidity.

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In response to comments on the granularity of timestamps, the Participants state that the quality of CAT Data would improve if the Plan required such timestamps to be reported by CAT reporters that use such timestamps internally.2765 Furthermore, in response to the comment that the imposition of a fee on message traffic would discourage liquidity provision, the Participants note that they actively considered the market quality concerns in devising the proposed funding model, and one of the reasons for proposing a tiered, fixed fee funding model was to limit the disincentives to providing liquidity to the market. In particular, the Participants believed that a funding model based on message volume was far more likely to affect market behavior.2766

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With regards to comments on sub-millisecond timestamps, the Commission acknowledges that this requirement may prove to be a disincentive for market participants to use sub-millisecond timestamps internally; however, the Commission believes that for many market participants, capturing timestamps at a finer resolution supports analysis of the firm’s data for business purposes that provide benefits such as improvement to trading strategies and measurement of execution costs, and the benefits of these business purposes may exceed the costs of reporting regulatory data with finer timestamps. However, the Commission acknowledges that for firms that do not perform such analyses, this requirement may prove to be a disincentive to adopting technologies that capture finer resolution timestamps.

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The Commission agrees with the comment about second order effects related to the tiering of broker-dealer fees based on message traffic and is adding this second-order effect to its analysis. The funding model anticipates Central Repository costs being spread across broker-dealers according to activity tiers based on message traffic. This may cause broker-dealers to alter their behavior to avoid being assigned to a higher fee tier. For example, trading strategies that involve providing liquidity might be expected to generate more message traffic than strategies that take liquidity because providing liquidity generally requires posting many quotes on many venues. Furthermore, while a broker-dealer is seeking to provide liquidity, market prices may change causing the broker-dealer to have to update its quotes on many venues multiple times as it seeks to trade. Consequently, the funding model may create an incentive to take rather than provide liquidity, which could reduce levels of market liquidity. Furthermore, these effects may vary across securities based on the liquidity of the security. As the commenter noted, “the quote-to-trade ratio for exchange-traded-products (“ETPs”) can be ten times greater than that for corporate stocks. This implies that market makers in ETPs may generate ten times the amount of message traffic per executed trade than market makers in corporate stock.”2767 Consequently, the Commission also agrees that the tiered funding model for broker-dealers may create disincentives to provide liquidity in less liquid securities, possibly resulting in less liquid markets for securities that are already considered illiquid. As discussed below, the Commission recognizes the potential differential effect on those broker-dealers that engage in market making in liquid stocks versus illiquid stocks and on those broker-dealers that engage in liquidity taking strategies versus those that engage in other strategies. Nonetheless, as explained above in Section IV.D.13.b, the Commission believes that the timestamp requirements contained in the CAT NMS Plan, including the requirement that a CAT Reporter report timestamps in increments finer than milliseconds if they do so in other systems, are reasonable and will improve regulators’ ability to sequence events.

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c. Tiered Funding Model

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In the Notice, the Commission stated its preliminary belief that establishing a small number of discrete fee tiers, as occurs under the Plan, could create incentives for CAT Reporters to alter their behavior to switch from one tier to another, thereby qualifying for lower fees.2768 Specifically, the Plan states that CAT Reporters would be classified into a number of groups based on reporter type and market share of share volume or message traffic and assessed a fixed fee that is determined by this classification. The higher-activity groups would be assessed higher fees such that market participants who fall into the lower tiers have a fee advantage over the market participants that fall into the higher tiers. The Commission noted, however, that because this incentive is contingent on being near a fee-tier cutoff point, relatively few market participants will likely be affected and thus market quality effects will likely not be significant. Furthermore, for those market participants near a cutoff point, managing activity to avoid a higher fee tier would necessarily incur costs of lost business and potential loss of market share, and would possibly be difficult to implement, which should mitigate any effects on market quality.

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The Commission also recognized that the tiering of fees could create calendar effects within markets. That is, the structure ultimately approved by the Operating Committee could affect market participant behavior near the end of a measuring period. For example, high levels of market activity during a measuring period might cause CAT Reporters to limit their activity near the end of a measurement period to avoid entering a higher fee tier. The Commission noted that the Operating Committee has discretion under the Plan governance structure to make the tier adjustments discussed in Section 11.1.d for individual CAT Reporters. This provision might mitigate incentives for individual market participants to alter market activities to reduce their expected CAT fees.

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The Commission did not receive any comments related to its economic analysis regarding the market quality effects, calendar effects, or other effects due to the tiered structure of the funding model. While the Commission is making certain modifications to the funding model, as described in Section IV.F above, the funding model will continue to utilize a tiered structure. Consequently, the Commission continues to believe that the tiered fee structure could create incentives for CAT Reporters to alter their behavior, but that market quality effects would likely not be significant. Nonetheless, the Commission expects that the required report by the Participants to study the impact of tiered-fees on market liquidity should provide insights into whether the fee model affects liquidity provision and ultimately market quality. This will assist the Commission’s oversight of the Plan and assist the Operating Committee in understanding whether it needs to make adjustments to the Funding Model. Furthermore, for those market participants near a cutoff point, managing activity to avoid a higher fee tier would necessarily incur costs of lost business and potential loss of market share, and would possibly be difficult to implement, which should mitigate any effects on market quality.

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The Commission is also updating its analysis based on the amendment to the Plan to clarify that the Operating Committee may only change the tier to which a Person is assigned in accordance with a fee schedule filed with the Commission..2769 Consequently, the Commission no longer believes that this provision would mitigate incentives for individual market participants to alter market activities to reduce their expected CAT fees. The Commission continues to recognize that CAT Reporters may have incentives to alter their behavior to switch from one tier to another.

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d. Differential CAT Fees across Market Participants

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In the Notice, the Commission discussed the funding model proposed in the Plan, which is a bifurcated funding model in which costs are first allocated between the group of all broker-dealers and the group of all Execution Venues, then within these groups by market activity level.2770 The Commission discussed its preliminary belief that the bifurcated funding model proposed in the Plan almost certainly would result in differential CAT costs between Execution Venues because it will assess fees differently on exchanges and ATSs. First, message traffic to and from an ATS would generate fee obligations on the broker-dealer that sponsors the ATS, while exchanges would incur almost no message traffic fees.2771 Second, broker-dealers that internalize off-exchange order flow, generating off-exchange transactions outside of ATSs, would face a differential funding model compared to ATSs and exchanges.2772 Specifically, broker-dealers internalizing orders would only pay fees based on message traffic, whereas orders routed to ATSs and exchanges would lead to broker-dealer fees based on message traffic and ATS or exchange fees based on market share. If these fees are even partially passed on to customers, then the cost differentials that result might create incentives for broker-dealers to route order flow to those broker-dealers who internalize in order to minimize costs, creating a potential conflict of interest with broker-dealers’ investor customers.

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In addition, the Commission discussed its preliminary belief that the funding model shifts broker-dealer costs associated with the Central Repository to all broker-dealers and away from Options Market Makers. The Plan provides that broker-dealers would not report their options quotations, while equity market makers would report their equity quotations to the Central Repository. This differential treatment of market making quotes would affect funding costs by (a) decreasing the number of messages that must be reported and stored by Options Market Makers, and (b) charging broker-dealers that do not quote listed options a higher share of broker-dealer-assessed CAT fees than they would if Options Market Makers’ quotes were included in the allocation of fees.

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Although this differential treatment would marginally increase the cost of providing other broker-dealer services relative to options market making, the Commission discussed its belief that this would not materially affect a market participant’s willingness to provide broker-dealer services other than options market making because (a) many market participants participate in both equities and options markets, and (b) broker-dealers participating in equity markets have significant infrastructure in place for serving that market and switching costs to participate in options market making are high.

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In the Notice, the Commission also discussed the allocation of costs between the Execution Venues and the other Industry Members (i.e., broker-dealers) and solicited comment on alternative funding models.2773 Specifically, the Commission noted that the CAT NMS Plan does not detail the proportions of fees to be borne by Execution Venues versus Industry Members. The Notice also pointed out that Execution Venues would be tiered by market share to determine their fees while Industry Members would be tiered by message traffic. In its analysis, the Commission noted that assessing CAT costs on market participants by message traffic may have the benefit of aligning market participants’ incentives with the Participants’ stated goal of minimizing costs. The Commission also explained that while a broker-dealer’s choice of business model is likely to determine its level of message activity, the majority of an exchange’s message traffic is passive receipt of quote updates.2774 Further, because quotes must be updated on all exchanges when prices change, exchanges with low market share are likely to have more message traffic (incurring CAT fees) per executed transaction (generating revenue).2775 The Commission further explained that bifurcated fee approaches, such as the one in the Plan, may cause one Execution Venue to be relatively cheaper if Execution Venues pass costs on to members and subscribers and may exacerbate conflicts of interest for broker-dealers routing customer orders.

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The Commission received comments that inform its analysis of differential fees across market participants, particularly focusing on the allocation to Participants versus broker-dealers. One commenter questioned why Participants were tiered by market share while broker-dealers were treated differently (by message traffic), and noted this could place a larger burden on market makers of liquid securities. The commenter explicitly stated that it is not suggesting that market-share tiers are wrong, but believes there should be a reason why Participant tiers are based on one metric (market share) while broker-dealer tiers are based on another metric (message traffic).2776 The Commission received several comments on issues related to cost differentials between Participants and broker-dealers that were not discussed in the Notice. One commenter noted that the profits from the fees would only be distributed among the Participants and suggested these should be at least partially returned to broker-dealers.2777 Another commenter was concerned that SROs would use CAT profits to fund other SRO operations.2778 There were comments regarding the lack of transparency over fee calculations and metrics used to determine tiers, as well as the determination of the allocation split between broker-dealers and Participants—all of which increases uncertainty in cost estimates.2779 Finally, there were a number of comments that described the potential for a conflict of interest in the allocation of fees, and discussing the relative burden of funding on broker-dealers to SROs, estimating that at least 88% of costs will be borne by broker-dealers.2780

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There were no comments related to the economic analysis regarding a double charging of ATSs.2781 In addition, there were no comments regarding the economic analysis related to differences in costs between option market makers and equity market makers.2782

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The Participants’ response contains information that is relevant to the economic analysis with regards to transparency in funding and the allocation of costs. Specifically, the Participants commented that the Plan provides the Advisory Committee with the right to receive information concerning the operation of the CAT,2783 and that the Participants plan to provide the Advisory Committee with minutes of Operating Committee meetings.2784 The response addressed the concerns over transparency in decision making; however, the concerns regarding uncertainty in the metrics used to determine tiers and the final cost allocation split will not be resolved until the Plan Processor is chosen.

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The Participants’ supplemental response also contained information that is relevant to the economic analysis with respect to second order effects of the funding model. With regards to determining fees via message traffic for broker-dealers and market share for Participants, the Participants noted that message traffic is a key component of CAT operating costs, and that message traffic is strongly correlated with broker-dealer size. However, there is little correlation between message traffic and Execution Venue size, so charging large and small Execution Venues with similar message traffic would be inequitable. The Plan treats ATSs in the same manner as exchanges because their business models and anticipated burden on CAT are similar.2785

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On this topic, the Participants proposed one modification to the plan. The Participants proposed to amend the manner in which market share will be calculated for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stock or OTC Equity Securities. For such an association, its market share for purposes of the funding model would not include the share volume reported to the national securities association by an ATS, as such share volume will be included in the market share calculation for that ATS. 2786

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The Participants also responded that they expect to operate the CAT on a break-even basis—that is, the fees imposed and collected would be intended to cover CAT costs and an appropriate reserve for CAT costs, and any surpluses would be treated as an operational reserve to offset fees in future payment. In addition, the Participants subsequently stated that the CAT LLC will seek to qualify for tax exempt status as a “business league.”2787

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With regards to fee transparency, the Participants noted that the details regarding the tiers are important considerations and are actively developing the tiers. Once the Plan Processor is selected, the Operating Committee will work with the Processor to finalize the tiers, and broker-dealers and other participants will have the opportunity to comment on the proposal as part of the approval process for an immediately effective rule filing.2788

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With regards to the allocation of costs between Participants and broker-dealers and the potential for a conflict of interest in determining this allocation, the Participants noted that the proposed funding model is designed to recover costs associated with creating, implementing, and operating CAT as opposed to addressing costs of compliance, which might be incurred regardless of the funding model. In addition, there are over 100 times more broker-dealers expected to report to CAT than Participants. Therefore, the 88% aggregate cost figure quoted in the comments is less than what broker-dealers would be expected to pay in aggregate on a per-CAT reporter basis.2789 With regard to the potential conflict of interest, the Participants noted that broker-dealers and the public will have the opportunity to comment on fees, the SEC will be required to evaluate the fees for consistency with the Exchange Act, the funding proposal expects that CAT will operate on a break-even basis, and Participants are prohibited from using regulatory fees for commercial purposes.2790

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The Commission is revising its economic analysis in light of comments, the Participants’ response, and Plan modifications. First, the Commission recognizes the validity of the comment that the funding tiers would place a larger burden on market makers of liquid securities relative to illiquid securities and place a lower burden on liquidity takers relative to those who provide liquidity. This could increase the incentive to broker-dealers to transact in more illiquid securities and reduce the incentive to provide liquidity. In response to the comment seeking the rationale behind the bifurcation in the funding model, the Commission notes that the Notice provided a rationale that the Commission continues to believe makes economic sense. Specifically, as summarized above, the Commission continues to believe that because message traffic is passive for exchanges and a business decision for Broker-Dealers, the bifurcated funding model will help align the incentives of market participants with the Participants’ stated goal of minimizing costs. More broadly, the Commission continues to believe that because the CAT NMS Plan does not detail the proportions of fees to be borne by Execution Venues versus Industry Members, its economic analysis contains uncertainty regarding the differential fees to be borne by Execution Venues versus Industry Members.

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With regards to the distribution of profits among SROs, the Commission is revising its economic analysis to incorporate the clarification in the Plan to the effect that profits from fees will go toward funding future costs instead of being redistributed among the SROs except in the two instances described above, as well as the modification to the Plan that reflects that the CAT LLC will seek to qualify for tax exempt status as a “business league.”2791 Broadly speaking, the Commission had been concerned about the competitive effects of distributing profits equally among SROs because, in profitable years, an equal distribution of profits would advantage smaller exchanges (larger exchanges in the case of losses). However, with the clarification and modification to the Plan, the Commission believes there will be little or no competitive effects resulting from distributions among SROs. The Commission also believes that this clarification and modification address commenter concerns about the distribution of CAT profits.

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The Commission is updating its analysis of the differential fees on exchanges and ATSs to incorporate Plan modifications that would change the way national securities associations are treated in the Funding Model. The modified Plan would no longer double-count ATS volume as share volume for the purposes of placing both ATSs and FINRA in tiers in the Funding Model. However, because of the uncertainty in the ultimate Funding Model, the Commission recognizes that this modification may not impact the fees paid by either ATSs or FINRA and may not alleviate any fee differentials between ATSs and exchanges. As described earlier in this Section, these fee differentials may arise because message traffic to and from an ATS would generate fee obligations on the broker-dealer that sponsors the ATS, while exchanges incur almost no message traffic fees.2792

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In addition, the Commission notes that other over-the-counter volume, such as occurs when orders are executed off-exchange against a broker-dealer’s inventory, will still be assessed share volume fees while the message traffic that resulted in the executions will also be subject to fees through the broker-dealers that had order events related to the transactions. This contrasts to executions that occur on exchanges, where the venue that facilitates the execution does not pay fees for message traffic that led to the execution. This difference in treatment could still result in costs that are passed on to investors because broker-dealers have the incentive to route orders in a way that results in less order flow to those who pay higher CAT fees.

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The Commission is not changing the economic analysis with respect to the allocation of costs between SROs and Broker-Dealers. As discussed in detail previously,2793 in response to the comments that suggested that Plan allocates 88% of the costs to broker-dealers, the Commission believes that the 88% figure cited is in reference to compliance costs, which are not “allocated” by the Plan. Fees to pay for the maintenance and operation of the Central Repository will be allocated via the funding model, and the current allocation of fees between broker-dealers and exchanges has not been determined.

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The Commission is updating the Economic Analysis to reflect some improvements in financial transparency as a result of amendments to the Plan. Specifically, the Commission’s amendment to the Plan to require that CAT LLC financial statements be prepared in accordance with GAAP and audited by an independent public accounting firm may substitute to a certain extent for the added financial transparency sought by commenters.2794 Additionally, as per the Participants’ response, all meeting minutes will be made available, and in addition, the Funding Model will be filed with the Commission and subject to public comment.2795 However, the Commission continues to recognize uncertainty in the ultimate allocation of fees.

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pubdate: November 15, 2016 effdate: N/A +

G. Efficiency, Competition, and Capital Formation

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Efficiency, Competition, and Capital Formation + Compliance User: Self-Regulatory Organization + Keywords: + Rule 613, + CAT NMS plan, + Operating Committee, + Plan Processor, + +

In determining whether to approve the CAT NMS Plan, and whether the Plan is in the public interest, Rule 613 requires the Commission to consider the impact of the Plan on efficiency, competition and capital formation.2796

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In the Notice, the Commission’s analysis supported the preliminary belief that the Plan generally promotes competition.2797 However, the Commission recognized that the Plan could increase barriers to entry because of the costs to comply with the Plan. Further, the Commission’s analysis in the Notice identified several limitations to competition, but stated that the Plan contains provisions to address some limitations and Commission oversight can also address the limitations.2798

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The Commission’s analysis in the Notice also supported the preliminary belief that the Plan would improve the efficiency of regulatory activities and enhance market efficiency by deterring violative activity that harms market efficiency. Further, the analysis in the Notice supported the Commission’s preliminary belief that the Plan would have modest positive effects on capital formation and that the threat of a security breach at the Central Repository would be unlikely to significantly harm capital formation.2799

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At the same time, however, the Notice stated that the significant uncertainties discussed elsewhere in its economic analysis also affect the Commission’s analysis of efficiency, competition, and capital formation.2800 Additionally, the Commission recognized that the Plan’s likely effects on competition, efficiency and capital formation were dependent to some extent on the performance and decisions of the Plan Processor and the Operating Committee in implementing the Plan, and thus there was necessarily some further uncertainty in the Commission’s analysis. Nonetheless, the Notice stated that the Commission preliminarily believed that the Plan contained certain governance provisions, as well as provisions relating to the selection and removal of the Plan Processor, that mitigate this concern regarding uncertainty by promoting decision-making that could, on balance, have positive effects on competition, efficiency, and capital formation.

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Overall, after considering comments, the Participants’ response, and modifications to the Plan, the Commission is updating and revising its economic analysis of competition, efficiency, and capital formation. However, the revisions in the analysis do not impact the Commission’s broad conclusions. The Commission continues to believe that the Plan generally will promote competition, improve the efficiency of regulatory activities, promote market efficiency, and have modest positive effects on capital formation. Further, the Commission continues to recognize the significant uncertainty and that certain provisions of the Plan could promote efficient decisions and implementation and could provide competitive incentives to the Plan Processor to promote good performance.

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pubdate: November 15, 2016 effdate: N/A +

1. Competition

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Efficiency, Competition, and Capital Formation, Competition + Compliance User: Self-Regulatory Organization + Keywords: + Trading Services, + NMS Stocks, + CAT NMS plan, + OTC Equity Securities, + SRO, + Rule 608(b)(2) of Regulation NMS, + CAT Reporting, + +

a. Market for Trading Services

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In the Notice, the Commission analyzed the CAT NMS Plan’s likely economic effects on competition in the market for trading services, as compared to the Baseline of the competitive environment without the Plan. The Commission stated that it preliminarily believed that the Plan would not place a significant burden on competition for trading services.2801 The Commission also examined the effect of the funding model on competition in the market for trading services, including off-exchange liquidity suppliers and ATSs. In addition, the Commission considered the effect of implementation and ongoing costs of the Plan, whether particular elements of the Plan could hinder competition, and the effect of enhanced surveillance on competition in the market for trading services. The Commission recognized the risk that the Plan would have negative effects on competition and increase the barriers to entry in this market, but discussed how the Plan provisions and Commission oversight could mitigate these risks.

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The Commission discussed how the market for trading services—which is served by exchanges, ATSs, and liquidity providers (internalizers and others) —relies on competition to supply investors with execution services at efficient prices. These trading venues, which compete to match traders with counterparties, provide a framework for price negotiation and disseminating trading information. The Commission observed that, since the adoption of Regulation NMS in 2005, there has been a shift in the market share of trading volume among trading venues. From 2005 to 2013, there was an increase in the market share of newer national securities exchanges and a decline in market share on NYSE. In addition, the proportion of NMS Stocks trading off-exchange (which includes both internalization and ATS trading) increased.

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The Commission noted that the Plan examines the effect of the CAT NMS Plan on the market for trading services primarily from the perspective of the exchanges. The Plan asserts that distribution of regulatory costs incurred by the Plan would be distributed according to “the Plan’s funding principles,” calibrated to avoid placing “undue burden on exchanges relative to their core characteristics,” and would thus not cause any exchange to be at a relative “competitive disadvantage in a way that would materially impact the respective Execution Venue marketplaces.”2802 Likewise, the Plan asserts that its method of cost allocation would avoid discouraging entry into the Participant community because a potential entrant, like an ATS, would “be assessed exactly the same amount [of allocated CAT-related fees] for a given level of activity” both before and after becoming an exchange.2803

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In addition, in its final analysis described below, the Commission examines each of the issues in relation to competition in the market for trading services and revises its economic analysis in response to comments, the Participants’ response, and modifications to the Plan.

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(1) Funding

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The Commission noted that the Operating Committee will fund the Central Repository by allocating its costs across exchanges, FINRA, ATSs (“Execution Venues”) and broker-dealers (“Industry Members”), and will decide which proportion of costs would be funded by exchanges, FINRA, and ATSs and which portion would be funded by broker-dealers. The Commission observed that the Plan does not specify how the Operating Committee would select the method of allocation. The Commission believed that any impacts of such fees on competition in the market for trading services will manifest either through the model for the fees itself or through the later allocation of the fees across market participant types, across equity or options exchanges, or within market participant types and markets, through the levels of fees paid by each tier.

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A. Funding Model

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In the Notice, the Commission discussed its preliminary belief that the structure of the funding model could provide a competitive advantage to exchanges.2804 Specifically, the Commission noted that the Plan states that an entity would be assessed exactly the same amount for a given level of activity whether it acted as an ATS or an exchange. However, FINRA would be charged fees based on the market share of off-exchange trading. ATSs, which are FINRA members, would presumably pay a portion of the FINRA fee through their broker-dealer membership fees. In addition, ATSs would pay a fee for their market share, which is a portion of the total off-exchange market share. Therefore, ATS volume would effectively be charged once to the broker-dealer operating the ATS and a second time to FINRA, which would result in ATSs paying more than exchanges for the same level of activity. Ultimately, if the funding model disadvantages ATSs relative to exchanges, trading volume could migrate to exchanges in response, and ATSs could have incentives to register as exchanges as well. Additionally, the Commission discussed its belief that the Participation Fee2805 could discourage new exchange entrants or the registration of an ATS as an exchange, increasing the barriers to entry to becoming an exchange. However, the Commission also explained that because the funding model seems to charge ATSs more for their market share than exchanges, ATSs could pay relatively less for their market share as an exchange than as an ATS, countering this barrier to entry depending on the magnitudes of the two fee types.

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As described earlier,2806 the Participants propose to amend the manner in which market share will be calculated for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stock or OTC Equity Securities.2807 For such an association, its market share for purposes of qualifying for a particular tier in the funding model would not include the share volume reported to the national securities association by an ATS, as such share volume will be included in the market share calculation for that ATS. 2808 As discussed above in Section IV.F, the Commission is modifying the Plan as the Participants suggested.

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This modification reduces the potential for the Plan to charge ATSs more than similarly situated exchanges, but it may not alleviate all the fee differentials between ATSs and exchanges. As described above, 2809 these fee differentials may arise because message traffic to and from an ATS would generate fee obligations on the broker-dealer that sponsors the ATS, while exchanges incur almost no message traffic fees. Even with this modification, the Commission continues to believe that the Funding Model could provide a competitive advantage to exchanges over ATSs. However, the Commission is approving the Plan without further modification for the reasons discussed in Section IV.F, above.

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B. Allocation of Voting Rights and Fees

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In the Notice, the Commission recognized that the potential for a burden on competition and effects on competitors in the market for trading services could arise from provisions relating to the allocation and exercise of voting rights.2810 The Commission noted that the potential for concentration of influence over vote outcomes arises from proposed provisions to give one vote to each Plan Participant in an environment where some Participants are Affiliated SROs. Indeed, supermajority approval could be achieved through four of the 10 groups of Affiliated SROs and individual SROs, and majority approval could be achieved with just three such groups or individual SROs.2811 For example, the Participant groups with options exchanges could have the incentive to allocate a disproportionately low level of fees for options market share than for equity market share. The Commission noted that such an allocation could disadvantage competing Participants with only equities exchanges.

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The Commission also noted that the inclusion of all exchanges on the Operating Committee could give the Plan Participants opportunities and incentives to share information and coordinate strategies in ways that could reduce the competition among exchanges or could create a competitive advantage for exchanges over venues for off-exchange trading.2812 However, the Commission stated that it preliminarily believed that certain provisions of the Plan would limit these potential burdens on competition. In particular, the Plan includes provisions designed to limit the flow of information between the employees of the Plan Participants who serve as members of the Operating Committee and other employees of the Plan Participants.2813

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Additionally, the Commission agreed with the Plan’s assessment that some governance features of the Plan will limit adverse effects on competition in the market for trading services. These include provisions limiting the incentive and ability of Operating Committee members to serve the private interests of their employers, such as the rules regulating conflicts of interest. Moreover, the Commission explained that it may summarily abrogate and require the filing of Plan amendments that establish or change a fee in accordance with Rule 608(a)(1) and review such amendments in accordance with Rule 608(b)(2) of Regulation NMS, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Act.2814 In such a case, if the Commission chooses to approve such amendment, it would be by order and with such changes or subject to such conditions as the Commission may deem necessary or appropriate.2815

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Several commenters provided information relevant to the Commission’s analysis of the potential impact of the allocation of fees on competition. In particular, three commenters suggested that there was an inherent conflict of interest as the SROs were the only ones with votes, yet will be involved in the decision to allocate funding responsibility across SROs and broker-dealers.2816 Such comments relate to the influence of voting rights on the allocation of fees to exchanges (SROs) compared to ATSs and internalizers (broker-dealers). The Commission notes also that certain EMSAC discussions recognized conflicts in the market for trading services.2817

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The Commission believes that the concerns expressed in the comments and the EMSAC discussions are consistent with the Commission’s discussion and analysis of the potential impacts in the Notice. The Commission recognized in the Notice that bloc voting could create a competitive advantage for exchanges over trading venues for off-exchange trading. The commenters did not address the Commission’s discussion in the Notice of certain provisions in the Plan that would limit potential burdens on competition or of the role of the Commission in approving NMS Plan fee filings. The Commission notes that changes in the number of exchanges and in exchange groups since the Notice 2818 affect the potential influence of bloc voting because fewer SRO groups will be needed for approval or to block an approval.2819 Nonetheless, the Commission continues to believe that provisions in the Plan and Commission oversight of the allocation of fees could mitigate these concerns.2820

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(2) Costs of Compliance

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In the Notice, the Commission explained that because all Participants but one compete in the market for trading services, the ability of affiliates to vote as a group could in principle allow a few large Participant groups to influence the outcome of competition in the market for trading services by making various decisions that can alter the costs of one set of competitors more than another set.2821 In addition, the Commission discussed the fact that the Plan calls for profits to be distributed equally among Participants, which could advantage smaller exchanges during profitable years and disadvantage smaller exchanges during loss years.2822

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The Commission explained that generally, smaller competitors could have implementation and ongoing costs of compliance that are disproportionate relative to their size. It noted that, to lessen the impact of funding the Central Repository on smaller exchanges and ATSs, the Plan would apply a tiered funding model that charges the smallest exchanges and ATSs the lowest fees. Likewise, the Plan would apply a tiered funding model that would charge the smallest broker-dealers, including liquidity suppliers, the lowest fees. However, the Commission noted that the Plan does not indicate whether off-exchange liquidity providers would pay fees similar to similarly-sized ATSs and exchanges. This is important because, as described earlier, broker-dealers internalizing orders off exchanges would only be allocated fees based on message traffic, whereas orders routed to ATSs and exchanges lead to broker-dealer fees based on message traffic and ATS or exchange fees based on market share. If these fees are even partially passed on to customers, then the cost differentials that result might create incentives for broker-dealers to route order flow to those broker-dealers who internalize in order to minimize costs, creating a potential conflict of interest with broker-dealers’ investor customers.2823

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The Commission discussed the fact that the Plan provides that the Technical Specifications will not be finalized until after the selection of a Plan Processor, which will not occur until after any decision by the Commission to approve the Plan. The Commission recognized that the costs of compliance associated with future technical choices or the selection of the Plan Processor could exacerbate the relative cost differential across competitors. However, the Commission preliminarily believed that the governance provisions of the Plan and Commission oversight could help to mitigate such effects in the market for trading services.

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The Commission received several comments relevant to its analysis of the potential impact of the costs of compliance on competition in the market for trading services. Specifically, as described earlier,2824 several commenters had concerns about the distribution of CAT profits among SROs, though none specifically discussed the potential differential impact on small versus large exchanges.2825 Further, the concerns of commenters and the EMSAC discussed in the Allocation of Fees section above also have implications for the Commission’s analysis.

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Regarding the distribution of CAT profits among SROs, as described earlier,2826 the Participants responded with a clarification that they expect to operate the CAT on a break-even basis and any surpluses would be treated as an operational reserve to offset fees in future payment. In addition, the Participants subsequently stated that the CAT LLC will seek to qualify for tax exempt status as a “business league.”2827

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The Commission has considered the comments and the EMSAC discussion regarding voting blocs and believes that these concerns do not alter the analysis in the Notice for the same reasons as described above.2828 Overall, the Commission continues to believe that the ability of affiliates to vote as a group could in principle allow a few large Participant groups to influence the outcome of competition in the market for trading services by making various decisions that alter the costs of one set of competitors more than another set, but that Commission oversight and the governance provisions of the Plan and could help to mitigate these effects.2829 Also, in light of the amendment to the Plan to reflect that the CAT LLC will seek to qualify for tax exempt status as a “business league,”2830 the Commission now believes that neither CAT profits or losses should affect competition in the market for trading services. The Commission maintains its conclusions regarding the impact of compliance costs on competition in the market for trading services, specifically, that compliance costs may be relatively more burdensome for small SROs, but that the tiered aspect of the funding model should serve to mitigate this. However, the Commission notes that the funding model continues to have uncertainties, and depends on the decisions of the Operating Committee.

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(3) Enhanced Surveillance and Deterrence

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In the Notice, the Commission also discussed its preliminary belief that the CAT NMS Plan could promote competition in the market for trading services through enhanced surveillance and the deterrence of violative behavior that could inhibit competition.2831 Should the Plan deter violative behavior, passive liquidity suppliers, such as on or off-exchange market makers could increase profits as a result of reduced losses from others’ violative behavior. This increase in profits could encourage new entrants or could spark greater competition, which would reduce transaction costs for investors. For example, if the Plan facilitates surveillance improvements that deter spoofing, the Commission stated that it could increase incentives to provide liquidity and promote lower transaction costs for investors, particularly in stocks that may lack a critical mass of competing liquidity providers or that could be targets for violative trading behavior.

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The Commission did not receive comments related to its economic analysis on enhanced surveillance and deterrence of violative behavior affecting competition in the market for trading services. Therefore, the Commission continues to believe that the CAT NMS Plan could promote competition in the market for trading services through enhanced surveillance and the deterrence of violative behavior that could inhibit competition.

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b. Market for Broker-Dealer Services

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In the Notice, the Commission analyzed the effect of the CAT NMS Plan on the market for broker-dealer services.2832 The Commission stated that it preliminarily believed that the costs of broker-dealers’ compliance, particularly the cost to report order events to the Central Repository, would differ substantially between broker-dealers and might affect competition between smaller and larger broker-dealers. The Commission also noted that broker-dealers that outsource regulatory data reporting activities are expected to see their costs of regulatory data reporting increase, while broker-dealers that insource may see a decrease in their regulatory data reporting costs.2833 The Commission stated that it preliminarily believed this dynamic might affect competition between Outsourcers (that tend to be smaller) and Insourcers (that tend to be larger), and might increase barriers to entry in some segments of this market.

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The Notice discussed the Plan’s assertion that it will have little to no adverse effect on competition between large broker-dealers, and will not materially disadvantage small broker-dealers relative to large broker-dealers. 2834 Regarding small broker-dealers, the Plan states, “…. [the allocation of costs to broker-dealers based on their contribution to market activity] may be significant for some small firms, and may even impact their business models materially . . . .” and that the Participants were sensitive to the burdens the Plan could impose on small broker-dealers, noting that such broker-dealers could incur minimal costs under their existing regulatory reporting requirements “because they are OATS-exempt or excluded broker-dealers or limited purpose broker-dealers.” The Commission noted that the CAT NMS Plan attempts to mitigate its impact on these broker-dealers by proposing to follow a cost allocation formula that should charge lower fees to smaller broker-dealers;2835 furthermore, Rule 613 provides them additional time to commence their reporting requirements.

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The Commission preliminarily agreed with the Plan’s general assessment of competition among broker-dealers, and also with the Plan’s assessment of differential effects on small versus large broker-dealers. The Commission agreed that the Plan’s funding model was an explicit source of financial obligation for broker-dealers and therefore an important feature to evaluate when considering potential differential effects of the Plan on competition in the market for broker-dealers. However, the Commission preliminarily believed that the segments of the market most likely to experience higher barriers to entry are those that currently have no data reporting requirements of the type the Plan requires and those that will involve more CAT Reporting obligations, such as the part of the broker-dealer market that involves connecting to exchanges, because of the technology infrastructure requirements and the potential to have to report several types of order events. Nonetheless, the Commission discussed its preliminary belief that any increases in the barriers to entry are justified because they are necessary in order for the CAT Data to include data from small broker-dealers. Specifically, the Commission noted that excluding small broker-dealers from reporting requirements would eliminate the collection of audit trail information from a segment of the broker-dealer community and would thus result in an audit trail that does not capture all orders by all participants in the securities markets.2836

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The Commission also recognized that the Plan could affect the current relative competitive positions of broker-dealers in the market for broker-dealer services because the economic impacts resulting from the Plan could benefit some broker-dealers and adversely affect others. However, the Commission stated that there is no clear reason to expect these impacts, should they occur, to decrease the current state of overall competition in the market for broker-dealer services so as to materially burden the price or quality of services received by investors on average.

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Regardless of the differential effects of the CAT NMS Plan on small versus large broker-dealers, the Commission discussed in the Notice that its preliminary view was that the CAT NMS Plan, in aggregate, will likely not reduce competition and efficiency in the overall market for broker-dealer services. The Commission explained that even if small broker-dealers potentially face a burden, this may not necessarily have an adverse effect on competition as a whole in the overall market for broker-dealer services. Under the Plan, broker-dealers could face high upfront costs to set up a processing environment to meet reporting responsibilities. As upfront, fixed costs, the burden could be greater for small broker-dealers. Instead of bearing these costs in-house, small broker-dealers could contract with outside vendors, which could lead to lower costs relative to not using a vendor for reporting services. Thus, the Commission explained that even firms that currently do not report to OATS, but will be CAT Reporters under the Plan, could face manageable upfront costs that permit them to continue in their line of business without a severe setback in their profitability.

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The Commission noted that a difficulty in assessing the likely impacts of the CAT NMS Plan on competition among broker-dealers is that competition in the markets for different broker-dealer services could be affected in different ways. If CAT costs represent a significant increase in overall business costs, the Plan could disadvantage broker-dealers who are CAT Reporters in the market segments that do not require CAT reporting. For example, broker-dealers that, in addition to providing services related to market transactions that are reportable to CAT, also compete to provide fixed-income order entry as a line of business may be at a relative disadvantage to competitors in the fixed-income market who do not provide broker-dealer services that are related to market activity that is reportable to CAT.

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The Commission recognized that the CAT NMS Plan could result in fewer broker-dealers providing specialized services that trigger CAT reporting obligations. The Commission also recognized, however, that fewer broker-dealers in a specialized segment of the market may not necessarily harm competition in that segment. In particular, the CAT compliance costs may be less of a relative burden for large broker-dealers who may provide a larger portfolio of specialized services to clients. This portfolio may buffer large broker-dealers from business risk associated with specialization, and so large broker-dealers are likely to maintain their presence in specialized market segments. If a sufficient number of large broker-dealers maintain their presence in specialized market segments, a net decrease in broker-dealers may not affect the competition in such market segments to a level in which the market segment offers fewer or lower quality services or higher prices.2837 However, the Commission recognized that negative effects on competition in specialized market segments could result if broker-dealers achieve a level of market concentration necessary to adversely affect prices for investors.

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The Commission received a few comment letters regarding its analysis of the effect of the Plan on the market for broker-dealer services. As previously described,2838 the Commission received one comment that noted that message traffic tiers could place a larger burden on market makers of liquid securities and a lower burden on liquidity takers.2839 In addition, one commenter noted that the current phased implementation schedule poses risks to clearing firms who will have to support both large and small broker-dealers during CAT implementation, incurring more CAT implementation costs than broker-dealers that do not have introducing broker-dealers.2840 Another comment estimated that CAT reporting costs, even at a $5,000 per month minimum, could reach 15% or more of revenue for a subset of small broker-dealers that are currently OATS exempt.2841 The commenter further stated that the Plan would have the greatest proportionate burden for those firms, which have the smallest justification for regulatory concern2842 and expressed concern regarding the ability for certain firms to say in business, stating that the Plan would “destroy the business model and profitability” of such firms.

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The Participants’ response letter addressed comments related to the market for broker-dealer services. With regards to the funding model tiers placing a larger burden on market makers of liquid securities, the Participants did not comment on the relative burden, but argued that a fixed-fee funding model would reduce the disincentives to provide liquidity to the market and would lead to fewer market distortions than a strictly variable funding model. 2843 With regards to the phased implementation schedule, the Participants noted that small broker-dealers may voluntarily begin reporting within two years instead of the required three years, 2844 but did not address whether this poses risks for clearing firms supporting both large and small broker-dealers. The Participants also did not address the relative burden on OATS-exempt broker-dealers.

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In response to these comments, the Commission has revised its economic analysis of the effect of the Plan on the market for broker-dealer services. First, the Commission now recognizes the potential differential effect on those broker-dealers that engage in market making in liquid stocks versus illiquid stocks and on those broker-dealers that engage in liquidity taking strategies versus those that engage in other strategies. The Commission believes that this differential effect could result in broker-dealers altering their activities, which could have the second order effects described above,2845 and could change the level of competition in certain market segments, such as those that specialize in providing services in more liquid securities. However, the Commission believes that services in liquid securities is the most competitive segment in the broker-dealer industry and therefore, does not believe that effects on competition would be material. In particular, based on Commission Staff experience, the Commission understands that quote competition in liquid securities comes from market makers on many exchanges, over-the-counter market makers, and customers who post quotations. These securities trade on one penny spreads and have deep order books. Further, consistent with the Participants’ Response Letter II, the tiered nature of the funding model effectively fixes the fees. In highly competitive markets, fixed fees should not affect prices. Therefore, the highly competitive liquid securities markets should remain liquid and highly competitive under the Plan, despite the fees related to message traffic.

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The Commission also agrees with the comment that certain broker-dealers could face a disproportionately large burden of costs from reporting, even as high as 15% of revenue as the commenter noted, and already recognized this possibility in the economic analysis in the Notice. However, the Commission is not revising its conclusion that it is necessary for even the smallest broker-dealers to report to CAT. Specifically, the Commission believes that excluding certain broker-dealers from reporting requirements would result in an audit trail that does not capture all orders by all participants in the securities markets, which could incentivize prospective wrongdoers to utilize these firms to evade regulatory oversight.

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With regards to competition, the Commission continues to believe that even if regulatory burdens from CAT reduce the number of small broker-dealers in specialized segments, overall competition in those segments may not be harmed.

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With regards to the comment on relative costs for clearing firms supporting large and small brokers during CAT implementation, the Commission acknowledges the costs of reporting to duplicative systems, and the relatively high costs to introducing broker-dealers. However, it is not clear why the additional costs to clearing firms servicing other broker-dealers would not be passed along to small broker-dealers—the impact of which has already been discussed. As such, the Commission does not believe the impact on clearing firms due to the phased implementation schedule is sufficiently large to affect competition in this market, and is not changing the Economic Analysis as it relates to costs for clearing services.

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The Commission does not believe that the modifications to the funding model described above will affect the allocation of fees or the relative compliance costs among broker-dealers. 2846 Overall, the Commission continues to believe that the CAT NMS Plan, in aggregate, would likely not reduce competition and efficiency in the overall market for broker-dealer services. Even if small broker-dealers, broker-dealers of liquid securities, or clearing firms of large and small broker-dealers potentially face a relatively high burden, this may not necessarily have an adverse effect on competition as a whole in the overall market for broker-dealer services, as the Commission explained in the Notice.

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c. Market for Regulatory Services

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In the Notice, the Commission discussed its preliminary conclusion that the Plan could provide opportunities for increased competition in the market to provide regulatory services.2847 The Commission noted that SROs compete to provide regulatory services in at least two ways. First, because SROs are responsible for regulating trading within venues they operate, their regulatory services are bundled with their operation of the venue. Consequently, for a broker-dealer, selecting a trading venue also entails the selection of a provider of regulatory services surrounding the trading activity. Second, SROs could provide this supervision not only for their own trading venues, but for other SROs’ trading venues as well through the use of Regulatory Service Agreements or a plan approved pursuant to Rule 17d-2 under the Exchange Act.2848 Consequently, SROs compete to provide regulatory services to trading venues they do not operate. The market for regulatory services in the equity and options markets currently has one dominant competitor, FINRA.

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In the Notice, the Commission noted that under the Plan, designated regulatory Staff from all of the SROs would have access to CAT Data, which would reduce the differences in data access across SROs.2849 This in turn could reduce barriers to entry in providing regulatory services because data will be centralized and standardized, possibly reducing economies of scale in performing surveillance activities. Furthermore, because some types of previously infeasible surveillance will become possible with the availability of additional data, the Commission believes that SROs will have greater opportunities to innovate in the type of surveillance that is performed, and the efficiency with which it is performed. In addition, as Rule 613(a)(3)(iv) requires, SROs will implement new or updated surveillance within 14 months after effectiveness of the CAT NMS Plan,2850 and thus any SRO could reconsider its approach to outsourcing its regulatory services and whether it wants to compete to provide regulatory services to others.

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While the Commission did not receive any comments addressing the effects of the CAT NMS Plan on the market for regulatory services, nor was the issue addressed in the Participants’ response, the Commission believes that certain EMSAC discussions are relevant to its analysis of competition in the market for regulatory services. In particular, the discussions regarding the EMSAC draft recommendation that the Commission should formalize by Rule the centralization of common regulatory functions across SROs into a single regulator reveal other potential considerations. 2851 In particular, the EMSAC subcommittee on Trading Venues opined that some regulatory activities are duplicative and needlessly complex because they are dispersed across SROs.2852 Further, the subcommittee argued that CAT will increase that duplicative regulatory oversight. In response to the EMSAC discussions, one commenter pointed out benefits in having competition between regulators.2853 This commenter explained that CAT Data could open up new frontiers for regulation that competition between multiple SROs could leverage off of.

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The Commission recognizes that increased competition in the market for regulatory services could create duplication of regulations, as the EMSAC discussed. But, ultimately, the Commission’s conclusions related to competition—namely, that the Plan will provide opportunities for increased competition in the market to provide regulatory services—are unchanged from the Notice. The Commission recognizes, however, the uncertainty of whether EMSAC will make a formal recommendation to the Commission and whether and how the Commission would act with respect to such a recommendation.

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d. Market for Regulatory Data Reporting Services

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In the Notice, the Commission analyzed the effect of the CAT NMS Plan on competition in the market for data reporting services with a focus on its impact on the costs incurred by broker-dealers to comply with the Plan.2854 As discussed in the Costs section above, the Commission preliminarily believed that many broker-dealers, particularly smaller broker-dealers, would fulfill their CAT reporting obligations by outsourcing to service bureaus and that the fees charged by the service bureaus would be a major cost driver for these broker-dealers. Further, these fees would factor into the increase in barriers to entry in the market for broker-dealer services.2855 Therefore, the Commission preliminarily believed that any effects on competition in the market for regulatory data reporting services could have a significant effect on the costs incurred by broker-dealers in complying with the CAT NMS Plan.

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The Plan provided information on broker-dealers’ use of third-party service providers to accomplish current regulatory data reporting. The Plan noted that while some broker-dealers perform their regulatory data reporting in-house, others outsource this activity. As noted in the Costs section of the Plan,2856 the Commission understands that most firms outsource the bulk of their regulatory data reporting to third-party firms. The Commission preliminarily believed that the competition in the market to provide data reporting services is a product of firms choosing to perform this activity in-house or to outsource it based on a number of considerations including cost, with some firms choosing to outsource this activity across multiple service providers.

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The market for regulatory data reporting services is currently characterized by bundling, high switching costs, and barriers to entry. First, service bureaus often bundle regulatory data reporting services with an order-handling system service that provides broker-dealers with market access and order routing capabilities.2857 Additionally, they sometimes bundle regulatory data reporting services with trade clearing services. Second, switching costs for service bureaus may be high and involve complex onboarding processes and requirements. Furthermore, systems between service bureaus may be disparate, and switching service providers may require different or updated client documentation. Difficulty switching between service providers could limit the competition among service bureaus to provide data reporting services, and impact the costs that Outsourcers incur to secure regulatory data reporting services. Third, high information technology (“IT”) infrastructure costs also give rise to barriers to entry, which could slow the entry of new market participants into this market. Despite this, the Commission explained that based on information from broker-dealer discussions arranged by Financial Information Forum it preliminarily believed that the market for regulatory data reporting services is generally expanding and the trend is for more, not less, outsourcing.2858

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In the Notice, the Commission discussed its preliminary belief that the Plan could alter the competitive landscape in the market for data reporting services in several ways. First, the Plan could increase the demand for data reporting services by requiring reporting by broker-dealers that may have previously been exempt due to size under individual SRO rules.2859 Because more broker-dealers would be required to report regulatory data under the Plan, the Commission preliminarily believed there could be an opportunity for increased competition in this market which might benefit all Outsourcers by reducing costs or increasing innovation. However, the increase in demand for data reporting services could serve to entrench existing providers if they capture a large share of newly created demand; this could lead to relatively higher costs for broker-dealers than they would face in a more competitive market. The potential increase in demand for data reporting services also could impact the capacity of already existing service providers to meet this increase in demand, and this in turn could have implications for competition and pricing in the market for data reporting services. Considering the barriers to entry that characterize the market for data reporting services and this potential increase in demand, service bureaus could have less incentive to compete for broker-dealer clients because these clients are no longer scarce, and as such, the CAT NMS Plan could result in a decline in the competition for data reporting services. It is possible that broker-dealers seeking to establish relationships with service bureaus could have trouble securing them because of the need to on-board many broker-dealers at once, especially if the service bureaus have limited on-boarding capacity. In the short-run these capacity constraints and the high demand could increase the costs of reporting through a service bureau. However, the two year implementation period for large broker-dealers and three year period for small broker-dealers could alleviate the reduction in competition due to the onboarding capacity strain because current service bureaus have time to increase their on-boarding capacity and new entrants have time to build the necessary IT infrastructure and a client base.

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Second, the Commission discussed in the Notice how the CAT NMS Plan could dramatically change the pool of firms demanding data reporting services, which would be skewed toward firms that are smaller and on average costlier to service, which could result in higher prices that could eventually be passed onto investors. In addition to small and medium sized broker-dealers that previously self-reported data to SROs, who now would be required to report, the CAT NMS Plan would also result in other broker-dealers having data reporting responsibilities. The Commission preliminarily believed that these broker-dealers would predominantly be small. Because the Plan would require additional elements in regulatory data, particularly customer data, some broker-dealers that currently self-report could no longer find it economically feasible to do so.

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Third, in addition to possibly increasing demand for data reporting services, the Commission discussed how the CAT NMS Plan may have a mixed effect on the number of firms offering data reporting services. This could impact the competitiveness of this market, and affect the costs broker-dealers bear in securing these services. On one hand, the number of firms offering data reporting services could decrease, because the need to secure PII might increase the likelihood of liability and litigation risks in the event of a security breach.2860 On the other hand, it is possible that the number of service bureaus offering data reporting services would increase. New reporting requirements for broker-dealers could create opportunities for new entrants to meet this demand. This could increase capacity and result in innovation in providing these services, which could benefit broker-dealers needing data reporting services by potentially reducing reporting costs, or at least reducing the potential for cost increases. Lower reporting costs for broker-dealers could in turn benefit the investors who are serviced by these broker-dealers, through reduced costs.

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Fourth, the Commission discussed how the Plan could decrease the demand for data reporting services. Many broker-dealers currently pay service bureaus to fulfill their regulatory data reporting; this may be because these broker-dealers find it would be more expensive to handle the translation of their order management system data into fixed formats, such as is required for OATS. If the Plan Processor allows broker-dealers to send data to the Central Repository in the formats that they use for normal operations, in drop copies for example, these broker-dealers may no longer see a cost advantage in engaging the services of a regulatory data reporting service provider because one of the costs associated with regulatory data reporting—having to translate data into a fixed format—will have been eliminated.2861 These broker-dealers may then choose to insource their regulatory data reporting.

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The Commission preliminarily believed that this reduction in demand would not likely be realized and, if realized, would be unlikely to offset the increase in demand that would come from CAT reporters not currently subject to OATS reporting, who would now have reporting obligations. As noted in the Costs section of the Plan, of the 1,800 expected CAT Reporters, 868 do not currently report to OATS.2862 This meant that the Commission expected a large proportion of CAT Reporters may be broker-dealers that currently do not have a service bureau for regulatory data reporting but would choose to engage one to manage their CAT reporting responsibilities. This is more than the Commission’s estimate of 806 current outsourcing broker-dealers.2863 The Commission therefore noted that it is unlikely that the number of current Outsourcers that choose to become Insourcers would be larger than the number of non-OATS reporters that would elect to outsource. As a result, demand is more likely to increase. Further, the Commission explained that the proposed requirement for CAT reports to use listing exchange symbology could require pre-report data processing even if the Plan Processor allows for the receipt of reports in the formats that broker-dealers use for normal operations. As a result, the Commission explained that the CAT NMS Plan is unlikely to eliminate the costs of processing data prior to reporting that data to the Central Repository.

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The Commission continues to believe that it is possible that the Plan would increase the demand for data reporting services by requiring regulatory data reporting by broker-dealers that may have previously been exempt due to size under individual SRO rules. Furthermore, the Commission continues to believe that the CAT NMS Plan may have a mixed effect on the number of firms offering data reporting services; this could impact the competitiveness of this market, and affect the costs broker-dealers bear in securing these services. Commenters did not provide any additional information or analysis that the Commission believes would warrant changes to its analysis or conclusions as set out in the Notice, nor does the Commission believe that the modifications to the Plan warrant changes to this aspect of the economic analysis.

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pubdate: November 15, 2016 effdate: N/A +

2. Efficiency

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Efficiency, Competition, and Capital Formation, Efficiency + Compliance User: Self-Regulatory Organization + Keywords: + Effect of the Plan on Efficiency, + CAT Reporters, + SRO, + CAT NMS plan, + Plan Processor, + Operating Committee, + +

In the Notice, the Commission analyzed the potential impact of the Plan on efficiency.2864 The Plan included a discussion of certain efficiency effects anticipated if the Plan is approved; as part of its economic analysis, the Commission discussed these effects, as well as additional effects anticipated by the Commission. The Commission discussed its preliminary belief that the Plan would likely result in significant improvements in efficiency related to how regulatory data is collected and used. The Commission also explained that the Plan could result in improvements in market efficiency by deterring violative activity. However, the Commission noted that any potential gains to efficiency from the retirement of duplicative and outdated reporting systems would be delayed for up to two and a half years and the interim period of increased duplicative reporting would impose significant financial burden on Industry Members.

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Overall, after considering comments, Participants’ responses, and modifications to the Plan, the Commission is updating and revising its economic analysis on efficiency. However, the revisions in the analysis do not impact the Commission’s broad conclusions. The Commission continues to believe that the Plan will generally improve the efficiency of regulatory activities and promote market efficiency.

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a. Effect of the Plan on Efficiency

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Building off the discussion in the Plan, in the Notice, the Commission analyzed the effect of the Plan on the efficiency of detecting violative behavior through examinations and enforcement, on the efficiency of surveillance, on market efficiency through deterrence of violative behavior, on operational efficiency of CAT Reporters, and on efficiencies through reduced ad hoc data requests and quicker access to data.2865

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The Commission explained that currently, regulators’ ability to efficiently supervise and surveil market participants and carry out their enforcement responsibilities is hindered by limitations in regulatory data.2866 Second, regulators’ ability to efficiently perform cross-market surveillance is also hindered by limitations in regulatory data.2867 Finally, there are a number of other inefficiencies associated with the current system of regulatory data collection. These include: delays in data availability to regulators; lack of direct access to data collected by other regulators results in numerous ad-hoc data requests; and the need for regulatory Staff to invest significant time and resources to reconciling disparate data sources.2868

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The Plan discussed a number of expected effects on efficiency such as: monitoring for rule violations; performing surveillance; and supporting fewer reporting systems. The Commission preliminarily agreed with the Plan’s assessments of the expected effects, and in addition, the Commission discussed how the Plan could also reduce violative behavior.

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First, the Plan concluded that SROs would experience improved efficiency in the detection of rule violations, particularly for violations that involve trading in multiple markets.2869 The Plan stated an expectation that SROs would need to expend fewer resources to detect violative cross-market activity, and such activity would be detected more quickly.2870 The Commission preliminarily agreed that the Plan would result in improvements in efficiency in the performance of examinations of market participants by SROs and the Commission. Improvements to data availability and access through the Central Repository could allow SROs and the Commission to more efficiently identify market participants for examination.2871 The Commission also agreed that the Plan would improve the efficiency of enforcement investigations. If regulatory data access improves, the quality and quantity of enforcement investigations could increase through improvements to the comprehensiveness and timeliness of data used to support investigations.

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Second, the Plan stated that the Participants believe that the CAT NMS Plan could improve the efficiency of surveillance.2872 This improvement is due to a number of factors including: increased surveillance capacity; improved system speed, which would result in more efficient data analysis; and a reduction in surveillance system downtime.2873 The Plan also cited reduced monitoring costs,2874 but the Commission noted that estimates in the Costs section of the Plan predicted increased surveillance costs if the Plan is approved. The increased surveillance costs predicted in the Plan could reflect more effective surveillance. Although the Plan did not discuss the cost-benefit tradeoff of increased surveillance directly, the Commission noted that achieving the level of surveillance that would be possible if the Plan is approved would likely be more expensive using currently available data sources, if it is achievable at all, due to the inefficiencies that currently exist in delivering regulatory supervision, which are discussed previously.2875

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Third, the Plan also discussed increased efficiency due to the reduction in redundant reporting systems,2876 specifically increases in system standardization, which would allow consolidation of resources, including the sunsetting of legacy reporting systems and processes, as well as consolidated data processing envisioned from the Plan.2877 However, the Commission noted that it is aware that the Plan calls for a period of years during which Industry Members would face duplicative reporting systems before older regulatory data reporting systems are retired.2878 This period of duplicative reporting would impose a considerable financial burden on Industry Members.2879

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The Plan also discussed two other possible efficiency improvements: a reduction in ad-hoc data requests and more fulsome access to raw data. While the Plan anticipated a decrease in ad-hoc data requests as a result of Plan-related data improvements, the Commission noted some types of ad-hoc data requests, such as, data requests for later-stage investigations might increase.2880 The Commission recognized that these increases in data requests would partially offset the efficiency improvements from the reduction in data requests noted above, but the Commission preliminarily believed that the Plan would reduce the total number of data requests.2881 Furthermore, the Plan anticipated more robust access to unprocessed regulatory data, which could improve the efficiency with which SROs and the Commission could respond to market events where they previously had to submit data requests and wait for data validation procedures to be completed before accessing data collected by other regulators.2882

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In addition to the potential benefits to efficiency discussed in the Plan, the Commission also discussed that CAT may reduce violative behavior. Improvements in the efficiency of market surveillance, investigations, and enforcement could directly reduce the amount of violative behavior by identifying and penalizing market participants who violate rules and who would more easily go undetected in the current regime. Furthermore, market participants’ awareness regarding improvements in the efficiency of market surveillance, investigations, and enforcement (or perceptions thereof), and the resultant increase in the probability of incurring a costly penalty for violative behavior, could deter violative behavior.2883 Reductions in violative behavior through both of these economic channels could improve market efficiency.2884

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The Commission received a comment on the cost estimates of the CAT NMS Plan and its effects on increasing the efficiency of surveillance activities. The commenter agreed with the Commission’s findings that the estimate of total implementation cost was accurate, however, the commenter stated that it is implausible that CAT would reduce surveillance costs by more than 40% while simultaneously improving the effectiveness of surveillance.2885

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The Commission also received a comment on whether the CAT NMS Plan would increase the efficiency in detecting rule violations and subsequent gains to market efficiency due to the reduction in violative behavior.2886 The commenter disagreed with the Commission’s analysis of the Plan’s effect on market efficiency due to the reductions in violative behavior, arguing that effectively and efficiently deterring violative behavior should be done by using a system other than the CAT, preferably the commenter’s proposed system which involves the use of real-time analytics.2887

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The Commission also received numerous comments on whether the retirement of duplicative reporting systems and the reduction in ad-hoc data requests would generate gains to efficiency. One commenter disagreed with the Commission’s analysis of the effect of the Plan on the reduction in duplicative reporting and ad-hoc requests.2888 Three commenters indicated that the period of duplicative reporting could also reduce the expected benefits of CAT.2889 One of these commenters suggested that the Plan’s timeline for the retirement of duplicative reporting does not provide the SROs with sufficient incentives to migrate surveillances to CAT, implying that there could be a reduction in the efficiency of surveillance.2890 Another commenter emphasized the inherent complexities of dual reporting, and the impact that this would have on the efficiency and effectiveness of reporting during this period.2891

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While the Participants did not directly respond to comments regarding efficiency, they did state that they expect cost savings as a result of moving surveillance operations from existing systems to the CAT.2892

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The Commission considered these comments, the Participants’ response, and modifications to the Plan, and is revising its analysis of the inefficiencies associated with duplicative reporting. The Commission is not revising its analysis or conclusions with regard to other aspects of efficiency.

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First, the Commission disagrees with the commenter who raised concerns about the surveillance cost estimates. As discussed above, all 19 SROs2893 responded to the Participants Study regarding cost estimates, and most SROs have experience collecting audit trail data as well as expertise in their business practices. Furthermore, the commenter provided no reasoning or estimates to indicate that the Participants are unable to reasonably estimate their current data reporting costs, and the Participants’ Response Letter II confirms the anticipated cost savings described in the Notice. Therefore, the Commission continues to believe that the cost estimates in the Notice are accurate, and that the CAT NMS Plan would improve the efficiency of surveillance by fostering increased surveillance capacity; improved system speed, which would result in more efficient data analysis; and a reduction in surveillance downtime.2894

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Second, the Commission disagrees with the commenter that stated that the CAT Plan would not improve market efficiency due to reductions in violative behavior, and that the Plan should adopt real-time analytics. The Commission continues to believe that real-time analytics are not necessarily required to reduce violative behavior. Analysis of raw data on T+1 and corrected data after T+3 can reveal violative activity nonetheless.

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Third, regarding the commenter who seems to imply that the Commission attributes savings in surveillance costs solely to the reduction in ad-hoc data requests, which is not the case. As discussed in the Notice, the Commission believes that it is possible that Participants and the Commission could realize efficiencies from having data standardized and centrally hosted that could allow them to handle fewer ad hoc data requests. In addition, the Plan could allow Participants and the Commission to automate some surveillance processes that may currently be labor intensive or processed on legacy systems, which could reduce costs because the primary driver of these costs is FTE costs.2895

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The Commission agrees with the commenters that suggested that the period of duplicative reporting could be associated with reduced benefits from the Plan. In particular, the Commission now acknowledges that in addition to involving significant costs, the period of duplicative reporting would be associated with reduced benefits in the form of potentially lower data quality and potential loss of efficiency and effectiveness of reporting in the short-term. Examples of losses in efficiency could include conflicting field definitions in CAT and OATS; differences in required corrections to the same errors across two different systems; and contention for the same reporting resources applied across two or more systems.2896

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Regarding the comment that SROs lack incentives to retire duplicative reporting systems, the Commission notes that the requirement that SROs implement surveillance using the Central Repository within 14 months of the Effective Date limits the incentives for the SROs to delay retiring duplicative systems because they will gain the capability of performing surveillance within CAT. However, the Commission acknowledges that small Industry Members will not yet be reporting to the Central Repository when the SROs gain this capacity. Consequently, SROs will by necessity be performing surveillance on data other than CAT Data until small Industry Members are reporting to the Central Repository and their CAT Data quality allows adequate surveillance using CAT Data. As discussed in Participants’ Response Letter II, as the Participants face significant costs in running duplicative systems, and to the extent that such systems are extraneous for regulatory purposes, the Participants would desire to cease their operation.2897 Consequently, the Commission believes the SROs are incented to retire these duplicative systems and move surveillance solely to the Central Repository as quickly as feasible.

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After considering these comments and responses from the Participants, potential changes in the Plan, the Commission has updated its analysis of the effects of duplicative reporting on efficiency. First, the Commission has updated its estimate of the expected duplicative reporting period and now believes that it is likely to be shorter than estimated in the Notice.2898 This would potentially result in the Commission and SROs realizing gains to efficiency earlier than what was stated in the Notice. Second, as discussed previously, the Commission now acknowledges that duplicative reporting may not result in efficiencies with duplicative reporting costs of less than $1.7 billion.2899 Furthermore, the Commission now believes that the period of duplicative reporting may create inefficiencies, such as contention for the same reporting resources to correct errors across two different systems, and that might reduce the quality of data being reporting to CAT during the period of duplicative reporting.2900 Regardless of the loss in efficiency due to duplicative reporting, the Commission nonetheless believes that the Plan will result in long-term gains to efficiency for the reasons stated earlier in this Section.

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b. Effects of Certain Costs of the Plan on Efficiency

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In the Notice, the Commission discussed the fact that the Plan anticipated that the implementation of CAT will introduce new costs related to data mapping and data dictionary creation, and add new expenditures, such as staff time for compliance with encryption requirements associated with the transmission of PII.2901 While the Commission recognized these are additional activities and costs that the Plan would require, it viewed these as additional costs rather than inefficiencies. While the Commission could not quantify the magnitude of these costs, it viewed these as having a relatively minor contribution to overall costs of the Plan because they impose technical requirements on systems that the industry will need to significantly alter to comply with other provisions in the Plan.2902 Commenters did not provide any additional information or analysis that the Commission believes would warrant changes to its analysis or conclusions regarding these costs and therefore continues to view these as costs rather than inefficiencies

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Additionally, the Commission discussed the Plan’s statement that there could be a market inefficiency effect related to the funding proposal for the Plan. The Plan indicated that the Funding Model for the Plan could create disincentives for the provision of liquidity, which could impair market quality and increase the costs to investors to transact.2903 The Commission discussed in the Notice two ways that the cost allocation methodology could negatively impact efficiency. First, data reporters could respond to the Funding Model by taking actions to limit their fee payments, such as exiting the market or reducing their activity levels. Second, the funding proposal for the CAT NMS Plan to align fees closely with the amounts that are required to cover costs could create incentives for the Plan Processor or Operating Committee to propose a cost schedule for the CAT that matches a given fee schedule, but is not the most efficient cost schedule for meeting CAT’s regulatory objectives.

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The Commission received a comment about the concerns the funding proposal in the Plan poses for liquidity provision. 2904 This comment echoed the concerns the Commission discussed in the Notice. The Participants responded to this comment and noted that they actively considered the market quality concerns in devising the proposed funding model, and one of the reasons for proposing a tiered, fixed fee funding model was to limit the disincentives to providing liquidity to the market. In particular, the Participants believed that a funding model based on message volume was far more likely to affect market behavior.2905

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In response to this comment, the Commission notes that it is amending the Plan to require the Participants to provide the Commission with a report on the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity 36 months after effectiveness of the Plan.2906 While the Commission continues to recognize that negative effects on efficiency could result from the Funding Model, for the reasons discussed in Section IV.F above, the Commission is approving the Funding Model as amended by the Commission.2907

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pubdate: November 15, 2016 effdate: N/A +

3. Capital Formation

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Efficiency, Competition, and Capital Formation, Capital Formation + Compliance User: Self-Regulatory Organization + Keywords: + Enhanced Investor Protection, + CAT NMS plan, + Data Security, + CAT governance, + Central Repository, + +

a. Enhanced Investor Protection

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In the Notice, the Commission examined the potential effects on capital formation discussed in the Plan in addition to other potential effects on capital formation that the Commission believed could result if the Plan is approved.2908 The Plan’s analysis regarding capital formation concluded that the Plan would generally not have a deleterious effect on capital formation and could bolster capital formation that could lead to increased investor participation in capital markets. The Commission agreed with the rationale of the Plan’s analysis, but addressed some additional considerations regarding the scope of the Plan’s effects on capital formation, as well as the channels through which these effects could accrue. The Commission preliminarily believed that the Plan would have a modest positive effect on capital formation.2909

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The Plan’s analysis stated that the Plan may improve capital formation by improving investor confidence in the market due to improvements in surveillance. As discussed previously,2910 in the Notice the Commission discussed its preliminary belief that the Plan would provide substantial enhancements to investor protection through improvements to surveillance, particularly for cross-market trading.2911 Improved surveillance, as well as other regulatory activities, could decrease the rate of violative activity in the market, reducing investor losses due to violative activity. If investors expect fewer losses, this may increase capital formation by facilitating a market where investors could be more likely to mobilize capital into securities markets.

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In the Notice, the Commission discussed its preliminary belief that the CAT NMS Plan could provide additional increases to capital formation in the form of improved allocative efficiency of existing capital within the industry. If investors perceive an environment of improved surveillance, they could be willing to allocate additional capital to liquidity provision or other activities that increase market efficiency. Further, an environment of improved surveillance could result in the reduction of capital allocated to violative activities that impose costs on other market participants, because these market participants may no longer find it desirable to engage in behavior that exposes them to regulatory action.

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The Commission explained, however, that market participants engaging in allowable activity that might be subject to additional regulatory scrutiny under the Plan could allocate capital to other activities to avoid this scrutiny, because even when activity is not violative, interacting with regulators can be costly for market participants.2912 This reallocation away from allowable activity to avoid regulatory interactions could result in capital allocations that are less efficient.

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The Plan stated that the costs from CAT are unlikely to deter investor participation in the capital markets.2913 The Commission noted, however, that the final costs of the Plan and the Funding Model for CAT are not wholly certain at this time; thus, it is the Commission’s view that there is uncertainty concerning the extent to which investors will bear Plan costs and consequently to what extent Plan costs could affect investors’ allocation of capital. Despite these potential costs to investors, the Commission noted that investors could believe that any additional benefits they receive from the potential of a market that is more effectively regulated justify any additional costs they pay to access capital markets.

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The Commission received several comments on whether the Plan would improve capital formation through investor protection against abusive behavior, and by fostering investor participation. One commenter stated that the Commission needs the CAT Plan not only to understand breakdowns in trading markets, but also to rid the markets of increasingly abusive trading practices. Doing this will protect investors, and foster investor participation, thereby fueling capital formation.2914 Another commenter disagreed with the Commission’s analysis and concluded that the Plan could adversely impact investors’ trust in the markets because the Plan lacks connection with real-world problems (i.e., huge investment losses can be accumulated within a split-second; market collapse does not take more than one day; abusive use of financial engineering techniques to synthetically create trades/derivatives to bypass controls).2915

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In response to the commenter who mentioned that the Commission needs the CAT Plan to not only understand breakdowns in trading markets, but also rid the markets of abusive trading practices, the Commission has noted previously that CAT Data would help regulators with analysis and reconstruction of market events, and also help regulators identify violative behavior and abusive trading through their enforcement investigations.2916

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The Commission also disagrees with the commenter who concluded that the Plan could adversely impact investors’ trust in the markets because the Plan lacks a connection with “real-world problems.” The Commission believes the Plan has a connection with these “real-world problems” because as stated above, CAT Data would help regulators analyze and reconstruct markets,2917 thereby helping them understand how split-second losses accumulate to investors and the underpinnings of market collapses. CAT Data would also help regulators with surveillance and investigation activities,2918 and potentially help them to understand the abusive use of financial engineering techniques. The Commission therefore believes that the benefits that CAT Data would provide regulators would also provide benefits to investors of a safer environment for allocating their capital and making financial decisions.

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Moreover, the changes to the Plan further support the Commission’s preliminary conclusions. Requiring Industry Members to report their LEI to the Central Repository if they have one should result in a greater ability for regulators to identify traders based on their Customer-IDs for the purposes of SRO surveillance. Potentially improved data completeness in terms of Customer-IDs could result in greater benefits to surveillance that would spillover to capital formation than stated in the Notice.

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b. Data Security

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In the Notice, the Commission agreed with the Plan’s assessment that data security concerns are unlikely to materially affect capital formation.2919 In its discussion of capital formation, the Plan recognized that data security concerns could potentially impact capital formation through market participants’ perception that sensitive proprietary data might be vulnerable in case of a data breach at the Central Repository. The Plan’s analysis discussed the security measures that are required by Rule 613 and the manner in which they have been implemented in the Plan. It concluded that these security measures are sufficient and that it is unlikely market participants would reduce their participation in markets in a manner that would affect capital formation. The Commission agreed that concerns regarding data security are unlikely to substantially affect capital formation, but that some uncertainty about the risks exist because of the variations in the potential security solutions and their resulting effectiveness.2920

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In the Notice, the Commission discussed how the consequences of a data breach, nonetheless, could be quite severe. A data breach could substantially harm market participants by exposing proprietary information, such as a proprietary trading strategy or the existence of a significant business relationship with either a counterparty or client. The Commission noted, however, that broker-dealers already bear such risks in transmitting regulatory data to SROs and the Commission. The Commission believed that the marginal increase in the risks to broker-dealers associated with a data breach would be unlikely to deter broker-dealers from participating in markets. Finally, the Commission noted that a data breach could potentially reveal PII of investors. To address the potential for harm to the investing public and the health of capital markets through such a breach, the Plan has enhanced requirements for security around PII. The Commission believed that the risk of a breach of PII data would not materially affect investors’ willingness to participate in markets because they already face these risks with PII shared with broker-dealers, though not in one centralized location.

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Several commenters wrote about data security, and the comments are summarized above in Section IV.D.6. Only one commenter discussed the effects of data security on capital formation. That commenter asserted that “[i]f investors perceive that the CAT NMS plan leaves their trading strategies and position information vulnerable to discovery and predatory use, interest in equity investing may decrease to the detriment of liquidity and, ultimately, capital formation.”2921 The Commission agrees that investors are sensitive to the protection of their data. The Plan amendments and Participants’ responses to comments provide more details about the required security provisions and more clarity on the applicability of Regulation SCI standards. The Commission believes that these changes should increase the security of CAT Data, and that concerns regarding data security are unlikely to affect capital formation substantially even though there may still be uncertainty regarding potential security solutions and their effectiveness.2922

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pubdate: November 15, 2016 effdate: N/A +

4. Related Considerations Affecting Competition, Efficiency and Capital Formation

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Efficiency, Competition, and Capital Formation, Related Considerations Affecting Competition, Efficiency and Capital Formation + Compliance User: Self-Regulatory Organization + Keywords: + Operating Committee, + CAT governance, + Plan Decision-Making Process, + +

The Commission in the Notice recognized that the Plan’s likely effects on competition, efficiency, and capital formation are dependent to some extent on the performance and decisions of the Plan Processor and the Operating Committee in implementing the Plan, and thus that there is necessarily some uncertainty in the Commission’s analysis.2923 The Commission noted that nonetheless, it believed that the Plan contains certain governance provisions, as well as provisions relating to the selection and removal of the Plan Processor, that mitigate this uncertainty by promoting decision-making that could, on balance, have positive effects on competition, efficiency, and capital formation.2924

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a. The Efficiency of the Plan

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(1) Plan Decision-Making Process

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The Commission in the Notice stated its preliminary belief that certain governance provisions in the Plan could create inefficiencies in the decision-making process, but that these inefficiencies are limited or exist to promote better decision-making. 2925 Specifically, the Notice stated that the Plan specified three types of voting protocols and when each protocol applies: unanimous voting (only in three circumstances), supermajority voting (in instances considered by the Participants to have a direct and significant impact on the functioning, management, and financing of the CAT system), or majority voting (other, routine matters that arise in the ordinary course of business; as a practical matter the default standard).2926 The Commission discussed how the Plan’s voting protocols balanced the efficiency of the decision-making process against the value of considering minority and dissenting opinions. Furthermore, the Commission stated its preliminary agreement with the Plan’s discussion of the need to balance efficiency in the voting protocols in the Plan and the Participants’ conclusion that the inefficiencies in the voting protocols in the Plan are limited enough to strike a balance between the inefficiencies of the decision-making process and the quality of the decisions.2927

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The Commission further noted that the Plan discusses the role of industry representation as part of the governance structure.2928 The Commission preliminarily agreed with the discussion in the Plan that including industry representation might result in a more efficiently designed CAT, but that an Advisory Committee also adds operational inefficiencies.2929 The Commission further stated its preliminary belief that as long as the Advisory Committee adds sufficiently useful information, the benefits from the Advisory Committee would justify any operational inefficiencies from the inclusion of the Advisory Committee.2930

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The Commission is not revising its analysis of the efficiency of the Plan’s decision-making process at this time. As discussed above, commenters provided information on concerns about current NMS Plan governance and made suggestions on how to more effectively include the Advisory Committee in decisions.2931 However, these commenters did not provide new insights into the efficiency of the decision-making process itself. As noted above, changes to plan governance to provide greater prominence to certain views could improve plan decision-making, to the extent that better-informed decisions would be superior decisions; on the other hand, larger or more diverse sets of voices could result in deadlocked or delayed decisions, which would impede the efficiency of the decision-making process under the CAT Plan. However, as noted above, the Commission is considering changes more broadly to NMS Plan governance, and any such changes may impact the CAT NMS Plan.2932

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(2) Level of Detail in the Plan

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The Commission in the Notice also considered an additional source of potential inefficiencies: minimum standards for particular provisions or solutions in Appendix D of the Plan, rather than a specification of the solutions themselves in the Plan.2933 The Commission stated that while this approach creates uncertainties surrounding the economic effects of the Plan in the approval process, it also means that the Operating Committee and/or Selection Committee would effectively decide upon the unspecified details when selecting the Plan Processor and when approving the Technical Specifications, and as a result could act much more quickly and at a potentially lower cost than if solutions were specified in the Plan.2934 In addition, the Commission explained why specifying details in the Technical Specifications instead of the Plan could make the Plan more agile and efficient in its ability to upgrade and improve the CAT Systems quickly.

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Several commenters sought to have certain definitions included in the Plan.2935 Two commenters sought to have the Plan amended to specify certain of the Technical Specifications.2936 Participants commented that incorporating Technical Specifications in the Plan itself would interfere with the development of these specifications by the Plan Processor, and that these items are better suited for the Technical Specifications than the Plan.2937 In a similar context, Participants also stated that subjecting Technical Specifications to a full filing process with the Commission would introduce significant delays in the process of developing the Technical Specifications, but that matters that are sufficiently significant to require a change to the Plan would be subjected to Commission review.2938

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The Commission believes that commenters’ requests that certain items be defined in the Plan are an implicit assertion that the Plan strikes the wrong balance with respect to the tradeoff identified in the Notice. In the Notice, the Commission was willing to accept the uncertainty created through the lack of definitions, in exchange for the benefits of permitting the relevant parties the flexibility to adopt the definitions or technical specifications at a later date, when the optimal approach to those issues might be more apparent, along with the flexibility to readily make changes to those items if challenges arise. By requesting that definitions or technical specifications be moved to the Plan, commenters advocate the opposite position: that it is acceptable to risk an inefficient definition in the Technical Specifications now, or to encounter delay or difficulty in changing it later, in exchange for added certainty in the definition or specifications as a part of the Plan approval process. The Commission disagrees. Given the technical nature of the technical specifications, and that the Plan does specify certain minimum standards that provide a floor and therefore certainty with respect to at least certain of the definitions and specifications, the Commission continues to believe that the existing process appropriately balances the need for certainty with the benefits of a flexible process going forward.

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(3) Implementation Efficiency

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In the Notice, the Commission recognized that provisions of the Plan should also promote efficiently implementing expansions to the CAT Data.2939 Appendix C of the Plan notes that the Plan Processor must ensure that the Central Repository’s technical infrastructure is scalable and adaptable.2940 The Commission explained that these provisions should reduce the costs and time needed for expansions to the Central Repository.

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Two commenters provided information relevant for the Commission’s analysis of the efficiency of the initial implementation of the Plan more broadly.2941 In particular, the commenters expressed concerns that the timeline for implementation, including the testing and publication and iterative reviews of the Technical Specifications, would not allow for efficient implementation, potentially affecting the quality of the data coming to CAT from the beginning of its operations.2942 One commenter stated that building in additional capacity and flexibility to expand CAT further over time will increase the scope of efficiencies and ancillary benefits, including long-term cost reductions, even if that additional capacity and flexibility are not absolutely necessary to meet minimum Plan requirements.2943 Other commenters asserted that the Plan Processor selection should occur before Commission approval of the Plan, because the selection could negate a significant amount of uncertainty regarding the ultimate effects of the Plan.2944

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Participants responded to the technical specifications point by stating that they recognize the benefit of iterative interactions between broker-dealers and the Plan Processor in terms of developing and executing final system specifications, which is why Appendix C of the Plan calls for the publication of iterative drafts, as necessary.2945 Participants responded to the comments regarding acceleration of Plan Processor selection by indicating that it would be infeasible to do so from a timing perspective; that the requirements of the CAT could change up until the point the Plan is approved, which could affect the selection process; and that selection is to be performed within two months of Plan effectiveness in any event.2946

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The Commission considered the comments and the Participants’ responses and now recognizes that the timeline for implementation can affect the efficiency of the initial implementation of the Plan. The timeline for implementation in the Plan includes a requirement for the Plan Processor to develop the Technical Specifications by publishing iterative drafts, as needed, and to publish the Technical Specifications one year before Industry Members are required to begin reporting data to the Central Repository, and to commence testing of connectivity and acceptance three months before Industry Members begin reporting data to the Central Repository.2947 The Plan has also been amended to require that the development of the Technical Specifications will begin no later than fifteen months before Industry Member reporting commences. Furthermore, the Plan has been amended to require that the CAT testing environment will be made available to Industry Members on a voluntary basis no later than six months prior to when Industry Members are required to report and that more coordinated, structured testing of the CAT system will begin no later than three months prior to when Industry Members are required to report data to CAT.2948

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The Commission believes that the modification to the Plan requiring development of Technical Specifications at least 15 months before reporting begins will ensure more advance notice to the Participants about specific functionalities of CAT, and that this could potentially mitigate inefficiency in the implementation of the Plan. Moreover, modifications to the Plan requiring that the CAT testing environment be made available to Industry Members before they begin reporting will provide additional time for Industry Members to test their reporting procedures for the CAT System prior to implementation. They will also further mitigate inefficiencies related to the implementation of the Plan.2949 Further, as explained below, the Commission understands that the Bids of the three remaining Bidders propose accepting existing messaging protocols (e.g., FIX), rather than requiring CAT Reporters to use a new format.2950 This reduces some of the uncertainty regarding implementation times because CAT Reporters may not need to build new systems to report data to the Central Repository.

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In response to the comment on building in additional capacity and flexibilities to expand further over time, the Commission believes that this comment is consistent with its analysis in the Notice that ensuring that the Central Repository’s technical infrastructure is scalable and adaptable should reduce the costs and time needed for future expansions. Further, the Commission believes that provisions in the Plan already address this issue.2951

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With respect to accelerating the selection of the Plan Processor, this could trade one potential inefficiency for another: whereas there could be greater certainty about the effects of the Plan by locking in certain choices in advance, locking in those choices could result in inefficiencies if modifications to the Plan in the approval process change the Plan Processor selection. As inefficiencies in the choice of the Plan Processor could persist for the length of the Plan Processor’s tenure, the Commission believes selecting the Plan Processor a short number of months after the approval of the Plan balances the need for expeditiously moving forward with implementation choices to provide sufficient time for implementation with the need to select the Plan Processor best positioned to achieve the regulatory benefits of the Plan.

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b. Selection and Removal of the Plan Processor

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In the Notice, the Commission discussed the CAT NMS Plan’s use of an “RFP” to select the Plan Processor that would design, build, and operate the Central Repository.2952 The winning bidder becomes the sole supplier of the operation of the Central Repository. The Commission stated its preliminary belief that this structure is necessary to achieve the benefits of a single consolidated source of regulatory data, but that the competitiveness of the selection process would thus influence the ultimate economic effect of the Plan.2953 The Commission further stated its preliminary belief that the selection process generally promotes competition, but that there are also a few potential limits on competition.2954 With respect to the Plan Processor’s behavior following selection, the Commission stated its preliminary belief that the threat of replacement of the Plan Processor could incentivize it to set costs and performance competitively, but that the high cost of replacing the Plan Processor could limit these incentives.2955 These are discussed further below.

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(1) Competitiveness of the Plan Processor Selection Process

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In the Notice, the Commission stated its belief that two elements determine the competitiveness of the bidding process: the voting process and the degree of transparency in the bidding process. The Commission discussed its preliminary belief that the Plan provisions relevant to these two factors could promote competition in the bidding process and limit the risk that the selection of the Plan Processor would be affected by a conflict of interest, thereby promoting better decision-making.2956 Specifically, the Commission noted that, in the voting process, there is “a residual risk in having an SRO among the bidders; it is possible that voting Participants would be biased for or against that SRO because they compete with that SRO in another market (and could gain a competitive advantage in that market by acting as Plan Processor) or because of repeated interactions with that SRO.”2957 Moreover, the Commission noted that “to the extent the Operating Committee has specific preferred solutions as to how the Plan should be implemented, the degree to which the Committee is transparent about those preferences in the bidding process would affect the competitiveness of that process”—but that “[t]he Commission has no reason to believe that the Operating Committee has preferred solutions beyond what is in the Plan that would significantly impact the competitiveness of the Plan Processor selection process.”2958

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One commenter stated that, rather than a competitive process for selection of the Plan Processor, the selection of FINRA would best promote efficiencies, as it appears to have the required technology mostly in place, or can easily adapt existing technology to CAT’s requirements; it already deals with the CAT Data; and it already regulates broker-dealers and ATSs that will submit data to the CAT.2959 The Participants responded that completing the competitive process is most likely to promote an innovative and efficient CAT solution.2960

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In the Commission’s view, a competitive process for the selection of the Plan Processor is most likely to lead to the best outcome for the CAT. The commenter has raised a number of reasons why FINRA’s bid may be the most persuasive. However, different approaches embodied in different bids would be expected to embody different tradeoffs. These tradeoffs can be considered as part of a competitive bidding process, with the best bid chosen in the end. The Commission believes that completing the competitive bidding process is most likely to result in a CAT system that best balances cost, benefits, and efficiencies.

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(2) Competitive Incentives of the Selected Plan Processor

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In the Notice, the Commission discussed how the Plan could create competitive incentives for the selected Plan Processor by detailing strong requirements for the Plan Processor and providing an efficient mechanism to remove the selected Plan Processor and introduce an alternative Plan Processor in the event of underperformance. Here, the Commission stated its preliminary belief that the Plan provides the selected Plan Processor with competitive incentives because the Plan contains defined procedures for monitoring and removing the Plan Processor for failure to perform functions or otherwise. While removal for performance that is not “reasonably acceptable” is by Majority Vote of the Operating Committee, assessing the Plan Processor’s performance and demonstrating failings may be difficult; if that standard is not met, then removal is by Supermajority Vote, which may be more challenging to attain. The degree of difficulty of removal thus could limit the Plan Processor’s competitive incentives. Similarly, the potentially extensive costs of switching to another Plan Processor (including selection of a new Plan Processor, which could potentially require rebuilding the Central Repository and implementation of new Technical Specifications) could limit competitive incentives.2961

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One commenter expressed a view that the continuing incentives of the Plan Processor are a legitimate concern, and that the contract with the Plan Processor should be rebid every 5 years, because it would “prevent the stagnation of the CAT system and encourage innovation” and “force the SEC to re-evaluate the performance of the system and the Plan Processor at least periodically, with the benefit of public input.”2962 The Participants responded by asserting that the Operating Committee will be reviewing Plan Processor performance, and may remove the Plan Processor by Supermajority Vote at any time, or by a Majority Vote where the Plan Processor has failed to reasonably perform its obligations.2963

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The Commission has considered the views of the commenter on the competitive incentives of the Plan Processor and continues to believe that the Plan provides competitive incentives to control costs and promote the performance of the Plan. The commenter did not provide any additional information or analysis that the Commission believes would warrant changes to its analysis, nor does the Commission believe that the modifications to the Plan warrant changes to this aspect of the economic analysis. With respect to the comment that suggested rebidding every 5 years, the Commission agrees that a rebidding process after some period of time could provide a focal point for determining whether other technologies or other entities could be preferable to the incumbent Plan Processor. However, the existing provisions for removing a Plan Processor in the event of underperformance, and the existing authority of the Commission to oversee the CAT NMS Plan, already provide some incentives for continuous CAT innovation and cost reductions. Moreover, a bidding process is not a costless exercise; it requires hundreds or thousands of hours of work on the part of bidders to prepare and submit bids, and Plan Participants to review bids. Additionally, it is not clear whether the rebidding process sought by the commenter would consider the costs to switch as part of the incumbent’s bid (in which case it would significantly advantage the incumbent), or would consider bids without reference to incumbency (which could result in the imposition of inefficient costs if the benefits of the new Plan Processor do not exceed the costs to switch).

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pubdate: November 15, 2016 effdate: N/A +

H. Alternatives

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Reporters, + OTC Equity Securities, + CAT Reporters, + +

As part of its economic analysis, the Commission has considered the likely economic effects of a number of alternatives to the approaches taken in the CAT NMS Plan as amended. In the Notice, the Commission analyzed alternatives that could have a direct and significant impact on costs or benefits deriving from at least one of the four data qualities discussed above: accuracy, completeness, accessibility, and timeliness.2964

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The Commission has considered the comments received on the alternatives discussed in the Notice, and continues to believe that the likely economic effects of the alternatives will be consistent with the preliminary conclusions set out therein, except where noted below.2965 In several instances, the Commission did not receive any comments that disagreed with its analysis of the likely costs and benefits of a particular alternative, and the approach taken in the Plan with respect to these alternatives is consistent with the Commission’s analysis. Where that is the case, the Commission has not discussed the alternative in this Order, and instead relies on the analysis in the Notice. These alternatives include: requiring both Options Market Makers and Options Exchanges to report Options Market Maker quotations to the Central Repository; requiring CAT Reporters to report a unique Customer-ID for each Customer upon the original receipt or origination of an order; requiring CAT Reporters to report a universal CAT-Reporter-ID to the Central Repository for orders and certain Reportable Events; excluding the requirement to report Customer-IDs; excluding the requirement to report CAT-Reporter-IDs when a routed order is received; alternative intake capacity levels; data accessibility standards, and the exclusion of OTC Equity Securities.

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Where commenters disagreed with Commission with respect to its analysis of an alternative approach, the Commission discusses the comments below and considers whether any changes are warranted to the Commission’s analysis and conclusions. Where commenters agreed with the Commission’s analysis, but the Plan’s approach differs in some respect from the approach discussed by the Commission and the commenters, the Commission summarizes its analysis and the comments received, below. Where a Plan modification supersedes the alternatives discussed in the Notice, the Commission considers comments on those alternatives in the discussion of the costs and benefits of the Plan, above.

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The Commission notes that some commenters also raised reasonable potential alternatives not discussed by the Commission in the Notice. If the Plan modifications do not incorporate the suggestions and the comment does not provide sufficient information for a fulsome economic analysis, the Commission responds to those comments above in the Discussion Section. If Plan modifications incorporate those suggestions, the Commission discusses the updates to its economic analysis to recognize the modification in the discussion of the costs and benefits of the Plan, above, and considers the points made by commenters therein.2966 If the Plan modifications do not incorporate the suggestions and the comment does provide sufficient information for an analysis of the economic effects of the alternative, the Commission discusses the alternative below.

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pubdate: November 15, 2016 effdate: N/A +

1. Timestamp Granularity

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Timestamp Granularity + Compliance User: Self-Regulatory Organization + Keywords: + CAT Reporters, + CAT NMS plan, + +

In the Notice, the Commission solicited comment on the benefits and costs of an alternative timestamp granularity requirement of less than one millisecond.2967 The Commission’s preliminary analysis of alternative clock offset tolerance requirements suggested that millisecond timestamps may be inadequate to allow sequencing of the majority of unrelated Reportable Events across markets.2968 In addition, the Commission recognized that sub-millisecond timestamp reporting would bring certain benefits, but the benefits would be limited unless the Plan were to require a clock offset tolerance far lower than is proposed in the Plan. The Commission also recognized that implementation costs of sub-millisecond timestamps would likely vary across CAT Reporters, but such a requirement is unlikely to create significant additional costs for CAT Reporters.

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Four commenters addressed this alternative. Three were supportive of the Plan, and one was supportive of the alternative. 2969 The commenters that supported the Plan generally indicated that one millisecond timestamps should be sufficient to sequence events. 2970 One of these commenters added that it would be very difficult, costly, and disruptive to change the timestamp granularity for broker-dealers and would involve expanding database fields, expanding application interfaces, logging files and managing to a clock offset lower than 50 milliseconds.2971 This commenter focused primarily on broker-dealers while noting that exchanges already have more granular timestamps.2972 Another commenter that supported the millisecond standard in the Plan stated it was “okay” to require this standard, but added, “if certain categories of market participants can originate, modify, cancel, route, execute[,] trade, and/or allocate an order in substantially less than one millisecond, then they should record and report the time of each reportable event using timestamps reflecting their sub-millisecond or microsecond processing capability.”2973 The final commenter that supported the millisecond standard disagreed that CAT Reporters should be required to report more granular timestamps when the Reporter captures that level of detail in its normal practice. The commenter stated that such reporting would require changes to all layers of servers, software and databases between the point of timestamp capture to the final CAT reporting layer, and would be unnecessarily expensive.2974 The commenter supporting more granular timestamps stated that there would be benefits in certain circumstances, stating that the Plan’s timestamp resolution “will be insufficient to show the precise time of the reportable activities” and “[f]or some practices, such as cancellations, stuffing, and other “noisy” behaviors … the Commission should require a more precise granularity to more comprehensibly and accurately capture the frequency and scale of such practices.”2975

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In their response to the comment on the costs of requiring more granular timestamps when the Reporter captures that level of detail in its normal practice, the Participants stated their belief that as additional CAT Reporters capture timestamps that are more granular than that required by the Plan, the quality of data reported to the CAT will increase correspondingly.2976

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The Commission considered these comments and the Participants’ response and now believes that the costs of requiring sub-millisecond timestamps could be significant for some broker-dealers, and also across broker-dealers, because the broker-dealer industry does not broadly apply sub-millisecond timestamps. In response to the commenters that stated that exchanges and certain other categories of market participants already may be capable of sub-millisecond timestamps,2977 the Commission notes that if a CAT Reporter uses timestamps in increments finer than milliseconds, that CAT Reporter must use those finer increments when reporting to the Central Repository.2978 Therefore, the Central Repository will capture finer timestamps in those cases. In response to the commenter who stated that the reporting of finer timestamps would be unnecessarily expensive for those Reporters who choose to capture finer timestamps, the Commission agrees that some Reporters may need to update their reporting systems to report these finer timestamps and therefore may incur additional costs. However, it is unclear to the Commission, and it was left unspecified by the commenter, how many CAT Reporters would need to update their systems and furthermore whether these Reporters would already be updating their systems in response to the Plan’s millisecond reporting standard, so that only incremental costs above this standard should be considered. Finally, the Commission agrees with the Participants’ stated view that the Plan provides for the quality of CAT Data to improve as CAT Reporters use more granular timestamps.2979 However, because the broker-dealer industry does not broadly apply sub-millisecond timestamps, many CAT Reporters will use timestamps to the millisecond, and the Commission continues to believe that millisecond timestamps may be inadequate to allow sequencing of the majority of unrelated Reportable Events. The commenters supporting the Plan either state that one millisecond is “okay” or state that it is not possible to sequence “all” events regardless of timestamp granularity. The Commission acknowledges that seeking to sequence “all” unrelated Reportable Events may not be possible, but maintains, as discussed in the Notice,2980 that a sub-millisecond timestamp could improve the ability to sequence the majority of orders, subject to limitations from the clock synchronization standard. However, the Commission is approving the Plan without modifying the requirements for timestamp granularity for the reasons discussed in Section IV.D.13, above.

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pubdate: November 15, 2016 effdate: N/A +

2. Error Rate

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Error Rate + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT Reporters, + OATS data, + +

In the Notice, the Commission solicited comments on the benefits and costs of alternative maximum Error Rates.2981 While the Commission believed that most regulatory uses would involve data after T+5, the Commission noted that regulators also have essential needs for uncorrected data prior to T+5. Therefore, a lower Error Rate in data available before T+5 could, in certain regulatory contexts, be meaningful. Additionally, because OATS currently has a lower observed error rate than the rate in the CAT NMS Plan, a reduction in CAT Error Rates may accelerate the retirement of OATS. Further, the Commission noted that reducing Error Rates could increase the implementation and ongoing costs incurred by CAT Reporters and the Central Repository as compared to costs estimated in the Plan.

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The Commission received five comments on the level of the error rates. 2982 Two commenters supported the CAT NMS Plan’s initial maximum Error Rate of 5% for CAT Data reported to the Central Repository.2983 One of these commenters stated, “the proposed initial maximum error rate provides the appropriate level [of] flexibility while ensuring the data will be capable of being used to conduct market reconstruction.”2984 One of the commenters that supported the Plan’s error rates conditioned the support on measuring the error rate using post-correction errors, but provided no explanation for the condition.2985 Another commenter that supported measuring the error rate post-correction stated the alignment of interests—the reporters would have an interest in the quality of the data most important to regulatory activities—but supported a “de minimis” error rate goal over time, indicating that uncertainty prevents the ability to predict when the Plan could achieve that goal.2986 This commenter further stated that there are cost tradeoffs that CAT Reporters face when attempting to reduce their error rates. The commenter mentioned several methods that would increase the cost of implementation but that should decrease the overall yearly reporting cost for a Reporter and stated that Reporters will choose different approaches for correcting errors.2987

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One commenter opposed the error rates in the Plan, arguing that they are too high,2988 while the other two commenters expressed significant uncertainty associated with assessing the appropriate error rates.2989 The commenter opposing the error rates in the Plan cited the industry’s experience with OATS, while the commenters expressing uncertainty cited a lack of experience with reporting certain types of data (options, market making, customer information, and allocations) 2990 or by certain types of reporters (those with no regulatory reporting experience), 2991 steep learning curves to new reporting,2992 and a lack of information in the Plan about the definition of an error and how it will be corrected. 2993

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Several commenters seemed to agree with the Commission that the error rates are important to retirement of duplicative systems, but that the specific error rate that could accelerate retirement is unknown.2994 However, another commenter did not think that error rates should have a direct impact on system retirement.2995

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Finally, one commenter opposed having different error rates for different types of CAT Reporters, stating that the Notice provided no compelling reason for excusing Small Industry Members from error rate requirements for the first two years while expressing an expectation that these reporters will account for a “massive amount of data.”2996

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The Commission has considered these comments and acknowledges the significant uncertainty associated with the determination of an appropriate Maximum Error Rate, as identified by commenters.2997 This uncertainty arises from the fact that the Plan requires the reporting of certain types of data that are not currently reported, the Plan requires reporting by certain participants that do not have experience with such reporting requirements, and the Plan has a lack of information about the definition of an error and how it will be corrected. The Commission notes, however, that provisions of the Plan could allow adjustment of error rates as more information becomes available, particularly during testing, and that adjustments could be up or down depending on the results of this testing.

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In response to the commenter that suggested that the maximum error rate in the Plan should be lower and cited the industry’s experience with OATS,2998 the Commission reiterates what was mentioned in other comment letters and discussed above, that CAT reporting involves reporting certain types of data not currently reported and requires reporting by certain market participants that do not have experience with such reporting requirements, so that experience with OATS may not be applicable for CAT reporting. Therefore, the Commission continues to believe that reducing Error Rates in the Plan could increase the implementation and ongoing costs incurred by CAT Reporters and the Central Repository as compared to costs estimated in the Plan.

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The Commission agrees with commenters who indicated the need to tie error rates to retirement of duplicative systems. The Commission believes that regulators may find it advantageous to retain other systems until CAT Data is at least as accurate as those systems, and therefore continues to believe that reducing the maximum error rate could accelerate their retirement. However, the CAT NMS Plan does not require a particular target Error Rate before other systems can be retired, so the Commission continues to be unable to assess the benefits of specific maximum error rates as they relate to system retirement.

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In response to the comments suggesting that the Plan focus only on post-correction error rates, the Commission agrees that the post-correction error rates, which the Plan states will be de minimis, are most important to data quality, but retains the belief that lower pre-correction error rates could be meaningful. This is because, as discussed in the Notice, regulators also have essential needs for uncorrected data prior to T+5, although the Commission believes that most regulatory uses would involve data after T+5.

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With respect to the comment that expressed concern that if small broker-dealers voluntarily report to CAT during the first two years of CAT operations, then the utility of CAT will be diminished because they would be permitted to report with limitless errors,2999 the Commission disagrees with this interpretation of the CAT NMS Plan, as discussed above because the Maximum Error Rate would apply to anyone reporting to CAT, whether mandated to do so in accordance with the CAT NMS Plan or voluntarily.3000

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pubdate: November 15, 2016 effdate: N/A +

3. Error Correction Timeline

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Error Correction Timeline + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

In the Notice, the Commission solicited comment on an alternative error correction timeline to that proposed in the CAT NMS Plan.3001 The CAT NMS Plan includes a deadline of T+3 for submission of corrected data to the Central Repository.3002 The CAT NMS Plan also discusses recommendations from Financial Information Forum and SIFMA to impose an alternative T+5 deadline.3003 The Participants state in the CAT NMS Plan that they believe it is important to retain the T+3 deadline in order to make data available to regulators as soon as possible.3004

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In the Notice, the Commission solicited comment on whether the CAT NMS Plan should impose a T+5 deadline for the submission of corrected data rather than the T+3 deadline. The Commission preliminarily believed that the delays in regulatory access from a T+5 deadline would reduce regulators’ ability to conduct surveillance and slow the response to market events relative to the CAT NMS Plan. At the same time, the Commission also believed that T+5 error correction might reduce costs to industry relative to the CAT NMS Plan, although the Commission was not aware of any existing cost estimates.3005

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Two commenters disagreed with the T+3 error correction deadline proposed in the Plan.3006 One of the commenters noted that the T+3 deadline “appears too aggressive at this time,” because “the fact that roll-out of the CAT will include a sharp learning curve for broker-dealers and regulators as they understand and absorb the intricacies of [a] new and complex system such as the CAT.” The commenter further stated that “the CAT NMS Plan should be amended to maintain current error correction timeframes until CAT reporting errors are analyzed and better understood by broker-dealers and exchanges, and regulators.”3007

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Likewise, the second commenter maintained that the T+3 deadline may not be achievable until “the CAT system and its support infrastructure can be proven stable, … a body of supporting documentation … can be developed and absorbed by the CAT Reporters”, and CAT reporting errors are analyzed and better understood.3008 The commenter suggested that the current OATS approach, under which firms have five days from the date they receive notice of the error to submit a correction, should be kept in place for the first year of CAT reporting for each group of CAT Reporters. The commenter noted that “a less aggressive, measured approach towards reduction in the error correction timeframe over time will produce better quality results, with less overall cost to the industry than the proposed approach.”3009 Under this commenter’s suggested approach, the deadline for the submission of corrected data would be 8:00am on T+6, with corrected data available to regulators by 8:00am on T+8, consistent with the current OATS approach.3010 One commenter stated that the current approach was “feasible.”3011

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In their response, the Participants stated that they believe that the prompt availability of corrected data is “imperative to the utility of the Central Repository,” and that the three-day error correction period “appropriately balances the need for regulators to access corrected data in a timely manner while taking into consideration the industry’s concerns.” 3012 The Participants acknowledged that a five-day window for error correction is used for OATS reporting currently, but stated their belief that the window in the Plan would allow for better regulatory surveillance and market oversight.3013 The Participants also stated that, based on a review of OATS data from August 2016, most errors reported to OATS were corrected within six business days of submission (approximately 91.26% of error corrections), with 26.46% of error corrections occurring one day after submission, and 59.45% of error corrections occurring six days after submission (i.e., on the rejection repair deadline).3014 Additionally, approximately 0.48% of error corrections were made on the day of submission, approximately 4.86% of error corrections were made two to five days after submission, and the remaining approximately 8.75% of error corrections were made seven to 36 days after submission.3015

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The Commission has considered the comments it received on whether the CAT NMS Plan should impose a T+5 deadline for the submission of corrected data, rather than the T+3 deadline, as well as the Participants’ response.

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The Commission recognizes that broker-dealers and regulators may face a learning curve as they adjust from the current OATS approach, under which firms have five days from the date they receive notice of the error to submit a correction, to the T+3 error correction deadline imposed by the Plan, which will allow firms approximately two days from the date they receive notice of the error to submit the correction.3016 The Commission also recognizes that a T+5 deadline may be easier to achieve than the T+3 deadline, and therefore may be less costly. The Commission notes that, while the data provided by the Participants indicates that approximately 26% of error corrections currently are made on T+1, approximately 59% of OATS error corrections are currently made on T+6, the last day of the OATS error correction period, indicating that many OATS reporters will likely be required to change their error correction practices to achieve the T+3 deadline in the Plan. The Commission also recognizes that keeping a deadline of T+5 for the first year of CAT reporting for each group of CAT Reporters may potentially improve the quality of CAT Data during that year. However, the Commission believes that a T+5 deadline would reduce the timeliness benefits of the Plan by delaying regulatory access to CAT Data during that year. The Commission continues to believe that the delays in regulatory access from a T+5 deadline would reduce regulators’ ability to conduct surveillance and slow the response to market events relative to the CAT NMS Plan, and would largely negate the timeliness benefits discussed above in connection with the error correction timeline.3017

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pubdate: November 15, 2016 effdate: N/A +

4. Requiring Listing Exchange Symbology

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Requiring Listing Exchange Symbology + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Central Repository, + OATS, + EBS, + DAG, + +

In the Notice, the Commission solicited comment on an alternative to the CAT NMS Plan that would allow CAT Reporters to report using their existing symbologies, rather than listing exchange symbology.3018 The Commission discussed its preliminary belief that, in light of the requirement for the Plan Processor to maintain a complete symbology database, the requirement that CAT Reporters report using listing exchange symbology may result in unnecessary costs to CAT Reporters. Therefore, the Commission preliminarily believed that the alternative of allowing CAT Reporters to use their existing symbologies for reporting purposes could significantly reduce the costs for exchanges and broker-dealers to report order events to the Central Repository, as compared to the approach in the CAT NMS Plan, without a significant impact on the expected benefits of the Plan or the costs to operate the Central Repository.

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The Commission received three comments relevant to this alternative. One commenter stated that, “in order to minimize cost and invasiveness to the industry,” the Central Repository should accept existing symbology “as-is” rather than requiring listing exchange symbology.3019 Another commenter stated that using listing exchange symbology was costly not only for equities, as discussed in the Notice,3020 but also for options.3021 The final commenter stated that, “it would be more efficient to have the Central Repository manage the mapping tables in one place, as it is less error prone… than to have all reporting broker-dealers mapping to their separate tables,”3022 and that the use of existing symbology “does provide a data quality advantage.”3023 However, the commenter also stated that it did not expect the elimination of the requirement to use existing symbology to result in a large cost savings.3024 While the commenter did not explain why the cost savings would be minimal, as discussed in the Baseline Section above, the Participants’ response notes that broker-dealers currently use listing exchange symbology to report to OATS and existing messaging protocols do not necessarily use a standard symbology. Therefore, in the absence of such a requirement, CAT reporters might use “bespoke” symbologies to report that would be difficult for the Central Repository to map.

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In the Participants’ response, the Participants stated their belief that the requirement for CAT Reporters to use listing exchange symbology “is the most efficient, cost-effective and least error prone approach to symbology,” and that based on discussions with the DAG, it is their understanding that “all Industry Members subject to OATS or EBS reporting requirements currently use the symbology of the listing exchange when submitting such reports.”3025 They further stated that allowing CAT Reporters to determine symbology would “require each CAT Reporter to submit regular mapping symbology information to the CAT, thereby increasing the complexity and likelihood for errors in the CAT.”3026 However, the Participants stated that they “understand that some industry messaging formats, such as some exchange binary formats, require symbology other than the primary listing exchange symbology,” and that in these and similar cases, the Participants recommended that the Plan be amended to permit the use of the required symbology.3027 The Participants also added that, based on their understanding of current practices, Industry Members currently employ technical solutions and/or systems that allow them to translate symbology in the correct format when submitting data to exchanges.3028

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The Commission is revising its economic analysis of this alternative in light of the comments and the Participants’ response. While commenters generally agreed with the Commission’s analysis in the Notice, they seemed to indicate that the cost savings from a requirement to use existing symbology would not be large. Further, the additional baseline information in the Participants’ response also suggests that the cost savings might not be significant. The Commission’s analysis in the Notice hinged on the necessity of running an additional process on messaging protocol data prior to submitting the data. The Commission believed the cost savings and the data quality benefits would come from avoiding this additional process, which would need to be built and maintained and could add errors to the data. However, the Participants’ response indicates that existing messaging protocols may already have integrated processes that translate symbols efficiently and accurately prior to routing to an exchange. While the Participants’ response does not indicate that the messaging protocols translate symbols for other types of messages, the Commission presumes that the functionality should be transferable to other message types, including order originations and routes to other broker-dealers. Because this functionality operates for business purposes, broker-dealers have a strong incentive to ensure its accuracy. Therefore, the Commission no longer believes that eliminating the requirement to translate symbols would improve accuracy and significantly reduce costs. In addition, the Commission now believes that eliminating the requirement could result in an additional cost to the Central Repository and a potential reduction in accuracy because it could involve having to map “bespoke” symbologies into one standardized symbology.

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pubdate: November 15, 2016 effdate: N/A +

5. Clock Synchronization Logging Procedures

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Clock Synchronization Logging Procedures + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + clock synchronization requirements, + +

In the Notice, the Commission solicited comments on an alternative that would require logging only exceptions to the clock offset (i.e., events in which a market participant checks the clock offset and applies changes to the clock).3029 While logging every event, including clock offset checks, may be cost effective with longer clock synchronization tolerances, the Commission questioned whether logging each event is cost effective with finer clock offset tolerances, given the large number of events expected for the proposed and alternative clock synchronization standards. The Commission explained that it could not quantify the reduction in costs from this alternative because it lacked data on the proportion of clock synchronization costs that are associated with event logging and the proportion of those costs that could be avoided by alternative event logging requirements. The Commission discussed its preliminary belief that any reduction in benefits from this alternative, as compared to the CAT NMS Plan’s approach for clock synchronization, would be minor because the inclusion of clock synchronization checks that required no clock adjustment would not improve regulators’ ability to sequence events. The Commission noted, however, that enforcement of clock synchronization requirements could be more difficult without comprehensive logging requirements that document firms’ actions to comply with requirements; consequently, relaxing the logging requirement could also reduce incentives to comply with the clock synchronization requirements.

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As discussed above,3030 one commenter supported the alternative raised by the Commission that any requirement to maintain a log of clock synchronization events should only require logging of clock synchronization exceptions, not all clock synchronization events, noting that requiring logging of all events would be costly for some broker-dealers.3031 However, the commenter did not provide any additional information that would allow the Commission to quantify the cost savings of logging only these events. Therefore, while the Commission continues to believe that there could be cost savings from logging only exceptions to the clock offset, the Commission remains unable to quantify the reduction in costs from this alternative. The Commission continues to believe that any reduction in benefits under this alternative approach would be minor, but that enforcement of clock synchronization requirements may be more difficult, which may reduce incentives to comply with the clock synchronization requirements.

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pubdate: November 15, 2016 effdate: N/A +

6. Data Accessibility Standards

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Data Accessibility Standards + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Central Repository, + SRO, + ISO 20022, + Rule 613, + Technical Specifications, + Plan Processor for the Central Repository, + +

In the Notice, the Commission solicited comment on alternative approaches to the manner in which the CAT NMS Plan provides data access to regulators.3032 The Commission discussed the requirements for regulatory access to the Central Repository, explaining that the CAT NMS Plan could result in many improvements to regulatory activities such as surveillance, examinations, and enforcement, but that these benefits may not be fully realized if access to data is cumbersome or inefficient. The Commission solicited comment on each of the minimum data accessibility standards required in the Plan. The Commission also discussed several examples in particular, and requested comment on alternative standards that might be adopted in each case.

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In the Notice, the Commission noted that the CAT NMS Plan requires query responses for various types of queries of 5 minutes, 10 minutes, 3 hours, and 24 hours, where the simplest queries involving scanning narrow sets of data would be required to return in 5 minutes and complex queries scanning multiple days of data and returning large datasets would be required to return within 24 hours. While the benefits of direct access to CAT Data depend on reasonably fast query responses, the Commission recognized that faster query response times come at a cost. The Commission stated that it did not have detailed information on significant breakpoints in those costs to judge whether slightly longer response times than those in the Plan could significantly reduce the costs of developing, maintaining, and operating the Central Repository. The Commission recognized that the detailed information on numerous other minimum standards regarding regulator access to CAT Data is similarly unclear. Therefore, the Commission requested comment regarding all standards for regulatory access and whether technology creates natural breakpoints in costs such that a particular alternative could reduce the costs of the Plan without significantly reducing benefits or could increase benefits without significantly increasing costs.

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Commenters made a number of suggestions regarding data accessibility standards. One commenter stated that it was unclear whether the CAT would be able to support various types of data analysis by regulators within the Central Repository, and noted that, without that ability, all of the analyses must be done outside of the CAT Repository and within the regulators’ own infrastructure, which would require bulk extraction and could lead to increased costs and security concerns due to the need to store multiple copies of CAT Data with various SROs.3033 The commenter recommended that the Plan clearly specify the analytical capability requirements with respect to the Central Repository.3034 Another commenter recommended that the CAT support real-time ingestion, processing and surveillance, and that the CAT provide regulators with access to real-time analytics.3035 One commenter believed that the proposed model and timeframe for regulatory access is consistent with the Commission’s regulatory objectives, but recommended the use of pre-defined extract templates and uniform global formats such as ISO 20022 to allow for exchange of data between both national and global regulators.3036 That commenter also suggested that there should be an ability for regulators to perform analyses within the CAT environment, and that there should be flexible search/filtering capabilities.3037

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In their response, the Participants stated that, with respect to the analytical requirements of the Central Repository, they believe the details in the Plan are sufficient, and noted that Section 8 of Appendix D of the Plan describes various tools that will be used for surveillance and analytics. They also noted that it would be “counterproductive from a regulatory oversight perspective to provide significant detail regarding the surveillance processes of the regulators.”3038 With respect to real-time ingestion, processing, surveillance, and analytics, the Participants noted that Rule 613 does not provide for real-time reporting.3039 With respect to pre-defined extract templates and uniform global formats, the Participants noted that the Plan requires data extracts to use common industry formats.3040 The Participants also stated that they expect that the requests from regulators other than those regulators permitted access to the CAT (such as foreign regulators and other U.S. government agencies) will be on an ad hoc basis pursuant to applicable information sharing agreements, and would be accommodated on a case-by-case basis.3041

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The Commission has considered the comments received and the Participants’ response. With respect to the suggestion that the Plan clearly specify the analytical capability requirements with respect to the Central Repository,3042 the Commission notes that, while the Plan provides detail on the method of access and the type of queries that regulators could run, many of the decisions regarding access have been deferred until after the Plan Processor is selected and finalizes the Technical Specifications. In particular, as discussed in the Notice, the details of functionality and performance of the final system are still to be determined.3043 The Commission believes that an alternative approach that clearly specified the required analytical capabilities of the Central Repository would reduce the uncertainty with respect to the expected benefits of the Plan in terms of accessibility. However, the Commission does not have sufficient information to estimate the costs of requiring the Central Repository to provide specific analytical capabilities, because the Commission lacks information on the costs of building those capabilities into the Central Repository as opposed to using outside servers.

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The Commission does not agree with the commenter that stated that an approach requiring bulk extractions by regulators is likely to increase the Participants’ costs significantly relative to an approach whereby regulators perform analyses within the Central Repository.3044 The Commission acknowledges that hosting large databases is costly, but it believes that SROs are likely to consider the cost implications when contemplating replicating large portions of the Central Repository within their IT infrastructure, and presumably will only replicate the data when it is efficient for them to do so.3045 In response to the commenter that stated that frequent bulk extractions of data by regulators may result in an increased security risk,3046 the Commission notes that, as discussed above,3047 in order to extract, remove, duplicate, or copy CAT Data into their own local server environment, the Participants will be required to have policies and procedures regarding CAT Data security that are equivalent to those implemented and maintained by the Plan Processor for the Central Repository,3048 and that each Participant must certify and provide evidence to the CISO of the Plan Processor that its policies and procedures for the security of CAT Data meet the same security standards applicable to the CAT Data that is reported to and collected and stored by the Central Repository. This requirement should mitigate any increased security risk associated with bulk extractions.

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In response to the suggestion that the CAT NMS Plan incorporate real-time analytics,3049 the Commission notes that this would require real-time reporting. As discussed further above,3050 the Commission considered whether CAT Reporters should be required to report data in real-time when it adopted Rule 613 under Regulation NMS. 3051 While the Commission acknowledged that there might be advantages to receiving data intraday, it stated that the greater majority of benefits that may be realized from development of the CAT do not require real-time reporting.3052 Further, the Commission recognized that not requiring real-time reporting upon implementation could result in cost savings for industry participants. 3053 The Commission therefore believes that any alternative approach that required real-time reporting would increase the costs of the Plan significantly. However, the commenter did not provide sufficient information to allow the Commission to further analyze the benefits and costs of this alternative.

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The Commission agrees with the commenter that suggested that using pre-defined extract templates and uniform global formats such as ISO 20022 could have some benefits in terms of facilitating the exchange of data between national and global regulators. As the Participants note, the Plan requires data extracts to use common industry formats,3054 but it does not require a particular format.3055 However, as explained above and in Section IV.D.2, when selecting a Plan Processor, the Participants will consider whether a Bidder has proposed a format that is easily understood and adoptable by the industry, and the Commission believes that the message format decision must be made in connection with developing the overall architecture for CAT.

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pubdate: November 15, 2016 effdate: N/A +

7. Clock Synchronization Hours

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Clock Synchronization Hours + Compliance User: Self-Regulatory Organization + Keywords: + FIF Clock Offset Survey, + Clock Synchronization, + Reportable Events, + +

In the Notice, the Commission solicited comment on alternative requirements for the times during which clock synchronization is required that would provide more flexibility than the requirements of the Plan.3056 The Commission discussed its preliminary belief that an alternative that does not require synchronizing clocks when servers are not recording Reportable Events or when precise timestamps are not as important to sequencing, such as outside of normal trading hours, would not materially reduce benefits. Given the responses to the FIF Clock Offset Survey, the Commission also stated that it preliminarily believed that this alternative could reduce costs, because synchronization activities and log entries related to those events would not be as beneficial outside of normal trading hours. The Commission noted, however, that it did not have information necessary to quantify the cost reduction from this alternative because cost information available to the Commission is not broken down by time of day or server status.

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One commenter supported alternative clock synchronization hours, stating off-hours clock synchronization “isn’t needed from either a business or regulator perspective” and that “without this provision, firms would require additional off-hours staffing, or it will prevent the off-hours support staff from focusing on more pressing issues that need to be resolved during off hours.”3057 However, the commenter did not provide any additional information that would allow the Commission to quantify the potential cost savings. The Commission continues to believe that an alternative that does not require synchronizing clocks when servers are not recording Reportable Events or when precise timestamps are not as important to sequencing, such as outside of normal trading hours, would not materially reduce benefits. The Commission also believes that this alternative could reduce costs, but continues to lack the information necessary to quantify the potential cost reduction.

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pubdate: November 15, 2016 effdate: N/A +

8. Primary Market Transactions

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Primary Market Transactions + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + Discussion Document, + Response Letter, + Hanley Letter, + FIF Letter, + CAT Reporter, + SIFMA Letter, + DAG, + Rule 105, + Sec Rule 613, + +

As set out in the Notice,3058 the CAT NMS Plan does not require the reporting of any primary market information to the Central Repository. However, as required by Rule 613(i), the CAT NMS Plan commits to incorporating a discussion of how and when to implement the inclusion of some primary market information into a document outlining how additional Eligible Securities could be reported to the Central Repository (the “Discussion Document”), which would be jointly provided to the Commission within six months after effectiveness of the Plan.3059 Additionally, as required by Rule 613(a)(1)(vi), the Plan includes a discussion of the feasibility, benefits, and costs of including primary market transactions in the CAT NMS Plan.3060 As explained in the Notice,3061 the discussion in the CAT NMS Plan divides the primary market information into two categories: information on top-account allocations and information on subaccount allocations. Top-account allocations refer to allocations to institutional clients and retail broker-dealers during the book-building process. Top-account institutions and broker-dealers make the subsequent subaccount allocations to the actual accounts receiving the shares. The Plan concludes that including information on subaccount allocations in the CAT would provide significant benefits without unreasonable costs, while including information on top-account allocations would provide marginal benefits at significantly higher costs.3062

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As discussed in the Notice, the Plan states that “the Participants are supportive of considering the reporting of Primary Market Transactions, but only at the subaccount level, and would incorporate analysis of this requirement, including how and when to implement such a requirement, into their document outlining how additional Eligible Securities could be reported to the Central Repository, in accordance with SEC Rule 613(i) and Section 6.11 of the Plan.”3063 The Plan therefore would limit the discussion of reporting primary market transactions in the Discussion Document to the subaccount level.

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In the Notice, the Commission solicited comment on the alternative approach that would broaden the required scope of the discussion of primary market allocation information in the Discussion Document to include an analysis of incorporating both top-account and subaccount allocation information for primary market transactions into the CAT.3064 To assess this alternative, the Commission examined the benefits and costs of ultimately including top-account allocations in the CAT. The Commission preliminarily believed that the potential benefits of including top-account allocation information in the CAT could be significant and that the costs of including top-account allocation information could be lower than what is described in the CAT NMS Plan and appropriate in light of significant potential benefits. For these reasons, the Commission preliminarily believed that top-account allocation information should not be excluded from the Discussion Document.3065

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In the Notice, the Commission discussed several benefits of including top-account allocation information, in addition to subaccount allocation information, for primary market transactions in CAT. First, the Commission noted that top-account allocation information would be necessary to surveil for prohibited activities in the book-building process and would improve the efficiency of investigations into such prohibited activities. For example, examinations of “spinning,” “laddering,” and other “quid pro quo” arrangements would benefit from inclusion of top-account allocation information in CAT Data. Second, the Commission noted that top-account allocation information would provide very useful insights into IPO and follow-on allocations in market analysis and that such insights would help inform rulemaking and other policy decisions.3066

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As discussed in the Notice,3067 the CAT NMS Plan estimates that for broker-dealers to implement a system to record and report both top-account and subaccount allocation information for primary market transactions would cost $234.8 million, whereas implementing a system with only subaccount information would cost $58.7 million.3068 The inclusion of top-account allocation information accounts for the difference of $176.1 million.

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In the Notice, the Commission discussed its preliminary belief that the implementation costs of adding top-account allocation information may be lower than those estimated in the CAT NMS Plan, for several reasons. First, the Commission noted that, in combination with an alternative that would require less granular timestamps or a larger allowable clock offset on less time-sensitive systems, including the systems for reporting top-account allocation information, the costs for including top-account allocation information would be lower than indicated in the Plan. Second, the Commission noted that the Plan’s estimate was sensitive to the number of underwriters. In particular, the estimates assumed that all underwriters participating in an offering would need to implement changes for top-account allocation information. In contrast, the Commission suspected that lead underwriters could have all of the information necessary to report the top-account allocation information. If so, then only the lead underwriters would need to implement systems changes to report top-account allocation information. Estimating costs only for lead underwriters could result in a much smaller estimate.3069

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The Commission noted that it did not have an estimate of the ongoing costs of underwriters reporting top-account allocation information. However, the Commission preliminarily estimated that the reporting of primary market transactions would generate a total of 1.2 million CAT Reportable Events per year. The Commission noted that this total was much smaller than the number of Reportable Events in the secondary market (trillions). The Commission preliminarily believed that the ongoing costs of reporting primary market transactions would be a fraction of the ongoing costs of secondary market reporting and would likely be supported by staff already engaged to maintain CAT reporting.3070

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The Commission received three comment letters that provided information relevant to the Commission’s economic analysis of this alternative, though the comments focused more on the inclusion of primary market transactions in the initial phase of the Plan as opposed to in the Discussion Document. In particular, commenters provided information relevant to the baseline, benefits, and costs of the inclusion of top-account primary market information in the Plan.3071

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Commenters provided information relevant to the current baseline of the underwriting process and primary market transaction records. One commenter documented significant diversity across underwriters in the volume of deals and workflows and provided more precise information on that diversity than included in the Notice or Plan.3072 The commenter further stated that the processes that handle top-account allocations are very separate from the secondary market systems. Another commenter described three stages in the offering process: 1) preliminary indications of interest, 2) final top-account allocation, and 3) subsequent subaccount allocations.3073 Both commenters agreed that indications of interest in top-account allocations can change numerous times,3074 but one commenter indicates the existence of a final top-account allocation (Stage 2) while the other does not.

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Two commenters provided different perspectives on the benefits of including top-account allocation information in the Discussion Document. One commenter emphasized that many benefits could only be achieved by requiring the reporting of primary market transactions at both the top-account and the subaccount allocation levels. 3075 In particular, the commenter maintained that because lead underwriters were responsible for the top-account allocations, some abuses, such as “spinning,” “laddering,” “quid pro quo,” Rule 105 violations, and manipulation, could only be present in these allocations.3076 Further, this commenter also stated that top-account information would facilitate analyses of the value of discretionary allocation in book-building for issuers. This commenter also indicated that final top-account allocations should be sufficient to achieve such benefits, while also indicating that information on the indications of interest was crucial for the understanding of the capital formation process and for designing efficient regulations that would facilitate capital formation without compromising investor protection.3077 The other commenter believed that having only subaccount primary market allocation information is less valuable from a regulatory perspective than having both subaccount and top-account allocation information.3078

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The Commission received three comment letters relevant to the costs of including top-account allocation information in the Plan. All three commenters indicated that it would be very costly to include top-account allocations in the Plan,3079 but one commenter limited this conclusion just to the inclusion of indications of interest.3080 According to the commenters, these costs generally stem from added complexity and a lack of standardization in book-building processes. Another commenter noted that top-account allocations would be less feasible to report than subaccount allocations and cited to information from the DAG.3081 One commenter disagreed with the Plan’s cost estimates of $176 million for including top-account allocation information in the Plan and provided an alternative estimate of $864,000 per year.3082 Another commenter indicated that the Plan’s estimates amounted to guesswork and that the $176 million estimate in the Plan does not contemplate reporting all the events in a deal’s lifecycle, but does not indicate which events it does include.3083

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Two commenters recommended additional analysis on some or all top-account allocation information, but neither specifically mentioned the Discussion Document. One commenter noted having little information about the requirements of reporting top-account allocation information and that subaccount allocation information is a good first step toward potentially collecting complete information on primary market activities that would allow time to study the complexities and difficulties associated with reporting top-account allocations.3084 This commenter also attempted a further study of more generally including primary market information in the Plan but noted that the 60-day comment period did not permit a larger, more in depth study.3085 Another commenter suggested considering an alternate reporting scheme for indications of interest other than CAT that better balances the costs of producing data indications of interest but does not diminish the usefulness of such data.3086

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In their response, the Participants reiterated their support for the inclusion in the CAT of subaccount allocations in Primary Market Transactions, but not top-account allocations, and reiterated the conclusions from the Plan that reporting top-account allocations would likely impose significant costs to CAT Reporters while only providing a marginal additional regulatory benefit over subaccount allocation data.3087 In response to comments regarding the scope of top-account allocation information, the Participants restated the definition in the Plan that top-account allocations are allocations to institutional clients or retail broker-dealers, which are conditional and may fluctuate until the offer syndicate terminates.3088 The Participants did not respond to the comment that the cost estimates in the Plan do not contemplate reporting all events in a deal’s lifecycle and did not further discuss why top-account allocation information should not be included in the Discussion Document.

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The Commission is revising its analysis of the economic effects of including top-account primary market transactions in the CAT and thus of whether top-account allocations should be included in the Discussion Document in light of comments and the Participants’ response. With respect to the benefits of including top-account allocation information, in addition to subaccount allocation information, in the CAT, none of the commenters disagreed with the Commission’s analysis. In fact, the Commission is expanding its analysis to include the additional benefits noted by one commenter that the Commission had not previously considered, namely better understanding the economics of the offering process and better identifying manipulative activities. 3089 Further, the Participants’ response provided no new information on why Participants believe top-account allocations provide only a marginal regulatory benefit over subaccount allocation data. Therefore, the Commission continues to believe that top-account primary market allocation information would provide significant regulatory benefits.

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With respect to the costs of including top-account allocation information in the CAT, the Commission notes that the estimate of $864,000 per year provided by one of the commenters may not be comparable to the estimate of $176.1 million provided in the CAT NMS Plan. This is because the latter estimate reflects the implementation costs of adding top-account allocation information, while the former estimate seems to measure the ongoing annual costs to maintain the reporting.

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At the same time, the Commission believes that the commenter’s analysis of costs is consistent with the Commission’s analysis in the Notice in two respects. First, the commenter’s analysis is consistent with the Commission’s preliminary conclusion that requiring less granular timestamps for reporting top-account allocation information would result in lower costs for top-account allocation information than indicated in the Plan. Second, the commenter’s estimate that reporting top-account allocation information would cost $864,000 per year in ongoing costs is consistent with the Commission’s preliminary conclusion that the ongoing costs of reporting primary market transactions would be a fraction of the ongoing costs of secondary market reporting. Indeed, $864,000 per year represents a small fraction of the total ongoing annual cost of CAT, which the Commission estimates to be $1.7 billion per year.3090

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With respect to the commenter who indicated that the cost estimates in the Plan did not contemplate indications of interest, the Commission notes that the Plan defines top-account allocations to include indications of interest—“conditional and may fluctuate until the offering syndicate terminates”3091—and suggests that its cost estimates for top-account allocations therefore include indications of interest. However, because this commenter conducted the study that provides the basis for the Plan’s cost estimate, the Commission believes that the commenter is correct and that the cost estimates in the Plan do not represent the costs of top-account allocations as defined in the Plan (i.e., the estimates do not cover indications of interest). That said, no comments directly disagreed with the reasons that the Commission provided in the Notice for why the Commission preliminarily believed the costs estimates in the Plan overstated the costs of including top-account allocation information in the Plan.3092 Therefore, in light of the comments, the Commission is less clear on the magnitude of the costs of including top-account allocation information in the Plan.

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In response to the commenters that indicated that additional analysis or consideration of including top-account allocation information in the Plan would be beneficial, the Commission notes that including this alternative in the Discussion Document provides an opportunity for this additional analysis and consideration. The Discussion Document will provide an outline of how the Participants could incorporate top-account allocation information into the CAT Data and include details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate. Indeed, in addition to the commenters’ suggestions for more study, the Commission believes that the information from commenters regarding the benefits of the different types of top-account allocation information, and the questions surrounding the cost estimates in the Plan, suggest that investors could benefit from the additional analysis that would be included in the Discussion Document.

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pubdate: November 15, 2016 effdate: N/A +

9. Periodic Updates to Customer Information

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Periodic Updates to Customer Information + Compliance User: Self-Regulatory Organization + Keywords: + Plan Processor, + Central Repository, + Response Letter, + FIF Letter, + +

In the Notice, the Commission solicited comment on an alternative that would eliminate the requirement for periodic full refreshes of customer information.3093 The Commission stated that the requirement for periodic full refreshes could be redundant if the initial list and daily updates are complete and accurate and would, therefore, provide no additional benefit. Further, not requiring these periodic refreshes could reduce the risk of a security breach of personally identifiable information. Therefore, the Commission preliminarily believed that removing the requirements for periodic full refreshes of customer information could minimally reduce the cost of the Plan without materially reducing the benefits.

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The Commission received two comments relevant to this alternative. One commenter suggested “having the functional support for a voluntary full refresh, but…eliminat[ing] the mandated requirement to provide full refreshes periodically,” and stated that, “the initial load, daily updates and standard error processing should be sufficient to maintain data integrity.”3094 That commenter went on to state that it “may be easier to define all active customers to CAT, or just active customers who have transacted in NMS securities.” The commenter stated that removing the requirement may “only slightly reduce the burden or cost,” although it would improve the overall security of the CAT.3095 Another commenter stated their belief that, “periodic refreshes of all customer information to the Central Repository is a bad idea.”3096 In their response, the Participants stated that they believe that a periodic refresh of customer information is beneficial because it will help to ensure that all customer information remains accurate and up to date.3097 The Participants noted the provisions in the Plan with respect to information security.3098 The Participants also noted that the Plan provides that the Participants will define the scope of what constitutes a “full” customer information refresh with the assistance of the Plan Processor to determine the extent to which inactive or other accounts would need to be reported.3099

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The Commission has considered the comments and the Participants’ response and continues to believe that removing the requirements for periodic full refreshes of customer information could minimally reduce the cost of the Plan without materially reducing the benefits. Specifically, the Commission agrees that allowing market participants to periodically refresh their customer information but dropping the requirement that they refresh it regularly would reduce costs to broker-dealers because broker-dealers could choose to do a refresh when they believe a full refresh would be more cost effective than editing individual records, while not requiring them to do a refresh when they believe their customer information stored in the Central Repository is accurate. Having a full refresh as an option would save broker-dealers the costs associated with running a refresh procedure when it is not needed, but allowing it when it is efficient for the broker-dealer to update its customer information in this manner. The Commission disagrees with the comment that periodic refreshes are a “bad idea” in general. As discussed above,3100 the Commission recognizes that periodic refreshes introduce an opportunity for correct data in the Central Repository to be replaced by incorrect data due to a problem in the refresh procedure. However, the Commission also believes that periodic refreshes provide an opportunity for incorrect information in the Central Repository to be replaced with correct information. The Commission does not have information to estimate whether the former outcome is more likely than the latter, because it lacks information on the proportion of customer information records that are errant in existing databases in industry and the likelihood that data refresh procedures introduce incorrect data, and commenters did not provide this information. The Commission notes that the Participants’ response does not address whether the periodic refreshes would be redundant, or why submitting the redundant information would be beneficial. However, the Commission acknowledges that, as set out in the Participants’ response, the Plan provides that the Participants will work with the Plan Processor to determine the extent to which inactive or other accounts would need to be reported,3101 which may reduce the costs of the periodic refresh by reducing the number of accounts to which it applies.

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pubdate: November 15, 2016 effdate: N/A +

10. Bulk Data Downloads by CAT Reporters

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Bulk Data Downloads by CAT Reporters + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Reporter, + Central Repository, + CAT Data, + Plan Processor, + +

Several commenters discussed the Plan’s treatment of bulk data downloads by CAT Reporters. Specifically, some commenters suggested that CAT Reporters should be allowed to access and export the data they report to the Central Repository. The Commission has considered the potential economic effects of that alternative approach, as discussed below.

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Several commenters suggested that the Plan permit CAT Reporters to access their own CAT Data through bulk data exports. 3102 Another commenter stated that permitting CAT Reporters to download their own data from the Central Repository will provide benefits such as improved CAT reporting error rates and improved ability to meet regulatory, surveillance, and compliance requirements.3103 One commenter suggested that independent software vendors be permitted to access the CAT Data on behalf of their clients.3104 However, several commenters expressed strong concerns about allowing any entity to extract or download data from the Central Repository, suggesting that the risk of a data breach would greatly increase as the data are maintained at more sites.3105 Commenters also suggested that the risk increases when those entities downloading the data may have technology systems that are not subject to the same high security requirements at the Plan Processor.3106

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In their response, the Participants stated that they believe that there may be merit to providing Industry Member CAT Reporters and their vendors with bulk access to the CAT Reporters’ own unlinked CAT Data, but noted that such access also raises a variety of operational, security, cost and other issues related to the CAT. The Participants stated that they will consider this issue once the CAT is operational.3107

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Currently, the CAT NMS Plan states that, initially, CAT Reporters will not have access to their data submissions through bulk data extracts.3108 The Commission agrees with commenters that an alternative approach that specified that CAT Reporters will be allowed to make bulk extractions of their own data from the Central Repository would help CAT Reporters correct errors and respond to regulatory inquiries. Specifically, the Commission believes that, by querying and analyzing the full set of data submitted to the CAT, as opposed to viewing only the errors, CAT Reporters may be able to better diagnose a problem that could be system-wide. This could facilitate corrections to the process that CAT reporters use to record and report order events to prevent future errors. The Commission also recognizes that there may be benefits to internal surveillance regarding compliance, tracking regulatory submissions by third parties, and CAT Reporter recordkeeping.3109 The Commission believes this could have benefits in terms of increasing the accuracy and timeliness of the CAT Data by allowing errors to be corrected faster and more effectively, and by possibly reducing reporting costs for some entities by making the error correction process easier and more efficient and eliminating the need for CAT Reporters to store the data they submit on their own systems.

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However, the Commission notes that, under the Plan, CAT Reporters will be able to view their submissions online in a read-only, non-exportable format, which will facilitate error identification and correction.3110 Commenters did not provide sufficient information to allow the Commission to assess the magnitude of the potential benefits of allowing bulk data exports in addition to read-only access,3111 and the Commission believes they may be modest. The Commission also notes that, to the extent CAT Reporters retain copies of their submissions, they may be able to refer to that data when correcting errors and responding to regulatory inquiries. Further, the Commission also agrees with commenters and the Participants that allowing CAT Reporters to engage in bulk data exports, even if limited to their own reported data, could increase the risk of a data breach insofar as it increases the number of systems that have access to the CAT Central Repository. As discussed above,3112 while uncertain, the costs of a security breach could be significant. The Commission recognizes that some CAT Reporters that would be downloading bulk data might already have access to the Central Repository in order to upload their data, but it notes that many may not, because their data may be reported by one or more third parties. The Commission notes that it is difficult to determine the magnitude by which the risk of a breach would increase, because many of the decisions that define security measures for the Central Repository are coincident with the selection of the Plan Processor, and there is considerable diversity in the potential security approaches of the Bidders. The Commission notes that the Participants state that they will reconsider the issue once the CAT is operational.3113

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pubdate: November 15, 2016 effdate: N/A +

11. Alternatives to the CAT NMS Plan

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Alternatives to the CAT NMS Plan + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + CAT Data, + OATS, + Rule 613, + +

In the Notice, the Commission recognized that approving the CAT NMS Plan is not the only available means of improving the completeness, accuracy, accessibility and timeliness of the data used in regulatory activities.3114 Therefore, the Commission solicited comment on the broad set of alternatives involving modifying existing systems to reduce their data limitations instead of approving the CAT NMS Plan.

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The Commission discussed how, as one alternative to the CAT NMS Plan, it could require modifications to OATS. However, the Commission also noted that OATS would require significant modifications in order to provide the attributes that the Commission deems crucial for an effective audit trail. Furthermore, the Commission indicated that any OATS-based alternative to CAT that did not provide these attributes would limit the potential benefits of the alternative significantly.3115

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The Commission acknowledged that it does not have sufficient information to estimate the potential cost savings, if any, from mandating an OATS-based approach as an alternative to the CAT NMS Plan. However, the Commission noted that Rule 613 provided flexibility to the SROs to propose an approach based on OATS and that the SROs could have utilized an OATS-based approach if that approach had represented significant cost savings relative to the Plan’s approach.3116

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In the Notice, the Commission discussed another alternative, which would be for the Commission to modify other data sources instead of, or in combination with, OATS. However, the Commission also noted that like OATS, all of the current data sources have limitations that would need to be addressed in order to provide the attributes that the Commission deems crucial to an effective audit trail. Furthermore, the Commission preliminarily believed that modifying any other single data source would be more costly than modifying OATS while adopting an alternative to the CAT NMS Plan that relied on multiple data sources … would eliminate the benefits associated with having a single complete consolidated source from which regulators can access trade and order data, which the Commission considers to be very significant.3117

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Overall, the Commission preliminarily believed that mandating improvements to the completeness, accuracy, accessibility, and timeliness of current data sources without an NMS Plan that requires the consolidation of data and increased coverage across markets and broker-dealers would likely significantly limit the potential benefits relative to the Plan, possibly without providing significant cost savings.3118

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The Commission received one comment on the possibility of requiring modifications to OATS as an alternative to the CAT NMS Plan. The commenter agreed with the Commission’s analysis and the CAT NMS Plan approach, noting that “the vision of CAT has evolved through the years to become a much more comprehensive system than OATS or any other current system” and that “there is an opportunity now to take advantage of new technologies and the associated cost benefits they provide.”3119 Another commenter suggested an alternate approach to the CAT NMS Plan where the Commission would host the system in-house, under its direct and sole control, retaining the prerogative to grant (or deny) access to the data to non-broker-dealer affiliated SROs.3120 The commenter believed that collecting the data pursuant to an NMS Plan providing for SRO ownership, management and control over the data would limit the benefits of the Plan by potentially limiting the Commission’s access to, and use of, CAT Data.3121

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The Commission has considered the comments and continues to believe that mandating improvements to the completeness, accuracy, accessibility, and timeliness of current data sources without an NMS Plan that requires the consolidation of data and increased coverage across markets and broker-dealers would likely significantly limit the potential benefits, possibly without providing significant cost savings. In response to the suggestion that the Commission host the system in-house, the Commission believes that the concerns expressed by the commenter with respect to the Commission’s ability to access and utilize the CAT Data are mitigated by the Commission’s direct oversight authority with respect to the CAT NMS Plan, including but not limited to its ability to observe all meetings, including those conducted in Executive Session, its review and approval of rule changes, and its examination and inspection authority over the SROs. Further, as discussed above,3122 SROs have specific obligations under the Exchange Act as front-line regulators of the securities markets, and accordingly are well-positioned to oversee the development and operation of the CAT in a manner that will best fulfill regulatory needs, subject to oversight by the Commission. The Commission therefore does not agree that an alternative to the CAT NMS Plan where the Commission hosted the system in-house would result in greater benefits as compared to the CAT NMS Plan approach.

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pubdate: November 15, 2016 effdate: N/A +

12. Alternatives Discussed in the CAT NMS Plan

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Economic Analysis, Alternatives, Alternatives Discussed in the CAT NMS Plan + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + FIF Letter, + Data Boiler Letter, + Response Letter, + CAT Reporter, + ICI Letter, + Better Markets Letter, + SIFMA Letter, + Rule 613, + +

In the Notice, the Commission recognized that the Plan discussed many alternatives that the Commission did not discuss in the Alternatives Section of the Notice. 3123 Rule 613(a)(1)(xii) required the Participants to discuss in the Plan any reasonable alternative approaches that the Plan sponsors considered in developing the Plan, including a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative’s costs and benefits; and the basis upon which the Plan sponsors selected the approach reflected in the CAT NMS Plan. Such discussions appear in Section 12 of Appendix C of the Plan. The Commission reviewed these alternatives and did not include in the Alternatives Section of its Notice a discussion of all of the specific alternatives addressed in the Plan. In some cases, the Commission had no analysis to add beyond the analysis in the Plan. In other cases, the Plan did not require any specific alternative, so the Commission could not analyze the effect on the Plan of selecting a different alternative.

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The Commission received sufficient comments to analyze some economic implications of alternatives related to the primary storage method, data ingestion format approaches, the process to develop the CAT, and user support and the help desk. However, the Commission still does not have sufficient information to add to the Plan’s analysis of the alternatives regarding organizational structure,3124 personally identifiable information,3125 required reportable events,3126 data feed connectivity,3127 industry testing,3128 user management,3129 and quality assurance3130.

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a. Primary Storage

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In the Notice, the Commission solicited comment on whether the CAT NMS Plan should mandate a particular data storage method and on how a storage method could affect the costs and benefits of the Plan.3131 The CAT NMS Plan states that bidders proposed two methods of primary data storage: traditionally-hosted storage architecture and infrastructure-as-a-service.3132 The CAT NMS Plan does not mandate a specific method for primary storage, but does indicate that the storage solution would meet the security, reliability, and accessibility requirements for the CAT, including storage of PII data, separately. The CAT NMS Plan also indicates several considerations in the selection of a storage solution including maturity, cost, complexity, and reliability of the storage method.

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The Commission received three comment letters in response to this alternative.3133 All three commenters recommended not mandating a particular storage method. One commenter suggested that mandating the storage method would “make the structure too rigid and static, hindering the flexibility for future scalability.”3134 Another commenter claimed too little information in that the “eventual Plan Processor is in a better position to define the storage methods” stating that evaluation considers “total system design, not storage methods in isolation.”3135 The third commenter did not provide arguments supporting its recommendation, but did point out that the method of storage would allow the ability to return results of queries at varying time intervals.3136 The commenters did not discuss the relative costs and benefits of the specific architectures mentioned in the Plan but one commenter indicated that its own system could enable ultrafast analysis/ pattern recognition and save significant space.3137 Based on these comments, the Commission believes that mandating a particular storage method could be costly, but Commission did not receive comments on the benefits of mandating a storage method or on the costs or benefits of particular storage methods. Therefore, the Commission has more information than at the time of the Notice regarding the costs of mandating a particular storage method but still cannot fully analyze the economic effects.

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b. Data Ingestion Format

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In the Notice, the Commission requested comment on whether the Plan should mandate a particular approach to data ingestion.3138 The CAT NMS Plan does not mandate the format in which data must be reported to the Central Repository.3139 Rather, the Plan provides that the Plan Processor will determine the electronic format in which data must be reported, and that the format will be described in the Technical Specifications.3140 The Plan discusses the tradeoffs between requiring that the CAT Reporters report data to CAT in a uniform defined format, in existing messaging protocols, or a hybrid of both.3141 The Plan does not require any approach, but will determine the approach in conjunction with the selection of the Plan Processor. An example of a uniform defined format includes the current process for reporting data to OATS.3142 Several bidders proposed to leverage the OATS format and enhance it to meet the requirements of Rule 613. The Plan states that this could reduce the burden on certain CAT Reporters (i.e., current OATS Reporters) and simplify the process for those CAT Reporters to implement the CAT.3143 The other alternative, accepting existing messaging protocols, would allow CAT Reporters to submit copies of their order handling messages that are typically used across the order lifecycle and within order management processes, such as FIX. 3144 The Plan states that using existing messaging protocols could result in quicker implementation times and simplify data aggregation.3145 The Plan further notes that surveys revealed no cost difference between the two approaches,3146 but that FIF members prefer using the FIX protocol.3147

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While the Plan discussed a “uniform defined format” as different from existing messaging protocols such as FIX, the Commission understands that the term “uniform defined format” can also apply to FIX. To clarify the distinction between the two approaches, the Commission refers to one approach as requiring a “specialized delimited flat file” approach and the other as requiring existing messaging protocols.

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In addition to soliciting comment on whether the Plan should mandate an approach, the Commission also requested information on the relative costs and benefits, including implementation and ongoing costs of the data ingestion format approaches.3148 Further, the Commission noted that the survey results that the costs of the approaches are similar did not seem intuitive and requested comment on why the costs appear similar in the survey results.3149

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As an alternative to the Plan, four commenters seemed to support specifying an approach to data ingestion format.3150 One commenter stated that mandating an approach in the Plan would give industry more time to prepare and would limit the chances that broker-dealers would need to make significant changes after seeing the Technical Specifications, which could seriously compromise the implementation schedule.3151 In particular, this commenter stated that the data ingestion format approach is a critical component of the Plan and “an optimum solution that meets the needs of industry at reasonable cost and is minimally disruptive” would require that the approach be “widely reviewed and vetted across the industry.”3152 Another commenter suggested mandating the approach for consistency and transparency.3153 The other two commenters that supported mandating the approach in the Plan provided arguments regarding the effects of a specific approach but not the effects of mandating an approach.

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Another alternative would be to specify the actual format in the Plan. Of the four commenters who supported mandating the approach, one also supported mandating the format in the Plan.3154

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Six commenters provided information on the tradeoffs or economic effects of various approaches or formats.3155 While some commenters addressed the alternatives of a specialized delimited flat file such as a modified OATS, existing messaging protocol such as FIX, or a hybrid of the two,3156 others commented more generally on the impacts of non-uniform formats or standards without indicating whether they consider a messaging protocol to be non-uniform or uniform format or standard.3157 Only one commenter specifically addressed why the costs of reporting using Plan-mandated messaging protocols would be similar to reporting in a specialized delimited flat file format, and that commenter asserted that the costs should be the same for either approach because accepting existing message protocols would require a more expensive infrastructure and the cost would likely be passed down to the CAT Reporters.3158 The six commenters also provided mixed information on the economic effects of various considerations, 3159 such as accepting multiple formats or a single format,3160 and accepting only widely used existing formats, new specialized delimited flat file formats, or existing bespoke broker-dealer formats. 3161

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In response to comments, the Participants explained that they continue to believe that the Plan should not mandate a specific message format.3162 That said, the Participants understand that the message format used for reporting to the Central Repository must be easily understood and adopted by the industry, and this factor will be considered as the Participants evaluate each Bidder’s solution. Moreover, the Participants also will take into consideration that the Plan Processor must be able to reliably and accurately convert data to a uniform electronic format for consolidation and storage, regardless of the message formats in which the CAT Reporters would be required to report data to the Central Repository. The message format(s) ultimately selected for reporting to the Central Repository will be described in the Technical Specifications, which will be approved by the Operating Committee. In addition, the Participants indicated that the Bids of the three remaining Bidders propose accepting existing messaging protocols (e.g., FIX), rather than requiring CAT Reporters to use a new format.3163

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The Commission has considered the comments and Participants’ responses in relation to whether the Plan should mandate a specific approach and believes that there are certain costs and benefits associated with mandating the approach in the Plan and that not mandating the approach is a source of uncertainty in assessing the economic effects of the Plan. The Commission believes that the risks to the implementation schedule (and therefore an increase in implementation costs) of not mandating an approach would be lower if CAT Reporters could submit their reports to CAT in the message protocols they currently use for business purposes because such implementation would involve updating current systems rather than building new systems. The Commission understands from the Participants’ response that all remaining Bidders would have within the Plan Processor the ability to accept existing message protocols. Therefore, those CAT Reporters currently using the messaging protocols accepted by the eventual Plan Processor would not need to make significant systems changes. However, the Commission recognizes that the mixed information regarding the economic effects of particular approaches or formats reflects the level of uncertainty in the range of benefits and costs associated with the selection of data ingestion formats and thus the impact of the lack of transparency in the Plan on this economic analysis.

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In response to the comment that the costs of the two approaches should be similar, the Commission notes that the costs of the approaches do not seem consistent with the comment. Whereas the commenter’s statements would suggest that the costs of message protocols would be lower for broker-dealers, vendors, and SROs, and higher for building and operating the Central Repository, and similar in aggregate, the costs actually appear similar for each survey group. Therefore, the Commission continues to recognize that the survey result indicating that the costs of the approaches are similar does not seem intuitive.

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Finally, the Commission notes the potential for the Plan Processor to use the opportunity to select a message format that entrenches itself by increasing the costs of replacement due to underperformance.3164 However, as explained above and in Section IV.D.2 the Participants will consider whether a Bidder has proposed a format that is easily understood and adoptable by the industry, and the Commission believes that the message format decision must be made in connection with developing the overall architecture for CAT.

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c. Process to Develop CAT

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In the Notice, the Commission requested comment on whether the CAT NMS Plan should mandate a particular development process and the impact on the relative costs and benefits of particular processes.3165 Bidders proposed, and the Plan describes, several processes for development of the CAT: the agile or iterative development model, the waterfall model, and hybrid models.3166 The CAT NMS Plan does not mandate a particular development process because any of the options could be utilized to manage the development of CAT.3167 The CAT NMS Plan notes that the agile model is more flexible and more susceptible to the early delivery of software for testing and feedback, but that the agile model makes it more difficult to accurately estimate the effort and time required for development. The waterfall model would also facilitate longer-term planning and coordination among multiple vendors or project streams.3168

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Two commenters suggested that the Plan not mandate a particular development method.3169 One commenter stated that “appropriate management flexibilities/discretions are needed.”3170 The other commenter cited bidder expertise and that the Plan Processor should be allowed to choose the “methodology most appropriate for the specific development effort.”3171 The commenter continued on to say that “the different development methodologies can each be equally effective in an implementation plan, depending on many factors and tradeoffs.” While providing information on the costs of mandating a method, neither provided relative costs and benefits of specific methods.

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Based on these comments, the Commission believes that mandating a specific development process in the Plan could be costly because mandating the process removes the ability for the Plan Processor to select the lowest cost or most effective methodology for a given implementation. The Commission recognizes that the Plan will involve one big implementation initially, but may also involve many subsequent implementations based on amendments to the Plan or changes in the technical specifications. The nature of these implementations could vary greatly and the same development methodology may not be most effective in all situations. Therefore, the Commission recognizes that mandating a specific development process would be costly.

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d. User Support and Help Desk

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In the Notice, the Commission requested comment on whether the CAT NMS Plan should specify the standards for user support and on the relative costs and benefits of the alternative standards.3172 The CAT NMS Plan discusses several alternatives related to how the Plan Processor provides a CAT help desk that would be available 24 hours a day, 7 days a week and be able to manage 2,500 calls per month.3173 Specifically, alternatives relate to the number of user support staff members, the degree to which the support team is dedicated to CAT, and whether the help desk is located in the United States or offshore. The CAT NMS Plan discusses the benefit and cost tradeoffs,3174 but does not mandate any of the particular alternatives. Instead, the CAT NMS Plan commits to considering each Bidder’s user support proposals in the context of the overall Bid.

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Two commenters addressed alternatives regarding user support and a help desk.3175 One commenter recommended that customer support guidelines and functionalities be specified in the Plan3176 while the other suggested that the costs of user support and a help desk could be “minimized or eliminated” under different data collection and reporting methods.3177 The commenter that supported specifying guidelines and functionalities in the Plan stated that “the level of service provided is directly tied to the industry’s ability to meet the aggressive quality goals and error rates, and directly tied to customer service costs in bidders’ proposals, and ultimately in costs to be borne by the industry.” Therefore, the commenter said they “should be dictated by the Plan and not left to Plan Processor discretion.” Rather than focus on the size and location of the support team and whether the team is dedicated to CAT, the commenter suggests specific standards and functionalities such as wait times, a tracking system, and the ability for web submission or “on-line chat.”

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In their response, the Participants clarified that the CAT Help Desk staff will be trained to support CAT Reporters as needed, and noted that this may include, for example, training related to data access tools, data submission requirements, and customer support.3178

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The Commission has considered these comments and recognizes the benefits of the Plan specifying certain functionalities and standards while letting the Plan Processor select the size and location of the support team necessary to meet these functionalities and standards. In particular, the Commission agrees with the commenter that specifying guidelines and functionalities can facilitate the accomplishment of the benefits described herein and could result in lower costs to the industry relative to the Plan. However, the Commission also agrees that the Plan Processor may be in a better position to determine the size and location of the support team needed to satisfy the guidelines and functionalities.

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pubdate: November 15, 2016 effdate: N/A +

VI. Paperwork Reduction Act

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + Section 11A of the Securities Exchange Act of 1934, + +

Certain provisions of Rule 613 contain “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).3179 The Commission published notice requesting comment on the collection of information requirements in the Notice and submitted the proposed collection to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The control number for Rule 613 is OMB Control No. 3235-0671 and the title of the collection of information is “Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules Thereunder.” The Commission is adopting this collection of information.

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The Commission has amended the CAT NMS Plan, resulting in “a new collection of information” “CAT NMS Plan Reporting and Disclosure Requirements.” The new collection of information is described in Section VI.E., below. The Commission is requesting public comment on the new collection of information requirement in this Order. We are applying for an OMB control number for the proposed new collection of information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a control number to the new collection. Responses to the new collection of information would be mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

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This Order includes the Commission’s estimates of the costs associated with the requirements of Rule 613, as imposed by the CAT NMS Plan. Similarly, the Commission is discussing below its estimates of the burden hours associated with the information collection requirements of the CAT NMS Plan, as filed by the Participants, and as subsequently amended by the Commission.3180 These estimates are based on the requirements of Rule 613 and take into account the Exemption Order.3181 Information and estimates contained in the CAT NMS Plan that was submitted by the Participants also informed these estimates because they provide a useful, quantified point of reference regarding potential burdens and costs. In the Notice, the Commission requested comment on the collection of information requirements associated with the CAT NMS Plan that were required by Rule 613. As noted above, the Commission received 24 comment letters on the Notice.3182 Although the Commission did not receive any comments on the hourly burdens associated with the information collections required by Rule 613, a number of comments were submitted that addressed the Commission’s cost estimates related to these collections.3183

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pubdate: November 15, 2016 effdate: N/A +

A. Summary of Collection of Information under Rule 613

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613 + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + Central Repository, + +

Rule 613 requires that the CAT NMS Plan must provide for an accurate, time-sequenced record of an order’s life, from receipt or origination, through the process of routing, modification, cancellation and execution.3184 The Central Repository, created by the Participants, would be required to receive, consolidate and retain the data required under the Rule.3185 Such data must be accessible to each Participant, as well as the Commission, for purposes of performing regulatory and oversight responsibilities.3186

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Rule 613 provides that the CAT NMS Plan must require that all Participants that are exchanges, and their members, record and report to the Central Repository certain data for each NMS security registered or listed on a national securities exchange, or admitted to unlisted trading privileges on such exchange, and each Participant that is a national securities association, and its members, record and report for each NMS security for which transaction reports are required to be submitted to the national securities association in a uniform electronic format or in a manner that would allow the Central Repository to convert the data to a uniform electronic format for consolidation and storage. This data must be recorded contemporaneously with the Reportable Event and reported to the Central Repository in no event later than 8:00 a.m. ET on the trading day following the day such information has been recorded by the national securities exchange, national securities association, or member.3187

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Rule 613 also provides that the CAT NMS Plan must require each member of a Participant to record and report to the Central Repository other information which may not be available until later in the clearing process no later than 8:00 a.m. ET on the trading day following the day the member receives such information.3188 Rule 613 also requires the Participants to provide to the Commission, at least every two years after the effectiveness of the CAT NMS Plan, a written assessment of the operation of the consolidated audit trail.3189

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Rule 613 requires all Participants to make use of the consolidated information, either by each developing and implementing new surveillance systems, or by enhancing existing surveillance systems.3190 The Rule also requires the CAT NMS Plan to require Participants to submit to the Commission a document outlining the manner in which non-NMS securities and primary market transactions in NMS and non-NMS securities can be incorporated into the consolidated audit trail.3191

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pubdate: November 15, 2016 effdate: N/A +

1. Central Repository

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Central Repository + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Plan Processor, + Rule 613, + Central Repository, + +

Rule 613 provides that the CAT NMS Plan must require the creation and maintenance of a Central Repository that would be responsible for the receipt, consolidation, and retention of all data submitted by the Participants and their members.3192 The Rule also requires that the CAT NMS Plan require the Central Repository to retain the information reported pursuant to subparagraphs (c)(7) and (e)(7) of the Rule for a period of not less than five years in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention.3193 The Plan Processor is responsible for operating the Central Repository in compliance with the Rule and the CAT NMS Plan. In addition, the Rule provides that the CAT NMS Plan must include: policies and procedures to ensure the security and confidentiality of all information submitted to the Central Repository,3194 including safeguards to ensure the confidentiality of data;3195 information barriers between regulatory and non-regulatory staff with regard to access and use of data;3196 a mechanism to confirm the identity of all persons permitted to use the data;3197 a comprehensive information security program for the Central Repository that is subject to regular reviews by the CCO;3198 and penalties for non-compliance with policies and procedures of the Participants or the Central Repository with respect to information security.3199 Further, the Rule provides that the CAT NMS Plan must include policies and procedures to be used by the Plan Processor to ensure the timeliness, accuracy, integrity, and completeness of the data submitted to the Central Repository,3200 as well as policies and procedures to ensure the accuracy of the consolidation by the Plan Processor of the data.3201

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pubdate: November 15, 2016 effdate: N/A +

2. Data Collection and Reporting

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Data Collection and Reporting + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + Central Repository, + +

Rule 613 provides that the CAT NMS Plan must require each Participant, and any member of such Participant, to record and electronically report to the Central Repository details for each order and Reportable Event documenting the life of an order through the process of original receipt or origination, routing, modification, cancellation, and execution (in whole or part) for each NMS security.3202 Rule 613 requires the CAT NMS Plan to require each national securities exchange and its members to record and report to the Central Repository the information required by Rule 613(c)(7) for each NMS security registered or listed for trading on an exchange, or admitted to unlisted trading privileges on such exchange.3203 Rule 613 provides that the CAT NMS Plan must require each Participant that is a national securities association, and its members, to record and report to the Central Repository the information required by Rule 613(c)(7) for each NMS security for which transaction reports are required to be submitted to the Participant.3204 The Rule requires each Participant and any member of a Participant to record the information required by Rule 613(c)(7)(i) through (v) contemporaneously with the Reportable Event, and to report this information to the Central Repository by 8:00 a.m. ET on the trading day following the day such information has been recorded by the Participant or member of the Participant.3205 The Rule requires each Participant and any member of a Participant to record and report the information required by Rule 613(c)(7)(vi) through (viii) to the Central Repository by 8:00 a.m. ET on the trading day following the day the Participant or member receives such information.3206 The Rule requires each Participant and any member of such Participant to report information required by Rule 613(c)(7) in a uniform electronic format or in a manner that would allow the Central Repository to convert the data to a uniform electronic format for consolidation and storage.3207

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Such information must also be reported to the Central Repository with a timestamp of a granularity that is at least to the millisecond or less to the extent that the order handling and execution systems of a Participant or a member utilize timestamps in finer increments.3208 The Commission understands that any changes to broker-dealer recording and reporting systems to comply with Rule 613 may also include changes to comply with the millisecond timestamp requirement.

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pubdate: November 15, 2016 effdate: N/A +

3. Collection and Retention of National Best Bid and National Best Offer, Last Sale Data and Transaction Reports

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Collection and Retention of National Best Bid and National Best Offer, Last Sale Data and Transaction Reports + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + Rule 601 of Regulation NMS, + +

Rule 613(e)(7) provides that the CAT NMS Plan must require the Central Repository to collect and retain on a current and continuing basis: (i) information on the National Best Bid and National Best Offer (“NBBO”) for each NMS Security; (ii) transaction reports reported pursuant to a transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS; and (iii) Last Sale Reports reported pursuant to the OPRA Plan.3209 The Central Repository must retain this information for no less than five years.3210

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pubdate: November 15, 2016 effdate: N/A +

4. Surveillance

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Surveillance + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613, + +

Rule 613(f) provides that the CAT NMS Plan must require that every Participant develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail. Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the surveillance systems be implemented within fourteen months after effectiveness of the CAT NMS Plan.

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pubdate: November 15, 2016 effdate: N/A +

5. Participant Rule Filings

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Participant Rule Filings + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 19b-4, + Rule 613, + Section 19(b)(2) of the Exchange Act, + +

Rule 613(g)(1) requires each Participant to file with the Commission, pursuant to Section 19(b)(2) of the Exchange Act and Rule 19b-4 thereunder,3211 a proposed rule change to require its members to comply with the requirements of Rule 613 and the CAT NMS Plan approved by the Commission.3212 The burden of filing such a proposed rule change is already included under the collection of information requirements contained in Rule 19b-4 under the Exchange Act.3213

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pubdate: November 15, 2016 effdate: N/A +

6. Document on Expansion to Other Securities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Document on Expansion to Other Securities + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613(i), + +

Rule 613(i) provides that the CAT NMS Plan must require the Participants to jointly provide to the Commission, within six months after the CAT NMS Plan is effective, a document outlining how the Participants could incorporate into the CAT information regarding: (1) equity securities that are not NMS securities;3214 (2) debt securities; and (3) primary market transactions in equity securities that are not NMS securities and in debt securities.3215

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pubdate: November 15, 2016 effdate: N/A +

7. Written Assessment of Operation of the Consolidated Audit Trail

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under Rule 613, Written Assessment of Operation of the Consolidated Audit Trail + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + Rule 613, + Plan Processor, + Securities Exchange Act Release No. 50486, + File No. S7-18-04, + Rule 19b-4, + +

Rule 613(b)(6) provides that the CAT NMS Plan must require the Participants to provide the Commission a written assessment of the consolidated audit trail’s operation at least every two years, once the CAT NMS Plan is effective.3216 Such written assessment shall include, at a minimum, with respect to the CAT: (i) an evaluation of its performance; (ii) a detailed plan for any potential improvements to its performance; (iii) an estimate of the costs associated with any such potential improvements; and (iv) an estimated implementation timeline for any such potential improvements, if applicable.3217 As required by Rule 613(b)(6), the Participants submitted a CAT NMS Plan that includes these minimum requirements. The Commission is subsequently amending the requirements set forth in the CAT NMS Plan to change the reporting frequency from every two years to annual, as well as to provide additional specificity regarding the elements of the written assessment.3218 As amended, the annual written assessment must include the following: (i) an evaluation of the information security program of the CAT to ensure that the program is consistent with the highest industry standards for protection of data; (ii) an evaluation of potential technological upgrades based upon a review of technological advancements over the preceding year, drawing on technology expertise, whether internal or external; (iii) an evaluation of the time necessary to restore and recover CAT Data at a back-up site; (iv) an evaluation of how the Plan Processor and Participants are monitoring Error Rates and to explore the imposition of Error Rates based on product, data element or other criteria; (v) a copy of the evaluation required by the CAT NMS Plan in Section 6.8(c) of the Plan that the Plan Processor evaluate whether industry standards have evolved such that: (1) the synchronization standard in Section 6.8(a) of the CAT NMS Plan should be shortened; or (2) the required timestamp in Section 6.8(b) of the CAT NMS Plan should be in finer increments; and (vi) an assessment of whether any data elements reported to the CAT should be added, deleted or changed; and (vii) an estimate of the costs and benefits associated with any potential improvements to the performance of the CAT, including an assessment of the potential impact on competition, efficiency, capital formation, and investor protection.

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pubdate: November 15, 2016 effdate: N/A +

B. Proposed Use of Information

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information + Compliance User: Self-Regulatory Organization + Keywords: +
pubdate: November 15, 2016 effdate: N/A +

1. Central Repository

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Central Repository + Compliance User: Self-Regulatory Organization + Keywords: + Central Repository, + Rule 613, + +

Rule 613 states that the Central Repository is required to receive, consolidate and retain the data required to be submitted by the Participants and their members.3219 Participant and Commission staff would have access to the data for regulatory purposes.3220

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pubdate: November 15, 2016 effdate: N/A +

2. Data Collection and Reporting

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Data Collection and Reporting + Compliance User: Self-Regulatory Organization + Keywords: + Rule 613, + +

The Commission believes that the data collected and reported pursuant to the requirements of Rule 613 would be used by regulators to monitor and surveil the securities markets and detect and investigate activity, whether on one market or across markets. The data collected and reported pursuant to Rule 613 would also be used by regulators for the evaluation of tips and complaints and for complex enforcement inquiries or investigations, as well as inspections and examinations. Further, the Commission believes that regulators would use the data collected and reported to conduct timely and accurate analysis of market activity for reconstruction of broad-based market events in support of regulatory decisions.

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pubdate: November 15, 2016 effdate: N/A +

3. Collection and Retention of NBBO, Last Sale Data and Transaction Reports

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Collection and Retention of NBBO, Last Sale Data and Transaction Reports + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Rule 613(c)(7), + Central Repository, + +

The CAT NMS Plan must require the Central Repository to collect and retain NBBO information, transaction reports, and Last Sale Reports in a format compatible with the order and event information collected pursuant to Rule 613(c)(7).3221 Participant and Commission staff could use this data to easily search across order, NBBO, and transaction databases. The Commission believes that having the NBBO information in a uniform electronic format compatible with order and event information would assist Participants in enforcing compliance with federal securities laws, rules, and regulations, as well as their own rules.3222 The Commission also believes that a CAT NMS Plan requiring the Central Repository to collect and retain the transaction reports and Last Sale Reports in a format compatible with the order execution information would aid regulators in monitoring for certain market manipulations.3223

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pubdate: November 15, 2016 effdate: N/A +

4. Surveillance

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Surveillance + Compliance User: Self-Regulatory Organization + Keywords: + Rule 611 of Regulation NMS, + SRO, + Rule 613, + +

The requirement in Rule 613(f) that the Participants develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information in the consolidated audit trail,3224 is intended to position regulators to make full use of the consolidated audit trail data in order to carry out their regulatory obligations. In addition, because trading and potentially manipulative activities could take place across multiple markets, and the consolidated audit trail data would trace the entire lifecycle of an order from origination to execution or cancellation, new or enhanced surveillance systems may also enable regulators to investigate potentially illegal activity that spans multiple markets more efficiently.

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pubdate: November 15, 2016 effdate: N/A +

5. Document on Expansion to Other Securities

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Document on Expansion to Other Securities + Compliance User: Self-Regulatory Organization + Keywords: + Rule 613, + CAT NMS plan, + +

Rule 613(i) requires the CAT NMS Plan to require the Participants to jointly provide to the Commission, within six months after the CAT NMS Plan is effective, a document outlining how the Participants could incorporate into the CAT information regarding certain products that are not NMS securities.3225 A document outlining a possible expansion of the consolidated audit trail could help inform the Commission about the Participants’ strategy for potentially accomplishing such an expansion over a reasonable period of time. Moreover, such document would aid the Commission in assessing the feasibility and impact of possible future proposals by the Participants to include such additional securities and transactions in the consolidated audit trail.

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pubdate: November 15, 2016 effdate: N/A +

6. Written Assessment of Operation of the Consolidated Audit Trail

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information, Written Assessment of Operation of the Consolidated Audit Trail + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Data, + Rule 613, + +

Rule 613(b)(6) requires the CAT NMS Plan to require the Participants to provide the Commission a written assessment of the CAT’s operation at least every two years, once the CAT NMS Plan is effective that includes a plan for potential improvements, an estimate of the costs associated with any such improvement, as well as the potential impact on competition, efficiency and capital formation, and a timeline.3226 The Commission has subsequently modified this requirement as imposed by the CAT NMS Plan to change the reporting frequency to annual and require that the written assessment include the benefits of any potential improvements and the impact on investor protection, as well as to provide more specificity on what the assessment must address.3227 The assessment is now required to include evaluations of the following: the information security program; potential technological upgrades; the time to restore and recover CAT Data at a back-up site; how the Plan Processor and the Participants are monitoring Error Rates and exploring imposing Error Rates based on other criteria; a copy of the evaluation required in Section 6.8(a) of the CAT NMS Plan that the Plan Processor evaluate whether industry standards have evolved such that: (i) the clock synchronization standard in Section 6.8(a) of the CAT NMS Plan should be shortened; (ii) the required timestamp in Section 6.8(b) of the CAT NMS Plan should be in finer increments; and an assessment of whether any data elements reported to the CAT should be added, deleted or changed. The Commission believes that requiring these specific issues to be addressed in the Participants’ annual written assessment will focus the Plan Processor and the Participants on critical technological and other developments, and should help ensure that CAT technology remains up-to-date, resilient and secure, and provides accurate CAT Data. Further, the Commission believes that it is important that the Participants consider not just the costs, but also the potential benefits associated with any improvements to the performance of the CAT, including the impact on investor protection.

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pubdate: November 15, 2016 effdate: N/A +

C. Respondents

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Respondents + Compliance User: Self-Regulatory Organization + Keywords: +
pubdate: November 15, 2016 effdate: N/A +

1. National Securities Exchanges and National Securities Associations

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Respondents, National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + +

The information collection titled “Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules Thereunder” and the proposed information collection apply to the 21 Participants (the 20 national securities exchanges and the one national securities association (FINRA)) currently registered with the Commission.3228

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pubdate: November 15, 2016 effdate: N/A +

2. Members of National Securities Exchanges and National Securities Association

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Respondents, Members of National Securities Exchanges and National Securities Association + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +

The information collection titled “Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules Thereunder” also applies to the Participants’ broker-dealer members, that is, Industry Members. The Commission believes that Rule 613 applies to 1,800 broker-dealers. The Commission understands that there are currently 4,138 broker-dealers; however, not all broker-dealers are expected to have CAT reporting obligations. The Participants report that approximately 1,800 broker-dealers currently quote or execute transactions in NMS Securities, Listed Options or OTC Equity Securities and would likely have CAT reporting obligations.3229

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pubdate: November 15, 2016 effdate: N/A +

D. Total Initial and Annual Reporting and Recordkeeping Burden

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden + Compliance User: Self-Regulatory Organization + Keywords: +
pubdate: November 15, 2016 effdate: N/A +

1. Burden on National Securities Exchanges and National Securities Associations

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Central Repository, + Plan Processor, + CAT, + Volcker Rule, + Section 17(a) of the Exchange Act, + SRO, + CAT Data, + FTE, + Rule 613, + +

a. Central Repository

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Rule 613 requires the Participants to jointly establish a Central Repository tasked with the receipt, consolidation, and retention of the reported order and execution information. The Participants reflected this requirement in the CAT NMS Plan. The Participants issued an RFP soliciting Bids from entities to act as the consolidated audit trail’s Plan Processor.3230 Bidders were asked to provide total one-year and annual recurring cost estimates to estimate the costs to the Participants for implementing and maintaining the Central Repository.3231 There are currently three remaining Bidders, any of which could be selected to be the Plan Processor. The Plan Processor would be responsible for building, operating, administering and maintaining the Central Repository.

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The Plan’s Operating Committee, which consists of one voting representative of each Participant,3232 would be responsible for the management of the LLC, including the Central Repository, acting by Majority or Supermajority Vote, depending on the issue.3233 In managing the Central Repository, among other things, the Operating Committee would have the responsibility to authorize the following actions of the LLC: (1) interpreting the Plan;3234 (2) determining appropriate funding-related policies, procedures and practices consistent with Article XI of the CAT NMS Plan;3235 (3) terminating the Plan Processor; (4) selecting a successor Plan Processor (including establishing a Plan Processor Selection Committee to evaluate and review Bids and make a recommendation to the Operating Committee with respect to the selection of the successor Plan Processor);3236 (5) entering into, modifying or terminating any Material Contract;3237 (6) making any Material Systems Change;3238 (7) approving the initial Technical Specifications or any Material Amendment to the Technical Specifications proposed by the Plan Processor;3239 (8) amending the Technical Specifications on its own motion;3240 (9) approving the Plan Processor’s appointment or removal of the CCO, CISO, or any Independent Auditor in accordance with Section 6.1(b) of the CAT NMS Plan;3241 (10) approving any recommendation by the CCO pursuant to Section 6.2(a)(v)(A);3242 (11) selecting the members of the Advisory Committee;3243 (12) selecting the Operating Committee chair;3244 and (13) determining to hold an Executive Session of the Operating Committee.3245

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Additionally, in managing the Central Repository, the Operating Committee would have the responsibility and authority, as appropriate, to: (1) direct the LLC to enter into one or more agreements with the Plan Processor obligating the Plan Processor to perform the functions and duties contemplated by the Plan to be performed by the Plan Processor, as well as such other functions and duties the Operating Committee deems necessary or appropriate;3246 (2) appoint as an Officer of the Company the individual who has direct management responsibility for the Plan Processor’s performance of its obligations with respect to the CAT;3247 (3) approve policies, procedures, and control structures related to the CAT System that are consistent with Rule 613(e)(4), Appendix C and Appendix D of the CAT NMS Plan that have been developed and will be implemented by the Plan Processor;3248 (4) approve any policy, procedure or standard (and any material modification or amendment thereto) applicable primarily to the performance of the Plan Processor’s duties as the Plan Processor;3249 (5) for both the CCO and CISO, render their annual performance reviews and review and approve their compensation;3250 (6) review the Plan Processor’s performance under the Plan at least once each year, or more often than once each year upon the request of two or more Participants that are not Affiliated Participants;3251 (7) in conjunction with the Plan Processor, approve and regularly review (and update as necessary) SLAs governing the performance of the Central Repository;3252 (8) maintain a Compliance Subcommittee for the purpose of aiding the CCO as necessary;3253 and (9) designate by resolution one or more Subcommittees it deems necessary or desirable in furtherance of the management of the business and affairs of the Company.3254

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The CAT NMS Plan will also establish a Selection Committee comprised of one Voting Senior Officer from each Participant,3255 which is tasked with the review and evaluation of Bids and the selection of the Initial Plan Processor.3256 The Selection Committee would determine, by Majority Vote, whether Shortlisted Bidders will have the opportunity to revise their Bids.3257 The Selection Committee would review and evaluate all Shortlisted Bids, including any permitted revisions submitted by Shortlisted Bidders, and in doing so, may consult with the Advisory Committee (or the DAG until the Advisory Committee is formed) and such other Persons as the Selection Committee deems appropriate.3258 After receipt of any permitted revisions, the Selection Committee would select the Initial Plan Processor from the Shortlisted Bids in two rounds of voting where each Participant has one vote via its Voting Senior Officer in each round.3259 Following the selection of the Initial Plan Processor, the Participants would file with the Commission a statement identifying the Initial Plan Processor and including the information required by Rule 608.3260

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For its initial and ongoing internal burden and cost estimates associated with the management of the Central Repository, the Commission is relying on estimates provided in the CAT NMS Plan for the development of the CAT NMS Plan, which the Participants “have accrued, and will continue to accrue,”3261 and have described in the CAT NMS Plan as “reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan.”3262

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The Commission believes that the activities of the Operating Committee and the Selection Committee overlap with those undertaken by the Participants to develop the CAT NMS Plan. The CAT NMS Plan describes the costs incurred by the Participants to develop the CAT NMS Plan as including “staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration.”3263 For the building and management of the Central Repository, the Selection Committee and the Operating Committee would have comparable responsibilities. The Selection Committee would be required to review and evaluate all Shortlisted Bids, including any permitted revisions submitted by Shortlisted Bidders, and then to select the Initial Plan Processor from those Bids. As part of its overall management of the Central Repository, the Operating Committee would have responsibility for decisions associated with the technical requirements of the Central Repository.3264 Furthermore, the Operating Committee would be required to establish a Selection Committee to evaluate Bids received to select a successor Plan Processor,3265 and would also be required to authorize the selection of the members of the Advisory Committee,3266 comprising members of the industry, to advise the Participants on the implementation, operation, and administration of the Central Repository.3267 Because the responsibilities of the Operating Committee and the Selection Committee are similar to those described in the CAT NMS Plan for the development of the CAT NMS Plan itself, the Commission believes that it is reasonable to use the CAT NMS Plan estimates as the basis for its burden and cost estimates for the initial and ongoing management of the Central Repository.

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(1) Initial Burden and Costs to Build the Central Repository

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Each Participant would contribute an employee and a substitute for the employee to serve on the Operating Committee that would oversee the Central Repository.3268 Additionally, each Participant would select a Voting Senior Officer to represent the Participant as a member of the Selection Committee responsible for the selection of the Plan Processor of the Central Repository.3269

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A. Notice Estimates – Initial Burden and Costs

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In the Notice, the Commission preliminarily estimated that, over the 12-month period after the effectiveness of the CAT NMS Plan within which the Participants would be required to select an Initial Plan Processor3270 and begin reporting to the Central Repository,3271 each Participant would incur an initial internal burden of 720 burden hours associated with the management of the creation of the Central Repository and the selection of the Plan Processor (including filing with the Commission the statement identifying the Initial Plan Processor and including the information required by Rule 608), for an aggregate initial estimate of 14,407 burden hours.3272

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Additionally, the Commission preliminarily estimated that the Participants would collectively spend $2,400,000 on external public relations, legal and consulting costs associated with building the Central Repository and the selection of the Plan Processor for the Central Repository, or $120,000 per Participant.3273 The Commission based this estimate on the estimate provided in the CAT NMS Plan for public relations, legal and consulting costs incurred in preparation of the CAT NMS Plan. Because the Participants described such costs as “reasonably associated with creating, implementing and maintaining the CAT,”3274 the Commission preliminarily believed these external cost estimates should also be applied to the creation and implementation of the Central Repository.

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Using the estimates in the CAT NMS Plan, which are based on the Bids of the six Shortlisted Bidders, 3275 the Commission preliminarily estimated that the initial one-time cost to develop the Central Repository would be an aggregate initial external cost to the Participants of $91.6 million,3276 or $4.6 million per Participant.3277 The Commission preliminarily estimated that each Participant would incur initial one-time external costs of $7 million3278 to build the Central Repository, or an aggregate initial one-time external cost across all Participants of $140 million.3279 The estimates in the CAT NMS Plan, as well as the Commission’s preliminary estimate includes internal technological, operational, administrative and “any other material costs.”3280

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B. Order Estimates – Initial Burden and Costs

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Subsequent to the publication of the Notice, the Participants submitted revised Central Repository cost estimates to reflect the proposed development and maintenance costs of the final three Shortlisted Bidders.3281 In addition, with the registration of IEX as a national securities exchange in June 2016,3282 the expected number of Participants has increased from 20 to 21. As a result, the Commission is modifying its estimates of the initial burden and costs of the Central Repository.

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After incorporating the revisions to the Central Repository cost estimates and the increase in the number of Participants, the Commission now estimates that, over the 12-month period after the effectiveness of the CAT NMS Plan within which the Participants would be required to select an Initial Plan Processor3283 and begin reporting to the Central Repository,3284 each Participant would incur an initial internal burden of 686.05 burden hours associated with the management of the creation of the Central Repository and the selection of the Plan Processor (including filing with the Commission the statement identifying the Initial Plan Processor and including the information required by Rule 608), for an aggregate initial estimate of 14,407 burden hours.3285

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The Commission has not changed its estimate that the Participants will collectively spend $2,400,000 on external public relations, legal and consulting costs associated with the building of the Central Repository. However, the individual Participant cost estimate has decreased from $120,000 per Participant (as the Commission preliminarily estimated in the Notice3286) to $114,285.71 per Participant, due to the increase in the number of Participants.3287 As noted in the Notice, the Commission is basing this estimate on the estimate provided in the CAT NMS Plan for public relations, legal and consulting costs incurred in preparation of the CAT NMS Plan. Because the Participants described such costs as “reasonably associated with creating, implementing and maintaining the CAT,”3288 the Commission believes these external cost estimates should also be applied to the creation and implementation of the Central Repository.

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As noted above, the Participants updated the Central Repository estimates to reflect the estimates of the final three Shortlisted Bidders.3289 Using the revised estimates, the Commission estimates that the initial one-time cost to develop the Central Repository would be an aggregate initial external cost to the Participants of $65 million,3290 or $3,095,238.09 per Participant.3291 Therefore, the Commission now estimates that each Participant would incur initial one-time external costs of $3,209,523.803292 to build the Central Repository, or an aggregate initial onetime external cost across all Participants of $67,399,999.80.3293

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(2) Ongoing, Annual Burden Hours and Costs for the Central Repository

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After the Central Repository has been developed and implemented, there would be ongoing costs for operating and maintaining the Central Repository, including the cost of systems and connectivity upgrades or changes necessary to receive and consolidate the reported order and execution information from Participants and their members; the cost to store data, and make it available to regulators, in a uniform electronic format, and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information; the cost of collecting and maintaining the NBBO and transaction data in a format compatible with the order and event information collected pursuant to the Rule; the cost of monitoring the required validation parameters, which would allow the Central Repository to automatically check the accuracy and completeness of the data submitted and reject data not conforming to these parameters consistent with the requirements of the Rule; and the cost of paying the CCO and CISO. The CAT NMS Plan provides that the Plan Processor would be responsible for the ongoing operations of the Central Repository.3294 The Operating Committee would continue to be responsible for the management of the Central Repository. In addition, the CAT NMS Plan states that the Participants would incur costs for public relations, legal, and consulting costs associated with maintaining the CAT upon approval of the CAT NMS Plan.3295

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A. Notice Estimates – Ongoing Burden and Costs

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In the Notice, the Commission preliminarily estimated that each Participant would incur an ongoing annual internal burden of 720 burden hours associated with the continued management of the Central Repository, for an aggregate annual estimate of 14,407 burden hours across the Participants.3296

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Additionally, the Commission preliminarily estimated that the Participants would collectively spend $800,000 annually on external public relations, legal and consulting costs associated with the continued management of the Central Repository, or $40,000 per Participant.3297

+

The CAT NMS Plan includes the estimates the six Shortlisted Bidders provided for the annual ongoing costs to the Participants to operate the Central Repository.3298 The CAT NMS Plan did not categorize the costs included in the ongoing costs, but the Commission believed they would comprise external technological, operational and administrative costs, as the Participants described the costs included in the initial one-time external cost to build the Central Repository.3299 Using these estimates, the Commission preliminarily estimated that the annual ongoing cost to the Participants3300 to compensate the Plan Processor for building, operating and maintaining the Central Repository would be an aggregate ongoing external cost of $93 million,3301 or approximately $4.7 million per Participant.3302 Therefore, the Commission preliminarily estimated that each Participant would incur ongoing annual external costs of $4,740,0003303 to maintain the Central Repository, or aggregate ongoing annual external costs across all Participants of $94,800,000.3304

+

B. Comments/Responses on Ongoing Costs

+

One commenter provided an alternate estimate for Central Repository ongoing costs of $28 million - $36 million.3305 The commenter did not provide additional information or analysis to support this estimate, but the Commission notes that the commenter cited a study of the costs of the Volcker Rule in support of estimates for costs to Industry Members.3306 If the commenter is basing its estimates on the costs expected from the Volcker Rule, the Commission notes that the requirements of Rule 613 are significantly different than the requirements of the Volcker Rule. The Commission also notes that the estimates provided in the Notice are the result of a competitive bidding process specific to the CAT and the Commission deems them credible.

+

C. Order Estimates – Ongoing Burden and Costs

+

As noted above, subsequent to the publication of the Notice, the Participants submitted revised Central Repository cost estimates to reflect the proposed development and maintenance costs of the final three Shortlisted Bidders.3307 In addition, with the registration of IEX as a national securities exchange in June 2016,3308 the expected number of Participants has increased from 20 to 21. As a result, the Commission is modifying its estimates of the ongoing burden and costs of the Central Repository.

+

After incorporating the revisions to the Central Repository cost estimates and the increase in the number of Participants, the Commission now estimates that each Participant would incur an ongoing annual internal burden of 686.05 burden hours associated with the continued management of the Central Repository, for an aggregate annual estimate of 14,407 burden hours across the Participants.3309

+

The Commission has not changed its estimate that the Participants would collectively spend $800,000 annually on external public relations, legal and consulting costs associated with the continued management of the Central Repository. However, the individual Participant cost estimate has decreased from $40,000 per Participant (as the Commission preliminarily estimated in the Notice3310) to $38,095.24 per Participant3311 due to the increase in the number of Participants.3312

+

As noted above, the Participants updated the Central Repository estimates to reflect the estimates of the final three Shortlisted Bidders.3313 Using the revised estimates, the Commission now estimates that the annual ongoing cost to the Participants to compensate the Plan Processor for building, operating and maintaining the Central Repository would be an aggregate ongoing external cost of $55 million,3314 or $2,619,047.62 per Participant.3315 Therefore, the Commission estimates that each Participant would incur ongoing annual external costs of $2,657,142.863316 to maintain the Central Repository, or aggregate ongoing annual external costs across all Participants of $55,800,000.06.3317

+

b. Data Collection and Reporting

+

Rule 613(c)(1) requires the CAT NMS Plan to provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a Participant, and further to document the life of the order through the process of routing, modification, cancellation and execution (in whole or in part) of the order. Rule 613(c) requires the CAT NMS Plan to impose requirements on Participants to record and report CAT information to the Central Repository in accordance with specified timelines.

+

Rule 613(c) would require the collection and reporting of some information that Participants already collect to operate their business and are required to maintain in compliance with Section 17(a) of the Exchange Act and Rule 17a-1 thereunder.3318 For instance, the Commission believes that the national securities exchanges keep records pursuant to Section 17(a) of the Exchange Act and Rule 17a-1 thereunder in electronic form, of the receipt of all orders entered into their systems, as well as records of the routing, modification, cancellation, and execution of those orders. However, Rule 613 requires the Participants to collect and report additional and more detailed information, and to report the information to the Central Repository in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format for consolidation and storage.

+

For its estimates of the Participants’ costs to report CAT Data, the Commission is relying on the cost data provided by the Participants in the CAT NMS Plan. The Commission believes that such reliance is appropriate because the estimates in the CAT NMS Plan are based on Participants’ responses to the Participants Study undertaken to estimate CAT-related costs for hardware and software, FTE costs, and third-party providers, if the Commission approves the CAT NMS Plan.3319 The Commission is providing below its paperwork burden estimates for the initial burden hours and external costs, and ongoing, annual burden hours and external costs to be incurred by the Participants to comply with the data reporting requirements of Rule 613.3320

+

(1) Initial Burden Hours and External Cost

+

The CAT NMS Plan provides the following average costs that the Participants would expect to incur to adopt the systems changes needed to comply with the data reporting requirements of the CAT: $10,300,000 in aggregate FTE costs for internal operational, technical/development, and compliance functions; $770,000 in aggregate third party legal and consulting costs; and $17,900,000 in aggregate total costs.3321

+

A. Notice Estimates – Initial Burden and Costs

+

In the Notice, based on estimates provided in the CAT NMS Plan, the Commission preliminarily estimated that the initial internal burden hours to develop and implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the Rule for each Participant would be approximately 2,185 burden hours.3322 The Commission also preliminarily estimated that each Participant would, on average, incur approximately $38,500 in initial third party legal and consulting costs3323 for a total of $380,000 in initial external costs.3324 Therefore, the Commission preliminarily estimated that, for all Participants, the estimated aggregate one-time burden would be 43,690 hours3325 and the estimated aggregate initial external cost would be $7,600,000.3326

+

B. Comments/Responses on Initial Costs

+

One commenter believed that estimates of current data reporting costs to Participants were “grossly underestimated,”3327 and stated that the implementation cost estimate of $17.9 million for Participants was “not too far off,” but felt the Participants’ estimated costs for legal and consulting services and additional employees were not reliable.3328

+

The Commission has considered the comment and continues to believe that the Participant cost estimates presented in the Plan are credible and is thus not changing its cost estimates of Participants’ Data Recording and Reporting in response to the commenter. All 19 Participants3329 responded to the Participants Study that served as the basis of the estimates, and most Participants have experience collecting audit trail data as well as expertise in the requirements of the CAT and in their business practices. The commenter did not provide an explanation for why the Participants were unable to reasonably estimate their own current data reporting costs.

+

C. Order Estimates – Initial Burden and Costs

+

As noted earlier, subsequent to the publication of the Notice, the expected number of Participants has increased from 20 to 21.3330 As a result, the Commission is modifying its estimates of the initial burden and costs of Participants’ data collection and reporting. After incorporating the increase in the number of Participants, the Commission now estimates that the initial internal burden hours to develop and implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the Rule for each Participant would be approximately 2,080.80 burden hours.3331 The Commission also now estimates that each Participant would, on average, incur approximately $36,666.67 in initial third party legal and consulting costs3332 for a total of $361,904.76 in initial external costs.3333 Therefore, the Commission now estimates that, for all Participants, the estimated aggregate onetime burden would be 43,696.80 hours3334 and the estimated aggregate initial external cost would be approximately $7,600,000.3335

+

(2) Ongoing, Annual Burden Hours and External Cost

+

Once a Participant has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, the Commission estimates that Rule 613 would impose on each Participant ongoing annual burdens associated with, among other things, personnel time to monitor each Participant’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems that might result in additional reports to the Central Repository. The CAT NMS Plan provides the following average aggregate costs that the Participants would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $7,300,000 in anticipated annual FTE costs for operational, technical/development, and compliance functions related to data reporting; $720,000 in annual third party legal, consulting, and other costs;3336 and $14,700,000 total annual costs.3337

+

A. Notice Estimates – Ongoing Burden and Costs

+

In the Notice, based on estimates provided in the CAT NMS Plan, the Commission believed that it would take each Participant 1,548 ongoing burden hours per year3338 to continue compliance with Rule 613. The Commission preliminarily estimated that it would cost, on average, approximately $36,000 in ongoing third party legal and consulting and other costs3339 and $370,000 in total ongoing external costs per Participant.3340 Therefore, the Commission preliminarily estimated that the estimated aggregate ongoing burden for all Participants would be approximately 30,966 hours3341 and an estimated aggregate ongoing external cost of $7,400,000.3342

+

B. Comments/Responses on Ongoing Costs

+

One commenter noted that the Participants’ ongoing data reporting cost estimates do not include a “per-message toll charge in the CAT funding model.”3343 The Commission considered this comment, but notes that the Participants are not charged for message traffic according to the Plan’s funding model.

+

One commenter noted that the Participants’ ongoing data reporting cost estimates do not include a “per-message toll charge in the CAT funding model.”3344 The Commission considered this comment, but notes that the Participants are not charged for message traffic according to the Plan’s funding model

+

C. Order Estimates – Ongoing Burden and Costs

+

As noted earlier, subsequent to the publication of the Notice, the expected number of Participants has increased from 20 to 21.3345 As a result, the Commission is modifying its estimates of the ongoing burden and costs of Participants’ data reporting. After incorporating the increase in the number of Participants, the Commission now estimates that it would take each Participant 1,474.20 ongoing burden hours per year3346 to continue compliance with Rule 613. The Commission now estimates that it would cost, on average, approximately $34,285.71 in ongoing third party legal and consulting and other costs3347 and $352,380.95 in total ongoing external costs per Participant.3348 Therefore, the Commission now estimates that the estimated aggregate ongoing burden for all Participants would be approximately 30,958.20 hours3349 and an estimated aggregate ongoing external cost of approximately $7,400,000.3350

+

c. Collection and Retention of NBBO, Last Sale Data and Transaction Reports

+

Rule 613(e)(7) provides that the CAT NMS Plan must require the Central Repository to collect and retain on a current and continuous basis NBBO information for each NMS security, transaction reports reported pursuant to an effective transaction reporting plan, and Last Sale Reports reported pursuant to the OPRA Plan.3351 Additionally, the CAT NMS Plan must require the Central Repository to maintain this data in a format compatible with the order and event information consolidated and stored pursuant to Rule 613(c)(7).3352 Further, the CAT NMS Plan must require the Central Repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of Rule 613 for a period of not less than five years in a convenient and usable uniform electronic format that is directly available and searchable electronically without any manual intervention.3353 The Commission notes that the CAT NMS Plan includes these data as “SIP Data” to be collected by the Central Repository.3354 As it concluded in the Notice Paperwork Reduction Act analysis,3355 the Commission believes the burden associated with SIP Data is included in the burden to the Participants associated with the implementation and maintenance of the Central Repository.

+

d. Surveillance

+

Rule 613(f) provides that the CAT NMS Plan must require that every national securities exchange and national securities association develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail. Rule 613(a)(3)(iv) provides that the CAT NMS Plan must require that the surveillance systems be implemented within fourteen months after effectiveness of the CAT NMS Plan.

+

(1) Initial Burden Hours and External Cost

+

The CAT NMS Plan states that the estimated total cost to the Participants to implement surveillance programs within the Central Repository is $23,200,000.3356 This amount includes legal, consulting, and other costs of $560,000, as well as $17,500,000 in FTE costs for operational, technical/development, and compliance staff to be engaged in the creation of surveillance programs.3357

+

A. Notice Estimates – Initial Burden and Costs

+

In the Notice, based on the estimates provided in the CAT NMS Plan, the Commission preliminarily estimated that the initial internal burden hours to implement new or enhanced surveillance systems reasonably designed to make use of the consolidated audit trail data for each Participant would be approximately 3,711.6 burden hours,3358 for an aggregate initial burden hour amount of 74,232 burden hours.3359 The Commission also preliminarily estimated that each Participant would, on average, incur an initial external cost of approximately $28,0003360 for outsourced legal, consulting and other costs in order to implement new or enhanced surveillance systems, for a total of $285,000 in initial external costs,3361 for an aggregate one-time initial external cost of $5,700,000 to implement new or enhanced surveillance systems.3362

+

B. Comments/Responses on Initial Burden and Costs

+

One commenter implied that savings on surveillance were unlikely, and stated that the lack of an analytical framework did not facilitate the identification of suspicious activities.3363 Another commenter noted that uncertainties in the manner in which regulators will access data in the Central Repository create significant cost uncertainties.3364 On the other hand, the commenter asserted that the CAT could permit more efficient market surveillance activity by the Participants, which would allow for cost savings.3365

+

The Commission has considered these comments and continues to believe that Participant cost estimates presented in the Plan are credible. As noted above, all 19 Participants3366 responded to the Participants Study, and most Participants have experience collecting audit trail data as well as expertise in the requirements of CAT as well as in their business practices. Regarding the comment about the inclusion of an analytical framework in surveillance cost estimates in the Plan, the Plan does incorporate an analytical framework;3367 therefore, the Commission believes that Participant cost estimates already account for such a framework.

+

C. Order Estimates – Initial Burden and Costs

+

As noted earlier, subsequent to the publication of the CAT NMS Plan Notice, the expected number of Participants has increased from 20 to 21.3368 As a result, the Commission is modifying its estimates of the initial burden and costs to implement new or enhanced surveillance systems reasonably designed to make use of the consolidated audit trail data. After incorporating the increase in the number of Participants, the Commission now estimates that the initial internal burden hours to implement new or enhanced surveillance systems for each Participant would be approximately 3,535.20 burden hours,3369 for an aggregate initial burden hour amount of 74,239.20 burden hours.3370 The Commission also now estimates that each Participant would, on average, incur an initial external cost of approximately $26,666.673371 for outsourced legal, consulting and other costs in order to implement new or enhanced surveillance systems, for a total of $271,428.57 in initial external costs,3372 for an aggregate one-time initial external cost of approximately $5,700,000 to implement new or enhanced surveillance systems.3373

+

(2) Ongoing, Annual Burden Hours and External Cost

+

The CAT NMS Plan states that the estimated total annual cost associated with the maintenance of surveillance programs for the Participants is $87,700,000.3374 This amount includes annual legal, consulting, and other costs of $1,000,000, as well as $66,700,000 in annual FTE costs for internal operational, technical/development, and compliance staff to be engaged in the maintenance of surveillance programs.3375

+

A. Notice Estimates – Ongoing Burden and Costs

+

In the Notice, based on the estimates provided in the CAT NMS Plan,3376 the Commission preliminarily estimated that the ongoing internal burden hours to maintain the new or enhanced surveillance systems reasonably designed to make use of the consolidated audit trail data for each Participant would be approximately 14,146 annual burden hours,3377 for an aggregate annual burden hour amount of 282,920 burden hours.3378 The Commission also preliminarily estimated that each Participant would, on average, incur an annual external cost of approximately $50,0003379 for outsourced legal, consulting and other costs in order to maintain the new or enhanced surveillance systems, for a total estimated ongoing external cost of $1,050,000,3380 for an estimated aggregate ongoing external cost of $21,000,000 to maintain the surveillance systems.3381

+

B. Order Estimates – Ongoing Burden and Costs

+

As noted earlier, subsequent to the publication of the Notice, the expected number of Participants has increased from 20 to 21.3382 As a result, the Commission is modifying its estimates of the ongoing burden and costs to maintain the new or enhanced surveillance systems reasonably designed to make use of the consolidated audit trail data. After incorporating the increase in the number of Participants, the Commission now estimates that the ongoing internal burden hours for each Participant would be approximately 13,473 annual burden hours,3383 for an aggregate annual burden hour amount of 282,933 burden hours.3384 The Commission also now estimates that each Participant would, on average, incur an annual external cost of approximately $47,619.053385 for outsourced legal, consulting and other costs in order to maintain the new or enhanced surveillance systems, for a total estimated ongoing external cost of $1,000,000,3386 for an estimated aggregate ongoing external cost of $21,000,000 across the 21 Participants to maintain the surveillance systems.3387

+

e. Document on Expansion to Other Securities

+

Rule 613(i) provides that the CAT NMS Plan must require the Participants to jointly provide to the Commission, within six months after the CAT NMS Plan is effective, a document outlining how the Participants could incorporate into the CAT information regarding: (1) equity securities that are not NMS securities;3388 (2) debt securities; and (3) primary market transactions in equity securities that are not NMS securities and debt securities.3389 The document must also detail the order and Reportable Event data that each market participant may be required to provide, which market participants may be required to provide such data, an implementation timeline, and a cost estimate. Thus, the Participants must, among other things, undertake an analysis of technological and computer system acquisitions and upgrades that would be required to achieve such an expansion.

+

A. Notice Estimates – Initial Burden and Costs

+

In the Notice, the Commission preliminarily estimated that it would take each Participant approximately 180 burden hours of internal legal, compliance, business operations and information technology staff time to create a document addressing expansion of the consolidated audit trail to additional securities as required by Rule 613(i).3390 The Commission preliminarily estimated that on average, each Participant would outsource 25 hours of external legal time to create the document, for an aggregate one-time external cost of approximately $10,000.3391 Therefore, the Commission preliminarily estimated that the one-time initial burden of drafting the document required by Rule 613 would be 180 initial burden hours plus $10,000 in initial external costs for outsourced legal counsel per Participant, for an estimated aggregate initial burden of 3,600 hours and an estimated aggregate initial external cost of $200,000.3392

+

B. Order Estimates – Initial Burden and Costs

+

As noted earlier, subsequent to the publication of the Notice, the expected number of Participants has increased from 20 to 21.3393 As a result, the Commission is modifying its estimates of the initial burden and costs of the document on expansion to additional securities. After incorporating the increase in the number of Participants, the Commission now estimates that it would take each Participant approximately 171.43 burden hours of internal legal, compliance, business operations and information technology staff time to create a document addressing expansion of the CAT to additional securities as required by Rule 613(i).3394 The Commission now estimates that on average, each Participant would outsource 25 hours of external legal time to create the document, for an aggregate one-time external cost of approximately $10,000.3395 Therefore, the Commission now estimates that the one-time initial burden of drafting the document required by Rule 613 would be 171.43 initial burden hours plus $10,000 in initial external costs for outsourced legal counsel per Participant, for an estimated aggregate initial burden of 3,600.3 hours and an estimated aggregate initial external cost of $210,000.3396

+

f. Written Assessment of Operation of the Consolidated Audit Trail

+

Rule 613(b)(6) provides that the CAT NMS Plan must require the Participants to provide the Commission a written assessment of the CAT’s operation at least every two years, once the CAT NMS Plan is effective.3397 The assessment must address, at a minimum, with respect to the CAT: (i) an evaluation of its performance; (ii) a detailed plan for any potential improvements to its performance; (iii) an estimate of the costs associated with any such potential improvements; and (iv) an estimated implementation timeline for any such potential improvements, if applicable.3398 Thus, the Participants must, among other things, undertake an analysis of the CAT’s technological and computer system performance.

+

The CAT NMS Plan states that the CCO would oversee the assessment required by Rule 613(b)(6), and would allow the Participants to review and comment on the assessment before it is submitted to the Commission.3399 The CCO would be an employee of the Plan Processor and would be compensated by the Plan Processor.3400 The Commission assumes that the overall cost and associated burden on the Participants to implement and maintain the Central Repository includes both the compensation for the Plan Processor as well as its employees for the implementation and maintenance of the Central Repository.

+

A. Notice Estimates – Ongoing Burden and Costs

+

In the Notice, the Commission preliminarily estimated that it would take each Participant approximately 45 annual burden hours of internal legal, compliance, business operations, and information technology staff time to review and comment on the assessment prepared by the CCO of the operation of the consolidated audit trail as required by Rule 613(b)(6).3401 The Commission preliminarily estimated that on average, each Participant would outsource 1.25 hours of legal time annually to assist in the review of the assessment, for an ongoing annual external cost of approximately $500.3402 Therefore, the Commission preliminarily estimated that the ongoing annual burden of submitting a written assessment at least every two years, as required by Rule 613(b)(6), would be 45 ongoing burden hours per SRO plus $500 of external costs for outsourced legal counsel per Participant per year, for an estimated aggregate annual ongoing burden of 900 hours3403 and an estimated aggregate ongoing external cost of $10,000.3404

+

B. Order Estimates – Ongoing Burden and Costs

+

As noted above,3405 the Commission has subsequently amended this requirement as imposed by the CAT NMS Plan to change the reporting frequency from every two years to annual, to require that the benefits of potential improvements, and their impact on investor protection, be discussed, as well as to provide additional specificity regarding the content of the report.3406 As amended, the content of the report must include the following: (i) an evaluation of the information security program of the CAT to ensure that the program is consistent with the highest industry standards for protection of data; (ii) an evaluation of potential technological upgrades based upon a review of technological advancements over the preceding year, drawing on technological expertise, whether internal or external; (iii) an evaluation of the time necessary to restore and recover CAT Data at a back-up site; (iv) an evaluation of how the Plan Processor and Participants are monitoring Error Rates and addressing the application of Error Rates based on product, data element or other criteria; (v) a copy of the evaluation required by the CAT NMS Plan in Section 6.8(c) that the Plan Processor evaluate whether industry standards have evolved such that: (1) the synchronization standard in Section 6.8(a) of the CAT NMS Plan should be shortened; or (2) the required timestamp in Section 6.8(b) of the CAT NMS Plan should be in finer increments.

+

The CAT NMS Plan states that the CCO would oversee the assessment required by Rule 613(b)(6), and would allow the Participants to review and comment on the assessment before it is submitted to the Commission.3407 The Commission believes the responsibility to oversee the assessment as amended should continue to belong to the CCO and is not amending the CAT NMS Plan to require a different process.

+

As a result, the Commission is modifying its estimates of the ongoing burden and costs related to the written assessment of the operation of the CAT, as well as to account for an increase in the expected number of Participants from 20 to 21, subsequent to the publication of the Notice.3408 The Commission now estimates that it would take each Participant approximately 171.43 annual burden hours of internal legal, compliance, business operations, and information technology staff time to review and comment on the assessment prepared by the CCO of the operation of the CAT.3409 The Commission now estimates that on average, each Participant would outsource 2.5 hours of legal time annually to assist in the review of the assessment, for an ongoing annual external cost of approximately $1,000.3410 Therefore, the Commission now estimates that the ongoing annual burden of submitting a written assessment annually would be 171.43 ongoing burden hours per SRO plus $1,000 of external costs for outsourced legal counsel per Participant per year, for an estimated aggregate annual ongoing burden of approximately 3,600.03 hours3411 and an estimated aggregate ongoing external cost of $21,000.3412

+
+
pubdate: November 15, 2016 effdate: N/A +

2. Burden on Members of National Securities Exchanges and National Securities Associations

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden, Burden on Members of National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organization + Keywords: + OATS, + CAT, + CAT NMS plan, + Options Market Maker, + EBS, + FIF Letter, + SIFMA Letter, + Outsourcing Cost Model, + SRO, + CCO, + Central Repository, + SIP Data, + FTE, + OPRA Plan, + CAT Data, + SIFMA’s Management & Professional Earnings, + Section 17(a) of the Exchange Act, + Volcker Rule, + Plan Processor, + Section 11A of the Securities Exchange Act of 1934, + Securities Exchange Act Release No. 50486, + File No. S7-18-04, + OMB, + FIX Trading Letter, + Data Boiler Letter, + Discussion Document, + Rule 613, + +

a. Data Collection and Reporting

+

Rule 613(c)(1) requires the CAT NMS Plan to provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a broker-dealer member of a Participant, and further documenting the life of the order through the process of routing, modification, cancellation and execution (in whole or in part) of the order. Rule 613(c) requires the CAT NMS Plan to impose requirements on broker-dealer members to record and report CAT Data to the Central Repository in accordance with specified timelines.

+

In calculating the burden on members of national securities exchanges and national securities associations, the Commission categorized broker-dealer firms by whether they insource or outsource, or are likely to insource or outsource, CAT Data reporting obligations.3413 The Commission believes that firms that currently report high numbers of OATS ROEs strategically would decide to either self-report their CAT Data or outsource their CAT Data reporting functions (Insourcers), while the firms with the lowest levels of activity would be unlikely to have the infrastructure and specialized employees necessary to insource CAT Data reporting and would almost certainly outsource their CAT Data reporting functions (Outsourcers).3414 The Commission recognizes that more active firms that will likely be CAT Reporters and insource regulatory data reporting functions may not have current OATS reporting obligations because they either are not FINRA members, or because they do not trade in NMS equity securities.3415

+

The Commission estimates that there are 126 OATS-reporting Insourcers and 45 non-OATS reporting Insourcers (14 ELPs and 31 Options Market Makers).3416 The Commission’s estimation categorizes the remaining 1,629 broker-dealers that the Plan anticipates would have CAT Data reporting obligations as Outsourcers.3417

+

(1) Notice Estimates

+

A. Insourcers

+

i. Large Non-OATS-Reporting Broker-Dealers

+

In the CAT NMS Plan, the Participants, based on the Reporters Study’s large broker-dealer cost estimates, estimated the following average initial external cost and FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to adopt the systems changes needed to comply with the data reporting requirements of Rule 613 under Approach 1: $450,000 in external hardware and software costs; 8.05 internal FTEs;3418 and $9,500 in external third party/outsourcing costs.3419 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $80,000 in external hardware and software costs; 7.41 internal FTEs;3420 and $1,300 in external third party/outsourcing costs.3421

+

In the Notice, the Commission discussed the Participants’ estimates and explained that the Commission also relied on the Reporters Study’s large broker-dealer cost estimates in estimating costs for large broker-dealers that can practicably decide between insourcing or outsourcing their regulatory data reporting functions. In the Notice, the Commission preliminarily estimated that there are 14 large broker-dealers that are not OATS reporters currently in the business of electronic liquidity provision that would be classified as Insourcers.3422 Additionally, the Commission estimated that there are 31 broker-dealers that may transact in options but not in equities that can be classified as Insourcers.3423 The Commission assumed the 31 Options Market Makers and 14 ELPs would be typical of the Reporters Study’s large, non-OATS reporting firms; for these firms, the Commission relied on the cost estimates provided under Approach 13424 for large, non-OATS reporting firms in the CAT NMS Plan.

+

The Notice explained that once a large non-OATS reporting broker-dealer has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, such broker-dealers would be subject to ongoing annual burdens associated with, among other things, personnel time to monitor each large non-OATS reporting broker-dealer’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems that might result in additional reports to the Central Repository.

+

(a) Large, Non-OATS Reporting Broker-Dealers – Initial Burden and Costs

+

In the Notice, the Commission preliminarily estimated that the average initial burden associated with implementing regulatory data reporting to capture the required information and transmit it to the Central Repository in compliance with the Rule for each large, non-OATS reporting broker-dealer would be approximately 14,490 initial burden hours.3425

+

The Commission also preliminarily estimated that these broker-dealers would, on average, would incur approximately $450,000 in initial costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository, and an additional $9,500 in initial third party/outsourcing costs.3426

+

Therefore, the Commission preliminarily estimated that the average one-time initial burden per ELP and Options Market Maker would be 14,490 internal burden hours and external costs of $459,500,3427 for an estimated aggregate initial burden of 652,050 hours3428 and an estimated aggregate initial external cost of $20,677,500.3429

+

(b) Large, Non-OATS Reporting Broker-Dealers – Ongoing Burden and Costs

+

In the Notice, the Commission preliminarily estimated that it would take a large non-OATS reporting broker-dealer 13,338 burden hours per year3430 to continue to comply with the Rule. The Commission also preliminarily estimated that it would cost, on average, approximately $80,000 per year per large non-OATS reporting broker-dealer to maintain systems connectivity to the Central Repository and purchase any necessary hardware, software, and other materials, and an additional $1,300 in third party/outsourcing costs.3431

+

Therefore, the Commission preliminarily estimated that the average ongoing annual burden per large non-OATS reporting broker-dealer would be approximately 13,338 hours, plus $81,300 in external costs3432 to maintain the systems necessary to collect and transmit information to the Central Repository, for an estimated aggregate ongoing burden of 600,210 hours3433 and an estimated aggregate ongoing external cost of $3,658,500.3434

+

ii. Large OATS-Reporting Broker-Dealers

+

In the CAT NMS Plan, the Participants, based on the Reporters Study’s large broker-dealer cost estimates, estimated the following average initial external cost and internal FTE count figures that a large OATS-reporting broker-dealer would expect to incur as a result of the implementation of the consolidated audit trail under Approach 1: $750,000 in hardware and software costs; 14.92 internal FTEs;3435 and $150,000 in external third party/outsourcing costs.3436 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large OATS-reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $380,000 in ongoing external hardware and software costs; 10.03 internal FTEs;3437 and $120,000 in ongoing external third party/outsourcing costs.3438

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In the Notice, the Commission discussed the Participants’ estimates and explained that the Commission also relied on the Reporters Study’s large broker-dealer cost estimates in estimating costs for large broker-dealers that can practicably decide between insourcing or outsourcing their regulatory reporting functions. In the Notice, based on the Commission’s analysis of data provided by FINRA and discussions with market participants, the Commission estimated that 126 broker-dealers, which reported more than 350,000 OATS ROEs between June 15 and July 10, 2015, would strategically decide to either self-report CAT Data or outsource their CAT data reporting functions.3439

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The Notice explained that once a large OATS-reporting broker-dealer has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, such broker-dealers would be subject to ongoing annual burdens and costs associated with, among other things, personnel time to monitor each broker-dealer’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems which might result in additional reports to the Central Repository.

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(a) Large OATS-Reporting Broker-Dealers – Initial Burden and Costs

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In the Notice, the Commission preliminarily estimated that the average initial burden to develop and implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the Rule for large OATS-reporting broker-dealers would be approximately 26,856 internal burden hours.3440

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The Commission also preliminarily estimated that these large OATS-reporting broker-dealers would, on average, incur approximately $750,000 in initial external costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository, and an additional $150,000 in initial external third party/outsourcing costs.3441

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Therefore, the Commission preliminarily estimated that the average one-time initial burden per large OATS-reporting broker-dealer would be 26,856 burden hours and external costs of $900,000,3442 for an estimated aggregate initial burden of 3,383,856 hours3443 and an estimated aggregate initial external cost of $113,400,000.3444

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(b) Large OATS-Reporting Broker-Dealers – Ongoing Burden and Costs

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In the Notice, the Commission preliminarily estimated that it would take a large OATS-reporting broker-dealer 18,054 ongoing burden hours per year3445 to continue compliance with the Rule. The Commission preliminarily estimated that it would cost, on average, approximately $380,000 per year per large OATS-reporting broker-dealer to maintain systems connectivity to the Central Repository and purchase any necessary hardware, software, and other materials, and an additional $120,000 in external ongoing third party/outsourcing costs.3446

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Therefore, the Commission preliminarily estimated that the average ongoing annual burden per large OATS-reporting broker-dealer would be approximately 18,054 burden hours, plus $500,000 in external costs3447 to maintain the systems necessary to collect and transmit information to the Central Repository, for an estimated aggregate burden of 2,274,804 hours3448 and an estimated aggregate ongoing external cost of $63,000,000.3449

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B. Outsourcers

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i. Small OATS-Reporting Broker-Dealers

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Based on data provided by FINRA, the Commission estimates that there are 806 broker-dealers that report fewer than 350,000 OATS ROEs monthly. The Commission believes that these broker-dealers generally outsource their regulatory reporting obligations because during the period June 15-July 10, 2015, approximately 88.9% of their 350,000 OATS ROEs were reported through service bureaus, with 730 of these broker-dealers reporting more than 99% of their OATS ROEs through one or more service bureaus.3450 The Commission estimates that these firms currently spend an aggregate of $100.1 million on annual outsourcing costs.3451 The Commission estimates these 806 broker-dealers would spend $100.2 million in aggregate to outsource their regulatory data reporting to service bureaus to report in accordance with Rule 613,3452 or $124,373 per broker-dealer.3453 These external outsourcing cost estimates are calculated using the information from staff discussions with service bureaus and other market participants, as applied to data provided by FINRA.3454

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Firms that outsource their regulatory data reporting would still face internal staffing burdens associated with this activity. These employees would perform activities such as answering inquiries from their service bureaus, and investigating reporting exceptions. Based on conversations with market participants, the Commission estimates that these firms currently have 0.5 full-time employees devoted to these activities.3455 The Commission estimates that these firms would need to hire one additional full-time employee for one year to implement CAT reporting requirements.3456

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Small OATS-reporting broker-dealers that outsource their regulatory data reporting would likely face internal staffing burdens and external costs associated with ongoing activity, such as maintaining any systems that transmit data to their service providers. Based on conversations with market participants, the Commission estimates these firms would need 0.75 FTEs on an ongoing basis to perform or monitor CAT reporting.3457

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(a) Small OATS-Reporting Broker-Dealers – Initial Burden and Costs

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In the Notice, the Commission preliminarily estimated that the average initial burden to implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the CAT NMS Plan for small OATS-reporting broker-dealers would be approximately 1,800 burden hours.3458 The Commission believed the burden hours would be associated with work performed by internal technology, compliance and legal staff in connection with the implementation of CAT data reporting. The Commission also preliminarily estimated that each small OATS-reporting broker-dealer would incur approximately $124,373 in initial external outsourcing costs.3459

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Therefore, the Commission preliminarily estimated that the average one-time initial burden per small OATS-reporting broker-dealer would be 1,800 burden hours and external costs of $124,373, for an estimated aggregate initial burden of 1,450,800 hours3460 and an estimated aggregate initial external cost of $100,244,638.3461

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(b) Small OATS-Reporting Broker-Dealers – Ongoing Burden and Costs

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In the Notice, the Commission preliminarily believed that it would take a small OATS-reporting broker-dealer 1,350 ongoing burden hours per year3462 to continue compliance with the Rule. The Commission preliminarily believed the burden hours would be associated with work performed by internal technology, compliance and legal staff in connection with the ongoing operation of CAT Data reporting. The Commission preliminarily estimated that it would cost, on average, approximately $124,373 in ongoing external outsourcing costs3463 to ensure ongoing compliance with Rule 613.

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Therefore, the Commission preliminarily estimated that the average ongoing annual burden per small OATS-reporting broker-dealer would be approximately 1,350 hours, plus $124,373 in external costs, for an estimated aggregate ongoing burden of 1,088,100 hours3464 and an estimated aggregate ongoing external cost of $100,244,638.3465

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ii. Small non-OATS-Reporting Broker-Dealers

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In addition to firms that currently report to OATS, the Commission estimates there are 799 broker-dealers that are currently exempt from OATS reporting rules due to firm size, or excluded because all of their order flow is routed to a single OATS reporter, such as a clearing firm, that would incur CAT reporting obligations.3466 A further 24 broker-dealers have SRO memberships only with one Participant;3467 the Commission believes this group is comprised mostly of floor brokers and further believes these firms would experience CAT implementation and ongoing reporting costs similar in magnitude to small equity broker-dealers that currently have no OATS reporting responsibilities.3468

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The Commission assumes these broker-dealers would have very low levels of CAT reporting, similar to those of the lowest activity firms that currently report to OATS. For these firms, the Commission assumes that under CAT they would incur the average estimated service bureau cost of broker-dealers that currently report fewer than 350,000 OATS ROEs per month, which is $124,373 annually.3469 Furthermore, because these firms have more limited data reporting requirements than other firms, the Commission assumes these firms currently have only 0.1 full-time employees currently dedicated to regulatory data reporting activities.3470 The

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Commission assumes these firms would require 2 full-time employees for one year to implement CAT.3471

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Small non-OATS-reporting broker-dealers that outsource their regulatory data reporting would likely face internal staffing burdens and costs associated with ongoing activity, such as maintaining any systems that transmit data to their service providers. Based on conversations with market participants, the Commission estimates these firms would need 0.75 full-time employees annually to perform or monitor CAT reporting.

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(a) Small non-OATS-Reporting Broker-Dealers – Initial Burden and Costs

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In the Notice, the Commission preliminarily estimated that the average initial burden to develop and implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the Rule for small, non-OATS-reporting broker-dealers would be approximately 3,600 initial burden hours.3472 The Commission believed the burden hours would be associated with work performed by internal technology, compliance and legal staff in connection with the implementation of CAT Data reporting. The Commission also preliminarily estimated that each small non-OATS-reporting broker-dealer would incur approximately $124,373 in initial external outsourcing costs.3473

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Therefore, the Commission preliminarily estimated that the average one-time initial burden per small OATS-reporting broker-dealer would be 3,600 burden hours and external costs of $124,373 for an estimated aggregate initial burden of 2,962,800 hours3474 and an estimated aggregate initial external cost of $102,358,979.3475

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(b) Small non-OATS-Reporting Broker-Dealers – Ongoing Burden and Costs

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In the Notice, the Commission preliminarily believed that it would take a small non-OATS-reporting broker-dealer 1,350 ongoing burden hours per year3476 to continue compliance with the Rule. The Commission preliminarily estimated that it would cost, on average, approximately $124,373 in ongoing external outsourcing costs3477 to ensure ongoing compliance with Rule 613.

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Therefore, the Commission preliminarily estimated that the average ongoing annual burden per small non-OATS-reporting broker-dealer would be approximately 1,350 hours, plus $124,373 in external costs, for an estimated aggregate ongoing burden of 1,111,050 hours3478 and an estimated aggregate ongoing external cost of $102,358,979.3479

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(2) Comments/ Responses on Broker-Dealer Data Collection and Reporting Costs

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As noted above, the Commission’s estimates are based on whether broker-dealers currently insource or outsource, or are likely to insource or outsource, their CAT Data reporting obligations. The Commission provided in the Notice an analysis of the compliance cost estimates for broker-dealers that included analyzing whether estimates provided in the Plan and based on a Reporters Study survey were reliable.3480 The Commission preliminarily believed that the cost estimates for small broker-dealers were not reliable. The Commission then developed and calibrated its Outsourcing Cost Model to estimate average current data reporting costs and average Plan compliance costs for broker-dealers that the Commission expects will rely on service bureaus to perform their CAT Data reporting responsibilities (Outsourcers).3481 For the Insourcers, the Commission continued to rely on the large broker-dealer estimates from the Plan.3482 The Commission’s preliminary initial and ongoing burden hour and cost estimates, as well as the Plan’s estimates, are aggregate estimates for a broker-dealer’s compliance with the data collection and reporting requirement under Rule 613; they do not quantify the burden hours or external cost estimates for each individual component comprising the broker-dealer’s data collection and reporting responsibility.

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The Commission received comments on the reliability of its Outsourcing Cost Model for small broker-dealers and its re-estimation of costs. One commenter believed that the Commission’s estimates of service bureau charges for a small firm were reasonable.3483 Another commenter noted that Outsourcers must expend internal resources even when relying on their service providers to accomplish current data reporting.3484 A third commenter stated that broker-dealers that clear for others may have higher implementation costs since they may have to support more broker-dealers as a result of the CAT.3485

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With respect to the comment that the Outsourcing Cost Model does not account for internal expenses, the Commission notes that its cost estimates explicitly assume that Outsourcers have employee expenses that cover these activities.3486 In response to the commenters concerned that the Commission’s estimates do not account for an increase in costs for broker-dealers that clear for other broker-dealers or provide support to introducing broker-dealers, the Commission continues to believe in the reliability of the analysis of broker-dealers implementation costs presented in the Notice, and notes that the Reporters Study estimates for large broker-dealers are likely to include these expenses because respondents are likely to include broker-dealers that provide these services. The Commission acknowledges, however, that there are some broker-dealers that would be classified as Outsourcers or new reporters and the additional implementation costs that these firms face due to clearing for other broker-dealers or supporting introducing broker-dealers are not captured by the Outsourcing Cost Model. The Commission cannot estimate the number of broker-dealers that would bear these costs because the Commission lacks data on the number of broker-dealers that clear for other broker-dealers that would be classified as new reporters or Outsourcers. Furthermore, the Commission lacks data to estimate the magnitude of these costs because the Plan does not provide this data and the Commission is unaware of any data available to it that it could use to estimate these costs.

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The Commission also received several comments on uncertainties in the cost estimates for broker-dealers arising from not knowing the choice of Plan Processor,3487 not having Technical Specifications,3488 differences in bids preventing broker-dealers from providing more definitive cost estimates,3489 and a lack of detail in the CAT NMS Plan.3490

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In response to comment letters that identified these sources of uncertainties related to the costs broker-dealers will incur, the Commission acknowledges that such costs depend on the technical specifications, which are likely to remain unknown until the Plan Processor is selected. The Commission also notes that final Bids will not be submitted until after the Plan is approved, so the Commission is unable to quantify the degree of variation in broker-dealer implementation costs across Bids.

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Additionally, the Commission received a number of comments relating to the costs of the individual components comprising the broker-dealer data collection and reporting requirement, such as customer information, the open/close indicator for equities, listing exchange symbology, allocation report timestamp, and quote sent time. In the Notice, as noted above, the Commission provided aggregate burden hour and external cost estimates for the broker-dealer data collection and reporting requirement of Rule 613. Although the costs of these specific data elements were not discussed in the Notice Paperwork Reduction Act analysis, the Commission has considered these comments because they relate to the overall data collection and reporting information collection.

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A. Customer Information

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In the Notice, the Commission stated that it believed the requirement in the CAT NMS Plan to report customer information for each transaction represents a significant source of costs.3491 One commenter believed that the costs for providing customer information to the Central Repository would comprise a significant proportion of costs to the total industry and that the costs associated with the management of sensitive information could increase costs.3492

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Two commenters stated that including Customer Identifying Information on new order reports would result in significant costs for the industry.3493 In Response Letter I, the Participants suggested that the Commission amend (and the Commission has accordingly amended) the CAT NMS Plan to clarify that Customer Identifying Information and Customer Account Information would not be reported with the original receipt or origination of an order.3494

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One commenter requested clarification that only active accounts would be reported as part of the customer definition process, which could reduce costs incurred for reporting customer information.3495 In Response Letter I, the Participants suggested that the Commission amend the Plan to add a definition of “Active Account,” defined as an account that has had activity in Eligible Securities within the last six months. Additionally, the Participants suggested that the Commission amend (and the Commission has amended) Section 6.4(d)(iv) of the Plan by clarifying that each broker-dealer must submit an initial set of customer information for Active Accounts at the commencement of reporting to the Central Repository, as well as any updates, additions, or other changes in customer information, including any such customer information for any new Active Accounts.3496

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The Commission considered these comments and the Participants’ responses and continues to believe that the requirement in the CAT NMS Plan to report customer information represents a significant proportion of total costs to the industry. The Commission is not amending its broker-dealer data collection and reporting external cost estimates in response to commenters. Commenters did not provide cost estimates that would allow the Commission to estimate such costs, and the amendments to the Plan clarify that the Plan does not require customer information to be reported on order origination.

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B. Open/Close Indicator for Equities

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The Commission received comments on the costs to report an open/close indicator on orders to buy or sell equities. Several commenters agreed with the Commission’s analysis that an open/close indicator represents a significant proportion of costs to the Plan.3497 Two commenters indicated that it would require significant process changes across multiple systems,3498 and one provided a list of the different types of systems impacted by the open/close indicator.3499 Some commenters mentioned that the open/close indicator is currently not populated for equities.3500 Further, several commenters implied that the costs of the open/close indicator were not included in the cost estimates in the Notice.3501 In Response Letter I, the Participants indicated that the open/close indicator is not captured on equities or on certain options transactions such as Options’ Market Maker transactions.3502

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The Commission considered these comments and is modifying the Plan to eliminate the requirement to report an open/close indicator for equities and on Options Market Maker quotations. Although the Commission believes this will reduce the compliance costs for broker-dealers, Participants, and the Central Repository, the Commission cannot quantify the savings and is thus not amending its external cost estimates in response to commenters.

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The Participants’ statement that open/close indicators are not reported on some options orders is consistent with the Commission’s experience and the analysis in the Notice. While the economic analysis in the Notice did not explicitly separate the costs associated with an open/close indicator for equities and an open/close indicator for options, the Commission believes that the costs of the open/close indicator for options are included in the cost estimates of the Notice. However, because the Plan will no longer require the reporting of the open/close indicator for Options Market Maker quotations, the Commission now believes there will be an additional cost savings associated with not having to report this indicator as part of CAT.

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C. Listing Exchange Symbology

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In the Notice, the Commission explained its belief that the requirement to use listing exchange symbology could represent a significant source of costs,3503 because broker-dealers do not necessarily use listing exchange symbology when placing orders on other exchanges or off-exchange. One commenter stated that it did not expect the use of listing exchange symbology to be much more costly than the use of existing symbology.3504 However, another commenter suggested that accepting only listing exchange symbology is costly and invasive.3505 One other commenter stated that listing exchange symbology would also be a significant source of costs to options.3506 The Participants responded in Response Letter II that it was their understanding that all broker-dealers subject to OATS or EBS reporting requirements currently use the listing exchange symbology when submitting such reports.3507 Further, they stated in Response Letter III that broker-dealers currently use symbology translation solutions when submitting data to exchanges or when submitting to regulatory reporting systems such as OATS or EBS.3508

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The Commission considered the comments and now believes that the incremental cost for CAT Reporters to translate from their existing symbology to listing exchange symbology would be less than as discussed in the Notice and would not be a substantial contributor to aggregate costs. The Commission is not amending its external cost estimates for broker-dealer data collection and reporting in response to commenters.

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D. Allocation Report Timestamp

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Several commenters noted that there would be costs associated with reporting timestamps on allocation reports.3509 One of these commenters mentioned that the requirement to report allocation timestamps would mean that broker-dealers would incur unnecessary costs to acquire additional resources.3510 One commenter estimated that the currently proposed allocation timestamp requirement, with a one millisecond timestamp granularity and a 50 millisecond clock offset, would cost the industry $88,775,000 in initial implementation costs and $13,925,000 in ongoing annual costs.3511 The commenter further estimated that a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset, would cost the industry $44,050,000 in initial implementation costs and $5,035,833 in ongoing annual costs.3512 In Response Letter I, the Participants recommended an amendment to the Plan that would specify a one-second timestamp for allocation time on Allocation Reports,3513 and the Commission is amending the Plan to reflect this recommendation.

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The Commission considered these comments and is increasing its external cost estimates for broker-dealer data collection and reporting in response to the comments. The Commission is now adding one commenter’s estimate of $44,050,000 in implementation costs and $5,035,833 in ongoing costs to the estimates of costs to broker-dealers.3514 The Commission believes the cost estimates received to be credible because they are based on a survey of industry participants who are informed of the Allocation Time requirement and the changes that broker-dealers would need to make to comply with the requirement.

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E. Quote Sent Time

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In the Notice, the Commission estimated that the requirement that Options Market Makers submit quote sent times to the exchanges would cost between $36.9 million and $76.8 million over five years.3515 The Commission concluded that this requirement did not represent a significant source of costs. The Commission received a comment stating that the estimated 5-year cost to Options Market Makers for adding a timestamp to the quote times was between the range of $39.9 million and $76.8 million. The commenter further stated that this is “not a trivial cost for providing one data element to the consolidated audit trail.”3516 The Commission continues to believe that the estimates in the Notice are credible estimates for the costs for Options Market Makers to send the Quote Sent Time field to exchanges. In response to the comment, the Commission notes that the implied annual costs would be much lower than the five year costs and the Commission agrees that the costs of quote sent time are significant.

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The Quote Sent Time cost estimate was not included in the cost estimates in the Notice, therefore the Commission is now adding this cost to its estimates for Options Market Maker data collection and reporting.3517 The Commission is using the maximum 5-year cost estimate to Options Market Makers provided by the commenter ($76.8 million) and has divided it into $17,400,000 in aggregate implementation external costs, and $11,880,000 in aggregate ongoing external costs, 3518 as provided in the burden hours and external cost estimates discussion for Options Market Makers in Section VI.D.2.a.(3)A.i.(b), below.

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(3) Order Estimates

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A. Insourcers

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i. Large Non-OATS Reporting Broker-Dealers

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The Commission notes that, in this Order Paperwork Reduction Act analysis, the Commission has divided the discussion of the burden hours and cost estimates associated with large non-OATS-reporting broker-dealers into two separate categories: ELPs and Options Market Makers. The Commission believes that it is necessary to discuss these categories separately to account for the addition of the Quote Sent Time cost to the external costs to be incurred solely by Options Market Makers.

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(a) Electronic Liquidity Providers

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As noted above,3519 in the CAT NMS Plan, the Participants, based on the Reporters Study’s large broker-dealer cost estimates, estimated the following average initial external cost and FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to adopt the systems changes needed to comply with the data reporting requirements of Rule 613 under Approach 1: $450,000 in external hardware and software costs; 8.05 internal FTEs;3520 and $9,500 in external third party/outsourcing costs.3521 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $80,000 in external hardware and software costs; 7.41 internal FTEs;3522 and $1,300 in external third party/outsourcing costs.3523 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $80,000 in external hardware and software costs; 7.41 internal FTEs;3524 and $1,300 in external third party/outsourcing costs.3525

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As it did in the Notice, the Commission relies on the Reporters Study’s large broker-dealer cost estimates in estimating costs for large broker-dealers that can practicably decide between insourcing or outsourcing their regulatory data reporting functions. The Commission estimates that there are 14 large broker-dealers that are not OATS reporters currently in the business of electronic liquidity provision that would be classified as Insourcers.3526 The Commission assumes the 14 ELPs would be typical of the Reporters Study’s large, non-OATS reporting firms; for these firms, the Commission relies on the cost estimates provided under Approach 13527 for large, non-OATS reporting firms in the CAT NMS Plan.

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Once an ELP has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, such broker-dealers would be subject to ongoing annual burdens associated with, among other things, personnel time to monitor each ELP’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems that might result in additional reports to the Central Repository.

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(i) Electronic Liquidity Providers – Initial Burden and Costs

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Based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3528 the Commission now estimates that the initial cost to an ELP to implement the modified allocation timestamp requirement would be $250,000.3529 The Commission believes that this cost would be an external hardware and software cost related to adding this functionality to servers. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by ELPs.

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Based on this information, the Commission estimates that the average initial burden associated with implementing regulatory data reporting to capture the required information and transmit it to the Central Repository in compliance with the Rule for each ELP would be approximately 14,490 initial burden hours.3530

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The Commission also now estimates that these broker-dealers would, on average, incur approximately $700,000 in initial costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository,3531 and an additional $9,500 in initial third party/outsourcing costs.3532 Therefore, the Commission now estimates that the average one-time initial burden per ELP would be 14,490 internal burden hours, and the initial external cost per ELP would be $709,500,3533 for an estimated aggregate initial burden of 202,860 hours3534 and an estimated aggregate initial external cost of $9,933,000.3535

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(ii) Electronic Liquidity Providers – Ongoing Burden and Costs

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Based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3536 the Commission now estimates that the ongoing cost to an ELP to maintain the modified allocation timestamp requirement would be $29,166.67.3537 The Commission believes that this cost would be an external hardware and software cost related to maintenance of the modified allocation timestamp. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by ELPs.

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Based on this information, the Commission believes that it would take an ELP 13,338 burden hours per year3538 to continue to comply with the Rule. The Commission also now estimates that it would cost, on average, approximately $109,166.67 per year per ELP to maintain systems connectivity to the Central Repository and purchase any necessary hardware, software, and other materials,3539 and an additional $1,300 in third party/outsourcing costs.3540

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Therefore, the Commission now estimates that the average ongoing annual burden per ELP would be approximately 13,338 hours, and the ongoing external cost per ELP would be $110,466.673541 to maintain the systems necessary to collect and transmit information to the Central Repository, for an estimated aggregate ongoing burden of 186,732 hours3542 and an estimated aggregate ongoing external cost for the ELPs of $1,546,533.38.3543

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(b) Options Market Makers

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As noted above,3544 in the CAT NMS Plan, the Participants, based on the Reporters Study’s large broker-dealer cost estimates, estimated the following average initial external cost and FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to adopt the systems changes needed to comply with the data reporting requirements of Rule 613 under Approach 1: $450,000 in external hardware and software costs; 8.05 internal FTEs;3545 and $9,500 in external third party/outsourcing costs.3546 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $80,000 in external hardware and software costs; 7.41 internal FTEs;3547 and $1,300 in external third party/outsourcing costs.3548 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large non-OATS reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $80,000 in external hardware and software costs; 7.41 internal FTEs;3549 and $1,300 in external third party/outsourcing costs.3550 As it did in the Notice, the Commission relies on the Reporters Study’s large broker-dealer cost estimates in estimating costs for large broker-dealers that can practicably decide between insourcing or outsourcing their regulatory data reporting functions.3551 The Commission estimates that there are 31 broker-dealers that may transact in options but not in equities that can be classified as Insourcers.3552 Although the exemptive relief may relieve these firms of the obligation to report their options quoting activity to the Central Repository, these firms may have customer orders and other activity off-exchange that would cause them to incur a CAT reporting obligation. The Commission assumes the 31 Options Market Makers would be typical of the Reporters Study’s large, non-OATS reporting firms; for these firms, the Commission relies on the cost estimates provided under Approach 13553 for large, non-OATS reporting firms in the CAT NMS Plan.

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Once an Options Market Maker has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, such broker-dealers would be subject to ongoing annual burdens associated with, among other things, personnel time to monitor each Options Market Maker’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems that might result in additional reports to the Central Repository.

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(i) Options Market Makers - Initial Burden and Costs

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Based on this information, the Commission estimates that the average initial burden associated with implementing regulatory data reporting to capture the required information and transmit it to the Central Repository in compliance with the Rule for each Options Market Maker would be approximately 14,490 initial burden hours.3554

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The Commission also estimates that these options firm would, on average, incur approximately $450,000 in initial costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository, and an additional $9,500 in initial third party/outsourcing costs.3555 Additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3556 the Commission now estimates that the initial cost to an Options Market Maker to implement the modified allocation timestamp requirement would be $250,000.3557 The Commission believes that this cost would be an external hardware and software cost related to adding this functionality to servers. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by Options Market Makers.

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The Commission also is adding a cost estimate for the requirement that an Options Market Maker submit a Quote Sent Time to an exchange.3558 The Commission is using the maximum 5-year cost estimate to Options Market Makers provided by a commenter ($76.8 million)3559 and has divided it into $17,400,000 in aggregate implementation external costs, and $11,880,000 in aggregate ongoing external costs.3560

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The Commission estimates that that this requirement will impose an additional initial hardware and software cost per Options Market Maker of $561,290.32.3561 Based on this information, the Commission now estimates that Options Market Makers would, on average, incur approximately $1,261,290.32 in initial costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository,3562 and an additional $9,500 in initial third party/outsourcing costs. Therefore, the Commission now estimates that the average one-time initial burden per options firm would be 14,490 internal burden hours, and the initial external cost per Options Market Maker would be $1,270,790.32,3563 for an estimated aggregate initial burden of 449,190 hours3564 and an estimated aggregate initial external cost of $39,394,499.92.3565

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(ii) Options Market Makers - Ongoing Burden and Costs

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Based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3566 the Commission estimates that the ongoing cost to an Options Market Maker to maintain the modified allocation timestamp requirement would be $29,166.67.3567 The Commission believes that this cost would be an external hardware and software cost related to maintenance of the modified allocation timestamp. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by Options Market Makers.

+

The Commission also is adding a cost estimate for the requirement that an Options Market Maker submit a Quote Sent Time to an exchange.3568 The Commission is using the maximum 5-year cost estimate to Options Market Makers provided by a commenter ($76.8 million)3569 and has divided it into $17,400,000 in aggregate implementation external costs, and $11,880,000 in aggregate ongoing external costs.3570 The Commission estimates that this requirement will impose an additional ongoing hardware and software cost per Options Market Maker of $383,255.81.3571 Based on this information, the Commission now believes that it would take an Options Market Maker 13,338 burden hours per year3572 to continue to comply with the Rule. The Commission also now estimates that it would cost, on average, approximately $492,422.48 per year per Options Market Maker to maintain systems connectivity to the Central Repository and purchase any necessary hardware, software, and other materials,3573 and an additional $1,300 in third party/outsourcing costs.3574

+

Therefore, the Commission now estimates that the average ongoing annual burden per Options Market Maker would be approximately 13,338 hours, and the ongoing external cost per Options Market Maker would be $493,722.483575 to maintain the systems necessary to collect and transmit information to the Central Repository, for an estimated aggregate ongoing burden of 413,478 hours3576 and an estimated aggregate ongoing external cost to Options Market Makers of $15,305,396.88.3577

+

ii. Large OATS-Reporting Broker-Dealers

+

As noted above,3578 in the CAT NMS Plan, the Participants, based on the Reporters Study’s large broker-dealer cost estimates, estimated the following average initial external cost and internal FTE count figures that a large OATS-reporting broker-dealer would expect to incur as a result of the implementation of the consolidated audit trail under Approach 1: $750,000 in hardware and software costs; 14.92 internal FTEs;3579 and $150,000 in external third party/outsourcing costs.3580 The Participants also estimated the following average ongoing external cost and internal FTE count figures that a large OATS-reporting broker-dealer would expect to incur to maintain data reporting systems to be in compliance with Rule 613: $380,000 in ongoing external hardware and software costs; 10.03 internal FTEs;3581 and $120,000 in ongoing external third party/outsourcing costs.3582

+

As it did in the Notice, based on the Commission’s analysis of data provided by FINRA and discussions with market participants, the Commission estimates that 126 broker-dealers, which reported more than 350,000 OATS ROEs between June 15 and July 10, 2015, would strategically decide to either self-report CAT Data or outsource their CAT data reporting functions.3583 To conduct its Paperwork Burden Analysis for the 126 broker-dealers, the Commission is relying on the Reporters Study estimates used by the CAT NMS Plan of expected costs that a large OATS-reporting broker-dealer would incur as a result of the implementation of the consolidated audit trail under Approach 1.

+

Once a large OATS-reporting broker-dealer has established the appropriate systems and processes required for collection and transmission of the required information to the Central Repository, such broker-dealers would be subject to ongoing annual burdens and costs associated with, among other things, personnel time to monitor each broker-dealer’s reporting of the required data and the maintenance of the systems to report the required data; and implementing changes to trading systems which might result in additional reports to the Central Repository.

+

(a) Large OATS-Reporting Broker-Dealers – Initial Burden and Costs

+

In this Order, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3584 the Commission is estimating that the initial cost to a large OATS-reporting broker-dealer to implement the modified allocation timestamp requirement would be $250,000.3585 The Commission believes that this cost would be an external hardware and software cost related to adding this functionality to servers. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by large-OATS-reporting broker-dealers.

+

Based on this information the Commission now estimates that these large OATS-reporting broker-dealers would, on average, incur approximately $1,000,000 in initial external costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the Central Repository,3586 and an additional $150,000 in initial external third party/outsourcing costs.3587 Therefore, the Commission now estimates that the average one-time initial burden per large OATS-reporting broker-dealer would be 26,856 burden hours and external costs of $1,150,000 to implement CAT data reporting systems,3588 for an estimated aggregate initial burden of 3,383,856 hours3589 and an estimated aggregate initial external cost of $189,000,000.3590

+

(b) Large OATS-Reporting Broker-Dealers - Ongoing Burden and Costs

+

In this Order, additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3591 the Commission estimates that the ongoing cost to a large OATS-reporting broker-dealer to maintain the modified allocation timestamp requirement would be $29,166.67.3592 The Commission believes that this cost would be an external hardware and software cost related to maintenance of the modified allocation timestamp. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by large OATS-reporting broker-dealers.

+

Based on this information the Commission believes that it would take a large OATS-reporting broker-dealer 18,054 ongoing burden hours per year3593 to continue compliance with the Rule. The Commission now estimates that it would cost, on average, approximately $409,166.67 per year per large OATS-reporting broker-dealer to maintain systems connectivity to the Central Repository and purchase any necessary hardware, software, and other materials,3594 and an additional $120,000 in external ongoing third party/outsourcing costs.3595

+

Therefore, the Commission now estimates that the average ongoing annual burden per large OATS-reporting broker-dealer would be approximately 18,054 burden hours, plus $529,166.673596 to maintain the systems necessary to collect and transmit information to the Central Repository, for an estimated aggregate burden of 2,274,804 hours3597 and an estimated aggregate ongoing external cost of $66,675,000.42.3598

+

B. Outsourcers

+

i. Small OATS-Reporting Broker-Dealers

+

As it did in the Notice, based on data provided by FINRA, the Commission estimates that there are 806 broker-dealers that report fewer than 350,000 OATS ROEs monthly. The Commission believes that these broker-dealers generally outsource their regulatory reporting obligations because during the period June 15—July 10, 2015, approximately 88.9% of their 350,000 OATS ROEs were reported through service bureaus, with 730 of these broker-dealers reporting more than 99% of their OATS ROEs through one or more service bureaus.3599 The Commission estimates that these firms currently spend an aggregate of $100.1 million on annual outsourcing costs.3600 The Commission estimates these 806 broker-dealers would spend $100.2 million in aggregate to outsource their regulatory data reporting to service bureaus to report in accordance with Rule 613,3601 or $124,373 per broker-dealer.3602 These external outsourcing cost estimates are calculated using the information from staff discussions with service bureaus and other market participants, as applied to data provided by FINRA.3603

+

Firms that outsource their regulatory data reporting still face internal staffing burdens associated with this activity. These employees perform activities such as answering inquiries from their service bureaus, and investigating reporting exceptions. Based on conversations with market participants, the Commission estimates that these firms currently have 0.5 full-time employees devoted to these activities.3604 The Commission estimates that these firms would need to hire one additional full-time employee for one year to implement CAT reporting requirements.3605

+

Small OATS-reporting broker-dealers that outsource their regulatory data reporting would likely face internal staffing burdens and external costs associated with ongoing activity, such as maintaining any systems that transmit data to their service providers. Based on conversations with market participants, the Commission estimates these firms would need 0.75 FTEs on an ongoing basis to perform or monitor CAT reporting.3606

+

(a) Small OATS-Reporting Broker-Dealers – Initial Burden and Costs

+

In this Order, additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3607 the Commission estimates that the initial cost to a small OATS-reporting broker-dealer to implement this requirement would be $798.04.3608 The Commission believes that this cost would be an external hardware and software cost related to adding this functionality to servers. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by small OATS-reporting broker-dealers.

+

Based on this information, the Commission estimates that the average initial burden to implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the CAT NMS Plan for small OATS-reporting broker-dealers would be approximately 1,800 burden hours.3609 The Commission believes the burden hours would be associated with work performed by internal technology, compliance and legal staff in connection with the implementation of CAT data reporting. The Commission also now estimates that each small OATS-reporting broker-dealer would incur approximately $125,171.04 in initial external costs.3610 Therefore, the Commission now estimates that the average one-time initial burden per small OATS-reporting broker-dealer would be 1,800 burden hours and external costs of $125,171.04, for an estimated aggregate initial burden of 1,450,800 hours3611 and an estimated aggregate initial external cost of $100,887,858.24.3612

+

(b) Small OATS-Reporting Broker-Dealers – Ongoing Burden and Costs

+

In this Order, the Commission estimates that it would cost, on average, approximately $124,373 in ongoing external outsourcing costs3613 to ensure ongoing compliance with Rule 613. Additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3614 the Commission estimates that the ongoing cost to a small OATS-reporting broker-dealer to maintain the modified allocation timestamp requirement would be $66.50.3615 The Commission believes that this cost would be an external hardware and software cost related to maintenance of the modified allocation timestamp. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by small OATS-reporting broker-dealers

+

Therefore, the Commission now estimates that the average ongoing annual burden per small OATS-reporting broker-dealer would be approximately 1,350 hours, plus $124,439.50,3616 in external costs, for an estimated aggregate ongoing burden of 1,088,100 hours3617 and an estimated aggregate ongoing external cost of $100,298,237.3618

+

ii. Small Non-OATS-Reporting Broker-Dealers

+

In addition to firms that currently report to OATS, as it did in the Notice, the Commission estimates there are 799 broker-dealers that are currently exempt from OATS reporting rules due to firm size, or excluded because all of their order flow is routed to a single OATS reporter, such as a clearing firm, that would incur CAT reporting obligations.3619 A further 24 broker-dealers have SRO memberships only with one Participant;3620 the Commission believes this group is comprised mostly of floor brokers and further believes these firms would experience CAT implementation and ongoing reporting costs similar in magnitude to small equity broker-dealers that currently have no OATS reporting responsibilities.3621

+

The Commission assumes these broker-dealers would have very low levels of CAT reporting, similar to those of the lowest activity firms that currently report to OATS. For these firms, the Commission assumes that under CAT they would incur the average estimated service bureau cost of broker-dealers that currently report fewer than 350,000 OATS ROEs per month, which is $124,373 annually.3622 Furthermore, because these firms have more limited data reporting requirements than other firms, the Commission assumes these firms currently have only 0.1 full-time employees currently dedicated to regulatory data reporting activities.3623 The Commission assumes these firms would require 2 full-time employees for one year to implement CAT.3624

+

Small non-OATS-reporting broker-dealers that outsource their regulatory data reporting would likely face internal staffing burdens and costs associated with ongoing activity, such as maintaining any systems that transmit data to their service providers. Based on conversations with market participants, the Commission estimates these firms would need 0.75 full-time employees annually to perform or monitor CAT reporting.

+

(a) Small Non-OATS Reporting Broker-Dealers – Initial Burden and Costs

+

In this Order, additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3625 the Commission estimates that the initial cost to a small non-OATS-reporting broker-dealer would be $798.04.3626 The Commission believes that this cost would be an external hardware and software cost related to adding this functionality to servers. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by small non-OATS-reporting broker-dealers

+

Based on this information, the Commission now estimates that the average initial burden to develop and implement the needed systems changes to capture the required information and transmit it to the Central Repository in compliance with the Rule for small, non-OATS-reporting broker-dealers would be approximately 3,600 initial burden hours.3627 The Commission believes the burden hours would be associated with work performed by internal technology, compliance and legal staff in connection with the implementation of CAT Data reporting. The Commission also now estimates that each small non-OATS-reporting broker-dealer would incur approximately $125,171.04 in initial external outsourcing costs.3628 Therefore, the Commission now estimates that the average one-time initial burden per small non-OATS-reporting broker-dealer would be 3,600 burden hours and external costs of $125,171.04 for an estimated aggregate initial burden of 2,962,800 hours3629 and an estimated aggregate initial external cost of $103,015,765.92.3630

+

(b) Small Non-OATS-Reporting Broker-Dealers – Ongoing Burden and Costs

+

In this Order, additionally, based on the comment that provided estimates for a modified allocation timestamp requirement, with a one second timestamp granularity and a one second clock offset,3631 the Commission estimates that the ongoing cost to a small non-OATS-reporting broker-dealer to maintain the modified allocation timestamp requirement would be $66.50.3632 The Commission believes that this cost would be an external hardware and software cost related to maintenance of the modified allocation timestamp. The Commission is adding the cost of the modified allocation timestamp requirement to the external costs to be incurred by small non-OATS-reporting broker-dealers

+

Therefore, the Commission now estimates that the average ongoing annual burden per small non-OATS-reporting broker-dealer would be approximately 1,350 hours, plus $124,439.503633 in external costs, for an estimated aggregate ongoing burden of 1,111,050 hours3634 and an estimated aggregate ongoing external cost of $102,413,708.50.3635

+
+
+
pubdate: November 15, 2016 effdate: N/A +

E. Summary of Collection of Information under the CAT NMS Plan, as Amended by the Commission

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under the CAT NMS Plan, as Amended by the Commission + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + OMB, + +

As noted above,3636 the Commission is amending the CAT NMS Plan, resulting in a new information collection requirement, “CAT NMS Plan Reporting and Disclosure Requirements.” The Commission is requesting public comment on the new collection of information requirement in this Order. The Commission is applying for an OMB control number for the proposed new collection of information in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13, and OMB has not yet assigned a control number to the new collection. Responses to the new collection of information would be mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

+
pubdate: November 15, 2016 effdate: N/A +

1. One-Time Reports

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under the CAT NMS Plan, as Amended by the Commission, One-Time Reports + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + SRO, + Industry Members, + Material Systems Change, + +

a. Independent Audit of Expenses Incurred Prior to the Effective Date

+

Section 6.6(a)(i) of the CAT NMS Plan requires the Participants to provide to the Commission, and make public, an independent audit of fees, costs and expenses incurred by the Participants on behalf of the Company, prior to the Effective Date, in connection with the creation and implementation of the CAT, at least one month prior to submitting any rule filing to establish initial fees to the Commission.

+

b. Review of Clock Synchronization Standards

+

Section 6.6(a)(ii) of the CAT NMS Plan now requires a written assessment of clock synchronization standards, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, within six months of effectiveness of the Plan.

+

c. Coordinated Surveillance Report

+

Section 6.6(a)(iii) of the CAT NMS Plan requires the Participants to submit a written report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into a Rule 17d-2 agreements or regulatory services agreements), within 12 months of effectiveness of the Plan.

+

d. Assessment of Industry Member Bulk Access to Reported Data

+

Section 6.6(a)(iv) of the CAT NMS Plan requires the Participants to provide a written report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository, within 24 months of effectiveness of the Plan.

+

e. Assessment of Errors in Customer Information Fields

+

Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to submit a written assessment of the nature and extent of errors in the Customer information submitted to the Central Repository and whether to prioritize the correction of certain data fields over others, within 36 months of effectiveness of the Plan.

+

f. Report on Impact of Tiered Fees on Market Liquidity

+

Section 6.6(a)(vi) of the CAT NMS Plan now requires the Participants to submit a written report to study the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity, within 36 months of effectiveness of the Plan.

+

g. Assessment of Material Systems Change on Error Rate

+

Section 6.6(a)(vii) of the CAT NMS Plan requires a written assessment of the projected impact of any Material Systems Change on the Maximum Error Rate, prior to the implementation of any Material Systems Change.

+
+
pubdate: November 15, 2016 effdate: N/A +

2. Non-Report Commission-Created Information Collections

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Summary of Collection of Information under the CAT NMS Plan, as Amended by the Commission, Non-Report Commission-Created Information Collections + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT LLC, + GAAP, + CAT System, + +

a. Financial Statements

+

Section 9.2 of the CAT NMS Plan now requires that the CAT LLC financials be (i) in compliance with GAAP, (ii) be audited by an independent public accounting firm, and (iii) be made publicly available.

+

b. Background Checks

+

Section 6.1(g) of the CAT NMS Plan now requires each Participant to conduct background checks of its employees and contractors that will use the CAT System.

+
+
+
pubdate: November 15, 2016 effdate: N/A +

F. Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission + Compliance User: Self-Regulatory Organization + Keywords: +
pubdate: November 15, 2016 effdate: N/A +

1. Independent Audit of Expenses Incurred Prior to the Effective Date

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Independent Audit of Expenses Incurred Prior to the Effective Date + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Commission, + +

Section 6.6(a)(i) of the CAT NMS Plan requires the Participants to provide to the Commission, and make public, an independent audit of fees, costs and expenses incurred by the Participants on behalf of the Company, prior to the Effective Date, in connection with the creation and implementation of the CAT, at least one month prior to submitting any rule filing to establish initial fees to the Commission. The Commission notes that any such filing will be published for notice and comment, and that such an audit would facilitate public comment and the Commission’s review of these filings to ensure the fees imposed on Industry Members are reasonable, equitable and not unfairly discriminatory.

+
+
pubdate: November 15, 2016 effdate: N/A +

2. Review of Clock Synchronization Standards

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Review of Clock Synchronization Standards + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + CAT Reporter, + +

Section 6.6(a)(ii) of the CAT NMS Plan now requires a written assessment of clock synchronization standards, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system. The Commission believes that the Participants should consider the Plan’s clock synchronization standards based on the diversity of the CAT Reporter, Industry Member, and type of system promptly and propose any appropriate amendments for Commission consideration, within six months of effectiveness of the Plan.

+
+
pubdate: November 15, 2016 effdate: N/A +

3. Coordinated Surveillance Report

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Coordinated Surveillance Report + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +

Section 6.6(a)(iii) of the CAT NMS Plan now requires the Participants to submit a written report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into a Rule 17d-2 agreements or regulatory services agreements), within 12 months of effectiveness of the Plan. The Commission notes that the CAT will allow regulators to conduct cross-market surveillances and to review conduct that occurs across the markets. As a result, the Commission believes that it may be efficient for the Participants to coordinate to conduct cross market surveillances.

+
+
pubdate: November 15, 2016 effdate: N/A +

4. Assessment of Industry Member Bulk Access to Reported Data

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Assessment of Industry Member Bulk Access to Reported Data + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

Section 6.6(a)(iv) of the CAT NMS Plan now requires the Participants to provide a written report discussing the feasibility, benefits and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository, within 24 months of effectiveness of the Plan. Commenters’ expressed a desire for bulk access to their own data for surveillance and internal compliance purposes, as well as possible error correction purposes. While the Participants did not permit such access in the Plan citing security and cost concerns, they did represent that they would consider allowing bulk access to the audit trail data reported by Industry Members once CAT is operational. The Commission believes a report discussing the feasibility of this type of access will ensure the Participants consider the issue and are responsive to Industry requests.

+
+
pubdate: November 15, 2016 effdate: N/A +

5. Assessment of Errors in Customer Information Fields

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Assessment of Errors in Customer Information Fields + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to submit a written assessment of the nature and extent of errors in the Customer information submitted to the Central Repository and whether the correction of certain data fields should be prioritized. The Commission believes that requiring such an assessment of errors could help ensure that the accuracy of CAT Data is achieved in the most prompt and efficient manner.

+
+
pubdate: November 15, 2016 effdate: N/A +

6. Report on Impact of Tiered Fees on Market Liquidity

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Report on Impact of Tiered Fees on Market Liquidity + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Commission, + +

Section 6.6(a)(vi) of the CAT NMS Plan now requires the Participants to submit a written report to study the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity, within 36 months of effectiveness of the Plan. One commenter expressed concern that use of a tiered-fees structure could discourage the display of quotes. In response the Participants explained that one of the reasons they chose to use a tiered-fee funding model was to limit disincentives to providing liquidity. To help determine whether the Plan’s funding model actually achieves the Participants’ stated objective, the Commission believes it is appropriate to require them to provide this assessment. The Commission believes that a report that explains the observed impact on liquidity after reporting begins will allow the Commission and the Participants to determine whether or not the tier-fee structure discourages Industry Member from providing liquidity.

+
+
pubdate: November 15, 2016 effdate: N/A +

7. Assessment of Material Systems Change on Error Rate

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Assessment of Material Systems Change on Error Rate + Compliance User: Self-Regulatory Organization + Keywords: + Material Systems Change, + +

The Commission is amending the Plan to require Participants to provide the Commission a written assessment of the projected impact of any Material Systems Change on the Maximum Error Rate, prior to the implementation of any Material Systems Change. The Commission believes that Material Systems Changes either could result in new challenges for CAT Reporters or simplify the means for reporting data. In either case, the appropriateness of the Maximum Error Rate could be impacted, and thus warrant a change. Accordingly, the Commission believes it appropriate to require the Participants to provide the Commission an assessment of the projected impact on the Maximum Error Rate, including any recommended changes thereto, prior to the implementation of any Material Systems Change.

+
+
pubdate: November 15, 2016 effdate: N/A +

8. Financial Statements

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Financial Statements + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + Financial, + +

Section 9.2 of the CAT NMS Plan now requires that the CAT LLC financials be (i) in compliance with GAAP, (ii) be audited by an independent public accounting firm, and (iii) be made publicly available. The Commission believes that this requirement will promote greater transparency with respect to the Company’s financial accounting.

+
+
pubdate: November 15, 2016 effdate: N/A +

9. Background Checks

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Proposed Use of Information under the CAT NMS Plan, as Amended by the Commission, Background Checks + Compliance User: Self-Regulatory Organization + Keywords: + CAT NMS plan, + +

Section 6.1(g) of the CAT NMS Plan now requires each Participant to conduct background checks of its employees and contractors that will use the CAT System. The Commission believes that such a requirement generally should extend to Participants with respect to all of their users that have access to CAT Data and therefore has amended the Plan to require that each Participant conduct background checks for its employees and contractors that will use the CAT System. The Commission believes that this amendment to the Plan is appropriate in order to better manage the risk of bad actors accessing to the CAT System.

+
+
+
pubdate: November 15, 2016 effdate: N/A +

G. Total Initial and Annual Reporting and Recordkeeping Burden of Information Collection under the CAT NMS Plan, as Amended by the Commission

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden of Information Collection under the CAT NMS Plan, as Amended by the Commission + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +
pubdate: November 15, 2016 effdate: N/A +

1. Burden on National Securities Exchanges and National Securities Associations

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden of Information Collection under the CAT NMS Plan, as Amended by the Commission, Burden on National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +

a. Independent Audit of Expenses Incurred Prior to the Effective Date

+

Section 6.6(a)(i) of the CAT NMS Plan now requires the Participants to provide to the Commission an independent audit of fees, costs and expenses incurred by the Participants on behalf of the Company, prior to the Effective Date, in connection with the creation and implementation of the CAT, at least one month prior to submitting any rule filing to establish initial fees to the Commission.

+

The Commission preliminarily estimates that each Participant would incur an initial, onetime external cost of the audit of $238.09.3637 The Commission preliminarily estimates that the aggregate initial, one-time external cost of the audit is $5,000.3638

+

b. Review of Clock Synchronization Standards

+

Section 6.6(a)(ii) of the CAT NMS Plan now requires a written assessment of clock synchronization standards, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, within six months of effectiveness of the Plan.

+

The Commission preliminarily estimates that it would take each Participant approximately 19 initial, one-time burden hours of internal legal and information technology staff time to prepare and submit the assessment of clock synchronization standards.3639 The Commission believes that this burden would mostly be comprised of information technology staff time to conduct the assessment, with less time allocated to internal legal staff for review of the assessment. Additionally, the Commission now preliminarily estimates that on average, each Participant would outsource 0.5 hours of legal time to assist in the review of the assessment, for an initial, one-time external cost of approximately $200.3640 Therefore, the Commission preliminarily estimates that the initial, one-time burden of preparing and submitting the assessment would be 19 initial, one-time burden hours per Participant plus $200 of external costs for outsourced legal counsel per Participant, for an estimated aggregate initial, one-time burden of approximately 399 hours3641 and an estimated aggregate initial, one-time external cost of $4,200.3642

+

c. Coordinated Surveillance Report

+

Section 6.6(a)(iii) of the CAT NMS Plan now requires the Participants to submit a written report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into Rule 17d-2 agreements or regulatory services agreements), within 12 months of effectiveness of the Plan.

+

The Commission preliminarily estimates that it would take each Participant approximately 85.71 initial burden hours of internal legal, compliance, business operations, and information technology staff time to prepare and submit the report.3643 The Commission preliminarily estimates that on average, each Participant would outsource 2.5 hours of legal time to assist in the drafting and review of the report, for an initial, one-time external cost of approximately $1,000.3644 Therefore, the Commission preliminarily estimates that the initial, one-time burden of preparing and submitting the report would be 85.71 initial, one-time burden hours per Participant plus $1,000 of external costs for outsourced legal counsel per Participant, for an estimated aggregate initial, one-time burden of 1,799.91 hours3645 and an estimated aggregate initial, one-time external cost of $21,000.3646

+

d. Assessment of Industry Member Bulk Access to Reported Data

+

Section 6.6(a)(iv) of the CAT NMS Plan requires the Participants to provide a written report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository, within 24 months of effectiveness of the Plan.

+

The Commission preliminarily estimates that it would take each Participant approximately 15 initial, one-time burden hours of internal legal, compliance, business operations, and information technology staff time to prepare and submit the assessment.3647 The Commission preliminarily estimates that on average, each Participant would outsource five hours of legal time to assist in the preparation and review of the assessment, for an initial, one-time external cost of approximately $2,000.3648 Therefore, the Commission preliminarily estimates that the initial one-time burden of submitting a written assessment would be 15 initial burden hours per SRO plus $2,000 of external costs for outsourced legal counsel per Participant, for an estimated aggregate initial burden of approximately 315 hours3649 and an estimated aggregate initial external cost of $42,000.3650

+

e. Assessment of Errors in Customer Information Fields

+

Section 6.6(a)(v) of the CAT NMS Plan requires the Participants to submit a written assessment of errors in the customer information submitted to the Central Repository and whether to prioritize the correction of certain data fields over others, within 36 months of effectiveness of the Plan.

+

The Commission preliminarily estimates that it would take each Participant approximately 24 initial, one-time burden hours of internal legal, compliance, and information technology staff time to prepare and submit the assessment of errors.3651 The Commission estimates that on average, each Participant would outsource 1.25 hours of legal time to assist in the review of the assessment, for an initial, one-time external cost of approximately $500.3652 Therefore, the Commission now preliminarily estimates that the initial, one-time burden of preparing and submitting a written assessment would be 24 initial, one-time burden hours per SRO plus $500 of external costs for outsourced legal counsel per Participant, for an estimated aggregate initial, one-time burden of approximately 504 hours3653 and an estimated aggregate initial, one-time external cost of $10,500.3654

+

f. Report on Impact of Tiered Fees on Market Liquidity

+

Section 6.6(a)(vi) of the CAT NMS Plan now requires the Participants to submit a written report to study the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity, within 36 months of effectiveness of the Plan.

+

The Commission preliminarily estimates that it would take each Participant approximately 21.43 initial, one-time burden hours of internal legal and business operations staff time to prepare and submit the report studying the impact of tiered fees on market liquidity.3655 The Commission also preliminarily estimates that on average, each Participant would outsource 0.5 hours of legal time to assist in drafting the report, for an initial, one-time external cost of approximately $200.3656 Therefore, the Commission now preliminarily estimates that the initial, one-time burden of preparing and submitting the report studying the impact of tiered fees on market liquidity would be 21.43 initial, one-time burden hours per Participant plus $200 of external costs for outsourced legal counsel per Participant, for an estimated aggregate initial, one-time burden of approximately 450 hours3657 and an estimated aggregate initial, one-time external cost of $4,200.3658

+

g. Assessment of Material Systems Change on Error Rate

+

Section 6.6(a)(vii) of the CAT NMS Plan requires a written assessment of the projected impact of any Material Systems Change on the Maximum Error Rate, prior to the implementation of any Material Systems Change.

+

The Commission preliminarily estimates that the CAT may have four Material Systems Changes per year. Based on this estimate, the Commission preliminarily estimates that each Participant would incur 5.953659 burden hours to prepare and submit each assessment, or 23.8 annual burden hours per year,3660 for an aggregate, ongoing estimate of 125 burden hours per report, 3661 or an aggregate ongoing estimate of 500 burden hours per year.3662

+

h. Financial Statements

+

Section 9.2 of the CAT NMS Plan now requires that the CAT LLC financials be (i) in compliance with GAAP, (ii) be audited by an independent public accounting firm, and (iii) be made publicly available. The Commission preliminarily estimates that each Participant would incur an annual external cost of $3,095.243663 associated with this requirement, for an aggregate annual, ongoing external cost of $65,000 to the Participants.3664

+

i. Background Checks

+

Section 6.1(g) of the CAT NMS Plan now requires each Participant to conduct background checks of its employees and contractors that will use the CAT System.3665 The Commission preliminarily estimates that this requirement will impact approximately 1,500 users.3666 The Commission preliminarily estimates that each Participant would need to have background checks of approximately 71 users.3667 For its estimates, the Commission is assuming that these would be background checks using fingerprints submitted to the Attorney General of the United States for identification and processing.3668 The Commission preliminarily estimates that it would take approximately 15 minutes3669 to create and submit each fingerprint card.3670 The total reporting burden per Participant is therefore preliminarily estimated to be 17.75 initial, one-time burden hours,3671 for an aggregate, initial burden of 374.01 hours.3672 The Commission preliminarily estimates that the total initial external cost per Participant would be $2,603.04,3673 for an aggregate, initial external cost of $54,987.45.3674

+

The Commission preliminarily estimates that the ongoing internal burden hours for each Participant would be approximately 4.26 annual burden hours,3675 for an aggregate annual burden hour amount of 89.51 burden hours.3676 The Commission also preliminarily estimates that the ongoing external cost to be incurred by each Participant would be approximately $625.07,3677 for an aggregate annual external cost of $13,126.37.3678

+
+
pubdate: November 15, 2016 effdate: N/A +

2. Request for Comment

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Total Initial and Annual Reporting and Recordkeeping Burden of Information Collection under the CAT NMS Plan, as Amended by the Commission, Request for Comment + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +

Pursuant to 44 U.S.C. 3506(c)(2)(A), the Commission solicits comments on the “CAT NMS Plan Reporting and Disclosure Requirements” collection of information to:

+

(1) Evaluate whether the proposed collection is necessary for the proper performance of our functions, including whether the information shall have practical utility;

+

(2) Evaluate the accuracy of our estimate of the burden of the collection of information;

+

(3) Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and

+

(4) Evaluate whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

+

Persons submitting comments on the collection of information requirement should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-11-10. Requests for materials submitted to OMB by the Commission with regard to the collection of information should be in writing, with reference to File No. S7-11-10, and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street, NE, Washington, DC 20549-2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication in the Federal Register, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

+
+
+
pubdate: November 15, 2016 effdate: N/A +

H. Collection of Information is Mandatory

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Collection of Information is Mandatory + Compliance User: Self-Regulatory Organization + Keywords: +

Each collection of information discussed above would be a mandatory collection of information.

+
+
pubdate: November 15, 2016 effdate: N/A +

I. Confidentiality

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Confidentiality + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + CAT NMS plan, + +

Rule 613 requires that the information to be collected and electronically provided to the Central Repository would only be available to the national securities exchanges, national securities association, and the Commission for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules and regulations. Further, the CAT NMS Plan is required to include policies and procedures to ensure the security and confidentiality of all information submitted to the Central Repository, and to ensure that all SROs and their employees, as well as all employees of the Central Repository, shall use appropriate safeguards to ensure the confidentiality of such data. The Commission will receive confidential information. To the extent that the Commission does receive confidential information pursuant to this collection of information, such information will be kept confidential, subject to the provisions of applicable law.

+
+
pubdate: November 15, 2016 effdate: N/A +

J. Recordkeeping Requirements

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Paperwork Reduction Act, Recordkeeping Requirements + Compliance User: Self-Regulatory Organization + Keywords: + SRO, + +

National securities exchanges and national securities associations would be required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.3679 Broker-dealers would be required to retain records and information in accordance with Rule 17a-4 under the Exchange Act.3680 The Plan Processor would be required to retain the information reported to Rule 613(c)(7) and (e)(6) for a period of not less than five years.3681

+
+
+
pubdate: November 15, 2016 effdate: N/A +

VII. Conclusion

+ Topic: Order Approving the Consolidated Audit Trail Plan Release 34-79318, Conclusion + Compliance User: Self-Regulatory Organization + Keywords: + Section 11A of the Act, + CAT NMS plan, + +

For the reasons discussed above, the Commission finds that the CAT NMS Plan as amended is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act.

+

IT IS THEREFORE ORDERED, that pursuant to Section 11A of the Act, and the rules and regulations thereunder, that the CAT NMS Plan (File No. 4-698), as modified, be and it hereby is approved and declared effective, and the Participants are authorized to act jointly to implement the CAT NMS Plan as a means of facilitating a national market system.

+

By the Commission.

+

Brent J. Fields Secretary

+
+
fn +

1 15 U.S.C. 78k-1.

+
+
fn +

2 17 CFR 242.608.

+
+
fn +

3 See Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 27, 2015. Pursuant to Rule 613, the SROs were required to file the CAT NMS Plan on or before April 28, 2013. At the SROs’ request, the Commission granted exemptions to extend the deadline for filing the CAT NMS Plan to December 6, 2013, and then to September 30, 2014. See Securities Exchange Act Release Nos. 69060 (March 7, 2013), 78 FR 15771 (March 12, 2013); 71018 (December 6, 2013), 78 FR 75669 (December 12, 2013). The SROs filed the CAT NMS Plan on September 30, 2014 (the “Initial CAT NMS Plan”). See Letter from the SROs, to Brent J. Fields, Secretary, Commission, dated September 30, 2014. The CAT NMS Plan filed on February 27, 2015, was an amendment to and replacement of the Initial CAT NMS Plan.

+
+
fn +

4 On December 24, 2015, the SROs submitted an Amendment to the CAT NMS Plan. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated December 23, 2015. On February 9, 2016, the Participants filed with the Commission an identical, but unmarked, version of the February 27, 2015 CAT NMS Plan, as modified by the December 24, 2015 Amendment, as well as a copy of the request for proposal issued by the Participants to solicit Bids from parties interested in serving as the Plan Processor for the consolidated audit trail. See Letter from Participants to Brent J. Fields, Secretary, Commission, dated February 8, 2016.

+
+
fn +

5 The Commission voted to publish the February 9, 2016 version of the CAT NMS Plan for public comment on April 27, 2016, and this version of the Plan was published in the Federal Register on May 17, 2016. See Securities Exchange Act Release No. 77724, 81 FR 30614 (the “Notice”). Unless the context otherwise requires, the “CAT NMS Plan” shall refer to the February 27, 2015 CAT NMS Plan, as modified by the December 24, 2015 Amendment and published for comment on May 17, 2016. The Commission notes that the application of ISE Mercury, LLC (“ISE Mercury”) for registration as a national securities exchange was granted on January 29, 2016. See Securities Exchange Act Release No. 76998 (January 29, 2016), 81 FR 6066 (February 4, 2016). In addition, the application of the Investors Exchange LLC (“IEX”) for registration as a national securities exchange was granted on June 17, 2016. See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016). ISE Mercury and IEX will become Participants in the CAT NMS Plan and are thus accounted for as Participants for purposes of this Order.

+
+
fn +

6 See Letters to Brent J. Fields, Secretary, Commission, from Kathleen Weiss Hanley, Bolton-Perella Chair in Finance, Lehigh University, et al., dated July 12, 2016 (“Hanley Letter”); Courtney Doyle McGuinn, FIX Operations Director, FIX Trading Community, dated July 14, 2016 (“FIX Trading Letter”); Kelvin To, Founder and President, Data Boiler Technologies, LLC, dated July 15, 2016 (“Data Boiler Letter”); Richard Foster, Senior Vice President and Senior Counsel for Regulatory and Legal Affairs, Financial Services Roundtable, dated July 15, 2016 (“FSR Letter”); David T. Bellaire, Executive Vice President & General Counsel, Financial Services Institute, dated July 18, 2016 (“FSI Letter”); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association, dated July 18, 2016 (“MFA Letter”); David W. Blass, General Counsel, Investment Company Institute, dated July 18, 2016 (“ICI Letter”); Larry E. Thompson, Vice Chairman and General Counsel, Depository Trust & Clearing Corporation, dated July 18, 2016 (“DTCC Letter”); Manisha Kimmel, Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated July 18, 2016 (“TR Letter”); Theodore R. Lazo, Managing Director and Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association, dated July 18, 2016 (“SIFMA Letter”); Anonymous, received July 18, 2016 (“Anonymous Letter I”); Mary Lou Von Kaenel, Managing Director, Financial Information Forum, dated July 18, 2016 (“FIF Letter”); Marc R. Bryant, Senior Vice President, Deputy General Counsel, Fidelity Investments, dated July 18, 2016 (“Fidelity Letter”); Mark Husler, CEO, UnaVista, and Jonathan Jachym, Head of North America Regulatory Strategy & Government Relations, London Stock Exchange Group, dated July 18, 2016 (“UnaVista Letter”); Gary Stone, Chief Strategy Officer for Trading Solutions and Global Regulatory and Policy Group, Bloomberg, L.P., dated July 18, 2016 (“Bloomberg Letter”); Bonnie K. Wachtel, Wachtel Co Inc., dated July 18, 2016 (“Wachtel Letter”); Dennis M. Kelleher, President & CEO, Stephen W. Hall, Legal Director & Securities Specialist, Lev Bagramian, Senior Securities Policy Advisor, Better Markets, dated July 18, 2016 (“Better Markets Letter”); John A. McCarthy, General Counsel, KCG Holdings, Inc., dated July 20, 2016 (“KCG Letter”); Industry Members of the Development Advisory Group (“DAG”) (including Financial Information Forum, Securities Industry and Financial Markets Association and Securities Traders Association), dated July 20, 2016 (“DAG Letter”); Joanne Moffic-Silver, EVP, General Counsel & Corporate Secretary, Chicago Board Options Exchange, Incorporated, dated July 21, 2016 (“CBOE Letter”); Elizabeth K. King, NYSE Group, Inc., dated July 21, 2016 (“NYSE Letter”); James Toes, Securities President & CEO, Securities Traders Association, dated July 25, 2016 (“STA Letter”); Anonymous, received August 12, 2016 (“Anonymous Letter II”); Scott Garrett, Member of Congress, et al., dated October 14, 2016 (“Garrett Letter”). See Exhibit B for a citation key to the comment letters received by the Commission on the proposed CAT NMS Plan.

+
+
fn +

7 See Securities Exchange Act Release No. 78441 (July 29, 2016), 81 FR 51527 (August 4, 2016).

+
+
fn +

8 See Letter from Participants to Brent J. Fields, Secretary, Commission, dated September 2, 2016 (“Response Letter I”).

+
+
fn +

9 See Letters from Participants to Brent J. Fields, Secretary, Commission, dated September 23, 2016 (“Response Letter II”) and October 7, 2016 (“Response Letter III”).

+
+
fn +

10 See Letter from Participants to Brent J. Fields, Secretary, Commission, dated November 2, 2016 (“Participants’ Letter I”); Letter from Participants to Brent J. Fields, Secretary, Commission, dated November 14, 2016 (“Participants’ Letter II”).

+
+
fn +

11 Completeness refers to whether a data source represents all market activity of interest to regulators, and whether the data is sufficiently detailed to provide the information regulators require. While current data sources provide the trade and order data required by existing rules and regulations, those sources generally do not provide all of the information of interest to regulators in one consolidated audit trail. Accuracy refers to whether the data about a particular order or trade is correct and reliable. Accessibility refers to how the data is stored, how practical it is to assemble, aggregate, and process the data, and whether all appropriate regulators could acquire the data they need. Timeliness refers to when the data is available to regulators and how long it would take to process before it could be used for regulatory analysis. See Adopting Release, infra note 14, at 45727.

+
+
fn +

12 The Commission notes that the SROs have taken steps in recent years to update their audit trail requirements. For example, NYSE, NYSE Amex LLC (n/k/a “NYSE MKT LLC”) (“NYSE Amex”), and NYSE ARCA, Inc. (“NYSE Arca”) have adopted audit trail rules that coordinate with FINRA’s Order Audit Trail System (“OATS”) requirements. See Securities Exchange Act Release No. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011) (concerning NYSE); Securities Exchange Act Release No. 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011) (concerning NYSE Amex); Securities Exchange Act Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (concerning NYSE Arca). This allows the SROs to submit their data to FINRA pursuant to a Regulatory Service Agreement (“RSA”), which FINRA can then reformat and combine with OATS data. Despite these efforts, however, significant deficiencies remain. See Notice, supra note 5, at Section IV.D.2.b.

+
+
fn +

13 See Notice, supra note 5, at Section IV.D.2.b (discussing the limitations of current trade and order data systems).

+
+
fn +

14 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Adopting Release”); see also Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) (“Proposing Release”).

+
+
fn +

15 17 CFR 242.613(a)(1), (c)(1), (c)(7).

+
+
fn +

16 17 CFR 242.613(a)(1).

+
+
fn +

17 See Adopting Release, supra note 14, at 45726.

+
+
fn +

18 Id. The Plan also includes certain recording and reporting obligations for OTC Equity Securities.

+
+
fn +

19 See supra note 4.

+
+
fn +

20 17 CFR 240.0-12.

+
+
fn +

21 See Securities Exchange Act Release No. 77265 (March 1, 2016), 81 FR 11856 (March 7, 2016) (“Exemption Order”); Letter from Participants to Brent J. Fields, Secretary, Commission, dated January 30, 2015 (“Exemptive Request Letter”). Specifically, the SROs requested exemptive relief from the Rule’s requirements related to: (i) the reporting of Options Market Maker quotations, as required under Rule 613(c)(7)(ii) and (iv); (ii) the reporting and use of the Customer-ID under Rule 613(c)(7)(i)(A), (iv)(F), (viii)(B) and 613(c)(8); (iii) the reporting of the CAT-Reporter-ID, as required under Rule 613(c)(7)(i)(C), (ii)(D), (ii)(E), (iii)(D), (iii)(E), (iv)(F), (v)(F), (vi)(B), and (c)(8); (iv) the linking of executions to specific subaccount allocations, as required under Rule 613(c)(7)(vi)(A); and (v) the timestamp granularity requirement of Rule 613(d)(3) for certain manual order events subject to reporting under Rule 613(c)(7)(i)(E), (ii)(C), (iii)(C) and (iv)(C). On April 3, 2015, the SROs filed a supplement related to the requested exemption for Rule 613(c)(7)(vi)(A). See Letter from Robert Colby, FINRA, on behalf of the SROs, to Brent J. Fields, Secretary, Commission, dated April 3, 2015 (“April 2015 Supplement”). This supplement provided examples of how the proposed relief related to allocations would operate. On September 2, 2015, the SROs filed a second supplement to the Exemptive Request Letter. See Letter from the SROs to Brent J. Fields, Secretary, Commission, dated September 2, 2015 (“September 2015 Supplement”). This supplement to the Exemptive Request Letter further addressed the use of an “effective date” in lieu of a “date account opened.” Unless the context otherwise requires, the “Exemption Request” shall refer to the Exemptive Request Letter, as supplemented by the April 2015 Supplement and the September 2015 Supplement.

+
+
fn +

22 As set forth in Section 1.1 of the CAT NMS Plan, supra note 5, the Plan Processor “means the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1 [to] perform the CAT processing functions required by SEC Rule 613 and set forth in [the CAT NMS Plan].” All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in Rule 613, the Adopting Release, or the CAT NMS Plan, as applicable.

+
+
fn +

23 See Securities Exchange Act Release Nos. 70892 (November 15, 2013), 78 FR 69910 (November 21, 2013) (“Selection Plan Notice”); 75192 (June 17, 2015), 80 FR 36028 (June 23, 2015) (Order Approving Amendment No. 1 to the Selection Plan); 75980 (September 24, 2015), 80 FR 58796 (September 30, 2015) (Order Approving Amendment No. 2 to the Selection Plan); 77917 (May 25, 2016), 81 FR 35072 (June 1, 2016) (Notice of Filing and Immediate Effectiveness of Amendment No. 3 to the Selection Plan); 78477 (August 4, 2016), 81 FR 52917 (August 10, 2016) (Notice of Filing and Immediate Effectiveness of Amendment No. 4 to the Selection Plan); see also Securities Exchange Act Release Nos. 71596 (February 21, 2014), 79 FR 11152 (February 27, 2014) (“Selection Plan Approval Order”); 74223 (February 6, 2015), 80 FR 7654 (February 11, 2015) (Notice of Amendment No. 1 to the Selection Plan); 75193 (June 17, 2015), 80 FR 36006 (June 23, 2015) (Notice of Amendment No. 2 to the Selection Plan).

+
+
fn +

24 See Notice, supra note 5, at 30885-30952 for a complete version of the Consolidated Audit Trail National Market System Plan Request for Proposal (issued February 26, 2013, version 3.0 updated March 4, 2014). Other materials related to the RFP are available at http://catnmsplan.com/process/. Among other things, the RFP describes the technical, business, and operational requirements for CAT and outlines the information that must be submitted by Bidders in response to the RFP.

+
+
fn +

25 “Shortlisted Bidders” were selected by the Selection Committee through the voting and scoring processes described in Section 5.2 of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Section 1.1; see also Section III.4, infra (describing the selection of the Plan Processor).

+
+
fn +

26 See Adopting Release, supra note 14, at 45726.

+
+
fn +

27 Id. at 45725.

+
+
fn +

28 See Adopting Release, supra note 14, at 45725.

+
+
fn +

29 See Exemption Order, supra note 21.

+
+
fn +

30 See Notice, supra note 5.

+
+
fn +

31 Id.

+
+
fn +

32 See CAT NMS Plan, supra note 5, at Section 3.2(d).

+
+
fn +

33 Id. at Section 2.6.

+
+
fn +

34 See Notice, supra note 5, at 30618.

+
+
fn +

35 Id.

+
+
fn +

36 See CAT NMS Plan, supra note 5, at Section 3.1.

+
+
fn +

37 “Majority Vote” means the affirmative vote of at least a majority of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d) of the CAT NMS Plan). See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

38 The “Initial Plan Processor” means the first Plan Processor selected by the Operating Committee in accordance with Rule 613, Section 6.1 and the Selection Plan. See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

39 Id. at Section 3.3(a).

+
+
fn +

40 Id. at Section 3.3(a)–(b).

+
+
fn +

41 See Notice, supra note 5, at 30618.

+
+
fn +

42 See CAT NMS Plan, supra note 5, at Section 3.3(b).

+
+
fn +

43 Id.; see also Exchange Act Section 11A(b)(2), 15 U.S.C. 78k-l(b)(5) (which provides that a prohibition or limitation on access to services by a registered securities information processor must be reviewed by the Commission upon application by an aggrieved person).

+
+
fn +

44 “CAT System” means all data processing equipment, communications facilities, and other facilities, including equipment, utilized by the Company or any third parties acting on the Company’s behalf in connection with operation of the CAT and any related information or relevant systems pursuant to the LLC Agreement. See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

45 Id. at Section 3.3(c).

+
+
fn +

46 Id.

+
+
fn +

47 Id. at Section 3.2(a).

+
+
fn +

48 Id. at Sections 3.2(b), 10.2.

+
+
fn +

49 Id. at Section 3.2(d).

+
+
fn +

50 Id. at Section 3.4(b).

+
+
fn +

51 Id. at Section 3.4(c).

+
+
fn +

52 “Permitted Legal Basis” means the Participant has become exempt from, or otherwise has ceased to be subject to, Rule 613 or has arranged to comply with Rule 613 in some manner other than through participation in the LLC Agreement, in each instance subject to the approval of the Commission. See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

53 Id. at Section 3.6.

+
+
fn +

54 Id. _at Sections 3.6, 3.7.

+
+
fn +

55 Id. at Section 3.7(a).

+
+
fn +

56 Id. at Section 3.7(b).

+
+
fn +

57 Id.

+
+
fn +

58 Id.

+
+
fn +

59 Id.

+
+
fn +

60 Id.

+
+
fn +

61 Id. at Section 3.7(c).

+
+
fn +

62 Id.

+
+
fn +

63 Id.

+
+
fn +

64 The Operating Committee will manage the Company except for situations in which the approval of the Participants is required by the Plan or by non-waivable provisions of applicable law. See CAT NMS Plan, supra note 5, at Article IV.

+
+
fn +

65 Id. at Section 4.2(a).

+
+
fn +

66 Id. at Sections 4.2(a), 9.6.

+
+
fn +

67 Id. at Section 4.2(a). An “Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant. Id. at Section 1.1.

+
+
fn +

68 Id. at Section 4.2(b).

+
+
fn +

69 Id.

+
+
fn +

70 Id.

+
+
fn +

71 Id.

+
+
fn +

72 Id. at Section 4.3(a).

+
+
fn +

73 Id.

+
+
fn +

74 Id.

+
+
fn +

75 “Supermajority Vote” means the affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)); provided that if two-thirds of all of such members authorized to cast a vote is not a whole number then that number shall be rounded up to the nearest whole number. Id. at Section 1.1.

+
+
fn +

76 Id. at Section 4.3(b).

+
+
fn +

77 Id. at Section 4.3(d).

+
+
fn +

78 Id.

+
+
fn +

79 “Bidding Participant” means a Participant that: (a) submits a Bid; (b) is an Affiliate of an entity that submits a Bid; or (c) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. Id. at Section 1.1.

+
+
fn +

80 Id. at Section 4.3(d).

+
+
fn +

81 Article IV also addresses, among other things, different types of Operating Committee meetings (regular, special and emergency), frequency of such meetings, how to call such meetings, the location of the meetings, the role of the Chair, and notice regarding such meetings. Id. at Section 4.4.

+
+
fn +

82 Id. at Section 4.4(a).

+
+
fn +

83 Id.

+
+
fn +

84 Id.

+
+
fn +

85 Id.

+
+
fn +

86 Id. _at Section 4.4(b).

+
+
fn +

87 Id. at Section 4.12(a).

+
+
fn +

88 Id.

+
+
fn +

89 Id.

+
+
fn +

90 Id.

+
+
fn +

91 Id.

+
+
fn +

92 Id. at Section 4.12(b).

+
+
fn +

93 Id. at Section 4.13(a), (d).

+
+
fn +

94 Id. at Section 4.13(b).

+
+
fn +

95 Id.

+
+
fn +

96 Id.

+
+
fn +

97 Id.

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+
fn +

98 Id.

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+
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99 Four of the initial twelve members of the Advisory Committee will have an initial term of one year, and another four of the initial twelve members of the Advisory Committee will have an initial term of two years. Id. at Section 4.13(c).

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+
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100 Id. at Section 4.13(d).

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+
fn +

101 Id.

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+
fn +

102 See Notice, supra note 5, at 30621 n.54.

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+
fn +

103 Id.

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+
fn +

104 See CAT NMS Plan, supra note 5, at Section 4.13(e).

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+
fn +

105 Id.

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+
fn +

106 Id. at Section 4.6(a).

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+
fn +

107 Id.

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+
fn +

108 Id.

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+
fn +

109 Id.

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+
fn +

110 Id. at Sections 4.6(a), 6.2.

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+
fn +

111 Id. at Section 4.6(b).

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+
fn +

112 Id.

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+
fn +

113 Id.

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+
fn +

114 Id.

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+
fn +

115 Id.

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116 Id. The Plan uses the term “statutory disqualification” as defined in Section 3(a)(39) of the Exchange Act, which addresses disqualification from membership or participation in, or association with a member of, an SRO. While Officers of the Plan are not persons associated with a member of an SRO, the Commission interprets this provision of the Plan to mean that no person that is subject to one of the statutory disqualifications set forth in Sections 3(a)(39)(A) through (F) of the Exchange Act may serve as Officer.

+
+
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117 See CAT NMS Plan, supra note 5, at Section 4.6(b).

+
+
fn +

118 The Plan Processor selection process set forth in the CAT NMS Plan is identical to the post-CAT NMS Plan approval selection process set forth in the Selection Plan. See Selection Plan, supra note 23.

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+
fn +

119 By its terms, the Selection Plan will terminate upon Commission approval of the Plan. Id.

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+
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120 As noted above, the Participants stated their belief that certain exemptive relief is necessary to include in the Plan all of the provisions the Participants believe are part of the optimal solution for the CAT. The Commission notes that the request for exemptive relief was granted on March 1, 2016. See Exemption Order, supra note 21.

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+
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121 See CAT NMS Plan, supra note 5, at Section 5.2(c)(ii).

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+
fn +

122 Id. at Section 5.1(b)(ii).

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+
fn +

123 Id.

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+
fn +

124 Id.

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+
fn +

125 See Notice, supra note 5, at 30623. If the proposed amendment to the Selection Plan is approved, the Selection Committee may determine to narrow the number of Shortlisted Bids prior to the two rounds of voting. Id. at 30623 n.58.

+
+
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126 This recusal provision is included in the Plan, as well as in an amendment to the Selection Plan. See Order Approving Amendment No. 2 to the Selection Plan, supra note 23.

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+
fn +

127 See CAT NMS Plan, supra note 5, at Section 5.2(e)(iii)(A).

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+
fn +

128 Id. at Section 5.2(e)(iii)(C). Each round of voting throughout the Plan is independent of other rounds. See Notice, supra note 5, at 30623 n.60.

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+
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129 See CAT NMS Plan, supra note 5, at Section 5.2(e)(iii)(D).

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+
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130 Id.

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+
fn +

131 Id.

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+
fn +

132 Id. at Section 5.2(e)(iii)(E).

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+
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133 Id.

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+
fn +

134 Id. at Section 6.7(a)(i).

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+
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135 Id. at Section 6.1(a).

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136 Id. at Section 6.1(d).

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137 “CAT Data” means data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as “CAT Data” from time to time. Id. at Section 1.1.

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+
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138 Id. at Section 6.1(d).

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+
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139 Id.

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+
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140 Id. at Section 6.1(e).

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+
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141 Id. at Section 6.1(f).

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+
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142 Id. at Section 6.1(g).

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+
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143 Id. at Section 6.1(h).

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+
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144 Id.

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+
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145 Id.

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+
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146 Id.

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+
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147 Id. at Section 6.1(i).

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+
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148 Id. at Section 6.1(j).

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+
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149 Id. at Section 6.1(k).

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+
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150 Id. at Section 6.1(l).

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+
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151 Id. at Section 6.1(o).

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+
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152 Id. at Section 6.1(p).

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+
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153 Id. at Section 6.1(b).

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+
fn +

154 Id.

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+
fn +

155 Id.

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+
fn +

156 Id.

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+
fn +

157 Id.

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+
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158 Id. at Section 6.2(a)(iii).

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+
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159 Id. at Section 6.2(a)(ii).

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+
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160 Id. at Section 6.2(a)(iv).

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+
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161 Id. at Section 6.2(b)(i).

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+
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162 Id.

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+
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163 Id.

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+
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164 Id. at Section 6.2(b)(ii).

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+
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165 Id. at Section 6.2(b)(iii).

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+
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166 Id. at Section 6.2(b)(iv).

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+
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167 Id. at Section 6.2(b)(v).

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+
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168 Id. at Section 6.2(b)(vi).

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+
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169 Id. at Section 6.1(u).

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+
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170 Id.

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+
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171 Id. at Section 6.1(n).

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+
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172 Id.

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173 Id. at Section 6.1(q).

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174 Id. at Section 6.1(r).

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+
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175 Id.

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176 Id. at Section 6.1(s).

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177 Id. at Section 6.1(t).

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178 Id. at Section 6.5(a)(i).

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179 Id. at Section 6.5(a)(ii)(A).

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+
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180 Id. at Section 6.5(a)(ii)(B).

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+
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181 Id. at Section 6.5(a)(ii)(C).

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182 Id. at Section 6.5(a)(ii)(D).

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183 Id. at Section 6.5(b)(i).

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184 Id. at Section 6.5(b)(ii).

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+
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185 Id. at Section 6.5(c)(i).

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+
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186 Id. at Section 6.5(c)(ii).

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+
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187 Id. at Section 6.5(c)(ii).

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+
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188 Id. at Section 6.5(c)(iii); see also id. at Appendix C, The Security and Confidentiality of Information Reported to the Central Repository, and Appendix D, Data Security, describe the security and confidentiality of the CAT Data, including how access to the Central Repository is controlled.

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+
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189 See CAT NMS Plan, supra note 5, at Section 6.3. Participants may, but are not required to, coordinate compliance with the recording and reporting efforts through the use of regulatory services agreements and/or agreements adopted pursuant to Rule 17d-2 under the Exchange Act.

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+
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190 See CAT NMS Plan, supra note 5, at Section 6.5(d). The CAT NMS Plan defines “Reportable Event” as “includ[ing], but . . . not limited to, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.” Id. at Section 1.1.

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+
fn +

191 Id. at Section 6.3(d)(i)(A).

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+
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192 Id. at Section 6.3(d)(i)(B).

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+
fn +

193 Id. at Section 6.3(d)(i)(C).

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+
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194 Id. at Section 6.3(d)(i)(D).

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+
fn +

195 Id. at Section 6.3(d)(i)(E).

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+
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196 Id. at Section 6.3(d)(i)(F). For a discussion of the Material Terms of the Order required by Rule 613, see Adopting Release, supra note 14, at 45750–52. The Commission notes that the Participants include in the Plan a requirement for the reporting of the OTC Equity Security symbol as one of the “Material Terms of the Order.” See CAT NMS Plan, supra note 5, at Section 1.1.

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+
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197 See CAT NMS Plan, supra note 5, at Section 6.3(d)(ii)(A).

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+
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198 Id. at Section 6.3(d)(ii)(B).

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+
fn +

199 Id. at Section 6.3(d)(ii)(C).

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+
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200 Id. at Section 6.3(d)(ii)(D).

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+
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201 Id. at Section 6.3(d)(ii)(E).

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+
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202 Id. at Section 6.3(d)(ii)(F).

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+
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203 Id. at Section 6.3(d)(ii)(G).

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+
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204 Id. at Section 6.3(d)(iii)(A).

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+
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205 Id. at Section 6.3(d)(iii)(B).

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+
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206 Id. at Section 6.3(d)(iii)(C).

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+
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207 Id. at Section 6.3(d)(iii)(D).

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+
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208 Id. at Section 6.3(d)(iii)(E).

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+
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209 Id. at Section 6.3(d)(iii)(F).

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+
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210 Id. at Section 6.3(d)(iv)(A).

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+
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211 Id. at Section 6.3(d)(iv)(B).

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+
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212 Id. at Section 6.3(d)(iv)(C).

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+
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213 Id. at Section 6.3(d)(iv)(D).

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+
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214 Id. at Section 6.3(d)(iv)(E).

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+
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215 Id. at Section 6.3(d)(iv)(F).

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216 Id. at Section 6.3(d)(v)(A).

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+
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217 Id. at Section 6.3(d)(v)(B).

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+
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218 Id. at Section 6.3(d)(v)(C).

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+
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219 Id. at Section 6.3(d)(v)(D).

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+
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220 Id. at Section 6.3(d)(v)(E).

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+
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221 Id. at Section 6.3(d)(v)(F).

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222 Id. at Section 6.3(d)(v)(G).

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223 Id. at Section 6.3(d)(vi).

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224 Id. at Section 6.3(a); Appendix D, Section 2.1.

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225 Id. at Section 6.3(b)(i); Appendix D, Section 3.

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+
fn +

226 Id. at Section 6.3(b)(ii).

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227 Id. at Section 6.3(b)(ii).

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228 Id. at Section 6.3(c)(i).

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229 Id. at Section 6.3(c)(ii).

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230 Id. at Section 6.4(d)(i).

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231 Id. at Section 6.4(d)(ii).

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232 Id.

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233 Id. at Section 6.4(d)(iii).

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+
fn +

234 Id.

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+
fn +

235 Id.

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+
fn +

236 Id. at Section 6.4(d)(v).

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+
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237 Id. at Section 6.4(e).

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238 Id. at Section 6.4(b)(i).

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+
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239 Id. at Section 6.4(b)(ii).

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+
fn +

240 Id.

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+
fn +

241 Id. at Section 6.4(c)(i).

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fn +

242 Id. at Section 6.4(c)(ii).

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fn +

243 See CAT NMS Plan, supra note 5, at Section 6.6(a)(i).

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+
fn +

244 Id. at Section 6.6(a)(ii).

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+
fn +

245 Id.

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+
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246 Id. at Section 1.1. The CAT NMS Plan defines a “Business Clock” to mean “a clock used to record the date and time of any Reportable Event required to be reported under SEC Rule 613.” Id.

+
+
fn +

247 Id. at Section 6.8(a)(i). Participants and Industry Members reviewed their respective internal clock synchronization technology practices, and reviewed the results of The Financial Information Forum (“FIF”) Clock Offset and determined that a 50 millisecond clock offset tolerance was consistent with the current industry clock synchronization standard. See CAT NMS Plan, supra note 5, at Appendix C, Section A.3(c) and D.12(p); see also Financial Information Forum, FIF Clock Offset Survey Preliminary Report (February 17, 2015), available at http://www.catnmsplan.com/industryfeedback/p602479.pdf and http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (“FIF Clock Offset Survey”).

+
+
fn +

248 See CAT NMS Plan, supra note 5, at Section 6.8(a)(ii).

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+
fn +

249 Id. at Section 6.8(a)(iii).

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+
fn +

250 Id.

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+
fn +

251 Id.

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+
fn +

252 Id. at Section 6.8(c).

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+
fn +

253 See id. at Appendix C, Section A.3(c).

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+
fn +

254 See id.

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+
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255 See id. It was noted that such a log would include results for a period of not less than five years ending on the then current date. Id.

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+
fn +

256 See id. at Appendix C, Section D.12(p).

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+
fn +
+
fn +

258 Id. at Section 6.8(b).

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+
fn +

259 Id.

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+
fn +

260 Id. at Section 6.8(c).

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+
fn +

261 Id. at Sections 6.8(a)(ii)(C), 6.8(a)(iii).

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+
fn +

262 Id. at Section 6.9(a).

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+
fn +

263 Id.

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+
fn +

264 Id.

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+
fn +

265 Id. at Section 6.9(b).

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+
fn +

266 Id. at Section 6.9(c).

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+
fn +

267 Id.

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+
fn +

268 Id. at Section 6.9(c)(i).

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+
fn +

269 Id.

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+
fn +

270 Id.

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+
fn +

271 Id.

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+
fn +

272 Id. at Section 6.9(c)(ii).

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+
fn +

273 Id. at Section 6.9(c)(iii).

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+
fn +

274 See CAT NMS Plan, supra note 5, at Section 6.10(a).

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+
fn +

275 Id.

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+
fn +

276 Id. at Section 6.10(b).

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+
fn +

277 Id. at Section 6.10(c)(i).

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+
fn +

278 Id. at Section 6.10(c)(i)(A).

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+
fn +

279 Id.

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+
fn +

280 Id. at Section 6.10(c)(i)(B).

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+
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281 Id. at Section 6.10(c)(ii).

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+
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282 The proposed CAT NMS Plan defines PII as “personally identifiable information, including a social security number or tax identifier number or similar information.” Id. at Section 1.1.

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+
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283 Id. at Section 6.10(c)(ii).

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+
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284 Id. at Section 6.10(c)(iii) (providing that “[s]uch monitoring shall include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or CAT Data extractions. The Plan Processor shall provide the Operating Committee or its designee(s) details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts”).

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+
fn +

285 Id.

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+
fn +

286 Id.

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+
fn +

287 Id. _at 6.10(c)(iv).

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+
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288 Id. at Section 6.10(c)(v).

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+
fn +

289 Id. at Section 6.10(c)(vi).

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290 Id. at Section 6.12.

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291 Id. at Section 8.1.

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+
fn +

292 Id. at Section 8.5(a).

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+
fn +

293 Id.

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+
fn +

294 Id. at Section 11.1(a).

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+
fn +

295 Id.

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+
fn +

296 Id. at Section 11.1(b).

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297 Id. at Section 11.2.

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+
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298 Id. at Section 11.1(b).

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299 Id. at Section 11.1(c).

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+
fn +

300 Id.

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+
fn +

301 Id. at Section 11.1(d).

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302 The Commission notes that Section 11.1(b) of the CAT NMS Plan states that the Participants would file fees for Industry Members approved by the Operating Committee with the Commission. The Operating Committee may only change the tier to which a Person is assigned in accordance with a fee schedule filed with the Commission.

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+
fn +

303 See CAT NMS Plan, supra note 5, at Section 11.1(d).

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+
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304 Id. at Section 11.3(a)(i).

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+
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305 Id.

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+
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306 Id.

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+
fn +

307 Id. at Section 11.3(a)(ii).

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+
fn +

308 Id.

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+
fn +

309 The Commission notes that the Participants could choose to submit the proposed fee schedule to the Commission as individual SROs pursuant to Rule 19b-4 or jointly as Participants to an NMS plan pursuant to Rule 608 of Regulation NMS. Because the proposed fee schedule would establish fees, whether the Participants individually file it pursuant to Section 19(b)(3)(A)(ii) of the Act, or jointly file it pursuant to Rule 608(b)(3)(i) of Regulation NMS, the proposed fee schedule could take effect upon filing with the Commission. See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i); see also Section IV.F, infra.

+
+
fn +

310 See CAT NMS Plan, supra note 5, at Section 11.3(b).

+
+
fn +

311 Id.

+
+
fn +

312 Id.

+
+
fn +

313 As it relates to fees that the Operating Committee may impose for access and use of the CAT for regulatory and oversight purposes, the Commission interprets the provisions in the Plan relating to the collection of fees as applying only to Participants and Industry Members, and thus the Commission would not be subject to such fees. See Section IV.F, infra, for further discussion regarding the funding of the Company.

+
+
fn +

314 See CAT NMS Plan, supra note 5, at Section 11.3(d).

+
+
fn +

315 Id.

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+
fn +

316 Id.; see also supra note 309.

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+
fn +

317 Id.

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+
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318 Id. at Section 11.4.

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+
fn +

319 Id.

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+
fn +

320 Id.

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+
fn +

321 Id.

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+
fn +

322 Id.

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+
fn +

323 Id.

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fn +

324 Id. at Section 11.5.

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+
fn +

325 Id.

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+
fn +

326 Id.

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+
fn +

327 Id.

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+
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328 Id. at Section 12.3.

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+
fn +

329 Id.

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+
fn +

330 Id.

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+
fn +

331 Id. at Section 3.11.

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+
fn +

332 Id.

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+
fn +

333 Appendix B is reserved for future use.

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+
fn +

334 17 CFR 242.613(a).

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+
fn +

335 See CAT NMS Plan, supra note 5, at Appendix C, Sections A.1–6, B.7–8, C.9–10.

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+
fn +

336 Id. at Appendix D, Sections 1.1, 1.3–1.4.

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+
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337 Id. at Appendix D, Section 2.1.

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+
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338 Id. at Appendix D, Sections 3, 6.1–6.2, 7.2.

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+
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339 Id. at Appendix D, Section 8.1.

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+
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340 Id. at Appendix D, Sections 4.1, 9.1.

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+
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341 Id. at Appendix D, Sections 5.3-5.4.

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+
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342 Id. at Appendix D, Sections 10, 11.

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+
fn +

343 Id. at Sections 6.3–6.4; Appendix D, at Section 2.1.

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+
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344 Id. at Sections 6.3(a), 6.4(a). The CAT NMS Plan also requires that the Operating Committee-approved format must be a format specified by the Plan Processor and Rule 613 compliant.

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+
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345 Id. at Sections 6.3(b)(i), 6.4(b)(i).

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+
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346 Id. at Sections 6.3(b)(ii); 6.4(b)(ii); Appendix C, Section A.1(a)(ii). Participants may voluntarily report CAT Data prior to the 8:00 a.m. ET deadline. Id. The CAT NMS Plan defines “Trading Day” as the date “as is determined by the Operating Committee.” The CAT NMS Plan also provides that “the Operating Committee may establish different Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time.”) Id. at Section 1.1.

+
+
fn +

347 See CAT NMS Plan, supra note 5, at Sections 6.3(c)(i)–(ii), 6.4(c)(i)–(ii).

+
+
fn +

348 The CAT NMS Plan defines the “Compliance Rule” to mean “with respect to a Participant, the rules promulgated by such Participant as contemplated by Section 3.11.” Id. at Section 1.1. Section 3.11 of the CAT NMS Plan provides that “each Participant shall comply with and enforce compliance, as required by SEC Rule 608(c), by its Industry Members with the provisions of SEC Rule 613 and of [the LLC Agreement], as applicable, to the Participant and its Industry Members. The Participants shall endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of SEC Rule 613 and [the LLC Agreement].” Id. at Section 3.11.

+
+
fn +

349 See id. at Section 6.4(c)(i)–(ii).

+
+
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350 For “original receipt or origination of an order,” the CAT NMS Plan specifies the following data elements: (i) Firm Designated ID(s) for each Customer; (ii) CAT-Order-ID; (iii) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order; (iv) date of order receipt or origination; (v) time of order receipt or origination (using timestamps pursuant to Section 6.8 of the CAT NMS Plan); and (vi) Material Terms of the Order. Id. at Section 6.3(d)(i).

+
+
fn +

351 For “routing of an order,” the CAT NMS Plan specifies the following data elements: (i) CAT-Order-ID; (ii) date on which the order is routed; (iii) time at which the order is routed (using timestamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; (v) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed; (vi) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed; and (vii) Material Terms of the Order. Id. at Section 6.3(d)(ii).

+
+
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352 For “receipt of an order that has been routed,” the CAT NMS Plan specifies the following data elements: (i) CAT-Order-ID; (ii) date on which the order is received; (iii) time at which the order is received (using timestamps pursuant to Section 6.8); (iv) SRO-Assigned Market Participant Identifier of the Industry Member or Participant receiving the order; (v) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; and (vi) Material Terms of the Order. Id. at Section 6.3(d)(iii).

+
+
fn +

353 For an “order [that] is modified or cancelled,” the CAT NMS Plan specifies the following data elements: (i) CAT-Order-ID; (ii) date the modification or cancellation is received or originated; (iii) time at which the modification or cancellation is received or originated (using timestamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) price and remaining size of the order, if modified; (v) other changes in the Material Terms of the Order, if modified; and (vi) whether the modification or cancellation instruction was given by the Customer or was initiated by the Industry Member or Participant. Id. at Section 6.3(d)(iv).

+
+
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354 For an “order [that] is executed, in whole or in part,” the CAT NMS Plan specifies the following data elements: (i) CAT-Order-ID; (ii) date of execution; (iii) time of execution (using timestamps pursuant to Section 6.8 of the CAT NMS Plan); (iv) execution capacity (principal, agency or riskless principal); (v) execution price and size; (vi) SRO-Assigned Market Participant Identifier of the Participant or Industry Member executing the order; and (vii) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information. Id. at Section 6.3(d)(v).

+
+
fn +

355 See id. at Section 6.3(d)(vi).

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356 For an “order [that] is executed, in whole or in part,” the CAT NMS Plan specifies the following additional data elements: (i) an Allocation Report; (ii) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and (iii) CAT-Order-ID of any contra-side order(s). Id. at Section 6.4(d)(ii)(A).

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+
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357 For a “trade [that] is cancelled,” the CAT NMS Plan specifies the following additional data element: a cancelled trade indicator. Id. at Section 6.4(d)(ii)(B).

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358 For “original receipt or origination of an order,” the CAT NMS Plan specifies the following additional data element(s): the Firm Designated ID, Customer Account Information, and Customer Identifying Information for the relevant Customer. Id. at Section 6.4(d)(ii)(C).

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+
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359 Id. at Appendix D, Section 3.

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+
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360 Id. at Section 6.3(b)(ii); see also id. at Appendix C, Section A.1(a)(ii); Appendix D, Sections 3.1, 6.1.

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+
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361 Id. at Section 6.3(b)(ii).

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+
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362 Id. at Section 6.4(b)(ii).

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+
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363 Id.

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+
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364 Id. at Appendix C, Section D.12(f); see also id. at Appendix C, Section A.1(a).

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+
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365 Id. at Appendix D, Section 2.1. Appendix D states that more than one format may be allowed to support the various market participants that would report information to the Central Repository. Id.; see also id. at Section 6.9.

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+
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366 Id. at Appendix C, Section A.1(b).

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+
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367 Id. at Sections 6.3(a), 6.4(a).

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368 Pursuant to the Plan, for data consolidation and storage, as noted above, such data must be reported in a uniform electronic format or in a manner that would allow the Central Repository to convert the data to a uniform electronic format. Id. at Appendix C, Section A.1(b).

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+
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369 Id. at Section 6.5(b)(i).

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+
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370 Id.

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+
fn +

371 Id. at Appendix D, Section 2.

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+
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372 Id. at Appendix C, Section A.1(a).

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373 The CAT NMS Plan defines an “SRO-Assigned Market Participant Identifier” as “an identifier assigned to an Industry Member by an SRO or an identifier used by a Participant.” Id. at Section 1.1.

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+
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374 Rule 613 defines a CAT-Reporter-ID as “a code that uniquely and consistently identifies [a CAT Reporter] for purposes of providing data to the central repository.” 17 CFR 242.613(j)(2).

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375 The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit the Existing Identifier Approach, which would allow a CAT Reporter to report an existing SRO-Assigned Market Participant Identifier in lieu of requiring the reporting of a universal CAT-Reporter-ID. See Exemptive Request Letter, supra note 21, at 19. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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+
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376 See CAT NMS Plan, supra note 5, at Sections 6.3(d)(i), 6.4(d)(i).

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+
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377 Id. at Sections 6.3(d)(ii), 6.4(d)(i).

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378 Id. at Sections 6.3(d)(iii), 6.4(d)(i).

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+
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379 Id. at Sections 6.3(d)(v), 6.4(d)(i).

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380 Id. at Section 6.4(d)(ii)(A)(2). Industry Members are required by the CAT NMS Plan to record and report this information. Id. at Section 6.4(d)(ii).

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381 See Exemption Order, supra note 21, at 31–41.

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+
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382 See id. at 20.

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+
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383 Id.

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384 See CAT NMS Plan, supra note 5, at Appendix D, Section 10.1. Changes to CAT-Reporter-IDs must be reviewed and approved by the Plan Processor. Id. The CAT NMS Plan also requires the Central Repository to generate and assign a unique CAT-Reporter-ID to all reports submitted to the system based on sub-identifiers that are currently used by CAT Reporters in their order handling and trading processes (described in the Exemption Request as SRO-assigned market participant identifiers). Id. at Appendix D, Section 3; see also Exemption Order, supra note 21, at 31–41.

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385 See CAT NMS Plan, supra note 5, at Section 6.3(e)(i).

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+
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386 Id. at Section 6.4(d)(vi).

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387 See Exemption Order, supra note 21, at 31-41.

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+
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388 Id. at 20.

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389 Id. at Appendix D, Section 2.

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390 See id. at Appendix D, Section 7.1.

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391 See id. at Appendix D, Section 7.2.

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392 See id. at Appendix D, Section 10.1.

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393 See id. at Appendix D, Section 7.2. The CAT NMS Plan also notes that both the CAT-Reporter-ID and the SRO-Assigned Market Participant Identifier would be data fields for the online targeted query tool described in the CAT NMS Plan as providing authorized users with the ability to retrieve processed and/or validated (unlinked) data via an online query screen. See id. at Appendix D, Section 8.1.1.

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+
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394 17 CFR 242.613(c)(7)(i)(A).

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395 17 CFR 242.613(j)(5).

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396 17 CFR 242.613(c)(8).

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397 The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit the Customer Information Approach, which would require each broker-dealer to assign a unique Firm Designated ID to each trading account and to submit an initial set of information identifying the Customer to the Central Repository, in lieu of requiring each broker-dealer to report a Customer-ID for each Customer upon the original receipt or origination of an order. See Exemptive Request Letter, supra note 21, at 12. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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+
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398 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(a)(iii).

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399 Id. The CAT NMS Plan defines a “Firm Designated ID” as “a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.” See id. at Section 1.1.

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400 Id. at Appendix C, Section A.1(a)(iii).

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401 The CAT NMS Plan provides that where a validated LEI is available for a Customer or entity, this may obviate a need to report other identifier information (e.g., Customer name, address, EIN). Id. at Appendix C, Section A.1(a)(iii) n.31.

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402 The CAT NMS Plan states that the Participants anticipate that Customer information that is initially reported to the CAT could be limited to Customer accounts that have, or are expected to have, CAT Reportable Event activity. For example, the CAT NMS Plan notes accounts that are considered open, but have not traded Eligible Securities in a given time frame, may not need to be pre-established in the CAT, but rather could be reported as part of daily updates after they have CAT Reportable Event activity. Id. at Appendix C, Section A.1(a)(iii) n.32.

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403 See id. at Appendix C, Section A.1(a)(iii). The CAT NMS Plan also requires Industry Members to report “Customer Account Information” upon the original receipt of origination of an order. See CAT NMS Plan, supra note 5, at Sections 1.1, 6.4(d)(ii)(C).

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+
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404 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(a)(iii).

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+
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405 Id.

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406 The CAT NMS Plan notes that because reporting to the CAT is on an end-of-day basis, intra-day changes to information could be captured as part of the daily updates to the information. To ensure the completeness and accuracy of Customer information and associations, in addition to daily updates, broker-dealers would be required to submit periodic full refreshes of Customer information to the CAT. The scope of the “full” Customer information refresh would need to be further defined, with the assistance of the Plan Processor, to determine the extent to which inactive or otherwise terminated accounts would need to be reported. Id. at Appendix C, Section A.1(a)(iii) n.33.

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407 See id. at Appendix C, Section A.1(a)(iii).

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408 Id. Section 9.1 of Appendix D also addresses, among other things, the minimum attributes that CAT must capture for Customers and the validation process for such attributes. Id. at Appendix D, Section 9.1.

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409 Id. at Appendix D, Section 9.1. In relevant part, “Customer Account Information” is defined in the Plan to include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable). See id. at Section 1.1.

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+
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410 See id. at Appendix C, Section A.1(a)(iii).

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+
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411 Id. The CAT NMS Plan defines “Customer Identifying Information” to mean “information of sufficient detail to identify a Customer, including, but not limited to, (a) with respect to individuals: name, address, date of birth, individual tax payer identification number (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney); and (b) with respect to legal entities: name, address, Employer Identification Number (“EIN”)/LEI) or other comparable common entity identifier, if applicable; provided, however, where the LEI or other common entity identifier is provided, information covered by such common entity identifier (e.g., name, address) would not need to be separately submitted to the Central Repository.” See id. at Section 1.1.

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+
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412 Id. at Appendix C, Section A.1(a)(iii).

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+
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413 Id.

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+
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414 17 CFR 242.613(c)(7)(viii)(B). “Customer Account Information” is defined in Rule 613(j)(4) to “include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).” 17 CFR 242.613(j)(4).

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+
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415 See CAT NMS Plan, supra note 5, at Section 1.1.

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+
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416 Id. The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit broker-dealers to report to the Central Repository the “effective date” of an account in lieu of requiring each broker-dealer to report the date the account was opened in certain limited circumstances. See Exemptive Request Letter, supra note 21, at 13. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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+
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417 See Exemption Order, supra note 21; see also September 2015 Supplement, supra note 21, at 4–5.

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+
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418 See September 2015 Supplement, supra note 21, at 6.

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+
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419 See CAT NMS Plan, supra note 5, at Section 1.1.

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+
fn +

420 Id.

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+
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421 Id.

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+
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422 Id.

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423 Id.; see also September 2015 Supplement, supra note 21, at 7–9.

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424 See CAT NMS Plan, supra note 5, at Section 1.1.

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+
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425 Id.

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+
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426 Id.

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+
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427 Id.

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+
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428 Id.

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+
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429 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).

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430 See CAT NMS Plan, supra note 5, at Section 6.3(d)(iv)(F). The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit CAT Reporters to report whether a modification or cancellation instruction was given by the Customer associated with the order, or was initiated by the broker-dealer or exchange associated with the order, in lieu of requiring CAT Reporters to report the Customer-ID of the person giving the modification or cancellation instruction. See Exemptive Request Letter, supra note 21, at 12–13. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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+
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431 See CAT NMS Plan, supra note 5, at Section 6.4(d)(ii)(A)(1); see also April 2015 Supplement, supra note 21. The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit Industry Members to record and report to the Central Repository an Allocation Report that includes the Firm Designated ID when an execution is allocated in whole or part in lieu of requiring the reporting of the account number for any subaccount to which an execution is allocated, as is required by Rule 613. See Exemptive Request Letter, supra note 21, at 26–27. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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432 See CAT NMS Plan, supra note 5, at Section 1.1; see also April 2015 Supplement, supra note 21.

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433 See CAT NMS Plan, supra note 5, at Section 1.1.

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434 Rule 613(c)(7) provides that the CAT NMS Plan must require reporting of the details for each order and each Reportable Event, including the routing and modification or cancellation of an order. 17 CFR 242.613(c)(7). Rule 613(j)(8) defines “order” to include “any bid or offer.” 17 CFR 242.613(j)(8).

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435 See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii). The SROs requested exemptive relief from Rule 613 so that the CAT NMS Plan may permit Options Market Maker quotes to be reported to the Central Repository by the relevant Options Exchange in lieu of requiring that such reporting be done by both the Options Exchange and the Options Market Maker, as is required by Rule 613. See Exemptive Request Letter, supra note 21, at 2. In accord with the exemptive relief requested, the SROs committed to require Options Market Makers to report to the Exchange the time at which a quote in a Listed Option is sent to the Options Exchange. Id. at 3. The Commission granted exemptive relief on March 1, 2016 in order to allow this alternative to be included in the CAT NMS Plan and subject to notice and comment. See Exemption Order, supra note 21.

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436 See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii).

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+
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437 Id.

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438 The CAT NMS Plan defines “Primary Market Transaction” to mean “any transaction other than a secondary market transaction and refers to any transaction where a Person purchases securities in an offering.” Id. at Section 1.1.

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439 The Commission notes that in the CAT NMS Plan some non-NMS equities (specifically, OTC equity securities) are required to be reported. Id. at Sections 1.1, 6.3 (requiring Eligible Securities data to be reported, and where Eligible Securities is defined as all NMS securities and all OTC equity securities).

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440 See 17 CFR 242.613(i); see also CAT NMS Plan, supra note 5, at Section 6.11. The CAT NMS Plan defines “NMS Securities” to mean “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.” See CAT NMS Plan, supra note 5, at Section 1.1. The CAT NMS Plan defines “OTC Equity Securities” as “any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.” Id.

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441 See CAT NMS Plan, supra note 5, at Section 1.1; see also Rule 613(j)(6).

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442 Id. at Section 6.5(d)(i).

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443 Id. at Appendix C, Section A.3(b).

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444 Id. at Appendix C, Section A.3(b); Rule 613(g)–(h).

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445 Id. at Appendix C, Section A.3(b).

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446 See Notice, supra note 5, at 30645.

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447 See CAT NMS Plan, supra note 5, at Section 6.5(d)(i).

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448 Id. at Appendix C, Section A.3(b).

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449 Id.

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450 Id.

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451 Id. The SROs note that the three comparative releases are known as “(1) OATS Phase III, which required manual orders to be reported to OATS; (2) OATS for OTC Securities which required OTC equity securities to be reported to OATS; and (3) OATS for NMS which required all NMS stocks to be reported to OATS.” Id.

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452 Id. The SROs note that the calculated “combined average error rates for the time periods immediately following [the OATS] release across five significant categories for these three releases” was used in setting in the initial maximum Error Rate. Id.

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453 Id.

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454 Id.

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455 Id.

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456 Id.

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457 Id. The CAT NMS Plan sets forth that the Plan Processor shall provide the Operating Committee with regular Error Rate reports. Id. at Section 6.1(o)(v). The Error Rate reports shall include each of the following—if the Operating Committee deems them necessary or advisable—”Error Rates by day and by delta over time, and Compliance Thresholds by CAT Reporter, by Reportable Event, by age before resolution, by symbol, by symbol type (e.g., ETF and Index) and by event time (by hour and cumulative on the hour)[.]” Id.

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458 See id. at Appendix C, Section A.3(b).

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+
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459 See id.

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460 See id. at Appendix D, Section 10.1. The CAT NMS Plan sets forth support programs that shall include educational programs, including FAQs, a dedicated help desk, industry-wide trainings, certifications, industry-wide testing, maintaining Technical Specifications with defined intervals for new releases/updates, emailing CAT Reporter data outliers, conducting annual assessments, using test environments prior to releasing new code to production, and imposing CAT Reporter attendance requirements for testing sessions and educational and industry-wide trainings. Id.

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461 See id. at Appendix D, Section 10.4.

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462 See id. at Appendix C, Section A.3(b).

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463 See id.

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464 See id. At a minimum, the processes would include validating the data’s file format, CAT Data format, type, consistency, range, logic, validity, completeness, timeliness and linkage. See id. at Appendix D, Section 7.2.

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465 17 CFR 242.613(a)(1)(ix).

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466 See CAT NMS Plan, supra note 5, at Section 6.7(d); Appendix C, Section C.9.

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467 Id. at Appendix C, Section C.9.

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468 Id.

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469 Id.

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470 Id.

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471 Id.

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472 Id.

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473 Id.

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474 Id.

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475 Id.

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476 Id.

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477 Id.

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478 Id.

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479 Id.

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480 Id.

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481 Id. at Section 6.5(c). Appendix C provides objective milestones to assess progress concerning regulator access to the Central Repository. See id. at Appendix C, Section C.10(d).

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482 Id. at Section 6.10(c). Section 6.10(c) also requires the Plan Processor to reasonably assist regulatory Staff with queries, submit queries on behalf of regulatory Staff as requested, and maintain a help desk to assist regulatory Staff with questions concerning CAT Data. Id.

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483 See id. at Appendix D, Section 8.

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484 Id. at Appendix D, Section 8.1.

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+
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485 Id.

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486 Id. at Appendix D, Sections 8.1.1–8.1.3.

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487 Id. at Appendix D, Section 8.1.1.

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488 Id.

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489 Id.

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490 Id. at Appendix D, Section 8.1.2. Appendix D, Section 8.1.2 contains further performance requirements applicable to data and the architecture of the online query tool. Id.

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491 Id. at Appendix D, Section 8.1.3.

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+
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492 Id. at Appendix D, Section 8.2.

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493 Id.

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494 Id.

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495 Id. Direct queries must not return or display PII data but rather display non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers could be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. See id. at Appendix D, Section 4.1.6.

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496 Id. at Appendix D, Section 8.2.

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497 Id. at Appendix D, Sections 8.2.1 and 8.2.2.

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498 Id. at Appendix C, Section A.2.

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499 Id. at Appendix C, Section A.2(a). Appendix C, Section A.3(e) indicates this would be no later than noon EST on T+1. Id. at Appendix C, Section A.3(e).

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500 Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section 6.1.

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501 Id. at Appendix C, Section A.2(a).

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502 Id. at Appendix C, Section A.2(b).

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503 Id. at Appendix C, Section A.2(c). Appendix C, Section A.2(d) addresses system service level agreements that the SROs and Plan Processor would enter into. Id. at Appendix C, Section A.2(d).

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504 Id. at Section 6.1(d)(iv). Such policies and procedures also shall: (A) provide for the escalation of reviews of proposed technological changes and upgrades (including as required by Section 6.1(i) and Section 6.1(j) or as otherwise appropriate) to the Operating Committee; and (B) address the handling of surveillance, including coordinated, SEC Rule 17d-2 or RSA surveillance queries and requests for data. Id.

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505 Id. at Section 6.1(i). Section 11 of Appendix D sets out the obligations of the Plan Processor with respect to the requirements discussed above (e.g., to develop a process to add functionality to CAT, including reviewing suggestions submitted by the Commission). The Plan Processor must create a defined process for developing impact assessments, including implementation timelines for proposed changes, and a mechanism by which functional changes that the Plan Processor wishes to undertake could be reviewed and approved by the Operating Committee. Section 11 further states that the Plan Processor must implement a process to govern changes to CAT (including “business-as-usual” changes and isolated infrastructure changes). Further, Section 11 states that the Plan Processor is required to implement a process governing user testing of changes to CAT functionality and infrastructure. See id. at Appendix D, Section 11.

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506 Id. at Section 6.1(j).

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507 Id. at Section 6.1(k).

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508 Id. at Appendix D, Section 11.

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509 Id. at Appendix D, Section 11.1.

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510 Id. at Appendix D, Section 11.2.

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511 Id. at Appendix D, Section 11.3.

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512 See id. at Appendix C, Section A.5(a).

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513 Id. at Appendix D, Sections 5.3–5.4.

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514 Id. at Section 6.1(o)(iii).

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515 Id. at Appendix D, Section 5.1.

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516 Id. at Appendix D, Section 5.2.

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517 Id. at Appendix D, Section 5.3.

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518 Id.

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519 Id.

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520 Id.

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521 Id. at Appendix C, Section 12(o). Appendix D, Section 5, provides details on how the CAT’s BCP/DR process would be structured. In part, Appendix D states, “[a] secondary processing site must be capable of recovery and restoration of services at the secondary site within a minimum of 48 hours, but with the goal of achieving next day recovery after a disaster event. The selection of the secondary site must consider sites with geographic diversity that do not rely on the same utility, telecom and other critical infrastructure services. The processing sites for disaster recovery and business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.” Id. at Appendix D, Section 5.1.

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522 Id. at Appendix D, Section 1.2.

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523 Id.

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524 Id.

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525 Id. at Article IX.

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526 17 CFR 240.17a-1. Upon request, representative copies of books and records maintained under Rule 17a-1 must be furnished to the Commission. 17 CFR 240.17a-1(c); see also CAT NMS Plan, supra note 5, at Section 9.1.

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527 See CAT NMS Plan, supra note 5, at Section 9.1.

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528 Id.

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529 Id. at Section 9.6. The CAT NMS Plan states that the information is disclosed by or on behalf of the Company or a Participant (the “Disclosing Party”) to the Company or any other Participant (the “Receiving Party”) in connection with the Agreement or the CAT System, but excludes any CAT Data or information otherwise disclosed pursuant to the requirements of Rule 613. See CAT NMS Plan, supra note 5, at Section 9.6(a).

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530 17 CFR 242.613.

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531 See CAT NMS Plan, supra note 5, at Section 9.6(a).

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532 Id.

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533 Id. at Article X.

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534 Id. at Section 10.1.

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535 Id. at Section 10.2.

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536 See CAT NMS Plan, supra note 5, at Section 6.5(f)(i), (iv)(A).

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537 Id. at Section 6.5(f)(i)(A).

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538 Id. at Sections 6.1(m), 6.12.

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539 Id. at Section 6.2(b)(i), (v).

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540 Id. at Section 6.9(b)(xi).

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541 Id. at Appendix D, Section 4.

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542 17 CFR 242.10001007; see also CAT NMS Plan, supra note 5, at Section 6.9(b)(xi).

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543 Standards issued by NIST that are explicitly listed in the CAT NMS Plan include NIST Security and Privacy Controls for Federal Information Systems and Organizations (Special Publication 800-53 Rev. 4); NIST Contingency Planning Guide for Federal Information Systems (Special Publication 800-34 Rev. 1), particularly Chapters 3, 4 & 5; NIST Guidelines to Federal Organizations on Security Assurance and Acquisition/Use of Test/Evaluated Products (Special Publication 800-23); NIST Technical Guide to Information Security Testing and Assessment (Special Publication 800-115); NIST Guide to Enterprise Password Management (Special Publication 800-118); NIST Recommendation for Cryptographic Key Generation (Special Publication 800-133); and NIST Information Security Continuous Monitoring for Federal Information Systems and Organizations (Special Publication 800-137). See CAT NMS Plan, supra note 5, at Appendix D, Sections 4.2, 5.2 and 5.3.

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+
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544 Standards issued by the Federal Financial Institutions Examination Council that are explicitly listed in the CAT NMS Plan include FFIEC Authentication Best Practices, and the Federal Financial Institutions Examination Council, Supplement to Authentication in an Internet Banking Environment (June 22, 2011). See CAT NMS Plan, supra note 5, at Appendix D, Sections 4.1.1, 4.2.

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545 Standards issued by the International Organization for Standardization that are explicitly listed in the CAT NMS Plan include ISO/IEC 27001—Information Security Management. See CAT NMS Plan, supra note 5, at Appendix D, Section 4.2. The CAT NMS Plan also states that the CAT System must adhere to the 2003 Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System, Securities Exchange Act Release No. 47638 (April 8, 2003), 68 FR 17809 (April 11, 2003). See CAT NMS Plan, supra note 5, at Appendix D, Section 5.3.

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546 See CAT NMS Plan, supra note 5, at Section 6.5(f)(i), (iv)(A).

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547 Id. at Section 6.2(b)(i), (v).

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548 Id. at Sections 6.1(m), 6.5(f)(i)(C).

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549 Id. at Section 6.5(f)(i)(D), (E).

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550 Id. at Section 6.9.

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551 Id. at Section 6.5(f)(i)(A).

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552 Id.

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553 Id. at Section 6.5(f)(i)(B).

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554 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.

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555 Id. at Appendix D, Section 4.1.1.

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556 Id. Multi-factor authentication, or MFA, is a method requiring a person to provide more than one factor (e.g., biometrics/personal information in addition to a password) in order to be validated by the system.). See id. at Appendix C, Section D.12(e), n.250.

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557 See id. at Appendix D, Section 4.1.1.

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558 Id.

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559 Id. at Appendix D, Section 4.1.2.

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+
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560 Id.

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+
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561 Id.

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+
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562 Id.

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+
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563 Id.

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564 Id.

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565 Id.

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566 Id.

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567 Id. at Appendix D, Section 4.1.3.

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+
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568 Id.

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569 Id.

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570 Id.

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571 Id.

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572 Id.

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573 Id.

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574 Id.

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575 Id. at Appendix D, Section 4.1.4.

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+
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576 Id.

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577 Id.

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578 Id.

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579 Id.

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580 See id.

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581 Id.

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582 Id. at Appendix D, Section 4.1.5.

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+
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583 Id.

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584 Id.

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585 See id. at Section 6.5(c)(i).

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586 Id. at Section 6.5(g). The Commission notes that regulatory purposes includes, among other things, analysis and reconstruction of market events, market analysis and research to inform policy decisions, market surveillance, examinations, investigations, and other enforcement functions. See Notice, supra note 5, at 30649 n.266.

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587 See CAT NMS Plan, supra note 5, at Section 6.5(f)(ii).

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588 Raw Data is defined as “Participant Data and Industry Member Data that has not been through any validation or otherwise checked by the CAT System.” Id. at Section 1.1.

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589 Id. at Section 6.5(h).

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590 Id. at Section 6.5(c)(i), (ii). Appendix C provides objective milestones to assess progress concerning regulator access to the Central Repository. See id. at Appendix C, Section C.10(d).

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591 Id. at Section 6.10(c)(i). Section 6.10(c) also requires the Plan Processor to reasonably assist regulatory Staff with queries, submit queries on behalf of regulatory Staff as requested, and maintain a help desk to assist regulatory Staff with questions concerning CAT Data. Id. at 6.10(c)(iv)–(vi).

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592 See id. at Appendix D, Section 8.

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593 Id. at Appendix C, Section A.2.

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594 Id. at Appendix C, Section A.2(a). Appendix C, Section A.3(e) indicates this would be no later than noon EST on T+1. Id. at Appendix C, Section A.3(e).

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595 Id. at Appendix C, Section A.1(a)(iv); Appendix D, Section 6.1.

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596 Id. at Appendix C, Section A.2(a).

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597 Id. at Appendix C, Section A.2(c). Appendix C, Section A.2(d) addresses system service level agreements that the SROs and Plan Processor would enter into. See id. at Appendix C, Section A.2(d).

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598 See id. at Appendix C, Section A.4.

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599 See id. at Appendix C, Section A.4(a).

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600 See id. at Section 6.10(c)(ii).

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601 Id. at Appendix D, Section 4.1.2

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602 Id.

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603 Id.

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604 Id. at Appendix D, Section 4.1.6.

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605 Id.

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606 Id. at Appendix C, Section A.4.

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607 Id. at Appendix D, Section 4.1.4. MFA is a method requiring a person to provide more than one factor (e.g., biometrics/personal information in addition to a password) in order to be validated by the system. See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(e), n.250.

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608 See id. at Appendix D, Section 4.1.4.

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609 Id. at Appendix D, Section 4.1.6.

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610 Id.

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611 Id.

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612 Id.

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613 Id.

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614 Id.

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615 Id.

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616 17 CFR 242.608(a)(4)(i).

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617 See CAT NMS Plan, supra note 5, at Section 6.7(a)(i).

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618 Effective Date is defined as “the date of approval of [the CAT NMS Plan] by the Commission.” Id. at Section 1.1.

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619 Id. at Section 6.7, Appendix C, Section C.10.

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620 See id. at Section 6.7(a). In the Amendment to the CAT NMS Plan, Section 6.11 excludes OTC Equity Securities from the document the Participants would submit to the Commission, since the Participants plan to include OTC Equity Securities as well as NMS Securities in the initial phase in of CAT. See Notice, supra note 5, at 30634 n.82.

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621 See CAT NMS Plan, supra note 5, at Section 6.7(a).

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622 See id. at Section 6.7(b).

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623 17 CFR 242.613(a)(1)(x).

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624 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10. The CAT NMS Plan requires the CCO to document these objective milestones to assess progress toward the implementation of CAT. See id. at Section 6.7(b).

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625 “Customer Account Information” shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable); except, however, that (a) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will (i) provide the Account Effective Date in lieu of the “date account opened”; (ii) provide the relationship identifier in lieu of the “account number”; and (iii) identify the “account type” as a “relationship”; (b) in those circumstances in which the relevant account was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), and no “date account opened” is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances: (i) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system; (ii) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system; (iii) where there are multiple dates associated with an account in an Industry Member’s system, and the parameters of each date are determined by the individual Industry Member; and (iv) where the relevant account is an Industry Member proprietary account.” See id. at Section 1.1.

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626 See id. at Appendix C, Section C.10(a)–(b).

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627 See id. at Appendix C, Section C.10(b).

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628 See id.

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629 See id. at Appendix C, Section C.10(c)–(e).

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630 See Notice, supra note 5, at 30635.

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631 See CAT NMS Plan, supra note 5, at Sections 4.3(a)(iii), 6.9(c)(i), 8.2.

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632 See id. at Section 3.3.

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633 See Notice, supra note 5, at 30635.

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634 See CAT NMS Plan, supra note 5, at Section 3.3(b).

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635 See id.; see also 15 U.S.C. 78k-l(b)(5).

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636 See CAT NMS Plan, supra note 5, at Section 11.5.

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fn +

637 Id.

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638 15 U.S.C. 78k-1.

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639 15 U.S.C. 78k-1(a)(3)(B).

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640 See Adopting Release, supra note 14; see also Proposing Release, supra note 14.

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641 17 CFR 242.613(a)(1), (c)(1), (c)(7).

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642 17 CFR 242.608(b)(2); see also 15 U.S.C. 78k-1(a).

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643 17 CFR 242.608(b)(2).

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644 See supra note 6.

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645 FSR, FSI, MFA, ICI, TR, SIFMA, FIF, Fidelity, UnaVista, CBOE, KCG, and NYSE Letters.

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646 Better Markets, Bloomberg, and Data Boiler Letters.

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647 Anonymous I, Anonymous II, DAG, STA, DTCC, Hanley, Wachtel, FIX Trading, and Garrett Letters.

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648 15 U.S.C. 78k-1.

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649 17 CFR 242.608(b)(2).

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650 See 17 CFR 242.608(b)(2).

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651 See Section III.1.; Section III.2., supra.

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652 See Sections IV.B and IV.F, infra.

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653 The Commission notes that some commenters recommended changing specific provisions in the CAT NMS Plan, which would also result in modifications to certain definitions set forth in Article I (e.g., Error Rate and Primary Market Transaction). The Commission discusses such comments in the Sections below in conjunction with the relevant substantive CAT NMS Plan provisions.

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654 TR Letter at 9.

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655 FIF Letter at 95–96.

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656 Anonymous Letter I at 9.

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657 The Plan defines “Allocation Report” to mean a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation; provided, for the avoidance of doubt, any such Allocation Report shall not be required to be linked to particular orders or executions. See CAT NMS Plan, supra note 5, at Section 1.1.

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658 TR Letter at 9.

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+
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659 Response Letter I at 25.

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660 The Plan states that “Trading Day” shall have such meaning as is determined by the Operating Committee. For the avoidance of doubt, the Operating Committee may establish different Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time. See CAT NMS Plan, supra note 5, at Section 1.1.

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661 FIF Letter at 95–96.

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662 Id. at 96, 124.

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663 Response Letter I at 31.

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664 The CAT NMS Plan provides that “Eligible Security” includes (a) all NMS Securities and (b) all OTC Equity Securities. See CAT NMS Plan, supra note 5, at Section 1.1.

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665 Anonymous Letter I at 9.

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666 Response Letter I at 25.

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667 See Section IV.D.8.a, infra.

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668 Participants’ Letter I at 1.

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669 Id.

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670 Id.

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671 Id.

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672 See Notice, supra note 5, at 30618.

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673 See Section III.3, supra.

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674 FSI Letter at 3; MFA Letter at 3–4; ICI Letter at 10–13; TR Letter at 6–7; SIFMA Letter at 24–29; FIF Letter at 14, 135–37; Fidelity Letter at 6–8; Better Markets Letter at 4–6; KCG Letter at 5–7; DAG Letter at 3; NYSE Letter at 4–6; STA Letter at 1–2.

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675 MFA Letter at 3–4; ICI Letter at 10–13; SIFMA Letter at 24–29; KCG Letter at 5–7; DAG Letter at 3; NYSE Letter at 4–6; TR Letter at 6–7; FIF Letter at 14, 135–37; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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676 FSI Letter at 3; MFA Letter at 3–4; ICI Letter at 10–13; Better Markets Letter at 4–6.

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677 See CAT NMS Plan, supra note 5, at Section 4.2, Appendix C, Section D.11(b).

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678 MFA Letter at 3–4; ICI Letter at 10–13; SIFMA Letter at 24–26; KCG Letter at 5–7; DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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679 SIFMA Letter at 24–26; KCG Letter at 5–7; DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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680 SIFMA Letter at 25; MFA Letter at 3; DAG Letter at 3; KCG Letter at 6; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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681 KCG Letter at 6; MFA Letter at 3.

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682 MFA Letter at 3.

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683 ICI Letter at 11. This commenter further noted that registered funds’ expertise in protecting trade and order information could help formulate CAT-related data security policies. Id.

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684 KCG Letter at 6; ICI Letter at 11.

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685 SIFMA Letter at 25; KCG Letter at 7.

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686 SIFMA Letter at 25.

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687 KCG Letter at 7. KCG suggested that the Advisory Committee alone would have “almost no voice in the operation [of the] NMS plan” based on the feedback regarding the administration and operation of other NMS plans. KCG Letter at 7.

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688 SIFMA Letter at 25; see also ICI Letter at 11 (“The perspective of other market participants—particularly given that the central repository will house their sensitive information—would help in the development and maintenance of the CAT.”); MFA Letter at 3 (“The decisions of the Operating Committee, such as those related to data security… will have a significant impact on market participants immediately and in the future.”). One commenter further noted that “the SROs expect the broker-dealers to help fund the costs of the CAT, and they proposed a funding model under which the vast majority of the CAT building and operating costs would be imposed on the broker-dealer firms.” SIFMA Letter at 25.

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689 SIFMA Letter at 25.

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690 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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691 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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692 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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693 Fidelity Letter at 7. The Commission also notes that although the commenter did not include the EMSAC’s rationale for the reallocation of voting rights recommendation, in the EMSAC Recommendations cited by the commenter, the EMSAC explained that it recommended reallocating voting rights because the “reallocation of voting rights [among NMS plan participants] is intended to better reflect the proportional interests of NMS [p]lan participants”). See EMSAC, Recommendations Regarding Enhanced Industry Participation in Certain SRO Regulatory Matters (June 10, 2016), available at https://www.sec.gov/spotlight/emsac/emsac-trading-venues-regulation-subcommitteerecomendation-61016.pdf (“EMSAC Recommendations”).

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694 Fidelity Letter at 7. This commenter noted that the EMSAC provided this recommendation. The Commission notes that although the commenter did not include the EMSAC’s rationale for this recommendation, in the EMSAC Recommendations cited by the commenter, the EMSAC explained that it recommended the limited use of unanimous voting requirements “to prevent undue friction or delay in [p]lan voting matters.” See EMSAC Recommendations, supra note 693, at 8.

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695 See Better Markets Letter at 6; DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations); SIFMA Letter at 25 n.4 (noting Rule 613 does not preclude the SROs from including independent directors in the Operating Committee).

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696 Better Markets Letter at 6.

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697 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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698 Response Letter I at 6; see also, NYSE Letter at 5.

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699 Response Letter I at 6.

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700 Id. at 7.

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701 Id.

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702 Id.

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703 The Participants explained this would impose an additional and direct financial burden on each Participant, thus each Participant’s approval is important. Id. at 8.

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704 The Participants explained this would directly impact each Participant’s ability to meet its regulatory and compliance requirements, so it is critical that each Participant consent to this action. Id.

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705 The Participants explained that this would ensure that all Operating Committee members would have knowledge of, and consider, all actions taken by the Operating Committee if an action by written consent is effected in lieu of a meeting. Id.

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706 Id. at 7.

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707 See 17 CFR 242.613; see, e.g., Securities Exchange Act Release Nos. 77679 (April 21, 2016), 81 FR 24908 (April 21, 2016) (NMS plan regarding addressing extraordinary market volatility); 75660 (August 11, 2015), 80 FR 48940 (August 14, 2015) (NMS plan regarding the consolidated tape association); 75504 (July 22, 2015), 80 FR 45252 (July 29, 2015) (NMS plan regarding consolidated quotations); 75505 (July 22, 2015), 80 FR 45254 (July 29, 2015) (NMS plan regarding unlisted trading privileges). The Commission believes it is reasonable for the CAT NMS Plan to include a governance structure similar to that utilized by other NMS plans that the Commission previously has found to be consistent with the Act. As noted above, the Commission is separately reviewing the EMSAC recommendations. See supra note 693.

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708 For these reasons, the Commission does not believe it is necessary to mandate independent directors in the governance of the CAT.

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709 See Section IV.B.2, infra.

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710 See supra note 693.

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711 15 U.S.C. 78f(b)(4)–(5), (8).

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712 See Section III.3, supra; see also CAT NMS Plan, supra note 5, at Section 4.13(a), (d).

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713 See Section III.3, supra; see also CAT NMS Plan, supra note 5, at Section 4.13(d).

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714 See Section III.3, supra; see also CAT NMS Plan, supra note 5, at Section 4.13(b).

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715 DAG Letter at 3; ICI Letter at 10–13; SIFMA Letter at 26–29; FIF Letter at 14, 135–37; see also STA Letter at 1–2 (supporting the SIFMA, FIF and DAG Letters’ Advisory Committee recommendations); but see NYSE Letter.

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716 TR Letter at 6–7; SIFMA Letter at 26–27; FIF Letter at 14, 135–37; see also STA Letter at 2 (supporting the SIFMA and FIF Letters’ Advisory Committee recommendations).

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717 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

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718 SIFMA Letter at 26; ICI Letter at 10–13; see also STA Letter at 1–2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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719 SIFMA Letter at 27; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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720 SIFMA Letter at 27; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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721 SIFMA Letter at 27; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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722 SIFMA Letter at 27; FIF Letter at 14, 135–37; TR Letter at 6–7 (arguing that a service bureau representative should be added to the Advisory Committee to offer a “collective perspective” that comes from supporting multiple clients); ICI Letter at 10–13; see also STA Letter at 1–2 (supporting the SIFMA and FIF Letters’ Advisory Committee recommendations).

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723 TR Letter at 6; SIFMA Letter at 27; FIF Letter at 135; ICI Letter at 12; see also STA Letter at 2 (supporting the SIFMA and FIF Letters’ Advisory Committee recommendations).

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724 FIF Letter at 135; see also STA Letter at 2 (supporting the FIF Letter’s Advisory Committee recommendations).

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725 Hanley Letter at 6.

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726 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s Advisory Committee recommendations).

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727 SIFMA Letter at 27; see also ICI Letter at 11; FIF Letter at 14, 135–37; STA Letter at 2 (supporting the FIF and SIFMA Letters’ Advisory Committee recommendations).

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728 SIFMA Letter at 27; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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729 SIFMA Letter 27–29; ICI Letter at 10–13; TR Letter at 6–7; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations). These recommendations are similar to the recommendations of the EMSAC.

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730 SIFMA Letter at 28; ICI Letter at 13; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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731 ICI Letter at 13.

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732 SIFMA Letter at 28; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations and noting its concern with the frequency and timeliness of information provided to the Advisory Committee).

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733 SIFMA Letter at 28; ICI Letter at 10–13; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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734 SIFMA Letter at 28; see also Fidelity Letter at 7 (noting the “Operating Committee determines the scope and content of information supplied to the Advisory Committee”); STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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735 SIFMA Letter at 27, 28; DAG Letter at 3; see also STA Letter at 1–2 (supporting the SIFMA and DAG Letters’ Advisory Committee recommendations).

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736 SIFMA Letter at 27; see also STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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737 TR Letter at 7; FIF Letter at 136; see also STA Letter at 2 (supporting the FIF Letter’s Advisory Committee recommendations).

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738 TR Letter at 7.

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739 The CAT NMS Plan defines a “Material Amendment” to the Technical Specifications as an amendment that requires “a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to the LLC Agreement or if it is required to safeguard the security or confidentiality of the CAT Data.” See CAT NMS Plan, supra note 5, at Section 6.9(c).

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+
fn +

740 FIF Letter at 136; see also STA Letter at 2 (supporting the FIF Letter’s Advisory Committee recommendations). The commenter references “external” material amendments as any change that affects the CAT Reporter Interface, such as coding or configuration changes. “Internal” material amendments are changes that do not affect the CAT Reporter interface (i.e., does not require coding or configuration changes).

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fn +

741 FIF Letter at 136; see also STA Letter at 2 (supporting the FIF Letter’s Advisory Committee recommendations).

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742 Fidelity Letter at 7.

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743 Id. This commenter noted that the EMSAC provided these recommendations; see also SIFMA Letter at 28; STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

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+
fn +

744 SIFMA Letter at 28; see also Fidelity Letter at 7 (noting there are “no limitations on when the Operating Committee can call an Executive Session” and that the Operating Committee can, for any reason, “prohibit the Advisory Committee from attending any Executive Session of the Operating Committee by a majority vote”); STA Letter at 2 (supporting the SIFMA Letter’s Advisory Committee recommendations).

+
+
fn +

745 NYSE Letter at 4.

+
+
fn +

746 Id.

+
+
fn +

747 Id. at 6.

+
+
fn +

748 Id.

+
+
fn +

749 Response Letter I at 9.

+
+
fn +

750 Id. at 10.

+
+
fn +

751 Id.

+
+
fn +

752 Id.

+
+
fn +

753 Id.

+
+
fn +

754 Id. at 10–12.

+
+
fn +

755 Id. at 13–14.

+
+
fn +

756 Id.

+
+
fn +

757 Id.

+
+
fn +

758 Id. at 15–16.

+
+
fn +

759 Id. at 16.

+
+
fn +

760 Id.

+
+
fn +

761 Id.

+
+
fn +

762 Id. at 15.

+
+
fn +

763 Id.

+
+
fn +

764 Id. at 16.

+
+
fn +

765 As previously stated, the Commission believes it is reasonable for the CAT NMS Plan to include a governance structure similar to that utilized by other NMS plans that the Commission previously has found to be consistent with the Act. As with the comments regarding the Operating Committee, some of the suggestions made by commenters regarding the Advisory Committee are mirrored in the EMSAC recommendations. As already discussed, the Commission is separately reviewing these EMSAC recommendations. See supra note 693.

+
+
fn +

766 See Section III.3, supra; see also CAT NMS Plan, supra note 5, at Section 4.6(a).

+
+
fn +

767 See Section III.3, supra; see also CAT NMS Plan, supra note 5, at Sections 4.6(a), 4.7(c).

+
+
fn +

768 FSI Letter at 3.

+
+
fn +

769 Id.

+
+
fn +

770 Id.

+
+
fn +

771 Response Letter I at 18–19.

+
+
fn +

772 Id. at 18.

+
+
fn +

773 While the SROs expressly waive fiduciary obligations to the Company, the SROs are subject to statutory obligations to regulate the securities markets and to create, implement and maintain the CAT.

+
+
fn +

774 See CAT NMS Plan, supra note 5, at Section 6.2(a)(i), (b)(i).

+
+
fn +

775 See id. at Section 6.2(a)(i), (b)(i).

+
+
fn +

776 See id. at Section 6.2(a)(ii), (b)(ii).

+
+
fn +

777 See id. at Section 6.2(a)(iii), (b)(iii).

+
+
fn +

778 See id. at Section 6.2(a)(iv), (b)(iv).

+
+
fn +

779 See id. at Section 6.2(a)(iv), (b)(iv).

+
+
fn +

780 See SIFMA Letter at 27, 29; ICI Letter at 12; Better Markets Letter at 5–6; DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

+
+
fn +

781 SIFMA Letter at 27.

+
+
fn +

782 ICI Letter at 12.

+
+
fn +

783 Id.

+
+
fn +

784 Better Markets Letter at 5.

+
+
fn +

785 Id. at 5–6.

+
+
fn +

786 Id. at 6.

+
+
fn +

787 Id. The commenter recommended that the board of directors of such entity contain a super-majority of independent directors to oversee the not-for-profit CAT NMS, LLC, and that the chair of the board of directors should be non-industry and appointed by the Commission. Further, the commenter recommended that the Director of the Division of Trading and Markets permanently serve as the vice-chair of the board of directors. Better Markets Letter at 6; see also DAG Letter at 3 (arguing that the CAT corporate governance structure should have independent directors comprised of both non-industry and industry participants); STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

+
+
fn +

788 Better Markets Letter at 6.

+
+
fn +

789 SIFMA Letter at 29; DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations).

+
+
fn +

790 DAG Letter at 3; see also STA Letter at 1 (supporting the DAG Letter’s governance recommendations). The Commission notes that the commenter specified in its comment that their definition of independent director includes industry participants (i.e., broker-dealers). See DAG Letter at 3.

+
+
fn +

791 SIFMA Letter at 29.

+
+
fn +

792 Id.

+
+
fn +

793 Id.

+
+
fn +

794 Id.

+
+
fn +

795 Response Letter I at 8.

+
+
fn +

796 Id. at 9.

+
+
fn +

797 Id. at 17.

+
+
fn +

798 See Section IV.H., supra.

+
+
fn +

799 17 CFR 242.603.

+
+
fn +

800 See, e.g., Securities Exchange Act Release Nos. 73918 (December 23, 2014), 79 FR 78920 (December 31, 2014) (BATS One Feed); 74128 (January 23, 2015), 80 FR 4951 (January 29, 2015) (NYSE Integrated Feed).

+
+
fn +

801 Participants’ Letter II at 2.

+
+
fn +

802 Participants’ Letter II at 2.

+
+
fn +

803 Participants’ Letter II at 1.

+
+
fn +

804 See Section IV.H, infra.

+
+
fn +

805 See CAT NMS Plan, supra note 5, at Section 9.1.

+
+
fn +

806 17 CFR 240.17a-1(c).

+
+
fn +

807 See Section III.4, supra, for a more detailed description of the Selection Plan.

+
+
fn +

808 See Selection Plan, supra note 23.

+
+
fn +

809 FSR Letter at 10; TR Letter at 4–5; FIF Letter at 42–43.

+
+
fn +

810 TR Letter at 4–5; FIF Letter at 42–43.

+
+
fn +

811 TR Letter at 4–5; see also Section V.G.4, infra, for a further discussion of these comment letters.

+
+
fn +

812 Anonymous Letter I at 1 (advocating for FINRA’s regulatory abilities related to OATS); but see Anonymous Letter II (criticizing FINRA’s handling of OATS non-compliance).

+
+
fn +

813 Better Markets Letter at 7.

+
+
fn +

814 Data Boiler Letter at 17, 27.

+
+
fn +

815 Response Letter I at 51.

+
+
fn +

816 The Participants note in Response Letter I that the Selection Plan contemplates the selection of the Plan Processor after the approval of the Plan. Id. at 52.

+
+
fn +

817 17 CFR 242.613(a)(3)(i).

+
+
fn +

818 Response Letter I at 52.

+
+
fn +

819 Id.

+
+
fn +

820 See supra note 67 for a definition of “Affiliated Participants.”

+
+
fn +

821 See Selection Plan Approval Order, supra note 23.

+
+
fn +

822 See id.

+
+
fn +

823 In addition, the Commission notes that, pursuant to an amendment to the Selection Plan, the Participants have already narrowed the Bidders to three Shortlisted Bidders, which will facilitate the timely completion of the Plan Processor selection process. See Selection Plan, supra note 23.

+
+
fn +

824 See CAT NMS Plan, supra note 5, at Section 4.3(b)(ii) (providing that the Operating Committee may terminate the Plan Processor without cause).

+
+
fn +

825 See Section IV.B., supra.

+
+
fn +

826 Wachtel Letter at 1–2.

+
+
fn +

827 Id.

+
+
fn +

828 Id.

+
+
fn +

829 Data Boiler Letter at 18. Specifically, the commenter argued that to link information accurately, there must be “a robust event sequencing method,” and stated that the Plan lacks sufficient detail on this matter. The commenter further suggested that order and execution information should be represented in a meaningful way and recommended expressing this information in audio/musical notes form.

+
+
fn +

830 Id. at 19-20.

+
+
fn +

831 The Participants did not respond to this comment.

+
+
fn +

832 As discussed in more detail below, the Commission believes that even if regulatory burdens reduce the number of small broker-dealers in specialized segments, overall competition in those segments may not be harmed. See Section V.G.1, infra.

+
+
fn +

833 17 CFR 242.613(c).

+
+
fn +

834 In the Adopting Release for Exchange Act Rule 613, the Commission stated that the data recording and reporting procedures are reasonably designed “to ensure that the [CAT] will be designed in a way that provides regulators with the accurate, complete, accessible, and timely market activity data they need for robust market oversight.” See Adopting Release, supra note 14, at 45743.

+
+
fn +

835 The Commission notes that the CAT NMS Plan also requires the Plan Processor to measure and monitor latency within the CAT. See CAT NMS Plan, supra note 5, at Appendix D, Section 8.3.

+
+
fn +

836 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(f); see also id. at Appendix C, Section A.1(a). The CAT NMS Plan states that CAT Reporters could be required to report data either in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format, for consolidation and storage. Id. at Appendix C, Section A.1(b).

+
+
fn +

837 Id. at Appendix D, Section 2.1. Appendix D states that more than one format may be allowed to support the various market participants that would report information to the Central Repository. Id.; see also id. at Section 6.9.

+
+
fn +

838 ICI Letter at 13.

+
+
fn +

839 Data Boiler Letter at 9. This commenter also stated that the formatting procedures in the Plan were insufficient and recommended using an audio/musical approach. Id. at 18.

+
+
fn +

840 FIF Letter at 90–92; FIX Trading Letter at 1; Better Markets Letter at 7 (stating that “the Commission should mandate the most widely used, open-sourced, machine-readable data format possible.”)

+
+
fn +

841 FIF Letter at 90–91.

+
+
fn +

842 Id. at 90.

+
+
fn +

843 Id. at 91-92.

+
+
fn +

844 FIF Letter at 90–92; ICI Letter at 13; FIX Trading Letter at 1–2; Data Boiler Letter at 41.

+
+
fn +

845 ICI Letter at 13; FIX Trading Letter at 1–2; Data Boiler Letter at 41; FIF Letter at 91. FIF stated that CAT Reporters could use either an existing format or a “native” format developed by the Plan Processor. Another commenter was against trying to develop a native CAT format. Data Boiler Letter at 20. This commenter suggested preserving data in its most original format and then converting trade streams into “music formats” for ease of storage and comparison and to facilitate surveillance. Id.

+
+
fn +

846 FIX Trading Letter at 1–2.

+
+
fn +

847 Id. at 1; see also FIF Letter at 92.

+
+
fn +

848 FIX Trading Letter at 2.

+
+
fn +

849 Id. at 2–3.

+
+
fn +

850 FIF Letter at 92.

+
+
fn +

851 Data Boiler Letter at 36, 41.

+
+
fn +

852 UnaVista Letter at 2.

+
+
fn +

853 Id.

+
+
fn +

854 Response Letter I at 29.

+
+
fn +

855 Response Letter III at 14.

+
+
fn +

856 Id.

+
+
fn +

857 Response Letter I at 29.

+
+
fn +

858 Id.

+
+
fn +

859 See CAT NMS Plan, supra note 5, at Sections 6.3, 6.4.

+
+
fn +

860 See id. at Section 6.4. Post-trade information includes: (1) if an order is executed in whole or part: (a) an Allocation Report; (b) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and (c) CAT-Order-ID of any contra-side order(s); (2) if the trade is cancelled, a cancelled trade indicator; and (3) for original receipt or origination of an order, the Firm Designated ID, Customer Account Information, and Customer Identifying Information for the relevant Customer.

+
+
fn +

861 See id. at Sections 6.3, 6.4.

+
+
fn +

862 UnaVista Letter at 2.

+
+
fn +

863 Id.

+
+
fn +

864 Data Boiler Letter at 18; Better Markets Letter at 6.

+
+
fn +

865 Better Markets Letter at 6.

+
+
fn +

866 Id.

+
+
fn +

867 Id.

+
+
fn +

868 Data Boiler Letter at 19.

+
+
fn +

869 Id. at 1. This commenter suggested that if CAT Data was going to be reported in real-time, SIP data should also be reported in real-time. See Data Boiler Letter at 42. Because the Commission does not believe that real-time reporting should be mandated by the Plan, the commenter’s suggestion that SIP data be reported in real-time if CAT Data is going to be reported in real-time, is moot.

+
+
fn +

870 Id. at 19–20.

+
+
fn +

871 FIF Letter at 125.

+
+
fn +

872 See Adopting Release, supra note 14, at 45765.

+
+
fn +

873 See 17 CFR 242.613(c)(3). See Adopting Release, supra note 14, at 45765. Indeed, Rule 613 stated that the CAT NMS Plan may not impose a reporting deadline earlier than 8:00 a.m. ET on the Trading Day after the trade date. 17 CFR 242.613(c)(3).

+
+
fn +

874 Better Markets Letter at 6.

+
+
fn +

875 Response Letter I at 31, 43.

+
+
fn +

876 See Adopting Release, supra note 14, at 45765.

+
+
fn +

877 Id. at 45768–69.

+
+
fn +

878 Id. at 45768.

+
+
fn +

879 Id. at 45769.

+
+
fn +

880 UnaVista Letter at 2.

+
+
fn +

881 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1.(a).(ii).

+
+
fn +

882 Anonymous Letter I at 1.

+
+
fn +

883 Id. at 3.

+
+
fn +

884 See Exemptive Request Letter, supra note 21, at 8–18; see also Section III.15, supra.

+
+
fn +

885 FIF Letter at 9–10, 67–72; Data Boiler Letter at 22–24; TR Letter at 8; see also UnaVista Letter at 3; DAG Letter at 2; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

886 Under the “customer definition process,” broker-dealers would submit an initial set of information identifying the Customer to the Central Repository.

+
+
fn +

887 FIF Letter at 9–10, 70–71; TR Letter at 8.

+
+
fn +

888 FIF Letter at 67; see also DAG Letter at 2; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

889 Anonymous Letter I at 3.

+
+
fn +

890 Data Boiler Letter at 23.

+
+
fn +

891 TR Letter at 9.

+
+
fn +

892 Id.

+
+
fn +

893 Id.

+
+
fn +

894 Id. at 10.

+
+
fn +

895 Id.

+
+
fn +

896 FIF Letter at 10.

+
+
fn +

897 Id. at 122.

+
+
fn +

898 Id. at 93.

+
+
fn +

899 Id.

+
+
fn +

900 Id.

+
+
fn +

901 Id. at 10.

+
+
fn +

902 Better Markets Letter at 9.

+
+
fn +

903 Response Letter I at 33.

+
+
fn +

904 See Exemptive Request Letter, supra note 21, at 17.

+
+
fn +

905 Response Letter I at 34.

+
+
fn +

906 Id. at 23.

+
+
fn +

907 Id. at 24.

+
+
fn +

908 Id. at 23.

+
+
fn +

909 Id. at 35.

+
+
fn +

910 Id. at 22 (citing the CAT NMS Plan, Appendix C, Section A.1(a)(iii)).

+
+
fn +

911 Id. (citing the CAT NMS Plan, Appendix C, Section A.1(a)(iii), n.39).

+
+
fn +

912 Id. (citing the CAT NMS Plan, Appendix C, Section A.1(a)(iii), n.36).

+
+
fn +

913 Id. at 31.

+
+
fn +

914 Id. at 32.

+
+
fn +

915 Id.

+
+
fn +

916 Id.

+
+
fn +

917 Id. at 22 (citing the CAT NMS Plan at Appendix D, Section 9.4).

+
+
fn +

918 Id.

+
+
fn +

919 Id.

+
+
fn +

920 The Commission also finds it reasonable not to rank CAT data elements in terms of relative importance because importance of the CAT data elements will necessarily vary in accordance with the manner in which the data is used.

+
+
fn +

921 17 CFR 242.613(c)(7)(iv)(F) (emphasis added).

+
+
fn +

922 See Exemption Request Letter, supra note 21, at 12.

+
+
fn +

923 Id.

+
+
fn +

924 Data Boiler Letter at 24 (responding to Question 161 of the Plan Proposing Release).

+
+
fn +

925 See CAT NMS Plan, supra note 5, at Section 6.3(d)(iv)(F).

+
+
fn +

926 Response Letter I at 24.

+
+
fn +

927 See September 2015 Supplement, supra note 21.

+
+
fn +

928 See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

929 See September 2015 Supplement, supra note 21.

+
+
fn +

930 The Commission notes that because “account type” will be defined in the Technical Specifications for purposes of reporting to the Central Repository, one type of “account type” will be “relationship,” See Section IV.D.4.a(1), supra.

+
+
fn +

931 CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

932 Data Boiler Letter at 24; TR Letter at 8; FIF Letter at 9, 81–83; see also Exemption Order, supra note 21.

+
+
fn +

933 Better Markets Letter at 8; DTCC Letter at 1; see also UnaVista Letter at 3 (supporting the use of LEIs in conjunction with other personal identifiers to identify Customers).

+
+
fn +

934 SIFMA Letter at 36.

+
+
fn +

935 Id. at 37; see also DTCC Letter at 2–4 (noting industry and regulatory support for LEIs and, that if LEIs were mandated, it would facilitate the ability for regulators to aggregate systemic risk exposures across markets).

+
+
fn +

936 FIF Letter at 70.

+
+
fn +

937 Response Letter II at 5–6.

+
+
fn +

938 Response Letter III at 12.

+
+
fn +

939 Response Letter II at 5.

+
+
fn +

940 Id.

+
+
fn +

941 Id.

+
+
fn +

942 Id. at 5-6.

+
+
fn +

943 The Participants do not believe that the proposed use of LEIs would reduce the granularity of information provided as the proposed use of LEIs would not change the provisions related to the SRO-Assigned Market Participant Identifiers (e.g., MPIDs). See CAT NMS Plan, supra note 5, at Sections 1.1 (definition of SRO-Assigned Market Participant Identifier), 6.3 (requiring reporting of SRO-Assigned Market Participant Identifier).

+
+
fn +

944 See CAT NMS Plan, supra note 5, at Section 6.5(d).

+
+
fn +

945 See id. at Section 6.3(e).

+
+
fn +

946 See Exemption Order, supra note 21, at 31–41.

+
+
fn +

947 See id. at 20.

+
+
fn +

948 Id.

+
+
fn +

949 See CAT NMS Plan, supra note 5, at Section 6.3(e)(i).

+
+
fn +

950 Id. at Section 6.4(d)(vi).

+
+
fn +

951 See Exemption Order, supra note 21, at 31–41.

+
+
fn +

952 Rule 613(c)(8) requires that CAT Reporters use the same CAT-Reporter-ID for each broker-dealer. 17 CFR 242.613(c)(8). The Reportable Events for which CAT-Reporter-IDs must be reported are: the broker-dealer receiving or originating an order (17 CFR 242.613(c)(7)(i)(C)); the broker-dealer or national securities exchange from which (or to which) an order is being routed (17 CFR 242.613(c)(7)(ii)(D) and (E)); if the order is routed to a national securities association, then the CAT-Reporter-ID of that national securities association must be reported (17 CFR 242.613(c)(7)(ii)(E)); the broker-dealer or national securities exchange receiving (or routing) a routed order (17 CFR 242.613(c)(7)(iii)(D) and (E)); if a national securities association receives the routed order, then the CAT-Reporter-ID of that national securities association must be reported (17 CFR 242.613(c)(7)(iii)(D)); the broker-dealer, if applicable, giving a modification or cancellation instruction, if an order is modified or cancelled (17 CFR 242.613(c)(7)(iv)(F)); the national securities exchange or broker-dealer executing an order, if an order is executed (17 CFR 242.613(c)(7)(v)(F)); and the clearing broker or prime broker, if applicable, if an order is executed (17 CFR 242.613(c)(7)(vi)(B)).

+
+
fn +

953 See Exemptive Request Letter, supra note 21, at 19.

+
+
fn +

954 See id. at 23, 26.

+
+
fn +

955 Id. at 23.

+
+
fn +

956 Id.

+
+
fn +

957 Id. at 21, 22, 24.

+
+
fn +

958 Id. at 24.

+
+
fn +

959 See Data Boiler Letter at 22; FIF Letter at 73–74; TR Letter at 7–8; see also DAG Letter at 2; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

960 Data Boiler Letter at 22; FIF Letter at 73–74.

+
+
fn +

961 Data Boiler Letter at 22.

+
+
fn +

962 FIF Letter at 73–74.

+
+
fn +

963 Data Boiler Letter at 22; FIF Letter at 74.

+
+
fn +

964 Data Boiler Letter; TR Letter; FIF Letter.

+
+
fn +

965 TR Letter at 8–9; FIF Letter at 10–11.

+
+
fn +

966 Data Boiler at 22.

+
+
fn +

967 TR Letter at 8–9; FIF Letter at 10–11. The Participants did not respond to the comment suggesting the CAT should “tag” trade patterns with the trading desk and trader.

+
+
fn +

968 Response Letter I at 33.

+
+
fn +

969 According to the Participants, requiring the reporting of unique CAT-Reporter-IDs of: (i) the Industry Member receiving or originating an order; (ii) the Industry Member or Participant from which (and to which) an order is being routed; (iii) the Industry Member or Participant receiving (and routing) a routed order; (iv) the Industry Member or Participant executing an order; and (v) the clearing broker or prime broker, would have imposed technical implementation difficulties on CAT Reporters and the Plan Processor alike to adopt the infrastructure to comply with the reporting, collection, and maintenance of CAT-Reporter-IDs. See Exemptive Request Letter, supra note 21, at 26. The Commission has considered the economic implications of the exemptive relief permitting the Existing Identifier Approach, as well as the other approaches in the CAT NMS Plan (options market maker quotes, Customer-ID, linking of executions to specific subaccount allocations on Allocation Reports, and timestamp granularity for Manual Order Events) that required exemptive relief from Rule 613 for inclusion in its economic analysis. See Notice, supra note 5, at 30709.

+
+
fn +

970 Data Boiler Letter at 22.

+
+
fn +

971 See Exemptive Request Letter, supra note 21, at 23. Further, the Commission notes that Section 6.3(d)(ii)(F) of the CAT NMS Plan currently requires the reporting of the identity and nature of the department or desk to which an internally routed order is being routed, so the identity of a trading desk for internally routed orders will be captured through this provision.

+
+
fn +

972 FIX Letter at 2; FIF Letter at 75, Data Boiler Letter at 22; DTCC Letter at 1–6.

+
+
fn +

973 Data Boiler Letter at 22.

+
+
fn +

974 FIF Letter at 11.

+
+
fn +

975 Response Letter II at 6; Response Letter III at 12.

+
+
fn +

976 Response Letter II at 5–6.

+
+
fn +

977 TR Letter at 9; SIFMA Letter at 35–36; FIF Letter at 83–86.

+
+
fn +

978 FIF Letter at 84; see also SIFMA Letter at 36.

+
+
fn +

979 TR Letter at 9.

+
+
fn +

980 SIFMA Letter at 35.

+
+
fn +

981 SIFMA Letter at 36; see also FIF Letter at 83–85.

+
+
fn +

982 FIF Letter at 85.

+
+
fn +

983 Response Letter I at 22.

+
+
fn +

984 “Material Terms of the Order” is defined in Section 1.1 of the CAT NMS Plan.

+
+
fn +

985 See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

986 See 17 CFR 242.613(c)(7)(vi)(A).

+
+
fn +

987 See Exemption Request, supra note 21, at 30.

+
+
fn +

988 See id.

+
+
fn +

989 Id.; see also Adopting Release, supra note 14, at 45798–99.

+
+
fn +

990 See Exemption Request, supra note 21, at 30.

+
+
fn +

991 Id.

+
+
fn +

992 Id.

+
+
fn +

993 See FIF Letter at 75–79; TR Letter at 8; see also DAG Letter at 2; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

994 FIF Letter at 78, 90.

+
+
fn +

995 Id. at 90.

+
+
fn +

996 Data Boiler Letter at 24–25.

+
+
fn +

997 Id. at 40.

+
+
fn +

998 Response Letter I at 36–37. The Participants estimated compliance costs related to linking orders to executions to be at least $525 million for the largest broker–dealers. Id.

+
+
fn +

999 See April 2015 Supplement, supra note 20 (providing examples of how the Allocation Report would be used to link the subaccount holder to those with authority to trade on behalf of the account).

+
+
fn +

1000 See CAT NMS Plan, supra note 5, at Sections 6.4(d)(ii)(A)(1), 6.8(b).

+
+
fn +

1001 Id. These commenters also expressed the view that Business Clocks that capture the time of allocation should be subject to a clock synchronization standard of one second. Id.

+
+
fn +

1002 SIFMA Letter at 35; FIF Letter at 86–90; FSR Letter at 9.

+
+
fn +

1003 SIFMA Letter at 35.

+
+
fn +

1004 FIF Letter at 86. In support of its objection to including a timestamp in the Allocation Report, this commenter explained that, to detect wrongdoing in the collection process, one could compare the average execution price on the allocation to the market price when the allocation was submitted. If any subaccount had a total and an average profit and loss far exceeding the average profit and loss for all subaccounts of the advisor, such subaccount could be highlighted. Id.

+
+
fn +

1005 FIF Letter at 86.

+
+
fn +

1006 Id. This commenter also provided an analysis of the cost for adding a timestamp on allocations. The cost analysis concluded that the cost to the industry of reporting timestamps on allocations to the millisecond with a clock offset of 50 milliseconds would be $88,775,000. The cost estimate is discussed further in the economic analysis. See Section V.F.3.a(4), infra.

+
+
fn +

1007 Response Letter I at 37.

+
+
fn +

1008 Id. at 37–38. Similarly, the Participants also suggested that the Plan be amended to permit Industry Members to synchronize their Business Clocks used solely for reporting of the time of allocation to within one second of NIST, instead of 50 milliseconds. Id.

+
+
fn +

1009 See Notice, supra note 5, at Section I.e(2).

+
+
fn +

1010 The Commission does not believe that the alternative suggested by one commenter, comparing the average execution price on the allocation to the market price when the allocation was submitted and looking for excess profits and losses, would be nearly as effective, given that the time of the actual allocation would not be available.

+
+
fn +

1011 As discussed in the economic analysis, the Commission believes that requiring a one-second timestamp instead of a one-millisecond timestamp for the allocation on Allocation Reports could save $44 million in implementation costs and $5 million in annual ongoing costs. See Section V.H.5, infra.

+
+
fn +

1012 As used in the CAT NMS Plan, “Options Exchange” means a registered national securities exchange or automated trading facility of a registered securities association that trades Listed Options. See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

1013 See CAT NMS Plan, supra note 5, at Section 6.4(d)(iii). As used in the CAT NMS Plan, “Options Market Maker” means a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange. See id. at Section 1.1.

+
+
fn +

1014 Id.

+
+
fn +

1015 See 17 CFR 242.613(c)(7).

+
+
fn +

1016 See 17 CFR 242.613(j)(8).

+
+
fn +

1017 See Exemption Request, supra note 21, at 8.

+
+
fn +

1018 Id. at 7.

+
+
fn +

1019 Id. at 6–7.

+
+
fn +

1020 Id.

+
+
fn +

1021 Id. at 7.

+
+
fn +

1022 FIF Letter at 62–64; TR Letter at 8; see also DAG Letter at 2; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

1023 FIF Letter at 64–65.

+
+
fn +

1024 Id. at 65–66.

+
+
fn +

1025 Data Boiler Letter at 25.

+
+
fn +

1026 Id.

+
+
fn +

1027 Response Letter I at 36.

+
+
fn +

1028 Id.

+
+
fn +

1029 Id.

+
+
fn +

1030 Id. (noting that this is an approximation based on the equities SIP data from the Consolidated Tape Association/Consolidated Quotation System and UTP Plans from June 2014 to June 2016).

+
+
fn +

1031 Data Boiler Letter at 25.

+
+
fn +

1032 The Commission notes that, when considering whether to require Options Market Makers to report their quotes to the Central Repository, the Commission was provided a detailed cost analysis of the savings that would result if Options Market Makers were not required to directly report their quote information to the Central Repository.

+
+
fn +

1033 Anonymous Letter I at 1, 3; see also Anonymous Letter I at 9–15 (stating that CAT Reporters should include ATSs, internalizers, ELPs, clearing firms, the Depository Trust and Clearing Corporation (“DTCC”), National Securities Clearing Corporation (“NSCC”)).

+
+
fn +

1034 Anonymous Letter I at 6.

+
+
fn +

1035 The Participants noted the definition of Material Terms of the Order includes whether an order is short or short exempt. Response Letter I at 26.

+
+
fn +

1036 The Participants explained that the processes involved in the ETF creations and redemptions are distinct from those used for transactions in NMS securities, and may involve parties that are not CAT Reporters. Response Letter I at 25–26.

+
+
fn +

1037 Response Letter I at 26.

+
+
fn +

1038 Id. at 25.

+
+
fn +

1039 See Proposing Release, supra note 14, at 32574.

+
+
fn +

1040 See CAT NMS Plan, supra note 5, at Appendix D, Section 2.

+
+
fn +

1041 FIF Letter at 95; Bloomberg Letter at 5–6; Data Boiler Letter at 36 (recommending the use of multiple formats and favoring use of “existing market practices/processes”).

+
+
fn +

1042 FIF Letter at 95.

+
+
fn +

1043 Id. The commenter also requested clarity on what symbology would be used for options. Id. This comment was not addressed by the Participants.

+
+
fn +

1044 Bloomberg Letter at 5.

+
+
fn +

1045 Id. at 6.

+
+
fn +

1046 Id.

+
+
fn +

1047 Response Letter II at 7.

+
+
fn +

1048 Response Letter III at 13.

+
+
fn +

1049 Response Letter II at 7 (citing OATS Reporting Technical Specifications (September 12, 2016), available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf (requiring data to be reported using symbol format published by primary listing exchange for listed securities).

+
+
fn +

1050 Id. The Plan requires the Participants to provide the Plan Processor with issue symbol information, and the Plan Processor to maintain a complete symbology database, including historical symbology. In addition, issue symbol validation must be included in the processing of data submitted by CAT Reporters. See _CAT NMS Plan, supra note 5, at Appendix C, Section A.1(a); Appendix D, Section 2.

+
+
fn +

1051 Id.

+
+
fn +

1052 Response Letter II at 7.

+
+
fn +

1053 The Participants noted, based on conversations with the DAG and as noted by one commenter, certain industry messaging formats, such as some exchange binary formats, require symbology other than the primary listing exchange symbology. Id.

+
+
fn +

1054 See CAT NMS Plan, supra note 5, at Section 6.1(c); see also Sections III.26 and III.27, supra.

+
+
fn +

1055 See CAT NMS Plan, supra note 5, at Appendix C and D.

+
+
fn +

1056 SIFMA Letter at 20; see also ICI Letter at 4 (stating that “despite the highly sensitive nature of the data captured by the CAT, the proposed CAT NMS plan provides only vague details about the information security provisions for the CAT. . . . [W]e understand that certain details of the plan processor’s information security program must remain confidential, but the proposed CAT NMS plan sets too low of a bar for information security”).

+
+
fn +

1057 FSR Letter at 6; see also TR letter at 8 (seeking clarification on the service levels and liability that will be associated with data transfers between CAT Reporters and the CAT Processor, and how information security will be addressed with customer service staff at the Plan Processor that will assist CAT Reporters with troubleshooting).

+
+
fn +

1058 FIF Letter at 131–132.

+
+
fn +

1059 Fidelity Letter at 4.

+
+
fn +

1060 One commenter, for example, suggested that experts from Industry Members be permitted to review and provide feedback on the security controls, policies and procedures of the Plan Processor. FIF Letter at 130. Another suggested that market participants be provided an opportunity to comment on these important details. Fidelity Letter at 4.

+
+
fn +

1061 UnaVista Letter at 5.

+
+
fn +

1062 Response Letter I at 53-54 (citing Adopting Release, supra note 14, at 45782).

+
+
fn +

1063 Response Letter I at 53-54 (citing Adopting Release, supra note 14, at 45782).

+
+
fn +

1064 Id.

+
+
fn +

1065 Response Letter I at 54.

+
+
fn +

1066 Id.

+
+
fn +

1067 Id.

+
+
fn +

1068 Id.

+
+
fn +

1069 Response Letter I at 55.

+
+
fn +

1070 Id.

+
+
fn +

1071 Id.

+
+
fn +

1072 Response Letter III at 7.

+
+
fn +

1073 Id.

+
+
fn +

1074 Response Letter III at 8.

+
+
fn +

1075 Id.

+
+
fn +

1076 See CAT NMS Plan, supra note 5, at Section 6.9(a).

+
+
fn +

1077 See Section IV.H, supra.

+
+
fn +

1078 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(b) (discussing the manner in which the Central Repository will receive, extract, transform, load, and retain data); Section 6.10(c) (discussing the CAT user Help Desk).

+
+
fn +

1079 See CAT NMS Plan, supra note 5, at Appendix D, Section 4 (Data Security); Section 5 (Business Continuity/Disaster Recovery).

+
+
fn +

1080 SIFMA Letter at 21.

+
+
fn +

1081 Id.

+
+
fn +

1082 FSI Letter at 5 (citing to Government Accountability Office, High-Risk Series: An Update, GAO-15-290 at 235 (Feb. 2016)).

+
+
fn +

1083 UnaVista Letter at 4.

+
+
fn +

1084 FIF Letter at 133.

+
+
fn +

1085 ICI Letter at 5.

+
+
fn +

1086 FIF Letter at 130–31.

+
+
fn +

1087 Data Boiler Letter at 29.

+
+
fn +

1088 Response Letter III at 5.

+
+
fn +

1089 Id.

+
+
fn +

1090 Id.

+
+
fn +

1091 Response Letter III at 8.

+
+
fn +

1092 Id.

+
+
fn +

1093 Response Letter III at 8.

+
+
fn +

1094 Response Letter I at 61.

+
+
fn +

1095 Response Letter III at 5.

+
+
fn +

1096 Response Letter I at 61.

+
+
fn +

1097 Response Letter III at 5.

+
+
fn +

1098 Response Letter III at 5.

+
+
fn +

1099 Response Letter III at 5-6.

+
+
fn +

1100 Id.

+
+
fn +

1101 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.2.

+
+
fn +

1102 The Commission notes that, in contrast to the Participants’ response, the Commission is amending the Plan without limitation to only “relevant standards” because the Commission believes that the NIST Cyber Security Framework already provides flexibility to ensure only relevant standards apply, and without specific reference to NIST 800-53 or ISO 27001. The Commission also is amending Appendix D, Section 4.2 of the Plan to clarify that the listed industry standards are not intended to be an exclusive list. The Commission believes this amendment is appropriate to clarify that the Participants may adhere to additional industry standards.

+
+
fn +

1103 Response Letter III at 6–7.

+
+
fn +

1104 SIFMA Letter at 21.

+
+
fn +

1105 ICI Letter at 9.

+
+
fn +

1106 UnaVista Letter at 4.

+
+
fn +

1107 FSR Letter at 5; FSI Letter at 5.

+
+
fn +

1108 MFA Letter at 6.

+
+
fn +

1109 SIFMA Letter at 21. This commenter also generally recommended automatic deactivation for users who do not access CAT for a specified period of time (e.g., 6 months), or whose access is not re–confirmed by the entity who employs the person requesting CAT Data, or whose firm account has been deactivated. Additionally, the commenter stated that email addresses for CAT users should be immutable and should allow for change via administrative review workflow, and shared user IDs should be prohibited. Id.

+
+
fn +

1110 Response Letter I at 55–56.

+
+
fn +

1111 Id.

+
+
fn +

1112 The Commission notes that certain provisions of the Plan appeared to require MFA only for access to PII. The Participants clarified in their response letter that MFA is required for all logins. Response Letter III at 6.

+
+
fn +

1113 Response Letter I at 56.

+
+
fn +

1114 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.4 (discussing an overview of access to CAT Data).

+
+
fn +

1115 See CAT NMS Plan, supra note 5, at Section 6.1(m).

+
+
fn +

1116 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.

+
+
fn +

1117 See CAT NMS Plan, supra note 5, at Section 6.1(g).

+
+
fn +

1118 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.4.

+
+
fn +

1119 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.4 (discussing an overview of the CAT password requirements).

+
+
fn +

1120 Response Letter III at 8.

+
+
fn +

1121 Response Letter III at 9.

+
+
fn +

1122 See CAT NMS Plan, supra note 5, at Section 6.1(u).

+
+
fn +

1123 Id.

+
+
fn +

1124 SIFMA Letter at 20; see also Data Boiler Letter at 26 (stating “CAT should under ABSOLUTELY NO CIRCUMSTANCE (including BCP/DR) allow anyone the option of to download the ‘entire’ data sets, because this essentially opens a ‘backdoor’ to significant security risk.”).

+
+
fn +

1125 SIFMA Letter at 20.

+
+
fn +

1126 FIF Letter at 134.

+
+
fn +

1127 Id.

+
+
fn +

1128 Fidelity Letter at 4.

+
+
fn +

1129 Id.

+
+
fn +

1130 ICI Letter at 7.

+
+
fn +

1131 Response Letter I at 56.

+
+
fn +

1132 Id.

+
+
fn +

1133 Id.

+
+
fn +

1134 Id.

+
+
fn +

1135 Id. (citing to CAT NMS Plan, supra note 5, at Section 6.5(f)(iv)).

+
+
fn +

1136 Id.

+
+
fn +

1137 Response Letter III at 10 (citing to Appendix D, Section 8.2 (providing that “the Central Repository must provide for direct queries, bulk extraction, and download of Data for all regulatory users.”)).

+
+
fn +

1138 Response Letter III at 11.

+
+
fn +

1139 Id.

+
+
fn +

1140 Id.

+
+
fn +

1141 Id.

+
+
fn +

1142 Id.

+
+
fn +

1143 Id.

+
+
fn +

1144 Response Letter III at 7. Notwithstanding the foregoing example, the Participants noted that the details regarding such an escalation policy will not be determined until the Plan Processor has been selected.

+
+
fn +

1145 Id.

+
+
fn +

1146 Response Letter III at 8.

+
+
fn +

1147 Id.

+
+
fn +

1148 Id.

+
+
fn +

1149 See CAT NMS Plan, supra note 5, at Section 6.1(c).

+
+
fn +

1150 See id. at Section 6.5(f)(i), (iv).

+
+
fn +

1151 See id. at Section 6.5(f)(iv).

+
+
fn +

1152 The Commission also notes that each Participant must comply with Regulation SCI. Response Letter III at 8.

+
+
fn +

1153 See CAT NMS Plan, supra note 5 at Section 6.2(b)(vii).

+
+
fn +

1154 See id.

+
+
fn +

1155 Fidelity Letter at 4.

+
+
fn +

1156 UnaVista Letter at 4.

+
+
fn +

1157 MFA Letter at 6.

+
+
fn +

1158 Data Boiler Letter at 14.

+
+
fn +

1159 Response Letter I at 44–45.

+
+
fn +

1160 Id. at 45.

+
+
fn +

1161 Id.

+
+
fn +

1162 Id.

+
+
fn +

1163 Such purposes include, among other things, analysis and reconstruction of market events, market analysis and research to inform policy decisions, market surveillance, examinations, investigations, and other enforcement functions. See supra note 586.

+
+
fn +

1164 This limitation on the use of CAT Data for regulatory and surveillance purposes does not restrict the ability of a Participant from using the Raw Data that it reports for commercial or other purposes. See Section IV.D.6.k, infra.

+
+
fn +

1165 See CAT NMS Plan, supra note 5, at Section 6.2(a)(v)(L).

+
+
fn +

1166 See CAT NMS Plan, supra note 5, at Section 6.9(b)(xi).

+
+
fn +

1167 SIFMA Letter at 21–22; see also MFA Letter at 4.

+
+
fn +

1168 FSR Letter at 6. This commenter also noted that the Plan Processor should ensure access to the PII complies with Regulation SCI and any other applicable federal and state privacy laws. Id.

+
+
fn +

1169 SIFMA Letter at 45.

+
+
fn +

1170 Response Letter I at 58.

+
+
fn +

1171 Id.

+
+
fn +

1172 An “SCI Entity” means an SCI self-regulatory organization, SCI alternative trading system, plan processor, or exempt clearing agency subject to the Commission’s Automated Review Program (“ARP”). 17 CFR 242.1000.

+
+
fn +

1173 An “SCI System” means all computer network, electronic, technical, or automated, or similar systems of, or operated by or on behalf of, an SCI entity that, with respect to securities, directly support trading, clearance and settlement, order routing, market data, market regulation, or market surveillance. 17 CFR 242.1000.

+
+
fn +

1174 See CAT NMS Plan, supra note 5, at Section 6.9(b)(xi).

+
+
fn +

1175 17 CFR 242.1001(a)(2). “SCI event” means an event at an SCI entity that constitutes: (1) A systems disruption; (2) a systems compliance issue; or (3) a systems intrusion. 17 CFR 242.1000.

+
+
fn +

1176 17 CFR 242.1001(a)(3).

+
+
fn +

1177 17 CFR 242.1001(a)(4).

+
+
fn +

1178 See Staff Guidance on Current SCI Standards, issued on November 19, 2014, available at https://www.sec.gov/rules/final/2014/staff-guidance-current-sci-industry-standards.pdf.

+
+
fn +

1179 Id.

+
+
fn +

1180 See CAT NMS Plan, supra note 5, at Appendix C, Section A.4(a).

+
+
fn +

1181 SIFMA Letter at 21.

+
+
fn +

1182 Response Letter I at 58.

+
+
fn +

1183 Id. at 58–59.

+
+
fn +

1184 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.3.

+
+
fn +

1185 MFA Letter at 8.

+
+
fn +

1186 Id.; see also SIFMA Letter at 20–21 (stating that “[t]he CAT Processor should employ strong, evolving encryption and decryption standards that are continuously updated to meet the most stringent data encryption requirements possible”).

+
+
fn +

1187 FSR Letter at 5–6; see also FIF Letter at 125 (suggesting that if given the option WORM (write once, read man) technology may be convenient and cost effective).

+
+
fn +

1188 MFA Letter at 8.

+
+
fn +

1189 SIFMA Letter at 20–21.

+
+
fn +

1190 FSR Letter at 5; MFA Letter at 8 (also stating that “[s]trong encryption should be at the heart of the CAT NMS Plan’s efforts to protect data”).

+
+
fn +

1191 FSR Letter at 4; see also CAT NMS Plan, supra note 5, at Section 6.10(c)(ii).

+
+
fn +

1192 Id.

+
+
fn +

1193 FIF Letter at 135.

+
+
fn +

1194 Response Letter III at 5. The Commission notes that as filed, the CAT NMS Plan had stated that all CAT Data must be encrypted in-flight using industry best practices, and that PII must be encrypted both at-rest and in-flight; storage of unencrypted PII is not permissible; and non-PII CAT Data stored in a Plan Processor private environment is not required to be encrypted at-rest. See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.2; see also Response Letter I at 57.

+
+
fn +

1195 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.2.

+
+
fn +

1196 Id. at Section 6.9(b)(xi).

+
+
fn +

1197 Response Letter III at 8.

+
+
fn +

1198 See CAT NMS Plan, supra note 5, at Appendix D, Sections 4.1.2 and 4.2.

+
+
fn +

1199 Id. at Section 6.10(c).

+
+
fn +

1200 SIFMA Letter at 20.

+
+
fn +

1201 Response Letter III at 6.

+
+
fn +

1202 Id.

+
+
fn +

1203 Id.

+
+
fn +

1204 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.1.

+
+
fn +

1205 MFA Letter at 8. This commenter also suggested that the Plan Processor adopt a “bug bounty program” which awards individuals who report software bugs. Id.

+
+
fn +

1206 SIFMA Letter at 21; ICI Letter at 8; FSI Letter at 4.

+
+
fn +

1207 SIFMA Letter at 21.

+
+
fn +

1208 ICI Letter at 8; see also FSI Letter at 4 (recommending that investors be notified of a breach).

+
+
fn +

1209 FSI Letter at 4.

+
+
fn +

1210 Id.

+
+
fn +

1211 FSR Letter at 8.

+
+
fn +

1212 SIFMA Letter at 22; see also FSI Letter at 5 (suggesting that the Plan Processor should bear responsibility in the event of a data breach and that the Plan Processor should expressly indemnify Participants for any costs or damages incurred as a result of a data breach occurring after they have provided data to the CAT).

+
+
fn +

1213 FSR Letter at 8; see also SIFMA Letter at 22.

+
+
fn +

1214 Response Letter I at 58.

+
+
fn +

1215 Id.

+
+
fn +

1216 Id.

+
+
fn +

1217 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.5.

+
+
fn +

1218 Response Letter I at 58.

+
+
fn +

1219 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.5.

+
+
fn +

1220 Id.

+
+
fn +

1221 Id.

+
+
fn +

1222 Pursuant to Regulation SCI, the Commission must be notified within 24 hours of an SCI Event. See 17 CFR 242.1002(b).

+
+
fn +

1223 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.5.

+
+
fn +

1224 “Raw Data” means Participant Data and Industry Member Data that has not been through any validation or otherwise checked by the CAT System. See CAT NMS Plan, supra note 5, at Section 1.1. The Commission notes that the Section 6.5(h) of the CAT NMS Plan also limits the use by a Participant of the Raw Data that the Participant has reported to the Central Repository; a Participant may not use the Raw Data reported by another Participant.

+
+
fn +

1225 ICI Letter at 10; SIFMA Letter at 31.

+
+
fn +

1226 SIFMA Letter at 31.

+
+
fn +

1227 Id.

+
+
fn +

1228 Id.

+
+
fn +

1229 KCG Letter at 9.

+
+
fn +

1230 ICI Letter at 10.

+
+
fn +

1231 Id.

+
+
fn +

1232 Response Letter I at 43.

+
+
fn +

1233 Id.

+
+
fn +

1234 Id.

+
+
fn +

1235 See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(A).

+
+
fn +

1236 See id. at Section 1.1.

+
+
fn +

1237 SIFMA Letter at 30; KCG Letter at 7–8.

+
+
fn +

1238 Response Letter I at 44.

+
+
fn +

1239 FIF Letter at 61.

+
+
fn +

1240 Id.

+
+
fn +

1241 SIFMA Letter at 30. In this regard, this commenter noted that broker-dealers could use their CAT reported data to run complex searches and generate reports to (1) meet their regulatory surveillance requirements; (2) conduct best execution analysis; and (3) conduct transaction costs analysis. Id.

+
+
fn +

1242 Id.; see also KCG Letter at 7.

+
+
fn +

1243 TR Letter at 8.

+
+
fn +

1244 Bloomberg Letter at 7.

+
+
fn +

1245 Id. (noting further that independent software vendors could build sophisticated analytics to aid this).

+
+
fn +

1246 Response Letter I at 44.

+
+
fn +

1247 Id.

+
+
fn +

1248 See CAT NMS Plan, supra note 5, at Appendix D, Section 10.1.

+
+
fn +

1249 Response Letter I at 44.

+
+
fn +

1250 Id.

+
+
fn +

1251 Id.

+
+
fn +

1252 Id.

+
+
fn +

1253 Id.

+
+
fn +

1254 The Commission preliminarily believes that if the Participants decide to provide access to broker-dealer CAT Reporters, an amendment to the CAT Plan would be required as this would expand the Plan’s restriction that CAT Data only be used by Participants for regulatory and surveillance purposes. See CAT NMS Plan, supra note 5, at Section 6.5(h).

+
+
fn +

1255 Bloomberg Letter at 7.

+
+
fn +

1256 See Section IV.H, supra.

+
+
fn +

1257 SIFMA Letter at 32–33.

+
+
fn +

1258 Id. at 31–33.

+
+
fn +

1259 Id. at 33.

+
+
fn +

1260 See Adopting Release, supra note 13, at 45798.

+
+
fn +

1261 Id.

+
+
fn +

1262 See CAT NMS Plan, supra note 5, at Sections 6.5(f)(i)(A)–(B), 6.5(f)(i)(D), 6.5(f)(iii), 6.5(f)(iv)(B), 6.5(g), Appendix D, Sections 4.1.4, 4.1.6, 11.3; see also supra Section III.25.

+
+
fn +

1263 See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(A)–(B).

+
+
fn +

1264 NYSE Letter at 2–4 (noting that “[i]f employees of the Commission with access to the data stored in the Central Repository or other CAT systems are subject to security standards less stringent than those applicable to other authorized users, the data obtained and held by those individuals may be subject to heightened risk of a data breach.”).

+
+
fn +

1265 Garrett Letter at 1–2.

+
+
fn +

1266 NYSE Letter at 3.

+
+
fn +

1267 Id. at 3–4 (citing U.S. Government Accountability Office (“GAO”) report discussing certain weaknesses in the Commission’s information security policies).

+
+
fn +

1268 Garrett Letter at 1 (noting also that computer systems at the Federal Deposit Insurance Corporation, Internal Revenue Service, Federal Reserve, and Office of Personnel Management have all recently been compromised by cyberattacks and that an April 2016 GAO report identified several weaknesses related to the SEC’s cybersecurity protocols that the Commission has not yet addressed).

+
+
fn +

1269 NYSE Letter at 3 (also objecting to the terms “misuse” and “data” (rather than CAT Data) as overly broad and imprecise).

+
+
fn +

1270 Response Letter I at 60.

+
+
fn +

1271 Id. at 60–61.

+
+
fn +

1272 See 17 CFR 242.608(a)(1) (stating that NMS plans are filed by two or more SROs).

+
+
fn +

1273 See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).

+
+
fn +

1274 Such an approach also has the potential to create tension with the existing oversight of the Commission conducted by the Office of the Inspector General and the Government Accountability Office.

+
+
fn +

1275 Moreover, Commission employees are generally immune from personal liability for actions performed in the course of their duties. See, e.g., Gilbert v. Digress, 756 F.2d 1455, 1458 (9th Cir. 1985) (“the bar of sovereign immunity cannot be avoided by naming officers and employees of the United States as defendants”); Clark v. Library of Congress, 750 F.2d 89, 103–04 (D.C. Cir. 1984) (absent a specific waiver by the government, sovereign immunity bars constitutional suits for money damages against government employees in their official capacity, even in cases where the employee acted outside his authority); 28 U.S.C. § 2679 (barring claims against government employees under the Federal Tort Claims Act).

+
+
fn +

1276 See, e.g., 5 C.F.R. § 2635.703(b) (“Nonpublic information is information that the employee gains by reason of Federal employment and that he knows or reasonably should know has not been made available to the general public.”).

+
+
fn +

1277 See, e.g., 15 U.S.C. § 78x(b) (“It shall be unlawful for any member, officer, or employee of the Commission to disclose to any person other than a member, officer, or employee of the Commission, or to use for personal benefit, any information contained in any application, statement, report, contract, correspondence, notice, or other document filed with or otherwise obtained by the Commission (1) in contravention of the rules and regulations of the Commission under [the Freedom of Information Act], or (2) in circumstances where the Commission has determined pursuant to such rules to accord confidential treatment to such information”); 17 C.F.R. § 200.735-3(b)(2)(i) (“A member or employee of the Commission shall not . . . [d]ivulge to any unauthorized person or release in advance of authorization for its release any nonpublic Commission document, or any information contained in any such document or any confidential information: (A) In contravention of the rules and regulations of the Commission promulgated under [the Freedom of Information Act], [the Privacy Act], and [the Sunshine Act]; or (B) in circumstances where the Commission has determined to accord such information confidential treatment”); 5 C.F.R. § 2635.703(a) (“An employee shall not engage in a financial transaction using nonpublic information, nor allow the improper use of nonpublic information to further his own private interest or that of another, whether through advice or recommendation, or by knowing unauthorized disclosure.”).

+
+
fn +

1278 See, e.g., 18 U.S.C. § 1905 (“Whoever, being an officer or employee of the United States or of any department or agency thereof . . . publishes, divulges, discloses, or makes known in any manner or to any extent not authorized by law any information coming to him in the course of his employment or official duties, . . . which information concerns or relates to the trade secrets, processes, operations, style of work, or apparatus, or to the identity, confidential statistical data, amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, or association; . . . shall be fined under this title, or imprisoned not more than one year, or both; and shall be removed from office or employment”); 5 U.S.C. § 552a(h)(i)(1) (“Criminal penalties – Any officer or employee of an agency, who by virtue of his employment or official position, has possession of, or access to, agency records which contain individually identifiable information the disclosure of which is prohibited by this section or by rules or regulations established thereunder, and who knowing that disclosure of the specific material is so prohibited, willfully discloses the material in any manner to any person or agency not entitled to receive it, shall be guilty of a misdemeanor and fined not more than $5,000”).

+
+
fn +

1279 A comment from one Participant suggested that persons with access to the Central Repository—regardless of whether they are employed by the Plan Processor, the Commission, or a Participant—should not be subject to personal liability for the misuse of data. The Commission is not amending the Plan to remove personal liability from all categories of such persons. The inclusion in the Plan of a provision providing for personal liability for the misuse of data indicates that the Participants more broadly believe that this is an appropriate and potentially effective way of deterring misuse of data, including by their own employees. And, in the Commission’s view, the Participants’ belief is reasonable.

+
+
fn +

1280 Pub. L. No. 113-283 (Dec. 18, 2014); NIST, Security and Privacy Controls for Federal Information Systems and Organizations, Special Publication 800-53, revision 4 (Gaithersburg, Md.: April 2013); NIST, Contingency Planning Guide for Federal Information Systems, Special Publication 800-34, revision 1 (Gaithersburg, Md.: May 2010)

+
+
fn +

1281 See CAT NMS Plan, supra note 5, at Section 6.5(f)(iv)(B).

+
+
fn +

1282 See CAT NMS Plan, supra note 5, at Section 6.5(f)(i)(D).

+
+
fn +

1283 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.6.

+
+
fn +

1284 Id. at Appendix D, Sections 4.1.4 and 4.1.6.

+
+
fn +

1285 TR Letter at 8; SIFMA Letter at 22; see also NYSE Letter at 3 (discussing CAT Data, including PII reported to the Central Repository, and noting that the security of the confidential data stored in the Central Repository and other CAT systems must be of the highest quality).

+
+
fn +

1286 Data Boiler Letter at 29 (stating “PII should properly be safeguarded . . . . but nothing will be absolutely ‘bullet-proof.”).

+
+
fn +

1287 SIFMA Letter at 44 (suggesting that the Bidders should be evaluated on how their proposed solutions will meet the confidentiality requirements by a technical panel of experts with representation from broker-dealers).

+
+
fn +

1288 SIFMA Letter at 22.

+
+
fn +

1289 FIF Letter at 134–135.

+
+
fn +

1290 SIFMA Letter at 22.

+
+
fn +

1291 Id.

+
+
fn +

1292 FSI Letter at 3.

+
+
fn +

1293 Response Letter III at 10.

+
+
fn +

1294 Id.

+
+
fn +

1295 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.6.

+
+
fn +

1296 For example, in their Response Letter, the Participants noted that if a regulatory user received a tip about a particular person, such user, if he or she were appropriately authorized to do so, could search the customer-related information database and view unmasked information to identify the person’s Customer-ID, and then use the Customer-ID to query the broader order and transaction database to view the relevant activity for that Customer-ID. Response Letter III at 10.

+
+
fn +

1297 Id.

+
+
fn +

1298 See Section IV.D.6.b, supra.

+
+
fn +

1299 The Commission understands that the “least privileged” practice entails limiting access to the minimal level of access to PII that will allow normal functioning.

+
+
fn +

1300 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.4.

+
+
fn +

1301 The Commission notes that regulatory uses includes, among other things, analysis and reconstruction of market events, market analysis and research to inform policy decisions, market surveillance, examinations, investigations, and other enforcement functions. See supra note 586.

+
+
fn +

1302 See CAT NMS Plan, supra note 5, at Section 6.1(o)(ii) (requiring the Plan Processor to provide the Operating Committee regular reports addressing, among other things, data security issues for the Plan Processor and the Central Repository taking into account the data security requirements set forth in Appendix D).

+
+
fn +

1303 FIF Letter at 135.

+
+
fn +

1304 Response Letter III at 9-10.

+
+
fn +

1305 Response Letter III at 9.

+
+
fn +

1306 Response Letter III at 10.

+
+
fn +

1307 FSR Letter at 4; FSI Letter at 3; SIFMA Letter at 22; see also MFA Letter at 8 (stating that particularly sensitive pieces of data should be isolated or compartmentalized).

+
+
fn +

1308 FIF Letter at 125. Similarly, another commenter recommended that PII data not overlap with access to the other transaction data available in the CAT. See SIFMA Letter at 23.

+
+
fn +

1309 FSI Letter at 3.

+
+
fn +

1310 Response Letter III at 9.

+
+
fn +

1311 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.3; see also Response Letter I at 58–59.

+
+
fn +

1312 See Section III.27, supra.

+
+
fn +

1313 FIF Letter at 43.

+
+
fn +

1314 Data Boiler Letter at 17.

+
+
fn +

1315 See, e.g., FSR Letter at 10 (noting that the implementation schedule should be extended to provide the industry a sufficient amount of time to comply with the new reporting structure under the CAT NMS Plan, including the ability to report CAT Data in a timely and accurate manner with a reduced error rate); FIF Letter at 7, 40–41, 45 (stating that FIF could not support the Plan’s implementation milestones as proposed and that the Plan lacks appropriate risk-mitigating strategies for CAT Reporters to cope with the “aggressive” implementation schedule and suggesting several such strategies).

+
+
fn +

1316 SIFMA Letter at 23.

+
+
fn +

1317 FSR Letter at 10. The Commission notes that, as of the date of this Order, a T+2 standard settlement cycle has been proposed, but not adopted. See Securities Exchange Act Release No. 78962 (September 28, 2016), 81 FR 69240 (October 5, 2016).

+
+
fn +

1318 FSR Letter at 10.

+
+
fn +

1319 FIF Letter at 36.

+
+
fn +

1320 Id. at 41–50. For example, FIF suggested that the Participants should select the Plan Processor prior to Plan approval and that the test environment should be available to CAT Reporters twelve months prior to the start of Industry Member reporting (rather than six months prior to the start of Industry Member reporting as proposed in the Plan). Id. at 42–43.

+
+
fn +

1321 Anonymous Letter I at 3.

+
+
fn +

1322 SIFMA Letter at 24.

+
+
fn +

1323 Id.; see also TR Letter at 6 (emphasizing the importance of the testing period and noting that the three-month period included in the Plan for testing the customer definition process and order data process is inadequate based on the commenter’s experience with projects of lesser complexity than the CAT and because continuous reporting of customer and options data will be entirely new processes).

+
+
fn +

1324 FIF Letter at 41.

+
+
fn +

1325 Id. at 37–38; see also id. at 38–39 (highlighting other development and testing issues, noting in particular that linkage testing across multiple CAT Reporters is one of the most complex pieces of logic for the CAT System and CAT Reporters).

+
+
fn +

1326 FIF Letter at 39.

+
+
fn +

1327 TR Letter at 6.

+
+
fn +

1328 Id.

+
+
fn +

1329 Id. at 2.

+
+
fn +

1330 Response Letter I at 39.

+
+
fn +

1331 Id. at 41.

+
+
fn +

1332 Id.

+
+
fn +

1333 Id. at 39.

+
+
fn +

1334 Id.

+
+
fn +

1335 17 CFR 242.613(a)(3).

+
+
fn +

1336 See also Adopting Release, supra note 14, at 45744, 45805 (stating that phasing CAT implementation to allow broker-dealers to begin reporting to the CAT after the SROs will “allow members additional time to, among other things, implement the systems and other changes necessary to provide the required information to the [C]entral [R]epository, including capturing customer and order information that they may not have previously been required to collect” and that “the Commission encourages plan sponsors to propose in the NMS plan a requirement that small broker-dealers report data to the [C]entral [R]epository within three years after effectiveness of the NMS plan, as the Commission believes that providing small broker-dealers a longer implementation time should assist such broker-dealers in identifying the most cost-effective and the most efficient manner in which to procure third-party software or make any systems modifications or other changes to comply with Rule 613.”).

+
+
fn +

1337 SIFMA Letter at 23–24; FSR Letter at 10 (stating that the release of final Technical Specifications should drive the implementation timeline and that Industry Members should be provided with the Technical Specifications and given an opportunity to review and provide feedback to the Plan Processor in an effort to determine an appropriate implementation schedule); TR Letter at 3–6 (stating that rule-making should begin once final Technical Specifications are published and noting that, in keeping with the SEC’s Equity Market Structure Advisory Committee’s Rule Change Implementation timing recommendation, the timing of CAT implementation should be based on a review of the Technical Specifications); FIF Letter at 6–7 (recommending that an implementation schedule be established only after publication of the Technical Specifications and that the process for SRO and Commission rulemaking should begin upon publication of the final Technical Specifications).

+
+
fn +

1338 See TR Letter at 6.

+
+
fn +

1339 SIFMA Letter at 23–24.

+
+
fn +

1340 Id. at 24; see also FIF Letter at 7, 40–41 (noting that there should be more time for testing and iterative specification reviews for CAT reporting).

+
+
fn +

1341 SIFMA Letter at 24.

+
+
fn +

1342 TR Letter at 5.

+
+
fn +

1343 Id. at 6.

+
+
fn +

1344 FIF Letter at 6; TR Letter at 3.

+
+
fn +

1345 FIF Letter at 6; TR Letter at 3–4.

+
+
fn +

1346 Response Letter I at 39–40.

+
+
fn +

1347 Id. at 40.

+
+
fn +

1348 Id.

+
+
fn +

1349 Id.

+
+
fn +

1350 Id. at 41.

+
+
fn +

1351 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10(b).

+
+
fn +

1352 See also Section IV.D.15, infra.

+
+
fn +

1353 See Response Letter II at 27 (“[T]he Participants have provided the Bidders with specific use cases that describe the surveillance and investigative scenarios that the Participants and the SEC would require for the CAT.”).

+
+
fn +

1354 See id. at 21.

+
+
fn +

1355 See Section III.27, supra.

+
+
fn +

1356 SIFMA Letter at 23.

+
+
fn +

1357 TR Letter at 3–4 (recommending that the definition of Small Industry Member be based on FINRA Rules 7470 and 7410(o)); see also Wachtel Letter at 1–2 (arguing that OATS-exempt firms should be granted Small Industry Member status and that metrics other than capital level such as number of registered persons, revenue, or number of orders routed may be better ways of assessing a firm’s actual activity level and market impact); FIF Letter at 49 (supporting the Plan’s approach to require Participants to report to the CAT first but suggesting that CAT reporting obligations be phased in first for OATS reporters and then non-OATS reporters, or, in the alternative, phasing reporting obligations based on functionality, such as equities, options and allocations); Section V.F.2.b, infra.

+
+
fn +

1358 FIF Letter at 40 (suggesting, in the alternative, that the CAT NMS Plan should permit Small Industry Members to report concurrently with Large Industry Members).

+
+
fn +

1359 Response Letter II at 19–20 (citing Adopting Release).

+
+
fn +

1360 Id.

+
+
fn +

1361 Id.

+
+
fn +

1362 17 CFR 240.0–10.

+
+
fn +

1363 Adopting Release, supra note 14, at 45804.

+
+
fn +

1364 See Notice, supra note 5, at 30715, 30793.

+
+
fn +

1365 See Section IV.D.9.a(1), infra.

+
+
fn +

1366 See CAT NMS Plan, supra note 5, at Appendix C, Section C.9.

+
+
fn +

1367 See Section IV.D.9.a(1), infra (requiring the Participants to consider, in their rule change filings to retire duplicative systems, whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards).

+
+
fn +

1368 See also Section V.F.2.b, infra (discussing comments on the costs of duplicative reporting).

+
+
fn +

1369 See Section III.20, supra.

+
+
fn +

1370 Id.

+
+
fn +

1371 Id.

+
+
fn +

1372 Id.

+
+
fn +

1373 KCG Letter at 2–3; see also DAG Letter at 2.

+
+
fn +

1374 KCG Letter at 2–3.

+
+
fn +

1375 DAG Letter at 2; see also STA Letter at 1 (supporting the DAG Letter’s elimination of systems recommendations)

+
+
fn +

1376 SIFMA Letter at 5–6; Bloomberg Letter at 7; Data Boiler Letter at 16–17, 36 (noting that the timing to retire duplicative reporting systems should be “now or never” and that CAT should have a milestone target of sun-setting OATS on the first day CAT goes live); FSR Letter at 10; TR Letter at 2–3; FIF Letter at 4 (noting that lack of an aggressive, detailed and committed retirement plan will result in excessive costs for CAT Reporters); Fidelity Letter at 2, 4–5 (noting that the Plan should establish a fixed date for retiring regulatory compliance systems that overlap with the CAT or, in the alternative, duplicative rules should sunset automatically once the CAT reaches certain performance metrics).

+
+
fn +

1377 SIFMA Letter at 5–6.

+
+
fn +

1378 FIF Letter at 26, 31–34. For example, FIF suggests that the Participants should complete their analyses of duplicative and partially duplicative rules and systems upon approval of the CAT NMS Plan and that the Participants should file rule changes to implement rule modifications or deletions when the Technical Specifications are released. Id.

+
+
fn +

1379 See, e.g., FSR Letter at 10 (recommending the replacement of the currently contemplated duplicative reporting period with a test period of the new CAT reporting system).

+
+
fn +

1380 FIF Letter at 6, 25–28, 39 (recommending that there should be no penalties, archiving requirements or regulatory inquiries related to CAT reporting during this trial period).

+
+
fn +

1381 TR Letter at 2.

+
+
fn +

1382 FSR Letter at 10; TR Letter at 2.

+
+
fn +

1383 TR Letter at 4.

+
+
fn +

1384 SIFMA Letter at 5–6; DAG Letter at 2 (suggesting that the Technical Specifications and functional requirements should include certain data attributes to assist in retiring duplicative systems and that the inclusion of OTC equities will more readily allow for the retirement of duplicative systems); see also STA Letter at 1 (supporting the DAG Letter’s elimination of systems recommendations).

+
+
fn +

1385 SIFMA Letter at 5–6.

+
+
fn +

1386 Id. at 5–6.

+
+
fn +

1387 Id. at 10–12.

+
+
fn +

1388 Id.

+
+
fn +

1389 Response Letter II at 21.

+
+
fn +

1390 Id.

+
+
fn +

1391 The Participants stated that this review also would cover the rules of other Participants that incorporate FINRA’s OATS requirements. Response Letter II at 21 (citing NASDAQ Rule 7000A Series, BX Rule 6950 Series, PHLX Rule 3400 Series, NYSE Rule 7400 Series, NYSE Arca Equities Rule 7400 Series, NYSE MKT Rule 7400 Series).

+
+
fn +

1392 Response Letter II at 21.

+
+
fn +

1393 Id. (noting that descriptions of OATS and EBS gap analyses created on behalf of the Participants are available for public review on the CAT NMS Plan website and that Participants have worked to keep these gap analyses up-to-date by including newly-added data fields in these duplicative systems, such as the new OATS data fields related to the tick size pilot and ATS order book changes, in the gap analyses).

+
+
fn +

1394 Id. at 20–21.

+
+
fn +

1395 Id. at 22–26.

+
+
fn +

1396 Id. at 22.

+
+
fn +

1397 Id. at 20–21.

+
+
fn +

1398 See id.

+
+
fn +

1399 Id.; see also Section IV.D.9.b, infra, discussing the Commission’s plans to retire certain aspects of EBS and large trader reporting and other SEC rules once CAT is operational.

+
+
fn +

1400 Response Letter II at 20.

+
+
fn +

1401 Id. at 27.

+
+
fn +

1402 Id.

+
+
fn +

1403 Id.

+
+
fn +

1404 Id. at 21.

+
+
fn +

1405 Response Letter II at 20.

+
+
fn +

1406 Id. at 20–21.

+
+
fn +

1407 See Notice, supra note 5, at 30700.

+
+
fn +

1408 KCG Letter at 2–3.

+
+
fn +

1409 FIF Letter at 5, 24–26; see also Bloomberg Letter at 8 (noting that the Commission should specify an appropriate error rate for CAT NMS reporting such that, once met, CAT reporters can retire superseded systems).

+
+
fn +

1410 SIFMA Letter at 6–7.

+
+
fn +

1411 Id.

+
+
fn +

1412 Id. at 7; see also FIF Letter at 5, 24 (corrected data should be used for error rates and individual firms should be allowed to retire duplicative systems once the Retirement Error Rate is achieved); TR Letter at 5–6; FSR Letter at 9 (stating that the error rate should only apply to post-correction data on equities). Section IV.D.11, infra, discusses the Commission’s response to commenters suggesting the use of post-correction error rates.

+
+
fn +

1413 17 CFR 242.613(a)(3)(iv).

+
+
fn +

1414 FIF Letter at 6, 24–25.

+
+
fn +

1415 Id.

+
+
fn +

1416 DAG Letter at 2; FIF Letter at 23; see also STA Letter at 1 (supporting the DAG Letter’s elimination of systems recommendations).

+
+
fn +

1417 SIFMA Letter at 7–10.

+
+
fn +

1418 Id. SIFMA also applied this framework to the retirement of OATS, EBS, and COATS. See id. at 10–12.

+
+
fn +

1419 Id. at 5–6; see also TR Letter at 5 (calling for such a moratorium to commence once the Technical Specifications are in development to ensure that the Technical Specifications are sufficiently robust and to avoid enhancing systems that will be retired); Fidelity Letter at 2, 4–5 (noting that the Plan should call for an immediate cessation of enhancements to existing broker-dealer reporting systems which will retire once the CAT is operational); KCG Letter at 3 (noting that there should be a cessation of any changes to duplicative reporting systems during the period leading up to the CAT compliance date and once broker‐dealers have to begin reporting to the CAT and any such changes should be built in to the CAT); FIF Letter at 27.

+
+
fn +

1420 SIFMA Letter at 5–6; FSR Letter at 10 (stating that to the extent that any subset of data collected under the CAT NMS Plan is otherwise collected under a different reporting regime, the existing reporting regime should be amended as soon as possible to remove the duplicative reporting requirement).

+
+
fn +

1421 Response Letter II at 26.

+
+
fn +

1422 Id.

+
+
fn +

1423 Id.

+
+
fn +

1424 Id. (noting that the Plan states that FINRA would consider exempting firms from the OATS requirements if the data submitted to the CAT is of sufficient quality for surveillance purposes and FINRA is able to integrate CAT Data with the remaining OATS data in a way that permits it to continue to perform its surveillance obligations).

+
+
fn +

1425 Id.

+
+
fn +

1426 Id.

+
+
fn +

1427 Id. at 27.

+
+
fn +

1428 Id.

+
+
fn +

1429 Id.

+
+
fn +

1430 Response Letter I at 38–39.

+
+
fn +

1431 Response Letter II at 28.

+
+
fn +

1432 Id.

+
+
fn +

1433 SIFMA Letter at 7–10.

+
+
fn +

1434 See supra notes 1403, 1430 and accompanying text.

+
+
fn +

1435 See CAT NMS Plan, supra note 5, at Appendix C, Section C.9.

+
+
fn +

1436 MFA Letter at 9.

+
+
fn +

1437 17 CFR 240.17a-25.

+
+
fn +

1438 SIFMA Letter at 10–11. This commenter also explained that in order to retire EBS, the relevant data elements that are included in an EBS report need to be retained as part of CAT’s Technical Specifications and the accuracy of the CAT Data reported by member firms should meet an acceptable threshold for its error/rejection rate. Id. The commenter also noted that fixed income data, since it will not be available initially through CAT, will still need to be requested through the EBS system and that historical equity and option data will have to be retained and archived to accommodate requests for this data through EBS. Id.

+
+
fn +

1439 Response Letter II at 21.

+
+
fn +

1440 See Notice, supra note 5, at 30660 (discussing equity and option cleared reports).

+
+
fn +

1441 See id. (discussing the EBS system).

+
+
fn +

1442 17 CFR 240.13h-1; see also Adopting Release, supra note 14, at 45734 (“The Commission . . . note[s] . . . that . . . aspects of Rule 13h–1 may be superseded by Rule 613. Specifically, the trade reporting requirements of Rule 13h–1 are built upon the existing EBS system. To the extent that . . . data reported to the central repository under Rule 613 obviates the need for the EBS system, the Commission expects that the separate reporting requirements of Rule 13h–1 related to the EBS system would be eliminated.”)

+
+
fn +

1443 17 CFR 240.13h-1(e).

+
+
fn +

1444 At this time, the Commission does not anticipate that there will be a need to make such requests.

+
+
fn +

1445 In addition, the Commission does not anticipate that it will make requests for equity and option cleared reports, except for historical data, once CAT is fully operational.

+
+
fn +

1446 To cite one example, Item 4 of Form 13H requires large traders to provide an “Organizational Chart” that will not be reported under CAT.

+
+
fn +

1447 See CAT NMS Plan, supra note 5, at Appendix C, Section C.9.

+
+
fn +

1448 See id. at Section 6.5(b).

+
+
fn +

1449 SIFMA Letter at 5–6.

+
+
fn +

1450 17 CFR 240.17a-1(b), 17a-6(a).

+
+
fn +

1451 Response Letter I at 27.

+
+
fn +

1452 Id.

+
+
fn +

1453 Id.

+
+
fn +

1454 Id.

+
+
fn +

1455 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(m).

+
+
fn +

1456 17 CFR 240.17(a)(3)–(4).

+
+
fn +

1457 See CAT NMS Plan, supra note 5, at Section 6.11; see also infra note 3059. The CAT NMS Plan specifies that the Discussion Document will include details for (i) each order and Reportable Event that may be required to be provided, (ii) which market participants may be required to provide the data, (iii) the implementation timeline, and (iv) a cost estimate.

+
+
fn +

1458 See CAT NMS Plan, supra note 5, at Appendix C, Section A.6.

+
+
fn +

1459 Id.

+
+
fn +

1460 Id.

+
+
fn +

1461 Id.

+
+
fn +

1462 Id.

+
+
fn +

1463 Id.

+
+
fn +

1464 See SIFMA Letter at 36; FIF Letter at 13, 118–20.

+
+
fn +

1465 See Hanley Letter.

+
+
fn +

1466 SIFMA Letter at 36; FIF Letter at 13 (noting that “the primary market and the secondary market are inherently different … different rules and reporting requirements, … business processes, … vendors, … and systems with different technology personnel.”).

+
+
fn +

1467 SIFMA Letter at 36; FIF Letter at 13; see also Notice, supra note 5, at 30772 (“The Commission preliminarily believes that the potential benefits of including top-account information in the CAT could be significant and that the costs of including top-account information could be lower than what is described in the CAT NMS Plan and appropriate in light of significant potential benefits. For these reasons, the Commission preliminarily believes that top-account information should not be excluded from the Discussion Document.”).

+
+
fn +

1468 FIF Letter at 13.

+
+
fn +

1469 SIFMA Letter at 36.

+
+
fn +

1470 Id.

+
+
fn +

1471 Hanley Letter.

+
+
fn +

1472 Id. at 1.

+
+
fn +

1473 Id. at 2–3.

+
+
fn +

1474 Id. at 1 (noting “[t]op-account allocations refer to allocations during the book-building process to institutional clients and retail broker-dealers … the subsequent sub-account allocations to the actual accounts receiv[e] the shares”).

+
+
fn +

1475 Id. at 5–6. The commenter, however, stated that it is not requesting that CAT include pre-offer changes in tentative allocations. Hanley Letter at 4–6 (noting that during the pre-offering stage of a book-building process, preliminary indications of interest while gathered are believed to be subject to change).

+
+
fn +

1476 Id. at 4.

+
+
fn +

1477 Id. at 5.

+
+
fn +

1478 EBS are trading records requested by the Commission and SROs from broker-dealers that are used in regulatory investigations to identify buyers and sellers of specific securities.

+
+
fn +

1479 Hanley Letter at 5.

+
+
fn +

1480 Response Letter I at 49.

+
+
fn +

1481 Id.

+
+
fn +

1482 Id. at 50. In response to a commenter seeking clarification on the meaning of certain aspects of Primary Market Transactions, the Participants identified the relevant Plan provisions for the commenter. Id. at 50–51.

+
+
fn +

1483 See _Section V.H.8, infra.

+
+
fn +

1484 CBOE Letter at 2; see also Better Markets Letter at 7.

+
+
fn +

1485 See CAT NMS Plan, supra note 5, at Section 6.11.

+
+
fn +

1486 Response Letter I at 26. The CAT NMS Plan specifies that the Discussion Document will include a discussion of debt securities and Primary Market Transactions, but does not expressly require that futures be in the Discussion Document. See CAT NMS Plan, supra note 5, at Section 6.11.

+
+
fn +

1487 Response Letter I at 26–27 (citing Adopting Release, supra note 14 at 45745 n.241).

+
+
fn +

1488 See CAT NMS Plan, supra note 5, at Section 6.5(d)(2).

+
+
fn +

1489 Id. at Section 6.5(d)(i). The Participants expect that post-correction Error Rates will be de minimis. See id. at Appendix C, Section A.3(b), n.102.

+
+
fn +

1490 See id. at Section 1.1; see also 17 CFR 242.613(j)(6).

+
+
fn +

1491 See CAT NMS Plan, supra note 5, at Appendix C, Section A.3(a) (stating, “[T]he initial step in ensuring the reliability and accuracy of data in the Central Repository is the validation checks made by the Plan Processor when data is received and before it is accepted into the Central Repository.”)

+
+
fn +

1492 SIFMA Letter at 6.

+
+
fn +

1493 UnaVista Letter at 4.

+
+
fn +

1494 FIF Letter at 51.

+
+
fn +

1495 Id. at 57. This commenter also stated that importance of data quality could consider whether the same data is available from multiple sources, noting that if two or more CAT Reporters are supplying the same information, regulators could effectively surveil if only one source of the data was correct. See id. at 58.

+
+
fn +

1496 FSR Letter at 9; SIFMA Letter at 7; FIF Letter at 51.

+
+
fn +

1497 FIF Letter at 52, 60. The commenter also noted that currently OATS does not have a de minimis error rate, and questioned how the CAT Plan Processor could detect errors that OATS cannot correct. Id. at 60.

+
+
fn +

1498 Response Letter I at 45 (citing 17 CFR 242.608(j)(6)).

+
+
fn +

1499 Id.

+
+
fn +

1500 FSR Letter at 9; SIFMA Letter at 7; FIF Letter at 51.

+
+
fn +

1501 Response Letter I at 47.

+
+
fn +

1502 UnaVista Letter at 3–4; FSR Letter at 9.

+
+
fn +

1503 UnaVista Letter at 3.

+
+
fn +

1504 Better Markets Letter at 9.

+
+
fn +

1505 UnaVista Letter at 3–4, Better Markets Letter at 9, FIF Letter at 50–52, SIFMA Letter at 6; FSR Letter at 9; see also Section IV.D.9, supra, for a summary of comment letters that discuss how error rates impact the retirement of duplicative systems.

+
+
fn +

1506 UnaVista Letter at 3–4; FSR Letter at 9.

+
+
fn +

1507 UnaVista Letter at 3–4.

+
+
fn +

1508 FIF Letter at 56, 58.

+
+
fn +

1509 Id. The commenter stated the objective should be an Error Rate that meets the regulators’ surveillance objectives, and is achievable by CAT Reporters at a reasonable cost. Id. at 57.

+
+
fn +

1510 Id. at 52, 55.

+
+
fn +

1511 UnaVista Letter at 4.

+
+
fn +

1512 FIF Letter at 50, SIFMA Letter at 6–7.

+
+
fn +

1513 Response Letter I, at 45–46. This analysis considered the initial error rates for reporting by market participants that were reporting audit trail information to OATS for the first time, and assumed a similar learning curve would be experienced by CAT Reporters who have not previously reported audit trail information, such as options market participants.

+
+
fn +

1514 Id.

+
+
fn +

1515 Id. at 46–47.

+
+
fn +

1516 Participants have considered the industry’s experience with the OATS system over the last 10 years, including three significant additions to OATS: (1) requirement that manual orders be reported to OATS; (2) requirement that OTC Equity Securities be reported to OATS; and (3) requirement that all NMS stocks be reported to OATS. Each of these changes resulted in significant updates to the required formats which required OATS reporters to update and test their reporting systems and infrastructure. See CAT NMS Plan, supra note 5, at Appendix C, Section A.3(b).

+
+
fn +

1517 See id. at Appendix C, Section A.3(b), n.99.

+
+
fn +

1518 Id. at Appendix C, Section A.3(b).

+
+
fn +

1519 See id. at Section 6.5(d)(i); Appendix C, Section A.3(b).

+
+
fn +

1520 FSR Letter at 9.

+
+
fn +

1521 SIFMA Letter at 6.

+
+
fn +

1522 FIF Letter at 52.

+
+
fn +

1523 FIF Letter at 51, SIFMA Letter at 6–7.

+
+
fn +

1524 Response Letter I at 47.

+
+
fn +

1525 Id. (referencing CAT NMS Plan Section 6.1(o)(v)).

+
+
fn +

1526 Section 6.5(d) of the CAT NMS Plan contemplates a single Error Rate for all data. If the Participants determine that it is appropriate to establish different Error Rates for different products, data elements, or other criteria, a Plan amendment, subject to notice and comment, would be required.

+
+
fn +

1527 SIFMA Letter at 6–7, UnaVista Letter at 4. One commenter also stated that small broker-dealers should not be excused from error rate requirements if they begin reporting voluntarily at the same time large broker-dealers begin reporting. This commenter argued that if small broker-dealers are permitted to report to CAT with limitless errors during the phase designed for large broker-dealers to report without being subject to an error rate, the utility of CAT will be diminished. See Better Markets Letter at 9. The Commission believes that a maximum Error Rate would apply to anyone reporting to CAT, whether mandated to do so to be in accordance with the CAT NMS Plan or voluntarily.

+
+
fn +

1528 SIFMA Letter at 6.

+
+
fn +

1529 FIF Letter at 52.

+
+
fn +

1530 FIF Letter at 54; see also SIFMA Letter at 7. This commenter also recommended that the CAT include a robust toolset and customer service model to assist CAT Reporters in meeting the established error rates. See FIF Letter at 126–127.

+
+
fn +

1531 Response Letter I at 47–48.

+
+
fn +

1532 FIF Letter at 52, 55, 57.

+
+
fn +

1533 See Response Letter I at 48 (referencing CAT NMS Plan, Appendix D, Section 1.2).

+
+
fn +

1534 In response to the commenter that noted that if two or more CAT Reporters are supplying the same information, regulators could effectively surveil if only one source of the data was correct, see FIF Letter at 58, the Commission believes that it is important that the audit trail contains consistently accurate information from all sources obligated to report data and that errors not be permitted to exist in the audit trail just because they were correctly reported by one party.

+
+
fn +

1535 See Section IV.D.8, supra, for a description of testing periods.

+
+
fn +

1536 The Plan requires the Plan Processor to define and design a process to efficiently and effectively communicate with CAT Reporters to identify errors, so that they can work to ensure that they get feedback to improve their reporting. See CAT NMS Plan, supra note 5, at Appendix C, Section A(3)(b).

+
+
fn +

1537 See id. at Sections 6.3(b)(ii), 6.4(b)(ii).

+
+
fn +

1538 Id. at Appendix C, Section A.1(a)(iv).

+
+
fn +

1539 Id.

+
+
fn +

1540 Id. at Appendix C, Section A.2(a).

+
+
fn +

1541 KCG Letter at 9; FIF Letter at 52.

+
+
fn +

1542 FIF Letter at 52. The commenter also noted that CAT Reporters do not have access to their reported data using a bulk extract format, which would facilitate error validation and correction. Id. The commenter also suggested that the five-day error correction timeline begin from the time the CAT Reporter receives a reject message. Id. at 53.

+
+
fn +

1543 Id. at 53. The Commission notes that time by which a CAT Reporter must report corrected Customer data is 5:00 p.m. ET on T+3.

+
+
fn +

1544 Id. This commenter also suggested that CAT provide an “incident” error functionality, similar to the one available for OATS. This functionality would allow CAT Reporters that are experiencing a systematic issue with reporting to submit an incident report to CAT and receive a case number, so the CAT Reporter’s data reported could be tracked and referenced when considering the Reporter’s error rate compliance. See FIF Letter at 130.

+
+
fn +

1545 UnaVista Letter at 4. The commenter also noted that a T+5 timeframe for regulatory access is feasible but that uniform formatting or pre-validation checks may reduce the timeframe for regulatory access. Id.

+
+
fn +

1546 Response Letter I at 30.

+
+
fn +

1547 Id.

+
+
fn +

1548 Id.

+
+
fn +

1549 Id.

+
+
fn +

1550 Id.

+
+
fn +

1551 See Adopting Release, supra note 13, at 45727.

+
+
fn +

1552 The timeline in the CAT NMS Plan improves the timeliness of regulators’ access to data they use for much of their surveillance by several days because the corrected and linked CAT Data would be accessible on T+5, compared to OATS Data, which is not available until T+8.

+
+
fn +

1553 See Section V.F.3.a(7), infra.

+
+
fn +

1554 FIF Letter at 53.

+
+
fn +

1555 In Response Letter I, the Participants noted an inadvertent error in Appendix D relating the Error Rate correction time. Specifically, the Plan incorrectly states that the Plan Processor must validate customer data and generate error reports no later than 5:00 p.m. ET on T+3. The Plan should state that such validations and error reports must occur no later than 5:00 p.m. ET on T+1. The Commission is amending the Plan to correct this error.

+
+
fn +

1556 See CAT NMS Plan, supra note 5, at Appendix C, Section A.3(f); Appendix D, Sections 5.1–5.4.

+
+
fn +

1557 SIFMA Letter; Data Boiler Letter (also noting that, if the markets deem acceptable that exchanges experience downtime without going into a contingency mode or halting trading, then standards comparable to those required of exchanges, but not tighter, are sufficient, due to cost); FSI Letter; FIF Letter. One commenter requested clarification of the requirement for a bi-annual test of the CAT systems at the disaster recovery site. This commenter noted that “bi-annual” is commonly understood to mean twice a year, but can also mean once every two years. The commenter believed that clarification is necessary to ensure that the site is tested twice a year. It also believed that secondary equipment and critical personnel should be tested at least once a year. See FSI Letter at 5. In their response, the Participants affirmed that the bi-annual disaster recovery test of CAT operations at the secondary facility is required to be conducted twice a year. See Response Letter I at 51.

+
+
fn +

1558 SIFMA Letter at 45.

+
+
fn +

1559 Id.

+
+
fn +

1560 Id.

+
+
fn +

1561 Id.

+
+
fn +

1562 FIF Letter at 13, 49, 125–26.

+
+
fn +

1563 Id. at 123.

+
+
fn +

1564 Data Boiler Letter at 42.

+
+
fn +

1565 See Response Letter I at 51.

+
+
fn +

1566 See CAT NMS Plan, supra note 5, at Appendix D, Section 5.4.

+
+
fn +

1567 See supra note 1173.

+
+
fn +

1568 See supra note 1172.

+
+
fn +

1569 17 CFR 242.1001(a)(2). See Section IV.D.6.f, supra, for a discussion of Regulation SCI.

+
+
fn +

1570 For example, Appendix D requires a bi-annual test of CAT operations from the secondary site; an effective telecommuting solution for all critical CAT operations staff; and a secondary site with the same level of availability, capacity, throughput and security (physical and logical) as the primary site. See CAT NMS Plan, supra note 5, at Sections 5.3 and 5.4.

+
+
fn +

1571 SIFMA Letter at 45.

+
+
fn +

1572 Id.

+
+
fn +

1573 FIF Letter at 13, 49. In response to the commenter’s suggestions that the Plan Processor provide a consistent and comprehensive data security program, and an adequate level of help desk staffing, especially during industry testing and on-boarding, the Commission notes that the Plan Processor will support industry testing and provide help desk support during industry testing, and that the same information security policies applicable to the production environment will apply to the industry test environment. See CAT NMS Plan, supra note 5, at Appendix D, Section 1.2.

+
+
fn +

1574 Response Letter I at 51.

+
+
fn +

1575 For purposes of the CAT NMS Plan, “Business Clock” means a clock used to record the date and time of any Reportable Event required to be reported under SEC Rule 613. See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

1576 See Exemption Order, supra note 21. In this Order, the Commission is also amending the Plan to allow Business Clocks used solely for the time of an allocation to synchronize to within one second of NIST. See Section IV.D.4.d, supra.

+
+
fn +

1577 CAT NMS Plan, supra note 5, at Appendix C, Section D.12(p).

+
+
fn +

1578 Id. at Appendix C, n.236. See FIF Clock Offset Survey, supra note 247.

+
+
fn +

1579 Id. at Appendix C, Section D.12(p).

+
+
fn +

1580 SIFMA Letter at 34–35; FIF Letter at 110–111, 115; TR Letter at 7; Data Boiler Letter at 9, 20; FSR Letter at 8–9. Three of these commenters stated that there should be a uniform clock synchronization standard for Industry Members. SIFMA Letter at 34; FIF Letter at 97–98; FSR Letter at 8.

+
+
fn +

1581 Data Boiler Letter at 9 (noting that FINRA’s current clock synchronization for Industry Members is 50 milliseconds); TR Letter at 7; SIFMA Letter at 34; FSR Letter at 8.

+
+
fn +

1582 Better Markets Letter at 8. The commenter recommended that exchanges and Industry Members should be required to use the same—presumably finer—clock synchronization standard for CAT purposes as they use for internal or commercial purposes.

+
+
fn +

1583 FIF Letter at 102, TR Letter at 7.

+
+
fn +

1584 FIF Letter at 110. This commenter revisited the cost estimates for clock synchronization presented in the commenter’s Clock Offset Survey, noting in particular that the industry will face increased costs with a finer clock synchronization standard as industry has already been working toward a clock synchronization standard of 50 milliseconds, and would need another two years of lead time to comply with a finer standard than 50 milliseconds. FIF Letter at 108, 114; see also SIFMA Letter at 34.

+
+
fn +

1585 FIF Letter at 99, 110–111. FIF recommended a pilot study be conducted to test the boundaries of clock synchronization and its accuracies across a broad geographic region at different tolerances for the purpose of event sequencing. Id. at 100, 112.

+
+
fn +

1586 Id. at 102. FIF also noted that timestamps together with the daisy chain approach to linking orders and events will allow sequencing of events. Id. at 101.

+
+
fn +

1587 Id. at 104–05. This commenter also argued that Industry Member CAT Reporters that synchronize their clocks to a finer standard voluntarily should not be required to maintain that clock synchronization under CAT as it would create an uneven playing field. Id. at 99, 112, 115. Similarly, another commenter noted that finer standards are already in place at exchanges and ATSs that maintain an order book and since they are already in place for commercial reasons, there is no reason to mandate them. TR Letter at 7.

+
+
fn +

1588 SIFMA Letter at 34–35.

+
+
fn +

1589 TR Letter at 7.

+
+
fn +

1590 FIF Letter at 97.

+
+
fn +

1591 Response Letter II at 4.

+
+
fn +

1592 Id.

+
+
fn +

1593 Id. In response to the commenters that suggested that the CAT clock synchronization should be same as the OATS standard, the Participants agreed that there is value in consistency between these standards. See Response Letter I at 20. See also Securities Exchange Act Release No. 77565 (April 8, 2016), 72 FR 22136 (April 14, 2016) (approving a 50 millisecond clock synchronization requirement for FINRA members).

+
+
fn +

1594 Response Letter II at 4 (noting CAT NMS Plan Appendix C, Section D.12(p)).

+
+
fn +

1595 Response Letter II at 4 (noting CAT NMS Plan Section 6.8(c)).

+
+
fn +

1596 Response Letter II at 4–5. In response to the commenters that argued that CAT Reporters would need lead time to address any changes made to the clock synchronization in the future, the Participants explained that Section 6.8(c) of the CAT NMS Plan requires that, in conjunction with Participants’ and other appropriate Industry Member advisory groups, the CCO must annually evaluate and recommend to the Operating Committee whether technology has evolved such that the standard should be shortened. The Participants further explained they will take the time required for CAT Reporters to update and test their systems for any changes to the clock synchronization standard into consideration when determining when changes to the standard are necessary. Response Letter I at 21.

+
+
fn +

1597 Response Letter II at 4–5. In the Notice, the Commission explained that, according to FIF, all exchange matching engines meet a clock synchronization standard of 50 milliseconds, and NASDAQ stated that all exchanges that trade NASDAQ securities have clock offset tolerances of 100 microseconds or less. See Notice, supra note 5, at 30760.

+
+
fn +

1598 Response Letter II at 4–5.

+
+
fn +

1599 See Section V.F.3.a(5), infra.

+
+
fn +

1600 See Section V.E.1.b(3)B, infra. A commenter agreed, noting that if exchanges were required to maintain finer clock synchronization standards than what the CAT NMS Plan currently requires, sequencing of the events in the lifecycle of an order across firms could be improved. FIF Letter at 97.

+
+
fn +

1601 See Section IV.D.13.b(1), infra.

+
+
fn +

1602 The Participants should consider the amount of time the industry may need to implement and test a newly imposed clock synchronization standard, and notes that any change to the clock synchronization standard will need to be submitted to the Commission as a proposed amendment to the Plan pursuant to Rule 608. 17 CFR 242.608(a)(ii)(A) and (B), (b)(1). Therefore, the Commission, as well as commenters, will have an opportunity to assess any proposed change to the clock synchronization requirements, including the related implementation time frames.

+
+
fn +

1603 See CAT NMS Plan, supra note 5, at Section 6.5(d)(ii).

+
+
fn +

1604 Id.

+
+
fn +

1605 Id. at Section 6.2(a)(v)(k).

+
+
fn +

1606 Response Letter I at 20–21.

+
+
fn +

1607 See CAT NMS Plan, supra note 5, at Appendix C, Section A.3.(c).

+
+
fn +

1608 FIF Letter at 108.

+
+
fn +

1609 Id. This commenter also recommended that reasonable policies and procedures be in place to ensure compliance with the clock synchronization requirements. See id. at 104–05. As noted above, the Plan requires that the Operating Committee adopt policies and procedures, including standards, that require that the CAT Data reported be timely, accurate, and complete, and to ensure the integrity of CAT Data.

+
+
fn +

1610 Response Letter I at 20.

+
+
fn +

1611 See Section V.H.5, supra.

+
+
fn +

1612 See Exemption Order, supra note 21, at 51. For purposes of the CAT NMS Plan, “Manual Order Event” is defined as a non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.

+
+
fn +

1613 See CAT NMS Plan, supra note 5, at Section 6.8(b); see also Exemption Order, supra note 21. In this Order, the Commission is amending the Plan to allow the time of an allocation reported on an Allocation Report to be timestamped to the second. See Section IV.D.4.d, supra.

+
+
fn +

1614 See CAT NMS Plan, supra note 5, at Section 6.8(c).

+
+
fn +

1615 See Exemption Request, supra note 21, at 36.

+
+
fn +

1616 See id. at 36.

+
+
fn +

1617 See id. at 35.

+
+
fn +

1618 See id. at 32.

+
+
fn +

1619 See id. at 36–37.

+
+
fn +

1620 DAG Letter at 2; see also STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations). These commenters also supported a clock synchronization standard of one second for Manual Order Events. See Section IV.D.13, supra.

+
+
fn +

1621 SIFMA Letter at 35.

+
+
fn +

1622 FIF Letter at 80. The commenter supported use of a daisy chain approach for linking orders, noting that it is successfully used by OATS and its logic is well-known by the industry. Id. at 96–97.

+
+
fn +

1623 Id. at 79, 116–117.

+
+
fn +

1624 Data Boiler Letter at 21–22.

+
+
fn +

1625 Better Markets Letter at 8.

+
+
fn +

1626 See CAT NMS Plan, supra note 5, at Section 3.11.

+
+
fn +

1627 SIFMA Letter at 35; DAG Letter at 2; see also FIF Letter at 12, 80; STA Letter at 1 (supporting the DAG Letter’s Exemptive Request Letter recommendations).

+
+
fn +

1628 Better Markets Letter at 8; Data Boiler Letter at 21–22.

+
+
fn +

1629 SIFMA Letter at 35; FIF Letter at 12. One commenter also requested clarification that the timestamp granularity requirement would be based on the functionality of the applicable CAT reporting system. See TR Letter at 7.

+
+
fn +

1630 FIF Letter at 79, 99, 111, 116–17; SIFMA Letter at 35. FIF listed Reportable Events in a descending level of sensitivity: (1) fully electronic trading events; (2) electronic orders requiring manual intervention; (3) manual order events; (4) post-trade events. See FIF Letter at 116. However, another commenter stated that no one particular reportable event is more time-sensitive than the others for surveillance purposes. See Data Boiler Letter at 21.

+
+
fn +

1631 Response Letter I at 29.

+
+
fn +

1632 For example, the ability to reconstruct market activity, perform other detailed market analyses, or determine whether a series of orders rapidly entered by a particular market participant is manipulative or otherwise violates SRO rules or federal securities laws requires the audit trail to sequence each order and event accurately.

+
+
fn +

1633 See Adopting Release, supra note 14, at 45762.

+
+
fn +

1634 FIF Letter at 79, 99, 111, 116–17; SIFMA Letter at 35.

+
+
fn +

1635 See Section IV.D.4.d, supra.

+
+
fn +

1636 SIFMA Letter at 35; FIF Letter at 12.

+
+
fn +

1637 See CAT NMS Plan, supra note 5, at Section 6.8(b).

+
+
fn +

1638 17 CFR 242.613(d)(3).

+
+
fn +

1639 See CAT NMS Plan, supra note 5, at Sections 6.1(d)(iv), (h)(i), (j), and (k). Appendix D provides additional detail about the obligations of the Plan Processor with respect to CAT Functional Changes, CAT Infrastructure Changes, and Testing of New Changes. See id. at Appendix D, Section 11.

+
+
fn +

1640 See id. at Appendix C, Section A.5(a).

+
+
fn +

1641 See Data Boiler Letter at 34.

+
+
fn +

1642 See SIFMA Letter at 45.

+
+
fn +

1643 See CAT NMS Plan, supra note 5, at Section 6.1(i)–(k), Appendix D, Section 11.

+
+
fn +

1644 Rule 613(f) requires the Participants to develop and implement a surveillance system, or enhance existing surveillance systems that are reasonably designed to make use of the CAT Data. 17 CFR 242.613(f); see also CAT NMS Plan, supra note 5, at Section 6.9(c), Appendix D, Section 11.

+
+
fn +

1645 See CAT NMS Plan, supra note 5, at Appendix C, Section 5.

+
+
fn +

1646 See id. at Appendix C, Section A.5(a).

+
+
fn +

1647 See id. at Section 6.9.

+
+
fn +

1648 See id. at Appendix C, Section C.10(b).

+
+
fn +

1649 See id. at Appendix C, Section C.10(a).

+
+
fn +

1650 See id. at Appendix C, Section C.10(b).

+
+
fn +

1651 FIF Letter at 36–38, 43–44; TR Letter at 4–6; UnaVista Letter at 2; Fidelity Letter at 3, 5–6.

+
+
fn +

1652 TR Letter at 4.

+
+
fn +

1653 FIF Letter at 37, 43–44. More specifically, the commenter recommended that the Plan Processor provide technical specifications for order processes and Customer and allocation reporting within two months after the Effective Date and allow CAT Reporters six months to review and comment on the Technical Specifications before they are finalized. FIF Letter at 37–38.

+
+
fn +

1654 FIF Letter at 38.

+
+
fn +

1655 TR Letter at 5. Thomson Reuters noted the review of Technical Specifications related to the expansion of OATS to all NMS equities took four months, and specifications for changes to EBS to support large trader reporting took ten months to finalize. Id.

+
+
fn +

1656 FIF Letter at 36, 37–38; see also SIFMA Letter at 24.

+
+
fn +

1657 FIF Letter at 37.

+
+
fn +

1658 Id. at 91.

+
+
fn +

1659 Response Letter I at 41.

+
+
fn +

1660 Id.

+
+
fn +

1661 Id.

+
+
fn +

1662 Id.

+
+
fn +

1663 Response Letter II at 7–8.

+
+
fn +

1664 Response Letter III at 12–13.

+
+
fn +

1665 See supra note 1663 and accompanying text.

+
+
fn +

1666 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10.

+
+
fn +

1667 Response Letter II at 21.

+
+
fn +

1668 See Section IV.D.8.b, supra.

+
+
fn +

1669 Specifically, the Commission is amending Appendix C, Section C.10(a) of the Plan to state that the Plan Processor will begin developing the Technical Specifications for Industry Member reporting of Customer Account Information and Customer Identifying Information no later than fifteen months before Industry Members are required to begin reporting data to the Central Repository. The Plan Processor will also begin developing the Technical Specifications for order data reporting at that time. In addition, the Commission is amending Appendix C, Section C.10(a) of the Plan to state that the Plan Processor will publish iterative drafts of the Technical Specifications for Industry Member reporting of Customer Account Information and Customer Identifying Information, as well as Industry Member reporting of order data, as needed before the final versions of these Technical Specifications are published.

+
+
fn +

1670 The milestones listed in Appendix C, Section C.10(a) apply to the customer definition process described in Section 6.4(d)(iv), which requires Industry Members to submit both Customer Account Information and Customer Identifying Information. See Section IV.D.4.a(1), supra.

+
+
fn +

1671 See Section III.5.d, supra.

+
+
fn +

1672 See Section IV.D.8.a, supra (discussing Commission amendments to the Technical Specifications and other milestones set forth in Section C.10 of Appendix C).

+
+
fn +

1673 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10.

+
+
fn +

1674 See Section IV.D.8.a, supra.

+
+
fn +

1675 As amended, the Plan will require that the Plan Processor will begin developing Technical Specifications for Industry Member submission of order data no later than fifteen months before Industry Members are required to begin reporting this data and will publish the final Technical Specifications no later than one year before Industry Members are required to begin reporting. Id.

+
+
fn +

1676 Fidelity Letter at 6.

+
+
fn +

1677 Id. at 3, 5–6.

+
+
fn +

1678 Id.

+
+
fn +

1679 The Participants noted that technical specifications for other NMS plans, such as the Tick Size Pilot Plan, have not been filed with the SEC. Response Letter I at 42.

+
+
fn +

1680 Response Letter I at 42.

+
+
fn +

1681 See Section IV.D.15.a, supra.

+
+
fn +

1682 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10. The Commission also believes that the details regarding data reporting and recording included in the CAT NMS Plan itself are sufficient for CAT Reporters to begin the process of preparing their systems for CAT reporting.

+
+
fn +

1683 See id. at Section 6.9(c).

+
+
fn +

1684 17 CFR 242.613(h)(1)

+
+
fn +

1685 See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).

+
+
fn +

1686 TR Letter at 5; FIF Letter at 91; UnaVista Letter at 2.

+
+
fn +

1687 TR Letter at 5 (recommending that the CAT Technical Specifications should include all scenarios currently covered in the OATS technical specification as well as additional scenarios on new processes related to the Customer definition process and options order reporting and that all scenarios required to meet the CAT NMS Plan Appendix D, Reporting & Linkage Requirements should be considered including step-outs, cancel-rebills, bunched orders and manual order processing); UnaVista Letter at 2.

+
+
fn +

1688 TR Letter at 5.

+
+
fn +

1689 FIF Letter at 124, 128.

+
+
fn +

1690 Id. at 124.

+
+
fn +

1691 UnaVista Letter at 2 (noting further that CAT certification courses, webinars, user groups and a forum for FAQs may improve knowledge transfer).

+
+
fn +

1692 Data Boiler Letter at 9–10.

+
+
fn +

1693 Response Letter I at 40.

+
+
fn +

1694 See CAT NMS Plan, supra note 5, at Section 6.9(b).

+
+
fn +

1695 See CAT NMS Plan, supra note 5, at Section 8.5(a).

+
+
fn +

1696 Id.

+
+
fn +

1697 See id. at Article VIII.

+
+
fn +

1698 SIFMA Letter; KCG Letter; DAG Letter.

+
+
fn +

1699 SIFMA Letter at 19; DAG Letter at 5.

+
+
fn +

1700 SIFMA Letter at 29.

+
+
fn +

1701 Id. at 14.

+
+
fn +

1702 KCG Letter at 5.

+
+
fn +

1703 Id.

+
+
fn +

1704 Id.

+
+
fn +

1705 Participants’ Letter I at 1.

+
+
fn +

1706 Id.

+
+
fn +

1707 Id.

+
+
fn +

1708 See id. The Participants also suggested conforming amendments to: Article I, to remove the definition of Capital Account; Article II, to state that the Company’s activities also shall be consistent with its tax exempt status; Articles III, IX, and XII and Appendix C to eliminate certain references to the Participants’ Capital Accounts and provisions regarding the Company’s potential taxation as a partnership and its distributions and allocations; and Article X, to state that certain distributions after an event of dissolution shall be made to such persons or institutions as is consistent with the purposes of the Company and with Section 501(c)(6) of the Internal Revenue Code. See id.

+
+
fn +

1709 See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i). The Commission notes that, although Section 11.1(b) of the CAT NMS Plan states that the Participants will file fees for Industry Members pursuant to Section 19(b) of the Exchange Act, the Participants could choose to submit the proposed fee schedule to the Commission as individual SROs pursuant to Rule 19b–4 under the Exchange Act or jointly as Participants to an NMS plan pursuant to Rule 608 of Regulation NMS. See 17 CFR 240.19b-4; 17 CFR 242.608. Because the proposed fee schedule would establish fees, whether the Participants individually file it pursuant to Section 19(b)(3)(A)(ii) of the Act, or jointly file it pursuant to Rule 608(b)(3)(i) of Regulation NMS, the proposed fee filings will be eligible for immediate effectiveness. See 15 U.S.C. 78s(b)(3)(A)(ii); 17 CFR 242.608(b)(3)(i). The Commission also notes that publication will be subject to the filing of the fee proposal by the Participants that satisfies the requirements of the Exchange Act. If the Participants file the proposed fee schedule pursuant to Rule 19b-4(f)(2) and the Commission deems such fees not to meet applicable statutory standards, the Commission summarily may temporarily suspend the fees if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78s(b)(3)(C). If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) to determine whether the proposed rule should be approved or disapproved. See 15 U.S.C. 78s(b)(3)(A). If the Participants file the proposed fee schedule pursuant to Rule 608(b)(3)(i), the Commission may summarily abrogate the fees and require them to be refiled in accordance with Rule 608(a)(1) and reviewed in accordance with Rule 608(b)(2) if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Exchange Act. See 17 CFR 242.608(b)(3)(iii).

+
+
fn +

1710 Id.

+
+
fn +

1711 The Commission defers, however, to the Internal Revenue Service regarding whether CAT NMS, LLC meets all the necessary requirements to so qualify.

+
+
fn +

1712 To qualify as a business league, an organization must “not [be] organized for profit and no part of the net earnings of [the organization can] inure[] to the benefit of any private shareholder or individual.” 26 U.S.C. § 501(c)(6).

+
+
fn +

1713 See supra note 1708.

+
+
fn +

1714 The CAT NMS Plan defines “Execution Venue” as “a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).” See CAT NMS Plan, supra note 5, at Section 1.1. The CAT NMS Plan categorizes FINRA as an Execution Venue because it has trades reported by its members to its trade reporting facilities (“TRFs”) for reporting transactions effected otherwise than on an exchange. See id. at Section 11.3(i).

+
+
fn +

1715 See id. at Section 11.3(a)(i)–(ii); Section 11.3(b); Appendix C, at Section B.7(b)(iv)(B).

+
+
fn +

1716 See id. at Section 11.3(a)(i).

+
+
fn +

1717 See id. at Section 11.3(a)(ii).

+
+
fn +

1718 See id. at Section 11.3(b); Appendix C, Section B.7(b)(iv)(B).

+
+
fn +

1719 KCG Letter at 3; DAG Letter at 4; see also FSR Letter at 9–10 (noting the ultimate cost of the CAT will be in the billions of dollars, “which will be passed-down to the Industry Members and investors through new fees”).

+
+
fn +

1720 DAG Letter at 4; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1721 SIFMA Letter at 14 (noting that the Participants fund similar systems like OATS themselves and then a portion of those costs are borne by Industry Members through fees); DAG Letter at 5.

+
+
fn +

1722 SIFMA Letter at 14.

+
+
fn +

1723 Id.

+
+
fn +

1724 Id. at 17. The commenter further noted that the Plan does not address how new costs resulting from regulatory research needs are allocated, providing as an example if the Commission requested a significant increase in the Central Repository’s processing capability to facilitate a large-scale analysis related to a market structure study, opining that it would be inappropriate to require Industry Members to pay for Participant-specific system enhancements through the general allocation of CAT costs. Id. at 18.

+
+
fn +

1725 Id. at 15.

+
+
fn +

1726 Id.; see also DAG Letter at 4–5.

+
+
fn +

1727 SIFMA Letter at 29.

+
+
fn +

1728 SIFMA Letter, DAG Letter; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1729 Response Letter II at 9–10 (citing 17 CFR 242.613(a)(1)(vii)(D) and Adopting Release, supra note 14, at 45795).

+
+
fn +

1730 Response Letter II at 13.

+
+
fn +

1731 Id.

+
+
fn +

1732 Id. at 10.

+
+
fn +

1733 Id.

+
+
fn +

1734 SIFMA Letter at 17–18; DAG Letter at 4.

+
+
fn +

1735 Response Letter II at 16. Specifically, the Participants stated that they expect to realize approximately $10.6 million in cost savings associated with the retirement of existing systems when moving to the CAT. However, they also said that they will incur approximately $17.9 million in expenses associated with complying with the CAT reporting requirements, and an additional $23.2 million in expenses related to the implementation of surveillance programs.

+
+
fn +

1736 Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require that an exchange or association have the capacity to be able to carry out the purposes of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-3(b)(2). See e.g., Schedule A to the By-Laws of FINRA, Section 1(a) (stating “FINRA shall, in accordance with this section, collect member regulatory fees that are designed to recover the costs to FINRA of the supervision and regulation of members, including performing examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities”). As SROs, the Participants have an obligation to be so organized and have the capacity to be able to carry out the purposes of the Exchange Act, and to enforce compliance by their members with the Exchange Act and their rules. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-3(b)(2).

+
+
fn +

1737 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).

+
+
fn +

1738 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).

+
+
fn +

1739 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).

+
+
fn +

1740 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).

+
+
fn +

1741 KCG Letter; SIFMA Letter; Fidelity Letter; FSR Letter; DAG Letter; Data Boiler Letter; Wachtel Letter.

+
+
fn +

1742 See DAG Letter at 4 (noting that the CAT NMS Plan estimates that 88% of the annual costs of CAT would be allocated to Industry Members, and that the Participants additionally intend to require Industry Members to help fund the creation and ongoing costs of CAT, significantly increasing the burden on Industry Members); KCG Letter at 4; SIFMA Letter at 12–13 (noting that the total estimated annual cost of the CAT NMS Plan would be $1.7 billion, of which $1.5 billion, or 88% of the costs for the operation of CAT, would be borne by Industry Members). One of these commenters stated that, although not mentioned in the CAT NMS Plan, it believed the Participants anticipate allocating 75% of CAT Central Repository build and operational costs to Industry Members and 25% to Execution Venues, thereby shifting the majority of CAT costs away from the SROs and on the Industry Members, and increasing the Industry Member portion of annual CAT‐related costs from approximately 88% to more than 96%. KCG Letter at 4. That commenter stated that “[t]his methodology is inequitable and serves to underscore the inherent conflicts of interest the SROs face with respect to CAT funding and the effects of precluding broker-dealers from meaningfully participating in management of the CAT.” KCG Letter at 4–5.

+
+
fn +

1743 SIFMA Letter at 13.

+
+
fn +

1744 Id. at 18.

+
+
fn +

1745 Fidelity Letter at 5.

+
+
fn +

1746 SIFMA Letter; DAG Letter.

+
+
fn +

1747 DAG Letter at 5.

+
+
fn +

1748 SIFMA Letter at 16. This commenter noted that the CAT NMS Plan provides only a high-level description of a funding model that reflects no input from broker-dealers and contains very little information on how costs will be allocated between broker-dealers and Participants. Id. at 13.

+
+
fn +

1749 Response Letter II at 10. The Participants stated that the funding model provides a framework for the recovery of the costs to create, develop and maintain the CAT, and is not meant to address the cost of compliance for Industry Members and Participants with the reporting requirements of Rule 613.

+
+
fn +

1750 DAG Letter at 5.

+
+
fn +

1751 Response Letter II at 17–18.

+
+
fn +

1752 SIFMA Letter at 13; DAG Letter at 4.

+
+
fn +

1753 Response Letter II at 18.

+
+
fn +

1754 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).

+
+
fn +

1755 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).

+
+
fn +

1756 See Section IV.F.1, supra.

+
+
fn +

1757 SIFMA Letter at 16–17; Data Boiler Letter at 15; see also DAG Letter at 5 (urging additional transparency related to the funding model based on market share and message traffic).

+
+
fn +

1758 SIFMA Letter at 17.

+
+
fn +

1759 Id.

+
+
fn +

1760 Id. at 16.

+
+
fn +

1761 Id. at 17–18.

+
+
fn +

1762 Id. at 16–17. The commenter urged the Participants to explain why they would not use the market share method of allocation for non-ATS Industry Members.

+
+
fn +

1763 Data Boiler Letter at 15.

+
+
fn +

1764 Id.

+
+
fn +

1765 Id.

+
+
fn +

1766 Response Letter II at 11.

+
+
fn +

1767 Id.

+
+
fn +

1768 Id.

+
+
fn +

1769 Id.

+
+
fn +

1770 Id. at 12.

+
+
fn +

1771 “Participant complexes” refers to Affiliated Participants, which include single entities that hold self-regulatory licenses for multiple exchanges. The Plan defines “Affiliated Participant” as “any Participant controlling, controlled by, or under common control with another Participant.” See CAT NMS Plan, supra note 5, at Section 1.1.

+
+
fn +

1772 Response Letter II at 12.

+
+
fn +

1773 SIFMA Letter at 17–18.

+
+
fn +

1774 Data Boiler Letter at 15.

+
+
fn +

1775 Response Letter II at 14.

+
+
fn +

1776 SIFMA Letter at 17.

+
+
fn +

1777 Response Letter II at 16. As an example, the Participants stated that a firm with a large volume of quotes would likely be categorized by the proposed funding model in an upper fee tier instead of being assessed a fee for its message traffic directly as it would be under “a more directly metered model.”

+
+
fn +

1778 See Notice, supra note 5, at 30740.

+
+
fn +

1779 The Commission notes that the Industry Member that operates an ATS also will be subject to message traffic fees. Section 11.3(b) of the CAT NMS Plan states: “The Operating Committee will establish fixed fees to be payable by Industry Members, based on the message traffic generated by such Industry Member. . . . For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that are sponsored by such Industry Member, and (ii) routing orders to and from any ATS sponsored by such Industry Member.” See CAT NMS Plan, supra note 5, at Section 11.3(b).

+
+
fn +

1780 Section 11.3(a)(i) of the CAT NMS Plan states: “Each Execution Venue that: (A) executes transactions; or (B) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stock or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stock and OTC Equity Securities…” Section 11.3(b) applies to Execution Venues transacting in Listed Options, stating: “Each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue…” See CAT NMS Plan, supra note 5, at Section 11.3(a)(i)–(ii).

+
+
fn +

1781 See Notice, supra note 5, at 30740. The Commission solicited comment on two Commission-proposed alternatives pertaining to fees imposed on ATSs. In the first alternative, the Commission proposed excluding ATS volume from TRF volume. The Commission stated that this alternative would allow SROs that operate TRFs (currently only FINRA) to avoid paying Execution Venue fees for volume originating from an ATS execution and would avoid double-counting ATS volume as share volume. See id. at 30768. The Commission also solicited comment on not charging Industry Members for message traffic to and from their ATSs while still assessing fees to ATSs as Execution Venues or exchange Industry Members for their message traffic. The Commission explained that this alternative would mitigate incentives for Industry Members to route their orders in order to minimize costs under the proposed funding model. Id.

+
+
fn +

1782 Response Letter II at 13.

+
+
fn +

1783 Further, the Commission believes that the tiered fee structure effectively mitigates a concern expressed by a commenter that charging for message traffic would amount to a “financial transaction tax” that would negatively impact the financial markets. See Data Boiler Letter at 15.

+
+
fn +

1784 SIFMA Letter at 17–18.

+
+
fn +

1785 See 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-3(b)(5).

+
+
fn +

1786 See 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).

+
+
fn +

1787 See supra note 1709.

+
+
fn +

1788 SIFMA Letter; FSI Letter; KCG Letter; Fidelity Letter at 5; DAG Letter. One commenter generally supported additional transparency into the funding model with respect to market share and message traffic. See DAG Letter at 5; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1789 SIFMA Letter at 29.

+
+
fn +

1790 Id. at 14.

+
+
fn +

1791 Id.

+
+
fn +

1792 KCG Letter at 5.

+
+
fn +

1793 FSI Letter at 6.

+
+
fn +

1794 Fidelity Letter at 5.

+
+
fn +

1795 Data Boiler Letter; SIFMA Letter.

+
+
fn +

1796 Data Boiler Letter at 15.

+
+
fn +

1797 SIFMA Letter at 18.

+
+
fn +

1798 Id.

+
+
fn +

1799 SIFMA Letter; Better Markets Letter; FSR Letter; DAG Letter; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1800 SIFMA Letter at 18, 30 (stating that if Industry Members must pay a user fee to access their own CAT data, then there should be also be a user fee for the Participants); FSR Letter at 10; DAG Letter at 5; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1801 Better Markets Letter at 5.

+
+
fn +

1802 Id. at 6.

+
+
fn +

1803 Response Letter II at 17.

+
+
fn +

1804 Id.

+
+
fn +

1805 Id. at 17 n.60.

+
+
fn +

1806 Id. at 17.

+
+
fn +

1807 SIFMA Letter at 15.

+
+
fn +

1808 Response Letter II at 15.

+
+
fn +

1809 Id.

+
+
fn +

1810 See 17 CFR 242.613(a)(1)(vii)(D).

+
+
fn +

1811 See 17 CFR 240.19b-4(f)(2); see also 15 U.S.C. 78s(b)(3)(A); 17 CFR 242.608; supra note 1756.

+
+
fn +

1812 SIFMA Letter at 18; FSR Letter at 10, DAG Letter at 5; see also STA Letter at 1 (supporting the DAG Letter’s cost and funding recommendations).

+
+
fn +

1813 Better Markets Letter at 6.

+
+
fn +

1814 Id. at 5.

+
+
fn +

1815 See Section V.F.3.b, infra, for additional discussion of these comments. As it relates to fees that the Operating Committee may impose for access to and use of the CAT for regulatory and oversight purposes, the Commission interprets the provisions in the Plan relating to the collection of fees as applying only to Participants and Industry Members, and thus the Commission would not be subject to such fees.

+
+
fn +

1816 See Notice, supra note 5, at 30635.

+
+
fn +

1817 CAT NMS Plan, supra note 5, at Section 3.3.

+
+
fn +

1818 See id. at Section 3.3(b); see also, Exchange Act Section 11A(b)(5), 15 U.S.C. 78k-l(b)(5) (which provides that a prohibition or limitation on access to services by a registered securities information processor must be reviewed by the Commission upon application by an aggrieved person).

+
+
fn +

1819 17 CFR 242.608(d).

+
+
fn +

1820 See CAT NMS Plan, supra note 5, at Section 6.6.

+
+
fn +

1821 Id.

+
+
fn +

1822 See Section IV.D.6.a, supra.

+
+
fn +

1823 See Section IV.D.14, supra.

+
+
fn +

1824 See Section IV.D.12, supra.

+
+
fn +

1825 See Section IV.D.11, supra.

+
+
fn +

1826 See Section IV.D.13, supra

+
+
fn +

1827 See Section III.6., supra.

+
+
fn +

1828 See supra note 1709.

+
+
fn +

1829 See Section IV.D.13, supra.

+
+
fn +

1830 See Section IV.B.4., supra. This assessment can be provided in conjunction with an annual written assessment required by Rule 6.6 of the Plan.

+
+
fn +

1831 See Section IV.D.6.m, supra. This report may be provided in conjunction with an annual written assessment required by Rule 6.6 of the Plan.

+
+
fn +

1832 See Section IV.D.4.a, supra. This assessment may be provided in conjunction with an annual written assessment required by Rule 6.6 of the Plan.

+
+
fn +

1833 See Section IV.F.3., supra.

+
+
fn +

1834 See Section IV.D.11.b., supra.

+
+
fn +

1835 See CAT NMS Plan, supra note 5.

+
+
fn +

1836 The Commission noted current SRO audit trail limitations in the Proposing Release and the Adopting Release. See Proposing Release, supra note 14, at 32563–68; Adopting Release, supra note 14, at 45726–30. Rule 613 is designed to address these limitations.

+
+
fn +

1837 See Adopting Release, supra note 14, at 45727 (discussing four “qualities” of trade and order data that impact the effectiveness of core SRO and Commission regulatory efforts: accuracy, completeness, accessibility, and timeliness); see also Section V.E. infra, for a detailed discussion of the expected benefits of the CAT NMS Plan.

+
+
fn +

1838 See Section V.E.2, infra.

+
+
fn +

1839 See CAT NMS Plan, supra note 5, at Sections 6.3, 6.4; see also 17 CFR 242.613(c)(7).

+
+
fn +

1840 The CAT NMS Plan requires that CAT Reporters who are Industry Members synchronize their business clocks to within 50 milliseconds of the time maintained by the NIST, which will increase the precision of the timestamps provided by the 39% of broker-dealers who currently synchronize their clocks with less precision than what is called for by the Plan. See FIF Clock Offset Survey, supra note 247. Further, the Commission has amended the Plan to require exchanges to synchronize their business clocks to within 100 microseconds. While this is similar to current practice, this requirement should still provide the greater ability for regulators to sequence unrelated events in a market reconstruction by anchoring lifecycles to events at exchanges. Independent of the potential time clock synchronization benefits, the order linking data that will be captured in CAT should increase the proportion of events that could be sequenced accurately. This reflects the fact that some records pertaining to the same order could be sequenced by their placement in an order lifecycle (e.g., an order submission must have occurred before its execution) without relying on timestamps. This information may also be used to partially sequence surrounding events, particularly with the Plan modifications.

+
+
fn +

1841 See CAT NMS Plan, supra note 5, at Appendix C, Section A.2, Appendix D, Section 8.1; see also 17 CFR 242.613(e)(2).

+
+
fn +

1842 CAT Data will be reported by 8:00 a.m. ET on T+1 and made available to regulators in raw form after it is received and passes basic formatting validations with an error correction process completed by 8:00 a.m. ET on T+5. While the Plan does not specify exactly when these validations would be complete, the requirement to link records by 12:00 p.m. ET on T+1 gives a practical upper bound on this timeline. See CAT NMS Plan, supra note 5, at Appendix C, Sections A.2(a), A.3(a), Appendix D, Section 6.2.

+
+
fn +

1845 See Section V.E.2, infra.

+
+
fn +

1843 Id. at Appendix D, Sections 8.1.1, 8.1.2.

+
+
fn +

1844 See Section V.E.3.d, infra.

+
+
fn +

1846 See Section V.F.1 and Section V.F.2, infra for discussion of comments received on cost estimates, and revisions the Commission made to those estimates in response.

+
+
fn +

1847 See Section V.F.2, infra.

+
+
fn +

1848 The economic analysis discusses duplicative reporting costs in Section V.F.2, infra.

+
+
fn +

1849 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8; see also Section V.G, infra

+
+
fn +

1850 See Adopting Release, supra note 14, at 45789.

+
+
fn +

1851 17 CFR 242.613(a)(1).

+
+
fn +

1852 See Notice, supra note 5, at 30651–30797.

+
+
fn +

1853 Id. at 30654–30656.

+
+
fn +

1854 See Data Boiler Letter at 9, 30; SIFMA Letter at 6, 13, 15–16, 23–24,32, 39, 40, 42, 44–45; FSR Letter at 9–10; Fidelity Letter at 6; TR Letter at 4; FSI Letter at 5–6; DAG Letter at 5; UnaVista Letter at 2.

+
+
fn +

1855 See Adopting Release, supra note 14, at 45727.

+
+
fn +

1856 Id. at 45730.

+
+
fn +

1857 Id. at 45727. Accuracy refers to whether the data about a particular order or trade is correct and reliable. Completeness refers to whether a data source represents all market activity of interest to regulators, and whether the data is sufficiently detailed to provide the information regulators require. While current data sources provide the trade and order data required by existing rules and regulations, those sources generally do not provide all of the information of interest to regulators in one consolidated audit trail. Accessibility refers to how the data is stored, how practical it is to assemble, aggregate, and process the data, and whether all appropriate regulators could acquire the data they need. Timeliness refers to when the data is available to regulators and how long it would take to process before it could be used for regulatory analysis. As explained in the Baseline, Section V.D.2, infra, the trading and order data currently available to regulators suffers from deficiencies in all four dimensions.

+
+
fn +

1858 See Adopting Release, supra note 14, at 45730.

+
+
fn +

1859 See Section V.E.2.a, infra.

+
+
fn +

1860 See Section V.D.2.b, infra.

+
+
fn +

1861 See Adopting Release, supra note 14, at 45732.

+
+
fn +

1862 See Section V.D.1.c.(1) and Section V.D.1.c.(3), infra.

+
+
fn +

1863 See Adopting Release, supra note 14, at 45730.

+
+
fn +

1864 Rule 613 requires the Plan to discuss “[a] plan to eliminate existing rules and systems (or components thereof) that would be rendered duplicative by the consolidated audit trail.” 17 CFR 242.613(a)(1)(ix); see also CAT NMS Plan, supra note 5, at Appendix C Section C.9.

+
+
fn +

1865 In addition to the CAT NMS Plan, the economic analysis in the Notice analyzed, for example, the Exemptive Relief Letter (see supra note 21), a survey of clock synchronization practices and costs (see supra note 247), discussions with members of the industry and service bureaus (see Section V.F.1.c and Section V.F.1.d, infra), data from FINRA (see Section V.F.1.c.(2).B., infra), and academic literature. See Notice, supra note 5, at 30655–56.

+
+
fn +

1866 As discussed below, the Commission notes that many of the uncertainties that existed at the time of the Notice will continue upon approval of the Plan. For example, the Funding Model and Technical Specifications will be determined after a Plan Processor is selected.

+
+
fn +

1867 See Notice, supra note 5, at 30655–56.

+
+
fn +

1868 See CAT NMS Plan, supra note 5, at Article VI. The Plan Participants have engaged in a bidding process to select a Plan Processor, and the leading candidate bidders have proposed different solutions. In certain instances, the Plan Participants have decided to adopt the solutions proposed by whichever bidder they select.

+
+
fn +

1869 See Section V.F.4.b, infra, for additional discussion of risks and uncertainties related to data security.

+
+
fn +

1870 Rule 613(e)(1) requires the CAT NMS Plan to create a Central Repository to collect, link, and store CAT Data and to make that data available to regulators. See 17 CFR 242.613(e)(1).

+
+
fn +

1871 The CAT NMS Plan contains minimum standards and principles for setting many of Technical Specifications, see CAT NMS Plan, supra note 5, at Section 6.9, and the Commission’s economic analysis reflects those minimum standards and principles. However, because the detailed Technical Specifications are not yet finalized by the Participants, the Commission cannot fully assess any corresponding costs and benefits.

+
+
fn +

1872 Id. at Section 6.9.

+
+
fn +

1873 Many commenters identified uncertainties related to the economic effects of the Plan that were consistent with those mentioned in the Notice. See SIFMA Letter at 6, 13, 15–16, 23, 32, 39, 40, 42, 44, 45; FIF Letter at 36, 50, 84–85, 86–90; FSI Letter at 5–6; FSR Letter at 9–10; DAG Letter at 5; UnaVista Letter at 2; TR Letter at 4; Fidelity Letter at 6; Data Boiler Letter at 9, 26, 30. Commenters also discussed several implications of the uncertainty in the Plan that were consistent with the Commission’s statement in the Notice that it cannot assess how and to what extent these elements of the Plan could affect the overall economic effects of the Plan. See FSR Letter at 9; FSI Letter at 5–6; TR at 4. Others highlighted implications for the Commission to consider. See, e.g., Fidelity Letter at 6; SIFMA Letter at 23–24, 44.

+
+
fn +

1874 For a full discussion of the governance provisions and how they may mitigate concerns about many of the sources of potential uncertainty in the economic effects of the Plan, see Section V.E.3.d, infra.

+
+
fn +

1875 See Notice, supra note 5, at 30656–59.

+
+
fn +

1876 Id.

+
+
fn +

1877 Id. at 30656–57.

+
+
fn +

1878 Id.

+
+
fn +

1879 Id. Examples of recent market reconstructions include the Commodity Futures Trading Commission (“CFTC”) and SEC’s analysis of the May 6, 2010 “Flash Crash,” analysis of equity market volatility on August 24, 2015, and the multi-agency report on the U.S. Treasuries market on October 15, 2014.

+
+
fn +

1880 See Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues (September 30, 2010) (“Flash Crash Analysis”), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.

+
+
fn +

1881 See Staff of the Office of Analytics and Research, Division of Trading and Markets, Research Note: Equity Market Volatility on August 24, 2015 (Dec. 2015), available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf; see also Austin Gerig and Keegan Murphy, The Determinants of ETF Trading Pauses on August 24th, 2015, White Paper (February 2016), available at http://www.sec.gov/marketstructure/research/determinants_eft_trading_pauses.pdf.

+
+
fn +

1882 See U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading Commission, Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (July 13, 2015), available at http://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014joint-report.pdf.

+
+
fn +

1883 See Notice, supra note 5, at 30657.

+
+
fn +

1884 Id.

+
+
fn +

1885 See Laura Tuttle, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks (October 2013) available at http://www.sec.gov/divisions/riskfin/whitepapers/alternative-trading-systems-102013.pdf; Laura Tuttle, OTC Trading: Description of Non-ATS OTC Trading in National Market System Stocks (March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.

+
+
fn +

1886 See Securities Exchange Act Release No. 74892, Order Approving the National Market System Plan to Implement a Tick Size Pilot Program (May 6, 2015), 80 FR 27514, 27534, 27541 (May 13, 2015); see also Charles Collver, A Characterization of Market Quality for Small Capitalization US Equities (September 2014), available at http://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.

+
+
fn +

1887 See SRO Supplemental Joint Assessment, available at http://www.sec.gov/comments/4631/4-631.shtml; Memo to File from the Division of Economic and Risk Analysis regarding the Cornerstone Analysis of the Impact of Straddle States on Options Market Quality (February 8, 2016), available at http://www.sec.gov/comments/4-631/463142.pdf; see also Gerig and Murphy, supra note 1881.

+
+
fn +

1888 See Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia Caglio regarding an Analysis of Short Selling Activity during the First Weeks of September 2008, (December 16, 2008), available at http://www.sec.gov/comments/s7-08-09/s70809369.pdf; Memo to Chairman Christopher Cox from Daniel Aromi and Cecilia Caglio regarding an Analysis of a Short Sale Price Test Using Intraday Quote and Trade Data (December 17, 2008), available at http://www.sec.gov/comments/s7-08-09/s70809368.pdf; Memo from the Office of Economic Analysis regarding an Analysis of the July Emergency Order Requiring a Pre-borrow on Short Sales (January 14, 2009) available at http://www.sec.gov/spotlight/shortsales/oeamemo011409.pdf.

+
+
fn +

1889 See Austin Gerig, High-Frequency Trading Synchronizes Prices in Financial Markets, (January 2015), available at http://www.sec.gov/dera/staff-papers/working-papers/dera-wp-hft-synchronizes.pdf; see also Staff of the Office of Analytics and Research, Division of Trading and Markets, Research Note: Equity Market Volatility on August 24, 2015 (December 2015), available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.

+
+
fn +

1890 See Notice, supra note 5, at 30657–59.

+
+
fn +

1891 17 CFR 242.613(f).

+
+
fn +

1892 See Notice, supra note 5, at 30657–58.

+
+
fn +

1893 FINRA conducts cross-market surveillance for approximately 99% of the listed equity market and approximately 70% of the listed options market. See Notice, supra note 5, at 30657.

+
+
fn +

1894 Response Letter I at 31.

+
+
fn +

1895 See Notice, supra note 5, at 30658.

+
+
fn +

1896 Id.

+
+
fn +

1897 Id. This estimate was based on Staff discussions with FINRA. See also FINRA Overview of Member Regulation, available at http://www.finra.org/industry/memberregulation.

+
+
fn +

1898 Id.

+
+
fn +

1899 See SEC, Examination Information for Entities Subject to Examination or Inspection by the Commission (June, 2014), available at http://www.sec.gov/about/offices/ocie/ocie_exambrochure.pdf.

+
+
fn +

1900 FINRA conducts regulatory examinations by contract on behalf of all the options and equities exchanges, except for the Chicago Stock Exchange, Inc. (“CHX”) and the National Stock Exchange, Inc. (“NSX”). Accordingly most exchanges also employ a risk-based approach to examination selection and scope. CHX examines members on a cycle basis. NSX recently resumed operations in December 2015. See Securities Exchange Act Release No. 76640 (December 14, 2015), 80 FR 79122 (December 18, 2015).

+
+
fn +

1901 See Notice, supra note 5, at 30658.

+
+
fn +

1902 Id. Examples of investigations of market manipulations include marking the close, order layering and spoofing, wash sales, and trading ahead. Layering and spoofing are manipulations where orders are placed close to the best buy or sell price with no intention to trade in an effort to falsely overstate the liquidity in a security.

+
+
fn +

1903 See Notice, supra note 5, at 30659.

+
+
fn +

1904 Id.

+
+
fn +

1905 Id. at 30659–62.

+
+
fn +

1906 Id. at 30659.

+
+
fn +

1907 Id. at 30659–60. The Notice provided further details on the reporting requirements of FINRA Rule 7440. Id. at 30659–60 nn.354–57.

+
+
fn +

1908 Id. at 30660. The Notice provided further details on the reporting requirements of options exchanges. Id. at 30660 nn.358–59. The Notice also outlined the reporting requirements of other SRO audit trails. Id. at 30660 n.364.

+
+
fn +

1909 Id. at 30660.

+
+
fn +

1910 Equity and option cleared reports show “the number of trades and daily cleared trade and share volume, by clearing member, for each equity and listed option security in which transactions took place. Regulators can query these reports directly through an internal online system that interfaces with the Depository Trust and Clearing Corporation (“DTCC”) data by security name and CUSIP number.” A CUSIP number is a “unique alphanumeric identifier assigned to a security and facilitates the clearance and settlement of trades in the security.” Id.

+
+
fn +

1911 Id. at 30661. The Notice provided further details on Rule 17a-25 and its reporting requirements. Id. at 30661, notes 368–369.

+
+
fn +

1912 Id. The Notice provided the definition of a “large trader” and further details on the reporting requirements of Rule 13h-1. Id.

+
+
fn +

1913 Id.

+
+
fn +

1914 Id.

+
+
fn +

1915 “Internal matching systems of broker-dealers may include Alternative Trading Systems (“ATSs”) or automated trading systems that provide liquidity to received orders without interacting on a registered exchange. The Commission understands that some broker-dealers rely on their clearing firms to collect and maintain records relating to routed orders on their behalf. Broker-dealers that operate their own internal matching systems are more likely to collect and maintain their own records.” Id. at 30662.

+
+
fn +

1916 Id.

+
+
fn +

1917 Id.

+
+
fn +

1918 Id.

+
+
fn +

1919 See Section V.D.2(a), supra.

+
+
fn +

1920 See Notice, supra note 5, at 30662–74.

+
+
fn +

1921 As proposed, the CAT NMS Plan also requires CAT Reporters to synchronize their time clocks to the time maintained by the NIST with an allowable drift of 50 milliseconds. See CAT NMS Plan, supra note 5, at Section 6.8. According to a survey conducted by the FIF, 39% of responding broker-dealers currently synchronize their clocks with less precision than what is called for by the CAT NMS Plan. Thus, the CAT NMS Plan would also increase the accuracy of the timestamps used by certain broker-dealers. See FIF Clock Offset Survey, supra note 247.

+
+
fn +

1922 Off-exchange activity includes currently reportable events that are not handled by a registered securities exchange.

+
+
fn +

1923 In this instance, “timeliness” refers to when the data are compiled at the source in question (e.g., when OATS receives data from reporting broker-dealers), not when they become available to regulators because that timeline can vary depending on the regulator in question. As shown in the “Direct Access for Regulators” column, it may still take several days, weeks, or months for regulators to be able to access the data. For example, while OATS reporters provide the data at T+1, the SEC must request OATS data in order to access it, which may take several days or weeks. This narrower definition of timeliness is not used throughout this economic analysis.

+
+
fn +

1924 Guidance from FINRA indicates that broker-dealers must “identify the party to the trade” through EBS fields such as “Primary Party Identifier,” but that party may be another broker-dealer rather than the ultimate customer. See FINRA, Electronic Blue Sheet Submissions, FINRA and ISG Extend Effective Date for Certain Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct. 2012), available at https://www.finra.org/sites/default/files/NoticeDocument/p194655.pdf. Similarly, under the large trader rule, persons exercising “investment discretion” are reported through EBS, but in some cases such persons are investment advisers rather than their customers. See Notice, supra note 5, at note 372 and accompanying text (discussing the large trader rule).

+
+
fn +

1925 Id. at 30664.

+
+
fn +

1926 Id.

+
+
fn +

1927 Data Boiler Letter at 30.

+
+
fn +

1928 See Notice, supra note 5, at 30664.

+
+
fn +

1929 Id.

+
+
fn +

1930 Id. (citing FINRA Rule 7470). At the time of the Notice, FINRA had granted approximately 50 such exemptions.

+
+
fn +

1931 Id. at 30665.

+
+
fn +

1932 Id.

+
+
fn +

1933 Id.

+
+
fn +

1934 Id.

+
+
fn +

1935 Id. for a full discussion of the impact on insider trading investigations.

+
+
fn +

1936 In the Notice, the Commission provided further details on the reporting of order display information (i.e., whether the size of the order is displayed or non-displayed) and special handling instructions in OATS data. The Commission also noted that this data is not directly available to all regulators, and that the Commission must request this data from FINRA. Id. at 30666 n.412.

+
+
fn +

1937 Id. at 30666.

+
+
fn +

1938 Id.

+
+
fn +

1939 While the Commission is sometimes able to acquire allocation time on trade blotters, not all broker-dealers keep records in a manner that facilitates efficient regulatory requests for allocation time information. Id.

+
+
fn +

1940 Id.

+
+
fn +

1941 TR Letter at 9; SIFMA Letter at 35; FIF Letter at 83.

+
+
fn +

1942 Response Letter I at 22.

+
+
fn +

1943 Response Letter I at 22.

+
+
fn +

1944 See Notice, supra note 5, at 30680.

+
+
fn +

1945 Id. at 30666–71.

+
+
fn +

1946 As used herein, the term “data errors” refers to instances where data reflect false information or are missing information such that they do not reflect order events that occurred in the market fully and accurately. Under this definition of “data errors,” a trading error or an order entry error would not be a “data error.” For example, if a trader submitted an order to an exchange with an order size of 100,000, an accurate order record would contain an order size of 100,000. If the trader actually intended to enter the order size as 1,000, the accurate order record would still be 100,000 because that would reflect the actual state of the market at the time. In other words, the 100,000 order size is not a “data error.” If the trader later corrected the order size, accurate data would reflect the subsequent corrections while still preserving the accurate state of the market at the time.

+
+
fn +

1947 Id. at 30666–67.

+
+
fn +

1948 Id.

+
+
fn +

1949 Id.

+
+
fn +

1950 Anonymous Letter I at 9–10; Anonymous Letter II at 1–2; FIF Letter at 55, 60.

+
+
fn +

1951 FIF Letter at 60.

+
+
fn +

1952 FIF Letter at 55.

+
+
fn +

1953 FIF Letter at 54.

+
+
fn +

1954 Anonymous Letter I at 9–10; Anonymous Letter II at 1–2.

+
+
fn +

1955 See Notice, supra note 5, at 30667.

+
+
fn +

1956 Id. at 30669.

+
+
fn +

1957 See FIF Clock Offset Survey, supra note 247.

+
+
fn +

1958 See Notice, supra note 5, at 30668.

+
+
fn +

1959 Id. at 30683.

+
+
fn +

1960 Id. at 30669.

+
+
fn +

1961 Id. at 30669–70.

+
+
fn +

1962 Id.

+
+
fn +

1963 Id.

+
+
fn +

1964 FIF Letter at 118.

+
+
fn +

1965 FIF Letter at 118.

+
+
fn +

1966 Id.

+
+
fn +

1967 TR Letter at 7; FIF Letter at 97–99.

+
+
fn +

1968 Better Markets Letter at 8.

+
+
fn +

1969 Response Letter II at 4; FIF Letter 97–99, 116.

+
+
fn +

1970 Id.

+
+
fn +

1971 FIF Letter at 118.

+
+
fn +

1972 SIFMA Letter at 35. Specifically, this commenter explained that manual order taking involves taking an order via phone, fax, or email and then manually entering the order into an electronic order management system.

+
+
fn +

1973 Response Letter II at 4–5.

+
+
fn +

1974 Id.

+
+
fn +

1975 See Notice, supra note 5, at 30669.

+
+
fn +

1976 Id.

+
+
fn +

1977 Id. at 30667.

+
+
fn +

1978 See Securities Exchange Act Release No. 77565 (April 8, 2016), 81 FR 22136 (April 14, 2016).

+
+
fn +

1979 Id. at 30670.

+
+
fn +

1980 Id.

+
+
fn +

1981 Id.

+
+
fn +

1982 Id.

+
+
fn +

1983 Id.

+
+
fn +

1984 Id. at 30670–71.

+
+
fn +

1985 Id.

+
+
fn +

1986 Id.

+
+
fn +

1987 Anonymous Letter I at 12.

+
+
fn +

1988 See Notice, supra note 5, at 30661.

+
+
fn +

1989 See OATS Compliance FAQ at C84 available at www.finra.org/industry/faq-oatscompliance-faq.

+
+
fn +

1990 See Notice, supra note 5, at 30688–89.

+
+
fn +

1991 Id. at 30671.

+
+
fn +

1992 Id.

+
+
fn +

1993 FINRA does receive data from certain SROs on a daily basis and subsequently has direct access to that data. Id. at 30671 n.453.

+
+
fn +

1994 Id. at 30671–72.

+
+
fn +

1995 Id. at 30672.

+
+
fn +

1996 Id.

+
+
fn +

1997 Id.

+
+
fn +

1998 Id.

+
+
fn +

1999 Id.

+
+
fn +

2000 Id. at 30673. The Commission noted that some of the data sources described above can be accessed by SROs and the Commission without significant delay. For example, SROs and the Commission have some real-time direct access to public data and, through MIDAS, the Commission has next-day direct access to analytics that are based on public data, such as volumes over various time horizons. Furthermore, the Commission noted that FINRA receives audit trail data from exchanges pursuant to Regulatory Services Agreements at the end of each trading day. Id.

+
+
fn +

2001 Id.

+
+
fn +

2002 Id. The Commission also noted that it has been the Commission’s experience that trade blotter data requests can take weeks or in excess of a month depending on the scope of the request and how accustomed the broker-dealer is with fulfilling such requests. Id.

+
+
fn +

2003 Id.

+
+
fn +

2004 Id.

+
+
fn +

2005 Id. at 30674.

+
+
fn +

2006 Id.

+
+
fn +

2007 Id. at 30674–30708.

+
+
fn +

2008 Id. at 30674–77.

+
+
fn +

2009 Id. at 30675–76.

+
+
fn +

2010 Id. at 30676.

+
+
fn +

2011 As proposed, the CAT NMS Plan also requires CAT Reporters to synchronize their time clocks to the time maintained by the NIST with an allowable drift of 50 milliseconds. See CAT NMS Plan, supra note 5, at Section 6.8. According to a survey conducted by the Financial Information Forum (FIF), 39% of responding broker-dealers currently synchronize their clocks with less precision than what is called for by the CAT NMS Plan. Thus, the CAT NMS Plan would also increase the accuracy of the timestamps used by certain broker-dealers. See FIF Clock Offset Survey, supra note 247.

+
+
fn +

2012 Off-exchange activity includes currently reportable events that are not handled by a registered securities exchange.

+
+
fn +

2013 In this instance, “timeliness” refers to when the data are compiled at the source in question (e.g., when OATS receives data from reporting broker-dealers), not when they become available to regulators because that timeline can vary depending on the regulator in question. As shown in the “Direct Access for Regulators” column, it may still take several days, weeks, or months for regulators to be able to access the data. For example, while OATS reporters provide the data at T+1, the SEC must request OATS data in order to access it, which may take several days or weeks. This narrower definition of timeliness is not used throughout this economic analysis.

+
+
fn +

2014 Guidance from FINRA indicates that broker-dealers must “identify the party to the trade” through EBS fields such as “Primary Party Identifier,” but that party may be another broker-dealer rather than the ultimate customer. See FINRA, Electronic Blue Sheet Submissions, FINRA and ISG Extend Effective Date for Certain Electronic Blue Sheet Data Elements, Regulatory Notice 12-47 (Oct. 2012), available at https://www.finra.org/sites/default/files/NoticeDocument/p194655.pdf. Similarly, under the large trader rule, persons exercising “investment discretion” are reported through EBS, but in some cases such persons are investment advisers rather than their customers. See supra note 1912 and accompanying text (discussing the large trader rule).

+
+
fn +

2015 See Adopting Release, supra note 14, at 45727.

+
+
fn +

2016 Changes in all four data qualities affect certain data-driven regulatory activities. The benefits of the Plan derive from the changes to these regulatory activities.

+
+
fn +

2017 See Notice, supra note 5, at 30678.

+
+
fn +

2018 Id. at 30678–81.

+
+
fn +

2019 Id. at 30678.

+
+
fn +

2020 The Commission noted that SRO audit trails currently do not include the activity of firms that are not members of that SRO. And, currently only FINRA requires its members to report their off-exchange activity. While broker-dealers that trade off-exchange must be members of FINRA unless their activity fits the terms of the exemption in Rule 15b9-1, firms that qualify for the exemption in that rule and that are not FINRA members do not report their off-exchange activity to OATS. This exemption covers a large percentage of off-exchange activity. Broker-dealers that are not FINRA Members accounted for 48% of orders sent directly to ATSs in 2014, 40% in 2013, and 32% in 2012. Because all SROs are Participants in the Plan, under the Plan all broker-dealers with Reportable Events, including off-exchange, would be required to report the required CAT Data to the Central Repository. Id. at 30678–79.

+
+
fn +

2021 Id. at Section IV.D.2.b(1)A.

+
+
fn +

2022 “OTC Equity Security” is defined in the Plan as “any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.” Id. at 30679.

+
+
fn +

2023 Anonymous Letter at 6–9, 12–14, 17; Better Markets Letter at 7; Data Boiler Letter at 1,10–13, 17–18, 31; CBOE Letter at 1–2.

+
+
fn +

2024 See Notice, supra note 5, at 30679–81.

+
+
fn +

2025 Id. at Section IV.D.2.a(1) and Section IV.D.2.b.(1)b, supra. As discussed in the Notice, SRO audit trails typically do not provide customer information, but a recent FINRA rule change would require its members to report to OATS non-FINRA member customers who are broker-dealers.

+
+
fn +

2026 “Quote Sent Time” refers to the time that an Options Market Maker routes its quote, or any modification or cancellation thereof, to an exchange. Id. at 30755.

+
+
fn +

2027 See Notice, supra note 5, at Section IV.E.3.a for a discussion of adding new data fields and other requirements for upgrading the CAT Data after approval.

+
+
fn +

2028 In the Notice, the Commission acknowledged that the Participants are continuing to study gaps between current regulatory data sources and the Plan as filed. See Notice, supra note 5, at 30680–81; see also SEC Rule 613 – Consolidated Audit Trail (CAT) OATS – CAT Gap Analysis and SEC Rule 613 – Consolidated Audit Trail (CAT) Revised EBS – CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/index.html.

+
+
fn +

2029 See Notice, supra note 5, at 30680–81.

+
+
fn +

2030 FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 3–4, 11, 86–89.

+
+
fn +

2031 SIFMA Letter at 35.

+
+
fn +

2032 FIF Letter at 11.

+
+
fn +

2033 FIF Letter at 89.

+
+
fn +

2034 FIF Letter at 84; TR Letter at 9; SIFMA Letter at 25.

+
+
fn +

2035 FIF Letter at 28–29.

+
+
fn +

2036 FIF Letter at 29.

+
+
fn +

2037 Response Letter I at 37–38.

+
+
fn +

2038 Response Letter I at 21–22.

+
+
fn +

2039 Response Letter II at 21.

+
+
fn +

2040 See Notice, supra note 5, at 30679; see also Section V.E.2.c(3), infra.

+
+
fn +

2041 See Section IV.D.9, supra.

+
+
fn +

2042 See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2043 See Notice, supra note 5, at 30681–89.

+
+
fn +

2044 Id.

+
+
fn +

2045 See CAT NMS Plan, supra note 5, at Section 6.9.

+
+
fn +

2046 Id. at Section 6.9(b)(v).

+
+
fn +

2047 The CAT NMS Plan provides details regarding how the responsibility for these decisions would be shared between the Operating Committee and the Plan Processor, with the Plan Processor having responsibility for data definitions and interpretations. Id. at Section 6.9(c)(i).

+
+
fn +

2048 For example, the Completeness section in the Notice noted that the open/close indicator for equities does not exist in current data sources. See Notice, supra note 5, at 30681. The accuracy of the open/close indicator for equities would have been subject to Plan Processor discretion, because the Plan Processor would have had responsibility for defining the permitted values and interpreting when CAT Reporters would use such permitted values and the Plan Processor would not have had guidance from previous data sources on how to define or interpret such a field.

+
+
fn +

2049 See CAT NMS Plan, supra note 5, at Section 6.9(a). The Commission notes that the standards in Appendices C and D do not cover all decisions that would affect the accuracy of the data.

+
+
fn +

2050 Id. at Section 6.9(c)(i).

+
+
fn +

2051 FIF Letter at 85.

+
+
fn +

2052 TR Letter at 9; FIF Letter at 86.

+
+
fn +

2053 TR Letter at 9.

+
+
fn +

2054 TR Letter at 9.

+
+
fn +

2055 FIF Letter at 86.

+
+
fn +

2056 FIF Letter at 86, 89.

+
+
fn +

2057 The Participants responded to the comments on open/close more generally by requesting that the Commission clarify that the open/close indicator should not apply to equities, and did not respond regarding the definition. As noted elsewhere, modifications to the Plan will remove the open/close indicator for equities. See Section IV.D.4.c, supra.

+
+
fn +

2058 See Notice, supra note 5, at n.537. While the Commission would ultimately be able to correct such misinterpretations, regulators may not detect such a misinterpretation until the misinterpretation harms an investigation, exam, or other analysis.

+
+
fn +

2059 Id. at 30681–82.

+
+
fn +

2060 Id.

+
+
fn +

2061 Id.

+
+
fn +

2062 Id.

+
+
fn +

2063 See Section IV.D.11, supra for a complete summary of comments and the Commission’s discussion of those comments. Further, the Commission responds to comments relevant to alternatives that would reduce error rates below in Section V.H.2, infra.

+
+
fn +

2064 FIF Letter at 50–60; Anonymous Letter II at 2; SIFMA Letter at 6.

+
+
fn +

2065 FIF Letter at 60.

+
+
fn +

2066 FIF Letter at 55.

+
+
fn +

2067 FIF Letter at 60.

+
+
fn +

2068 Anonymous Letter II at 2.

+
+
fn +

2069 FIF Letter at 50; SIFMA Letter at 6.

+
+
fn +

2070 SIFMA Letter at 6.

+
+
fn +

2071 FIF Letter at 50.

+
+
fn +

2072 FIF Letter at 50.

+
+
fn +

2073 FIF Letter at 55.

+
+
fn +

2074 Response Letter I at 45.

+
+
fn +

2075 The Error Rate reports shall include each of the following—if the Operating Committee deems them necessary or advisable—“Error Rates by day and by delta over time, and Compliance Thresholds by CAT Reporter, by Reportable Event, by age before resolution, by symbol, by symbol type (e.g., ETF and Index) and by event time (by hour and cumulative on the hour)[.]” See CAT NMS Plan, supra note 5, at Section 6.1(o)(v).

+
+
fn +

2076 Response Letter I at 46.

+
+
fn +

2077 Response Letter I at 46.

+
+
fn +

2078 See CAT NMS Plan, supra note 5, at Appendix D, Section 7.2.

+
+
fn +

2079 See Notice, supra note 5, at 30667.

+
+
fn +

2080 See Section V.D.2.b(2)A, supra, which lists error types as rejects, unmatched exchange routes, inter firm received unmatched, inter-firm sent unmatched, out of sequence, and late reports.

+
+
fn +

2081 Id. at 30682.

+
+
fn +

2082 Id.

+
+
fn +

2083 See CAT NMS Plan, supra note 5, at Section 6.8(b).

+
+
fn +

2084 17 CFR 242.613(d)(3). This requirement does not apply to certain Manual Order Events, which are exempted from the requirement and are captured at one-second increments. Timestamp granularity on Manual Order Events is discussed separately in the Alternatives section.

+
+
fn +

2085 Id.

+
+
fn +

2086 For example, OPRA allows for timestamps in nanoseconds, and the other SIPs require timestamps in microseconds for equity trades and quotes. See Notice, supra note 5, at Section IV.D.2.b.(2).

+
+
fn +

2087 Current OATS rules require timestamps to be expressed to the nearest second, unless the member’s system expresses time in finer increments. As of September 2014, approximately 12% of OATS records contain timestamps greater than one millisecond. EBS records either do not contain times or express timestamps in seconds. Id.

+
+
fn +

2088 For example, under the requirements in the Plan, an order event at Broker-Dealer A could have a timestamp that is 1 millisecond sooner than an order event at Broker-Dealer B even if the event at Broker-Dealer B actually occurred 99 milliseconds sooner. This could occur if Broker-Dealer A’s systems are recording times 50 milliseconds ahead of NIST while Broker-Dealer B’s systems are recording times 50 milliseconds behind NIST. Both broker-dealers’ systems would be within the Plan’s allowable clock synchronization tolerance.

+
+
fn +

2089 See Notice, supra note 5, at 30684.

+
+
fn +

2090 FIF Letter at 112; Data Boiler Letter at 21.

+
+
fn +

2091 FIF Letter at 12.

+
+
fn +

2092 SIFMA Letter at 35.

+
+
fn +

2093 Data Boiler Letter at 21; Better Markets Letter at 8.

+
+
fn +

2094 Data Boiler Letter at 21.

+
+
fn +

2095 Better Markets Letter at 8.

+
+
fn +

2096 Better Markets Letter at 8.

+
+
fn +

2097 TR Letter at 7

+
+
fn +

2098 SIFMA Letter at 35; FIF Letter at 87, 89.

+
+
fn +

2099 FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 89.

+
+
fn +

2100 Data Boiler Letter at 21–22.

+
+
fn +

2101 FIF Letter at 115; SIFMA Letter at 34; Better Markets Letter at 8; Response Letter I at 38. However, Better Markets expressed the concern that gaming of the system could occur by writing algorithms to make automated orders appear as manual orders.

+
+
fn +

2102 Response Letter I at 28.

+
+
fn +

2103 Response Letter I at 37.

+
+
fn +

2104 Response Letter I at 38.

+
+
fn +

2105 See Section IV.D.13, supra.

+
+
fn +

2106 See Section IV.D.13.a(1), supra.

+
+
fn +

2107 See Notice, supra note 5, at 30669 for a definition of unrelated order events as it relates to this analysis and the analysis described there.

+
+
fn +

2108 Id. at 30683. The Commission discussed that these estimates were upwardly biased.

+
+
fn +

2109 Id. The Commission discussed that these estimates were upwardly biased.

+
+
fn +

2110 A 100 microsecond clock offset tolerance will now be required of Participants due to an amendment to the Plan.

+
+
fn +

2111 The Commission noted that the Plan itself states “[f]or unrelated events, e.g., multiple unrelated orders from different broker-dealers, there would be no way to definitively sequence order events within the allowable clock drift as defined in Article 6.8,” and that this limitation “in turn limits the benefits of CAT in regulatory activities that require event sequencing, such as the analysis and reconstruction of market events, as well as market analysis and research in support of policy decisions, in addition to examinations, enforcement investigations, cross-market surveillance, and other enforcement functions.” See Notice, supra note 5, at 30683.

+
+
fn +

2112 See Notice, supra note 5, at n. 555.

+
+
fn +

2113 FIF Letter at 97–111; Data Boiler Letter at 31.

+
+
fn +

2114 FIF Letter at 101; Data Boiler Letter at 31.

+
+
fn +

2115 FIF Letter at 101.

+
+
fn +

2116 FIF Letter at 111.

+
+
fn +

2117 FIF Letter at 98.

+
+
fn +

2118 See CAT NMS Plan, supra note 5, at Appendix C-25.

+
+
fn +

2119 See Section IV.D.13, supra.

+
+
fn +

2120 Response Letter II at 4–5.

+
+
fn +

2121 See Section IV.D.13.a(1), supra.

+
+
fn +

2122 See Securities Exchange Act Release No. 77565 (April 8, 2016), 81 FR 22136 (April 14, 2016).

+
+
fn +

2123 Although not currently required in the Plan, the Commission believes there would be additional benefit to event sequencing if off-exchange execution venues, including alternative trading systems and broker-dealer internalizers, were required to adhere to a more stringent clock synchronization standard. As discussed in Section IV.D.13.a, the Commission understands that certain Industry Members, such as ATSs and broker-dealers that internalize off-exchange order flow, today adhere to a finer clock synchronization standard. As the Participants conduct their annual reviews, the Commission expects them to consider proposing new clock synchronization standards whenever they determine the industry standard for CAT Reporters, or certain categories or systems thereof, has become more granular than required by the Plan at that time. In determining the appropriate industry standards for clock synchronization, the Commission has amended the Plan so that the SROs should apply industry standards based on the type of CAT Reporter or system, rather than the industry as a whole. Varied requirements would segment the broker-dealer community, and one commenter stated a desire to “avoid unnecessary market segmentation” with regard to clock synchronization. See FSR Letter at 8. See also Section IV.D.13.a(1), supra. The Commission notes, however, that these venues are already segmented with respect to their position within the broker-dealer and also with respect to other broker-dealers that do not provide these services.

+
+
fn +

2124 Note that broker-dealers that are not FINRA members are not subject to FINRA’s clock synchronization requirements and do not submit reports to OATS. Currently, their activity, to the extent it is captured, is captured and timestamped by exchanges and other FINRA members that receive their orders.

+
+
fn +

2125 As discussed in the Notice, this reflects the fact that some records pertaining to the same order could be sequenced by their placement in an order without relying on timestamps. This information may also be used to partially sequence surrounding events. See Notice, supra note 5, at n.555.

+
+
fn +

2126 While the 5% Error Rate covers data from CAT Reporters, the Plan Processor could create errors as well, for example, through the linking process. Further, the Plan does not include details on how the Plan Processor would perform the linking process, identify broken linkages, and seek corrected reports from CAT Reporters to correct broken linkages. Instead, the Plan defers key decisions regarding the validation process until the selection of a Plan Processor and the development of Technical Specifications. The CAT NMS Plan describes the Plan Processor’s responsibility for creating the Technical Specifications. See CAT NMS Plan, supra note 5, at Section 6.9.

+
+
fn +

2127 The Commission notes that the Plan Processor is required to create a quality assurance testing environment in which, during industry-wide testing, the Plan Processor provides linkage processing of data submitted, the results of which are reported back to Participants and to the Operating Committee for review. Id. at Appendix D, Section 1.2. This may help identify challenges in the linking process and allow for their early resolution.

+
+
fn +

2128 See Notice, supra note 5, at 30686.

+
+
fn +

2129 Id.

+
+
fn +

2130 Id.

+
+
fn +

2131 Id.

+
+
fn +

2132 FIF Letter at 96.

+
+
fn +

2133 Data Boiler Letter at 31.

+
+
fn +

2134 Data Boiler Letter at 31.

+
+
fn +

2135 Data Boiler Letter at 18.

+
+
fn +

2136 FIF Letter at 90–91; FIX Letter at 1; ICI Letter at 13; Better Markets Letter at 7–8.

+
+
fn +

2137 Better Markets Letter at 7–8; UnaVista Letter at 2–3.

+
+
fn +

2138 Data Boiler Letter at 24–25.

+
+
fn +

2139 See Section V.D.2.b.(2).C, supra.

+
+
fn +

2140 In the Notice, the Commission discussed an alternative that would require the Rule 613 approach to allocation reporting linking. The Commission stated that linking allocations to order lifecycles would improve accuracy for many situations, particularly in one-to-one, one-to-many, and many-to-one allocations. Further, the Commission explained that broker-dealers likely already maintain records that allow them to ensure that the allocations receive fair prices based on market executions, and requested comment on whether those systems could provide a key to accurately link allocations to lifecycles in many-to-many allocations. See Notice, supra note 5, at 30757-58. One commenter, however, stated that the “many-to-many relationships [between executions and allocations] do not allow unique linkages for all situations.” See FIF Letter at 90. This commenter did not refute the accuracy improvements that could come from linking allocations to order lifecycles. Another commenter opined that broker-dealers should and can track order allocation information, including in the many-to-many situation. See Data Boiler at 40. Therefore, the Commission continues to believe that such linking would be beneficial relative to the Plan. However, the Commission also believes that allocation linking would be costly to implement, a belief supported by the commenter who provided additional information on the source of such costs. See FIF Letter at 90.

+
+
fn +

2141 See Notice, supra note 5, at 30686–88.

+
+
fn +

2142 Id.

+
+
fn +

2143 Id.

+
+
fn +

2144 Id.

+
+
fn +

2145 Id.

+
+
fn +

2146 Data Boiler Letter at 31.

+
+
fn +

2147 Anonymous Letter I at 3.

+
+
fn +

2148 Anonymous Letter I at 3.

+
+
fn +

2149 UnaVista Letter at 3.

+
+
fn +

2150 SIFMA Letter at 37.

+
+
fn +

2151 Response Letter II at 5.

+
+
fn +

2152 See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2153 Anonymous Letter I at 3.

+
+
fn +

2154 See Section IV.E.2.c., infra.

+
+
fn +

2155 Anonymous Letter I at 3.

+
+
fn +

2156 Data Boiler Letter at 31.

+
+
fn +

2157 See Sections IV.D.4.a and IV.D.4.b, supra.

+
+
fn +

2158 SIFMA Letter at 36–37; DTCC Letter at 1–6; UnaVista Letter at 3; Better Markets Letter at 8; Data Boiler Letter at 22.

+
+
fn +

2159 SIFMA Letter at 37.

+
+
fn +

2160 See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra.

+
+
fn +

2161 See Notice, supra note 5, at 30688–89.

+
+
fn +

2162 Id. at Section IV.D.2.b.(2)E. Item 703 of Regulation S-K requires issuers to report aggregated issuer repurchase data to the Commission on an annual and quarterly basis in Forms 10-K and 10-Q. 17 CFR 229.703.

+
+
fn +

2163 See CAT NMS Plan, supra note 5, at Section 6.4(d)(iv).

+
+
fn +

2164 Accessibility refers to “how the data is stored, how practical it is to assemble, aggregate, and process the data, and whether all appropriate regulators could acquire the data they need.” See Notice, supra note 5, at 30689.

+
+
fn +

2165 Id. at 30689–91.

+
+
fn +

2166 Id. at 30689.

+
+
fn +

2167 Id. at 30689–90, citing CAT NMS Plan, supra note 5, at Appendix D, Section 8.

+
+
fn +

2168 The Commission further explained that the online targeting query tool must include a date or time range, or both, and allow users to choose from a broad menu of 26 predefined selection criteria (e.g., data type, listing market, size, price, CAT-Reporter-ID, Customer-ID, or CAT-Order-ID), with more to be defined at a later date. Results must be viewable in the tool or downloadable in a variety of formats and support at least a result size of 5,000 or 10,000 records, respectively, with a maximum result size to be determined by the Plan Processor. With the user-defined direct query or bulk extraction, CAT must be able to support at least 3,000 daily queries, including 1,800 concurrently, and up to 300 simultaneous query requests, with no performance degradation. See Notice, supra note 5, at 30689–90.

+
+
fn +

2169 Id. at 30690.

+
+
fn +

2170 Id.

+
+
fn +

2171 Id. at 30691.

+
+
fn +

2172 Id.

+
+
fn +

2173 Data Boiler Letter at 26.

+
+
fn +

2174 Data Boiler Letter at 10–13.

+
+
fn +

2175 Data Boiler Letter at 31.

+
+
fn +

2176 Data Boiler Letter at 38.

+
+
fn +

2177 FIF Letter at 34–35.

+
+
fn +

2178 SIFMA Letter at 32, 39–41; Data Boiler Letter at 26.

+
+
fn +

2179 SIFMA Letter at 39.

+
+
fn +

2180 SIFMA Letter at 41.

+
+
fn +

2181 SIFMA Letter at 40.

+
+
fn +

2182 SIFMA Letter at 39.

+
+
fn +

2183 Id.

+
+
fn +

2184 Data Boiler Letter at 26.

+
+
fn +

2185 Response Letter I at 42.

+
+
fn +

2186 Response Letter I at 42, citing CAT NMS Plan, supra note 5, at Appendix D, Section 8.2. A discussion of the types of data tools that Bidders proposed to support can be found in Appendix C, Section A.2(b) of the Plan. ODBC (Open Database Connectivity) is an open standard API (Application Programming Interface) for accessing a database. JDBC (Java Database Connectivity) is an API for the programming language Java, which defines how a client may access a database.

+
+
fn +

2187 Data Boiler Letter at 10–13, 26.

+
+
fn +

2188 See Notice, supra note 5, at 30690.

+
+
fn +

2189 See Section V.E.2, infra, for a discussion of various regulatory activities that direct access to data will improve.

+
+
fn +

2190 Data Boiler Letter at 38.

+
+
fn +

2191 SIFMA Letter at 32, 39–41.

+
+
fn +

2192 See Notice, supra note 5, at 30691.

+
+
fn +

2193 SIFMA Letter at 39.

+
+
fn +

2194 Accessibility refers to “how the data is stored, how practical it is to assemble, aggregate, and process the data, and whether all appropriate regulators could acquire the data they need.” See Notice, supra note 5, at 30689.

+
+
fn +

2195 Id. at 30690.

+
+
fn +

2196 The Commission recognizes that FINRA collects data from exchanges for which it provides regulatory services. However, this data is sent to FINRA by the exchanges with a delay, and the data formats are not standardized prior to receipt at FINRA.

+
+
fn +

2197 17 CFR 242.613(c)(5), (c)(6).

+
+
fn +

2198 See CAT NMS Plan, supra note 5, at Section 6.5(b)(i). Currently, broker-dealers retain data for six years, but exchanges are only required to retain data for five years. In practice, the Commission understands that most exchanges generally retain data for at least six years, but at least one exchange does not retain data for six or more years. Therefore, the CAT NMS Plan would improve the historical data available from at least one exchange.

+
+
fn +

2199 Timeliness refers to when the data is available to regulators and how long it would take to process before it could be used for regulatory analysis. See Notice, supra note 5, at 30691.

+
+
fn +

2200 Id.

+
+
fn +

2201 Compiling data refers “to a process that aggregates individual data records into a data set. This could occur when regulators request data and when the regulators receive data from multiple providers. This is different from the act of reporting data.” Id.

+
+
fn +

2202 Id. at 30691–92.

+
+
fn +

2203 Id.

+
+
fn +

2204 Id.

+
+
fn +

2205 Id. at 30691.

+
+
fn +

2206 Under the Plan, SROs that are exchanges would still have the same real-time access to their own audit trail data as they currently do. The Commission does not expect that all SRO audit trails will be retired on implementation of the Plan because exchanges may use such audit trails to implement their CAT reporting responsibilities. CAT reporting requirements would require that exchanges collect and report audit trail information from their systems even if they elect to replace their current audit trails. However, CAT requirements may improve the completeness of real-time exchange audit trail data if the information that exchanges collect under the Plan is more complete than what they currently collect.

+
+
fn +

2207 As noted, the SROs are generally currently able to access their own audit trail data on the same day of an event and the Commission is currently able to access some public data, like SIP and MIDAS, on the same day as an event. Further, OATS is available to FINRA at 8am on the day following an event. The Commission preliminarily does not expect the CAT NMS Plan would affect these regulators’ access to most of these respective data sources.

+
+
fn +

2208 See CAT NMS Plan, supra note 5, at Appendix C, Section A.2(a), Appendix D, Section 6.1.

+
+
fn +

2209 Id. at Appendix D, Section 6.2.

+
+
fn +

2210 Id. at Appendix C, Section A.3.(b), Appendix D, Section 7.4.

+
+
fn +

2211 Id. at Appendix D, Section 6.2.

+
+
fn +

2212 Id.

+
+
fn +

2213 Id. at Appendix D, Section 6.1.

+
+
fn +

2214 See Notice, supra note 5, at Section IV.D.2.b.(4) and n.465.

+
+
fn +

2215 Id. at Appendix C, Section A.2(a).

+
+
fn +

2216 CAT Data being available on T+5 may be later than for other current SRO audit trails.

+
+
fn +

2217 See Notice, supra note 5, at 30692 (citing CAT NMS Plan, supra note 5, Section 6.5(c)).

+
+
fn +

2218 See Notice, supra note 5, at Section IV.D.2.b.(4) and n.468.

+
+
fn +

2219 See Notice, supra note 5, at 30693.

+
+
fn +

2220 See Table 1, Section V.D.2.b, supra.

+
+
fn +

2221 See CAT NMS Plan, supra note 5, at Section 6.5(b)(i). The CAT NMS Plan does not link allocations to order events. See also 17 CFR 242.613(e)(1).

+
+
fn +

2222 The daisy chain approach is used to link and reconstruct the complete lifecycle of each Reportable Event in CAT. According to this approach, CAT Reporters assign their own identifiers to each order event that the Plan Processor later replaces with a single identifier (the CAT Order-ID) for all order events pertaining to the same order. See Notice, supra note 5, at 30691.

+
+
fn +

2223 Id. at 30693.

+
+
fn +

2224 Data Boiler Letter at 18; Better Markets Letter at 6.

+
+
fn +

2225 Better Markets Letter at 6.

+
+
fn +

2226 Data Boiler Letter at 26.

+
+
fn +

2227 Data Boiler Letter at 32.

+
+
fn +

2228 Response Letter I at 30.

+
+
fn +

2229 Data Boiler Letter at 26.

+
+
fn +

2230 See Section IV.D.3, supra.

+
+
fn +

2231 See Adopting Release, supra note 13, at 45765. Indeed, Rule 613 stated that the CAT NMS Plan may not impose a reporting deadline earlier than 8:00 a.m. ET. 17 CFR 242.613(c)(3).

+
+
fn +

2232 Id.

+
+
fn +

2233 See Notice, supra note 5, at Section IV.E.1.d(2) and Section IV.E.1.d(3).

+
+
fn +

2234 Id. at 30673.

+
+
fn +

2235 Id. at 30692.

+
+
fn +

2236 Data Boiler Letter at 32.

+
+
fn +

2237 See CAT NMS Plan, supra note 5, at Appendix D, Section 6.2.

+
+
fn +

2238 Id.

+
+
fn +

2239 See note 1555, supra.

+
+
fn +

2240 See Notice, supra note 5, at 30692.

+
+
fn +

2241 Id. at 30693–99.

+
+
fn +

2242 In 2015, the Commission filed 807 enforcement actions, including 39 related to insider trading, 43 related to market manipulation, 124 related to broker-dealers, 126 related to investment advisers/investment companies, and one related to exchange or SRO duties, many of which involved trade and order data. In 2014, the Commission filed 755 enforcement actions, including 52 related to insider trading, 63 related to market manipulation, 166 related to broker-dealers, and 130 related to investment advisers/investment companies, many of which also involved trade and order data. See Year-by-Year SEC Enforcement Statistics, available at https://www.sec.gov/news/newsroom/images/enfstats.pdf. The total number of actions filed is not necessarily the same as the number of investigations. An investigation may result in no filings, one filing, or multiple filings. Additionally, trade and order data may be utilized in enforcement investigations that do not lead to any filings. Based on these numbers, the Commission estimates that 30–50% of its enforcement actions incorporate trading or order data. A portion of FINRA’s 1,397 disciplinary actions in 2014 and 1,512 in 2015 also involved trading or order data. See http://www.finra.org/newsroom/statistics.

+
+
fn +

2243 In fiscal years 2014 and 2015, the Commission received around 15,000 entries in its TCR system, approximately one third of which related to manipulation, insider trading, market events, or other trading and pricing issues.

+
+
fn +

2244 See Notice, supra note 5, at 30694–95.

+
+
fn +

2245 See Adopting Release, supra note 14, at 45732.

+
+
fn +

2246 During the financial crisis in 2008, the lack of direct access to audit trail data resulted in the Commission being unable to quickly and efficiently reconstruct market events. The state of OATS data in 2008 also limited FINRA’s ability to analyze and reconstruct the market during the financial crisis because FINRA could not yet augment its OATS data with exchange data and OATS did not include market maker quotations. As a result, regulators had little information about the role of short sellers in market events and the identity of short sellers during the financial crisis, for example. See Notice, supra note 5, at 30694–95.

+
+
fn +

2247 Id. at Section IV.E.2.a (noting that in 2014, the SEC made 3,722 EBS requests which generated 194,696 letters to broker-dealers requesting EBS data). The Commission understands that FINRA makes about half this number of requests.

+
+
fn +

2248 Large traders who file Form 13H with the Commission are assigned a “large trader identification number” by the Commission and must provide that number to their brokers for inclusion in the EBS records that are maintained by the clearing brokers. Rule 13h-1, subject to relief granted by the Commission, requires that execution time be captured (to the second) for certain categories of large traders. Id. at Section IV.D.2.a(3) and Section IV.D.2.b (discussing the EBS system and large trader reports and the limitations of these data sources in performing market reconstructions).

+
+
fn +

2249 The Commission stated that the lack of readily available trade and order data resulted in delays and gaps in the Commission’s analysis of the events of the Flash Crash. It was also unable to quickly and efficiently conduct analysis and reconstruction of markets events, particularly around the financial crisis. Furthermore, the Commission and SROs have faced similar challenges when reconstructing events around the May 2012 Facebook IPO, the August 2012 Knight Securities “glitch,” and the August 2013 NASDAQ SIP outage. Id. at 30694–95.

+
+
fn +

2250 Data Boiler Letter at 30.

+
+
fn +

2251 Data Boiler Letter at 33.

+
+
fn +

2252 Id.

+
+
fn +

2253 See Notice, supra note 5, at Sections III.B.3, III.B.12.

+
+
fn +

2254 See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2255 See Section V.E.1.b(5), supra for a discussion of how LEIs can increase the accuracy of identifications; see also SIFMA Letter at 37.

+
+
fn +

2256 For example, this includes understanding the role and impact of high-frequency trading strategies; understanding how broker-dealers route their customer orders and studying “whether access fees and rebates drive routing decisions as much as execution quality considerations;” understanding the nature of short selling; and more generally, understanding how entities trade and the market impact of their trading. See Notice, supra note 5, at 30695–97.

+
+
fn +

2257 Better Markets Letter at 4.

+
+
fn +

2258 Data Boiler Letter at 33.

+
+
fn +

2259 See Notice, supra note 5, at 30695–97 for a list of examples of market analysis and research that could be conducted by SROs and the Commission with access to CAT Data.

+
+
fn +

2260 See Proposing Release, supra note 14, at 45768.

+
+
fn +

2261 Id.

+
+
fn +

2262 See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2263 See Section V.E.1.b(5), supra for a discussion of how LEIs can increase the accuracy of identifications; see also SIFMA Letter at 37.

+
+
fn +

2264 See Notice, supra note 5, at 30696.

+
+
fn +

2265 Id. at 30697–99.

+
+
fn +

2266 It is well established in the economics and political science literature that common knowledge among market actors can lead to the deterrence of behaviors. See, e.g., Schelling, Thomas, “The Strategy of Conflict: Prospectus for a Reorientation of Game Theory,” Journal of Conflict Resolution, Vol. 2 No.3 (1958) and Ellsberg, Daniel, “The Crude Analysis of Strategic Choices,” American Economic Review, Vol. 51, No. 2 (1961). Therefore, market participants with knowledge of improvements in the efficiency of market surveillance, investigations, and enforcement, and consequently the increased probability of incurring a costly penalty, could be deterred from participating in violative behavior.

+
+
fn +

2267 The Plan would allow regulators to more efficiently conduct cross-market and cross-product surveillance relative to surveillance using current data sources, and the requirement that data be consolidated in a single database would assist regulators in detecting violative (but not obvious) activity. To the extent that market participants are aware of the current challenges to regulators in performing cross-market surveillance and aggregating data across venues, and to the extent that they believe that their violative behavior is more likely to be detected if regulators’ ability to perform those activities improves, they may reduce or eliminate violative behavior if the CAT Plan is approved. See Notice, supra note 5, at Section IV.E.2.c(1).

+
+
fn +

2268 17 CFR 242.613(f).

+
+
fn +

2269 The Commission understands that SRO surveillances on topics such as insider trading and market manipulation do not incorporate data that identifies customers. Based on alerts from their surveillances, SROs may open a review that runs through several stages of data requests before identifying a customer. The Commission notes that SRO audit trails typically do not provide customer information but a recent FINRA rule change would require its members to report to OATS non-FINRA member customers who are broker-dealers. See Notice, supra note 5, at 30697.

+
+
fn +

2270 For example CAT Data would include Customer information, subaccount allocation information, exchange quotes, trade and order activity that occurs on exchanges, trade and order activity that occurs at broker-dealers that are not FINRA members, and trade and order activity that occurs at FINRA members who are not currently required to report to OATS. In addition CAT Data would require reporters to report data in milliseconds and would be directly available to non-FINRA regulators much faster than OATS is currently available to them. Id. at 30698.

+
+
fn +

2271 See Section V.E.2.c(3), infra. The Commission notes that while this is a benefit allowed by consolidation of data in the Central Repository, linked data would not be available in the Central Repository until T+5, which may delay the completion of surveillance activities.

+
+
fn +

2272 As noted above, SROs currently do not conduct routine surveillance that tracks particular customers because data currently used for surveillance does not include customer information.

+
+
fn +

2273 Anonymous Letter I at 3; Data Boiler Letter at 33.

+
+
fn +

2274 Data Boiler Letter at 33.

+
+
fn +

2275 Data Boiler Letter at 33.

+
+
fn +

2276 Data Boiler Letter at 33.

+
+
fn +

2277 Data Boiler Letter at 13, 27.

+
+
fn +

2278 Data Boiler Letter at 30; Better Markets Letter at 6–7.

+
+
fn +

2279 SIFMA Letter at 32.

+
+
fn +

2280 Response Letter I at 31, 43

+
+
fn +

2281 Response Letter I at 42.

+
+
fn +

2282 Response Letter I at 42.

+
+
fn +

2283 Response Letter II at 27

+
+
fn +

2284 See CAT NMS Plan, supra note 5, at Appendix D, Section 8.2.

+
+
fn +

2285 Id. at Appendix D, Section 8.1.1.

+
+
fn +

2286 See Section V.E.1.d(3), supra for additional information.

+
+
fn +

2287 As noted in Section V.D.1.c, this economic analysis considers surveillance to be SROs running processing on routinely collected or in-house data to identify potential violations of rules or regulations.

+
+
fn +

2288 17 CFR 242.613(f).

+
+
fn +

2289 See Section IV.D.4.a.(4) and Section IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2290 See Section V.E.1.b(5), supra, for a discussion of how LEIs can increase the accuracy of identifications; see also SIFMA Letter at 37.

+
+
fn +

2291 See Notice, supra note 5, at 30698–99.

+
+
fn +

2292 Regulators can obtain detailed equity transaction data by requesting a trade blotter from a particular firm; however, the data would only show the activity of that firm.

+
+
fn +

2293 Part of the commenter’s recommended approach to conducting surveillance involves using sensors to perform real-time analytics over streamed data. See Data Boiler Letter at 10–13.

+
+
fn +

2294 Data Boiler Letter at 32.

+
+
fn +

2295 Data Boiler Letter at 33.

+
+
fn +

2296 See Section V.E.2.c(1), supra; supra n.2284.

+
+
fn +

2297 See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2298 See Section V.E.1.b(5), supra, for a discussion of how LEIs can increase the accuracy of identifications; see also SIFMA Letter at 37.

+
+
fn +

2299 See Notice, supra note 5, at 30699.

+
+
fn +

2300 Benefits associated with the ability to sequence events may be limited in some cases because many order events would not be able to be sequenced completely with the standards established in the CAT NMS Plan. See Section V.D.2.b(2)B.i, supra.

+
+
fn +

2301 Data Boiler Letter at 32.

+
+
fn +

2302 Id.

+
+
fn +

2303 Id. at 33.

+
+
fn +

2304 Anonymous Letter I at 3.

+
+
fn +

2305 Data Boiler Letter at 33.

+
+
fn +

2306 See Section V.E.2.c(1), supra; supra n.2284.

+
+
fn +

2307 See Sections IV.D.4.a.(4) and IV.D.4.b.(2), supra, for a description of the LEI reporting requirements in the Plan.

+
+
fn +

2308 See Section V.E.1.b(5), supra, for a discussion of how LEIs can increase the accuracy of identifications; see also SIFMA Letter at 37.

+
+
fn +

2309 See Notice, supra note 5, at 30699; see also SEC Office of the Whistleblower, What Happens to Tips, available at https://www.sec.gov/about/offices/owb/owb-what-happensto-tips.shtml.

+
+
fn +

2310 Id. at 30699–30708.

+
+
fn +

2311 Id. at 30700. Examples of these provisions include, requiring “the Chief Compliance Officer to review completeness of CAT Data periodically;” requiring that “the Central Repository be scalable to efficiently adjust for new requirements and changes in regulations;” and requiring Participants “to provide the Commission with a document outlining how Participants could incorporate information on selecting additional products and related Reportable Events.” Id.

+
+
fn +

2312 See CAT NMS Plan, supra note 5, at Sections 4.12(b)(ii), 6.2(a)(v)(E). The CCO would be required to perform reviews on matters including the completeness of information submitted to the Plan Processor or Central Repository and report findings periodically to the Operating Committee.

+
+
fn +

2313 Id. at Appendix D, Section 1.1.

+
+
fn +

2314 Id. at Section 6.11. This document is due within six months of the Effective Date of the CAT NMS Plan.

+
+
fn +

2315 17 CFR 242.608.

+
+
fn +

2316 Data Boiler Letter at 34.

+
+
fn +

2317 FSI Letter at 3.

+
+
fn +

2318 The Plan delegates these tasks to the CCO. See CAT NMS Plan, supra note 5, at Sections 4.12(b)(ii), 6.11, 6.2(a)(v)(E).

+
+
fn +

2319 Response Letter I at 17–18.

+
+
fn +

2320 Data Boiler Letter at 34.

+
+
fn +

2321 See Sections V.E.1.a and V.E.2, supra, for a discussion of how more complete data is expected to improve the analysis and reconstruction of market events, market analysis and research in support of regulatory decisions, and market surveillance, examinations, investigations, and other enforcement functions.

+
+
fn +

2322 See Section IV.D.15, supra.

+
+
fn +

2323 FSI Letter at 3.

+
+
fn +

2324 See Section IV.D.14, supra.

+
+
fn +

2325 See Notice, supra note 5, at 30700–01.

+
+
fn +

2326 See CAT NMS Plan, supra note 5, at Section 6.2(a)(v)(E).

+
+
fn +

2327 Id. at Section.4.12(b).

+
+
fn +

2328 Id. at Appendix C, Section A.3(b).

+
+
fn +

2329 See Notice, supra note 5, at 30701

+
+
fn +

2330 Data Boiler Letter at 34. The commenter generally suggests an alternative approach to data reporting involving a “dynamic analytical framework” where “sensors directly conduct real-time analytics over streamed data where it was originated.” Id.

+
+
fn +

2331 FIF Letter at 58.

+
+
fn +

2332 FIF Letter at 11, 93.

+
+
fn +

2333 FIF Letter at 57.

+
+
fn +

2334 FIF Letter at 52.

+
+
fn +

2335 SIFMA Letter at 7.

+
+
fn +

2336 SIFMA Letter at 7.

+
+
fn +

2337 UnaVista Letter at 4.

+
+
fn +

2338 FIF Letter at 106; SIFMA Letter at 34; Data Boiler Letter at 21.

+
+
fn +

2339 FIF Letter at 106. This commenter recommended that any clock synchronization should stay in place for three years because it is costly to the industry and distributive to the industry to change the standard, and such changes could take two years to implement. Id.

+
+
fn +

2340 SIFMA Letter at 34.

+
+
fn +

2341 Data Boiler Letter at 21.

+
+
fn +

2342 Response Letter I at 22, citing the CAT NMS Plan at Appendix D, Section 9.4.

+
+
fn +

2343 Id.

+
+
fn +

2344 Id.

+
+
fn +

2345 UnaVista Letter at 4.

+
+
fn +

2346 Response Letter I at 49.

+
+
fn +

2347 See Section V.E.3.a, supra.

+
+
fn +

2348 FSI Letter at 3.

+
+
fn +

2349 Response Letter I at 17–18.

+
+
fn +

2350 See Section IV.D.4.a.(1), supra.

+
+
fn +

2351 The Plan states that minor inconsistencies, such as variations in road name abbreviations in searches, would be resolved within the Plan Processor. Material inconsistencies, such as two different people with the same SSN, must be communicated to the submitting CAT Reporters and resolved within the error correction timeframe described in Section 2.2.4 of the Plan. See CAT NMS Plan, supra note 5, at D-35.

+
+
fn +

2352 Id. at Appendix C.

+
+
fn +

2353 See Section IV.D.8.a, supra.

+
+
fn +

2354 FSI Letter at 3.

+
+
fn +

2355 FIF Letter at 58.

+
+
fn +

2356 See Section IV.D.9, supra.

+
+
fn +

2357 Id. (explaining that the Commission is amending Section C.9 of Appendix C of the Plan to require that the Participants consider, in their rule filings to retire duplicative systems, whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy standards, including, but not limited to, ways in which establishing cross-system regulatory functionality or integrating data from existing systems and the CAT would facilitate such individual Industry Member exemptions).

+
+
fn +

2358 See Section IV.D.11.c, supra.

+
+
fn +

2359 See Section IV.D.11.b, supra.

+
+
fn +

2360 See Section IV.B.4, supra.

+
+
fn +

2361 See CAT NMS Plan, supra note 5, at Appendix D, Section 8.3

+
+
fn +

2362 Id. at Section 6.2(a)(v)(J).

+
+
fn +

2363 Id. at Appendix D, Section 6.2(a)(v)(J).

+
+
fn +

2364 Id. at Appendix D, Section 6.1(o)(i).

+
+
fn +

2365 Id. at Appendix D, Section 8.5.

+
+
fn +

2366 SIFMA Comment Letter at 45.

+
+
fn +

2367 FSI Letter at 5.

+
+
fn +

2368 Response Letter I at 51.

+
+
fn +

2369 See Section IV.B.3, supra.

+
+
fn +

2370 FSI Letter at 3.

+
+
fn +

2371 See CAT NMS Plan, supra note 5, at Appendix D, Section 6.2(a)(v)(J).

+
+
fn +

2372 FSI Letter at 3.

+
+
fn +

2373 FSI Letter at 5.

+
+
fn +

2374 SIFMA Letter at 45.

+
+
fn +

2375 See CAT NMS Plan, supra note 5, at Appendix D, Section 5.4.

+
+
fn +

2376 See Notice, supra note 5, at 30702.

+
+
fn +

2377 Id. (quoting the Adopting Release, supra note 14, at 45787).

+
+
fn +

2378 Id.

+
+
fn +

2379 Id.

+
+
fn +

2380 Id.

+
+
fn +

2381 Id. at 30703.

+
+
fn +

2382 Id.

+
+
fn +

2383 Id. at 30703.

+
+
fn +

2384 Id.

+
+
fn +

2385 Id. at 30703–04.

+
+
fn +

2386 Id.

+
+
fn +

2387 Id. at 30704.

+
+
fn +

2388 Fidelity Letter at 7–8; see also EMSAC Recommendation, supra note 693, at 3. The recommendation recognizes changes in the environment with respect to exchange competition. See Transcript, Equity Market Structure Advisory Committee Meeting (April 26, 2016) at 106 (“EMSAC April 26 Transcript”), available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.

+
+
fn +

2389 Fidelity Letter at 7–8; see also EMSAC Recommendation, supra note 693 at 3. The recommendation recognizes that the number of exchange licenses that an exchange may have is related to the flexibility to provide for different pricing arrangements, rather than relating to what is appropriate for NMS Plan voting. See EMSAC April 26 Transcript, supra note 2388, at 106–07.

+
+
fn +

2390 Response Letter I at 7–8.

+
+
fn +

2391 Response Letter I at 7.

+
+
fn +

2392 The analysis therefore does not relate to whether changes at a later point to NMS Plan governance more broadly, which could include changes to CAT NMS Plan governance, would be appropriate at such time; see also infra note 2442 and associated text; Section IV.B, supra.

+
+
fn +

2393 Unanimous voting is required for: (i) obligating Participants to make a loan or capital contribution to the Company; (ii) dissolving the Company; and (iii) acting by written consent in lieu of a meeting. See Section IV.B.1, supra.

+
+
fn +

2394 See infra note 2811.

+
+
fn +

2395 See Notice, supra note 5, at 30704. The Notice also makes clear that the “[t]erms of Advisory Committee members would not exceed three years, and memberships would be staggered so that a third of the Committee would be replaced each year.” Id.

+
+
fn +

2396 Id.

+
+
fn +

2397 Id.

+
+
fn +

2398 Id.

+
+
fn +

2399 Id.

+
+
fn +

2400 Id. at 30705. The Notice clarifies that staggering of terms could “enhance the cohesion of the Advisory Committee, and thereby its effectiveness in communicating member viewpoints to the Operating Committee.” But, “the Operating Committee members may exclude Advisory Committee members from Executive Sessions.” Id.

+
+
fn +

2401 Id.

+
+
fn +

2402 Id. Such a mechanism could include, per the Notice, “requiring the Operating Committee to respond to the Advisory Committee’s views, formally or informally, in advance of or following a decision by the Operating Committee.” Id.

+
+
fn +

2403 SIFMA Letter at 25 (“The existing governance structure for other NMS Plans, which is being imported into the Plan, is ineffective and will provide broker-dealers with no meaningful participation in the development or operation of the CAT.”); Fidelity Letter at 7 (noting that the Plan’s governance structure is similar to that of other NMS Plans, which structure has largely been unchanged since the 1970s, despite significant market changes; stating that “we do not believe that the governance structure in the Proposed Plan permits CAT Advisory Committee members an opportunity to participate meaningfully in the implementation, operation, and administration of the CAT . . . .”); KCG Letter at 7 (“Feedback related to the administration and operation of other NMS Plans . . . indicates that Advisory Committee members have limited visibility into the actions of the Operating Committee and almost no voice in the operation [of the] NMS Plan”); ICI Letter at 10 (“[T]he governance structure . . ., similar to other NMS plans, deprives a broad range of market participants, including registered funds and their advisers, of any meaningful voice in plan operations . . . .”). Cf. DAG Letter at 3 (noting that Industry’s experience as a part of the CAT’s DAG was that “SROs limited the Industry’s participation in important aspects of the development process”); STA Letter at 1 (seconding the DAG Letter’s conclusions).

+
+
fn +

2404 SIFMA Letter at 26; KCG Letter at 7; ICI Letter at 10; Fidelity Letter at 7.

+
+
fn +

2405 SIFMA Letter at 26 (“[T]he SROs have a long history of conducting all meaningful NMS Plan business in executive session, from which Advisory Committee members are excluded.”); Fidelity Letter at 7; KCG Letter at 7.

+
+
fn +

2406 SIFMA Letter at 26 (“[T]he Operating Committees have refused to share even routine documents.”); cf. Fidelity Letter at 7.

+
+
fn +

2407 SIFMA Letter at 26 (citing also the exclusion of Advisory Committee members from meetings of “subcommittees” of the Operating Committee, the circulation of agendas with limited opportunity to prepare views and the requirement that an SRO “sponsor” an agenda item raised by the Advisory Committee, and the absence of a mechanism for an individual member of an Advisory Committee to solicit and represent the views of broader constituencies).

+
+
fn +

2408 SIFMA Letter at 25 (broker-dealers); DAG Letter at 3 (“Industry members”); ICI Letter at 11 (representatives of registered funds and other non-SRO participants); STA Letter at 1 (seconding the DAG Letter); KGC Letter at 6 (broker-dealers); MFA Letter at 3 (“an institutional investor, a broker–dealer with a substantial retail base, a broker-dealer with a substantial institutional base, a data management expert, and . . . a representative from a federal agency experienced with cybersecurity concerns as they relate to national security”).

+
+
fn +

2409 SIFMA Letter at 25 (noting that (1) the CAT is complex and broker-dealer insight will bring perspectives of those who will be doing the bulk of the reporting; (2) broker-dealer participation will ensure the burden of systems changes is shared between broker-dealers and SROs; and (3) broker-dealers will, under the CAT funding model, be expected to bear the vast majority of costs); DAG Letter at 3 (“[F]iltering [Industry] input through SROs, who face a different set of reporting challenges than Industry members, has proven to be an imperfect mechanism for communicating and addressing concerns[;] . . . the Industry remains too far removed from decision-making processes.”); STA Letter at 1 (seconding the DAG Letter); ICI Letter at 11 (stating that “[t]he perspective of other market participants—particularly given that the central repository will house their sensitive information—would help in the development and maintenance of the CAT” and noting further that registered funds’ and their advisers’ views would make the Operating Committee “far better informed” particularly with respect to the impact of CAT on trading and order management practices of funds, and on CAT data security); MFA Letter at 3 (suggesting representation for market participants who will be most significantly impacted by the Operating Committee’s decisions).

+
+
fn +

2410 ICI Letter at 12 (stating that the SROs have an incentive to make regulatory use of and to potentially commercialize the information that they report to the CAT, whereas registered funds would be solely interested in the “security, confidentiality, and appropriate use of all data reported to the CAT”); KCG Letter at 7; MFA Letter at 3–4.

+
+
fn +

2411 MFA Letter at 4.

+
+
fn +

2412 See infra n.161–162 & associated text; see also SIFMA Letter at 26 (while stating that the Advisory Committee is not a substitute for direct voting rights, offering comments “in the alternative” on the Plan’s proposed Advisory Committee structure); FIF Letter at 135 (recommending “defining the Advisory Committee to reflect a more participatory, active role in the formulation of decisions and directions being reviewed by the SROs”). But cf. KCG Letter at 7 (stating that the Advisory Committee is “not an adequate substitute for providing non-SROs with full voting power on the CAT NMS Plan Operating Committee”).

+
+
fn +

2413 Hanley Letter at 6 (add two financial economists); SIFMA Letter at 27 (“the makeup of the Advisory Committee should include participants with an appropriate representation of firm sizes and business models, such as: inter-dealer brokers, agency brokers, retail brokers, institutional brokers, proprietary trading firms, smaller broker-dealers, firms with a floor presence, and trade associations”—to be selected by broker-dealer representatives, rather than SROs); DAG Letter at 3 (the “Advisory Committee should have a strong Industry continent and [] this contingent should be formed prior to the approval of the plan”); STA Letter at 1 (seconding the DAG Letter); FIF Letter at 135–136 (“the composition of the Advisory Committee should be widened to 20 participants with a minimum of 12 broker-dealer firms represented”; “[c]ategories of participants that should be added are trade processing and order management service bureaus, as well as the industry associations, such as FIF and SIFMA”); ICI Letter at 12 (“more investor representation, including representation from registered funds” and clarify that existing slot for “institutional” investor would include “advisers to registered funds”); Reuters at 6 (add service bureau representation; service bureaus can offer the view of multiple of their audit trail reporting clients); see also Fidelity Letter at 7 (recommending adoption of the EMSAC recommendations, which includes nomination of new candidates for Advisory Committee membership by the Advisory Committee, to be confirmed by a majority vote of the Operating Committee).

+
+
fn +

2414 SIFMA Letter at 27–28 (stating that the role of the Advisory Committee must include every aspect of the CAT, including every discussion and meeting of the Operating Committee, and every key issue; procedural safeguards would include (1) establishing written criteria for, and written justifications for invoking, executive sessions, (2) written responses to or documentation for any rejection by the Operating Committee of a written recommendation of the Advisory Committee, (3) circulation of agendas and documentation with sufficient time to prepare for meetings, and (4) broad access by Advisory Committee members to information regarding the performance of the central repository); ICI Letter at 13 (stating that the CAT NMS Plan should include (1) a requirement that the Operating Committee respond in writing to Advisory Committee recommendations, (2) a right for the Advisory Committee to have broad access to documents, and (3) a right to be present in all discussions about data security, including receiving all reports from the CCO and CISO that the Operating Committee receives); Reuters at 7 (stating that the Advisory Committee should have input on Plan amendments that impact CAT Reporters, as well as on decisions on “funding and other aspects of CAT operations”); Fidelity Letter at 7 (supporting changes to Advisory Committee structure proposed by the EMSAC). Cf. DAG Letter at 3 (the Advisory Committee’s Industry contingent should be formed prior to the approval of the Plan to permit the Advisory Committee to provide input to the selection of the Processor and developing Operating Procedures); FIF Letter at 136–37 (an active and collaborative Advisory Committee is necessary to ensure a high-quality CAT; the scope of the Advisory Committee should include the CAT System in addition to the Central Repository; and the Advisory Committee should have input into all amendments—material and non-material (with material amendments redefined to include “External Material Amendments” and “Internal Material Amendments”); NYSE Letter at 4–6.

+
+
fn +

2415 SIFMA Letter at 29 (requesting that the CAT be operated at-cost, with fully transparent, publicly-disclosed annual reports, audited financial statements, and executive compensation disclosure; an audit committee should ensure that revenue is used for regulatory purposes — these would be appropriate to the “regulatory undertaking” and “industry utility” that the CAT should be, with SROs’ regulatory decisions “made outside the governance and operation of the CAT itself”); DAG Letter at 3 (calling for the CAT governance structure to include independent directors (with both non-Industry and Industry participants) and a majority-independent audit committee); STA Letter at 1 (seconding the DAG Letter).

+
+
fn +

2416 Better Markets Letter at 4–6 (with respect to the latter option, the CAT would need to be a not-for-profit, led by a Board with a supermajority of independent directors (including an independent Chair), and with SEC representation, with ultimate SEC control over the access to and usage of the CAT).

+
+
fn +

2417 NYSE Letter at 4–5 (citing the Commission’s statement in the Adopting Release that the structure of the Operating Committee and the Advisory Committee, including the ability of the Operating Committee to meet in executive session, “appropriately balances the need to provide a mechanism for industry input . . . against the regulatory imperative that the operations and decisions regarding the [CAT] be made by SROs who have a statutory obligation to regulate the securities markets, rather than by members of the SROs, who have no corresponding statutory obligation . . . .”). But cf. KCG Letter at 6 (stating that the SRO-only Operating Committee is “contrary to the public interest and fails to recognize the CAT system as a core market utility meant to benefit all market participants”).

+
+
fn +

2418 Id. at 6 (the latter are the obligations to comply, and enforce its members’ compliance with, the Exchange Act).

+
+
fn +

2419 Response Letter I at 6.

+
+
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2420 Id. at 7.

+
+
fn +

2421 Id. at 9–10.

+
+
fn +

2422 Id. at 10–11.

+
+
fn +

2423 Id. at 13–14.

+
+
fn +

2424 Response Letter I at 13. The Participants also declined to form the Advisory Committee prior to the approval of the Plan in response to the commenter who wanted the Industry contingent to the Advisory Committee to be formed early to have input on selection of the Plan Processor and the formation of operating procedures, stating that they have, and will continue, to engage with the DAG in order to receive the views of industry members prior to the approval of the Plan. Id. at 16–17.

+
+
fn +

2425 Id. at 19–20.

+
+
fn +

2426 Id. at 14–16. The purposes requiring confidentiality for which an Executive Session could be appropriate were further elaborated as including “(1) matters that present an actual or potential conflict of interest for Advisory Committee members (e.g., relating to Industry Members’ regulatory compliance); (2) discussion of actual or potential litigation; (3) CAT security issues; and (4) personnel issues.” Id. at 15.

+
+
fn +

2427 Id. at 15–16. Response Letter I did not directly address the comments regarding agenda timing, or broad informational access.

+
+
fn +

2428 Id. at 7.

+
+
fn +

2429 Id. at 8–9. However, Participants also stated that the Operating Committee could decide to add an audit committee at a later date. Id. at 9.

+
+
fn +

2430 Id. at 17.

+
+
fn +

2431 See Notice, supra note 5, at 30705.

+
+
fn +

2432 Id. at 30704.

+
+
fn +

2433 Similarly, adding an independent board or audit committee to the Plan’s governance structure could provide additional oversight of Plan decision-making and mitigate potential concerns about Plan Participants’ conflicts of interest, but it could also decrease coordination in decision-making required for efficiently achieving the regulatory benefits of the Plan. Aside from the potential costs, the incremental benefits of these and other enhanced governance features (e.g., additional disclosure requirements) may be narrow in light of the other provisions discussed in the Notice, including the Commission’s ability to monitor whether the benefits of the CAT are being achieved and the provisions limiting the incentive and ability of Operating Committee members to serve the private interests of their employers, including rules regarding recusal of Operating Committee members from voting on matters that raise a conflict of interest. Id. at 30741.

+
+
fn +

2434 Id. at 30705.

+
+
fn +

2435 For example, while there are many diverse types of broker-dealers, it is not clear that increasing the number of broker-dealers representatives from 7 to 12 would add significantly to the diversity of views represented on the Advisory Committee, and by constituting a majority of Advisory Committee members, may give rise to a risk that broker-dealer voices would dominate Advisory Committee discussions, which could limit the diversity of views transmitted to the Operating Committee and thereby worsen Plan decision-making.

+
+
fn +

2436 Similarly, constituting the industry portion of the Advisory Committee early, so that industry may have a greater voice with respect to selection of the Plan Processor and the operating procedures of the CAT, would not improve Plan decision-making where those views could be solicited from industry via the DAG.

+
+
fn +

2437 It is not clear the extent to which the Advisory Committee would have the opportunity to have input into a non-Material Amendment during the 10 day window before the non-Material Amendment is deemed approved, but, as noted above in Section IV.B.2, the Commission amendment to the Plan would provide the Advisory Committee with the same information regarding non-Material Amendments as the Operating Committee would have.

+
+
fn +

2438 See Notice, supra note 5, at 30705.

+
+
fn +

2439 Response Letter I at 15–16.

+
+
fn +

2440 In addition, as the Notice makes clear, the Commission can modify the Plan as it may deem necessary or appropriate, and has the right to attend meetings of the Operating Committee, as well as receive specified documents. See Notice, supra note 5 at 30702. The Commission can thus serve as an additional external check on potential conflicts.

+
+
fn +

2441 Similarly, the Commission’s amendment to the Plan to require that CAT LLC financial statements be prepared in compliance with GAAP and audited by an independent public accounting firm may substitute to a certain extent for the added financial transparency sought by commenters. See CAT NMS Plan, supra note 5, at Section 9.2; see also Section IV.B.4; Participants’ Letter II.

+
+
fn +

2442 See, e.g., Fidelity Letter at 7–8 (“We also agree that the SEC should engage in formal administrative rulemaking to revise Rule 608 of Regulation NMS to specify that NMS Plans must contain governance provisions consistent with the objectives specified in the EMSAC recommendations . . . .”). Cf. ICI Letter at 12 (noting that “every NMS Plan . . . at least should include an advisory committee comprising a broad range of industry participants that lack operating committee representation” (emphasis added)); see also supra Section IV.B.

+
+
fn +

2443 SIFMA Letter at 29 (suggesting that a single SRO take the lead, and others execute agreements to transfer responsibility for enforcement to that SRO).

+
+
fn +

2444 Id.

+
+
fn +

2445 Response Letter I at 17.

+
+
fn +

2446 Id.

+
+
fn +

2447 See Notice, supra note 5, at 30708–30.

+
+
fn +

2448 The number of Participants has changed since the Plan was filed. Adjustments to cost numbers to account for new Participants is discussed in Section V.F.1.b, infra.

+
+
fn +

2449 Id. at 30730–32.

+
+
fn +

2450 Id. at 30733–34.

+
+
fn +

2451 See Section V.C.8, supra and Section VI.F.2.b, infra.

+
+
fn +

2452 See Section V.F.3.a(5), infra.

+
+
fn +

2453 See Section VI.1.b, infra.

+
+
fn +

2454 The Commission recognizes that Allocation Time may also increase the costs of the Central Repository and that Quote Sent Time may increase the costs of the Central Repository and to Participants. However, the Commission lacks sufficient information to add these costs to the existing estimates in these categories. Consequently, the Commission discusses the modifications qualitatively.

+
+
fn +

2455 FSR Letter at 9.

+
+
fn +

2456 By characterizing estimates as “reliable,” the Commission is stating its belief that the methodology used to create the estimates is likely to result in estimates that are representative of the costs industry will actually incur, and that the magnitude of the estimates appears to be reasonable. However, the Commission is not suggesting such estimates are free of uncertainty. Indeed, the Commission recognizes a degree of uncertainty – in some cases a large degree – surrounding estimates it is characterizing as “reliable.”

+
+
fn +

2457 See Notice, supra note 5, at 30708.

+
+
fn +

2458 See Section V.F.3, infra for a discussion of some of the individual components of the costs.

+
+
fn +

2459 See Notice, supra note 5, at 30709–11.

+
+
fn +

2460 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B). The Plan does not reflect any more specific cost ranges that result from narrowing the range of Bidders from six to three.

+
+
fn +

2461 Id. at Appendix C, Section B.7(b)(i)(B).

+
+
fn +

2462 See Notice, supra note 5, at 30709. The Notice further explains this position.

+
+
fn +

2463 Id. at 30709–30710.

+
+
fn +

2464 Data Boiler Letter at 15.

+
+
fn +

2465 Data Boiler Letter at 15.

+
+
fn +

2466 See Section V.F.2.a, infra.

+
+
fn +

2467 See Participants’ Letter II.

+
+
fn +

2468 The Commission uses the upper end of cost ranges for its estimates of aggregate costs to industry, as discussed in Section V.F.2.a, infra.

+
+
fn +

2469 Response Letter III at 15.

+
+
fn +

2470 These fields were included in the Plan, but because the bidding process began before the Exemptive Requests were submitted and approved, it is possible that Bids did not include expenses related to collecting and storing these fields. See Section V.F.3(6), infra and Section V.F.3(4), infra.

+
+
fn +

2471 Response Letter III at 15.

+
+
fn +

2472 See Notice, supra note 5, at 30711.

+
+
fn +

2473 In its discussion of Participants’ costs, the Notice errantly discussed six single license Participants and five Affiliated Participant Groups. See Notice, supra note 5, at 30711. At the time of the notice, there were five single license Participants and six Affiliated Participant Groups. Because Participant costs were aggregated across all Participants in the Plan, this correction does not affect the Commission’s estimate of the Participants’ costs of the Plan. At this time, there are six single-license Participants and four Affiliated Participant Groups. See infra note V.G.1.a(1)B.

+
+
fn +

2474 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2).

+
+
fn +

2475 Id.

+
+
fn +

2476 Id.

+
+
fn +

2477 17 CFR 242.613(f).

+
+
fn +

2478 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2). Rule 613 requires the SROs to file updated surveillance plans within 14 months of CAT implementation. See 17 CFR 242.613(f). The Commission assumes that the CAT NMS Plan’s estimate is limited to adapting current surveillance programs to the Central Repository.

+
+
fn +

2479 The Participants may have incurred obligations that would generate expenses if the Plan were not approved, such as expenses to terminate contracts entered or employees hired in expectation of approval of the Plan. The Commission is not aware of the existence of or details of such obligations.

+
+
fn +

2480 See Notice, supra note 5, at 30711, n.848.

+
+
fn +

2481 Id.

+
+
fn +

2482 Data Boiler Letter at 35.

+
+
fn +

2483 Data Boiler Letter at 35.

+
+
fn +

2484 SIFMA Letter at 18.

+
+
fn +

2485 SIFMA Letter at 33.

+
+
fn +

2486 Data Boiler Letter at 35.

+
+
fn +

2487 See Notice, supra note 5, at 30737; see also Data Boiler Letter at 37.

+
+
fn +

2488 Response Letter II at 13.

+
+
fn +

2489 There were 19 participants at the time the Participants conducted the study.

+
+
fn +

2490 See Section V.E.2.c.(1), supra.

+
+
fn +

2491 See Notice, supra note 5, at Appendix D, Section 8.2.

+
+
fn +

2492 The assessment is now required to include the following: (1) an evaluation of the information security program of the CAT to ensure that the program is consistent with the highest industry standards for protection of data; (2) an evaluation of potential technological upgrades based upon a review of technological developments over the preceding year, drawing on necessary technological expertise, whether internal or external; (3) an assessment of efforts to reduce the time to restore and recover CAT Data at a back-up site; (4) an assessment of how the Plan Processor and SROs are monitoring Error Rates and address the application of Error Rates based on product, data element or other criteria; and (5) a copy of the evaluation required by Section 6.8(c) as to whether industry standards have evolved such that: (i) the clock synchronization standard in Section 6.8(a) should be shortened; or (ii) the required timestamp in Section 6.8(b) should be in finer increments; and (6) an assessment of whether any data elements should be added, deleted or changed. See Section IV.H., supra. Although the bi-annual assessment was required under the Plan and its costs would thus have been included in the Participants’ cost estimates presented in the Plan, the requirements have changed such that the report is both produced more frequently and is presented in greater detail. Consequently, the Commission assumes that the majority of the cost of this report would not be covered by cost estimates presented in the Plan as filed, and is adding the cost of this reporting to its final cost estimates. To the extent that a less detailed bi-annual report was already included in the Participants’ cost estimates, the revised cost estimate overestimates this reporting cost.

+
+
fn +

2493 Detailed cost estimates are discussed in Section VI.D.1.f.B, infra.

+
+
fn +

2494 To arrive at this estimate, the Commission relied on an industry source for the costs of an audit per dollar of revenue, and assumed that the audit cost per unit of revenue would be comparable to the audit cost per unit of development costs, which were approximately $8.8 million. See infra note 2503. $8.8 x $479 = $4,215 ~ $5,000.

+
+
fn +

2495 See Section VI.G.1.b, infra.

+
+
fn +

2496 See Section VI.G.1.c, infra. The Commission assumes an hourly labor rate of $235.75 that is based on the FTE annual cost provided by the Participants in the Plan and an assumption of 1,800 hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350 / 1800 hours = $235.75.

+
+
fn +

2497 See Section VI.G.1.d, infra.

+
+
fn +

2498 See Section VI.G.1.e, infra.

+
+
fn +

2499 See Section VI.G.1.f, infra. The Commission assumes an hourly labor rate of $235.75 that is based on the FTE annual cost provided by the Participants in the Plan and an assumption of 1,800 hours annually. See Notice, supra note 5 at 30762 n.1243. $424,350 / 1800 hours = $235.75.

+
+
fn +

2500 See Section VI.G.1.g, infra.

+
+
fn +

2501 See Section VI.G.1.h, infra.

+
+
fn +

2502 See Section IV.B.4, supra; see also Participants’ Letter II.

+
+
fn +

2503 To estimate this number, the Commission drew from a recent Commission adopting release and an industry report. Specifically, the Commission’s Crowdfunding Adopting Release estimated that the audit costs for affected issuers would be $2,500 to $30,000. See Securities Act Release No. 9974 (October 30, 2015), 80 FR 71499 (November 16, 2015). The Commission believes this estimate could be reasonable if the Company’s financials are of the same level of complexity as the larger issuers affected by the Crowdfunding rule, which is realistic because the Company is not publicly traded, is organized as a “business league”, and has a limited and predictable revenue stream. As an alternative estimate, the Commission estimated an audit cost of approximately $65,000 using an industry estimate of $479 in audit costs per $1 million in revenue, using the assumption that Company revenue will just offset expected costs of $139 million. See Audit Analytics report “Audit Fees and Non-Audit Fees: A Twelve Year Trend,” October 9, 2014, available at http://www.auditanalytics.com/blog/audit-fees-and-non-audit-fees-a-twelve-year-trend/. $479 x $139 = $64,665 ~ $65,000. The Commission incorporates the higher estimate from the two methodologies ($65,000) into its cost estimates.

+
+
fn +

2504 See Section VI.G.1.i, infra.

+
+
fn +

2505 The Participants Study covered the 19 Participants that were operating as Participants at the time the study was conducted. The Notice acknowledged that ISE Mercury would likely become a Participant before the Plan was implemented, but cost estimates presented in the Notice did not account for costs that ISE Mercury would incur due to the Plan. Since filing the Plan, ISE Mercury and IEX have become Participants in the Plan.

+
+
fn +

2506 100 x (2/19) = 10.53%.

+
+
fn +

2507 See Section V.F.2.b, infra.

+
+
fn +

2508 See Section V.F.3.a(5), infra.

+
+
fn +

2509 See Notice, supra note 5, at 30712–26.

+
+
fn +

2510 Data Boiler Letter at 36.

+
+
fn +

2511 Specifically, this commenter references EBS reporting, but indicates that broker-dealers sometimes must also be involved in preparing EBS request responses. See FIF Letter at 34.

+
+
fn +

2512 TR Letter at 3–4.

+
+
fn +

2513 TR Letter at 3.

+
+
fn +

2514 TR Letter at 4; FSI Letter at 6.

+
+
fn +

2515 FSI Letter at 6.

+
+
fn +

2516 SIFMA Letter at 42; FSI Letter at 6.

+
+
fn +

2517 See, e.g., FSR Letter at 10; SIFMA Letter at 23; UnaVista Letter at 2; Fidelity Letter at 6.

+
+
fn +

2518 See Notice, supra note 5, at 30723.

+
+
fn +

2519 Costs related to outsourcing services such as clearing are discussed in Section V.F.1.c, supra, and Section V.G.1.d, infra. “Piggyback” relationships are discussed in the Notice, supra note 5, at 30716 n.894.

+
+
fn +

2520 For example, the analyses in the Plan and the Commission’s analysis assume that respondents to cost surveys are representative of their respective groups. If broker-dealers that clear for other broker-dealers or serve as introducing broker-dealers did not respond to cost surveys, the costs such broker-dealers are likely to face might not be represented by Plan estimates, and the Commission’s estimates where they rely on the Plan’s estimates.

+
+
fn +

2521 See Section V.F.1.b, supra, for further discussion.

+
+
fn +

2522 See Notice, supra note 5, at n 848. This clarification to the Plan, and comments received on this clarification, which are discussed in Section IV, imply disagreement with the Commission’s treatment of these costs as sunk costs in the Notice. The Commission notes that these costs have already been incurred, so are not attributable to the Approval of the Plan, but rather are costs associated with and anticipated by Rule 613. Furthermore, the recovery of these costs by the Participants does not change the cost to industry of the Plan; rather the costs comprise a transfer from one market participant type (Industry Members) to another (Participants). Consequently, the cost of the Plan to industry is unaffected. The Commission acknowledges that this transfer will increase broker-dealer costs and decrease Participant costs.

+
+
fn +

2523 This cost is also subtracted from costs to Participants. See Section V.F.1.b, supra.

+
+
fn +

2524 See Section V.F.3.a(2), infra, for a more detailed discussion of the effect of this modification.

+
+
fn +

2525 The Commission believes the estimates are conservative in this dimension as they overestimate broker-dealer implementation costs due to the removal of the open/close indicator from the material terms of the order insofar as broker-dealers included that indicator in their implementation cost estimates in the Reporters Study survey.

+
+
fn +

2526 The Notice discusses estimates of five year implementation and ongoing costs of up to $76.8 million. The Commission notes that for other broker-dealer costs, implementation costs are 146.46% of ongoing costs and assumes that ratio of implementation to ongoing costs for Quote Sent Time. (1.4646 ongoing costs + 5 x ongoing costs = $76.8 million.) See Section V.F.3.a(6), infra for discussion of these estimates and their treatment in the Notice and this Order.

+
+
fn +

2527 See Section V.F.3.a(4), infra, for a more detailed discussion of the costs of including allocation times on Allocation Reports.

+
+
fn +

2528 See Notice, supra note 5, at 30712–14.

+
+
fn +

2529 Survey respondents were instructed to classify themselves as “small” if their Total Capital (defined as net worth plus subordinated liabilities) was less than $500,000. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C) n.188. This is consistent with the definition of “small business” or “small organization” used with reference to a broker or dealer for purposes of Commission rulemaking in accordance with provisions of Chapter Six of the Administrative Procedure Act (5 U.S.C. 601 et seq.). See 17 CFR 240.0-10(c).

+
+
fn +

2530 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iv)(A)(3).

+
+
fn +

2531 Id.

+
+
fn +

2532 See Notice, supra note 5, at 30712–14.

+
+
fn +

2533 The Plan presents summary statistics such as average, median and maximum for each survey response. See CAT NMS Plan, supra note 5, at Appendix C, Section B(7)(b)(ii)(C), Table 5. In the left most column, $14 million is the maximum response for “Hardware/Software Current Cost.”

+
+
fn +

2534 In reaching these conclusions, the Commission reviewed the detailed discussions of the Reporters Study survey methodology in the Plan and the survey form and instructions provided to respondents. See 6/23/14 entry on CAT NMS Plan website, available at http://www.catnmsplan.com/pastevents/index.html. The Commission Staff also discussed with the Participants potential methodology adjustments in aggregating the CAT Reporters Study data. After Commission Staff discussions with the Participants, the Commission concluded that no methodology could address these fundamental issues with the survey data.

+
+
fn +

2535 See Notice, supra note 5, at 30714.

+
+
fn +

2536 See CAT NMS Plan, supra note 5, at Appendix C, Section B.(7)(b)(ii)(C), Table 3. The $8.7 million figure was calculated by summing the average hardware/software cost, third party/outsourcing cost, and full-time employee costs using the Commission’s estimated cost per employee of $424,350.

+
+
fn +

2537 Id. at Appendix C, Section B.(7)(b)(ii)(C), Table 4. The $1.4 million figure was calculated by summing the average hardware/software cost, third party/outsourcing cost, and full-time employee costs using the Commission’s estimated cost per employee of $424,350.

+
+
fn +

2538 Id. at Appendix C, Section B.(7)(b)(iii)(C)(2)a., Table 9; Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 15.

+
+
fn +

2539 See CAT NMS Plan, supra note 5, at Appendix C, Section B.(7)(b)(iii)(C)(2)a., Table 10; and at Appendix C, Section B.(7)(b)(iii)(C)(2)b., Table 16.

+
+
fn +

2540 See Notice, supra note 5, at 30717–24.

+
+
fn +

2541 Discussions below present information included in the Notice on data obtained from FINRA and gleaned from discussions with broker-dealers and service bureaus arranged by FIF and staff. Id. at 30715.

+
+
fn +

2542 To the extent that the CAT NMS Plan underestimates the number of broker-dealers that would incur CAT reporting obligations, the Commission’s estimates presented in the Notice understate the actual costs Reporters will face.

+
+
fn +

2543 These figures cover only broker-dealer costs. Industry-wide costs are summarized below.

+
+
fn +

2544 See Notice, supra note 5, at 30715–17.

+
+
fn +

2545 Id. at 30714 n.880.

+
+
fn +

2546 Id. at 30715.

+
+
fn +

2547 Id.

+
+
fn +

2548 Id. at 30715–16.

+
+
fn +

2549 The Commission believes this decision is strategic and discretionary because FINRA data reveals that while many broker-dealers at these activity levels self-report most or all of their regulatory data, other broker-dealers outsource most or all of their regulatory reporting at these activity levels. At lower activity levels, most, but not all, broker-dealers outsource most if not all of their regulatory data reporting. The Commission is cognizant that some broker-dealers reporting fewer than 350,000 OATS ROEs per month can and do opt to self-report their regulatory data. However, based on conversations with broker-dealers, the Commission believes that most broker-dealers at these activity levels do not have the infrastructure and specialized staff that would be required to report directly to the Central Repository, and electing to self-report would be cost-prohibitive in most but not all cases.

+
+
fn +

2550 See Notice, supra note 5, at 30718–24, for more information on these discussions.

+
+
fn +

2551 Id. at 30719, for more information on these discussions.

+
+
fn +

2552 The Commission’s estimate of concavity relies on data from exchanges that do not feature inverted pricing. On “inverted” exchanges, the party with the resting order pays a fee while her counterparty that receives immediate execution earns a rebate.

+
+
fn +

2553 In conversations with Commission Staff, service bureaus related that some very large clients provide their own order-handling system and market connectivity.

+
+
fn +

2554 Although the pricing function is assumed constant, as explained in the Notice, broker-dealer costs would increase because the number of ROEs they report through their service bureaus would increase under the Plan. See Notice, supra note 5, at 30721.

+
+
fn +

2555 The average broker-dealer in this category reported 15,185 OATS ROEs from June 15 – July 10, 2015; the median broker-dealer reported 1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 100,000 OATS ROEs during the sample period. Id. at 30722.

+
+
fn +

2556 Based on discussions with broker-dealers described in the Notice, the Commission believes that very small broker-dealers are unlikely to have employees entirely dedicated to regulatory data reporting. Instead, other employees generally have duties that include dealing with service bureau matters and answering regulatory inquiries. The Commission assumes a full-time employee costs $424,350 per year. Id. at 30714, n.880.

+
+
fn +

2557 In discussions with Commission Staff, FINRA has stated that there are currently 54 OATS-exempt broker-dealers and 691 OATS-excluded firms.

+
+
fn +

2558 Exemption or exclusion from OATS may be based on firm size or type of activity. Broker-dealers with exemptions or exclusions that relate to firm size are presumably relatively inactive. However, some firms may be exempted or excluded because they route only to a single OATS-reporting broker-dealer; this could encompass large firms that would be more similar to Insourcers.

+
+
fn +

2559 See supra note 2556.

+
+
fn +

2560 The category of Insourcers that do not currently report OATS data includes firms that have multiple SRO memberships that exclude FINRA. This category includes Options Market Makers and at least 14 ELPs; these are firms that carry no customer accounts and directly route proprietary orders to Alternative Trading Systems.

+
+
fn +

2561 See Exemption Order, supra note 21, at 11857–58.

+
+
fn +

2562 The Commission identified 39 CBOE-member broker-dealers that were not FINRA members, but were members of multiple SROs; 8 of these broker-dealers were previously identified as ELPs, leaving 31 firms with multiple SRO memberships that were unlikely to be CBOE floor brokers.

+
+
fn +

2563 The Commission recognizes that additional broker-dealers may be members of neither FINRA nor CBOE, yet may incur CAT reporting obligations if the Plan is approved. The Commission has determined that categorizing additional broker-dealers that are currently classified as exempt or excluded FINRA members as non-FINRA members would not change the cost estimates because these groups have identical estimated per-firm costs.

+
+
fn +

2564 As noted in Section V.F.1.b, supra, the Plan as amended in February 2016 states that the Participants will recover their costs of developing the Plan (currently $8.8 million) from broker-dealers. This constitutes a transfer from broker-dealers to Participants, but does not change the aggregate cost of the Plan to market participants.

+
+
fn +

2565 In the Reporters Study, Large OATS Reporters cite average current data reporting costs of $8.32 million and Approach 1 maintenance costs of $4.5 million annually. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7.(b)(ii)(C).

+
+
fn +

2566 Additional Costs are discussed in Section V.F.1.c(1), supra. See additional discussion in Section V.F.3.a(4), infra and Section V.F.a(6), infra.

+
+
fn +

2567 See Notice, supra note 5, at 30726.

+
+
fn +

2568 The Vendor Survey asked about the costs under two different data ingestion formats, Approach 1 and Approach 2. Approach 1 would allow broker-dealers to submit data to the Central Repository using their choice of existing industry messaging protocols, while Approach 2 would specify a pre-defined format. Id. at Section 30726.

+
+
fn +

2569 FIF Letter at 87–88.

+
+
fn +

2570 See Notice, supra note 5, at 30726–30.

+
+
fn +

2571 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iv)(A)(5).

+
+
fn +

2572 Data Boiler Letter at 14–15.

+
+
fn +

2573 FSR Letter at 9–10.

+
+
fn +

2574 FSR Letter at 9–10.

+
+
fn +

2575 Data Boiler Letter at 14–15.

+
+
fn +

2576 See Notice, supra note 5, at 30722.

+
+
fn +

2577 FSR Letter at 9–10.

+
+
fn +

2578 See Notice, supra note 5, at 30708.

+
+
fn +

2579 FSR Letter at 9–10.

+
+
fn +

2580 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iv)(A)(5).

+
+
fn +

2581 At its simplest level, ceasing reporting activities would include scrapping IT hardware dedicated to the endeavor and terminating the employees responsible for such regulatory data reporting. The Commission recognized that there are costs associated with those activities, but did not preliminarily believe their magnitude (estimated in the Plan as $2.6 billion) should approach or exceed the magnitude of costs of CAT implementation (estimated in this analysis as $2.4 billion). See Notice, supra note 5, at 30726–28.

+
+
fn +

2582 Id.

+
+
fn +

2583 Id. at 30728.

+
+
fn +

2584 Id.

+
+
fn +

2585 Id. at 30726–30.

+
+
fn +

2586 Assuming that OATS, for example, is a subset of CAT, producing OATS data from the same database that produces CAT data might be less expensive than creating a separate infrastructure to report OATS data during the period of duplicative reporting.

+
+
fn +

2587 FIF Letter at 5; SIFMA Letter at 5; FSR Letter at 10; Fidelity Letter at 4–5; TR Letter at 2; KCG Letter at 3; MFA Letter at 9; DAG Letter at 2.

+
+
fn +

2588 FIF Letter at 30; SIFMA Letter at 5; Fidelity Letter at 4–5; TR Letter at 2.

+
+
fn +

2589 FIF Letter at 30.

+
+
fn +

2590 FIF Letter at 30.

+
+
fn +

2591 TR Letter at 2.

+
+
fn +

2592 FIF Letter at 30; SIFMA Letter at 5.

+
+
fn +

2593 Fidelity Letter at 5; KCG Letter at 3.

+
+
fn +

2594 See Notice, supra note 5, at 30729.

+
+
fn +

2595 TR Letter at 2.

+
+
fn +

2596 SIFMA Letter at 5; Data Boiler Letter at 36; Fidelity Letter at 4; DAG Letter at 2.

+
+
fn +

2597 FIF Letter at 5; DAG Letter at 2.

+
+
fn +

2598 FIF Letter at 6.

+
+
fn +

2599 FIF Letter at 6.

+
+
fn +

2600 TR Letter at 2.

+
+
fn +

2601 SIFMA Letter at 7.

+
+
fn +

2602 Response Letter II at 19–20.

+
+
fn +

2603 Response Letter II at 20–21.

+
+
fn +

2604 Response Letter II at 21–25.

+
+
fn +

2605 Response Letter II at 26; see also Section IV.D.9, supra.

+
+
fn +

2606 See Section IV.D.9.a(2), supra (explaining that the Commission is amending Section C.9 of Appendix C of the Plan to state that between the Effective Date and the retirement of the Participants’ duplicative systems, each Participant, to the extent practicable, will attempt to minimize changes to those duplicative systems.

+
+
fn +

2607 See Notice, supra note 5, at 30729. As discussed above, the Commission estimates that market participants currently spend $1.7 billion for regulatory data reporting, and estimates that market participants will spend $1.7 billion to report regulatory data under CAT. During years of duplicative reporting, the Commission estimates market participants would spend $3.3 billion in regulatory data reporting, which is approximately double the $1.7 billion they currently spend. See Section V.F.2, supra.

+
+
fn +

2608 See Section IV.D.9.a(1), supra.

+
+
fn +

2609 The Plan states that Step 1 would end 1-1.5 years after large Industry Members begin reporting to the Central Repository. Large Industry Members will begin reporting 2 years after the Plan is approved.

+
+
fn +

2610 See Section IV.D.9, supra.

+
+
fn +

2611 These proposals must consider at least three factors: 1) specific standards of data accuracy and reliability, including, but not limited to, whether the attainment of a certain Error Rate is reached, 2) whether the availability of Small Industry Member data two years after Plan approval would facilitate more expeditious systems retirement, and 3) whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards. See Section IV.D.9.a, supra. The Commission analyzes these amendments below.

+
+
fn +

2612 See Section IV.D.9, supra.

+
+
fn +

2613 See Notice, supra note 5, at 30729.

+
+
fn +

2614 TR Letter at 2.

+
+
fn +

2615 The Commission’s analysis of costs is not based on small versus large Industry Members, but rather is based on Insourcers versus Outsourcers. It is reasonable to assume that Insourcers, ELPs and Option Market Makers are large Industry Members because these market participants can be characterized as having high activity levels that would require capital levels that exceed the upper threshold for small Industry Members. For these three groups of CAT reporters, one year of duplicative reporting is estimated to cost $1.2 billion. See estimates of current data reporting costs in Section V.F.1.c(2)B, supra.

+
+
fn +

2616 See Section IV.D.9.a.(2), supra. Note that such proposals are subject to Commission approval. In reviewing such a proposal, the Commission would consider the appropriateness, and the consistency with the Act, of the proposal.

+
+
fn +

2617 Id.

+
+
fn +

2618 Id.

+
+
fn +

2619 SIFMA Letter at 7.

+
+
fn +

2620 See Notice, supra note 5, at 30727–28.

+
+
fn +

2621 As discussed in the Notice, the Insourcing/Outsourcing decision is correlated with firm size. Insourcers tend to be larger firms, as do ELPs and Options Market Makers. These firms are likely to have more internal systems and more complex internal systems that will likely be more expensive to retire. On the other hand, Outsourcers, new reporters and options floor brokers are likely to be smaller firms with fewer internal systems that are less complex for retirement. Furthermore, new reporters and options floor brokers are likely to have fewer internal reporting systems than other broker-dealers because they are unlikely to have current OATS reporting obligations. Id. at 30718.

+
+
fn +

2622 The Commission recognizes that there is uncertainty in the system retirement costs that broker-dealers will face generally. The estimates provided by the commenter are presented as a range, and the Commission’s assumptions of which firms would fall at the top and the bottom of the range have significant uncertainty. If all 1,800 broker-dealers anticipated to incur CAT reporting obligations bore $100,000 in system retirement costs, broker-dealer system retirement costs would be $180 million. The Commission believes system retirement costs will be far less than this because many broker-dealers currently have limited regulatory data reporting systems, and the majority of broker-dealers rely on service providers to perform much of their data reporting responsibilities.

+
+
fn +

2623 The Commission recognizes that some new reporters and options floor brokers may choose to insource their CAT reporting activities, and thus may be considered similar in size and scope of operations to non-OATS reporting large firms. Because new reporters and options floor brokers do not currently report to OATS, the Commission believes that they will face lower system retirement costs than ELPs and Options Market Makers because the Commission believes many ELPs and Options Market Makers are members of an exchange that requires them to be able to report to OATS on request, while new small firms and options floor brokers are unlikely to be members of an exchange with this requirement.

+
+
fn +

2624 The Notice estimated $310,000 for system retirement costs for Participants. The Commission is increasing this estimate by 10.53% to account for the addition of two Participants. See Section V.F.1.b, supra.

+
+
fn +

2625 See Notice, supra note 5, at 30730–32.

+
+
fn +

2626 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1.a.iii.

+
+
fn +

2627 The Commission recognizes that Allocation Time may also increase the costs of the Central Repository and that Quote Sent Time may increase the costs of the Central Repository and to Participants. However, the Commission lacks sufficient information to add these costs to the existing estimates in these categories. Consequently, the Commission discusses the modifications qualitatively.

+
+
fn +

2628 See Notice, supra note 5, at 30730.

+
+
fn +

2629 Data Boiler Letter at 37.

+
+
fn +

2630 FIF Letter at 10.

+
+
fn +

2631 TR Letter at 8–9; FIF Letter at 9–10, 86.

+
+
fn +

2632 Response Letter I at 35.

+
+
fn +

2633 Response Letter I at 34.

+
+
fn +

2634 TR Letter at 9; SIFMA Letter at 35–36; FIF Letter at 83–86.

+
+
fn +

2635 SIFMA Letter at 35; FIF Letter at 4, 84.

+
+
fn +

2636 FIF Letter at 84.

+
+
fn +

2637 TR Letter at 9, FIF Letter at 4, SIFMA Letter at 35.

+
+
fn +

2638 FIF Letter at 85; TR Letter at 9.

+
+
fn +

2639 Specifically, one commenter stated that the inclusion of the open/close indicator for equities was a surprise (See FIF Letter at 84) and two commenters wanted additional cost benefit analysis on the open/close indicator (See FIF Letter at 84; SIFMA Letter at 36).

+
+
fn +

2640 Response Letter I at 21, 22.

+
+
fn +

2641 See Notice, supra note 5, at 30730–30731.

+
+
fn +

2642 For example, class A shares of ABC Company might be traded using ticker symbol “ABC A” on one exchange, “ABC_A” on another exchange, and “ABC.A” on a third. As written, the Plan would require all broker-dealers to use the listing exchange’s symbol for its Central Repository reporting, regardless of the symbol in the order messages received or acted upon at the broker-dealer or exchange.

+
+
fn +

2643 FIF Letter at 12, 95.

+
+
fn +

2644 Data Boiler Letter at 37–38.

+
+
fn +

2645 Bloomberg Letter at 5.

+
+
fn +

2646 Response Letter II at 7.

+
+
fn +

2647 Response Letter III at 13.

+
+
fn +

2648 FSR Letter at 9; SIFMA Letter at 35; FIF Letter at 3–4, 11, 86–89.

+
+
fn +

2649 FSR Letter at 11.

+
+
fn +

2650 FIF Letter at 87–89.

+
+
fn +

2651 FIF Letter at 88, Table 6.

+
+
fn +

2652 FIF Letter at 86.

+
+
fn +

2653 Response Letter I at 25.

+
+
fn +

2654 See Section V.F.3.a(4), supra. The total cost estimates of the CAT Plan reflect these implementation and ongoing costs.

+
+
fn +

2655 See CAT NMS Plan, supra note 5, at Section D.12, and note 247. In the Notice, the Commission noted that the survey has two limitations pertinent to specific cost estimates provided in the summary of survey results. First, cost estimates are likely to be significantly downward biased. Individual responses to cost data were gathered within a range; for example, a firm would quantify its expected costs as “Between $500K and less than $1M” or “$2.5M and over.” When aggregating these responses, FIF generally used the range midpoint as a point estimate; however, for the highest response, the range minimum was used (i.e., “$2.5M and over” was summarized as $2.5M.) This is likely to have produced a significant downward bias in aggregate survey responses. Second, the survey included only broker-dealers and service bureaus, thus the data excludes exchanges. The Commission preliminarily believed this limitation would not significantly impact industry costs because all exchanges currently maintain clock synchronization standards finer than those discussed as alternatives.

+
+
fn +

2656 See FIF Clock Offset Survey, supra note 247. This is based on the current practice of the broker-dealers who responded to the survey.

+
+
fn +

2657 See id. at 16. The $109,197 figure is obtained by subtracting the cost of maintaining current clock offsets of $203,846 annually from the estimated per-firm annual cost of maintaining a 50-millisecond clock offset of $313,043. See id. at 7 (“Even where firms were at the target clock offset, many firms cited additional costs associated with compliance including logging and achieving greater degrees of reliability”).

+
+
fn +

2658 See Section V.F.1.d, infra, for discussion of service bureau costs and the degree to which those costs might be passed on to broker-dealers.

+
+
fn +

2659 These are the 126 current OATS reporters that report more than 350,000 OATS ROEs per month; the 31 options market-making firms; and the 14 ELPs.

+
+
fn +

2660 See Section VI.H.2.a(1), infra, for a discussion of how these implementation costs might vary for different clock synchronization standards.

+
+
fn +

2661 See id., for discussion of costs attributable to the 50 millisecond clock synchronization tolerance proposed in the Plan, including the $109,197 estimate of per-firm implementation costs of the 50 millisecond clock synchronization requirement; see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(3). 171 broker-dealers x $109,197 = $18,672,687. Note also that the Commission erroneously reported in the Notice that costs were $19.7 million in implementation costs, but these estimated costs should have been $18.7 million in ongoing costs. See _Notice, supra note 5, at 30762–63 for further information on the Commission’s estimation.

+
+
fn +

2662 The CAT NMS Plan states that the Vendor Study was distributed to 13 service bureaus or technology-providing firms identified by the DAG. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(3). 13 service bureaus x $109,197 × 4.2 = $5,962,156.2. The 4.2 multiplier is the ratio between the total incremental ongoing charges to broker-dealers and the total incremental ongoing costs to service bureaus derived from the cost estimates above. See Notice, supra note 5, at 30763 n 1245. Note that the Commission erroneously reported in the Notice that costs were $1.4 million in implementation costs, but these estimated costs should have been $6 million in ongoing costs. The Commission believed clock synchronization costs are already included in cost estimates provided in the Vendor Study. In the Notice, the Commission explained its belief that these costs likely would ultimately be passed on to service bureaus’ broker-dealer clients. See Notice, supra note 5 at 30726; see also Notice, supra note 5, at 30762–63 for further information on the Commission’s estimation.

+
+
fn +

2663 See Notice, supra note 5, at 30759.

+
+
fn +

2664 See FIF Clock Offset Survey, supra note 247.

+
+
fn +

2665 SIFMA Letter at 34.

+
+
fn +

2666 FIF Letter at 108.

+
+
fn +

2667 FIF Letter at 86.

+
+
fn +

2668 FIF Letter at 88, Table 6.

+
+
fn +

2669 Id. at 109.

+
+
fn +

2670 Response Letter II at 5.

+
+
fn +

2671 Response Letter I at 25.

+
+
fn +

2672 Response Letter III at 14.

+
+
fn +

2673 See CAT NMS Plan, supra note 5, at Section 6.8(c).

+
+
fn +

2674 See FIF Clock Offset Survey, supra note 247.

+
+
fn +

2675 Compare the implied Outsourcer clock offset implementation cost estimate of $554,348 × 1,629 = $903,032,892 ($554,348 × 1,629 outsourcers) to total Outsourcer implementation costs of $1,040,506,000 (342,026,000 + 678,111,000 + 20,369,000). See Notice, supra note 5, at 30726.

+
+
fn +

2676 See Notice, supra note 5, at n 968.

+
+
fn +

2677 The total cost estimates of the CAT Plan reflect these implementation and ongoing costs. See Section V,F.2.a, infra.

+
+
fn +

2678 See Notice, supra note 5, at 30669.

+
+
fn +

2679 Response Letter II at 4.

+
+
fn +

2680 See Section V.F.1.b, supra.

+
+
fn +

2681 See Notice, supra note 5, at 30759–64.

+
+
fn +

2682 See FIF, SIFMA, and Security Traders Association, Cost Survey Report on CAT Reporting of Options Quotes by Market Makers (November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iv)(B).

+
+
fn +

2683 See CAT NMS Plan, supra note 5, at Section 12(m).

+
+
fn +

2684 See id. at Section 12(q). The Commission does not have the information necessary to precisely estimate the costs that are incurred by including OTC Equity Securities in the initial phase of the implementation of the CAT NMS Plan, because the Plan does not separately present the costs associated with OTC Equity Securities. Because of low trading activity in the OTC equity markets, any significant costs associated with including OTC Equity Securities would be in implementation costs. Further, broker-dealers that implement CAT Data reporting for NMS securities may not incur significant additional costs to implement CAT Data reporting for OTC Equity Securities.

+
+
fn +

2685 FIF Letter at 65.

+
+
fn +

2686 FIF Letter at 65.

+
+
fn +

2687 See Notice, supra note 5, at Section IV.F.1.c(2).

+
+
fn +

2688 See Section V.F.1.c.(2).B, supra.

+
+
fn +

2689 The Commission also acknowledges that the costs associated with handling PII could create an incentive for service bureaus not to offer CAT Reporting services. Nonetheless, the Commission does not believe that this incentive would significantly alter the services available to broker-dealers. For further discussion, see Section V.G.1.e, infra. The Commission also notes that, pursuant to the exemptive relief granted by the Commission, the approach to the reporting of Customer information in the CAT NMS Plan could allow for the bifurcation of PII reporting from the reporting of order data. See Exemption Order, supra note 21, at 11858–63.

+
+
fn +

2690 Data Boiler Letter at 37.

+
+
fn +

2691 TR Letter at 8–9; FIF Letter at 9–10, 86.

+
+
fn +

2692 See _Section IV.D.6, supra.

+
+
fn +

2693 See Section V.E.1.d., supra.

+
+
fn +

2694 See Section IV.D.8.a, supra.

+
+
fn +

2695 See CAT NMS Plan, supra note 5, at Section 11.3(c).

+
+
fn +

2696 SIFMA Letter at 18; DAG Letter at 5; STA Letter at 1.

+
+
fn +

2697 SIFMA Letter at 18.

+
+
fn +

2698 Response Letter II at 15.

+
+
fn +

2699 See Notice, supra note 5, at 30732–36.

+
+
fn +

2700 See Notice, supra note 5, at Section IV.F.4a(2) for the risk of a security breach and Section IV.F.4a(1) for the costs resulting from a security breach.

+
+
fn +

2701 See Notice, supra note 5, at 30733.

+
+
fn +

2702 The Commission noted that, as discussed in the Plan, the Participants collected information from the Bidders regarding security and confidentiality during the RFP process, however, there was considerable diversity in the approaches proposed by the Bidders and the Participants chose to give the Plan Processor flexibility on many implementation details and state the requirements as a set of minimum standards. These requirements include both general security and PII treatment requirements. General security requirements are designed to address physical security, data security during transmissions, transactions, and while at-rest, confidentiality, and a cyber incident response plan. PII requirements include a separate PII-specific workflow, PII-specific authentication and access control, separate storage of PII data, and a full audit trail of PII access. Id.

+
+
fn +

2703 Id.

+
+
fn +

2704 Id. at 30732.

+
+
fn +

2705 Although the Plan does not require reporting positions, observation of a broker-dealer’s recent executions can offer information about their change in position, or, potentially, information about their actual position if the audit trail information breached contains all trading activity since the creation of the position.

+
+
fn +

2706 According to survey data, the Bureau of Justice Statistics reported $24.7 billion in identity theft costs in 2012, available at http://www.bjs.gov/content/pub/press/vit12pr.cfm.

+
+
fn +

2707 Data Boiler Letter at 26.

+
+
fn +

2708 MFA Letter at 2, 5.

+
+
fn +

2709 FSR Letter at 5, which references the “High-Risk Series: An Update” a publication issued by the Government Accountability Office, GAO-15-290 at 235 (Feb. 2015).

+
+
fn +

2710 FSR Letter at 7.

+
+
fn +

2711 FSI Letter at 4.

+
+
fn +

2712 FSR Letter at 8.

+
+
fn +

2713 FSR Letter at 8; SIFMA Letter at 22.

+
+
fn +

2714 MFA Letter at 9.

+
+
fn +

2715 ICI Letter at 7.

+
+
fn +

2716 See CAT NMS Plan, supra note 5, at Appendix D, Section 4.1.5.

+
+
fn +

2717 See Section III.26, supra.

+
+
fn +

2718 See Section IV.D.6.j, supra.

+
+
fn +

2719 See Notice, supra note 5, at 30732–34.

+
+
fn +

2720 The Commission notes that, at a minimum, the security of the CAT Data must be consistent with Reg SCI. 17 CFR 242.1000 to 1007.

+
+
fn +

2721 See Notice, supra note 5, at 30733.

+
+
fn +

2722 The Commission noted that “Rule 613(e)(4) requires policies and procedures that are designed to ensure the rigorous protection of confidential information collected by the Central Repository, and Rule 613(iv) requires that the Plan contain a discussion of the security and confidentiality of the information reported to the Central Repository. Rule 613 also restricts access to use only for regulatory purposes, and requires certain provisions that are designed to mitigate these security risks such as the appointment of a Chief Compliance Officer and annual audits of Plan Processor operating procedures.” Id.

+
+
fn +

2723 The Notice, supra note 5, at 30733 lists the following three governance mechanisms: activities of the Compliance Subcommittee that could reduce the risk that information is released to unauthorized entities; the requirement that the Plan Processor submit a comprehensive security plan to the Operating Committee and update this security plan annually; and the establishment of a Chief Information Security Officer who is responsible for monitoring and addressing data security issues for the Plan Processor.

+
+
fn +

2724 The Commission noted that “the Plan requires that bulk extract data be encrypted, password protected and sent via secure methods of transmission.” Id.

+
+
fn +

2725 The Commission noted that regulators authorized to access PII would be required to complete additional authentications, and PII would be masked unless users have permissions to view PII. Id.

+
+
fn +

2726 SIFMA Letter at 20; Fidelity Letter at 4; FIF Letter at 134; ICI Letter at 7.

+
+
fn +

2727 Data Boiler Letter at 26.

+
+
fn +

2728 FIF Letter at 134; NYSE Letter at 2–4 (noting also that “[i]f employees of the Commission with access to the data stored in the Central Repository or other CAT systems are subject to security standards less stringent than those applicable to other authorized users, the data obtained and held by those individuals may be subject to heightened risk of a data breach”); Garrett Letter at 1–2.

+
+
fn +

2729 SIFMA Letter at 20; MFA Letter at 8; FSR Letter at 4–8; Data Boiler Letter at 8.

+
+
fn +

2730 ICI Letter at 6.

+
+
fn +

2731 ICI Letter at 3; Fidelity Letter at 3; FSI Letter at 4; SIFMA Letter at 19; MFA Letter at 5.

+
+
fn +

2732 SIFMA Letter at 20; ICI Letter at 4; FSR Letter at 6; TR Letter at 8; FIF Letter at 131–132; Fidelity Letter at 4. The Commission responds to these comments in detail in Section IV.D.6.a, supra.

+
+
fn +

2733 FSI Letter at 3. As discussed above in Section IV.D.6, the CCO and CISO each have responsibilities related the security of CAT Data.

+
+
fn +

2734 FSI Letter at 4–5.

+
+
fn +

2735 FSI Letter at 4–5.

+
+
fn +

2736 Response Letter I at 56.

+
+
fn +

2737 Response Letter III at 10.

+
+
fn +

2738 Response Letter III at 11.

+
+
fn +

2739 Response Letter I at 60–61

+
+
fn +

2740 Response Letter I at 57.

+
+
fn +

2741 Response Letter I at 53–54.

+
+
fn +

2742 Response Letter III at 7-8.

+
+
fn +

2743 Response Letter I at 53–54.

+
+
fn +

2744 Response Letter I at 17–19.

+
+
fn +

2745 Response Letter I at 59.

+
+
fn +

2746 ICI Letter at 6.

+
+
fn +

2747 See Notice, supra note 5, at 30733.

+
+
fn +

2748 See _Section IV.D.6.a, supra.

+
+
fn +

2749 See Section IV.D.6.c, supra.

+
+
fn +

2750 See _Section IV.H, supra.

+
+
fn +

2751 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(b) (discussing the manner in which the Central Repository will receive, extract, transform, load, and retain data); Section 6.10(c) (discussing the CAT user help desk).

+
+
fn +

2752 Response Letter I at 17–19.

+
+
fn +

2753 See Notice, supra note 5, at 30733–34.

+
+
fn +

2754 Id.

+
+
fn +

2755 The Commission noted that this could increase the potential for a short term strain on capacity and exacerbate the costs. Id. at 30733.

+
+
fn +

2756 The Commission noted that consequences of changes in investor behavior in response to the threat of a breach include: Investors holding suboptimal portfolios; lost profits to the securities industry; and higher costs of raising capital for U.S.-based securities issuers, if the public’s willingness to participate in capital markets is sufficiently reduced. Id. at 30734.

+
+
fn +

2757 Id.

+
+
fn +

2758 FSR Letter at 2; SIFMA Letter at 22.

+
+
fn +

2759 An analysis related to Capital Formation can be found in Section V.G.3., infra.

+
+
fn +

2760 Response Letter I at 59.

+
+
fn +

2761 See Notice, supra note 5, at 30734.

+
+
fn +

2762 Id. at 30764–65.

+
+
fn +

2763 FIF Letter at 12; SIFMA Letter at 35.

+
+
fn +

2764 SIFMA Letter at 16–17.

+
+
fn +

2765 Response Letter I at 28–29.

+
+
fn +

2766 Response Letter II at 16.

+
+
fn +

2767 SIFMA Letter at 17.

+
+
fn +

2768 See Notice, supra note 5, at 30734–35.

+
+
fn +

2769 See CAT NMS Plan, supra note 5, at Section 11.1(d).

+
+
fn +

2770 See Notice, supra note 5, at 30735–36.

+
+
fn +

2771 See CAT NMS Plan, supra note 5, at Section 11.3.

+
+
fn +

2772 Id.

+
+
fn +

2773 See Notice, supra note 5, at 30766–69.

+
+
fn +

2774 Using MIDAS data, Commission Staff analyzed the number of equity exchange proprietary feed messages and trades during the week of October 12, 2015 and provided the results in the Notice. The message per trade ratio varied across exchanges from 38.46 to 987.17, with a median of 57.21.

+
+
fn +

2775 The Commission’s data analysis as reported in the Notice confirmed this for the smallest exchanges. Except for the smallest exchanges, the trade-to-message ratios range from about 0.016 trades for every quote update to about 0.026 trades for every quote update and appear constant across market share levels. However, the smallest exchanges by market share have only about 0.001 trades for every quote update to about 0.009 trades for every quote update.

+
+
fn +

2776 SIFMA Letter at 16–17.

+
+
fn +

2777 KCG Letter at 5.

+
+
fn +

2778 DAG Letter at 5.

+
+
fn +

2779 SIFMA Letter at 16; FSI Letter at 6.

+
+
fn +

2780 KCG Letter; SIFMA Letter; Fidelity Letter; FSR Letter; DAG Letter; Data Boiler Letter; Wachtel Letter; FSI Letter; STA Letter.

+
+
fn +

2781 See Section VI.G.1.a.(1)A., supra.

+
+
fn +

2782 While FIF recommends exempting equity market makers, they did not provide information that suggests revising the Commission’s OMM vs equity market maker analysis. See FIF Letter at 65–66. Specifically, the letter says that equity market makers would get the same benefits as OMMs for the quotes that are not paired with orders.

+
+
fn +

2783 See CAT NMS Plan, supra note 5, at Section 4.13(d)–(e).

+
+
fn +

2784 Response Letter I at 17.

+
+
fn +

2785 Response Letter II at 11, 13.

+
+
fn +

2786 Response Letter II at 12.

+
+
fn +

2787 Participants’ Letter at 1; Section IV.B.4, supra.

+
+
fn +

2788 Response Letter II at 14. See supra note 1709.

+
+
fn +

2789 Response Letter II at 10–11.

+
+
fn +

2790 Response Letter II at 17.

+
+
fn +

2791 Participants’ Letter at 1.

+
+
fn +

2792 See _CAT NMS Plan, supra note 5 at Section 11.3.(b): (“For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member.”) The Commission notes that exchange broker-dealers would be subject to message traffic fees as Industry Members under the Plan. However, the Commission notes that based on its analysis of OATS data from September 15–19, 2014, these broker-dealers are minor contributors to overall message traffic, accounting for less than 0.03% of OATS ROEs.

+
+
fn +

2793 See Section IV.E, infra.

+
+
fn +

2794 See CAT NMS Plan, supra note 5, at Section 9.2; see also Section IV.B.4; Participants’ Letter II.

+
+
fn +

2795 See supra note 1709 for further details on fee proposals.

+
+
fn +

2796 17 CFR 242.613(a)(5); see also 15 U.S.C. 78c(f).

+
+
fn +

2797 See Notice, supra note 5, at 30738.

+
+
fn +

2798 Id. at 30738–46.

+
+
fn +

2799 Id. at 30748–50

+
+
fn +

2800 Id. at 30738. As examples, the Commission recognized that the uncertainties around the improvements to data qualities could affect the conclusions on efficiency and the uncertainty regarding how the Operations Committee allocated the fees used to fund the Central Repository could affect the conclusions on competition.

+
+
fn +

2801 Id. at 30739–42.

+
+
fn +

2802 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(a)(i); see also id. at Section 11.2 (for a discussion of the Plan’s funding principles).

+
+
fn +

2803 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(a)(i).

+
+
fn +

2804 See Notice, supra note 5, at 30740.

+
+
fn +

2805 The Participation Fee would be determined by the Operating Company and paid by national securities exchanges and national securities associations currently registered with the Commission (“Participants”) to fund costs incurred in creating, implementing and maintaining the CAT.

+
+
fn +

2806 See Section V.F.5.d, supra.

+
+
fn +

2807 Response Letter II at 12.

+
+
fn +

2808 Response Letter II at 12.

+
+
fn +

2809 See Section V.F.5.d, supra.

+
+
fn +

2810 See Notice, supra note 5, at 30740–41.

+
+
fn +

2811 At the time of the Notice, the twenty SROs that were Participants in the CAT NMS Plan included five sets of affiliated SROs (New York Stock Exchange LLC, NYSE Arca, Inc., and NYSE MKT LLC (the “NYSE Group”); The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., and NASDAQ OMX PHLX LLC (the “NASDAQ Group”); BATS Exchange, Inc., BATS Y-Exchange, Inc., EDGX Exchange, Inc., and EDGA Exchange, Inc. (the “BATS Group”); Chicago Board Options Exchange, Inc. and C2 Options Exchange, Inc. (the “Chicago Options Group”); International Securities Exchange, LLC, ISE Gemini, LLC, and ISE Mercury, LLC (the “ISE Group”); and five independent SROs (National Stock Exchange, Inc.; Chicago Stock Exchange, Inc.; BOX Options Exchange LLC; Miami International Securities Exchange LLC; and Financial Industry Regulatory Authority, Inc.). The BATS Group would have had four votes, the NYSE Group, the NASDAQ Group and the ISE Group each would have had three votes, and the Chicago Options Group would have had two votes. See CAT NMS Plan, supra note 5, at Appendix C, Section D.11(b). A majority approval would have required eleven votes. This could have included as few as four of the SROs and sets of affiliated SROs: the affiliated SROs that would have had four votes, two sets of affiliated SROs that would have had three votes, and one other SRO or set of affiliated SROs. Supermajority approval would have required fourteen votes. This could have included as few as five SROs and sets of affiliated SROs: the affiliated SROs that would have had four votes, three sets of affiliated SROs with three votes, and any additional SRO. Note also that as few as two sets of affiliated SROs could have blocked a Supermajority approval by casting seven “no” votes: the affiliated SROs with four votes and any one of the affiliated SROs with three votes.

+
+
fn +

2812 The Commission also noted that FINRA could represent the perspectives of the off-exchange portion of the market, but FINRA would have only one vote and exchanges would have twenty.

+
+
fn +

2813 See CAT NMS Plan, supra note 5, at Section 9.6; see also Section III.24, supra.

+
+
fn +

2814 17 CFR 242.608(a)(1); 608(b)(2); 608(b)(3)(i); and 608(b)(3)(iii). Pursuant to Rule 608(b)(2) of Regulation NMS, the Commission shall approve such amendment, with such changes or subject to such conditions as the Commission may deem necessary or appropriate, if it finds that such amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act. Approval of the amendment shall be by Commission order.

+
+
fn +

2815 See Notice, supra note 5, at 30741; supra note 1709 for further details on fee proposals.

+
+
fn +

2816 Fidelity Letter at 5, SIFMA Letter at 27 and KCG Letter at 4.

+
+
fn +

2817 See “Recommendations Relating to Trading Venues Regulation”, Equity Market Structure Advisory Committee (“EMSAC”) Trading Venues Regulation Subcommittee, April 19, 2016, at 1, available at https://www.sec.gov/spotlight/emsac/emsac-tradingvenues-subcommittee-recommendations-041916.pdf (describing four recommendations relating to the regulation of trading venues); see also EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.

+
+
fn +

2818 Since the time of the Notice, the Commission approved a new exchange, the Investors' Exchange, LLC (“IEX”), which is an independent SRO, and two sets of affiliated SROs merged, the NASDAQ Group and the ISE Group.

+
+
fn +

2819 The Plan now includes twenty-one SROs with votes on the Operating Committee, including four sets of affiliated SROs and six independent SROs. Compared to the time of the Notice (see supra note 2811), the number of votes required for majority or Supermajority approval remains the same, but the number of SRO blocks required for approval or to block an approval has changed. Now, the NASDAQ-ISE Group has six votes instead of separate blocs of three votes each. A majority approval still requires eleven votes. This could include as few as three of the SROs and sets of affiliated SROs instead of the former four: the affiliated SROs that have six votes, the affiliated SROs that have four votes, and one other SRO or set of affiliated SROs. Supermajority approval still requires fourteen votes. This could include as few as four SROs and sets of affiliated SROs instead of the former five: the affiliated SROs that have six votes, the affiliated SROs that have four votes, the affiliated SROs that have three votes, and any additional SRO or group of affiliated SROs. Note also that, now, as few as two sets of affiliated SROs, instead of the former three, could block a Supermajority approval by casting eight “no” votes: the affiliated SROs with six votes, and the affiliated SRO with two votes.

+
+
fn +

2820 See supra note 1709 for further details on fee proposals.

+
+
fn +

2821 See Notice, supra note 5, at 30741–42.

+
+
fn +

2822 Generally, smaller exchanges will have smaller fees. So, if there are profits, and each exchange receives the same nominal reimbursement amount, then the percentage reduction in fees from the redistributed profit will be greater for smaller exchanges, as they are starting with a smaller denominator in the ratio. This does not speak to the relative burden of compliance costs, however, which may still disadvantage smaller exchanges.

+
+
fn +

2823 See Section V.F.5.d, supra.

+
+
fn +

2824 Id.

+
+
fn +

2825 SIFMA Letter at 19; KCG Letter at 5; DAG Letter at 5.

+
+
fn +

2826 See Section V.F.5.d, supra.

+
+
fn +

2827 Participants’ Letter at 1; Section IV.B.4, supra.

+
+
fn +

2828 See Section V.G.1.a(1)B, supra.

+
+
fn +

2829 See supra note 2814.

+
+
fn +

2830 Participants’ Letter at 1. See also Section V.F.5.d, supra. for more detail on these modifications and the resulting economic effects.

+
+
fn +

2831 See Section V.E.2.c, supra, for a discussion of how the CAT NMS Plan would enhance surveillance and deter violative behavior.

+
+
fn +

2832 The market for broker-dealer services is described in the Notice, supra note 5, at 30742–44.

+
+
fn +

2833 See Section V.E.2.c., supra.

+
+
fn +

2834 See CAT NMS Plan, supra note 5, at Appendix C B.8.(a)(ii).

+
+
fn +

2835 See CAT NMS Plan, supra note 5, at Appendix C B.7.(b)(iv)(C) (“The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic from firms in each tier. Therefore, larger broker-dealers, generating the majority of message traffic, will be in the higher tiers, and therefore be charged a higher fee. Smaller broker-dealers with low levels of message traffic will be in lower tiers and will be assessed a minimal fee for the CAT. The Participants estimate that up to 75% of broker-dealers will be in the lower tiers of the Funding Model.”).

+
+
fn +

2836 See Notice, supra note 5, at 30743 (citing Adopting Release, supra note 14, at 45749).

+
+
fn +

2837 See Notice, supra note 5, at 30742–44.

+
+
fn +

2838 See Section V.F.5.d, supra.

+
+
fn +

2839 SIFMA Letter at 16–17.

+
+
fn +

2840 TR Letter at 3–4.

+
+
fn +

2841 Wachtel Letter at 1–4.

+
+
fn +

2842 Wachtel Letter at 2–4 (stating that customers of certain small firms are unlikely to engage in violative behavior such as market manipulation and insider trading).

+
+
fn +

2843 Response Letter II at 16.

+
+
fn +

2844 Response Letter II at 20.

+
+
fn +

2845 See Section V.F.5.b., supra.

+
+
fn +

2846 Id.

+
+
fn +

2847 See Notice, supra note 5, at 30744–45.

+
+
fn +

2848 17 CFR 240.17d-2.

+
+
fn +

2849 Without a Central Repository, an SRO wishing to compete as a regulatory services provider would need to invest in the IT infrastructure and enter into the data access agreements necessary to surveil broadly beyond its exchanges’ data resources. By providing access to consolidated trade and order data to all SROs, CAT may reduce barriers to entry for this market. See Securities Exchange Act Release No. 74581 (March 25, 2015), 80 FR 18035 (April 2, 2015) at 18057–58 (describing the barriers to entry of potential new national securities associations).

+
+
fn +

2850 17 CFR 242.613(a)(3)(iv).

+
+
fn +

2851 See “Recommendations Relating to Trading Venues Regulation”, Equity Market Structure Advisory Committee (“EMSAC”) Trading Venues Regulation Subcommittee, April 19, 2016, available at https://www.sec.gov/spotlight/emsac/emsac-trading-venuessubcommittee-recommendations-041916.pdf (describing four recommendations relating to the regulation of trading venues); see also EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt.

+
+
fn +

2852 See EMSAC April 26, 2016 Transcript, available at https://www.sec.gov/spotlight/emsac/emsac-042616-transcript.txt, at 111.

+
+
fn +

2853 See NASDAQ comment on EMSAC, May 24, 2016, available at https://www.sec.gov/comments/265-29/26529-71.pdf.

+
+
fn +

2854 See Notice, supra note 5, at 30745–46.

+
+
fn +

2855 See Section V.G.1.b, supra.

+
+
fn +

2856 See Section V.F.1.c.(2).A, supra.

+
+
fn +

2857 See Section V.F.1.c.(2).A, supra, for more information on broker-dealer use of service bureaus.

+
+
fn +

2858 See Notice, supra note 5, at n.920.

+
+
fn +

2859 See, e.g., FINRA Rule 7470.

+
+
fn +

2860 See Section V.F.4.a(3), supra, for a discussion of the potential exit of service bureaus from the market resulting from the risk of a security breach.

+
+
fn +

2861 The Plan does not mandate the data ingestion format. See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(b). In the Notice, the Commission recognized that the CAT Reporters Study found no difference in expected costs for a fixed format, but requested comment on why the costs may be similar when it would seem logical that allowing flexible data reporting formats would reduce costs for broker-dealers. See Notice, supra note 5, at Section IV.F.5.

+
+
fn +

2862 The Plan estimates that 1,800 broker-dealers are expected to have CAT reporting obligations. Based on data from FINRA, 932 broker-dealers currently report OATS data. 1,800-932=868. See Section VI.F.1.c.(2)A, supra.

+
+
fn +

2863 Id.

+
+
fn +

2864 See Notice, supra note 5, at 30746–48.

+
+
fn +

2865 Id.

+
+
fn +

2866 See Section V.E.2.c, supra.

+
+
fn +

2867 Id.

+
+
fn +

2868 See Section V.D.2.b, supra. These other inefficiencies are discussed above in the Baseline and Benefits Sections.

+
+
fn +

2869 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b); see also Section V.E.2, supra.

+
+
fn +

2870 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b).

+
+
fn +

2871 See Section V.E.2.c, supra.

+
+
fn +

2872 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b) (stating that the CAT NMS Plan could reduce monitoring costs, enable regulators to detect cross-market violative activity more quickly, provide regulators more fulsome access to unprocessed data and timely and accurate information on market activity, and provide CAT Reporters with long term efficiencies resulting from the increase in surveillance capabilities); see also Section V.E.2.c, supra.

+
+
fn +

2873 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b). The Participants surveyed the 10 exchange-operating SRO groups on surveillance downtime. In conversations with Commission staff, the Participants informed Staff that average surveillance downtime was 0.03% from August 1, 2014 to August 31, 2015, and ranged from 0 to 0.21% across SROs.

+
+
fn +

2874 Id.

+
+
fn +

2875 See Section VI.E.2, supra.

+
+
fn +

2876 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C) (discussing benefits of CAT to broker-dealers).

+
+
fn +

2877 Id. at Appendix C, Section B.8(b).

+
+
fn +

2878 Id. at Appendix C, Section B.9.

+
+
fn +

2879 See Section VI.F.2, supra, for a discussion of duplicative reporting and whether broker-dealers would pass costs on to investors.

+
+
fn +

2880 Examples of data requests for later-stage investigations could include commissions paid or locate identifiers.

+
+
fn +

2881 The Commission acknowledged that this decrease in total number of data requests may be partially offset by an increase in the number of investigations in general, because enhanced surveillance is likely to detect more potentially violative activity that would need to be investigated.

+
+
fn +

2882 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b).

+
+
fn +

2883 See, e.g., Schelling, Thomas, “The Strategy of Conflict: Prospectus for a Reorientation of Game Theory,” Journal of Conflict Resolution, Vol. 2 No. 3 (1958); Ellsberg, Daniel, “The Crude Analysis of Strategic Choices,” American Economic Review, Vol. 51, No. 2 (1961).

+
+
fn +

2884 The implicit assumption here is that violative behavior receives diminishing marginal gains and generates increasing marginal harm. See, e.g., Becker, Gary and William Landes, “Essays in the Economics of Crime and Punishment,” Columbia University Press (1974).

+
+
fn +

2885 Data Boiler Letter at 38.

+
+
fn +

2886 Data Boiler Letter at 10, 35.

+
+
fn +

2887 Data Boiler Letter at 10–13, 33, 38.

+
+
fn +

2888 Data Boiler Letter at 38–39.

+
+
fn +

2889 FIF Letter at 29–30; SIFMA Letter at 5; DAG Letter at 2.

+
+
fn +

2890 SIFMA Letter at 5.

+
+
fn +

2891 FIF Letter at 30.

+
+
fn +

2892 Response Letter II at 16.

+
+
fn +

2893 At the time of the Participants Study, there were 19 SROs. All responded to the study. See Section V.F.1.b, supra for discussion of the Participants Study and changes to cost estimates to account for additional Participants.

+
+
fn +

2894 See supra note 2873.

+
+
fn +

2895 See Notice, supra note 5, at 30711.

+
+
fn +

2896 FIF Letter at 30.

+
+
fn +

2897 Response Letter II at 20.

+
+
fn +

2898 See Section V.F.2.b, supra.

+
+
fn +

2899 Id.

+
+
fn +

2900 See supra note 2896.

+
+
fn +

2901 See Notice, supra note 5, at 30748.

+
+
fn +

2902 See Section VI.G.2.a, supra.

+
+
fn +

2903 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(b).

+
+
fn +

2904 SIFMA Letter at 16–17.

+
+
fn +

2905 Response Letter II at 16.

+
+
fn +

2906 See Section IV.F.3., supra.

+
+
fn +

2907 See _Section IV.F, supra.

+
+
fn +

2908 See Notice, supra note 5, at 30748–49.

+
+
fn +

2909 Id. at 30748–50.

+
+
fn +

2910 See Notice, supra note 5, at Section IV.E.2.c(1); see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(B)(1)–(2), B.7(b)(iii)(C).

+
+
fn +

2911 FINRA currently provides cross-market surveillance, but limitations in the data (e.g., reliable cross-market linkages, customer identification, parent order identification) limit the scope and reliability of this surveillance.

+
+
fn +

2912 See Section V.E.2.c., supra, for a discussion of the potential for the efficiencies in surveillance, examinations, and investigations to increase the number of regulatory actions, including investigations of conduct that turns out not to violate laws or regulations.

+
+
fn +

2913 See CAT NMS Plan, supra note 5, at Appendix C, Section B.8(c).

+
+
fn +

2914 Better Markets Letter at 3.

+
+
fn +

2915 Data Boiler Letter at 39.

+
+
fn +

2916 See Section V.E.2.c(1), supra; Section V.E.2.c(3), supra.

+
+
fn +

2917 See Section V.E.2.a., supra.

+
+
fn +

2918 See Section V.E.2.c., supra.

+
+
fn +

2919 See Notice, supra note 5, at 30749–50.

+
+
fn +

2920 Id. at 30749.

+
+
fn +

2921 ICI Letter at 3.

+
+
fn +

2922 See Notice, supra note 5, at 30749.

+
+
fn +

2923 See Notice, supra note 5, at 30750; see also the discussion of the CAT governance structure in Notice, supra note 5, at Section IV.E.4.d, supra.

+
+
fn +

2924 See Notice, supra note 5, at 30750.

+
+
fn +

2925 Id.

+
+
fn +

2926 Id.

+
+
fn +

2927 Id. at 30750–51.

+
+
fn +

2928 Id. at 30751.

+
+
fn +

2929 Id.

+
+
fn +

2930 Id.

+
+
fn +

2931 See Section V.E.3.d(2)B, supra.

+
+
fn +

2932 Id.

+
+
fn +

2933 See Notice, supra note 5, at 30751

+
+
fn +

2934 Id.

+
+
fn +

2935 TR Letter at 9–10; FIF Letter at 95–96; SIFMA Letter at 6.

+
+
fn +

2936 TR Letter at 5; UnaVista Letter at 2; see also Bloomberg Letter at 6–7 (recommending that Section 6.3 of the Plan be amended to specify the use of a uniform, global, open, multi-asset identifier; suggesting one such identifier developed by the commenter).

+
+
fn +

2937 Response Letter I at 40.

+
+
fn +

2938 Id. at 42.

+
+
fn +

2939 See Notice, supra note 5, at 30751.

+
+
fn +

2940 See CAT NMS Plan, supra note 5, at Appendix C, Section A.5(a).

+
+
fn +

2941 SIFMA Letter at 23–24; FIF Letter at 37 (requesting two iterative reviews of order data and customer information specifications before implementation; noting that the 5 months allotted between the production of the customer information specification and implementation for large industry members is similarly insufficient to permit development and testing of a complex new function).

+
+
fn +

2942 Id. Per one commenter, an aggressive timeline that results in “[r]ushing to achieve artificial milestones established without knowledge of the development effort involved, or even the full functionality to be delivered, will only result in poorly built systems, inferior quality of data reporting, missed and delayed schedules and cost overruns, for the Plan Processor, the regulators and the broker-dealer community.” See also FIF Letter at 36.

+
+
fn +

2943 SIFMA Letter at 5–6. The commenter mentioned that such additional capacity and flexibility could be in the form of information, products, or functionality.

+
+
fn +

2944 TR Letter at 4; see also FSR Letter at 10 (recommending “acceleration of the Plan Processor selection process” in order to begin moving forward with formulation of technical specifications; “the release of final technical specifications should drive the implementation timeline”).

+
+
fn +

2945 Response Letter I at 41.

+
+
fn +

2946 Response Letter I at 52.

+
+
fn +

2947 See CAT NMS Plan, supra note 5, at Appendix C, Section C.10.

+
+
fn +

2948 See Section IV.D.8.a, supra.

+
+
fn +

2949 See Section IV.D.8, supra, for further discussion of the comments regarding implementation and the Commission’s response.

+
+
fn +

2950 See Section V.H.12.b, supra.

+
+
fn +

2951 See Section IV.D.15, supra, for further discussion of scalability of the Plan.

+
+
fn +

2952 See Notice, supra note 5, at 30751

+
+
fn +

2953 Id. It would do so because the “effects depend in large part on the efficiency and effectiveness of the Plan Processor.” Id.

+
+
fn +

2954 Id.

+
+
fn +

2955 Id. at 30752.

+
+
fn +

2956 Id.

+
+
fn +

2957 Id.

+
+
fn +

2958 Id.

+
+
fn +

2959 Anonymous Letter I at 1, 19–20.

+
+
fn +

2960 Response Letter I at 52.

+
+
fn +

2961 See Notice, supra note 5, at 30752–53. Specifically, with regard to removal, the Commission noted that “[t]he Plan contains several provisions that would allow the Operating Committee to remove the Plan Processor”—including in specified circumstances by “only a Majority Vote” which “incentivizes the Plan Processor to perform well enough to avoid being removed” but that it “depend[s] significantly on strong oversight by the Operating Committee.” Id. at 30753. However, the Commission also noted that it “recognizes that the effort required to remove a Plan Processor could be significant” and that “significant switching costs could influence whether removing a Plan Processor despite poor performance makes economic sense”—such that “the Plan Processor may only need to perform well enough to keep the inefficiencies associated with their performance from exceeding the cost to switch to another Plan Processor.” Id.

+
+
fn +

2962 Better Markets Letter at 7.

+
+
fn +

2963 Response Letter I at 52.

+
+
fn +

2964 See _Notice, supra note 5, at 30754–76.

+
+
fn +

2965 Id.

+
+
fn +

2966 See Section IV., supra.

+
+
fn +

2967 See Notice, supra note 5, at 30764–65.

+
+
fn +

2968 See Notice, supra note 5, at Section IV.E.1.b(2)B.

+
+
fn +

2969 FIF Letter at 112; SIFMA Letter at 34–35; Better Markets Letter at 8; Data Boiler Letter at 21.

+
+
fn +

2970 FIF Letter at 112; SIFMA Letter at 34–35; Data Boiler Letter at 21. FIF provided additional insight into event sequencing possibilities.

+
+
fn +

2971 FIF Letter at 112.

+
+
fn +

2972 FIF Letter at 112.

+
+
fn +

2973 Data Boiler Letter at 21.

+
+
fn +

2974 SIFMA Letter at 35.

+
+
fn +

2975 Better Markets Letter at 8.

+
+
fn +

2976 Response Letter I at 28-29.

+
+
fn +

2977 FIF Letter at 112; Data Boiler Letter at 21.

+
+
fn +

2978 See CAT NMS Plan, supra note 5, at Appendix C, Section A.3(c).

+
+
fn +

2979 Response Letter I at 29.

+
+
fn +

2980 See Notice supra note 5, at 30684–85.

+
+
fn +

2981 Id. at 30765–66.

+
+
fn +

2982 FSR Letter at 9; UnaVista Letter at 3–4; SIFMA Letter at 6; FIF Letter at 50; Better Markets Letter at 9.

+
+
fn +

2983 FSR Letter at 9; UnaVista Letter at 3–4.

+
+
fn +

2984 UnaVista Letter at 3.

+
+
fn +

2985 FSR Letter at 9.

+
+
fn +

2986 FIF Letter at 51–52.

+
+
fn +

2987 FIF Letter at 55-56.

+
+
fn +

2988 Better Markets Letter at 9.

+
+
fn +

2989 SIFMA Letter at 6; FIF Letter at 50.

+
+
fn +

2990 FIF Letter at 50.

+
+
fn +

2991 FIF Letter at 50.

+
+
fn +

2992 SIFMA Letter at 6.

+
+
fn +

2993 SIFMA Letter at 6; FIF Letter at 50.

+
+
fn +

2994 SIFMA Letter at 6; FIF Letter at 50.

+
+
fn +

2995 UnaVista Letter at 3.

+
+
fn +

2996 Better Markets Letter at 9.

+
+
fn +

2997 SIFMA Letter at 6; FIF Letter at 50.

+
+
fn +

2998 Better Markets Letter at 9.

+
+
fn +

2999 Better Markets Letter at 9.

+
+
fn +

3000 See Section IV.D.10., supra.

+
+
fn +

3001 See Notice, supra note 5, at 30766.

+
+
fn +

3002 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(a)(iv).

+
+
fn +

3003 Id. In earlier comment letters submitted to the Participants, FIF and SIFMA maintained that the T+3 deadline may not be feasible and would prove costly to market participants. See Letter from Manisha Kimmel, Managing Director, FIF, to the Participants, dated November 19, 2014, available at http://www.catnmsplan.com/industryfeedback/p601972.pdf; Industry Recommendations for the Creation of a Consolidated Audit Trail (CAT), SIFMA, March 28, 2013, available at http://www.catnmsplan.com/industryfeedback/p242319.pdf.

+
+
fn +

3004 See CAT NMS Plan, supra note 5, at Appendix C, Section A.1(a)(iv).

+
+
fn +

3005 See Notice, supra note 5, at 30766.

+
+
fn +

3006 FIF Letter at 3, 9, 52–53; KCG Letter at 9.

+
+
fn +

3007 KCG Letter at 9.

+
+
fn +

3008 FIF Letter at 52.

+
+
fn +

3009 FIF Letter at 53.

+
+
fn +

3010 FIF Letter at 59–60.

+
+
fn +

3011 UnaVista Letter at 4.

+
+
fn +

3012 Response Letter I at 30.

+
+
fn +

3013 Response Letter I at 30.

+
+
fn +

3014 Response Letter III at 13. The letter states that the percentages were determined by FINRA based on a review of OATS data from August 2016.

+
+
fn +

3015 Response Letter III at 13.

+
+
fn +

3016 Under the Plan’s approach, the deadline for the Plan Processor to validate customer data and generate error reports is 5:00 p.m. on T+1, and the deadline for the submission of corrected data is 8:00 a.m. ET on T+3. See Appendix C, Section A.1(a)(iv).

+
+
fn +

3017 See Section V.E.1.d, supra (noting that corrected OATS data is currently available to FINRA by T+8, and that under the Plan, regulators will be able to access corrected CAT Data three days earlier).

+
+
fn +

3018 See Notice, supra note 5, at 30769–70.

+
+
fn +

3019 Data Boiler Letter at 37–38.

+
+
fn +

3020 See _Notice, supra note 5, at 30730.

+
+
fn +

3021 Bloomberg Letter at 5.

+
+
fn +

3022 FIF Letter at 95.

+
+
fn +

3023 FIF Letter at 95.

+
+
fn +

3024 FIF Letter at 95.

+
+
fn +

3025 Response Letter II at 7.

+
+
fn +

3026 Response Letter II at 7.

+
+
fn +

3027 Response Letter II at 7.

+
+
fn +

3028 Response Letter III at 13.

+
+
fn +

3029 See Notice, supra note 5, at 30764. This is one of the alternatives suggested in the FIF Clock Offset Survey. See supra note 247.

+
+
fn +

3030 See Section IV.D.13, supra.

+
+
fn +

3031 FIF Letter at 108, 122.

+
+
fn +

3032 See Notice, supra note 5, at 30770.

+
+
fn +

3033 SIFMA Letter at 33.

+
+
fn +

3034 SIFMA Letter at 33.

+
+
fn +

3035 Data Boiler Letter at 1, 10.

+
+
fn +

3036 UnaVista Letter at 4.

+
+
fn +

3037 UnaVista Letter at 4.

+
+
fn +

3038 Response Letter I at 42.

+
+
fn +

3039 Response Letter I at 43.

+
+
fn +

3040 Response Letter I at 43.

+
+
fn +

3041 Response Letter I at 43.

+
+
fn +

3042 SIFMA Letter at 33.

+
+
fn +

3043 See Notice, supra note 5, at 30691.

+
+
fn +

3044 SIFMA Letter at 33.

+
+
fn +

3045 See Section V.F.1, supra, for further discussion of the costs of bulk downloads by the Participants.

+
+
fn +

3046 See Section IV.D.6.f, supra.

+
+
fn +

3047 Id.

+
+
fn +

3048 See Section IV.D.6.o, supra.

+
+
fn +

3049 Data Boiler Letter at 1, 10.

+
+
fn +

3050 See Section IV.D.3, supra.

+
+
fn +

3051 See Adopting Release, supra note 14, at 45765. Indeed, Rule 613 stated that the CAT NMS Plan may not impose a reporting deadline earlier than 8:00 a.m. ET. 17 CFR 242.613(c)(3).

+
+
fn +

3052 See Adopting Release, supra note 14, at 45768.

+
+
fn +

3053 Id. at 45769.

+
+
fn +

3054 Response Letter I at 43.

+
+
fn +

3055 For further discussion of the alternatives related to the data ingestion format, See Section V.H.12, infra.

+
+
fn +

3056 See Notice, supra note 5, at 30764.

+
+
fn +

3057 FIF Letter at 122–23.

+
+
fn +

3058 See Notice, supra note 5, at 30772.

+
+
fn +

3059 See CAT NMS Plan, supra note 5, at Appendix C, Section C.9. Section 6.11 of the Plan satisfies a requirement in 17 CFR 242.613(i) to plan for expansion.

+
+
fn +

3060 17 CFR 242.613(a)(1)(vi); CAT NMS Plan, supra note 5, at Appendix C, Section A.6.

+
+
fn +

3061 See Notice, supra note 5, at 30772.

+
+
fn +

3062 See CAT NMS Plan, supra note 5, at Appendix C, Section A.6(b)–(c).

+
+
fn +

3063 Id. at Appendix C, Section A.6(c).

+
+
fn +

3064 See Notice, supra note 5, at 30772.

+
+
fn +

3065 Id.

+
+
fn +

3066 Id. at 30773.

+
+
fn +

3067 Id.

+
+
fn +

3068 See CAT NMS Plan, supra note 5, at Appendix C, Section A.6(c).

+
+
fn +

3069 See Notice, supra note 5, at 30773.

+
+
fn +

3070 Id. at 30773–74.

+
+
fn +

3071 Commenters also provided general information on primary market transactions that could inform the Discussion Document. See FIF Letter at 118–20; SIFMA Letter at 36; Hanley Letter at 1–6.

+
+
fn +

3072 FIF Letter at 118–19.

+
+
fn +

3073 Hanley Letter at 4.

+
+
fn +

3074 FIF Letter at 118; Hanley Letter at 4.

+
+
fn +

3075 Hanley Letter at 4.

+
+
fn +

3076 Hanley Letter at 4.

+
+
fn +

3077 Hanley Letter at 5–6.

+
+
fn +

3078 FIF Letter at 120.

+
+
fn +

3079 FIF Letter at 120; Hanley Letter at 4; SIFMA Letter at 36.

+
+
fn +

3080 Hanley Letter at 4.

+
+
fn +

3081 SIFMA Letter at 36.

+
+
fn +

3082 Hanley Letter at 4–5.

+
+
fn +

3083 FIF Letter at 120.

+
+
fn +

3084 FIF Letter at 13, 120.

+
+
fn +

3085 FIF Letter at 119.

+
+
fn +

3086 Hanley Letter at 5–6.

+
+
fn +

3087 Response Letter I at 49.

+
+
fn +

3088 Response Letter I at 50.

+
+
fn +

3089 Hanley Letter at 1–4.

+
+
fn +

3090 See Section VI.F.2, supra.

+
+
fn +

3091 See CAT NMS Plan, supra note 5, at Appendix C, Section A.6(a).

+
+
fn +

3092 See Notice, supra note 5, at 30773.

+
+
fn +

3093 See Notice, supra note 5, at 30775–76.

+
+
fn +

3100 See Section V.E.3.a, supra.

+
+
fn +

3094 FIF Letter at 22.

+
+
fn +

3095 FIF Letter at 93.

+
+
fn +

3096 Data Boiler Letter at 41.

+
+
fn +

3097 Response Letter I at 31–32.

+
+
fn +

3098 Response Letter I at 31–32.

+
+
fn +

3099 Response Letter I at 31–32.

+
+
fn +

3101 Response Letter I, at 31–32.

+
+
fn +

3102 FIF Letter at 1, 9, 60–61; KCG Letter at 7–8.

+
+
fn +

3103 TR Letter at 8.

+
+
fn +

3104 Bloomberg Letter at 7.

+
+
fn +

3105 SIFMA Letter at 20; Fidelity Letter at 4; ICI Letter at 6–7.

+
+
fn +

3106 FSR Letter at 7.

+
+
fn +

3107 Response Letter I at 43–44.

+
+
fn +

3108 See CAT NMS Plan, supra note 5, at Appendix D, Section 8.2.

+
+
fn +

3109 FIF Letter at 60–61.

+
+
fn +

3110 See CAT NMS Plan, supra note 5, at Appendix D, Section 10.1.

+
+
fn +

3111 For example, the Commission does not know how many of the errors that may need to be corrected may be rooted in a problem that a CAT Reporter would require bulk-downloaded data to detect.

+
+
fn +

3112 See Section V.F.4.a, supra.

+
+
fn +

3113 Response Letter I at 44.

+
+
fn +

3114 See Notice, supra note 5, at 30776.

+
+
fn +

3115 Id.

+
+
fn +

3116 Id.

+
+
fn +

3117 Id.

+
+
fn +

3118 Id.

+
+
fn +

3119 FIF Letter at 121.

+
+
fn +

3120 Better Markets Letter at 3–5.

+
+
fn +

3121 Specifically, the commenter stated that allowing the SROs ownership, management, and control over the data, without direct SEC oversight and control, would have “serious and unacceptable” consequences, because there will be a limited number of user accounts allocated to the SEC; there may be limitations on the SEC’s access to the data for non-regulatory purposes; the potential exists for the CAT LLC to charge the SEC for accessing the CAT system and its data; the SEC does not participate directly in the governance of the CAT Plan; the CAT Plan Participants may dismiss the Plan Processor with no notice to the SEC; and the Plan Participants may make material changes to the functions and operations of the CAT NMS system (or matters related to the CAT data).

+
+
fn +

3122 See supra note 747.

+
+
fn +

3123 See Notice, supra note 5, at 30779–82 (Request for Comment Nos. 437–50).

+
+
fn +

3124 The Commission received one comment on its request for comment regarding the organizational structure. Better Markets opposes the for-profit nature of the CAT LLC and the fact that the Commission would not control that corporation. See Section IV.B.4, supra, discusses the Participants’ and the Commission’s responses to that comment. Specifically, the CAT LLC will not be for-profit.

+
+
fn +

3125 Many commenters suggested alternative approaches to maintain the security and confidentiality of PII. See Section IV.D.7.b, supra, for a summary of these comments and the Commission’s response.

+
+
fn +

3126 Data Boiler suggested including the “results order event” and the “CAT feedback order event” as a “way to introduce randomness for the sake of improving information security control.” While the Commission is sensitive to security, the Commission still does not have sufficient information to distinguish these order events from the required order event types to ascertain the benefits other than the security benefits mentioned by this commenter or to analyze the costs of reporting these order types. See Data Boiler Letter at 42.

+
+
fn +

3127 Data Boiler suggested receiving SIP data in real-time, but did so conditional on the Central Repository receiving the data in real-time. Because the SROs may already get SIP data in real-time for other purposes and the CAT reporting will be on T+1, the Commission still does not have sufficient information to fully analyze the alternative of receiving SIP data in real-time. See Data Boiler Letter at 42; see also Section IV.D.3, supra, for the Commission’s response to this comment.

+
+
fn +

3128 Data Boiler suggested not mandating an approach to industry testing because “appropriate management flexibilities/discretions are needed,” but did not provide further explanation that would allow the Commission to better understand the economic tradeoffs. See Data Boiler Letter at 42. Further, FIF suggested specific testing standards but did not provide further explanation that would allow the Commission to better understand the economic tradeoffs of specifying these standards. See FIF Letter at 13, 125–26; see also Section IV.D.12, supra, for the Commission’s response to these comments.

+
+
fn +

3129 FIF stated that the Plan does not need to require a specific approach to user management, but that the Plan should specify some functionality and criteria for evaluation of the approach. For example, the user management system should provide for on-boarding and support levels of entitlement. See FIF Letter at 129–30. The commenter did not provide further explanation that would allow the Commission to better understand the costs and benefits of specifying these functionalities or not specifying an approach. Further, SIFMA provided specific suggestions for user management but did not specifically address the relative economic effects of various alternatives. See SIFMA Letter at 21.

+
+
fn +

3130 Data Boiler suggested not mandating an approach to quality assurance because appropriate management flexibilities /discretions are needed, but did not provide further explanation that would allow the Commission to better understand the economic tradeoffs. See Data Boiler Letter at 42.

+
+
fn +

3131 See Notice, supra note 5, at 30780.

+
+
fn +

3132 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(c). Traditionally-hosted storage architecture is a model in which an organization would purchase and maintain proprietary servers and other hardware to store CAT Data. Infrastructure-as-a-service is a provisioning model in which an organization outsources the equipment used to support operations, including storage, hardware, servers, and networking components, to a third party who charges for the service on a usage basis.

+
+
fn +

3133 FIF Letter at 125; FSI Letter at 3; Data Boiler Letter at 8.

+
+
fn +

3134 Data Boiler Letter at 8.

+
+
fn +

3135 FIF Letter at 125.

+
+
fn +

3136 FSI Letter at 3.

+
+
fn +

3137 Data Boiler Letter at 8.

+
+
fn +

3138 See Notice, supra note 5, at 30780–81.

+
+
fn +

3139 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(f); see also id. at Appendix C, Section A.1(a).

+
+
fn +

3140 Id. at Appendix D, Section 2.1.

+
+
fn +

3141 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2), Section D.12(f). These are also called “Approach 1” and “Approach 2” elsewhere in this economic analysis.

+
+
fn +

3142 This is Approach 2 in the CAT Reporters Study. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2).

+
+
fn +

3143 Id. at Appendix C, Section D.12(f).

+
+
fn +

3144 This is Approach 1 in the CAT Reporters Study. Id. at Appendix C, Section B.7(b)(i)(A)(2).

+
+
fn +

3145 Id. at Appendix C, Section D.12(f).

+
+
fn +

3146 Id.

+
+
fn +

3147 Id.

+
+
fn +

3148 See Notice, supra note 5, at 30780–81.

+
+
fn +

3149 See Notice, supra note 5, at 30737 (Request for Comment Nos. 318 and 331).

+
+
fn +

3150 FIF Letter at 91; FIX Trading Letter at 1; Better Markets Letter at 7; ICI Letter at 13.

+
+
fn +

3151 FIF Letter at 90.

+
+
fn +

3152 FIF Letter at 90.

+
+
fn +

3153 FIX Trading Letter at 1.

+
+
fn +

3154 Better Markets Letter at 7.

+
+
fn +

3155 These comments are summarized in more detail in Section IV.D.2, supra.

+
+
fn +

3156 FIF Letter at 90–91; FIX Trading Letter at 1. ICI provided a messaging protocol as an example, but did not recommend a messaging protocol specifically.

+
+
fn +

3157 ICI Letter at 13; Better Markets Letter at 7–8; UnaVista Letter at 2–3.

+
+
fn +

3158 Data Boiler Letter at 36.

+
+
fn +

3159 See Section IV.D.2, supra, for a complete summary of these comments as well as the Participants’ and Commission’s responses.

+
+
fn +

3160 Data Boiler Letter at 41; FIF Letter at 91; FIX Trading Letter at 1; UnaVista Letter at 2–3; ICI Letter at 13; Better Markets Letter at 7–8.

+
+
fn +

3161 Data Boiler Letter at 41; FIF Letter at 90–91; FIX Trading Letter at 1; ICI Letter at 13; Better Markets Letter at 7.

+
+
fn +

3162 Response Letter I at 29; see also Section IV.D.2, supra, for a complete discussion of the Participants’ response.

+
+
fn +

3163 Response Letter III at 13.

+
+
fn +

3164 See Section V.I.4.b.(2), supra, for a discussion of how the costs of switching Plan Processors limits the competitive incentives of the selected Plan Processor and of the provisions that promote good performance by the Plan Processor.

+
+
fn +

3165 See Notice supra note 5, at 30781.

+
+
fn +

3166 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(g). An agile methodology is an iterative model in which development is staggered and provides for continuous evolution of requirements and solutions. A waterfall model is a sequential process of software development with dedicated phases for Conception, Initiation, Analysis, Design, Construction, Testing, Production/Implementation and Maintenance. Id.

+
+
fn +

3167 Id.

+
+
fn +

3168 Id.

+
+
fn +

3169 FIF Letter at 49; Data Boiler Letter at 42.

+
+
fn +

3170 Data Boiler Letter at 42.

+
+
fn +

3171 FIF Letter at 49.

+
+
fn +

3172 See Notice, supra note 5, at 30781.

+
+
fn +

3173 See CAT NMS Plan, supra note 5, at Appendix C, Section D.12(j). The RFP specified these standards. Id.

+
+
fn +

3174 See id. The Plan states that a larger support staff could be more effective, but would be more costly. Further, a dedicated CAT support team would have a deeper knowledge of CAT but would be more costly. Finally, a U.S.-based help desk could facilitate greater security and higher quality service, but would be more costly. Id.

+
+
fn +

3175 FIF Letter at 125–29; Data Boiler Letter at 42.

+
+
fn +

3176 FIF Letter at 125–29.

+
+
fn +

3177 Data Boiler Letter at 42.

+
+
fn +

3178 See Response Letter I at 38.

+
+
fn +

3179 44 U.S.C. 3501 et. seq.

+
+
fn +

3180 See Section VI.E., infra.

+
+
fn +

3181 See Exemption Order, supra note 21. The Commission acknowledges that the CAT NMS Plan as filed contains provisions in addition to those required by Rule 613 (e.g., requiring the inclusion of OTC Equity Securities; the availability of historical data for not less than six years in a manner that is directly available and searchable without manual intervention from the Plan Processor; a complete symbology database to be maintained by the Plan Processor, including the historical symbology; as well as issue symbol information and data using the listing exchange symbology format). See CAT NMS Plan, supra note 5, at Section 1.1 (defining “Eligible Security” as all NMS securities and all OTC Equity Securities); Section 6.5(b)(1); Appendix C, Section A.1(a), Appendix D, Section 2.

+
+
fn +

3182 See supra note 6.

+
+
fn +

3183 In addition to the discussion that follows, the Commission’s cost estimates and responses to cost comments are discussed in detail in Section V.F., supra.

+
+
fn +

3184 See 17 CFR 242.613(c)(1).

+
+
fn +

3185 See 17 CFR 242.613(e)(1).

+
+
fn +

3186 See 17 CFR 242.613(e)(1), (e)(2).

+
+
fn +

3187 See 17 CFR 242.613(c)(3).

+
+
fn +

3188 See 17 CFR 242.613(c)(4).

+
+
fn +

3189 See _17 CFR 242.613(b)(6).

+
+
fn +

3190 See 17 CFR 242.613(a)(3)(iv).

+
+
fn +

3191 See 17 CFR 242.613(i).

+
+
fn +

3192 See 17 CFR 242.613(e)(1).

+
+
fn +

3193 See 17 CFR 242.613(e)(8). The Commission notes that the CAT NMS Plan proposes to require that the Central Repository retain data reported in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for six years. See CAT NMS Plan, supra note 5, at Section 6.5(b)(i).

+
+
fn +

3194 See 17 CFR 242.613(e)(4)(i).

+
+
fn +

3195 See 17 CFR 242.613(e)(4)(i)(A).

+
+
fn +

3196 See 17 CFR 242.613(e)(4)(i)(B).

+
+
fn +

3197 See 17 CFR 242.613(e)(4)(i)(C).

+
+
fn +

3198 Id.

+
+
fn +

3199 See 17 CFR 242.613(e)(4)(i)(D).

+
+
fn +

3200 See 17 CFR 242.613(e)(4)(ii).

+
+
fn +

3201 See 17 CFR 242.613(e)(4)(iii).

+
+
fn +

3202 See 17 CFR 242.613(c)(1), (c)(5), (c)(6), (c)(7).

+
+
fn +

3203 See 17 CFR 242.613(c)(1), (c)(5).

+
+
fn +

3204 See 17 CFR 242.613(c)(1), (c)(6).

+
+
fn +

3205 See 17 CFR 242.613(c)(3).

+
+
fn +

3206 See 17 CFR 242.613(c)(4).

+
+
fn +

3207 See 17 CFR 242.613(c)(2).

+
+
fn +

3208 See 17 CFR 242.613(d)(3).

+
+
fn +

3209 See 17 CFR 242.613(e)(7); 17 CFR 242.601.

+
+
fn +

3210 See 17 CFR 242.613(e)(8).

+
+
fn +

3211 15 U.S.C. 78s(b)(2); 17 CFR 240.19b-4.

+
+
fn +

3212 See 17 CFR 242.613(g)(1).

+
+
fn +

3213 See Securities Exchange Act Release No. 50486 (October 5, 2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) (describing the collection of information requirements contained in Rule 19b-4 under the Exchange Act). The Commission has submitted revisions to the current collection of information titled “Rule 19b-4 Filings with Respect to Proposed Rule Changes by Self-Regulatory Organizations” (OMB Control No. 3235-0045). According to the last submitted revision, for Fiscal Year 2012 SROs submitted 1,688 Rule 19b-4 proposed rule changes.

+
+
fn +

3214 As noted above, the CAT NMS Plan would require the inclusion of OTC Equity Securities, while Rule 613 does not include such a requirement. See supra note 3181.

+
+
fn +

3215 See 17 CFR 242.613(i).

+
+
fn +

3216 See 17 CFR 242.613(b)(6).

+
+
fn +

3217 See id.

+
+
fn +

3218 See Section IV.H., supra.

+
+
fn +

3219 See 17 CFR 242.613(e)(1).

+
+
fn +

3220 See 17 CFR 242.613(e)(2).

+
+
fn +

3221 See 17 CFR 242.613(e)(7).

+
+
fn +

3222 The Commission and Participants use the NBBO to, among other things, evaluate members for compliance with numerous regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS. See 17 CFR 242.611; see also, e.g., ISE Rule 1901 and Phlx Rule 1084.

+
+
fn +

3223 Rules 613(e)(7)(ii) and (iii) require that transaction reports reported pursuant to an effective transaction reporting plan and Last Sale Reports reported pursuant to the OPRA Plan be reported to the Central Repository. This requirement should allow regulators to evaluate certain trading activity. For example, trading patterns of reported and unreported trades may cause Participant or Commission staff to make further inquiries into the nature of the trading to ensure that the public was receiving accurate and timely information regarding executions and that market participants were continuing to comply with trade reporting obligations under Participant rules. Similarly, patterns in the transactions that are reported and unreported to the consolidated tape could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. The Commission and the Participants would be able to review information on trades not reported to the tape to determine whether they should have been reported, whether Section 31 fees should have been paid, and/or whether the trades are part of a manipulative scheme.

+
+
fn +

3224 17 CFR 242.613(f).

+
+
fn +

3225 See 17 CFR 242.613(i); see also supra note 439.

+
+
fn +

3226 17 CFR 242.613(b)(6).

+
+
fn +

3227 See Section IV.H., supra.

+
+
fn +

3228 The Participants are: Bats BZX Exchange, Inc., Bats BYX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. ISE Mercury and IEX will become Participants in the CAT NMS Plan and are thus accounted for as Participants for purposes of this Order. See supra note 10.

+
+
fn +

3229 The Commission understands that the remaining 2,338 registered broker-dealers either trade in asset classes not currently included in the definition of Eligible Security or do not trade at all (e.g., broker-dealers for the purposes of underwriting, advising, private placements). See Notice, supra note 5, at 30712, n.864.

+
+
fn +

3230 See Notice, supra note 5, at 30616.

+
+
fn +

3231 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B). The CAT NMS Plan listed the following as primary drivers of Bid costs: (1) reportable volumes of data ingested into the Central Repository; (2) number of technical environments that would have to be built to report to the Central Repository; (3) likely future rate of increase of reportable volumes; (4) data archival requirements; and (5) user support and/or help desk resource requirements. Id.

+
+
fn +

3232 See id. at Section 4.2(a).

+
+
fn +

3233 See Notice, supra note 5, at 30702.

+
+
fn +

3234 See CAT NMS Plan, supra note 5, at Section 4.3(a)(iii).

+
+
fn +

3235 See id. at Section 4.3(a)(vi).

+
+
fn +

3236 See id. at Section 4.3(b)(i).

+
+
fn +

3237 See id. at Section 4.3(b)(iv).

+
+
fn +

3238 See id. at Section 4.3(b)(v).

+
+
fn +

3239 See id. at Section 4.3(b)(vi).

+
+
fn +

3240 See id. at Section 4.3(b)(vii).

+
+
fn +

3241 See id. at Section 4.3(b)(iii).

+
+
fn +

3242 See id. at Section 4.3(a)(iv).

+
+
fn +

3243 See id. at Section 4.3(a)(ii). Section 4.13(e) of the CAT NMS Plan states that the members of the Advisory Committee shall have the right to receive information concerning the operation of the Central Repository; provided that the Operating Committee retains the authority to determine the scope and content of information supplied to the Advisory Committee, which shall be limited to that information that is necessary and appropriate for the Advisory Committee to fulfill its functions. The Commission is amending this section to state that the members of the Advisory Committee shall receive the same information concerning the operation of the Central Repository as the Operating Committee; provided, however, that the Operating Committee may withhold information it reasonably determines requires confidential treatment. See Section IV.B.2, supra. The Commission does not believe this amendment would change the hourly burden or external cost imposed on Participants for management of the Central Repository.

+
+
fn +

3244 See id. at Section 4.3(a)(i).

+
+
fn +

3245 See id. at Section 4.3(a)(v).

+
+
fn +

3246 See id. at Section 6.1(a).

+
+
fn +

3247 See id. at Section 4.6(b).

+
+
fn +

3248 See id. at Section 6.1(c).

+
+
fn +

3249 See id. at Section 6.1(e).

+
+
fn +

3250 See id. at Section 6.2(a)(iv), (b)(iv).

+
+
fn +

3251 See id. at Section 6.1(n).

+
+
fn +

3252 See id. at Section 6.1(h).

+
+
fn +

3253 See id. at Section 4.12(b).

+
+
fn +

3254 See id. at Section 4.12(a).

+
+
fn +

3255 See id. at Section 5.1(a).

+
+
fn +

3256 See id. at Section 5.1.

+
+
fn +

3257 See id. at Section 5.2(d)(i).

+
+
fn +

3258 See id. at Section 5.2(d)(ii).

+
+
fn +

3259 See id. at Section 5.1(e).

+
+
fn +

3260 See id. at Section 6.7(a)(i).

+
+
fn +

3261 See id. at Appendix C, Section B.7(b)(iii).

+
+
fn +

3262 See id.

+
+
fn +

3263 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii).

+
+
fn +

3264 For example, the Operating Committee would be required to authorize the following actions of the LLC: entering into, modifying or terminating any Material Contract (see id. at Section 4.3(b)(iv)); making any Material Systems Change (see id. at Section 4.3(b)(v)); amending the Technical Specifications on its own motion (see id. at Section 4.3(b)(vii)); and approving the initial Technical Specifications or any Material Amendment to the Technical Specifications proposed by the Plan Processor (see id. at Section 4.3(b)(vi)). Further, the Operating Committee would be able to approve policies, procedures, and control structures related to the CAT System that are consistent with Rule 613(e)(4), Appendix C and Appendix D of the CAT NMS Plan that have been developed and will be implemented by the Plan Processor (see id. at Section 6.1(c)); and in conjunction with the Plan Processor, approve and regularly review (and update as necessary) SLAs governing the performance of the Central Repository (see id. at Section 6.1(h)).

+
+
fn +

3265 See id. at Section 4.3(b)(i).

+
+
fn +

3266 See id. at Section 4.3(a)(ii).

+
+
fn +

3267 See id. at Section 4.13(d).

+
+
fn +

3268 In the case of Affiliated Participants, one individual may be the primary representative for all or some of the Affiliated Participants, and another individual may be the substitute for all or some of the Affiliated Participants. See id. at Section 4.2(a).

+
+
fn +

3269 In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual will have the right to vote on behalf of each such Affiliated Participant. See id. at Section 5.1(a).

+
+
fn +

3270 Rule 613(a)(3)(i) requires the selection of the Plan Processor within 2 months after effectiveness of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(i).

+
+
fn +

3271 Rule 613(a)(3)(iii) requires the Participants to provide to the Central Repository the data required by Rule 613(c) within one year after effectiveness of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(iii).

+
+
fn +

3272 The Commission based this estimate on the internal burden estimate provided in the CAT NMS Plan related to the development of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “…the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimated that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). The Commission believed the staff time incurred for the development of the CAT NMS Plan would be comparable to the staff time incurred for the activities required of the Operating Committee and the Selection Committee for the creation and management of the Central Repository once the Plan is effective. (20 FTEs / 30 months) = 0.667 FTEs per month for all of the Participants to develop the CAT NMS Plan. Converting this into burden hours, (0.667 FTEs) x (12 months) x (1,800 burden hours per year) =14,407 initial burden hours for all of the Participants to develop the CAT NMS Plan. (14,407 burden hours for all Participants / 20 Participants) = 720 initial burden hours for each Participant to develop the CAT NMS Plan.

+
+
fn +

3273 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “the Participants have incurred public relations, legal and consulting costs in preparation of the CAT NMS Plan. The Participants estimated the costs of these services to be $8,800,000”). $2,400,000 for all Participants over 12 months = ($8,800,000/44 months between the adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 months). ($2,400,000 / 20 Participants) = $120,000 per Participant over 12 months.

+
+
fn +

3274 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii).

+
+
fn +

3275 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B). See also id. at Appendix C, Section B.7(b)(iv)(A)(1). The Commission noted that the cost associated with the build and maintenance of the Central Repository includes compliance with the requirement in Rule 613(e)(8) that the Central Repository retain information collected pursuant to Rule 613(c)(7) and (e)(7) in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. See id. at Section 6.1(d)(i) (requiring the Plan Processor to comply with the recordkeeping requirements of Rule 613(e)(8)). See also id. at Appendix C, Section D.12(l) (stating that Rule 613(e)(8) requires data to be available and searchable for a period of not less than five years, that broker-dealers are currently required to retain data for six years under Rule 17a-4(a), and that the Participants are requiring CAT Data to be kept online in an easily accessible format for regulators for six years, though this may increase the cost to run the CAT). The Commission notes that changes in technology between the time the Bids were submitted and the time the Central Repository is built could result in changes to the costs to build and operate the Central Repository.

+
+
fn +

3276 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B) (describing the minimum, median, mean and maximum Bidder estimates for the build and maintenance costs of the Central Repository).

+
+
fn +

3277 Id. The Bidders provided a range of estimates. For purposes of this Paperwork Burden Act analysis, the Commission used the build cost of the maximum Bidder estimate. $4,580,000 = $91,600,000/20 SROs.

+
+
fn +

3278 $7 million for each Participant to build the Central Repository = ($4.6 million per Participant in initial one-time costs to compensate the Plan Processor to build the Central Repository) + ($2.4 million per Participant in initial one-time public relations, legal and consulting costs associated with the building of the Central Repository and the selection of the Initial Plan Processor).

+
+
fn +

3279 $140 million for all of the Participants to build the Central Repository = $7 million per Participant to build the Central Repository) x (20 Participants). Id.

+
+
fn +

3280 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B).

+
+
fn +

3281 See Response Letter III at 14–15.

+
+
fn +

3282 IEX became a registered national securities exchange on June 17, 2016. See Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142 (June 23, 2016).

+
+
fn +

3283 Rule 613(a)(3)(i) requires the selection of the Plan Processor within 2 months after effectiveness of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(i).

+
+
fn +

3284 Rule 613(a)(3)(iii) requires the Participants to provide to the Central Repository the data required by Rule 613(c) within one year after effectiveness of the CAT NMS Plan. See 17 CFR 242.613(a)(3)(iii).

+
+
fn +

3285 The Commission based this estimate on the internal burden estimate provided in the CAT NMS Plan related to the development of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “…the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimated that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). The Commission believed the staff time incurred for the development of the CAT NMS Plan would be comparable to the staff time incurred for the activities required of the Operating Committee and the Selection Committee for the creation and management of the Central Repository once the Plan is effective). (20 FTEs / 30 months) = 0.667 FTEs per month for all of the Participants to develop the CAT NMS Plan. Converting this into burden hours, (0.667 FTEs) x (12 months) x (1,800 burden hours per year) =14,407 initial burden hours for all of the Participants to develop the CAT NMS Plan. (14,407 burden hours for all Participants / 21 Participants) = 686.05 initial burden hours for each Participant associated with the management of the creation of the Central Repository and the selection of the Plan Processor.

+
+
fn +

3286 See Notice, supra note 5, at Section V.D.l.a(1).

+
+
fn +

3287 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “the Participants have incurred public relations, legal and consulting costs in preparation of the CAT NMS Plan. The Participants estimate the costs of these services to be $8,800,000”). $2,400,000 for all Participants over 12 months = ($8,800,000 / 44 months between the adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 months). ($2,400,000 / 21 Participants) = $114,285.71 per Participant over 12 months.

+
+
fn +

3288 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii).

+
+
fn +

3289 See Response Letter III at 14–15.

+
+
fn +

3290 See id.

+
+
fn +

3291 Id. The Participants provided a range of Bidder estimates. For purposes of this Paperwork Burden Act analysis, the Commission is using the build cost of the maximum estimate. $3,095,238.09 = $65,000,000 / 21 Participants.

+
+
fn +

3292 $3,209,523.80 for each Participant to build the Central Repository = ($3,095,238.09 per Participant in initial one-time costs to compensate the Plan Processor to build the Central Repository) + ($114,285.71 per Participant in initial one-time public relations, legal and consulting costs associated with the building of the Central Repository and the selection of the Initial Plan Processor).

+

Commission staff notes that the Notice for the CAT NMS Plan contained an erroneous estimate of the initial one-time external costs to the Participants to build the Central Repository, estimating that each Participant would incur a cost of $7 million. The correct estimate was $4,476,190.47 per Participant. However, the Commission has subsequently revised its estimated costs to account for updated estimates provided by the Participants. See supra note 3289.

+
+
fn +

3293 $67,399,999.80 for all of the Participants to build the Central Repository = ($3,209,523.80 per Participant to build the Central Repository) x (21 Participants).

+
+
fn +

3294 See CAT NMS Plan, supra note 5, at Section 6.1.

+
+
fn +

3295 See id. at Appendix C, Section B.7(b)(iii).

+
+
fn +

3296 The Commission based this estimate on the internal burden estimate provided in the CAT NMS Plan for the development of the CAT NMS Plan. The Commission noted that the CAT NMS Plan describes the internal burden estimate for the development of the CAT NMS Plan as a cost the Participants will continue to accrue; therefore, the Commission preliminarily believed that it is reasonable to use this burden estimate as the basis for its ongoing internal burden estimate for the maintenance of the Central Repository, particularly as the Commission believed the reasons for the staff time incurred for the development of the CAT NMS Plan would be comparable to those of the staff time to be incurred by the Operating Committee and the Selection Committee for the continued management of the Central Repository. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “…the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). (20 FTEs / 30 months) = 0.667 FTEs per month for all of the Participants to continue management of the Central Repository. Converting this into burden hours, (0.667 FTEs) x (12 months) x (1,800 burden hours per year) = 14,407 ongoing annual burden hours for all of the Participants to continue management of the Central Repository. (14,407 ongoing annual burden hours for all Participants / 20 Participants) = 720 ongoing annual burden hours for each Participant to continue management of the Central Repository.

+
+
fn +

3297 The Commission based this external cost estimate on the public relations, legal and consulting external cost estimate provided in the CAT NMS Plan associated with the preparation of the CAT NMS Plan (which the Participants consider “reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan”). See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “the Participants have incurred public relations, legal and consulting costs in preparation of the CAT NMS Plan. The Participants estimated the costs of these services to be $8,800,000”). $2,400,000 for all Participants over 12 months = ($8,800,000 / 44 months between the adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 months). Because the Central Repository will have already been created, the Commission believed it is reasonable to assume that the Participants will have a lesser need for public relations, legal and consulting services. The Commission estimated that the Participants will incur one-third of the external cost associated with development and implementation of the Central Repository to maintain the Central Repository. $800,000 = (0.333) x ($2,400,000). ($800,000 / 20 Participants) = $40,000 per Participant over 12 months.

+
+
fn +

3298 See Section V.F.1.a, supra, for a discussion of the total five-year operating costs for the Central Repository presented in the CAT NMS Plan. See also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B).

+
+
fn +

3299 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B).

+
+
fn +

3300 See supra note 3276.

+
+
fn +

3301 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(B).

+
+
fn +

3302 The Bidders provided a range of estimates. For purposes of this Paperwork Burden Act analysis, the Commission preliminarily used the maximum operation and maintenance cost estimate. $4,650,000 = $93,000,000 / 20 Participants. See also Section V.F.1.a, supra. The Commission noted several uncertainties that may affect the Central Repository cost estimates, including (1) that the Participants have not yet selected a Plan Processor and the Shortlisted Bidders have submitted a wide range of cost estimates for building and operating the Central Repository; (2) the Bids submitted by the Shortlisted Bidders may not be final because they may be revised before the final selection of the CAT Processor; and (3) neither the Bidders nor the Commission can anticipate the evolution of technology and market activity with precision, as improvements in available technology may allow the Central Repository to be built and operated at a lower cost than is currently anticipated, but if levels of anticipated market activity are materially underestimated, the capacity of the Central Repository may need to be increased, resulting in an increase in costs.

+
+
fn +

3303 $4,740,000 for each Participant to build the Central Repository = ($4.7 million per Participant in ongoing annual costs to build the Central Repository) + ($40,000 per Participant in ongoing annual public relations, legal and consulting costs associated with the maintenance of the Central Repository).

+
+
fn +

3304 $94,800,000 for all of the Participants to maintain the Central Repository = ($4,740,000 per Participant to compensate the Plan Processor and for external public relations, legal and consulting costs associated with the maintenance of the Central Repository) x (20 Participants).

+
+
fn +

3305 Data Boiler Letter at 15.

+
+
fn +

3306 Data Boiler Letter at 15.

+
+
fn +

3307 See Response Letter III at 14–15. The Commission continues to believe that estimating Central Repository costs using estimates from the Bids is reliable and is therefore updating its cost estimates to reflect the updates provided by the Participants.

+
+
fn +

3308 See supra note 3282.

+
+
fn +

3309 The Commission is basing this estimate on the internal burden estimate provided in the CAT NMS Plan for the development of the CAT NMS Plan. The Commission notes that the CAT NMS Plan describes the internal burden estimate for the development of the CAT NMS Plan as a cost the Participants will continue to accrue; therefore, the Commission believes that it is reasonable to use this burden estimate as the basis for its ongoing internal burden estimate for the maintenance of the Central Repository, particularly as the Commission believes the reasons for the staff time incurred for the development of the CAT NMS Plan would be comparable to those of the staff time to be incurred by the Operating Committee and the Selection Committee for the continued management of the Central Repository. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “…the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). (20 FTEs / 30 months) = 0.667 FTEs per month for all of the Participants to continue management of the Central Repository. Converting this into burden hours, (0.667 FTEs) x (12 months) x (1,800 burden hours per year) = 14,407 ongoing annual burden hours for all of the Participants to continue management of the Central Repository. (14,407 ongoing annual burden hours for all Participants / 21 Participants) = 686.05 ongoing annual burden hours for each Participant to continue management of the Central Repository.

+
+
fn +

3310 See Notice, supra note 5, at Section V.D.l.a(1).

+
+
fn +

3311 The Commission is basing this external cost estimate on the public relations, legal and consulting external cost estimate provided in the CAT NMS Plan associated with the preparation of the CAT NMS Plan (which the Participants consider “reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan”). See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “the Participants have incurred public relations, legal and consulting costs in preparation of the CAT NMS Plan. The Participants estimate the costs of these services to be $8,800,000”). $2,400,000 for all Participants over 12 months = ($8,800,000/44 months between the adoption of Rule 613 and the filing of the CAT NMS Plan) x (12 months). Because the Central Repository will have already been created, the Commission believes it is reasonable to assume that the Participants will have a lesser need for public relations, legal and consulting services. The Commission is estimating that the Participants will incur one-third of the external cost associated with development and implementation of the Central Repository to maintain the Central Repository. $800,000 = (0.333) x ($2,400,000). ($800,000 / 21 Participants) = $38,095.24 per Participant over 12 months.

+
+
fn +

3312 See supra note 3282.

+
+
fn +

3313 See Response Letter III at 14–15.

+
+
fn +

3314 Id.

+
+
fn +

3315 The Participants provided a range of Bidder estimates. See id. For purposes of this Paperwork Burden Act analysis, the Commission is using the maximum operation and maintenance cost estimate. $2,619,047.62 = $55,000,000 / 21 Participants. The Commission noted several uncertainties that may affect the Central Repository cost estimates, including (1) that the Participants have not yet selected a Plan Processor and the Shortlisted Bidders have submitted a wide range of cost estimates for building and operating the Central Repository; (2) the Bids submitted by the Shortlisted Bidders may not be final because they may be revised before the final selection of the CAT Processor; and (3) neither the Bidders nor the Commission can anticipate the evolution of technology and market activity with precision, as improvements in available technology may allow the Central Repository to be built and operated at a lower cost than is currently anticipated, but if levels of anticipated market activity are materially underestimated, the capacity of the Central Repository may need to be increased, resulting in an increase in costs.

+
+
fn +

3316 $2,657,142.86 for each Participant to maintain the Central Repository = ($2,619,047.62 per Participant in ongoing annual costs to maintain the Central Repository) + ($38,095.24 per Participant in ongoing annual public relations, legal and consulting costs associated with the maintenance of the Central Repository).

+
+
fn +

3317 $55,800,000.06 for all of the Participants to maintain the Central Repository = ($2,657,142.86 per Participant to compensate the Plan Processor and for external public relations, legal and consulting costs associated with the maintenance of the Central Repository) x (21 Participants).

+
+
fn +

3318 15 U.S.C. 78q(a); 17 CFR 240.17a-1.

+
+
fn +

3319 Third-party provider costs are generally legal and consulting costs, but may include other outsourcing. The template used by respondents is available at http://catnmsplan.com/PastEvents/ under the Section titled “6/23/14” at the “Cost Study Working Template” link.

+
+
fn +

3320 The Commission notes that throughout this Paperwork Reduction Act analysis, it is categorizing the FTE cost estimates for the Participants, as well as the broker-dealer respondents, that were provided in the CAT NMS Plan as an internal burden. To convert the FTE cost estimates into internal burden hours, the Commission: (1) divided the FTE cost estimates by a divisor of $424,350, which is the Commission’s estimated average salary for a full-time equivalent employee in the securities industry in a job category associated with regulatory data reporting; and then (2) multiplied the quotient by 1,800 (the number of hours a full-time equivalent employee is estimated to work per year). See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192. The Participants represented that the cost per FTE is $401,440. The $401,440 figure used in the CAT NMS Plan was based on a Programmer Analyst’s salary ($193 per hour) from SIFMA’s Management & Professional Earnings in the Securities Industry 2008, multiplied by 40 hours per week, then multiplied by 52 weeks per year. The Commission has updated this number to include recent salary data for other job categories associated with regulatory data reporting in the securities industry, using the hour and multiple methodology used by the Commission in its paperwork burden analyses. The Commission is using $424,350 as its annual cost per FTE for purposes of its cost estimates. The $424,350 FTE cost = 25% Compliance Manager + 75% Programmer Analyst (0.25) x ($283 per hour x 1,800 working hours per year) + (0.75) x ($220 per hour x 1,800 working hours per year). The $283 per hour figure for a Compliance Manager and the $220 per hour figure for a Programmer Analyst are from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by the Commission to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.

+
+
fn +

3321 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2). Of the $17,900,000 in aggregate total costs, $11,070,000 is identified (subtotal of FTE costs and outsourcing), but the remaining $6,830,000 is not identified in the CAT NMS Plan. The Commission believes that the $6,830,000 may be attributed to hardware costs because the Participants have not provided any hardware costs associated with data reporting elsewhere and the Commission believes that the Participants will likely incur external costs to purchase upgraded hardware to report data to the Central Repository.

+
+
fn +

3322 ($10,300,000 anticipated initial FTE costs) / (20 SROs) = $515,000 in anticipated initial FTE costs per Participant. ($515,000 in anticipated initial FTE costs per Participant) / ($424,350 FTE costs per Participant) = 1.214 anticipated FTEs per Participant for the implementation of data reporting. (1.214 FTEs) x (1,800 working hours per year) = 2,184.5 initial burden hours per Participant to implement CAT Data reporting.

+
+
fn +

3323 ($770,000 anticipated initial third party costs) / (20 Participants) = $38,500 in initial anticipated third party costs per Participant.

+
+
fn +

3324 To determine the total initial external cost per Participant, the Commission subtracted the anticipated initial FTE cost estimates for the Participants as provided in the Plan from the total aggregate initial costs to the Participants and divided the remainder by 20 Participants. ($17,900,000 total aggregate initial cost to Participants) – ($10,300,000 initial FTE cost to Participants) = $7,600,000. ($7,600,000) / 20 Participants = $380,000 in initial external costs per Participant. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the Participants’ anticipated costs associated with the implementation of regulatory reporting to the Central Repository.

+
+
fn +

3325 43,690 initial burden hours = (20 Participants) x (2,184.5 initial burden hours).

+
+
fn +

3326 $7,600,000 = ($380,000 in initial external costs) x (20 Participants).

+
+
fn +

3327 Data Boiler Letter at 35.

+
+
fn +

3328 Data Boiler Letter at 35.

+
+
fn +

3329 There were 19 Participants at the time the Participants conducted the study.

+
+
fn +

3330 See supra note 3282.

+
+
fn +

3331 ($10,300,000 anticipated initial FTE costs) / (21 Participants) = $490,476.19 in anticipated initial FTE costs per Participant. ($490,476.19 in anticipated initial FTE costs per Participant) / ($424,350 FTE costs per Participant) = 1.156 anticipated FTEs per Participant for the implementation of data reporting. (1.156 FTEs) x (1,800 working hours per year) = 2,080.8 initial burden hours per Participant to implement CAT Data reporting.

+
+
fn +

3332 ($770,000 anticipated initial third party costs) / (21 Participants) = $36,666.67 in initial anticipated third party costs per Participant.

+
+
fn +

3333 To determine the total initial external cost per Participant, the Commission subtracted the anticipated initial FTE cost estimates for the Participants as provided in the Plan from the total aggregate initial costs to the Participants and divided the remainder by 21 Participants. ($17,900,000 total aggregate initial cost to Participants) – ($10,300,000 initial FTE cost to Participants) = $7,600,000. ($7,600,000) / 21 Participants = $361,904.76 in initial external costs per Participant. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the Participants’ anticipated costs associated with the implementation of regulatory reporting to the Central Repository.

+
+
fn +

3334 43,696.80 initial burden hours = (21 Participants) x (2,080.80 initial burden hours).

+
+
fn +

3335 $7,599,999.96 = ($361,904.76 in initial external costs) x (21 Participants).

+
+
fn +

3336 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2). The CAT NMS Plan did not identify the other costs.

+
+
fn +

3337 Of the $14,700,000 in aggregate total annual costs, $8,020,000 is identified (subtotal of FTE costs and outsourcing), but the remaining $6,680,000 is not identified in the CAT NMS Plan. The Commission believes that this amount may be attributed to hardware costs because the Participants have not provided any hardware costs associated with data reporting elsewhere and the Commission believes that the Participants will likely incur costs to upgrade their hardware to report data to the Central Repository.

+
+
fn +

3338 ($7,300,000 in anticipated Participant annual FTE costs) / (20 Participants) = $365,000 in anticipated per Participant annual FTE costs. ($365,000 in anticipated per Participant FTE costs) / ($424,350 FTE cost per Participant) = 0.86 anticipated FTEs per Participant. (0.86 FTEs) x (1,800 working hours per year) = 1,548.3 burden hours per Participant to maintain CAT Data reporting.

+
+
fn +

3339 ($720,000 in annual third party costs) / (20 Participants) = $36,000 per Participant in anticipated annual third party costs.

+
+
fn +

3340 To determine the total external annual cost per Participant, the Commission subtracted the anticipated annual FTE cost estimates for the Participants as provided in the Plan from the total aggregate annual costs to the Participants and divided the remainder by 20 Participants. ($14,700,000 total aggregate annual cost to Participants) – ($7,300,000 annual FTE cost to Participants) = $7,400,000. ($7,400,000) / 20 Participants = $370,000 in annual external costs per Participant. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the Participants’ anticipated maintenance costs associated with regulatory reporting to the Central Repository.

+
+
fn +

3341 30,966 annual burden hours = (20 Participants) x (1,548.3 annual burden hours).

+
+
fn +

3342 $7,400,000 = ($370,000 in total annual external costs) x (20 Participants).

+
+
fn +

3343 Data Boiler Letter at 35.

+
+
fn +

3344 Data Boiler Letter at 35.

+
+
fn +

3345 See supra note 3282.

+
+
fn +

3346 ($7,300,000 in anticipated Participant annual FTE costs) / (21 Participants) = $347,619.08 in anticipated per Participant annual FTE costs. ($347,619.05 in anticipated per Participant FTE costs) / ($424,350 FTE cost per Participant) = 0.819 anticipated FTEs per Participant. (0.819 FTEs) x (1,800 working hours per year) = 1,474.20 burden hours per Participant to maintain CAT Data reporting.

+
+
fn +

3347 ($720,000 in annual third party costs) / (21 Participants) = $34,285.71 per Participant in anticipated annual third party costs.

+
+
fn +

3348 To determine the total external annual cost per Participant, the Commission subtracted the anticipated annual FTE cost estimates for the Participants as provided in the Plan from the total aggregate annual costs to the Participants and divided the remainder by 21 Participants. ($14,700,000 total aggregate annual cost to Participants) – ($7,300,000 annual FTE cost to Participants) = $7,400,000. ($7,400,000) / 21 Participants = $352,380.95 in annual external costs per Participant. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(1) for the Participants’ anticipated maintenance costs associated with regulatory reporting to the Central Repository.

+
+
fn +

3349 30,958.20 annual burden hours = (21 Participants) x (1,474.20 annual burden hours).

+
+
fn +

3350 $7,399,999.95 = ($352,380.95 in total annual external costs) x (21 Participants).

+
+
fn +

3351 See 17 CFR 242.613(e)(7).

+
+
fn +

3352 Id.

+
+
fn +

3353 See 17 CFR 242.613(e)(8).

+
+
fn +

3354 See CAT NMS Plan, supra note 5, at Section 6.5(a)(ii).

+
+
fn +

3355 See Notice, supra note 5, at Section V.D.1.c.

+
+
fn +

3356 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2).

+
+
fn +

3357 Id. The Commission also notes that based upon the data provided by the Participants, the source of the remaining $5,140,000 in initial costs to implement new or enhanced surveillance systems is unspecified. The Commission believes that this amount may be attributed to hardware costs because the Participants have not provided any hardware costs associated with surveillance elsewhere and the Commission believes that the Participants will likely incur costs to implement new or enhanced surveillance systems reasonably designed to make use of the consolidated audit trail data.

+
+
fn +

3358 ($17,500,000 in anticipated initial FTE costs) / (20 Participants) = $875,000 in anticipated FTE costs per Participant. ($875,000 in anticipated initial FTE costs per Participant) / ($424,350 FTE cost per Participant) = 2.06 anticipated initial FTEs per Participant. (2.06 FTEs) x (1,800 working hours per year) = 3,711.6 initial burden hours per Participant to implement new or enhanced surveillance systems.

+
+
fn +

3359 (3,711.6 initial burden hours per Participant to implement new or enhanced surveillance systems) x (20 Participants) = 74,232 aggregate initial burden hours.

+
+
fn +

3360 $28,000 = $560,000 / 20 Participants.

+
+
fn +

3361 $285,000 = ($23,200,000 in total initial surveillance costs - $17,500,000 in FTE costs) / (20 Participants).

+
+
fn +

3362 $5,700,000 = $285,000 x 20 Participants.

+
+
fn +

3363 Data Boiler Letter at 33.

+
+
fn +

3364 SIFMA Letter at 33.

+
+
fn +

3365 SIFMA Letter at 18.

+
+
fn +

3366 There were 19 Participants at the time the Participants conducted the study.

+
+
fn +

3367 See Section V.E.2.c(1), supra.

+
+
fn +

3368 See supra note 3282.

+
+
fn +

3369 ($17,500,000 in anticipated initial FTE costs) / (21 Participants) = $833,333.33 in anticipated FTE costs per Participant. ($833,333.33 in anticipated initial FTE costs per Participant) / ($424,350 FTE cost per Participant) = 1.964 anticipated initial FTEs per Participant. (1.964 FTEs) x (1,800 working hours per year) = 3,535.20 initial burden hours per Participant to implement new or enhanced surveillance systems.

+
+
fn +

3370 (3,535.20 initial burden hours per Participant to implement new or enhanced surveillance systems) x (21 Participants) = 74,239.20 aggregate initial burden hours.

+
+
fn +

3371 $26,666.67 = $560,000 / 21 Participants.

+
+
fn +

3372 $271,428.57 = ($23,200,000 in total initial surveillance costs - $17,500,000 in FTE costs) / (21 Participants).

+
+
fn +

3373 $5,699,999.97 = ($271,428.57 in initial external costs) x (21 Participants).

+
+
fn +

3374 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2).

+
+
fn +

3375 Id. The Commission also notes that based upon the data provided by the Participants, the source of the remaining $21,000,000 in ongoing costs to maintain the new or enhanced surveillance systems is unspecified. The Commission believes that this amount may be attributed to hardware costs because the Participants have not provided any hardware costs associated with surveillance elsewhere and the Commission believes that the Participants would likely incur costs associated with maintaining the new or enhanced surveillance systems.

+
+
fn +

3376 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(B)(2).

+
+
fn +

3377 ($66,700,000 in anticipated ongoing FTE costs) / (20 Participants) = $3,335,000 in anticipated ongoing FTE costs per Participant. ($3,335,000 in anticipated ongoing FTE costs per Participant) / ($424,350 FTE cost per Participant) = 7.86 anticipated FTEs per Participant. (7.86 FTEs) x (1,800 working hours per year) = 14,146 ongoing burden hours per Participant to maintain the new or enhanced surveillance systems.

+
+
fn +

3378 (14,146 annual burden hours per Participant to maintain new or enhanced surveillance systems) x (20 Participants) = 282,920 aggregate annual burden hours.

+
+
fn +

3379 $50,000 = $1,000,000 for ongoing legal, consulting and other costs associated with maintenance of surveillance programs / 20 Participants.

+
+
fn +

3380 $1,050,000 = ($87,700,000 in total ongoing surveillance costs - $66,700,000 in ongoing FTE costs) / 20 Participants

+
+
fn +

3381 $21,000,000 = $1,050,000 x 20 Participants.

+
+
fn +

3382 See supra note 3282.

+
+
fn +

3383 ($66,700,000 in anticipated ongoing FTE costs) / (21 Participants) = $3,176,190.48 in anticipated ongoing FTE costs per Participant. ($3,176,190.48 in anticipated ongoing FTE costs per Participant) / ($424,350 FTE cost per Participant) = 7.485 anticipated FTEs per Participant. (7.485 FTEs) x (1,800 working hours per year) = 13,473 ongoing burden hours per Participant to maintain the new or enhanced surveillance systems.

+
+
fn +

3384 (13,473 annual burden hours per Participant to maintain new or enhanced surveillance systems) x (21 Participants) = 282,933 aggregate annual burden hours.

+
+
fn +

3385 $47,619.05 = ($1,000,000 for ongoing legal, consulting and other costs associated with maintenance of surveillance programs) / (21 Participants).

+
+
fn +

3386 $1,000,000 = ($87,700,000 in total ongoing surveillance costs - $66,700,000 in ongoing FTE costs) / (21 Participants).

+
+
fn +

3387 $21,000,000 = ($1,000,000) x (21 Participants).

+
+
fn +

3388 As noted above, the CAT NMS Plan would require the inclusion of OTC Equity Securities, while Rule 613 does not include such a requirement. See supra note 439.

+
+
fn +

3389 See 17 CFR 242.613(i).

+
+
fn +

3390 The Commission based this estimate on the internal burden provided in the CAT NMS Plan related to the development of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “[t]he Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). Because this document is much more limited in scope than the CAT NMS Plan, and because the Commission assumes that in drafting the CAT NMS Plan, the Participants have already contributed time toward considering how the CAT can be expected to be expanded in accordance with Rule 613(i), the Commission applied the CAT NMS Plan development internal burden over a 6-month period (Rule 613(i) requires this document to be submitted to the Commission within six months after effectiveness of the CAT NMS Plan), divided by half. 0.667 FTEs required for all Participants per month to develop the CAT NMS Plan = (20 FTEs / 30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/ 2 = 2 FTEs needed for all of the Participants to create and submit the document. 2 FTEs x 1,800 working hours per year = 3,600 burden hours. 3,600 burden hours / 20 Participants = 180 burden hours per Participant to create and file the document.

+
+
fn +

3391 $10,000 = (25 hours of outsourced legal time per Participant) x ($400 per hour rate for outside legal services). The Commission derived the total estimated cost for outsourced legal counsel based on the assumption that the report required by Rule 613 would require approximately fifteen percent of the Commission’s approximated burden of drafting and filing the CAT NMS Plan. This assumption is based on the Participants leveraging their knowledge gained from their drafting and filing of the CAT NMS Plan and applying it to efficiently preparing the report required by Rule 613 with respect to other securities’ order and Reportable Events, implementation timeline and cost estimates.

+
+
fn +

3392 The initial burden hour estimate is based on: (20 Participants) x (180 initial burden hours to draft the report). The initial external cost estimate is based on: (20 Participants) x ($10,000 for outsourced legal counsel).

+
+
fn +

3393 See supra note 3282.

+
+
fn +

3394 The Commission is basing this estimate on the internal burden provided in the CAT NMS Plan related to the development of the CAT NMS Plan. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii) (stating “[t]he Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process”). Because the expansion document is much more limited in scope than the CAT NMS Plan, and because the Commission assumes that in drafting the CAT NMS Plan, the Participants have already contributed time toward considering how the CAT can be expected to be expanded in accordance with Rule 613(i), the Commission is applying the CAT NMS Plan development internal burden over a 6-month period (Rule 613(i) requires this document to be submitted to the Commission within six months after effectiveness of the CAT NMS Plan), divided by half. 0.667 FTEs required for all Participants per month to develop the CAT NMS Plan = (20 FTEs / 30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/ 2 = 2 FTEs needed for all of the Participants to create and submit the document. 2 FTEs x 1,800 working hours per year = 3,600 burden hours. (3,600 burden hours) / (21 Participants) = 171.43 burden hours per Participant to create and file the document.

+
+
fn +

3395 $10,000 = (25 hours of outsourced legal time per Participant) x ($400 per hour rate for outside legal services). The Commission derived the total estimated cost for outsourced legal counsel based on the assumption that the report required by Rule 613 would require approximately fifteen percent of the Commission’s approximated burden of drafting and filing the CAT NMS Plan. This assumption is based on the Participants leveraging their knowledge gained from their drafting and filing of the CAT NMS Plan and applying it to efficiently preparing the report required by Rule 613 with respect to other securities’ order and Reportable Events, implementation timeline and cost estimates.

+
+
fn +

3396 The initial burden hour estimate is based on: (21 Participants) x (171.43 initial burden hours to draft the report). The initial external cost estimate is based on: (21 Participants) x ($10,000 for outsourced legal counsel).

+
+
fn +

3397 17 CFR 242.613(b)(6); see also Notice, supra note 5, at 30700.

+
+
fn +

3398 See 17 CFR 242.613(b)(6).

+
+
fn +

3399 See CAT NMS Plan, supra note 5, at Section 6.6.

+
+
fn +

3400 Id. at Section 6.2(a).

+
+
fn +

3401 The Commission calculated the total estimated burden hours based on a similar formulation used for calculating the total estimated burden hours of Rule 613(i)’s requirement for a document addressing expansion of the CAT to other securities. See Notice, supra note 5, at Section V.D.1.f. The Commission assumed that the review and potential revision of the written assessment required by Rule 613(b)(6) would be approximately one-half as burdensome as the document required by Rule 613(i) as the Participants are delegating the responsibility to prepare the written assessment required by Rule 613(b)(6) to the CCO and the Participants would only need to review the written assessment and revise it as necessary. As noted in note 3394, supra, to estimate the Rule 613(i) burden, the Commission is applying the internal burden estimate provided in the CAT NMS Plan for Plan development over a 6-month period, and dividing the result in half. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii). To estimate the Rule 613(b)(6) written assessment burden, the Commission is dividing the result further by half. 0.667 FTEs required for all Participants per month to develop the CAT NMS Plan = (20 FTEs / 30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/ 2 = 2 FTEs needed for all of the Participants to create and submit the Rule 613(i) document. 2 FTEs / 2 = 1 FTE needed for all of the Participants to review and comment on the written assessment. (1 FTE x 1,800 working hours per year) = 1,800 ongoing annual burden hours per year for all of the Participants to review and comment on the written assessment. (1,800 burden hours / 20 Participants) = 90 ongoing annual burden hours per Participant to review and comment on the written assessment prepared by the CCO. The Commission noted that this assessment must be filed with the Commission every two years and is providing an annualized estimate of the burden associated with the assessment as required for its Paperwork Reduction Act analysis. To provide an estimate of the annual burden associated with the assessment as required for its Paperwork Reduction Act analysis, Commission divided the 90 ongoing burden hours in half (over two years) = 45 ongoing annual burden hours per Participant to review and comment on the written assessment prepared by the CCO.

+
+
fn +

3402 $500 = ($400 per hour rate for outside legal services) x (1.25 hours). Because the written assessment was a biennial requirement, the Commission divided the cost of the written assessment in half (over two years) to estimate the annual ongoing external cost per Participant for outside legal services to review and comment on the written assessment prepared by the CCO.

+
+
fn +

3403 900 ongoing annual burden hours = (45 ongoing annual burden hours) x (20 Participants).

+
+
fn +

3404 $10,000 = 20 Participants x ($400 per hour rate for outside legal services) x (1.25 hours).

+
+
fn +

3405 See Section VI.A.7., supra.

+
+
fn +

3406 See Section IV.H., supra.

+
+
fn +

3407 See CAT NMS Plan, supra note 5, at Section 6.6.

+
+
fn +

3408 See supra note 3282.

+
+
fn +

3409 As it did when making its preliminary estimate, the Commission calculated the total estimated burden hours based on a similar formulation used for calculating the total estimated burden hours of Rule 613(i)’s requirement for a document addressing expansion of the CAT to other securities. See Section VI.D.1.e., supra. Specifically, as noted above, the Commission assumed that the review and potential revision of the written assessment would be approximately one-half as burdensome as the document required by Rule 613(i) when making its preliminary estimate. The Commission then further divided the burden by half because this report is required to be furnished every two years.

+

The Commission has amended the CAT NMS Plan to add more specificity to the requirement to provide the written assessment. As a result, the Commission now estimates that the written assessment would now be as burdensome (instead of half as burdensome) as the document addressing expansion required by Rule 613(i). 2 FTEs needed for all of the Participants to create and submit the document required by Rule 613(i) (and now for all of the Participants to review and comment on the written assessment). (2 FTEs) x (1,800 working hours per year) = 3,600 ongoing annual burden hours per year for all of the Participants to review and comment on the written assessment. (3,600 burden hours per year) / (21 Participants) = 171.43 ongoing annual burden hours per Participant to review and comment on the written assessment prepared by the CCO.

+

The Commission also has amended the CAT NMS Plan to require this assessment to be provided annually instead of once every two years. To account for this change, the Commission is no longer dividing the ongoing burden hours for providing the written assessment in half to determine the annualized estimate of the burden.

+
+
fn +

3410 $1,000 = ($400 per hour rate for outside legal services) x (2.5 hours). The Commission has amended the CAT NMS Plan to add more specificity to the requirement to provide the written assessment and is now requiring this assessment to be provided annually instead of once every two years. Because the written assessment is no longer a biennial requirement, the Commission is no longer dividing the cost of the written assessment in half (over two years) to estimate the annual ongoing external cost per Participant for outside legal services to review and comment on the written assessment prepared by the CCO.

+
+
fn +

3411 3,600.03 ongoing annual burden hours = (171.43 ongoing annual burden hours) x (21 Participants).

+
+
fn +

3412 $21,000 = (21 Participants) x ($400 per hour rate for outside legal services) x (2.5 hours).

+
+
fn +

3413 The Commission acknowledges the inherent difficulty in establishing precise burden estimates because the Commission does not know the exact method of data reporting the Participants would decide for broker-dealers. For these estimates, the Commission is relying, in part, on the cost data provided by the Participants in the CAT NMS Plan, and, as noted earlier, on its own estimates of the costs that broker-dealers are likely to face for CAT implementation and ongoing reporting in compliance with Rule 613. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b); see Section V.F.1.c.(2)B., supra.

+
+
fn +

3414 See Notice, supra note 5, at 30718.

+
+
fn +

3415 The Commission also recognizes as discussed above that some broker-dealer firms may strategically choose to outsource despite the Plan’s working assumption that these broker-dealers would insource their regulatory data reporting functions.

+
+
fn +

3416 See Section V.F.1.c(2)B., supra.

+
+
fn +

3417 Id.

+
+
fn +

3418 Approach 1 also provided $3,200,000 in initial internal FTE costs. The Commission believed the $3,200,000 in internal FTE costs is the Participants’ estimated cost of the 8.05 FTEs. (8.05 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, at n. 192. See also supra note 3320.

+
+
fn +

3419 See CAT NMS Plan, supra note 5, at Section B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/outsourcing costs may be attributed to the use of service bureaus (potentially), technology consulting, and legal services.

+
+
fn +

3420 Approach 1 also provided $3,000,000 in internal FTE costs related to maintenance. The Commission believes the $3,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS Plan, supra note 5, at n.192.

+
+
fn +

3421 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these third party costs into categories.

+
+
fn +

3422 These broker-dealers are not FINRA members and thus have no regular OATS reporting obligations. See supra note 2560.

+
+
fn +

3423 See supra note 2562.

+
+
fn +

3424 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer respondents to provide estimates to report to the Central Repository under two approaches. Approach 1 assumes CAT Reporters would submit CAT Data using their choice of industry protocols. Approach 2 assumes CAT Reporters would submit data using a pre-specified format. Approach 1’s aggregate costs are higher than those for Approach 2 for all market participants except in one case where service bureaus have lower Approach 1 costs. See supra note 2568. For purposes of this Paperwork Reduction Act analysis, the Commission did not rely on the cost estimates for Approach 2 because overall the Approach 1 aggregate estimates represent the higher of the proposed approaches. The Commission believed it would be more comprehensive to use the higher of the two estimates for its Paperwork Reduction Act analysis estimates.

+
+
fn +

3425 14,490 initial burden hours = (8.05 FTEs for implementing CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3426 See supra note 3421.

+
+
fn +

3427 ($450,000 in initial hardware and software costs) + ($9,500 initial third party/outsourcing costs) = $459,500 in initial external costs to implement data reporting systems.

+
+
fn +

3428 The Commission preliminarily estimates that 45 large non-OATS reporting broker-dealers would be impacted by this information collection. (45 large non-OATS reporting broker-dealers) x (14,490 burden hours) = 652,050 initial burden hours to implement data reporting systems.

+
+
fn +

3429 ($450,000 in hardware and software costs) + ($9,500 third party/outsourcing costs) x 45 large, non-OATS reporting broker-dealers = $20,677,500 in initial external costs to implement data reporting systems.

+
+
fn +

3430 13,338 ongoing burden hours = (7.41 ongoing FTEs to maintain CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3431 See supra note 3421.

+
+
fn +

3432 ($80,000 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) = $81,300 in ongoing external costs per large non-OATS reporting broker-dealer.

+
+
fn +

3433 The Commission estimated that 45 large non-OATS reporting broker-dealers would be impacted by this information collection. (45 large non-OATS reporting broker-dealers) x (13,338 burden hours) = 600,210 aggregate ongoing burden hours.

+
+
fn +

3434 ($80,000 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) x (45 large non-OATS reporting broker-dealers) = $3,658,500 in aggregate ongoing external costs.

+
+
fn +

3435 Approach 1 also provided $6,000,000 in initial internal FTE costs. The Commission believes the $6,000,000 in initial internal FTE costs is the Participants’ estimated cost of the 14.92 FTEs. (14.92 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $5,989,485. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3436 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these third party costs into categories. The Commission believes that these costs may be attributed to the use of service bureaus, technology consulting, and legal services.

+
+
fn +

3437 Approach 1 also provided $4,000,000 in internal FTE costs related to maintenance. The Commission believes the $4,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3438 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these third party costs. The Commission believes that these costs may be attributed to the use of service bureaus, technology consulting, and legal services.

+
+
fn +

3439 See Notice, supra note 5, at 30718; see also id., at n.901 (stating that the Commission believes that broker-dealers that report fewer than 350,000 OATS ROEs per month are unlikely to be large enough to support the infrastructure required for insourcing data reporting activities).

+
+
fn +

3440 26,856 initial burden hours per large OATS-reporting broker-dealer = (14.92 FTEs for implementation of CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3441 See CAT NMS Plan, supra note 5, at Section B.7(b)(iii)(C)(2)(a).

+
+
fn +

3442 ($750,000 in initial external hardware and software costs) + ($150,000 initial external third party/outsourcing costs) = $900,000 in initial external costs per large OATS-reporting broker-dealer to implement CAT data reporting systems.

+
+
fn +

3443 The Commission preliminarily estimates that 126 large OATS-reporting broker-dealers would be impacted by this information collection. 126 large OATS-reporting broker-dealers x 26,856 burden hours = 3,383,856 initial burden hours to implement data reporting systems.

+
+
fn +

3444 ($750,000 in initial external hardware and software costs) + ($150,000 initial external third party/outsourcing costs) x 126 large OATS-reporting broker-dealers = $113,400,000 in initial external costs to implement data reporting systems.

+
+
fn +

3445 18,054 ongoing burden hours = (10.03 ongoing FTEs for maintenance of CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3446 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b).

+
+
fn +

3447 ($380,000 in ongoing external hardware and software costs + $120,000 in ongoing external third party/outsourcing costs) = $500,000 in ongoing external costs per large OATS-reporting broker-dealer.

+
+
fn +

3448 The Commission preliminarily estimates that 126 large OATS-reporting broker-dealers would be impacted by this information collection. (126 large OATS-reporting broker-dealers) x (18,054 burden hours) = 2,274,804 aggregate ongoing burden hours.

+
+
fn +

3449 ($380,000 in ongoing external hardware and software costs + $120,000 in ongoing external third party/outsourcing costs) x 126 large OATS-reporting broker-dealers = $63,000,000 in aggregate ongoing external costs.

+
+
fn +

3450 See Notice, supra note 5, at 30718. Because of the extensive use of service bureaus in these categories of broker-dealers, the Commission assumes that these broker-dealers are likely to use service bureaus to accomplish their CAT data reporting.

+
+
fn +

3451 The average broker-dealer in this category reported 15,185 OATS ROEs from June 15-July 10, 2015; the median reported 1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 100,000 OATS ROEs during the sample period. See Section V.F.1.c.(2)B., supra.

+
+
fn +

3452 Id.

+
+
fn +

3453 $124,373 = $100,200,000 / 806 broker-dealers. This amount is the average estimated annual outsourcing cost to firms that currently report fewer than 350,000 OATS ROEs per month. Id.

+
+
fn +

3454 See Section V.F.1.c.(2)B., supra.

+
+
fn +

3455 Id.

+
+
fn +

3456 Id.

+
+
fn +

3457 See Section IV.F.1.c.(2)B., supra.

+
+
fn +

3458 This estimate assumed that, based on the expected FTE count provided, a small OATS-reporting broker-dealer would have to hire 1 new FTE for implementation. The salary attributed to the 1 FTE would be (1 x $424,350 FTE cost) = $424,350 per year. To determine the number of burden hours to be incurred by the current 0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year = 900 initial burden hours.

+
+
fn +

3459 The Commission preliminarily believed the outsourcing cost would be the cost of the service bureau, which would include the compliance and legal costs associated with changing to CAT Data reporting. The Commission assumes these costs of changing to CAT Data reporting would be included in the cost of the service bureau because the broker-dealers would be relying on the expertise of the service bureau to report their data to CAT on their behalf. See Notice, supra note 5, at Section IV.F.1.C(2), n. 941.

+
+
fn +

3460 The Commission preliminarily estimates that 806 small OATS-reporting broker-dealers would be impacted by this information collection. (806 small OATS-reporting broker-dealers x 1,800 burden hours) = 1,450,800 aggregate initial burden hours.

+
+
fn +

3461 ($124,373 in outsourcing costs) x (806 small OATS-reporting broker-dealers) = $100,244,638 in aggregate initial external costs.

+
+
fn +

3462 1,350 ongoing burden hours = (0.75 FTE for maintenance of CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3463 See Notice, supra note 5, at Section IV.F.1.c(2)B.ii. See supra note 3459.

+
+
fn +

3464 The Commission preliminarily estimates that 806 small OATS-reporting broker-dealers would be impacted by this information collection. (806 small OATS-reporting broker-dealers x 1,350 burden hours) = 1,088,100 aggregate ongoing burden hours to ensure ongoing compliance with Rule 613.

+
+
fn +

3465 $100,244,638 = $124,373 in ongoing outsourcing costs x 806 broker-dealers.

+
+
fn +

3466 See Section V.F.1.c.(2)B., supra. Rule 613 does not exclude from data reporting obligations SRO members that quote or execute transactions in NMS Securities and Listed Options that route to a single market participant; see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(B)(2).

+
+
fn +

3467 See Section V.F.1.c.(2)B., supra.

+
+
fn +

3468 Id.

+
+
fn +

3469 Id.

+
+
fn +

3470 Id.

+
+
fn +

3471 Id.

+
+
fn +

3472 3,600 initial burden hours = (2 FTEs for implementation of CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3473 See Section V.F.1.c.(2)B., supra.

+
+
fn +

3474 The Commission preliminarily estimates that 823 small non-OATS-reporting broker-dealers would be impacted by this information collection. (823 small non-OATS-reporting broker-dealers x 3,600 burden hours) = 2,962,800 aggregate initial burden hours.

+
+
fn +

3475 ($124,373 in outsourcing costs) x (823 small non-OATS-reporting broker-dealers) = $102,358,979 in aggregate initial external costs.

+
+
fn +

3476 1,350 ongoing burden hours = (0.75 FTEs for maintenance of CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3477 The Commission assumed these firms would have very low levels of CAT reporting, similar to those of the lowest activity firms that currently report to OATS. For these firms, the Commission assumes that under CAT they would incur the average estimated service bureau cost of firms that currently OATS report fewer than 350,000 OATS ROEs per month of $124,373 annually.

+
+
fn +

3478 The Commission preliminarily estimated that 823 small non-OATS-reporting broker-dealers would be impacted by this information collection. (823 small non-OATS-reporting broker-dealers x 1,350 burden hours) = 1,111,050 aggregate ongoing burden hours to ensure ongoing compliance with Rule 613.

+
+
fn +

3479 ($124,373 in ongoing external outsourcing costs) x 823 = $102,358,979 in aggregate ongoing external costs to ensure ongoing compliance with Rule 613.

+
+
fn +

3480 See Notice, supra note 5, at 30712–26.

+
+
fn +

3481 See Section V.F.1.c(1), supra.

+
+
fn +

3482 Id.

+
+
fn +

3483 See Data Boiler Letter at 36.

+
+
fn +

3484 Specifically, this commenter references EBS reporting, but indicates that Industry Members sometimes must also be involved in preparing EBS request responses. See FIF Letter at 34.

+
+
fn +

3485 See TR Letter, at 3–4.

+
+
fn +

3486 See Notice, supra note 5, at 30723.

+
+
fn +

3487 TR Letter at 4; FSI Letter at 6.

+
+
fn +

3488 See, e.g., FSR Letter at 10; and Fidelity Letter at 6.

+
+
fn +

3489 FSI Letter at 6.

+
+
fn +

3490 SIFMA Letter at 42 and FSI Letter at 6.

+
+
fn +

3491 See Notice, supra note 5, at Section IV.F.3.a.

+
+
fn +

3492 Data Boiler Letter at 37.

+
+
fn +

3493 TR Letter at 8–9; FIF Letter at 9–10, 86.

+
+
fn +

3494 Response Letter I at 34.

+
+
fn +

3495 FIF Letter at 10.

+
+
fn +

3496 Response Letter I at 35.

+
+
fn +

3497 TR Letter at 9; SIFMA Letter at 35–36; FIF Letter at 83–86.

+
+
fn +

3498 SIFMA Letter at 35; FIF Letter at 4, 84.

+
+
fn +

3499 FIF Letter at 84.

+
+
fn +

3500 TR Letter at 9, FIF Letter at 4, 83–85, SIFMA Letter at 35.

+
+
fn +

3501 Specifically, one commenter stated that the inclusion of the open/close indicator for equities was a surprise (FIF Letter at 84) and two commenters wanted additional cost benefit analysis on the open/close indicator (FIF Letter at 84; SIFMA Letter at 36).

+
+
fn +

3502 Response Letter I at 21, 22.

+
+
fn +

3503 See Notice, supra note 5, at 30730–30731.

+
+
fn +

3504 FIF Letter at 12, 95.

+
+
fn +

3505 Data Boiler Letter at 37–38.

+
+
fn +

3506 Bloomberg Letter at 5.

+
+
fn +

3507 Response Letter II at 7.

+
+
fn +

3508 Response Letter III at 13.

+
+
fn +

3509 FSR Letter, at 9; SIFMA Letter, at 35; FIF Letter, at 3–4, 11, 86–89.

+
+
fn +

3510 FSR Letter at 9.

+
+
fn +

3511 FIF Letter at 87–89.

+
+
fn +

3512 FIF Letter at 88, Table 6.

+
+
fn +

3513 Response Letter I at 25.

+
+
fn +

3514 See Section V.F.3.a(4), supra. The total cost estimates of the CAT Plan reflect these implementation and ongoing costs.

+
+
fn +

3515 See FIF, SIFMA, and Security Traders Association, Cost Survey Report on CAT Reporting of Options Quotes by Market Makers (November 5, 2013), available at http://www.catnmsplan.com/industryfeedback/p601771.pdf; see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iv)(B).

+
+
fn +

3516 FIF Letter at 65.

+
+
fn +

3517 See Section V.F.1.c(2)B, supra.

+
+
fn +

3518 The Commission assumes that the ratio of ongoing to implementation costs for Quote Sent Time would be the same as the ratio of ongoing to implementation costs for the other costs incurred by broker-dealers for data collection and reporting to CAT. See supra note 2526; see also Section V.F.3.a(6), supra.

+
+
fn +

3519 See Section VI.D.2.a.(1)A.i., supra.

+
+
fn +

3520 Approach 1 also provided $3,200,000 in initial internal FTE costs. The Commission believed the $3,200,000 in internal FTE costs is the Participants’ estimated cost of the 8.05 FTEs. (8.05 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, at n. 192. See also supra note 3320.

+
+
fn +

3521 See CAT NMS Plan, supra note 5, at Section B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/outsourcing costs may be attributed to the use of service bureaus (potentially), technology consulting, and legal services.

+
+
fn +

3522 Approach 1 also provided $3,000,000 in internal FTE costs related to maintenance. The Commission believes the $3,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS Plan, supra note 5, at n.192. See also supra note 3320 .

+
+
fn +

3523 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these third party costs into categories.

+
+
fn +

3524 Approach 1 also provided $3,000,000 in internal FTE costs related to maintenance. The Commission believes the $3,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3525 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these third party costs into categories.

+
+
fn +

3526 These broker-dealers are not FINRA members and thus have no regular OATS reporting obligations. See supra note 2560.

+
+
fn +

3527 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer respondents to provide estimates to report to the Central Repository under two approaches. Approach 1 assumes CAT Reporters would submit CAT Data using their choice of industry protocols. Approach 2 assumes CAT Reporters would submit data using a pre-specified format. Approach 1’s aggregate costs are higher than those for Approach 2 for all market participants except in one case where service bureaus have lower Approach 1 costs. Id. at Section B.7(b)(iii)(C)(2). For purposes of this Paperwork Reduction Act analysis, the Commission is not relying on the cost estimates for Approach 2 because overall the Approach 1 aggregate estimates represent the higher of the proposed approaches. The Commission believes it would be more comprehensive to use the higher of the two estimates for its Paperwork Reduction Act analysis estimates.

+
+
fn +

3528 FIF Letter at 88, Table 6. The commenter based its implementation and ongoing estimates on a survey it conducted of broker-dealers to estimate the costs associated with the allocation report timestamp requirement. The commenter noted that the estimates do not account for all Insourcers (the cost estimates cover the 126 large OATS-reporting broker-dealer Insourcers, but not the 14 ELPs or 31 Options Market Makers), nor do they cover Outsourcing broker-dealers. The Commission believes those categories may not have been included in the estimates due to a lack of participation by such broker-dealers in the survey. The Commission is assuming, for its Paperwork Reduction Act cost estimates, that the portion of the estimates attributed by the commenter to service bureaus will be passed-through to their Outsourcing broker-dealer clients that rely on service bureaus to perform their regulatory data reporting. The Commission is thus applying the portion of the commenter’s cost estimates attributed to the 126 Insourcers to all 171 Insourcers, as well as the portion of the cost estimates attributed to the 13 service bureaus across the 1,629 broker-dealers that are categorized as Outsourcing broker-dealers.

+
+
fn +

3529 The commenter stated that this requirement would cost the industry $44,050,000 in initial implementation costs. The commenter attributed $42,750,000 of the implementation cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000 / 171 Insourcers = $250,000 in initial costs to implement the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3530 14,490 initial burden hours = (8.05 FTEs for implementing CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3531 $700,000 = ($450,000 in initial hardware and software costs) + ($250,000 in initial hardware and software costs to implement the modified allocation timestamp requirement).

+
+
fn +

3532 See supra note 3436.

+
+
fn +

3533 ($700,000 in initial hardware and software costs) + ($9,500 initial third party/outsourcing costs) = $709,500 in initial external costs to implement data reporting systems.

+
+
fn +

3534 The Commission estimates that 14 ELPs would be impacted by this information collection. (14 ELPs) x (14,490 burden hours) = 202,860 initial burden hours to implement data reporting systems.

+
+
fn +

3535 ($709,500 in initial hardware and software costs) + ($9,500 initial third party/outsourcing costs) x 14 ELPs = $9,933,000 in initial external costs to implement data reporting systems.

+
+
fn +

3536 See supra note 3528.

+
+
fn +

3537 The commenter stated that this requirement would cost the industry $5,035,833 in ongoing costs. The commenter attributed $4,987,500 of the ongoing cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $4,987,500/171 Insourcers = $29,166.67 in ongoing costs to maintain the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3538 13,338 ongoing burden hours = (7.41 ongoing FTEs to maintain CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3539 $109,166.67 = ($80,000 in ongoing external hardware and software costs) + ($29,166.67 to maintain the modified allocation timestamp requirement).

+
+
fn +

3540 See supra note 3421.

+
+
fn +

3541 ($109,166.67 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) = $110,466.6769 in ongoing external costs per ELP.

+
+
fn +

3542 The Commission estimates that 14 ELPs would be impacted by this information collection. (14 ELPs) x (13,338 burden hours) = 186,732 aggregate ongoing burden hours.

+
+
fn +

3543 ($109,166.67 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) x (14 ELPs) = $1,546,533.38 in aggregate ongoing external costs.

+
+
fn +

3544 See Section VI.D.2.a.(1)A.i., supra.

+
+
fn +

3545 Approach 1 also provided $3,200,000 in initial internal FTE costs. The Commission believed the $3,200,000 in internal FTE costs is the Participants’ estimated cost of the 8.05 FTEs. (8.05 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $3,231,592. See CAT NMS Plan, supra note 5, at n. 192. See also supra note 3320.

+
+
fn +

3546 See CAT NMS Plan, supra note 5, at Section B.7(b)(iii)(c)(2)(a). The Commission believed that the third party/outsourcing costs may be attributed to the use of service bureaus (potentially), technology consulting, and legal services.

+
+
fn +

3547 Approach 1 also provided $3,000,000 in internal FTE costs related to maintenance. The Commission believes the $3,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS Plan, supra note 5, at n.192. See also supra note 3320.

+
+
fn +

3548 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these third party costs into categories.

+
+
fn +

3549 Approach 1 also provided $3,000,000 in internal FTE costs related to maintenance. The Commission believes the $3,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 7.41 FTEs. (7.41 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $2,974,670. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3550 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not break down these third party costs into categories.

+
+
fn +

3551 See CAT NMS Plan, supra note 5, at Appendix C, Section A.6(c).

+
+
fn +

3552 See supra note 2562.

+
+
fn +

3553 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(i)(A)(2). The Reporters Study requested broker-dealer respondents to provide estimates to report to the Central Repository under two approaches. Approach 1 assumes CAT Reporters would submit CAT Data using their choice of industry protocols. Approach 2 assumes CAT Reporters would submit data using a pre-specified format. Approach 1’s aggregate costs are higher than those for Approach 2 for all market participants except in one case where service bureaus have lower Approach 1 costs. Id. at Section B.7(b)(iii)(C)(2). For purposes of this Paperwork Reduction Act analysis, the Commission is not relying on the cost estimates for Approach 2 because overall the Approach 1 aggregate estimates represent the higher of the proposed approaches. The Commission believes it would be more comprehensive to use the higher of the two estimates for its Paperwork Reduction Act analysis estimates.

+
+
fn +

3554 14,490 initial burden hours = (8.05 FTEs for implementing CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3555 See supra note 3436. 3556 See supra note 3528.

+
+
fn +

3557 The commenter stated that this requirement would cost the industry $44,050,000 in initial implementation costs. The commenter attributed $42,750,000 of the implementation cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000 / 171 Insourcers = $250,000 in initial costs to implement the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3558 See Section VI.D.2.a.(1)E., supra; see also supra note 2526; Section V.F.3.a(6), supra; Section V.F.1.c(2)B., supra.

+
+
fn +

3559 FIF Letter at 65.

+
+
fn +

3560 See supra note 2526.

+
+
fn +

3561 The Commission estimates that the implementation cost of the Quote Sent Time requirement is approximately $17,400,000. See Section V.F.1.c(2)B., supra. ($17,400,000 in implementation costs) / (31 Options Market Makers) = $561,290.21 in initial external costs to implement the Quote Sent Time requirement per Options Market Maker.

+
+
fn +

3562 $1,261,290.32 = ($450,000 in initial hardware and software costs) + ($250,000 in initial hardware and software costs to implement the modified allocation timestamp requirement) + ($561,290.32 in initial hardware and software costs to implement the requirement that an Options Market Maker submit a Quote Sent Time).

+
+
fn +

3563 ($1,261,290.32 in initial hardware and software costs) + ($9,500 initial third party/outsourcing costs) = $1,270,790.32 in initial external costs to implement data reporting systems.

+
+
fn +

3564 The Commission estimates that 31 Options Market Makers would be impacted by this information collection. (31 Options Market Makers) x (14,490 burden hours) = 449,190 initial burden hours to implement data reporting systems.

+
+
fn +

3565 ($1,270,790.32 in initial hardware and software costs) + ($9,500 initial third party/outsourcing costs) x (31 Options Market Makers) = $39,394,499.92 in initial external costs to implement data reporting systems.

+
+
fn +

3566 See supra note 3528.

+
+
fn +

3567 The commenter stated that this requirement would cost the industry $5,035,833 in ongoing costs. The commenter attributed $4,987,500 of the ongoing cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $4,987,500/171 Insourcers = $29,166.67 in ongoing costs to maintain the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3568 See Section VI.D.2.a.(1)E., supra; see also supra note 2526; Section V.F.3.a(6), supra; Section V.F.1.c(2)B., supra.

+
+
fn +

3569 FIF Letter at 65.

+
+
fn +

3570 See supra note 2526.

+
+
fn +

3571 The Commission estimates that the ongoing cost of the Quote Sent Time requirement is approximately $11,880,000. See Section V.F.1.c(2)B., supra. ($11,880,000 in ongoing costs) / (31 Options Market Maker) = $383,255.81 in ongoing external costs to maintain the Quote Sent Time requirement per Options Market Maker.

+
+
fn +

3572 13,338 ongoing burden hours = (7.41 ongoing FTEs to maintain CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3573 $492,422.48 = ($80,000 in ongoing external hardware and software costs) + ($29,166.67 to maintain the modified allocation timestamp requirement) + ($383,255.81 in ongoing external costs to maintain the Quote Sent Time requirement per options firm).

+
+
fn +

3574 See supra note 3548.

+
+
fn +

3575 ($492,422.48 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) = $493,722.48 in ongoing external costs per options firm.

+
+
fn +

3576 The Commission estimates that 31 options firms would be impacted by this information collection. (31 options firms) x (13,338 burden hours) = 413,478 aggregate ongoing burden hours.

+
+
fn +

3577 ($492,422.48 in ongoing external hardware and software costs) + ($1,300 ongoing external third party/outsourcing costs) x (31 options firms) = $15,305,396.88 in aggregate ongoing external costs.

+
+
fn +

3578 See Section VI.D.2.a.(1)(A)ii., supra.

+
+
fn +

3579 Approach 1 also provided $6,000,000 in initial internal FTE costs. The Commission believes the $6,000,000 in initial internal FTE costs is the Participants’ estimated cost of the 14.92 FTEs. (14.92 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $5,989,485. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3580 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(a). The CAT NMS Plan did not break down these third party costs into categories. The Commission believes that these costs may be attributed to the use of service bureaus, technology consulting, and legal services.

+
+
fn +

3581 Approach 1 also provided $4,000,000 in internal FTE costs related to maintenance. The Commission believes the $4,000,000 in ongoing internal FTE costs is the Participants’ estimated cost of the 10.03 FTEs. (10.03 FTEs) x ($401,440 Participants’ assumed annual cost per FTE provided in the CAT NMS Plan) = $4,026,443. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(C), n.192; see also supra note 3320.

+
+
fn +

3582 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b). The CAT NMS Plan did not categorize these third party costs. The Commission believes that these costs may be attributed to the use of service bureaus, technology consulting, and legal services.

+
+
fn +

3583 See Notice, supra note 5, at 30718; see also id., at n.901 (stating that the Commission believes that broker-dealers that report fewer than 350,000 OATS ROEs per month are unlikely to be large enough to support the infrastructure required for insourcing data reporting activities).

+
+
fn +

3584 See supra note 3528.

+
+
fn +

3585 The commenter stated that this requirement would cost the industry $44,050,000 in initial implementation costs. The commenter attributed $42,750,000 of the implementation cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $42,750,000 / 171 Insourcers = $250,000 in initial costs to implement the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3586 $1,000,000 = ($750,000 in initial external hardware and software costs) + ($250,000 to implement the modified allocation timestamp).

+
+
fn +

3587 See supra note 3421.

+
+
fn +

3588 ($1,000,000 in initial external hardware and software costs) + ($150,000 initial external third party/outsourcing costs) = $$1,150,000 in initial external costs per large OATS-reporting broker-dealer to implement CAT data reporting systems.

+
+
fn +

3589 The Commission estimates that 126 large OATS-reporting broker-dealers would be impacted by this information collection. (126 large OATS-reporting broker-dealers) x (26,856 initial burden hours) = 3,383,856 initial burden hours to implement data reporting systems.

+
+
fn +

3590 ($1,000,000 in initial external hardware and software costs) + ($150,000 initial external third party/outsourcing costs) x (126 large OATS-reporting broker-dealers) = $189,000,000 in initial external costs to implement data reporting systems.

+
+
fn +

3591 See supra note 3528.

+
+
fn +

3592 The commenter stated that this requirement would cost the industry $5,035,833 in ongoing costs. The commenter attributed $4,987,500 of the ongoing cost estimate to 126 Insourcers. For purposes of this Paperwork Reduction Act analysis, the Commission is applying the portion of the cost estimates attributed to the 126 Insourcers to all 171 Insourcers. $4,987,500 / 171 Insourcers = $29,166.67 in ongoing costs to maintain the modified allocation timestamp requirement per Insourcer.

+
+
fn +

3593 18,054 ongoing burden hours = (10.03 ongoing FTEs for maintenance of CAT data reporting systems) x (1,800 working hours per year).

+
+
fn +

3594 $409,166.67 = ($380,000 in ongoing external hardware and software costs) + ($29,166.67 to maintain the modified allocation timestamp requirement).

+
+
fn +

3595 See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii)(C)(2)(b).

+
+
fn +

3596 ($409,166.67 in ongoing external hardware and software costs) + ($120,000 in ongoing external third party/outsourcing costs) = $529,166.67 in ongoing external costs per large OATS-reporting broker-dealer.

+
+
fn +

3597 The Commission estimates that 126 large OATS-reporting broker-dealers would be impacted by this information collection. (126 large OATS-reporting broker-dealers) x (18,054 burden hours) = 2,274,804 aggregate ongoing burden hours.

+
+
fn +

3598 ($409,166.67 in ongoing external hardware and software costs) + ($120,000 in ongoing external third party/outsourcing costs) x (126 large OATS-reporting broker-dealers) = $66,675,000.42 in aggregate ongoing external costs.

+
+
fn +

3599 See Notice, supra note 5, at 30718. Because of the extensive use of service bureaus in these categories of broker-dealers, the Commission assumes that these broker-dealers are likely to use service bureaus to accomplish their CAT data reporting.

+
+
fn +

3600 The average broker-dealer in this category reported 15,185 OATS ROEs from June 15-July 10, 2015; the median reported 1,251 OATS ROEs. Of these broker-dealers, 39 reported more than 100,000 OATS ROEs during the sample period. See Section V.F.1.c.(2)B., supra.

+
+
fn +

3601 Id.

+
+
fn +

3602 $124,373 = $100,200,000 / 806 broker-dealers. This amount is the average estimated annual outsourcing cost to firms that currently report fewer than 350,000 OATS ROEs per month. Id.

+
+
fn +

3603 See Section V.F.1.c.(2)B., supra.

+
+
fn +

3604 Id.

+
+
fn +

3605 Id.

+
+
fn +

3606 See Section IV.F.1.c.(2)B., supra.

+
+
fn +

3607 See supra note 3528.

+
+
fn +

3608 The commenter stated that this requirement would cost the industry $44,050,000 in initial implementation costs. The commenter attributed $1,300,000 of the implementation cost estimate to 13 service bureaus. For purposes of this Paperwork Reduction Act analysis, the Commission is assuming that the portion of the estimates attributed by the commenter to service bureaus will be passed-through to their Outsourcing broker-dealer clients that rely on service bureaus to perform their regulatory data reporting. The Commission is thus applying the portion of the commenter’s cost estimates attributed to the 13 service bureaus across the 1,629 broker-dealers that are categorized as Outsourcing broker-dealers. $1,300,000 / 1,629 Outsourcing broker-dealers = $798.04 in initial costs to implement the modified allocation timestamp requirement per Outsourcing broker-dealer.

+
+
fn +

3609 This estimate assumes that, based on the expected FTE count provided, a small OATS-reporting broker-dealer would have to hire 1 new FTE for implementation. The salary attributed to the 1 FTE would be (1 FTE) x ($424,350 FTE cost) = $424,350 per year. To determine the number of burden hours to be incurred by the current 0.5 FTE for implementation, multiply 0.5 FTE by 1,800 hours per year = 900 initial burden hours.

+
+
fn +

3610 $125,171.04 = ($124,373 in initial outsourcing costs) + ($798.04 to implement the allocation timestamp).

+
+
fn +

3611 The Commission estimates that 806 small OATS-reporting broker-dealers would be impacted by this information collection. (806 small OATS-reporting broker-dealers) x (1,800 burden hours) = 1,450,800 aggregate initial burden hours.

+
+
fn +

3612 ($124,373 in initial outsourcing costs) + ($798.04 to implement the allocation timestamp) x (806 small OATS-reporting broker-dealers) = $100,887,858.24 in aggregate initial external costs.

+
+
fn +

3613 See supra note 3610.

+
+
fn +

3614 See supra note 3528.

+
+
fn +

3615 The commenter stated that this requirement would cost the industry $5,035,833 in ongoing costs. The commenter attributed $108,333 of the ongoing cost estimate to 13 service bureaus. For purposes of this Paperwork Reduction Act analysis, the Commission is assuming that the portion of the estimates attributed by the commenter to service bureaus will be passed-through to their Outsourcing broker-dealer clients that rely on service bureaus to perform their regulatory data reporting. The Commission is thus applying the portion of the commenter’s cost estimates attributed to the 13 service bureaus across the 1,629 broker-dealers that are categorized as Outsourcing broker-dealers. $108,333 / 1,629 Outsourcing broker-dealers = $66.50 in ongoing costs to maintain the modified allocation timestamp requirement per Outsourcing broker-dealer.

+
+
fn +

3616 $124,439.50 = ($124,373 in ongoing outsourcing costs) + ($66.50 to maintain the allocation timestamp)

+
+
fn +

3617 The Commission estimates that 806 small OATS-reporting broker-dealers would be impacted by this information collection. (806 small OATS-reporting broker-dealers) x (1,350 burden hours) = 1,088,100 aggregate ongoing burden hours to ensure ongoing compliance with Rule 613.

+
+
fn +

3618 $100,298,237 = ($124,373 in ongoing outsourcing costs) + ($66.50 to maintain the allocation timestamp) x (806 broker-dealers).

+
+
fn +

3619 See Section V.F.1.c.(2)B., supra. Rule 613 does not exclude from data reporting obligations SRO members that quote or execute transactions in NMS Securities and Listed Options that route to a single market participant; see also CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(ii)(B)(2).

+
+
fn +

3620 See Section V.F.1.c.(2)B., supra.

+
+
fn +

3621 Id.

+
+
fn +

3622 Id.

+
+
fn +

3623 Id.

+
+
fn +

3624 Id.

+
+
fn +

3625 See supra note 3528.

+
+
fn +

3626 The commenter stated that this requirement would cost the industry $44,050,000 in initial implementation costs. The commenter attributed $1,300,000 of the implementation cost estimate to 13 service bureaus. For purposes of this Paperwork Reduction Act analysis, the Commission is assuming that the portion of the estimates attributed by the commenter to service bureaus will be passed-through to their Outsourcing broker-dealer clients that rely on service bureaus to perform their regulatory data reporting. The Commission is thus applying the portion of the commenter’s cost estimates attributed to the 13 service bureaus across the 1,629 broker-dealers that are categorized as Outsourcing broker-dealers. $1,300,000 / 1,629 Outsourcing broker-dealers = $798.04 in initial costs to implement the modified allocation timestamp requirement per Outsourcing broker-dealer.

+
+
fn +

3627 3,600 initial burden hours = (2 FTEs for implementation of CAT Data reporting systems) x (1,800 working hours per year).

+
+
fn +

3628 $125,171.04 = ($124,373 in initial outsourcing costs) + ($798.04 to implement the allocation timestamp).

+
+
fn +

3629 The Commission estimates that 823 small non-OATS-reporting broker-dealers would be impacted by this information collection. (823 small non-OATS-reporting broker-dealers) x (3,600 burden hours) = 2,962,800 aggregate initial burden hours.

+
+
fn +

3630 $103,015,765.92 = ($124,373 in initial outsourcing costs) + ($798.04 to implement the allocation timestamp) x (823 small non-OATS-reporting broker-dealers).

+
+
fn +

3631 See supra note 3528.

+
+
fn +

3632 The commenter stated that this requirement would cost the industry $5,035,833 in ongoing costs. The commenter attributed $108,333 of the ongoing cost estimate to 13 service bureaus. For purposes of this Paperwork Reduction Act analysis, the Commission is assuming that the portion of the estimates attributed by the commenter to service bureaus will be passed-through to their Outsourcing broker-dealer clients that rely on service bureaus to perform their regulatory data reporting. The Commission is thus applying the portion of the commenter’s cost estimates attributed to the 13 service bureaus across the 1,629 broker-dealers that are categorized as Outsourcing broker-dealers. $108,333 / 1,629 Outsourcing broker-dealers = $66.50 in ongoing costs to maintain the modified allocation timestamp requirement per Outsourcing broker-dealer.

+
+
fn +

3633 $124,439.50 = ($124,373 in ongoing outsourcing costs) + ($66.50 to maintain the allocation timestamp)

+
+
fn +

3634 The Commission estimates that 823 small non-OATS-reporting broker-dealers would be impacted by this information collection. (823 small non-OATS-reporting broker-dealers x 1,350 burden hours) = 1,111,050 aggregate ongoing burden hours to ensure ongoing compliance with Rule 613.

+
+
fn +

3635 $102,413,708.50 = ($124,373 in ongoing outsourcing costs) + ($66.50 to maintain the allocation timestamp) x (823 small non-OATS reporting broker-dealers).

+
+
fn +

3636 See Section VI.

+
+
fn +

3637 The Commission estimates that the cost of the audit would be an aggregate, external cost of $5,000. $5,000 / 21 Participants = $238.09 per Participant. See Section V.F.1.b., supra.

+
+
fn +

3638 Id.

+
+
fn +

3639 The Commission estimates that 19 internal burden hours = (Computer Operations Department Manager at 5 hours) + (Senior Systems Analyst at 5 hours) + (Systems Analyst at 5 hours) + (Attorney at 2 hours) + (Assistant General Counsel at 2 hours).

+
+
fn +

3640 $200 = ($400 per hour rate for outside legal services) x (0.5 hours). The Commission based this estimate on the assumption that the assessment would require approximately one-fifth the effort of review by outside counsel as the document required by Rule 613(i) regarding the expansion of the CAT to other securities because the Commission believes the assessment is not as comprehensive as the expansion document since it is limited to clock synchronization standards. See Section VI.D.1.e., supra.

+
+
fn +

3641 399 initial internal burden hours = (19 initial, one-time burden hours) x (21 Participants).

+
+
fn +

3642 $4,200 = (21 Participants) x ($400 per hour rate for outside legal services) x (0.5 hours).

+
+
fn +

3643 The Commission calculates the total estimated burden hours based on a similar formulation used for calculating the total estimated burden hours of Rule 613(i)’s requirement for a document addressing expansion of the CAT to other securities. See Section VI.D.1.e., supra. The Commission assumes that the preparation of the report would be approximately one-half as burdensome as the document required by Rule 613(i). Because the Commission believes that the report would be half as burdensome as the document required by Rule 613(i), the Commission believes that all of the Participants would need 1 FTE for the report. (1 FTE) x (1,800 working hours per year) = 1,800 initial, one-time burden hours per year for all of the Participants. (1,800 burden hours per year) / (21 Participants) = 85.71 initial, one-time burden hours per Participant for preparation and submission of the report.

+
+
fn +

3644 $1,000 = ($400 per hour rate for outside legal services) x (2.5 hours). The Commission based this estimate on the assumption that the report would require approximately one-tenth the effort of drafting by outside counsel as the document required by Rule 613(i) regarding the expansion of the CAT to other securities. See Section VI.D.1.e., supra.

+
+
fn +

3645 1,799.91 initial, one-time burden hours = (85.71 initial, one-time burden hours) x (21 Participants).

+
+
fn +

3646 $21,000 = (21 Participants) x ($400 per hour rate for outside legal services) x (2.5 hours).

+
+
fn +

3647 The Commission estimates that 15 internal burden hours = (Computer Operations Department Manager at 2 hours) + (Senior Database Administrator at 5 hours) + (Senior Systems Analyst at 2 hours) + (Systems Analyst at 2 hours) + (Attorney at 2 hours) + (Assistant General Counsel at 2 hours).

+
+
fn +

3648 $2,000 = ($400 per hour rate for outside legal services) x (5 hours). The Commission is basing this estimate on the assumption that the assessment would require approximately twice the effort of drafting by outside counsel as the document required by Rule 613(i) regarding the expansion of the CAT to other securities. The Commission attributes this difference to ensuring that any potential security issues regarding industry bulk access of data are sufficiently reviewed and addressed. See Section VI.D.1.e., supra.

+
+
fn +

3649 315 initial one-time internal burden hours = (15 initial, one-time burden hours per Participant) x (21 Participants).

+
+
fn +

3650 $42,000 = (21 Participants) x ($400 per hour rate for outside legal services) x (5 hours).

+
+
fn +

3651 The Commission estimates that 24 internal burden hours = (Computer Operations Department Manager at 3 hours) + (Senior Database Administrator at 4 hours) + (Senior Systems Analyst at 2 hours) + (Systems Analyst at 2 hours) + (Compliance Attorney at 5 hours) + (Attorney at 4 hours) + (Assistant General Counsel at 4 hours).

+
+
fn +

3652 The Commission calculated the total estimated external cost based on the revised burden hour estimate for the written assessment of the operation of the CAT. See Section VI.D.1.f.b, supra. The Commission assumes that the preparation and submission of the error assessment would cost approximately half as much as the revised written assessment. The revised written assessment estimate provides that each Participant would outsource 2.5 hours of legal time to assist in the review of the assessment, for an external cost of approximately $1,000. The Commission estimates that each Participant would outsource approximately 1.25 hours of legal time, for an initial, one-time external cost of $500 (1.25 hours x $400 per hour rate for outside legal services) to assist in drafting the error assessment.

+
+
fn +

3653 504 initial, one-time burden hours = (24 initial, one-time burden hours per Participant) x (21 Participants).

+
+
fn +

3654 $10,500 = (21 Participants) x ($400 per hour rate for outside legal services) x (1.25 hours).

+
+
fn +

3655 The Commission calculated the total estimated burden hours based on a similar formulation used for calculating the total estimated burden hours of Rule 613(i)’s requirement for a document addressing expansion of the CAT to other securities. See Section VI.D.1.e., supra. The Commission assumes that the preparation of the assessment would be approximately one-eighth as burdensome as the document required by Rule 613(i). As noted in note 3394, to estimate the Rule 613(i) burden, the Commission is applying the internal burden estimate provided in the CAT NMS Plan for Plan development over a 6-month period, and dividing the result in half. See CAT NMS Plan, supra note 5, at Appendix C, Section B.7(b)(iii). 0.667 FTEs required for all Participants per month to develop the CAT NMS Plan = (20 FTEs / 30 months). 0.667 FTEs x 6 months = 4 FTEs. 4 FTEs/ 2 = 2 FTEs needed for all of the Participants to create and submit the Rule 613(i) document. (2 FTEs) x (1/8) = 0.25 FTE to prepare and submit the report studying the impact of tiered fees on market liquidity. (0.25 FTE x 1,800 working hours per year) = 450 initial, one-time burden hours for all of the Participants to review and comment on the written assessment. (450 burden hours / 21 Participants) = 21.43 initial, one-time burden hours per Participant to prepare and submit the report.

+
+
fn +

3656 $200 = ($400 per hour rate for outside legal services) x (0. 5 hours).

+
+
fn +

3657 450 initial, one-time burden hours = (21.43 initial, one-time burden hours) x (21 Participants).

+
+
fn +

3658 $4,200 = (21 Participants) x ($400 per hour rate for outside legal services) x (0.5 hours).

+
+
fn +

3659 This estimate is based on the quarterly material system change reports required under Rule 1003(a)(1) of Regulation SCI. The Commission estimated that each SCI entity would incur a burden of 125 hours to comply with the quarterly report on material changes to SCI systems required under Rule 1003(a)(1) (7.5 hours by an Attorney, 7.5 hours by a Compliance Manager, 5 hours by a Chief Compliance Officer, 30 hours by a Senior Business Analyst, and 75 hours by a Senior Systems Analyst). See Regulation Systems Compliance and Integrity, Securities Exchange Act Release No. 73639 (December 5, 2014), 79 FR 72251, at 72390, n.1656. Because the CAT is an SCI System of the Participants, the Commission is assuming for its estimates that each Participant would incur an equal portion of the 125 burden hours per report.

+
+
fn +

3660 The Commission estimates that there would be four Material System Changes per year. 5.95 burden hours per report x 4 reports per year = 23.8 annual burden hours per year.

+
+
fn +

3661 (5.95 burden hours per report) x 21 Participants = 125 burden hours per report.

+
+
fn +

3662 (125 burden hours) x (4 reports per year) = 500 annual burden hours.

+
+
fn +

3663 ($65,000 annual, external cost) / (21 Participants) = $3,095.24 per Participant. See supra note 2503 (explaining the source of the $65,000 estimate, stating that the Commission drew this estimate from a recent Commission adopting release and an industry report); see also Section V.F.1.b., supra.

+
+
fn +

3664 See supra note 2503 (explaining the source of the $65,000 estimate); see also Section V.F.1.b., supra.

+
+
fn +

3665 The Commission notes that Section 17(f)(2) of the Exchange Act already mandates that each national securities exchange and national securities association require each of its partners, directors, officers and employees be fingerprinted and such fingerprints to be submitted to the Attorney General of the United States for identification and appropriate processing. 15 U.S.C. 78q(f)(2).

+
+
fn +

3666 This number is based on conversations with Participants.

+
+
fn +

3667 71.42 users per Participant = (1,500 users) / (21 Participants).

+
+
fn +

3668 The Commission is basing this assumption on the requirements of Section 17(f)(2). 15 U.S.C. 78q(f)(2).

+
+
fn +

3669 This is based on the per respondent burden in Extension of Rule 17f-2, SEC File No. 270-35, OMB Control No. 3235-0029, 79 FR 42563 (July 22, 2014).

+
+
fn +

3670 The Commission is assuming that this would be a burden of 15 minutes for a Compliance Manager per fingerprint card.

+
+
fn +

3671 17.81 burden hours = (Compliance Manager at 15 minutes) x (71.42 users).

+
+
fn +

3672 374.01 = (17.75 initial one-time burden hours) x (21 Participants).

+
+
fn +

3673 71.42 x 45% hard copy fingerprinting = 32.14 users. 71 x 55% electronic fingerprinting = 39.28 users. (32.14 hard copy fingerprinting users) x ($44.50 per hard copy fingerprint) = $1,430.23 for hard copy fingerprinting users per Participant. (39.28 electronic fingerprinting users) x ($30.25 per electronic fingerprint) = $1,188.22 for electronic fingerprint users per Participant. $1,430.23 + $1,188.22= $2,618.45 per Participant in initial external costs for fingerprinting.

+
+
fn +

3674 $54,987.45 = ($2,618.45 per Participant) x (21 Participants).

+
+
fn +

3675 The Commission assumes that the finance industry has a rate of 23.87% turnover per year, based on a monthly rate for both employment separations and hires of 1.8% for the finance and insurance industry in September 2016. See http://www.bls.gov/news.release/pdf/jolts.pdf (news release from the Bureau of Labor Statistics, dated November 8, 2016). The Commission preliminarily estimates that the Participants will have to annually conduct background checks of 23.87% of the 1,500 users, or 358.05 users per year. (358.05 users) / (21 Participants) = 17.05 users that will need to be subject to background checks on an annual basis. Based on this estimate, the Commission estimates that each Participant would incur a burden of 4.26 ongoing annual burden hours = (Compliance Manager at 15 minutes) x (17.05 users).

+
+
fn +

3676 89.51 annual ongoing burden hours = (4.26 ongoing annual burden hours per Participant) x (21 Participants).

+
+
fn +

3677 See supra note 3675. Based on the Commission’s estimate that 17.05 users will need to be subject to background checks annually, the Commission estimates that 45% of the 17.05 users would submit hard copy fingerprints and 55% of the 17.05 users would submit electronic fingerprints to conduct their background checks. 45% of 17.05 = 7.67 users that would submit hard copy fingerprints. 55% of 17.05 = 9.38 users that would submit electronic fingerprints. (7.67 hard copy fingerprinting users) x ($44.50 per hard copy fingerprint) = $341.32 for hard copy fingerprinting users per Participant. (9.38 electronic fingerprinting users) x ($30.25 per electronic fingerprint) = $283.75 for electronic fingerprint users per Participant. $341.32 + $283.75 = $625.07 per Participant in initial external costs for fingerprinting.

+
+
fn +

3678 ($625.07 per Participant in annual, ongoing external costs) x (21 Participants) = $13,126.37 to conduct a fingerprint-based background check of the users.

+
+
fn +

3679 17 CFR 240.17a-1.

-
fn -

14 17 CFR 242.608.

+
fn +

3680 17 CFR 240.17a-4.

-
fn -

15 The marked additions and deletions show the proposed changes to the current Selection Plan without taking into account Amendment No.1. The effect of the proposed additions and deletions on the Selection Plan, taking into account Amendment No. 1, would be renumbering Section V.(B)(3) as Section V.(B)(4).

+
fn +

3681 17 CFR 242.613(c)(7) and (e)(6).

\ No newline at end of file diff --git a/spider/files/data000018.html b/spider/files/data000018.html index 9f73204..f01600e 100644 --- a/spider/files/data000018.html +++ b/spider/files/data000018.html @@ -1,403 +1,48 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Joint Industry Plan (Notice of Plan Amendment Release 34-79898) - document_type: Notices - source: US/SEC/Notices/Notice of Plan Amendment - source_type: Notice of Plan Amendment + document_title: SEC Comment Letters (SEC Release 34-62174) + document_type: Letters + source: US/SEC/Letters/Comment Letter + source_type: Comment Letter language: English - citation: Notice of Plan Amendment Release 34-79898 -
pubdate: January 30, 2017 effdate: N/A -

Joint Industry Plan (Notice of Plan Amendment Release 34-79898)

- Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant - Compliance User: MIAX PEARL, LLC + citation: SEC Comment Letters (SEC Release 34-62174) +
pubdate: July 28, 2010 effdate: N/A +

SEC Comment Letters (SEC Release 34-62174)

+ Topic: SEC Comment Letter, File Number S-­‐7-­11-‐10, Consolidated Audit Trail, Release No. 34-‐62174 + Compliance User: Securities and Exchange Commission/Self-Regulatory Organization Keywords: - Securities Exchange Act - Section 11A, - Rule 608, - MIAX PEARL, LLC, - CAT NMS plan, + FIX Protocol, + Consolidated Audit Trail System, -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-79898; File No. 4-698)

-

January 30, 2017

-

Joint Industry Plan; Notice of Filing and Immediate Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant

-

Pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 (“Act”)1 and Rule 608 thereunder,2 notice is hereby given that on January 12, 2017, MIAX PEARL, LLC (“MIAX PEARL” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) an amendment to the Plan Governing the Consolidated Audit Trail (“Plan”).3 The Commission approved the application of MIAX PEARL to register as a national securities exchange on December 13, 2016.4 One of the conditions of the Commission’s approval was the requirement for MIAX PEARL to join the CAT NMS Plan.5 The amendment adds MIAX PEARL as a Participant to the Plan.6 The Commission is publishing this notice to solicit comments on the amendment from interested persons.

-
pubdate: January 30, 2017 effdate: N/A -

I. Description and Purpose of the Amendment

- Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Description and Purpose of the Amendment - Compliance User: MIAX PEARL, LLC - Keywords: - Rule 608, - MIAX PEARL, LLC, - CAT NMS plan, - Participant, - -

The amendment to the CAT NMS Plan adds MIAX PEARL as a Participant.7 The CAT NMS Plan provides that any Person8 approved by the Commission as a national securities exchange or national securities association under the Exchange Act may become a Participant by submitting to the Company a completed application in the form provided by the Company.9 As a condition to admission as a Participant, said Person shall: (i) execute a counterpart of the CAT NMS Plan, at which time Exhibit A shall be amended to reflect the status of said Person as a Participant (including said Person's address for purposes of notices delivered pursuant to the CAT NMS Plan); and (ii) pay a fee to the Company as set forth in the Plan (the “Participation Fee”).10 The amendment to the Plan reflecting the admission of a new Participant shall be effective only when: (x) it is approved by the Commission in accordance with Rule 608 or otherwise becomes effective pursuant to Rule 608; and (y) the prospective Participant pays the Participation Fee.11

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MIAX PEARL has executed a copy of the current CAT NMS Plan, amended to include MIAX PEARL in the List of Parties (including the address of MIAX PEARL), paid the applicable Participation Fee and provided each current Plan Participant with a copy of the executed and amended Plan.12

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pubdate: January 30, 2017 effdate: N/A -

II. Effectiveness of the CAT NMS Plan Amendment

- Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Effectiveness of the CAT NMS Plan Amendment - Compliance User: MIAX PEARL, LLC - Keywords: - Rule 608, - Effectivity, - -

The foregoing Plan amendment has become effective pursuant to Rule 608(b)(3)(iii)13 because it involves solely technical or ministerial matters. At any time within sixty days of the filing of this amendment, the Commission may summarily abrogate the amendment and require that it be refiled pursuant to paragraph (a)(1) of Rule 608,14 if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors or the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system or otherwise in furtherance of the purposes of the Act.

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pubdate: January 30, 2017 effdate: N/A -

III. Solicitation of Comments

- Topic: SEC Release, Release No. 34-79898, Joint Industry Plan; Notice of Filing and Effectiveness of Amendment to the Plan Governing the Consolidated Audit Trail to Add MIAX PEARL, LLC as a Participant, Solicitation of Comments - Compliance User: MIAX PEARL, LLC - Keywords: - Comments, - Electronic Comments, - Paper Comments, - File Number 4-698, - 5 U.S.C. 552, - -

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the amendment is consistent with the Act. Comments may be submitted by any of the following methods:

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Electronic Comments:

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• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

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• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-698 on the subject line.

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Paper Comments:

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• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

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All submissions should refer to File Number 4-698. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the amendment between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm. Copies of such filing also will be available for inspection and copying at the principal office of MIAX PEARL. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-698 and should be submitted on or before [insert date 21 days from publication in the Federal Register].

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By the Commission.

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Eduardo A. Aleman

-

Assistant Secretary

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fn -

1 15 U.S.C. 78k-1(a)(3).

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-
fn -

2 17 CFR 242.608.

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-
fn -

3 The Commission approved the CAT NMS Plan on November 15, 2016. See Securities Exchange Act Release No. 79318, 81 FR 84695 (Nov. 23, 2016).

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-
fn -

4 See Securities and Exchange Act Release No. 79543 (Dec. 13, 2016), 81 FR 92901 (Dec. 20, 2016) (File No. 10-227).

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-
fn -

5 See id. 81 FR at 92916.

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-
fn -

6 See Letter from Barbara J. Comly, Executive Vice President, General Counsel, and Corporate Secretary, MIAX PEARL, to Brent J. Fields, Secretary, Commission, dated January 11, 2017.

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-
fn -

7 See Section 1.1 of the CAT NMS Plan. The term “Participant” is defined in the CAT NMS Plan as any Person that becomes a Participant as permitted by this agreement, in such Person’s capacity as a Participant in the Company (it being understood that the Participants shall comprise the “members” of the Company (as the term “member” is defined in Section 18-101(11) of the Delaware Act)). As defined in the CAT NMS Plan, the name of the “Company” is CAT NMS, LLC.

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-
fn -

8 See Section 1.1 of the CAT NMS Plan. The term “Person” is defined as means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

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-
fn -

9 See Section 3.3 of the CAT NMS Plan. MIAX PEARL was approved as a national securities exchange on December 13, 2016. See Securities and Exchange Act Release No. 79543, 81 FR 92901 (Dec. 20, 2016) (File No. 10-227).

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-
fn -

10 See Section 3.3 of the CAT NMS Plan.

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fn -

11 Id.

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fn -

12 See supra note 6.

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fn -

13 17 CFR 242.608(b)(3)(iii).

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-
fn -

14 17 CFR 242.608(a)(1).

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+

28 July 2010

+

Securities and Exchange Commission

+

100 F Street, NE

+

Washington, DC 20549-1090

+

File Number S-7-11-10, Consolidated Audit Trail, Release No. 34-62174

+

Re: Recommendation to Use FIX Protocol in Consolidated Audit Trail System

+

Dear Sir or Madam:

+

I work as a consultant to the electronic trading industry with my company Aditat. Previous to this, I was President of Orc Software North America and President of Cameron Systems. I was co-chair of the FIX Protocol Americas Committee and member of the Global Steering Committee 2005-2007.

+

My submission is limited to only the data protocol used and is a recommendation that the SEC mandates that the FIX data protocol be used for the proposed Consolidated Audit Trail System.

+

The Financial Information Exchange (FIX) protocol is an industry driven protocol for electronic trading. It is now the global industry standard and has been a great success within the securities industry in the last 15 years. FIX is used in equities, foreign exchange, fixed income, commodities, and derivative markets. FIX is used by the buy side, sell side and exchanges. It is a global standard, being the dominant protocol in all major European and most major Asian markets. Its usage is governed by the industry run non-profit FIX Protocol Ltd (http://www.fixprotocol.org). A list of buy and sell side members, plus exchanges, is available at http://www.fixprotocol.org/members/. Please note that though this list is large it is not exhaustive, as firms do not need to be a member to use the protocol.

+

Nearly all pre-trade, trade, and some post-trade messages that are sent between the buy side, sell side and exchanges are sent using the FIX protocol. FIX is used for indications of interest, quotes, orders, basket/list orders, cancel/replace orders, executions and allocations. Many brokers also use the FIX protocol for routing messages within their organization. The FIX protocol already captures most of the information that the Consolidated Audit Trail System hopes to capture, including timestamp, side, quantity, type of order, client order ID, account, order handling instructions, desk received, and stock locate for short sales. If any extra data needs to be captured for the Consolidated Audit Trail System this can be easily done by adding new fields to the protocol, which the FIX Protocol organization often does.

+

The advantages of using the FIX Protocol for the Consolidated Audit Trail System are:

+

a. Lower Costs to the Industry – Buy side, sell side and exchanges already communicate and store messages using the FIX protocol. Costs to develop systems to store and communicate trading information to the SEC or SROs would be lower using FIX as the data already exists in a suitable format today.

+

b. Less Error and Easier Auditing – As records are currently kept using the FIX protocol, if any other protocol is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data.

+

c. Real Time – All FIX messages are generated in real time for trading. The SEC could more easily attain a real time reporting system by using FIX.

+

d. Ability to Co-ordinate Across Derivative Markets and Globally – Market events such as the May 6 flash crash require looking at not just historical equity data but also data from equity derivative markets and international markets. As the FIX protocol is dominant in other asset classes and derivative markets including equity index futures, equity futures, equity options, and global markets, regulators can more easily gain a broader view.

+

e. Ability to Use Established Knowledge and Vendor Base – All buy side and sell side firms and exchanges today have experience working with the FIX protocol. There are thousands of business analysts, developers and consultants with in depth experience. There are hundreds of suppliers with products that communicate, monitor and manage the FIX protocol. These products range from free open source to robust vendor solutions. Using the FIX protocol will allow the SEC, SROs and firms to use this established experience and vendor base.

+

Currently some of the scope of the Consolidated Audit Trail System is captured in FINRA’s Order Audit Trail System (OATS) and the NYSE’s Order Tracking System (OTS). It is worthwhile to use many of the processes around data requested and the data transmission between brokers and the SRO from these systems. However the advantage of moving to FIX protocol instead of using one of the custom data protocols that these systems use is that the data is first in FIX and therefore requires no translation ensuring accuracy. FIX is in real time, while these custom data protocols are used for end of day reporting. Using a custom data protocol means that the data will not be as easily compared with data from derivatives and international markets that use FIX. And using a custom protocol will forever silo understanding of the data in the protocol within the limited number of people who focus on regulatory and compliance issues at securities firms. The entire global securities industry uses FIX, while only the regulatory and compliance departments at US equity brokers understand the OATS or OTS data format.

+

FIX is currently used to support regulations from FINRA, CFTC, SEC and internationally from the Investment Industry Regulatory Organization of Canada

+

(IIROC) and the Australian Securities and Investment Commission (ASIC). An overview of this regulatory support is at: http://www.fixprotocol.org/regulations/.

+

For clarity, the FIX protocol has two parts. The application layer governs the data format (what the data looks like) and is what this recommendation is focused on. The session layer governs the transport of the messages (how the messages are sent between firms). While the session layer could be used for sending the messages from firms to the SRO, there may be other ways of sending the messages that are just as suitable.

+

Thank you for consideration of this submission.

+

Sincerely,

+

Martin Koopman

+

martink@aditat.com

+

+1 917 3885775

+

137 West 78th Street

+

New York, NY 10024

\ No newline at end of file diff --git a/spider/files/data000019.html b/spider/files/data000019.html index 9edebd9..7b26a33 100644 --- a/spider/files/data000019.html +++ b/spider/files/data000019.html @@ -1,790 +1,102 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Joint Industry Plan (Notice of Proposed Plan Release 34-70892) - document_type: Notices - source: US/SEC/Notices/Notice of Proposed Plan - source_type: Notice of Proposed Plan + document_title: SEC Exemptive Relief (SEC Release 34-69060) + document_type: Reliefs + source: US/SEC/Reliefs/Exemptive Relief + source_type: Exemptive Relief language: English - citation: Notice of Proposed Plan Release 34-70892 -
pubdate: November 15, 2013 effdate: N/A -

Joint Industry Plan (Notice of Proposed Plan Release 34-70892)

- Topic: Joint Industry Plan (Notice of Proposed Plan Release 34-70892) + citation: SEC Exemptive Relief (SEC Release 34-69060) +
pubdate: March 07, 2013 effdate: N/A +

SEC Exemptive Relief (SEC Release 34-69060)

+ Topic: SEC Release, Release No. 34-69060), Exemptive Relief Compliance User: Self-Regulatory Organization Keywords: - Joint Industry Plan, - Selection Plan, + Sec Rule 613, + FINRA, + SRO, + NMS Plan, + Exemptive Order, + Request Letter, + Exchange Act - Section 36, -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-70892; File No. 4-668)

-

November 15, 2013

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Joint Industry Plan; BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and Topaz Exchange, LLC; Notice of Filing of Proposed National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail

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pubdate: November 16, 2013 effdate: N/A -

I. Introduction

- Topic: I. Introduction - Compliance User: Self-Regulatory Organization - Keywords: - Securities Exchange Act - Section 11A, - SRO, - Selection Plan, - CAT NMS plan, - -

Pursuant to Section 11A of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”)1 and Rule 608 thereunder (“Rule 608”),2 notice is hereby given that on September 3, 2013, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc., and Topaz Exchange, LLC (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission”) the proposed National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Plan”). A copy of the Plan is attached as Exhibit A hereto. The Commission is publishing this notice to solicit comments on the Plan.

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pubdate: November 17, 2013 effdate: N/A -

II. Background

- Topic: II. Background - Compliance User: Self-Regulatory Organization - Keywords: - SRO, - Selection Plan, - CAT NMS plan, - Sec Rule 613, - -

On July 11, 2012, the Commission adopted Rule 613 under the Exchange Act3 to require the SROs to jointly submit an NMS plan (the “CAT NMS Plan”) to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.4 Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail.5 In instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the CAT NMS Plan in a way that best achieves the objectives of the Rule.6

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As described in more detail below, the SROs concluded that publication of a request for proposal was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the SROs and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan. The SROs also decided, for the reasons set forth below, to file the Plan to govern how the SROs will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how to review, evaluate, and narrow down the bids submitted in response to the request for proposal—and ultimately choosing the plan processor that would build, operate, and maintain the consolidated audit trail.

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pubdate: November 18, 2013 effdate: N/A -

III. Description of the Plan

- Topic: III. Description of the Plan - Compliance User: Self-Regulatory Organization - Keywords: - Rule 608, - SRO, - Purpose of the Plan, - -

Set forth in this Section III is the statement of the purpose of the Plan, along with the information required by Rule 608(a)(4) and (5) under the Exchange Act,7 prepared and submitted by the SROs with the Plan to the Commission.8

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pubdate: November 19, 2013 effdate: N/A -

A. Statement of Purpose

- Topic: A. Statement of Purpose - Compliance User: Self-Regulatory Organization - Keywords: - Sec Rule 613, - CAT NMS plan, - Purpose of the Plan, - Selection Committe, - Plan Processor, - Participant, - Section (V) Selection Plan, - Bidder, - Shortlisted Bids, - Qualified Bids, - Voting Senior Officer, - -

Rule 613 requires the Participants to “jointly file . . . a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository.”9 The Plan being submitted for approval by the Participants governs the process of selecting a Plan Processor for the consolidated audit trail and developing the CAT NMS Plan.

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As adopted, Rule 613 “expand[ed] the set of solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and [provided] the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule.”10 As the Commission noted in the Adopting Release, because of this expanded solution set, “the adopted Rule now requires the [Participants] to provide much more information and analysis to the Commission as part of their [CAT NMS Plan] submission.”11 Specifically, these requirements were incorporated into Rule 613 as a series of twelve “considerations” that the Participants must address in the CAT NMS Plan, including:

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• the specific details and features of the CAT NMS Plan;

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• the Participants’ analysis of the CAT NMS Plan’s costs and impact on competition, efficiency, and capital formation;

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• the process in developing the CAT NMS Plan;

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• information about the implementation of the CAT NMS Plan; and

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• milestones for the creation of the consolidated audit trail.

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As part of the discussion of these “considerations,” the Participants must include “cost estimates for the proposed solution, and a discussion of the costs and benefits of alternative [sic] solutions considered but not proposed.”12 In addition, the Commission noted that Rule 613 requires that the [Participants]: (1) Provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the [CAT NMS Plan] submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the [CAT NMS Plan] submitted; and (3) provide their own analysis of the submitted [CAT NMS Plan’s] potential impact on competition, efficiency, and capital formation.13

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The Commission stated that these detailed requirements are “intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the [CAT NMS Plan] ultimately submitted by the [Participants].”14 Indeed, the Commission expressed its expectation that “the [Participants] will seriously consider various options as they develop the [CAT NMS Plan] to be submitted to the Commission for its consideration.”15

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In light of the numerous specific requirements of Rule 613, on March 7, 2013, the Commission granted the Participants an extension of the time in which to file the CAT NMS Plan so that the Participants could ensure that all potential options for the consolidated audit trail could be considered. As noted in the Exemptive Letter, the Participants concluded that publication of a request for proposal (“RFP”) was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan.

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The Participants published the RFP on February 26, 2013, and requested that any potential bidders notify the Participants of their intent to bid by March 5, 2013. Thirty-one firms submitted an intent to bid in response to the publication of the RFP; four of the firms were Participants or Affiliates of Participants.16

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The Plan is intended to govern how the Participants will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, reviewing, evaluating, and narrowing down the Bids submitted in response to the RFP—and ultimately choosing the Plan Processor. Because of the important regulatory obligations that exist for each Participant with respect to the creation and operation of the consolidated audit trail, it is essential that each Participant contribute to the development of the CAT NMS Plan. The Participants recognize, however, that Participants or Affiliates of Participants may also be Bidders seeking to serve as the Plan Processor or may be included as part of a Bid. The Participants have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions, which are described below, designed to balance these competing factors. The Participants believe that the Plan achieves this balance by allowing all Participants to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.

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Section III of the Plan establishes the overall governance structure the Participants have chosen.17 Specifically, the Participants propose establishing an Operating Committee responsible for formulating, drafting, and filing with the Commission the CAT NMS Plan and for ensuring the Participants’ joint obligations under Rule 613 are met in a timely and efficient manner. As set forth in Section III(B) of the Plan, each Participant will select one individual and one substitute to serve on the Operating Committee; however, other representatives of each Participant are permitted to attend Operating Committee meetings. Section III of the Plan also establishes the procedures for the Operating Committee, including provisions regarding meetings, Participants’ voting rights, and voting requirements.

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Sections V and VI of the Plan18 set forth the process for the Participants’ evaluation of Bids and the selection process for narrowing down the Bids and choosing the Plan Processor.19 Pursuant to these Sections, the evaluation of Bids and selection of the Plan Processor will be performed by a Selection Committee composed of one senior officer from each Participant (referred to as the “Voting Senior Officer”).20 Because of the potential conflicts of interest noted above, the Plan includes multiple requirements to increase the independence of the Voting Senior Officer who participates on the Selection Committee on behalf of a Bidding Participant.21 The criteria set forth in Section V(D) of the Plan include requirements concerning the Voting Senior Officer’s job responsibilities, decision-making authority, and reporting, and require that the Bidding Participant establish functional separation between its Plan responsibilities and its business/commercial (including market operations) functions. In addition, the criteria prohibit any disclosure of information regarding the Bid to the Voting Senior Officer and prohibit the Voting Senior Officer from disclosing any non-public information gained in his or her role as such. These criteria are intended to insulate the Voting Senior Officer from any inside knowledge regarding the Bid (while also preventing any information about the evaluation process from being shared with staff preparing the Bidding Participant’s Bid) and to reduce any potential personal motivation that may exist that could improperly influence a Voting Senior Officer’s decisions.22

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Because of the integral role played by the Selection Committee, any action requiring a vote by the Selection Committee under the Plan can only be taken in a meeting in which all Participants entitled to vote are present. All votes taken by the Selection Committee are confidential and non-public, and a Participant’s individual votes will not be disclosed to other Participants or to the public. For this reason, the Plan provides that votes of the Selection Committee will be tabulated by an independent third party approved by the Operating Committee. Moreover, the Participants do not anticipate that aggregate votes or anonymized voting distribution numbers will be provided to the Participants following votes by the Selection Committee.

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The Plan divides the review and evaluation of Bids and selection of the Plan Processor into four separate stages. After Bids are received,23 Section VI(A) of the Plan provides that the Selection Committee will review all submitted Bids to determine which Bids are Qualified Bids (i.e., Bids that contain sufficient information to allow the Voting Senior Officers to meaningfully assess and evaluate the Bid).24 At this initial stage, if two-thirds or more of the Participants determine that a Bid does not meet the threshold for a Qualified Bid, the Bid will be eliminated from further consideration. The Participants believe this initial step will ensure that only those Bids meeting a minimum level of detail and sufficiency will move forward in the process, and insufficient Bids can be eliminated.

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Following the elimination of Bids that are not Qualified Bids, each Qualified Bidder will be provided the opportunity to present its Bid to the Selection Committee. After the Qualified Bidders have made their presentations, the Selection Committee will establish a “shortlist” of Bids that will move on in the process. The Plan provides that, if there are six or fewer Qualified Bids submitted, all of those Bids will be selected as “Shortlisted Bids.”25 If there are more than six but fewer than eleven Qualified Bids, the Selection Committee will choose five Shortlisted Bids, and if there are eleven or more Qualified Bids, the Selection Committee will choose 50% of the Qualified Bids as Shortlisted Bids.26

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When voting to select the Shortlisted Bids from among the Qualified Bids, each Voting Senior Officer must rank his or her selections, and the points assigned to the rankings increase in single-point increments. Thus, for example, if five Shortlisted Bids are to be chosen, each Participant will vote for its top five choices in rank order, with the first choice being given five points, the second choice four points, the third choice three points, the fourth choice two points, and the fifth choice one point. The Participants considered numerous alternative voting procedures but determined that the proposed process appropriately balances the need to differentiate among Qualified Bids while also ensuring that each Qualified Bid receives due consideration for inclusion as a Shortlisted Bid since each Voting Senior Officer must select multiple Qualified Bids for inclusion as a Shortlisted Bid. Further, while the Participants believe that the independence indicia sufficiently address any potential conflicts of interest that may arise with respect to Bids with which a Participant is affiliated, the proposed process will further

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mitigate potential conflicts because each Voting Senior Officer must select multiple unaffiliated Qualified Bids. The Participants believe this step is appropriate both to ensure that Bidders submit a complete and thorough Bid initially and so that Qualified Bidders will know whether they have a realistic opportunity to be selected as the Plan Processor after the CAT NMS Plan is approved.

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To further reduce the impact of potential conflicts of interest in choosing Shortlisted Bids, the Plan also provides that at least two Non-SRO Bids must be included as Shortlisted Bids, provided there are two Non-SRO Bids that are Qualified Bids.27 If, following the vote, no Non-SRO Bids have been selected as Shortlisted Bids, the Plan requires that the two Non-SRO Bids receiving the highest cumulative votes be added as Shortlisted Bids. If, in this scenario, a single Non-SRO Bid was a Qualified Bid, that Non-SRO Bid would be added as a Shortlisted Bid.

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Following the selection of Shortlisted Bids, the Participants will identify the optimal proposed solution(s) for the consolidated audit trail for inclusion in the CAT NMS Plan for submission to the Commission. Following approval of the CAT NMS Plan by the Commission, the Selection Committee will determine, by majority vote, which Shortlisted Bidders will be provided the opportunity to revise their Bids in light of the provisions in the final, approved CAT NMS Plan. In making a decision whether to permit a Shortlisted Bidder to revise its Bid, the Selection Committee will consider the provisions in the CAT NMS Plan as well as the content of the Shortlisted Bidder’s initial Bid. To reduce potential conflicts of interest, the Plan also provides that if a Bid submitted by or including a Bidding Participant or an Affiliate of a Bidding Participant is a Shortlisted Bidder, that Bidding Participant will be recused from all votes regarding whether a Shortlisted Bidder will be permitted to revise its Bid.

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After any permitted revisions have been received, the Selection Committee will select the Plan Processor from the Shortlisted Bids in two rounds of voting where, subject to the recusal provision described below, each Participant has one vote. In the first round, each Participant will select a first and second choice, with the first choice receiving two points and the second choice receiving one point. The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.28 In the event of a tie, the tie will be broken by assigning one point per vote to the tied Shortlisted Bids, and the Shortlisted Bid with the most votes will advance. If this procedure fails to break the tie, a revote will be taken on the tied Bids with each vote receiving one point. If the tie persists, the Participants will identify areas for discussion, and revotes will be taken until the tie is broken.

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Once two Shortlisted Bids have been chosen, the Participants will vote for a single Shortlisted Bid from the final two to determine the Plan Processor. If one or both of the final Bids is submitted by or includes a Bidding Participant or an Affiliate of a Bidding Participant, the Bidding Participant must recuse itself from the final vote. In the event of a tie, a revote will be taken. If the tie persists, the Participants will identify areas for discussion and, following these discussions, revotes will be taken until the tie is broken. As set forth in Section VII of the Plan, following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by Rule 608.

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pubdate: November 20, 2013 effdate: N/A -

B. Governing or Constituent Documents

- Topic: B. Governing or Constituent Documents - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

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-
pubdate: November 21, 2013 effdate: N/A -

C. Implementation of Plan

- Topic: C. Implementation of Plan - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan - Section VI, - CAT NMS plan, - -

The terms of the Plan will be operative immediately upon approval of the Plan by the Commission. The Participants have announced that Bids must be submitted four weeks after the Commission’s approval of the Plan. The Participants will begin reviewing and evaluating the Bids pursuant to Section VI of the Plan upon receipt of the Bids.

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The Participants anticipate that it will take seven months to evaluate the Bids and submit the CAT NMS Plan to the Commission pursuant to Sections VI(A) and (B) of the Plan.29 As noted above, upon approval of the CAT NMS Plan, the Plan will automatically terminate. The review of revised Shortlisted Bids and the selection of the Plan Processor will be undertaken as set forth in Sections VI(D) and (E) of the Plan as those sections are incorporated into the CAT NMS Plan.

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pubdate: November 22, 2013 effdate: N/A -

D. Development and Implementation Phases

- Topic: D. Development and Implementation Phases - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

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-
pubdate: November 23, 2013 effdate: N/A -

E. Analysis of Impact on Competition

- Topic: E. Analysis of Impact on Competition - Compliance User: Self-Regulatory Organization - Keywords: - Exchange Act - Section 11A, - Bidding Participants, - -

The Plan does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Participants do not believe that the Plan introduces terms that are unreasonably discriminatory for the purposes of Section 11A(c)(1)(D) of the Exchange Act. As noted in Section A, the Participants are aware that potential conflicts of interest are raised because a Participant, or an affiliate of a Participant, may be both submitting a Bid (or participating in a Bid) and participating in the evaluation of Bids to select the Plan Processor. As described in Section A, the Plan includes multiple provisions designed to mitigate the potential impact of these conflicts by imposing restrictions on the Voting Senior Officer and by requiring the recusal of Bidding Participants for certain votes taken by the Selection Committee. In addition, the Plan requires that at least two Non-SRO Bids be Shortlisted Bids to ensure Non-SRO Bids are given full and fair consideration.

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-
pubdate: November 24, 2013 effdate: N/A -

F. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan

- Topic: F. Written Understanding or Agreements Relating to Interpretation of, or Participation in, Plan - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan - Section III, - Selection Plan - Section II, - -

The Participants have no written understandings or agreements relating to interpretations of, or participation in, the Plan other than those set forth in the Plan itself. Section III(F)(2)(a) of the Plan provides that interpretations of the Plan require approval by a majority of Participants entitled to vote. Section II(B) of the Plan sets forth how any entity registered as a national securities exchange or national securities association under the Exchange Act may become a Participant.

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-
pubdate: November 25, 2013 effdate: N/A -

G. Approval of Amendment of the Plan

- Topic: G. Approval of Amendment of the Plan - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

-
-
pubdate: November 26, 2013 effdate: N/A -

H. Terms and Conditions of Access

- Topic: H. Terms and Conditions of Access - Compliance User: Self-Regulatory Organization - Keywords: - Sec Rule 613, - Selection Plan - Section II, - -

Each currently approved national securities exchange and national securities association subject to Rule 613(a)(1) is a Participant in the Plan. Section II(B) of the Plan provides that any entity approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new

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Participant’s name in Section II of the Plan) and submitting such amendment to the Commission for approval; and (2) providing each then-current Participant with a copy of such executed Plan.

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-
pubdate: November 27, 2013 effdate: N/A -

I. Method of Determination and Imposition, and Amount of, Fees and Charges

- Topic: I. Method of Determination and Imposition, and Amount of, Fees and Charges - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

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-
pubdate: November 28, 2013 effdate: N/A -

J. Method and Frequency of Processor Evaluation

- Topic: J. Method and Frequency of Processor Evaluation - Compliance User: Self-Regulatory Organization - Keywords: -

Not applicable.

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-
pubdate: November 29, 2013 effdate: N/A -

K. Dispute Resolution

- Topic: K. Dispute Resolution - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan - Section III, - CAT NMS plan, - Sec Rule 613, - Rule 608, - -

The Plan does not include specific provisions regarding resolution of disputes between or among Participants. Section III(B) of the Plan provides for each Participant to designate an individual to represent the Participant as a member of an Operating Committee. Section III(A) of the Plan provides that the Operating Committee is responsible for: (1) formulating, drafting, and filing with the Commission the CAT NMS Plan; and (2) ensuring the Participants’ obligations under Rule 613 are met in a timely and efficient manner. Within the areas of its responsibilities and authority as set forth in the Plan, decisions made or actions taken by the Operating Committee, directly or by duly delegated individuals or Subcommittees, shall be binding upon each Participant, without prejudice to the rights of any Participant to seek redress from the Commission pursuant to Rule 608 or in any other appropriate forum.

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-
-
pubdate: November 30, 2013 effdate: N/A -

IV. Solicitation of Comments

- Topic: IV. Solicitation of Comments - Compliance User: Self-Regulatory Organization - Keywords: - Submission of Comments, - Electronic Comments, - Paper Comments, - File Number 4-668, - 5 U.S.C. 552, - -

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the Plan is consistent with the Act.

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Comments may be submitted by any of the following methods:

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Electronic comments:

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• Use the Commission’s Internet comment form (http://www.sec.gov/rules/sro.shtml); or

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• Send an e-mail to rule-comments@sec.gov. Please include File Number 4-668 on the subject line.

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Paper comments:

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• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

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All submissions should refer to File Number 4-668. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Plan that are filed with the Commission, and all written communications relating to the Plan between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-668 and should be submitted on or before [insert date 30 days from publication in the Federal Register].

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By the Commission.

-

Kevin O’Neill

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Deputy Secretary

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-
pubdate: December 01, 2013 effdate: N/A -

EXHIBIT A

- Topic: EXHIBIT A - Compliance User: Self-Regulatory Organization - Keywords: - Consolidated Audit trail, - Plan Processor Evaluation and Selection Plan, - -

NATIONAL MARKET SYSTEM PLAN GOVERNING THE PROCESS OF SELECTING A PLAN PROCESSOR AND DEVELOPING A PLAN FOR

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THE CONSOLIDATED AUDIT TRAIL

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SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 608 OF REGULATION NMS UNDER THE SECURITIES EXCHANGE ACT OF 1934

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Consolidated Audit Trail: Plan Processor Evaluation and Selection Plan

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Preamble

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This Plan governs the process of: (1) evaluating and selecting a Plan Processor for the consolidated audit trail; and (2) developing a national market system plan pursuant to SEC Rule 613 to create, implement, and maintain a consolidated audit trail. This Plan will automatically terminate upon the SEC’s approval of the CAT NMS Plan. The Participants developed this Plan pursuant to Rule 608(a)(3) of Regulation NMS under the Exchange Act, which authorizes the Participants to act jointly in preparing, filing, and implementing national market system plans.

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I. Definitions

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(A) An “Affiliate” of an entity means any entity controlling, controlled by, or under common control with such entity.

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(B) “Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant.

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(C) “Bid” means a proposal submitted by a Bidder in response to the RFP.

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(D) “Bidder” means any entity, or any combination of separate entities, submitting a Bid.

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(E) “Bidding Participant” means a Participant that: (1) submits a Bid; (2) is an

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Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid.

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(F) “CAT NMS Plan” means the NMS Plan to be jointly submitted to the Commission by the Participants pursuant to paragraph (a)(1) of SEC Rule 613.

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(G) “Commission” or “SEC” means the United States Securities and Exchange Commission.

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(H) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

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(I) “Material Contract” means any contract resulting in a total cost to all Participants of more than $1,000,000.

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(J) “Material Subcontractor” means any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year. An entity will not be considered a “Material Subcontractor” solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.

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(K) “NMS Plan” shall have the same meaning as “[n]ational market system plan” provided in Rule 600(b)(43) of Regulation NMS under the Exchange Act.

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(L) “Non-SRO Bid” means a Bid that does not include a Bidding Participant.

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(M) “Operating Committee” shall have the meaning provided in Section III of the Plan.

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(N) “Participant” means a party to the Plan.

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(O) “Plan” means the plan set forth in this instrument, as amended from time to time in accordance with its provisions.

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(P) “Plan Processor” means the entity jointly selected by the Participants pursuant to SEC Rule 613, the Plan, and the CAT NMS Plan to perform the consolidated audit trail processing functions required by SEC Rule 613 and set forth in the RFP.

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(Q) “Qualified Bid” means a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee. When evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment. The determination of whether a Bid is a Qualified Bid shall be determined pursuant to the process set forth in Section VI of the Plan.

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(R) “Qualified Bidder” means a Bidder that has submitted a Qualified Bid.

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(S) “RFP” means the “Consolidated Audit Trail National Market System Plan Request for Proposal” published by the Participants on February 26, 2013, as amended from time to time.

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(T) “Selection Committee” means the committee formed pursuant to Section V of the Plan.

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(U) “SEC Rule 608” means Rule 608 of Regulation NMS under the Exchange Act.

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(V) “SEC Rule 613” means Rule 613 of Regulation NMS under the Exchange Act.

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(W) “Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section VI(B) of the Plan.

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(X) “Shortlisted Bidder” means a Qualified Bidder that has submitted a Bid selected as a Shortlisted Bid.

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(Y) “Voting Senior Officer” means the senior officer of a Participant chosen to serve on the Selection Committee pursuant to Section V of the Plan.

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II. Participants

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(A) List of Participants

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The Participants are as follows:

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(1) BATS Exchange, Inc.

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(2) BATS Y-Exchange, Inc.

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(3) BOX Options Exchange LLC

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(4) C2 Options Exchange, Incorporated

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(5) Chicago Board Options Exchange, Incorporated

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(6) Chicago Stock Exchange, Inc.

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(7) EDGA Exchange, Inc.

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(8) EDGX Exchange, Inc.

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(9) Financial Industry Regulatory Authority, Inc.

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(10) International Securities Exchange, LLC

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(11) Miami International Securities Exchange LLC

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(12) NASDAQ OMX BX, Inc.

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(13) NASDAQ OMX PHLX LLC

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(14) The Nasdaq Stock Market LLC

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(15) National Stock Exchange, Inc.

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(16) New York Stock Exchange LLC

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(17) NYSE MKT LLC

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(18) NYSE Arca, Inc.

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(19) Topaz Exchange, LLC

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(B) Admission of New Participants

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Any entity approved by the SEC as a national securities exchange or national securities association under the Exchange Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new Participant’s name in Section II of the Plan) and submitting such amendment to the SEC for approval; and (2) providing each then-current Participant with a copy of such executed Plan. The amendment shall be effective when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

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(C) Withdrawal of Participants

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(1) A Participant may withdraw from the Plan upon written notice to each of the other Participants of no less than 30 days. The written notice must include the legal basis for the Participant's withdrawal from the Plan, including, if applicable, any required approvals or orders issued by the SEC.

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(2) Withdrawal of a Participant shall be effectuated by an amendment to the Plan, including, if applicable, approval of any such amendment by the SEC.

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(3) Notwithstanding a Participant’s withdrawal from the Plan, the Participant shall remain liable for, and shall pay upon demand:

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(a) its proportionate share of any costs, including those resulting from any Material Contracts, accrued or incurred before the effectiveness of the Participant’s withdrawal;

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(b) its proportionate share of any liabilities arising while the organization was a Participant that are based on actions jointly undertaken by the Participants pursuant to the Plan or in furtherance of the Participants’ obligations pursuant to SEC Rule 613; and

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(c) any costs incurred as a result of the Participant’s withdrawal from the Plan.

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(4) Except as aforesaid, a withdrawing Participant shall have no further obligation under the Plan or to any of the other Participants with respect to the period following the effectiveness of its withdrawal.

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III. Operating Committee

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(A) Authority

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The Operating Committee shall be responsible for: (1) formulating, drafting, and filing with the SEC the CAT NMS Plan; and (2) ensuring the Participants’ obligations under SEC Rule 613 are met in a timely and efficient manner. Within the areas of its responsibilities and authority as set forth in the Plan, decisions made or actions taken by the Operating Committee, directly or by duly delegated individuals or Subcommittees, shall be binding upon each Participant, without prejudice to the rights of any Participants to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

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(B) Composition

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(1) Each Participant shall select from its staff one individual (the “primary representative”) to represent the Participant as a member of the Operating Committee, together with a substitute(s) for such individual. In the case of Affiliated Participants, one individual may be the primary representative for all or some of the Affiliated Participants, and another individual may be the substitute for all or some of the Affiliated Participants.

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(2) Regular meetings of the Operating Committee may be attended by each Participant’s primary representative and its substitute(s), and may be attended by other representatives of the Participant.

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(3) Any organization that is not a Participant but has an actively pending Form 1 Application on file with the Commission to become a national securities exchange will be permitted to appoint one primary representative and one alternate representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer/advisor. If the organization’s Form 1 Application is withdrawn, returned, or otherwise not actively pending with the Commission for any reason, then the organization will no longer be eligible to be represented in the Operating Committee meetings. The Operating Committee shall have the discretion, in limited instances, to deviate from this policy if, as indicated by majority vote, the Operating Committee agrees that circumstances so warrant.

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(4) Nothing in this section or elsewhere within the Plan shall authorize any person or organization other than Participants and their representatives to participate on the Operating Committee in any manner.

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(C) Meetings

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(1) Quorum

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(a) Any action requiring a vote can only be taken at a meeting in which a quorum of all Participants is present. For actions requiring a majority vote of all Participants, a quorum of greater than 50% of all Participants entitled to vote must be present at the meeting before such a vote may be taken. For actions requiring at least a two-thirds vote of all Participants, a quorum of at least two-thirds of all Participants entitled to vote must be present at the meeting before such a vote may be taken.

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(b) For purposes of establishing a quorum, a Participant is considered present at a meeting only if a Participant’s primary representative or substitute is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

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(c) Any Participant recused from voting on a particular action pursuant to Paragraph (E) below shall not be considered to be “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

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(2) Frequency

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Meetings of the Operating Committee shall be held as needed at such times and locations as shall from time to time be determined by the Operating Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Operating Committee deems acceptable.

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(3) Written Consent

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Any action may be taken without a meeting if a consent in writing, setting forth the action so taken, is sent to, via physical or electronic means, and agreed to by all Participants entitled to vote with respect to the subject matter thereof. The action taken shall be effective when the minimum number of Participants entitled to vote have approved the action, unless the consent specifies a different effective date.

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(4) Minutes

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Minutes of each meeting of the Operating Committee shall be taken.

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(5) Subcommittees

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In addition to the Selection Committee established pursuant to Section V of the Plan, the Operating Committee may establish any Subcommittees it deems necessary in fulfilling its obligations under the Plan. Membership on any Subcommittee is open to any Participant indicating a desire to participate. Minutes of each meeting of any Subcommittee shall be taken.

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(D) Voting Rights

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(1) Unless recused pursuant to Paragraph (E) below, each Participant shall have one vote on all matters considered by the Operating Committee.

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(2) Where one individual represents more than one Affiliated Participant, either as the primary representative or as a substitute, such individual will have the right to vote on behalf of each such Affiliated Participant. The substitute(s) may participate in deliberations of the Operating Committee and shall be considered a voting member thereof only in the absence of the primary representative.

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(E) Conflicts and Recusals

-

A Participant may recuse itself from voting on any matter under consideration by the Operating Committee if the Participant determines that voting on such matter raises a conflict of interest. Except as provided in Sections V(B)(2) and V(B)(3) of the Plan, no Participant is automatically recused from voting on any matter.

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(F) Voting Requirements

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(1) Supermajority Voting Requirements

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The following actions require approval by at least two-thirds of Participants entitled to vote:

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(a) Amendments to the Plan, other than amendments to add a new Participant; and

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(b) Material Contracts.

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(2) Majority Voting Requirements

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The following actions require approval by a majority of Participants entitled to vote:

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(a) Interpretations of the Plan; and

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(b) Any other matters not specified as requiring a supermajority vote.

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(G) Interpretations of Regulations

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Interpretative questions arising during the time for which the Plan is operative will be presented to the Operating Committee, which will determine whether to seek interpretive guidance from the Commission or other regulatory body and, if so, in what form.

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(H) Delegated Authority Within the areas of its responsibilities, the Operating Committee may delegate an individual or Subcommittee to make decisions or take action on behalf of the Operating Committee. Any decision made or action taken by such duly delegated individual or Subcommittee within the scope of such delegation shall be binding upon each Participant.

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IV. Plan Amendments

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(A) General Amendments

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Except with respect to the addition of new Participants, any proposed change in, addition to, or deletion from the Plan shall be effected by means of a written amendment to the Plan that: (1) sets forth the change, addition, or deletion; (2) is executed by over two-thirds of the Participants; and (3) is approved by the SEC pursuant to SEC Rule 608, or otherwise becomes effective under SEC Rule 608.

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(B) New Participants

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With respect to new Participants, an amendment to the Plan may be effected by the new national securities exchange or national securities association in accordance with Section II of the Plan.

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V. Selection Committee

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The Participants shall establish a Selection Committee in accordance with this Section V to:

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(1) evaluate and review Bids; and (2) select the Plan Processor.

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(A) Composition

-

Each Participant shall select from its staff one senior officer (“Voting Senior Officer”) to represent the Participant as a member of a Selection Committee. In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual will have the right to vote on behalf of each such Affiliated Participant.

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(B) Voting

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(1) Unless recused pursuant to Paragraph (2) or (3) below, each Participant shall have one vote on all matters considered by the Selection Committee.

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(2) No Bidding Participant shall vote on whether a Shortlisted Bidder will be permitted to revise its Bid pursuant to Section VI(D)(1) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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(3) No Bidding Participant shall vote in the second round set forth in Section VI(E)(4) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is part of the second round.

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(4) All votes by the Selection Committee shall be confidential and non-public. All such votes will be tabulated by an independent third party approved by the Operating Committee, and a Participant’s individual votes will not be disclosed to other Participants or to the public.

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(C) Quorum

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(1) Any action requiring a vote by the Selection Committee can only be taken at a meeting in which all Participants entitled to vote are present. Meetings of the Selection Committee shall be held as needed at such times and locations as shall from time to time be determined by the Selection Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Selection Committee deems acceptable.

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(2) For purposes of establishing a quorum, a Participant is considered present at a meeting only if the Participant’s Voting Senior Officer is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

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(3) Any Participant recused from voting on a particular action pursuant to Paragraph (B) above shall not be considered “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

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(D) Qualifications for Voting Senior Officer of Bidding Participants

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The following criteria must be met before a Voting Senior Officer is eligible to represent a Bidding Participant and serve on the Selection Committee:

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(1) the Voting Senior Officer is not responsible for the Bidding Participant’s market operations, and is responsible primarily for the Bidding Participant’s legal and/or regulatory functions, including functions related to the formulation and implementation of the Bidding Participant’s legal and/or regulatory program;

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(2) the Bidding Participant has established functional separation of its legal and/or regulatory functions from its market operations and other business or commercial objectives;

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(3) the Voting Senior Officer ultimately reports (including through the Bidding Participant’s CEO or Chief Legal Officer/General Counsel) to an independent governing body that determines or oversees the Voting Senior Officer’s compensation, and the Voting Senior Officer does not receive any compensation (other than what is determined or overseen by the independent governing body) that is based on achieving business or commercial objectives;

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(4) the Voting Senior Officer does not have responsibility for any non-regulatory functions of the Bidding Participant, other than the legal aspects of the organization performed by the Chief Legal Officer/General Counsel or the Office of the General Counsel;

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(5) the ultimate decision making of the Voting Senior Officer position is tied to the regulatory effectiveness of the Bidding Participant, as opposed to other business or commercial objectives;

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(6) promotion or termination of the Voting Senior Officer is not based on achieving business or commercial objectives;

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(7) the Voting Senior Officer has no decision-making authority with respect to the development or formulation of the Bid submitted by or including the Participant or an Affiliate of the Participant; however, the staff assigned to developing and formulating such Bid may consult with the Voting Senior Officer, provided such staff members cannot share information concerning the Bid with the Voting Senior Officer;

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(8) the Voting Senior Officer does not report to any senior officers responsible for the development or formulation of the Bid submitted by or including the Participant or by an Affiliate of the Participant; however, joint reporting to the Bidding Participant’s CEO or similar executive officer by the Voting Senior Officer and senior staff developing and formulating such Bid is permissible, but the Bidding Participant’s CEO or similar executive officer cannot share information concerning such Bid with the Voting Senior Officer;

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(9) the compensation of the Voting Senior Officer is not separately tied to income earned if the Bid submitted by or including the Participant or an Affiliate of the Participant is selected; and

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(10) the Voting Senior Officer, any staff advising the Voting Senior Officer, and any similar executive officer or member of an independent governing body to which the Voting Senior Officer reports may not disclose to any person any non-public information gained during the review of Bids, presentation by Qualified Bidders, and selection process. Staff advising the Voting Senior Officer during the Bid review, presentation, and selection process may not include the staff, contractors, or subcontractors that are developing or formulating the Bid submitted by or including a Participant or an Affiliate of the Participant.

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VI. RFP Bid Evaluation and Plan Processor Selection

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(A) Initial Bid Review to Determine Qualified Bids

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(1) The Selection Committee shall review all Bids in accordance with the process developed by the Selection Committee.

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(2) After review, the Selection Committee shall vote on each Bid to determine whether such Bid is a Qualified Bid. A Bid that is deemed unqualified by at least a two-thirds vote of the Selection Committee will not be deemed a Qualified Bid and will be eliminated individually from further consideration.

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(B) Selection of Shortlisted Bids

-

(1) Each Qualified Bidder shall be given the opportunity to present its Bid to the Selection Committee. Following the presentations by Qualified Bidders, the Selection Committee shall review and evaluate the Qualified Bids to select the Shortlisted Bids in accordance with the process in this Paragraph (B).

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(2) If there are six or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.

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(3) If there are more than six Qualified Bids but fewer than eleven Qualified Bids, the Selection Committee shall select five Qualified Bids as Shortlisted Bids, subject to the requirement in Paragraph (d) below. Each Voting Senior Officer shall select a first, second, third, fourth, and fifth choice from among the Qualified Bids.

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(a) A weighted score shall be assigned to each choice as follows:

-

• First – 5 points

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• Second – 4 points

-

• Third – 3 points

-

• Fourth – 2 points

-

• Fifth – 1 point

-

(b) The five Qualified Bids receiving the highest cumulative scores will be Shortlisted Bids.

-

(c) In the event of a tie to select the five Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

-

(d) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section VI(B)(3) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section VI(B)(3), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

-

(4) If there are eleven or more Qualified Bids, the Selection Committee shall select fifty percent of the Qualified Bids as Shortlisted Bids, subject to the requirement in Paragraph (d) below. If there is an odd number of Qualified Bids, the number of Shortlisted Bids chosen shall be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, then seven Shortlisted Bids will be selected). Each Voting Senior Officer shall select as many choices as Shortlisted Bids to be chosen.

-

(a) A weighted score shall be assigned to each choice in single point increments as follows:

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• Last – 1 point

-

• Next-to-Last – 2 points

-

• Second-from-Last – 3 points

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• Third-from-Last – 4 points

-

• Fourth-from-Last – 5 points

-

• Fifth-from-Last – 6 points

-

For each additional Shortlisted Bid that must be chosen, the points assigned will increase in single point increments.

-

(b) The fifty percent of Qualified Bids (or, if there is an odd number of Qualified Bids, the next whole number above fifty percent of Qualified Bids) receiving the highest cumulative scores will be Shortlisted Bids.

-

(c) In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

-

(d) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section VI(B)(4) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section VI(B)(4), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

-

(C) Formulation of the CAT NMS Plan

-

(1) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the consolidated audit trail and provide descriptions of such proposed solutions for inclusion in the CAT NMS Plan. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

-

(2) The Participants shall incorporate information on optimal proposed solutions in the CAT NMS Plan, including cost-benefit information as required by SEC Rule 613.

-

(D) Review of Shortlisted Bids Under the CAT NMS Plan

-

(1) Following approval of the CAT NMS Plan by the SEC, Shortlisted Bidders may be permitted to revise their Bids based on the provisions in the approved CAT NMS Plan, including further discussions if determined to be necessary by the Selection Committee. A Shortlisted Bidder will be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to the recusal provision in Section V(B)(2) above, that revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan. A Shortlisted Bidder may not revise its Bid unless approved to do so by the Selection Committee pursuant to this paragraph.

-

(2) The Selection Committee shall review and evaluate all Shortlisted Bids, including any permitted revisions thereto submitted by Shortlisted Bidders. In performing the review and evaluation, the Selection Committee may consult with the Advisory Committee established pursuant to paragraph (b)(7) of SEC Rule 613.

-

(E) Selection of Plan Processor Under the CAT NMS Plan

-

(1) Under the CAT NMS Plan, there will be two rounds of voting by the Selection Committee to select the Plan Processor from among the Shortlisted Bidders. Each round shall be scored independently of prior rounds of voting, including the scoring to determine the Shortlisted Bids under Section VI(B) of the Plan.

-

(2) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in the second round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in the second round. Until the second round, Bidding Participants may vote for any Shortlisted Bid.

-

(3) First Round Voting by the Selection Committee

-

(a) In the first round of voting, each Voting Senior Officer shall select a first and second choice from among the Shortlisted Bids.

-

(b) A weighted score shall be assigned to each choice as follows:

-

• First – 2 points

-

• Second – 1 point

-

(c) The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.

-

(d) In the event of a tie that would result in more than two Shortlisted Bids advancing to the second round, the tie will be broken by assigning one point per vote, with the Shortlisted Bid(s) receiving the highest number of votes advancing to the second round. If, at this point, the Shortlisted Bids remain tied, a revote will be taken with each vote receiving one point. If the revote results in a tie, the Participants shall identify areas for further discussion and, following any such discussion, voting will continue until two Shortlisted Bids are selected to advance to the second round.

-

(4) Second Round Voting by the Selection Committee

-

(a) In the second round of voting, each Voting Senior Officer, subject to the recusal provisions in Paragraph (E)(2) above, shall vote for one Shortlisted Bid.

-

(b) The Shortlisted Bid receiving the most votes in the second round shall be selected, and the proposed entity included in the Shortlisted Bid to serve as the Plan Processor shall be selected as the Plan Processor.

-

(c) In the event of a tie, a revote will be taken. If the revote results in a tie, the Participants shall identify areas for further discussions with the two Shortlisted Bidders. Following any such discussions, voting will continue until one Shortlisted Bid is selected.

-

VII. Implementation

-

Within two months after effectiveness of the CAT NMS Plan, the Participants will jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Section VI of the Plan and as incorporated into the CAT NMS Plan. Following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by SEC Rule 608.

-

VIII. Applicability of the Exchange Act

-

The rights and obligations of the Participants in respect of the matters covered by the Plan shall at all times be subject to any applicable provisions of the Exchange Act, as amended, and any rules and regulations promulgated thereunder.

-

IX. Counterparts and Signatures

-

The Plan may be executed in any number of counterparts, no one of which need contain all signatures of all Participants, and as many of such counterparts as shall together contain all such signatures shall constitute one and the same instrument.

-

IN WITNESS WHEREOF, this Plan has been executed as of the 23rd day of August 2013 by each of the parties hereto.

-

- -

-
fn -

1 15 U.S.C. 78k-1.

-
-
fn -

2 17 CFR 242.608.

+

SECURITIES AND EXCHANGE COMMISSION

+

(Release No. 34-69060)

+

Order Granting a Temporary Exemption Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 from the Filing Deadline Specified in Rule 613(a)(1) of the Exchange Act

+

March 7, 2013

+

Rule 613(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)1 requires the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the seventeen registered national securities exchanges (collectively, the “SROs”) to “jointly file on or before 270 days from the date of publication of the Adopting Release [for Rule 613 of the Exchange Act2] in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by [the rule].” The Adopting Release for Rule 613 was published in the Federal Register on August 1, 2012,3 thus requiring the national market system plan (the “NMS plan”) to be filed on or before April 28, 2013.4 On February 8, 2013, the Commission received a request from the SROs, pursuant to Rule 0-12 under the Exchange Act,5 that the Securities and Exchange Commission (“Commission”) grant a temporary exemption under Section 36 of the Exchange Act,6 from the deadline specified in Rule 613(a)(1) of the Exchange Act7 for submitting the NMS plan to the Commission.8

+

In the Request Letter, the SROs noted that Rule 613 requires that they include in the NMS plan “cost estimates for the proposed solution, and a discussion of the costs and benefits of alternative solutions considered but not proposed.”9 They also noted that Rule 613 requires that the NMS plan include a discussion of “[t]he process by which the [SROs] solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the [SROs] took such views into account in preparing the [NMS plan].”10

+

In order to satisfy these requirements, the SROs believe that conducting a request for proposal (“RFP”) process is necessary prior to filing an NMS plan. The SROs believe that such a process will ensure that potential alternative solutions for creating the consolidated audit trail can be presented to the SROs for their consideration, and will provide the SROs with information necessary to prepare a detailed cost/benefit analysis as required by Rule 613. To ensure that the RFP process is effective, the SROs believe the concepts that will be contained in the RFP should be subject to public comment before the document is finalized and formally published. The SROs believe that public comment will ensure that the RFP addresses areas of concerns to the industry and the SROs, and will also provide potential bidders with information on the RFP prior to its formal publication. To this end, the SROs published an RFP concept document on December 5, 2012, and requested public feedback by January 18, 2013.11

+

The SROs stated in their Request Letter that they do not believe that the 270-day time period provided for in Rule 613(a)(1) provides sufficient time for the development of the RFP, formulation and submission of bids, and review and evaluation of such bids. The SROs also stated that they believe additional time beyond the 270 days provided for in Rule 613(a)(1) is necessary in order to provide sufficient time for effective consultation with and input from the industry and the public on the proposed solution chosen by the SROs for the creation of the consolidated audit trail at the conclusion of the RFP process and the NMS plan itself. The SROs believe that such a comment process is necessary in order to gather information needed to perform an effective cost/benefit analysis, including the estimated costs to broker-dealers and other market participants of building the consolidated audit trail in accord with the proposed solution, as well as to meaningfully assess and respond to the comments and draft the final NMS plan for submission to the Commission.

+

In the Request Letter, the SROs provided the following estimated timeline, which is based on their current expectation for conducting the RFP process and drafting the NMS plan:

+

• December 5, 2012: The SROs published an RFP concept document for comment

+

• January 18, 2013: Deadline to submit comments on the RFP concept document made publicly available (i.e., a 45-day comment period)

+

• February 2013: The SROs will publish the final RFP for bids

+

• March 2013: The SROs will solicit public comment on certain portions of the draft NMS plan that are not dependent on the RFP process and can benefit from public comment

+

• April 2013: Deadline for submitting bids in response to the RFP

+

• July 2013: The SROs will select a proposed solution after reviewing and evaluating the RFP bids

+

• August 2013: The SROs will solicit public comment on other specific portions of the proposed NMS plan that the SROs believe can benefit from public comment and that incorporate the RFP process and the proposed solution, including soliciting estimates on industry costs

+

• October 2013: Comments must be submitted on the proposed solution (i.e., a 60-day comment period)

+

• December 6, 2013: The SROs file the proposed NMS plan with the Commission

+

For the reasons set forth above, the SROs stated that a temporary exemption from the filing deadline until December 6, 2013 is “necessary to allow the SROs to conduct the thoughtful and comprehensive analysis this important regulatory initiative deserves.”12 The SROs also stated their belief that “the timeline outlined above will lead to a significantly better and more informed process and, as a result, the proposed solution will be the result of a more meaningful and careful analysis.”13

+

Section 36 of the Exchange Act14 authorizes the Commission, by rule, regulation, or order, to exempt, either conditionally or unconditionally, any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of the Exchange Act or any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.

+

After considering the SROs’ proposed process for developing the NMS plan, the Commission finds that it is appropriate in the public interest, and is consistent with the protection of investors, to grant the SROs a temporary exemption from the deadline for filing the NMS plan contained in Rule 613(a)(1)15 until December 6, 2013. The Commission understands that the creation of a consolidated audit trail is a significant undertaking and that a proposed NMS plan must include detailed information and discussion about many things, including the methods for reporting the required data; a detailed estimate of the costs to plan sponsors and to members of the plan sponsors of creating, implementing, and maintaining the consolidated audit trail (including issues relating to funding of the consolidated audit trail); an analysis of the impact on competition, efficiency and capital formation of creating, implementing and maintaining the NMS plan; and a discussion of any reasonable alternative approaches that the plan sponsors considered including a description of any such alternative approach, the relative advantages and disadvantages of each such alternative, including an assessment of the alternative’s costs and benefits, and the basis upon which the plan sponsors selected the approach in the NMS Plan submitted.16

+

Additionally, given that the planned RFP process as described in the Request Letter is expected to include multiple solicitations for public comment, the Commission believes that it is appropriate in the public interest and consistent with the protection of investors to provide the SROs with additional time. This additional time to complete the RFP process should allow the SROs to engage in a more thoughtful and comprehensive process for the development of an NMS plan. In this regard, the Commission notes that the additional time to solicit comment from the industry and the public at certain key points in the development of the NMS plan could identify issues that can be resolved earlier in the development of the consolidated audit trail and prior to filing the NMS plan with the Commission. In granting the SROs’ request, the Commission expects the SROs to work diligently to adhere to the milestones specified by the SROs in the Request Letter. The Commission also expects the SROs to utilize the additional time to prepare a detailed and complete NMS plan for the Commission and the public to consider.

+

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 36 of the Exchange Act,17 that the SROs are temporarily exempted from the deadline for submitting the NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository contained in Rule 613(a)(1) until December 6, 2013.

+

By the Commission.

+

Elizabeth M. Murphy

+

Secretary

+
fn +

1 17 CFR 242.613(a)(1).

+
+
fn +

2 17 CFR 242.613.

+
+
fn +

3 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Adopting Release”).

+
+
fn +

4 April 28, 2013, is a Sunday. Therefore, in accordance with Rule 160(a) of the Commission Rules of Practice, the deadline for filing the NMS plan is Monday, April 29, 2013. The SROs, however, had established an earlier deadline for the filing of the NMS plan of Friday, April 26, 2013.

+
+
fn +

5 17 CFR 240.0-12.

+
+
fn +

6 15 U.S.C. 78mm(a)(1).

+
+
fn +

7 17 CFR 242.613(a)(1).

fn -

3 17 CFR 242.613.

+

8 See Letter from Robert L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated February 7, 2013 (the “Request Letter”).

fn -

4 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Adopting Release”).

-
-
fn -

5 Id. at 45742.

-
-
fn -

6 Id.

-
-
fn -

7 See 17 CFR 242.608(a)(4) and (a)(5).

-
-
fn -

8 See Letter from the SROs, to Elizabeth Murphy, Secretary, Commission, dated August 23, 2013.

-
-
fn -

9 17 CFR 242.613(a)(1). Rule 613(a) requires that the Participants jointly file the CAT NMS Plan “on or before 270 days from the date of publication of the Adopting Release in the Federal Register.” The release adopting Rule 613 was published in the Federal Register on August 1, 2012. See Adopting Release, supra note 4. On March 7, 2013, the Commission provided a temporary exemption to the Participants to permit them to file the CAT NMS Plan by December 6, 2013. See Exchange Act Release No. 69060 (March 7, 2013), 78 FR 15771 (March 12, 2013) (“Exemptive Order”); see also Letter from Robert L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, dated February 7, 2013 (“Exemptive Letter”).

-
-
fn -

10 Adopting Release, supra note 4 at 45725.

-
-
fn -

11 Id. See also id. at 45789.

-
-
fn -

12 Id. at 45789.

-
-
fn -

13 Id. at 45726.

-
-
fn -

14 Id. at 45725.

-
-
fn -

15 Id. at 45725 and 45789.

-
-
fn -

16 Since that time, six firms—including one Participant and one Affiliate of a Participant—have formally notified the Participants that they will not submit Bids as primary bidders. A list of firms that submitted an intent to bid is located on the Participants’ website at catnmsplan.com.

-
-
fn -

17 Section I of the Plan sets forth the definitions used throughout the Plan. Section II of the Plan lists the Participants, as well as establishing the requirements to admit new Participants or to withdraw as a Participant.

-
-
fn -

18 Section IV of the Plan governs amendments to the Plan. In general, except with respect to the addition of new Participants, any change to the Plan requires a written amendment that sets forth the change, is executed by over two-thirds of the Participants, and is approved by the Commission pursuant to Rule 608 or otherwise becomes effective under Rule 608.

-
-
fn -

19 Initial steps in the evaluation and selection process will be performed pursuant to the Plan; the final two rounds of evaluation and voting, as well as the final selection of the Plan Processor, will be performed pursuant to the CAT NMS Plan. The sections of the CAT NMS Plan governing these final two voting rounds are set forth in Sections VI(D) and (E) of the Plan and will be incorporated into the CAT NMS Plan. The Participants believe it is essential that the entire process be laid out in the Plan so that the Commission can consider and approve the entire evaluation and selection process, even though the final two voting rounds, including the selection of the Plan Processor, will not be conducted until after the approval of the CAT NMS Plan.

-
-
fn -

20 In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants.

-
-
fn -

21 The Plan defines a “Bidding Participant” broadly to include any Participant that (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. A “Material Subcontractor” is “any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year.” The Plan provides that “[a]n entity will not be considered a ‘Material Subcontractor’ solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.”

+

9 See Request Letter (quoting Adopting Release, supra 3, at 45725).

-
fn -

22 As described below, even with the independence criteria in place, the Plan also requires recusal from certain votes.

+
fn +

10 See Request Letter (quoting 17 CFR 242.613(a)(1)(xi)).

-
fn -

23 The Participants anticipate that Bids must be submitted four weeks after the Commission approves the Plan.

+
fn +

11 See Request Letter.

-
fn -

24 The Plan defines a Qualified Bid as “a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee.” The Plan provides that, “[w]hen evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment.”

+
fn +

12 See Request Letter.

-
fn -

25 In the Letter submitted by the SROs describing the Plan, the SROs state that the Plan provides that, if there are fewer than six Qualified Bids submitted, all of those bids will be selected as Shortlisted Bids. See supra note 8. The Commission notes, however, that Section IV(B)(2) of the Plan states, “If there are six or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.” (emphasis added)

+
fn +

13 Id.

-
fn -

26 The Plan provides that, if there is an odd number of Qualified Bids, the number of Shortlisted Bids to be chosen will be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, seven Shortlisted Bids will be selected). In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids.

+
fn +

14 15 U.S.C. 78mm.

-
fn -

27 The Plan defines a “Non-SRO Bid” as “a Bid that does not include a Bidding Participant.” See supra note 21.

+
fn +

15 As noted above, the current deadline for submitting the NMS plan is April 29, 2013. This deadline is calculated pursuant to Rule 613(a)(1) which requires the NMS plan to be filed 270 days from the date of publication of the Adopting Release in the Federal Register. See note 4, supra.

-
fn -

28 Each round of voting throughout the Plan is independent of other rounds.

+
fn +

16 See Rule 613(a)(1).

-
fn -

29 The Participants recognize that a seven-month timeframe is inconsistent with the current obligation to submit the CAT NMS Plan by December 6, 2013. The Participants anticipate filing an exemptive request with the Commission to extend the date.

+
fn +

17 15 U.S.C. 78mm.

\ No newline at end of file diff --git a/spider/files/data000020.html b/spider/files/data000020.html index 273ac1d..a0fa60a 100644 --- a/spider/files/data000020.html +++ b/spider/files/data000020.html @@ -1,508 +1,4179 @@ - + jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: Joint Industry Plan (Order Approving Plan Amendment No. 1 Release 34-75192) - document_type: Orders - source: US/SEC/Orders/Order Approving Plan Amendment - source_type: Order Approving Plan Amendment + regulatory_authority: Securities and Exchange Commission + content_type: compilation + document_title: 34-67457 Consolidated Audit Trail + document_type: Releases + source: Securities and Exchange Commission/Releases/Final Rule Release + source_type: Final Rule Release language: English - citation: Order Approving Plan Amendment No. 1 Release 34-75192 -
pubdate: June 17, 2015 effdate: N/A -

Joint Industry Plan (Order Approving Plan Amendment No. 1 Release 34-75192)

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1 - Compliance User: Self-Regulatory Organization + citation: SEC Release No. 34-67457 +
pubdate: N/A effdate: N/A +

34-67457 Consolidated Audit Trail

+ Topic: SEC Final Rule, Release No. 34-67457 + Compliance User: Broker-dealers Keywords: - Amendment No. 1, - CAT NMS plan, - Selection Plan, + Consolidated Audit trail, -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-75192; File No. 4-668)

-

June 17, 2015

-

Joint Industry Plan; Order Approving Amendment No. 1 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

-
pubdate: June 18, 2015 effdate: N/A -

I. Introduction

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Introduction - Compliance User: Self-Regulatory Organization +

AGENCY: Securities and Exchange Commission

+

ACTION: Final rule.

+

SUMMARY: The Securities and Exchange Commission ("Commission") is adopting Rule 613 under the Securities Exchange Act of 1934 ("Exchange Act" or "Act") to require national securities exchanges and national securities associations ("self-regulatory organizations" or "SROs") to submit a national market system ("NMS") plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

+

EFFECTIVE DATE: October 1, 2012

+

FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202) 551-5665; Jennifer Colihan, Special Counsel, at (202) 551-5642; Carl Tugberk, Special Counsel, at (202) 551-6049; or Leigh Duffy, Special Counsel, at (202) 551-5928, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

+
pubdate: July 18, 2012 effdate: October 01, 2012 +

SUPPLEMENTARY INFORMATION:

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information + Compliance User: Broker-dealers Keywords: - SRO, - Securities Exchange Act - Section 11A, - CAT NMS plan, - Selection Plan, + Consolidated Audit trail, -

On December 12, 2014, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 an amendment (“Amendment No. 1”) to the National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Selection Plan”).3 Amendment No. 1 was published for comment in the Federal Register on February 11, 2015.4 The Commission received one comment letter5 and the SROs submitted a response to that comment letter.6 This order approves Amendment No. 1 to the Selection Plan.

-
-
pubdate: June 19, 2015 effdate: N/A -

II. Background and Description of the Proposal

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan, - Descripton of the Proposal, - -
pubdate: June 20, 2015 effdate: N/A -

A. Background

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal, Background - Compliance User: Self-Regulatory Organization +
pubdate: July 18, 2012 effdate: October 01, 2012 +

I. Executive Summary

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Executive Summary + Compliance User: Broker-dealers Keywords: - Sec Rule 613, + Trading, + broker-dealers, SRO, - CAT NMS plan, - Shortlisted Bidder, - Plan Processor, + audit trail, + NMS Plan, -

On July 11, 2012, the Commission adopted Rule 613 to require the SROs to jointly submit an NMS plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).7 In response, the SROs engaged in a request for proposal (“RFP”) process to help them develop an NMS Plan proposal and to solicit bids (“Bids”) for the role of Plan Processor8 to build, operate, administer, and maintain the consolidated audit trail.9 The Selection Plan, which was approved by the Commission on February 21, 2014, sets forth the process by which the Participants will review, evaluate, and narrow down the Bids, and ultimately select the Plan Processor, following Commission approval of the CAT NMS Plan.10 Currently, the Participants have narrowed the universe of Bids received to a set of six “Shortlisted Bidders.” Under the Selection Plan, a Shortlisted Bidder is only eligible to revise its Bid following Commission approval of the CAT NMS Plan and approval of a majority of the Selection Committee.11 Additionally, the Participants are not permitted to narrow the set of Shortlisted Bidders prior to approval of the CAT NMS Plan, but must proceed with selection of the CAT Plan Processor from among the Shortlisted Bidders in a two-round voting process.12

-

As described in more detail below, Amendment No. 1 would revise the Selection Plan to allow the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan and allow the SROs to narrow the list of Shortlisted Bids prior to Commission approval of the CAT NMS Plan. The SROs believe that providing the Shortlisted Bidders with an additional opportunity (or opportunities) to revise their Bids prior to the approval of the CAT NMS Plan is critical to the timely and considered selection of the CAT Plan Processor, and more importantly, the adherence to the other timelines for the CAT NMS Plan set forth in Rule 613(a).13 The SROs state that since the time the Bidders submitted their Bids, the SROs have gathered and evaluated data and information from a variety of market participants, including Bidders, broker-dealers, vendors, regulators and others, and have made progress in developing an optimal solution and formalizing the solution in the proposed CAT NMS Plan and related technical documents.14 Given these developments, the SROs believe that Bidders should be permitted to revise their Bids using the new information provided in the proposed CAT NMS Plan and technical documents prior to approval of the CAT NMS Plan.15 The SROs also state that given the passage of time since the Bids were submitted, Bidders have indicated that new technological and other beneficial solutions are now available that may further improve the Bids, and, ultimately, the proposed solutions.16

-

The SROs also explain that given the large amount of information they expect will be included in any revised Bids and the importance of appropriately analyzing such information, the SROs do not believe that two months will be sufficient to select the CAT Plan Processor from as many as six Shortlisted Bidders.17 However, the SROs believe that if the existing Shortlisted Bidders were able to revise their Bids, including the option to reflect any new technology or other relevant developments, the SROs could further narrow the list of Shortlisted Bidders to better facilitate the ultimate selection of the CAT Plan Processor within the time limits imposed by Rule 613 in an appropriately thoughtful and deliberative manner.18

+

In today's high-speed electronic markets, trading is widely dispersed across a variety of market centers, including exchanges, alternative trading systems ("ATSs"), such as dark pools and electronic communication networks ("ECNs"), and over-the-counter broker-dealers acting as market makers or block positioners. In their capacity as SROs, the Financial Industry Regulatory Authority ("FINRA") and some of the exchanges currently maintain their own separate audit trail systems for certain segments of this trading activity, which vary in scope, required data elements and format. In performing their market oversight responsibilities, SRO and Commission staffs today must rely heavily on data from these various SRO audit trails.

+

As discussed more fully in part II.A below, there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, rerouted, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.

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Though SRO and Commission staff also have access to sources of market activity data other than SRO audit trails, these systems each suffer their own drawbacks. For example, data obtained from the electronic blue sheet ("EBS")1 system and equity cleared reports2 comprise only trade executions, and not orders or quotes. In addition, like data from existing audit trails, data from these sources lacks key elements important to regulators, such as the time of execution, and, in the case of equity cleared reports, the identity of the customer. Furthermore, recent experience with implementing incremental improvements to the EBS system has illustrated some of the overall limitations of the current technologies and mechanisms used by the industry to collect, record, and make available market activity data for regulatory purposes.3

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The Commission therefore believes that the regulatory data infrastructure on which the SROs and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system. In performing their oversight responsibilities, regulators today must attempt to cobble together disparate data from a variety of existing information systems lacking in completeness, accuracy, accessibility, and/or timeliness – a model that neither supports the efficient aggregation of data from multiple trading venues nor yields the type of complete and accurate market activity data needed for robust market oversight.

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To address this problem and improve the ability of the SROs and the Commission to oversee the securities markets, on May 26, 2010, the Commission proposed Rule 613,4 with the goal of creating a comprehensive consolidated audit trail5 that allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets. As proposed – and summarized in part II.B below – Rule 613 required SROs to jointly submit an NMS plan6 that would govern the creation, implementation, and maintenance of a consolidated audit trail, including a central repository to receive and store consolidated audit trail data. In the proposed Rule, the Commission specified many requirements that the NMS plan, and by extension the consolidated audit trail, must meet, ranging from details of the data elements to be collected, to the timing of data transmissions, to specific standards for data formatting.

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Among its various requirements, the proposed Rule mandated that the NMS plan developed by the SROs must in turn require each SRO and its members to capture and report specified trade, quote, and order activity in all NMS securities7 to the central repository in real time, across all markets, from order inception through routing, cancellation, modification, and execution. The proposed Rule also mandated that the NMS plan require the creation of unique order identifiers to facilitate the ability of regulators to view cross-market activity, as well as unique customer identifiers to enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order or the person exercising investment discretion for the account originating the order, if different from the beneficial owner.

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The Commission received 64 comment letters from 56 commenters in response to the proposed consolidated audit trail representing a wide range of viewpoints, as summarized in part II.C below.8 The commenters included national securities exchanges, a national securities association, technology providers, academics, broker-dealers, organizations representing industry participants, individual investors, and members of Congress.9 Of the comment letters received, 13 expressed support for the proposal;10 36 expressed support, but suggested modifications to certain provisions of the proposal;11 five solely suggested modifications to the proposal;12 two opposed the proposal;13 and seven neither supported nor opposed the substance of the proposal.14 Concerns raised in these comment letters included: (1) the appropriateness of real-time reporting of required data to the central repository;15 (2) the scope of the required data elements, including the use of unique order identifiers and unique customer identifiers;16 and (3) the burden and costs associated with the proposal.17 In addition, a number of commenters offered alternative approaches and made suggestions regarding the creation, implementation, and maintenance of the consolidated audit trail.18

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In consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to the proposed requirements for the NMS plan submitted to the Commission for its consideration. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means SROs may use to meet certain requirements. Some of the more significant changes are as follows:

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• Replacing Real-Time Reporting with a Requirement to Report Data by 8: 00 AM of the Next Trading Day. The adopted Rule no longer requires that the NMS plan provide for the reporting of order event data19 to the central repository in real time; rather, it provides that the NMS plan must require the reporting of order event data to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the SRO or the member.20 The NMS plan may accommodate voluntary submissions of order event data prior to 8: 00 a.m. on the following trading day, but it may not mandate a reporting deadline prior to 8: 00 a.m.

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• Providing More Flexibility to Determine the Format of Data Reported to the Central Repository. The proposed Rule mandated that the NMS plan require the SROs and their members to collect and provide to the central repository the required order and event information in a uniform electronic format. The adopted Rule instead allows the SROs to determine the details of how market participants would transmit data to the central repository (which might include multiple electronic formats, rather than a uniform electronic format), subject to a more general requirement that data must be transmitted in a manner that ultimately allows the central repository to make this data available to regulators in a uniform electronic format.21

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• Eliminating the Requirement to Report Orders with a Unique Order Identifier. The proposed Rule mandated that each order reported to the central repository be tagged with a unique identifier that is the same throughout the order's entire lifecycle. In the adopted Rule, this requirement is replaced with a more general requirement that once all order events are transmitted to the central repository, the repository must be able to efficiently and accurately link together all lifecycle events for the same order, and make available to regulators this linked order data.22

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• Extending the Compliance Period for Small Broker-Dealers. Under the adopted Rule, the NMS plan may provide that small broker-dealers be allowed up to three years, rather than two years as proposed, from the effectiveness of the NMS plan to provide the required data to the consolidated audit trail. 23

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In addition to the above modifications, the Commission has also added a number of new requirements to the adopted Rule in response to general concerns expressed by commenters regarding the process for the development and implementation of the NMS plan. Some of the more significant of these additions are as follows:

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• Considering and Explaining Choices and Available Alternatives. The adopted Rule requires that the NMS plan describe and discuss any reasonable alternative approaches to the creation of the consolidated audit trail that were considered by the SROs and why the approach set forth by the NMS plan was selected.24

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• Planning for Future System Efficiencies. The adopted Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof) that are rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also discuss the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).25

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• Considering Input. The adopted Rule requires the NMS plan to address the process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, provide a summary of the views of such members and other parties, and describe how the plan sponsors took such views into account in preparing the NMS plan.26 In addition, the adopted Rule also requires the NMS plan to provide for the establishment of an Advisory Committee whose function will be to advise the plan sponsors on the implementation, operation, and administration of the central repository.27

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• Periodic Reviews of the Consolidated Audit Trail. To help assure the Commission that as financial markets evolve and new technologies emerge, the consolidated audit trail remains a useful regulatory tool, the adopted Rule mandates that the NMS plan must require the central repository's Chief Compliance Officer to regularly review the operations of the consolidated audit trail, and, in light of market and technological developments, make appropriate recommendations for enhancements to the consolidated audit trail.28

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The Commission has also added certain requirements to the adopted Rule in response to specific concerns expressed by commenters with respect to the use of consolidated audit trail data. Some of the more significant of these additions are as follows:

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• Enhancing Security and Privacy Requirements. Commenters have expressed concerns regarding the risk of failing to maintain appropriate controls over the privacy and security of consolidated audit trail data. Accordingly, the adopted Rule requires the NMS plan to include additional policies and procedures that are designed to ensure the rigorous protection of confidential information collected by the central repository.29

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• Addressing and Limiting Errors. Commenters have also expressed concerns about the potential for errors in the consolidated audit trail; the adopted Rule requires the SROs to provide in their NMS plan detailed information regarding anticipated error rates as well as the plan's proposed error correction process.30

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The Commission generally believes that the collective effect of the modifications and additions described above will be to significantly expand the set of solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and to provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the alternatives that would have been available under the requirements of the proposed Rule. The Commission further believes that these changes address or mitigate the principal concerns raised by commenters – including concerns regarding the extent and cost of the systems changes required by the SROs and their members – while continuing to enable the SROs and the Commission to achieve significant benefits from the consolidated audit trail.31 Each of the modifications and additions noted above is described and explained in detail in part III below.

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Given these changes and the wide array of commenters' views on how to best create, implement, and maintain a consolidated audit trail, the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration.32 Indeed, some commenters recognized that a consolidated audit trail could be created, implemented, and maintained in a number of ways, and thus recommended that the Commission replace the specific systems requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal request-for-proposal ("RFP") process.33

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In light of the expanded solution set that should be available under the changes described above and commenter views on the NMS plan development process, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on competition, efficiency, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., the requirement to solicit input from members of the SROs and other appropriate parties); and (4) information about the implementation plan and milestones for the creation of the consolidated audit trail.

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These requirements are intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of how well the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. To help elicit the most appropriate information and analysis from the SROs in response to these requirements, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." These use cases and accompanying questions should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule, as well as aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail.34

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Because the Commission believes the adopted Rule permits a wider array of solutions to be considered by the SROs than the proposed Rule did and because the Commission and the public will be able to avail themselves of much more information and analysis in connection with the NMS plan submission, the Commission is also making significant modifications to the process by which it will consider the costs and benefits of the creation, implementation, and maintenance of a consolidated audit trail, as well as the potential impacts on efficiency, competition, and capital formation. In particular, the methodology that the Commission used in the Proposing Release to estimate the costs of creating, implementing, and maintaining a consolidated audit trail may be no longer suitable. As discussed in the Proposing Release, the approximately $4 billion cost estimate for the creation and implementation of a consolidated audit trail was primarily based on averages for the development from scratch of new, very large-scale market systems.35 However, the Commission's rationale for this approach was predicated on some of the specific technical requirements of the proposed Rule, especially those related to the real-time collection and standard formatting of all data. As such, the approach assumed that the consolidated audit trail would not be able to build on existing trade, order, and audit trail systems. As noted above, these assumptions may no longer be valid since several of the specific technical requirements underlying the Proposing Release's approach have been substantially modified. The Commission believes these changes would now permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards.36

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In light of these changes, the Commission believes that the economic consequences of the consolidated audit trail now will become apparent only over the course of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. In particular, the Commission believes that the costs and benefits of creating a consolidated audit trail, and the consideration of specific costs as related to specific benefits, is more appropriately analyzed once the SROs narrow the expanded array of choices they have under the adopted Rule and develop a detailed NMS plan. The Commission therefore is focusing its economic analysis in this Release on the actions the SROs are required to take upon approval of the adopted Rule – specifically the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research, that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.37 A robust economic analysis of the next step – the actual creation and implementation of a consolidated audit trail itself – requires information on the plan's detailed features (and their associated cost estimates) that will not be known until the SROs submit their NMS plan to the Commission for its consideration. Accordingly, the Commission is deferring this analysis until such time as it may approve any NMS plan – that is, after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

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To that end, the adopted Rule requires that the SROs: (1) provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the NMS plan submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the NMS plan submitted; and (3) provide their own analysis of the submitted NMS plan's potential impact on competition, efficiency and capital formation. The Commission believes that these estimates and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can develop estimates of the costs for the creation, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs.

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The Commission notes that this approach is suited for the multi-step nature of the particular process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. Further, because the Commission is deferring its final analysis of the consolidated audit trail until after a detailed NMS plan has been submitted to the Commission for its consideration and the public has had an opportunity to comment, the adopted Rule has been modified to include a mandate that in determining whether to approve the NMS plan and whether the NMS plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation of creating, implementing, and maintaining the NMS plan.38 The Commission also will consider the costs and benefits of the creation, implementation, and maintenance of the consolidated audit trail pursuant to the details proposed in the NMS plan submitted to the Commission for its consideration.

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As a result of the new requirements for SROs to provide additional information about costs and a number of other aspects of the NMS plan they submit, the Commission is extending the timeframe for the submission of the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the adopting release for Rule 613 ("Adopting Release") in the Federal Register. The Commission also is altering the timeframe within which SROs must submit proposed rule changes to require their members to comply with the requirements of the Rule and the NMS plan approved by the Commission39 and the deadline for submitting the document required by Rule 613(i) regarding the possible expansion of the scope of the NMS plan.40

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pubdate: June 21, 2015 effdate: N/A -

B. Description of the Proposal

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Background and Description of the Proposal, Description of the Proposal - Compliance User: Self-Regulatory Organization +
pubdate: July 18, 2012 effdate: October 01, 2012 +

II. Introduction

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction + Compliance User: Broker-dealers Keywords: - SRO, - CAT NMS plan, - Shortlisted Bids, + Objectives, + Limitations, + Reporting, -

The SROs propose to amend the Selection Plan to permit the Shortlisted Bidders to revise their Bids one or more times prior to Commission approval of the CAT NMS Plan if the Selection Committee determines, by majority vote, subject to the applicable recusal provisions, that such revisions are necessary and appropriate.19 Amendment No. 1 would not affect Section VI.(D) of the Selection Plan, which states that, following approval of the CAT NMS Plan by the Commission, Shortlisted Bidders for the role of Plan Processor may be permitted to revise their Bids only upon approval by a majority of the Selection Committee, subject to certain recusal provisions in the Selection Plan.20

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In Amendment No. 1, the Participants also propose to provide the Selection Committee discretion to narrow the set of Shortlisted Bids prior to Commission approval of the CAT NMS Plan. Specifically, Amendment No. 1 would authorize an additional round of voting21 to narrow the number of Shortlisted Bids, currently six, down to as few as three Bids. This round of voting, which could occur either before or after any revisions to Shortlisted Bids are accepted, would commence upon at least a two-thirds vote of the Selection Committee, and would proceed in a manner similar to the initial round of voting for determining the Shortlisted Bids.22 Proposed Amendment No. 1 includes a recusal provision providing that no SRO shall vote in the process narrowing the set of Shortlisted Bidders if a Bid submitted by or including the SRO or an Affiliate of the SRO is a Shortlisted Bid.23

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pubdate: July 18, 2012 effdate: October 01, 2012 +

A. Need for, and Objectives of, a Consolidated Audit Trail

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives + Compliance User: Broker-dealers + Keywords: + audit trail, + Rule 613, + NMS Plan, + +

The Commission believes that the Rule adopted today is an appropriate step in the creation of a consolidated audit trail which, when implemented, should substantially enhance the ability of the SROs and the Commission to oversee today's securities markets and fulfill their responsibilities under the federal securities laws. Rule 613 requires the submission of an NMS plan to create, implement, and maintain the first comprehensive audit trail for the U.S. securities markets, which will allow for the prompt and accurate recording of material information about all orders in NMS securities, including the identity of customers, as these orders are generated and then routed throughout the U.S. markets until execution, cancellation, or modification. This information will be consolidated and made readily available to regulators in a uniform electronic format.

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This section reviews the current status and limitations of existing, discrete audit trails and discusses how a consolidated audit trail could address those limitations and improve the ability of the SROs and the Commission to perform their regulatory functions. To perform this review, the Commission is, in part, drawing upon its own experiences in using existing audit trails to carry out its regulatory duties.41 The Commission also is relying on information provided to the Commission from other regulators who use existing audit trail systems, broker-dealers and organizations representing industry participants, and those with expertise in data management and technology solutions that may be applicable to the adopted requirements.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Use and Limitations of Current Sources of Trading Data
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Use and Limitations + Compliance User: Broker-dealers + Keywords: + SRO, + TRade, + EBS System, + Equity Cleared Reports, + SRO Audit Trails, + +

It has become increasingly challenging for SROs and the Commission to oversee the U.S. securities markets across the multitude of trading venues, given the huge volume of orders and trades that are generated, routed, transformed, and then re-routed across dozens of venues every day. Among the challenges is the fact that there is no single, comprehensive audit trail available to regulators.42 At present, the SROs and the Commission must use a variety of data sources, including EBS,43 equity cleared reports,44 and SRO audit trail data to help fulfill their regulatory obligations. As a result, among other issues, regulatory authorities face many challenges in obtaining, reconciling, and making effective use of even the limited order and execution data that is available, thereby hindering the conduct of market surveillance, investigation and enforcement activities, and market reconstructions and analyses.45

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The ultimate effectiveness of core SRO and Commission regulatory efforts depends on the following four qualities of trade and order (collectively "market") data:

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• Accuracy. Is the data about a particular order or trade correct?

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• Completeness. Does the data represent all market activity of interest, or just a subset? Is the data sufficiently detailed to provide the required information?

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• Accessibility. How is the data stored? How practical is it to assemble, aggregate, reconcile, and process the data? Can all appropriate regulators acquire the data they need?

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• Timeliness. When is the data available to regulators? How long will it take to process before it can be used for regulatory analyses?

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SROs generally use market data in the form of audit trails to identify potential misconduct in the markets they oversee, including attempts to manipulate market quotations, inflate trading or order volume artificially, or profit from non-public information. When these surveillance efforts identify suspicious trading activity, SROs have a responsibility to open investigations in which they assemble and review additional market data to assess the nature and scope of the potential misconduct. When an SRO detects persistent problems in the market it oversees, it may write new rules for its members to address the problems. To inform these rulemaking efforts, SROs frequently gather and analyze significant amounts of market data. The effectiveness of such efforts is largely determined by the qualities of the data available.46

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The qualities of such market data are also primary determinants of the Commission's ability to fulfill its statutory mission. The Commission uses market data in most of its investigations of potential securities law violations. In many of these investigations, market data analysis frames the issues for investigation and is a primary means of identifying relationships between individuals and entities whose activities may threaten the integrity of the securities markets or create substantial and unnecessary investor losses. The Commission also uses audit trails and other sources of market data to: (1) inform its priorities for examinations of broker-dealers, investment advisers and SROs; (2) supplement the data and information it collects during those examinations; and (3) determine the nature and scope of any potential misconduct the examinations identify. The Commission also relies heavily on market data to identify patterns of trading and order activity that pose risks to the securities markets and to inform regulatory initiatives, as well as to perform market reconstructions. In addition, the Commission relies on market data to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. As is the case for the SROs, the effectiveness of such efforts by the Commission is largely determined by the qualities of the data available.47

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As described in the following sections, each of the present sources of market data available to regulators suffers from deficiencies limiting its effective use.

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a. The EBS System

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The EBS system is currently the only available source of data that allows regulators to obtain the identity of customers of broker-dealers who have executed trades. The SROs and the Commission have depended on this system for decades to request trading records from broker-dealers. The EBS system, supplemented by the requirements of Rule 17a-25 under the Exchange Act,48 is generally used by SRO and Commission staff to assist in the investigation of possible securities law violations, typically involving insider trading and market manipulations.49 In its electronic format, the EBS system provides certain detailed execution information, upon request by SRO or Commission staff, for specific securities during specified timeframes. However, EBS data, which is currently sourced from the so-called back-office records of clearing brokers, are limited to executed trades and do not contain information on orders or quotes (and thus no information on routes, modifications, and cancellations). Also, in frequent cases where brokers utilize average-price accounts to execute and aggregate multiple trades for one or more customers, the details of each individual trade execution are typically lost when reported through the EBS system because it is only the average aggregate price and volume of a series of executed trades that are transmitted to the clearing systems for processing.50

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Furthermore, the EBS data currently includes only the dates, but not the times, of each trade execution (regardless of whether or not the trade represents an average-price series of executions).51 Since there could be many broker-dealers trading a given security on a given day of interest, to reconstruct trading on the market for one security on one day could involve many, perhaps hundreds, of EBS requests. Consequently, EBS data, alone, are not generally useful for price or short sale manipulations analysis, order flow analysis, depth-of-book analysis, or any large-scale market reconstructions in which the timing of events is required to build a useful picture of the market.52

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In addition, though the EBS system provides the names associated with each account in which a trade has been placed, these names are based on the separate records of each broker-dealer providing data to the EBS system, and the same party may be identified by a different name across multiple broker-dealers. Experience of staff at the Commission has shown53 that it is difficult to perform cross-broker customer analysis of trading since the same customer may be known by different names depending on the account and broker-dealer through which it traded.

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The EBS system also typically requires SRO and Commission staff needing EBS data to request the information from each broker-dealer, and complete responses from each broker-dealer may take days or weeks depending upon the scope of the request. As a result of these various limitations, the EBS system is generally only used by regulators in narrowly-focused enforcement investigations that generally involve trading in particular securities on particular dates or with specific broker-dealers.

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b. Equity Cleared Reports

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In addition to the EBS system and Rule 17a-25, the SROs and the Commission also rely upon the NSCC54 equity cleared report for initial regulatory inquiries.55 This report is generated on a daily basis by the SROs, is provided to the NSCC, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.56 This information is also provided to the Commission upon request. Since the information made available on the report is limited to the date, the clearing firm, and the number of transactions cleared by each clearing firm, its use for regulatory purposes is quite limited -- equity cleared reports basically serve as a starting point for certain types of investigations, providing a tool the Commission can use to narrow down the clearing firms to contact concerning transactions in a certain security.

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c. SRO Audit Trails

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In addition to EBS data and equity cleared reports, the SROs and the Commission rely on data collected through individual SRO audit trails. Most SROs maintain their own specific audit trails applicable to their members. For example, the National Association of Securities Dealers ("NASD")57 established its Order Audit Trail System ("OATS")58 in 1996, which required NASD (n/k/a FINRA) members to report certain trade and order data on Nasdaq-listed equity securities. OATS was later expanded to include OTC equity securities. Similarly, the NYSE implemented its Order Tracking System ("OTS")59 in 1999 under which its members were required to report certain trade and order data on NYSE-listed securities. Beginning in 2000, several of the current options exchanges implemented the Consolidated Options Audit Trail System ("COATS").60 In addition, many of the exchanges have created their own audit trails to assist in surveillance activities.

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Recently, FINRA expanded its OATS requirements from covering only Nasdaq-listed and OTC equity securities to covering all NMS stocks.61 To avoid duplicative reporting requirements, the NYSE, NYSE Amex LLC (n/k/a "NYSE MKT LLC") ("NYSE Amex"), and NYSE ARCA, Inc. ("NYSE Arca") subsequently replaced their OTS audit trail requirements for members who are also members of either FINRA or Nasdaq (and therefore subject to OATS requirements) with rules that allow these members to satisfy their reporting obligations by meeting the new OATS requirements.62

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Although these developments with respect to the scope of FINRA's OATS rules reduce the number of audit trails with disparate requirements, they still do not result in a comprehensive audit trail that provides regulators with accurate, complete, accessible, and timely data on the overall markets for which regulators have oversight responsibilities. In particular, data collected by FINRA pursuant to FINRA's Rule 7400 series ("OATS data") does not provide a complete picture of the market because though OATS collects data from FINRA members with respect to orders and trades involving NMS stocks, OATS does not include trade or order activity that occurs on exchanges, or at broker-dealers that are not FINRA or Nasdaq members. Nor does OATS include exchange quotes, principal orders submitted by FINRA members registered as market makers, or options data.63 In performing its own regulatory oversight of the markets, FINRA has chosen to create an internal process in which it augments the data it collects via OATS with trade execution data from other exchanges with which it has a regulatory services agreement. This process provides FINRA with a wider view of the markets than that provided by OATS alone, but linking data in this fashion does not yield fully accurate results.64 For these reasons, the Commission believes that the augmented OATS data currently falls short of providing an efficient source of data for analyzing cross-market activities, or tracking an order through its entire cycle from generation through routing to execution, modification or cancellation.

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OATS data also suffers from a lack of timeliness, partly as a result of the problems with the accuracy of the data as collected, and partly because of its lack of completeness. When FINRA receives an end-of-day OATS file from a member, it takes an hour for FINRA to acknowledge receipt of the report and approximately another 24 hours to determine if there is a syntax error65 in the report.66 During this time, FINRA performs over 152 validation checks on each order event reported to OATS. Thus, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.67 Each of these checks can result in OATS data submissions being rejected and generating an error message.68 As a result of these validation checks, almost 425,000 reports per day, on average, are rejected and must be corrected.69 In addition to the 24 hours needed to identify errors within a report, it takes another two business days to determine whether a file that is syntactically correct nevertheless contains errors in content related to internally-inconsistent information about processing, linking, and routing orders. Once a member is advised of such errors, the member has up to five business days to re-submit a corrected file. However, error corrections are limited to only those that are required to remedy internal inconsistencies within a given member's submission. Cross-firm inconsistencies in which, for example, one member reports routing an order to a second member, but the second member does not report receiving or processing such an order, are identified as unmatched or unlinkable data records, but neither firm corrects these types of reporting errors. The net result yields an historical data record of market activity that contains a small but permanent number of incorrect or irreconcilable trade and order events.70

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Given the time it takes to process each OATS file, and the nature of the process in which errors are detected, reported back to members, and then corrected, inter-firm surveillance by FINRA typically does not begin until 5 business days after receipt of OATS data. In addition, the final product of the FINRA process is available to FINRA, but is not stored in a market-wide database or a central repository that is readily accessible to other regulators. This is because SROs do not typically have access to the internal systems of another SRO, though they may share some sources of underlying data.71

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Because the Commission does not have direct access to OATS data and other SRO audit trails and because each SRO only has direct access to its own audit trails, requests must be made to the Intermarket Surveillance Group ("ISG")72 or SROs to conduct an analysis on order data. It can take days or weeks, depending on the scope of the information requested, to receive responses to requests. Once the responses to its requests for information are received, the Commission, or any SRO undertaking the same task, must commit a significant amount of time and resources to process and cross-link the data from the various formats used by different SROs before it can be analyzed and used for regulatory purposes. Whether or not this process is successful depends on the accuracy, completeness, and format of the data received, as well as how readily data from different SROs can be reliably linked. For example, staff at the Commission working on the analysis of the May 6, 2010 "Flash-Crash" found it was not possible to use the data from existing audit trails to accurately or comprehensively reconstruct exchange and ATS equity limit order books for NMS securities as required to fully analyze the events of that day.73

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A further difficulty in using existing audit trails to conduct cross-market surveillance is the lack of consistency in both format and content among the various audit trails. Not all SROs collect data using the OATS format. In addition, each options exchange maintains its own COATS audit trail in a different format and includes different supplemental data items in its audit trail. These differences make it difficult and labor intensive for regulators to view options trading activity across multiple markets, and the lack of any combined equity and options audit trail is a significant impediment to regulators performing cross-product investigations and analyses.

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An additional shortcoming of existing SRO audit trails is the lack of customer identifiers. In general, existing SRO audit trails only identify the broker-dealer handling the order and not the account holder or the person exercising investment discretion for the account holder, if different. This limitation makes the process of identifying the customers involved in unusual trading patterns or market events very difficult. Even determining whether or not an unusual trading pattern exists is challenging if the data does not identify trades by a single customer at multiple broker-dealers. Requests therefore must be made to one or more broker-dealers to obtain information about the customer or customers behind an order. Multiple requests may be necessary before the information is obtained. EBS data may have to be requested as a supplement. A further challenge arises in any type of customer-based cross-market analysis because there is no standard convention for how customers are identified at different broker-dealers – the same party directing trades across multiple venues, or through different broker-dealers, can be known by many different names.

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Not having customer information at the early stage of surveillance can also impair the accuracy, and thus efficacy, of certain surveillances. The patterns that emerge when trade and order activity is aggregated across all customers of a broker-dealer often exhibit characteristics that can be quite different from the (initially) unobservable patterns of trade and order activity of each individual customer at that broker-dealer. This could result in what are known as "false positive signals," in which market activities that initially are flagged as being potentially manipulative by a surveillance system are later found not to be potentially manipulative once more detailed customer data from the broker-dealer is requested and analyzed. In contrast, potentially manipulative activities may be missed by a surveillance system that cannot identify the customers behind each order or trade if those activities are otherwise obscured by non-manipulative activities of other customers of the same broker-dealer such that the aggregate patterns of trading do not appear potentially manipulative.

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Given the various limitations described above, the Commission does not believe that existing audit trails, with their current features, provide regulators with an efficient or adequate method of monitoring and surveilling the market for NMS securities. The Commission notes, for example, that FINRA summarizes the current cross-market systems as follows: "The current systems in place to achieve effective cross-market surveillance, such as the ISG, are incomplete. For example, the ISG audit trail data has numerous shortcomings, including: (1) it does not capture quote/orders away from a market's inside market (i.e., those quotes/orders below the best bid or above the best offer); (2) it currently identifies participants of a trade only to the clearing broker, not down to the executing broker level; (3) data submitted by participants is not validated; (4) certain data fields are not mandatory; and (5) there are no service level agreements to ensure that participants submit timely and accurate information."74

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pubdate: July 18, 2012 effdate: October 01, 2012 +
2. Regulatory Improvements with a Consolidated Audit Trail
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Regulatory Improvements with CAT + Compliance User: Broker-dealers + Keywords: + NMS Plan, + Quality of Audit Trail, + Surveillance, + Investigation, + Customer-ID, + Risk-Based Examination, + Market Manipulation, + Tips, + Complaints, + Cross-Market, + Broad-Based Market Events, + Market Analysis, + Reporting Requirements, + +

The NMS plan required by the Rule, if approved by the Commission, will improve the quality of audit trail data by, among other things: (1) identifying with a unique "Customer-ID" the account holder(s) with respect to an account at a registered broker-dealer and, if different, any person authorized to give the broker-dealer trading instructions for such account; (2) identifying the time of each key event in the life of an order according to synchronized business clocks; (3) requiring the reporting of comprehensive order lifecycle data; and (4) including all NMS securities in one audit trail. As discussed below, the Commission believes that these improvements should have the potential to result in the following: (1) improved market surveillance and investigations; (2) improved analysis and reconstruction of broad-based market events; and (3) improved market analysis. In addition, a consolidated audit trail has the potential to result in a reduction in disparate reporting requirements and data requests.

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a. Improved Market Surveillance and Investigations

+

A consolidated audit trail will expand the data available for regulators to perform surveillance and investigations for illegal activities such as insider trading, wash sales, or manipulative practices. In particular, a consolidated audit trail will help surveillance and investigations by facilitating risk-based examinations, allowing more accurate and faster surveillance for manipulation, improving the process for evaluating tips, complaints, and referrals ("TCRs"), and promoting innovation in cross-market and principal order surveillance.

+

i. Risk-Based Examinations

+

A consolidated audit trail will facilitate risk-based examinations. Risk-based examinations require access to accurate and timely data so that the scope of the examination can be properly set to cover the areas of identified risks. Regulators currently may request audit trail data directly from the broker-dealer, work with the broker-dealer to understand the format and definitions in the data, validate that information with a third party, and analyze the data to determine whether the initial assumptions concerning risk were valid. This effort requires significant resources from both the regulator and the broker-dealer, all of which may be wasted if the resulting analysis shows that the assumptions of risk justifying the examination of a particular subject were not founded. Thus, this resource-intensive process does not necessarily reveal the subjects most worthy of examination, and does not permit an effective pre-examination review of a subject's trading practices.

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In contrast, a consolidated audit trail would permit regulators, for example, to identify risks and appropriate subjects for examinations relating to certain types of trading by creating and comparing metrics based on the complete (and possibly cross-market) activities of a broker-dealer or customer. Signals based on such metrics could, for example, identify outlier patterns in the ratio of order activity to execution, which may be an indication of potentially manipulative practices. Currently, this method is impractical because, as described above, it requires the consolidation of many audit trails that store data in non-uniform formats, participant information in SRO audit trails often does not consistently identify the executing broker-dealer, and there is no uniform method of identifying customers.

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In sum, consolidated audit trail data that meets the minimum requirements for the NMS plan specified in the Rule would allow regulators to create a process that focuses much more of their resources on those firms for which specific activities over specific time periods warrant follow up. The subsequent examinations would thus be more precise, resulting in more efficient use of regulatory resources, potentially reducing the need for multiple document requests, and ultimately reducing the sometimes significant compliance burden on a broker-dealer or other subject.

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ii. Market Manipulation

+

In addition to helping regulators focus their resources and better identify areas in which potentially manipulative trading activity may be occurring, a consolidated audit trail will greatly aid the analysis of the potential manipulation itself. The current methodology to analyze order and trade data requires a tremendous amount of time and resources to construct an accurate picture of when trades are actually executed. Typically, this includes: (1) broker-dealers and other registrants responding to multiple requests from the Commission and SROs; (2) SROs devoting regulatory resources to obtaining, analyzing, and reporting data requested by the Commission; and (3) Commission staff reconciling inconsistent order data provided by different SROs with respect to different markets.

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In addition, while SRO audit trail data identifies the dates and times of trades by a particular broker-dealer, SRO audit trail data does not reveal the identities of the customers initiating the trades executed by the broker-dealers. Accordingly, to identify customers placing trades through a broker-dealer, regulatory staff must obtain EBS data and integrate such data with SRO audit trail data. This is a cumbersome process because there is no automated process to link the two data sources. To determine the exact execution time for trades by a particular customer, regulatory staff must obtain a third set of data from the broker-dealer's trading and order handling system. These processes can take many months. In some cases, the laborious process of assembling the data delays other critical investigative or analytical steps. In other cases, investigators or analysts forego the process of determining when trades occurred, limiting their analysis to more accessible information. As a result, SRO and Commission staffs may fail to ascertain the full scope of misconduct under investigation or the causes of unusual market events at issue.

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Even more critically, the absence of reliable information about who initiated which orders makes detection of schemes that involve repeat instances of activity through accounts at multiple broker-dealers difficult. Schemes of this sort may be among the most harmful and difficult to police, but without a customer identifier that consistently and uniquely identifies responsibility for orders across all broker-dealers, no amount of technical sophistication and securities market insight can produce a data query or analysis to detect them.75

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With the data provided by the consolidated audit trail, regulatory staff would be able to conduct such analyses in a much shorter period of time. In addition, the process of analysis with a consolidated audit trail would be inherently more reliable than the manual reconstruction process currently available, reducing the risk of inaccuracies. Furthermore, the ability to process and meaningfully analyze audit trail data more quickly would allow regulatory staff to employ proactive methods of identifying potentially manipulative activities. The Commission therefore believes a consolidated audit trail would make the overall process of identifying and analyzing potentially manipulative trading practices much more focused, accurate, and efficient.76

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The timely availability of data to regulators also impacts the efficacy of detecting (and possibly mitigating the effects of) some types of market manipulation. For example, some pernicious trading schemes are designed to generate large "quick-hit" profits in which participants attempt to transfer the proceeds from the activity to accounts outside of the reach of domestic law enforcement as soon as the offending transactions have settled in the brokerage account (typically three days after execution). If the SROs detect such schemes and promptly report them to the Commission, the Commission potentially could seek asset freezes that limit the transfer of funds until charges against the account holder are resolved. The Commission believes that a consolidated audit trail in which uniform data about market activities are efficiently collected and processed soon after such activities occur, and in which data are available to regulators in a timely manner, would more frequently and effectively allow regulators to use this approach.

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iii. Tips and Complaints

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A consolidated audit trail also would significantly improve the processes used by the SROs and the Commission for evaluating tips and complaints about trading activity.77 It is not uncommon for market participants or those with experience in market data to sometimes note atypical trading or quoting patterns in publicly-available market data. A consolidated audit trail would allow regulatory staff to quickly determine whether a particular instance of an atypical activity (regardless of how it was originally identified), such as an abnormally high level of quote traffic, is worthy of further investigation.

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Today, such an analysis of TCRs is difficult and cumbersome. Even a preliminary review requires analysis by each exchange or ATS to identify the activity in question and to determine its scope. Regulators then must consolidate the analyses from each such market center to determine the identities of those responsible for the atypical activity in question. To the extent that the activity originates from several market participants, regulators must conduct additional analysis on each of those participants, and possibly other participants, to discover information that could identify the customer(s) originating the orders that created the atypical activity. Without a unique customer identifier included in the order and trade data, this may not be possible. The consolidated audit trail would significantly improve the multi-stage process, enabling regulatory staff to make efficient queries on orders and more quickly determine whether the TCR can be "closed" or if further analysis and investigation are warranted.

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iv. Cross-Market and Principal Order Surveillance

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Investigations of cross-market activity may be more efficient with a consolidated audit trail as such an audit trail may provide regulators with data not currently consolidated across markets and/or data not currently available to regulators such as broker-dealer principal orders, including market maker quotes. For example, in an attempt to manipulate the market, a broker-dealer could use numerous principal sell orders across multiple venues to give the misleading appearance of broad sell-side pressure, and then send a buy principal order at a favorable price to take advantage of the market momentum created by the misleading sell orders. This type of activity would be difficult to readily identify with current audit trails, but it could be the target of a routine surveillance of a consolidated audit trail. The Commission notes, for example, the statement of FINRA and NYSE Euronext that, "[p]articularly since the implementation of Regulation NMS in 2007, there has been a significant increase in market linkages, the result of which is that trading activity on one market can have a profound effect on other markets. This, in turn, has led to the realization that market manipulation, by its very nature, is facilitated cross-market where, for example, trading on one market is used to affect a security's price while trading on another market is used to take advantage of that price change."78

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In addition, the consolidation of order data with direct access for all relevant regulators may create opportunities for regulators to develop entirely new methods of surveillance, and to keep existing forms of surveillance up to date as new market practices and new market technologies continue to rapidly evolve. In fact, as described more fully below, SROs are required by the Rule to incorporate the expanded audit trail data into their surveillance systems.79

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b. Improved Analysis and Reconstruction of Broad-Based Market Events

+

A consolidated audit trail will significantly improve the ability of regulators to reconstruct broad-based market events so that they and the public may be informed by an accurate and timely accounting of what happened, and possibly why. The sooner a reconstruction can be completed, the sooner regulators can begin reviewing an event to determine what, if any, regulatory responses might be required to address the event in an effective manner.

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For example, on the afternoon of May 6, 2010, the U.S. equity and equity futures markets experienced a sudden breakdown of orderly trading, when broad-based indices, such as the Dow Jones Industrial Average Index and the S&P 500 Index, fell about 5% in just five minutes, only to rebound soon after (the "Flash Crash"). Many individual equities suffered even worse declines, with prices in over 300 stocks and exchange-traded funds falling more than 60%. In many of these cases, trades were executed at a penny or less in stocks that were trading at prices of $30 or more only moments earlier before prices recovered to their pre-Flash Crash levels.80

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The Commission immediately formed an interdisciplinary team from across the Commission to analyze the events of May 6, 2010, identify possible causes, inform the public of what happened, and aid in formation of regulatory responses. The CFTC took similar steps. Within a few weeks, staff at the Commission and the CFTC released a joint preliminary report that described the event and, in general terms, the market conditions prior to and during the rapid decline.81 However, at that time the staffs were unable to definitively identify the specific conditions or circumstances that could have caused, contributed to, or exacerbated the event. Though the SROs and the Commission quickly implemented a single-stock circuit breaker pilot program as an initial response, a more complete regulatory response required a full and robust analysis of additional data.

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From the start of the investigation, many market participants had suggested that the sudden withdrawal of liquidity in the equity markets may have resulted in the rapid decline of prices as orders to immediately sell (many from retail investors) found no interest on the buy side (from market professionals).82 To fully understand how such conditions could occur, Commission economists needed to analyze the order books for thousands of equities. Commission staff requested order book data from several exchanges that sell such data or could readily put such data together, but this data did not represent the whole market. Commission staff attempted to use order data from OATS and several SRO audit trails to reconstruct order books for thousands of equities traded on exchanges that do not maintain or could not provide order book data. Although it was possible to link the data from different sources to show trading activity for a particular stock over a specific period of time, the accuracy, completeness, and content of the combined data sets were not sufficient to allow for an accurate reconstruction of the order books. This hindered staff in determining what happened to liquidity before, during, and after the Flash Crash. Two major problems were the inability to identify and eliminate duplicate orders from the data and the inability to accurately sequence events across the multiple data sources.

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As described in the final joint report issued by the staffs of the CFTC and the Commission on September 30, 2010, Commission staff were only able to create a comprehensive view of the order books by acquiring, processing, and aggregating four distinct data sets that each contained a subset of order book information from each of the four exchanges that could provide such information: Nasdaq ModelView, NYSE Openbook Ultra, NYSE ARCABook, and BATS Exchange.83 Given the enormous volume of data that needed to be processed (more than 5.3 billion records), even small changes to the integration and aggregation process took significant computer time to test and implement.

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By early July 2010, staff at the CFTC had completed a very detailed analysis of the full order book of the S&P 500 E-Mini futures contract and were able to show how liquidity in that contract had been eroding for most of the day. The CFTC's detailed second-by-second analysis of trading during the Flash Crash itself revealed how buy-side depth in the S&P 500 E-Mini futures virtually evaporated as broad market indices rapidly fell 5%.84 However, until a similar analysis could be completed in the equity markets, neither regulators nor the public would know whether an evaporation of liquidity was also present in the equity markets, and whether the timing of such an event preceded or followed the liquidity event in the futures market. Ultimately, it took Commission staff nearly five months to complete an accurate representation of the order books of the equity markets for May 6, 2010. Even then, the reconstruction was not fully complete and only contained an estimated 90% of trade and order activity for that day.85 However, it was sufficiently comprehensive to allow staff to perform a robust analysis of the equity markets revealing how "the decline in full-depth buy-side liquidity for the E-Mini precede[d] that of the SPY and [the stocks composing] the S&P 500," and how "drops in [stock] prices [became] increasingly more severe with ever-larger drops in liquidity."86

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Had there been a consolidated audit trail in place on May 6, 2010, regulators would likely have been able to much more quickly and efficiently perform these types of detailed analyses. This in turn could have dramatically shortened the time during which regulators, as well as the public, remained uncertain about what actually happened during the Flash Crash.

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c. Improved Market Analysis

+

In addition to the surveillance and reconstruction benefits described above, a consolidated audit trail would also significantly improve the ability of regulators to monitor overall market structure, so that both the Commission and the SROs can be better informed in their rulemakings. In January 2010 the Commission published a concept release on equity market structure that discusses how the markets have rapidly evolved from trading by floor-based specialists to trading by high-speed computers. The concept release poses a number of questions about the role and impact of high-frequency trading strategies and the movement of trading volume from the public national securities exchanges to dark pools.87

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Over the past two years there has been considerable discussion about these topics by regulators, market participants, the media, and the general public. Nevertheless, numerous open questions remain because of a lack of consolidated market data, making certain types of market-wide analysis impractical. For example, existing research on high frequency trading cannot precisely identify high frequency traders. As a result, studies of high frequency trading have been limited in their ability to thoroughly examine such strategies and their impact on the market, leaving many open questions. Having more precise data on who is trading (and from which general patterns of order submission could be inferred) would help regulators better understand the impact of high frequency trading on markets. Similar analyses also could be performed for other aspects of general market structure, such as those discussed in the concept release related to dark pools and internalization. In addition, having access to a consolidated audit trail will provide the Commission and SROs with better data to conduct retrospective analyses of rules and pilots. Informed analysis of these topics requires consolidating audit trails so that quotes and trades across multiple exchanges can be linked (either by customer type or by specific customer) with order flow and trades from the many dozens of over-the-counter venues.

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d. Potential Reduction in Disparate Reporting Requirements and Data Requests

+

The Commission believes that a consolidated audit trail will reduce the burdens on SROs and broker-dealers associated with producing regulatory data. In particular, the consolidated audit trail may reduce burdens from ad hoc data requests.

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The Commission believes that the creation of a consolidated audit trail may reduce the number and types of ad hoc requests made by regulators to market participants for data concerning their trading activities. In particular, regulators could use direct access to data in the consolidated audit trail for investigations or analyzing trends or broad market activities instead of requesting data from market participants. In addition, regulators could use this direct access to analyze the activities of a single trader across multiple markets, which today requires requests for data from multiple market participants. Regulators would therefore likely make fewer ad hoc requests. The Commission, however, does not believe that all ad hoc requests for data from market participants will be replaced by obtaining data from the consolidated audit trail. A detailed investigation of a particular firm may require types of data from that firm that are not stored in the consolidated audit trail, or that relate to periods prior to the implementation of the consolidated audit trail. In addition, in cases in which there are discrepancies, or even suspected discrepancies, between a firm's actual trading activities and what is stored in the consolidated audit trail's central repository, regulators are likely to request data directly from market participants for verification and investigative purposes.

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +
3. Large Trader Reporting System Rule
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Large Trader Reporting System Rule + Compliance User: Broker-dealers + Keywords: + Rule 3h-1, + NMS Plan, + +

The Commission believes that a consolidated audit trail will be able to build upon various aspects of the large trader reporting system that was recently adopted by the Commission.88 Rule 13h-1, which establishes the large trader reporting system, requires large traders to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. Upon receipt of Form 13H, the Commission issues a unique identification number to the large trader, which the large trader then will be required to provide to those broker-dealers through which the large trader trades. Registered broker-dealers will be required to maintain specified transaction records for each large trader and to report that information to the Commission upon request. The Large Trader Rule requirements are designed to enable the Commission to promptly and efficiently identify significant market participants and collect data on their trading activity so that Commission staff can reconstruct market events, conduct investigations and bring enforcement actions as appropriate.

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Several commenters noted that portions of the requirements of Rule 13h-1 overlapped with certain provisions of proposed Rule 613 and requested that the Commission harmonize the rules.89 One commenter stated that the Commission should consider implementing only those portions of Rule 13h-1 that would not be affected by, or be redundant to, the implementation of the consolidated audit trail proposal.90 Another commenter suggested that the Commission mandate compliance only with those aspects of Rule 13h-1 that would operate as part of the consolidated audit trail – the large trader identifier in particular – so they could be leveraged in the creation of the consolidated audit trail.91 Yet another commenter believed that, upon implementation of the consolidated audit trail, it would not be necessary for large traders to identify themselves to their broker-dealers pursuant to Rule 13h-1, because the consolidated audit trail already would require broker-dealers to include a customer identifier for every order.92 The commenter explained that, if customer information is collected as part of the consolidated audit trail, the Commission and SROs could run queries to identify customers with significant trading volume.93

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The Commission believes that both Rules are necessary to enhance regulatory oversight of the markets and its members. Key aspects of Rule 13h-1 define the types of entities that are large traders, and who must register with the Commission and file and keep current certain background information on Form 13H. These aspects of Rule 13h-1 are not addressed by Rule 613 and would not be superseded by it. Rather, the information collected by the registration of large traders would further complement the data collected for a consolidated audit trail. To this end, Rule 613 requires that large trader identifiers also be reported to the central repository as part of any large trader's customer account information94

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The Commission does note, however, that other aspects of Rule 13h-1 may be superseded by Rule 613. Specifically, the trade reporting requirements of Rule 13h-1 are built upon the existing EBS system. To the extent that, as described in Section II.A.2.iv.d., data reported to the central repository under Rule 613 obviates the need for the EBS system, the Commission expects that the separate reporting requirements of Rule 13h-1 related to the EBS system would be eliminated.95

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pubdate: July 18, 2012 effdate: October 01, 2012 +

B. Summary of Proposed Rule 613

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of Proposed Rule 613 + Compliance User: Broker-dealers + Keywords: + NMS Plan, + FINRA, + Rule 613, + Data Collection, + SRO, + +

Proposed Rule 613 would have required that the SROs propose an NMS plan that included provisions regarding: (1) the operation and administration of the NMS plan; (2) the creation, operation and oversight of a central repository; (3) the data required to be provided by SROs and their members96 to the central repository; (4) clock synchronization; (5) compliance by national securities exchanges, FINRA, and their members with Rule 613 and the NMS plan; and (6) a plan for the possible expansion of the NMS plan to products other than NMS securities. Specifically, proposed Rule 613 would have required the SROs to jointly file an NMS plan with the Commission to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.97 The NMS plan would have been required to provide for an accurate, time-sequenced record of an order's life, from receipt or origination, through cancellation or execution. In particular, the proposed Rule would have required the NMS plan to require that the SROs and their respective members collect and provide to the central repository data for each "reportable event," defined to include the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order, with respect to any NMS security. This data would have been required to be collected and provided to the central repository in a uniform electronic format on a real-time basis.

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Under the proposed Rule, the data collected upon the receipt or origination of an order would have included: a unique order identifier; a unique customer identifier;98 a unique identifier for the broker-dealer receiving or originating the order; the date and time of receipt or origination of the order; and the "material terms of the order."99 For orders that are modified or cancelled, the data collected in real time would have included: the date and time the modification or cancellation was received or originated; the price and remaining size of the order; changes in the material terms of the order (if the order is modified); and the identity of the person giving the modification or cancellation.

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For orders that are routed, data collected in real time would have included: the unique order identifier, the date and time the order was routed; the unique identifier of the broker-dealer or national securities exchange routing the order; the unique identifier of the broker-dealer or national securities exchange receiving the order; if routed internally at a broker-dealer, the identity and nature of the department and desk to which the order was routed; and the material terms of the order.

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For orders received that were routed, data collected in real time would have included all the information for orders that are routed, except the identity and nature of the department and desk to which the order was routed, if routed internally at a broker-dealer; however, the date and time the order was routed would be replaced by the date and time the order was received.

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For the execution of an order, data collected in real time would have included: the unique order identifier; the date and time of execution; the execution size and price; the unique identifier of the SRO or broker-dealer executing the order; the capacity of the broker-dealer executing the order (i.e., principal, agency, riskless principal); and whether the execution was reported pursuant to an effective transaction reporting plan or the OPRA Plan.100

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Because certain information may not be readily available at the time of the reportable event, the proposed Rule would have required the NMS plan to require each SRO and its members to collect and provide to the central repository certain information, in a uniform electronic format, promptly after receipt of such information, but in no instance later than midnight of the day that the reportable event occurred or when the SRO or its member receives such information. Under the proposed Rule, this data would have included: the account number for any subaccounts to which the execution is allocated (in whole or part); the unique identifier of the clearing broker or prime broker, if applicable; the unique order identifier of any contra-side order; special settlement terms, if applicable; short sale borrow information and identifier; the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid; and, if the execution is cancelled, a cancelled trade indicator.

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The proposed Rule would have required that the SROs jointly file an NMS plan with the Commission within 90 days after approval of the Rule. In addition, the SROs would have been required to select a plan processor within two months of the effectiveness of the NMS plan, as well as provide the Commission a document outlining how the SROs would propose to expand the audit trail to include non-NMS securities and additional transactions. The proposed Rule also would have required the SROs to file proposed rule changes to require their members to comply with the requirements of the proposed Rule and the NMS plan within 120 days of the effectiveness of the NMS plan. The SROs would have been required to begin reporting data to the central repository within one year after the effectiveness of the NMS plan, and their members would have been required to begin reporting data to the central repository within two years after the effectiveness of the NMS plan.

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As proposed, the NMS plan would have been required to include specific plan provisions, detailing: the plan governance structure, the processes of admission and withdrawal of plan sponsors, the percentage of votes required to effectuate amendments to the plan, the allocation of central repository costs among the plan sponsors, and the appointment of a Chief Compliance Officer ("CCO") of the central repository. The proposed Rule would have required all plan sponsors to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the information contained in the consolidated audit trail. This information would be available to the Commission and the SROs for regulatory and oversight purposes only. The proposed Rule also would have required the NMS plan to require information be collected in a convenient and usable standard electronic data format, directly available and searchable electronically without any manual intervention for a period of not less than five years. This information would have been required to be available immediately, or, if immediate availability was not reasonably and practically achieved, any search query would have to begin operating on the data not later than one hour after the search query was made. Additionally, the proposed Rule would have required the NMS plan to include policies and procedures, including standards, to be utilized by the plan processor to ensure the security and confidentiality of all information submitted to the central repository, and all SROs and their employees, as well as all employees of the central repository, would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data. The proposed Rule also would have required SROs and their members to synchronize their business clocks that are used for the purposes of recording the date and time of any event that must be reported under the proposed Rule consistent with industry standards. Further, the proposed Rule would have required the central repository to collect and retain, on a current and continuing basis, and in a format compatible with the other information collected pursuant to the proposed Rule, the national best bid and national best offer ("NBBO") information for each NMS security. Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act,101 and last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act also would have been required to be collected and retained.

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pubdate: July 18, 2012 effdate: October 01, 2012 +

C. Summary of General Comments on the Proposed Rule

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule + Compliance User: Broker-dealers + Keywords: + Comments, + +

The Commission requested comments on all aspects of the proposed Rule, including the potential costs and benefits.102 In particular, the Commission encouraged commenters to identify, discuss, analyze, and supply relevant data regarding any such costs or benefits.103 In response, commenters provided views and opinions regarding the regulatory usefulness of a consolidated audit trail; the overall costs of the proposed Rule, focusing on those requirements that commenters believed would be the most costly or burdensome to implement;104 the process for creating and implementing a consolidated audit trail; and alternatives to the proposed Rule's approach to creating, implementing, and maintaining a consolidated audit trail. These comments are discussed below.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Industry Support for a Consolidated Audit Trail
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT + Compliance User: Broker-dealers + Keywords: + Opinions, + FINRA, + NYSE, + NASDAQ, + Commenters, + SIFMA, + +

Commenters provided a wide range of opinions, and shared their concerns, regarding specific aspects of the proposed Rule.105 However, many of the commenters and their representatives who are involved with regulating and operating securities markets – as well as many of the commenters who otherwise populate data for, or make use of, existing audit trail systems (such as broker-dealers) – expressed support for the creation of a single consolidated audit trail.

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FINRA and NYSE Euronext, filed a joint letter, "vigorously support[ing] the establishment of a consolidated audit trail," and stating, among other things, that "the evolution of the U.S. equity markets and the technological advancements that have recently taken place have created an environment where a consolidated audit trail is now essential to ensuring the proper surveillance of the securities markets and maintaining the confidence of investors in those markets."106

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The NASDAQ OMX Group, Inc. similarly states that "[m]arket developments and fragmentation of market centers with varying market structures and levels of transparency have created inefficiencies and potential gaps in cross-market regulation," and that "[c]omplete transparency is the only way to ensure fair and orderly markets."107

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Other commenters also stated their general support for the creation of a consolidated audit trail. According to Direct Edge Holdings, LLC ("Direct Edge"), "[t]he proposed consolidated audit trail ('CAT') system would significantly enhance the capabilities of regulators to police trading across asset classes; replace existing audit trails and consolidate trading and execution data for the asset classes under the Commission's jurisdiction . . . enable regulators to create a more complete timeline of an order's lifecycle; and facilitate large-scale market reconstructions . . . ."108

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Although CBOE expressed some concerns in its comment letter about the "breadth, expense, and timetable of the Proposal"109 (concerns that were shared by other commenters),110 it "recognizes there are potential benefits to be obtained from CAT, and agrees that a central repository with uniform data submitted by all markets could enhance SRO and SEC oversight of the markets."111 CBOE further stated that, "[i]n particular, a CAT that contains a customer identifier on an order by order basis would enhance significantly the audit trails of the markets."112

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BATS Exchange, Inc. ("BATS") expressed general support for the Commission's proposal, stating, "[o]ver the last several years, liquidity has dispersed across multiple interconnected venues, such that no one market center can claim a majority share of equity securities transactions. However, regulatory tools have not evolved to keep pace with these changes, and the limited existing processes and data available to analyze inter-market trading are inadequate. As a consequence, regulators rely on inefficient processes to reconstruct intermarket trading activity, including ad hoc requests to members for trading data when a potential problem is identified."113

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Liquidnet, Inc. ("Liquidnet"), an ATS, generally stated that, "[i]n the long run, a properly-designed system that provides for centralized reporting of data should be more cost-efficient than the current patchwork system for collecting audit trail data."114 Liquidnet outlined seven specific benefits of a consolidated audit trail, ranging from "[reducing] the time that regulatory personnel must expend to request and collect data from market participants on a case-by-case basis," to "[reducing] the cost of reconstructing, analyzing, and reporting on significant market events such as those that occurred on May 6, 2010." 115

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The Securities Industry and Financial Markets Association ("SIFMA"), an industry group that represents, among other entities, hundreds of securities firms that could be impacted by the creation of a consolidated audit trail, "believes that a centralized and comprehensive audit trail would enable the SEC and securities self-regulatory organizations ('SROs') to perform their monitoring, enforcement, and regulatory activities more effectively."116 SIFMA further states that, "[i]n the current era of electronic trading, regulators need efficient access to order and execution data from both broker-dealers and exchanges. Indeed, a consolidated audit trail is a much-needed improvement over today's fragmented audit trail platforms."117 As did a number of other commenters,118 SIFMA also expressed concerns about, and suggested alternatives to, some specific aspects of the proposed Rule, which will be further discussed below.

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Finally, the Commission notes that members of the Financial Information Forum, whose participants include "trading and back office service bureaus, broker-dealers, market data vendors and exchanges," agree that "an enhanced audit trail system could increase the effectiveness of cross-market surveillance through better data availability and integration."119

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When the perspectives of these commenters are combined with the Commission's own experiences (as described above in Section II.A.1.c.), a common theme emerges: there is substantial room for improvement in the collection of and access to trading data beyond what is available today from existing audit trails and other sources. The Commission agrees with many of the commenters that one of the main benefits of a consolidated audit trail will be to improve the efficiency and adequacy of a regulatory process of collecting and accessing audit trail data that directly affects and impacts a significant number, and wide variety, of market participants.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
2. Commenters' Views on the Overall Costs of the Proposed Rule and the Resulting Framework of the Adopted Rule
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT + Compliance User: Broker-dealers + Keywords: + Cost, + Comments, + +

With respect to general costs for the proposal, commenters expressed differing views. As discussed below, some commenters thought that the Commission overestimated the burdens of creating, implementing, and maintaining a consolidated audit trail, while others argued that the Commission had underestimated such burdens.

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Nasdaq was among those commenters that stated that the Commission had overestimated the burdens. Specifically, Nasdaq stated that "innovative technology exists to meet many of the Commission's goals at significantly lower costs than estimated in the Proposing Release," and that SROs should be able to weigh the costs and benefits of various designs.120 Other commenters also expressed similar opinions stating that a consolidated audit trail accomplishing the Commission's goals could be implemented for less than the preliminary estimates.121 Two firms with experience in processing and analyzing market data, FTEN and Thomson Reuters, each noted that current technology could convert data from disparate systems into a uniform format, resulting in a less costly implementation of the consolidated audit trail.122 FTEN stated that "currently available commercial systems are capable of immediately accomplishing CAT goals of real-time cross-market transparency, accountability and control with no implementation risk and for far less than the estimated multi-billion dollar price tag."123 It further suggested that "[t]he SEC should leverage already deployed and commercially available solutions that are in production use today by major market participants . . . ." and an "iterative approach [that] would leverage existing systems to capture order and execution data in real-time from liquidity destinations (exchanges, ECNs, ATSs and dark pools) and 'map' the data back to original trade submissions by market participants without requiring integration with, or changes to, market participants systems or to liquidity destination systems and without modifying existing order flow."124 Similarly, another commenter recommended a technology solution that could handle the required data in milliseconds and that "significantly reduces disk space required, which can potentially save millions of dollars when dealing with multiple terabytes of data."125 One commenter suggested an entirely different approach through the use of an "adaptive graph indexing-based architecture" as the basis for the consolidated audit trail platform, instead of using a central repository, and explained that this technology would keep trading data within each SRO.126

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On the other hand, numerous commenters expressed general concerns about the costs of implementing a consolidated audit trail relative to the benefits to be gained. For example, one commenter stated that "there can be no doubt whether market regulators need a consolidated audit trail;" however, the commenter questioned whether a system as costly as the consolidated audit trail was necessary to detect violations such as frontrunning, spoofing, and layering, which are violations the Commission has rarely pursued in the recent past.127

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As discussed above, many commenters expressed general support for the creation of a consolidated audit trail, but believed that, as proposed, the implementation would be too costly and that the Rule should be modified.128 Concern about the proposed real-time requirements for reporting data to the central repository was a common theme expressed by these commenters,129 including those who maintained that a requirement to provide data on a real-time basis would be too burdensome due to the extensive systems changes that would be needed to comply with such a requirement.130 Some of these commenters argued that a real-time reporting requirement would require many industry participants to build entirely new systems or undertake significant technological upgrades.131 SIFMA, in particular, estimated that the cost per broker-dealer to implement real-time reporting could be millions of dollars and that the cost of capturing options quotes in real time alone could exceed the Commission's $2.1 billion estimate for the annualized cost of the audit trail.132 SIFMA further argued that broker-dealers would incur costs associated not only with establishing and maintaining the infrastructure to support real-time reporting, but also due to regulatory risk if they are not able to achieve 100 percent compliance with the proposed Rule.133 While SIFMA opposed a real-time reporting requirement, and encouraged the Commission to adopt a next day or later reporting requirement,134 SIFMA also stated that "if the SEC determines to require reporting of certain data elements in real-time or near real-time, we believe such data should be limited to reporting of 'key business events.'"135 SIFMA further stated that, "if the definition of real-time allowed for reporting within minutes (e.g. 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications . . . ."136 SIFMA described how a reporting system using "drop copies"137 could be "achievable in the relative near term," although it noted that its proposed process would not, among other things, include a unique Customer ID or a unique order identifier.138

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Commenters also expressed general concerns regarding the costs of other aspects of the Proposed Rule. For example, Global Electronic Trading Company ("GETCO"), a market maker in equities and equity options, urged the Commission to consider whether quotation information already disseminated by SROs could be reported instead of requiring the SROs and their members to report all quotation information to reduce costs for the industry.139 Another commenter, Wells Fargo Advisors, argued that the inclusion of a unique customer identifier would add "tremendous incremental cost to the [consolidated audit trail]."140

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Many commenters provided suggestions and views on how the costs of creating and implementing a consolidated audit trail might be lowered. For example, financial technology firm, Correlix, Inc. ("Correlix"), stated that relying on existing infrastructure, where possible, could bring down the cost and amount of time it would take to implement the consolidated audit trail.141 Correlix further stated that existing technology already is able to provide "a complete end-to-end history of message and order data from the market participant to the execution venue's matching engine and back to the originator," and that allows clients to run customized queries and reports on the data.142

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A variety of commenters, including SROs and broker-dealers, also believed it would be more cost efficient to use the existing OATS infrastructure specifically as a basis for a consolidated audit trail, rather than to purchase or create an entirely new system.143 Commenters further argued that existing audit trails could be expanded economically and quickly.144

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In contrast, other commenters expressed the view that costs could be reduced not by using existing audit trail infrastructures, but rather by using new, innovative technology to create the consolidated audit trail.145 Noetic Partners, a financial technology firm, explained that technologies are currently available to build a system that would capture "full-depth" data with "compression and near-line storage" in a system that would enable fast retrieval and analysis of data, and opined that, based on existing technology, a consolidated audit trail could be implemented for substantially less than the Commission's preliminary estimates.146 This commenter stated that, based on available technology, a fully functional consolidated audit trail could be implemented in months, rather than years, at an initial cost of less than $100 million.147

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An aggregate analysis of the many specific opinions described above suggests that commenters' views regarding the costs of creating, implementing, and maintaining a consolidated audit trail fall into one of two general categories. One set of commenters expressed the view that many, if not all, of the requirements of the proposed Rule could be met in a cost-effective fashion if current audit trail systems were replaced with new technologies and systems. However, another set of commenters expressed the view that a number of the requirements of the proposed Rule would be very costly to implement, and, instead, suggested that the most cost-effective method of creating a consolidated audit trail would be to relax some of the proposed requirements and build upon the infrastructure of existing audit trail systems.

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Therefore, as discussed above and in detail below,148 in response to these comments, and specific comments discussed throughout this Release,149 the Commission is adopting Rule 613 with substantive changes to some of the specific collection, reporting, and data requirements of the Rule.150 The Commission believes that these changes significantly expand the solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the Rule compared with the requirements of the proposed Rule. For example, the Rule no longer requires real-time reporting151 or only one unique order identifier;152 thus, the Rule would accommodate an NMS plan based on the types of solutions proposed by SIFMA and FINRA. However, to guide the SROs in their development of the NMS plan, the Rule includes several specific considerations153 that the Commission intends to use to evaluate the submitted NMS plan and consider its costs and benefits.

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The changes from the Proposing Release provide the SROs with the flexibility to submit an NMS plan that provides creative solutions that harness innovative technology or that build on existing audit trail systems.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
3. Comments on the Process for Creating a Consolidated Audit Trail
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on the Process for Creating a CAT + Compliance User: Broker-dealers + Keywords: + NMS Plan, + FIF, + STA, + Comments, + SROs, + +

The Commission received comments regarding the process through which a consolidated audit trail should be created. As proposed, the Rule required that the SROs submit an NMS plan setting forth the details for the creation, implementation, and maintenance of a consolidated audit trail within 90 days of approval of the Rule. A few commenters suggested that more time be allotted for the planning and design of the NMS plan.154 FIF and the Security Traders Association ("STA") recommended extensive, "up-front business analysis,"155 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."156 These commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.157

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In this regard, several commenters suggested that the Commission undergo a RFP or request for information ("RFI") process to create and implement a consolidated audit trail.158 Specifically, FIF urged the Commission to perform a RFP process "to determine the best technical solution for developing a consolidated audit trail."159 FIF suggested that the Commission "should outline a set of goals and guiding principles they are striving to achieve as part of the adopted CAT filing and leave the determination of data elements and other technical requirements to [an] industry working group."160 Similarly, Direct Edge suggested that Commission staff should form and engage in a working group to develop an RFP for publication by the Commission.161 DirectEdge explained that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.162 Further, commenters, including Broadridge Financial Solutions, Inc., a technology provider,163 also requested more specific information about the audit trail system to better assess the Commission's initial cost estimates and to determine the best approach to the consolidated audit trail.164

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To gather the necessary information, commenters argued that the timeframe for submitting an NMS plan should be extended. FIF and STA opined that the time needed to perform the analysis to produce a "detailed blueprint for CAT"165 would be closer to six months,166 rather than the proposed 90 days.167 As a basis for their suggestions, FIF provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.168 FIF noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.169

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In response to these comments, the Rule requires the SROs to provide more information and analysis to the Commission as part of their NMS plan submission than would have been required under the proposed Rule. As discussed in more detail below, these requirements have been incorporated into the Rule as "considerations" that the SROs must address, and they generally mandate that the NMS plan submitted to the Commission for its consideration discuss certain important features and details of the NMS plan, such as how data will be transmitted to the central repository, as well as an analysis of NMS plan costs and impact on efficiency, competition, and capital formation, the process followed by the SROs in developing the NMS plan, and information about the implementation plan and milestones for the creation of the consolidated audit trail.170 These requirements are intended to ensure that the NMS plan is the result of a thorough and well-developed plan for creating, implementing, and maintaining the consolidated audit trail, and the Proposing Release highlighted the importance of these types of considerations. In Section III.C. below, the Commission also provides details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases" to help the SROs prepare a sufficiently detailed NMS plan that addresses the requirements of the adopted Rule.171

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Because of the additional information and analysis required to be included in the NMS plan, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan. Rule 613(a)(1) provides that "[e]ach national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section." The Commission will publish the NMS plan submitted in accordance with Rule 608 of Regulation NMS under the Exchange Act172 for public comment and will approve the NMS plan if the Commission determines it is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act. 173 The Commission also will consider whether the NMS plan submitted for its consideration would achieve the objectives of the Rule.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
4. Comments on Alternatives to the Proposed Consolidated Audit Trail
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on Alternatives to the Proposed Consolidated Audit + Compliance User: Broker-dealers + Keywords: + Recommendation, + Alternatives, + FINRA, + OATS, + +

Several commenters, many of whom generally supported the concept of a consolidated audit trail, recommended alternatives for how a consolidated audit trail should be created, implemented, and maintained. In particular, the Commission received comments suggesting various ways that the OATS system could be modified to serve as the central repository for the consolidated audit trail. FINRA submitted a blueprint for a modified version of OATS that listed certain changes to address the Commission's proposed requirements for the creation, implementation, and maintenance of the consolidated audit trail.174 The proposed modifications included, for example, the addition of data elements capturing whether an order was solicited, customer account type, a large trader identifier,175 and a unique identifier for branch office and registered representative to the data reported to OATS;176 using OATS to capture order and quote data from all national securities exchanges and eventually OPRA; the inclusion of options, fixed income securities, security-based swaps, principal orders and orders originating in firm-controlled accounts for purposes of working a customer order in OATS; the use of CRD numbers to identify broker-dealers; an exchange data processing gateway for OATS to validate submissions from exchanges; full access to regulators of queryable consolidated audit trail data through the FINRA web portal;177 and OATS' acceptance of limited drop-copy report information from broker-dealers on a 15-minute reporting basis.178 However, FINRA's blueprint provided that the large trader identifier should be used initially to identify market participants, as the complexities of tracking retail accounts, the infrequent amount of trading by retail investors, and the large number of such investors make requiring a unique customer identifier difficult.179

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Another commenter from the academic field believed that a modified version of OATS (including fields incorporating ultimate customer account information, a reduction in the time stamp standard to milliseconds or even microseconds, and standardized clock synchronization requirements), coupled with a requirement that exchanges must report to OATS, would allow OATS to fulfill the needs of the consolidated audit trail in a less costly manner than originally proposed.180 This commenter stated that the Commission's needs could be met by "a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."181

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Several commenters, including SROs and broker-dealers, generally believed that it would be more cost and time efficient to use a form of OATS as a basis for the consolidated audit trail than to purchase or create a new system.182 For example, FINRA/NYSE Euronext stated that modifying existing systems would reduce both the time and cost to develop a consolidated audit trail, explaining that "the programming changes needed to comply with an entirely new system are substantially greater than expanding existing protocols,"183 while BATS suggested that significant cost savings may be realized by building a consolidated audit trail that "leverages elements of OATS."184 FINRA/NYSE Euronext also argued that existing audit trails could be expanded "economically and quickly,"185 noting that use of such systems, such as FINRA's OATS, could make the central repository unnecessary.186 Similarly, FINRA believed that using OATS as a foundation of the consolidated audit trail would make the consolidated audit trail easier to implement,187 as opposed to building a new system, which could take years to establish and would likely result in "negative unintended consequences" during development.188 FIF suggested leveraging FINRA's Trade Reporting and Compliance Engine as a basis for the coverage of debt securities.189

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Two SROs, BOX and CBOE, recommended the joint use of both OATS and COATS.190 BOX suggested an expansion of OATS and COATS to include customer information,191 and CBOE stated that it believed that certain aspects of OATS and COATS could be combined, with the addition of customer and routing broker information, and new formats.192 The Commission also received an alternative proposal from a commenter that was not based on OATS, but on a combination of automatically-generated drop-copies and the Financial Information eXchange ("FIX") protocol.193 SIFMA urged reporting on a T+1 basis as it believed real-time reporting would require significant changes to existing order management and trading systems.194 If T+1 reporting were not adopted, however, SIFMA's proposal suggested that certain data be provided to the central repository in near real time, such as data pertaining to "key business events" such as order receipt and origination, order transmittal, execution, modification, and cancellation. SIFMA's proposal listed the specific data elements to be reported for each event, but, to achieve quick implementation, did not include unique customer or order identifiers, or an identifier for algorithmic orders.195

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The Commission has considered the comments on alternative proposals, including those based on OATS, and has made significant modifications to the proposed Rule in light of such comments. Each of these modifications is discussed in detail in Section III. below. But the Commission notes more generally that, as adopted, Rule 613 does not prescribe a specific audit trail collection system or a particular method of data collection to be used for the central repository. In addition, the Commission believes that certain modifications to Rule 613, such as allowing data to be reported by 8: 00 a.m. Eastern Time the following trading day, rather than in real time as proposed, provide the SROs with a wider range of options for how they choose to meet the requirements of the adopted Rule compared with the requirements of the proposed Rule. This wider range of options could more easily accommodate an OATS-based approach or other approaches for the creation of a consolidated audit trail, as suggested by commenters, consistent with the requirements of Rule 613.

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The Commission notes, however, that OATS, in its current form, has certain limitations and does not include certain attributes that the Commission deems crucial to an effective and complete consolidated audit trail.196 Some of the limitations of OATS that would need to be addressed to meet the requirements of Rule 613 include:

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• At present, only FINRA members are required to report trade and order activity through OATS. The resulting exclusion of some exchange-based and other types of non-member activity could lead to significant gaps in the data as an order is generated, routed, rerouted, and finally executed, canceled, or modified;

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• OATS does not currently require the collection of market-making quotes submitted by registered market makers (in those stocks for which they are registered), resulting in further, significant gaps in the data;

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• OATS is a part of a process by which FINRA collects data from its members for its own regulatory use. OATS is not a central repository and therefore does not presently provide other regulators with ready access to a central database containing processed, reconciled, and linked orders, routes, and executions ready for query, analysis, or download; and

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• OATS does not presently collect options data, and does not afford regulators an opportunity to perform cross-product surveillance and monitoring;

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• OATS does not collect information on the identities of the customers of broker-dealers from whom an order is received. As discussed above in Section I., the Commission believes that the integrated inclusion of such data elements into a single consolidated audit trail provides many important regulatory benefits.

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pubdate: July 18, 2012 effdate: October 01, 2012 +

III. Discussion

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion + Compliance User: Broker-dealers + Keywords: + Rule 613, + +

A discussion of each of the key provisions of Rule 613, as adopted, is set forth below.

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pubdate: July 18, 2012 effdate: October 01, 2012 +

A. NMS Plan

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan + Compliance User: Broker-dealers + Keywords: + Description, + Implementation, + +
pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Description of the Rule
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan, Description + Compliance User: Broker-dealers + Keywords: + Implementation, + NMS Plan, + Comments, + +

a. Implementation of the Consolidated Audit Trail through an NMS Plan

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As proposed, the consolidated audit trail would have been created, implemented, and maintained through an NMS plan approved by the Commission. As proposed, Rule 613(a)(1) would have required each national securities exchange and national securities association to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.197 The Commission would then have been required to publish the NMS plan for public comment pursuant to Rule 608 of Regulation NMS under the Exchange Act,198 and, following the period of public comment, would consider whether or not to approve the NMS plan. In the Proposing Release, the Commission stated its expectation that the exchanges and FINRA would "cooperate with each other and take joint action as necessary to develop, file, and ultimately implement a single NMS plan to fulfill this requirement."199

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The Commission requested comment on this approach. Specifically, the Commission requested comment on whether requiring the exchanges and FINRA to jointly file an NMS plan that would contain the requirements for a consolidated audit trail was the most effective and efficient way to achieve the objectives of Rule 613, or whether the Commission should require the exchanges and FINRA to standardize or otherwise enhance their existing rules. The Commission further requested comment on which approach would be most efficient in improving the ability to monitor cross-market trading, or to undertake market analysis or reconstructions, and why.

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Two commenters discussed how the consolidated audit trail should be created and implemented through an NMS plan.200 One noted that the Rule should provide the SROs with sufficient flexibility to develop an NMS plan that meets the overarching goals of the Commission.201 The second suggested that the Rule should "include only the elements needed for a [consolidated audit trail], and then leave it up to the SROs, [securities information processors] and involved vendors to develop the specifications for the data elements to be specified in the NMS plan, which would ultimately be subject to public comment and SEC approval."202

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Other commenters objected in principle to the use of an NMS plan to create and implement the consolidated audit trail.203 One commenter stated that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient," given the need "to respond and adapt quickly to new ways of trading and handling orders," and believed it would be difficult to jointly make necessary technology changes under an NMS plan because, based on the commenter's experience of collecting data for an existing audit trail, "technology changes and changes to technical specifications must be made regularly and promptly with respect to firm-specific reporting requirements, interpretations, and codes to keep up with complex and evolving trading and routing strategies."204 Another commenter argued that an NMS plan is "unnecessary … given all of the governance issues with NMS plans" because "[t]he Commission can get most of what it needs with a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."205

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For the reasons discussed below, the Commission continues to believe that an NMS plan filed pursuant to Rule 608 of Regulation NMS206 is the most effective mechanism to implement the consolidated audit trail, and is adopting Rule 613 with a number of modifications and clarifications to address the concerns of commenters.207

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The Commission believes that the creation, implementation, and maintenance of the consolidated audit trail through an NMS plan will ensure that the SROs' expertise as the "front line" regulators of securities markets is drawn upon to develop the details of the consolidated audit trail, and to make appropriate adjustments as warranted to respond to changes in the securities markets and technology going forward. As such, under the Commission's approach, Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail. Additionally, Rules 613(a)(1) and (a)(4), which require that each SRO jointly file and be a sponsor of the NMS plan, is being adopted as proposed. The Commission continues to believe that requiring all SROs to jointly file the NMS plan to establish the consolidated audit trail, as opposed to the flexibility provided by current Rule 608 of Regulation NMS under the Exchange Act,208 which permits any two or more SROs to submit an NMS plan, is appropriate because such a requirement is expected to result in an NMS plan that is the product of negotiation and compromise among all of the SROs; in this regard, the NMS plan submitted to the Commission also may be more readily implemented as the NMS plan should take into consideration the capabilities of every SRO.

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In response to the commenter that advocated granting additional flexibility to the SROs in developing the requirements of the NMS plan,209 the Commission has made significant modifications to the Rule in several respects to increase the options available to SROs in developing the requirements of the NMS plan.210 Furthermore, in instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the NMS plan in a way that best achieves the objectives of the Rule. For example, Rule 613 requires the NMS plan submitted to the Commission for its consideration to require material terms of an order, such as order type, to be collected by the central repository.211 However, the Rule does not enumerate specific order types or prescribe the format or nature of how this information would be represented. This would be left to the SROs developing the NMS plan and allows flexibility for the future, when new order types may be introduced and added, if appropriate.

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Similarly, in response to the commenter stating that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient" given the need to respond and adapt quickly to new ways of trading and handling orders,212 the Commission notes that, while the NMS plan submitted to the Commission for its consideration must contain the minimum necessary elements for the consolidated audit trail, and any amendments to an effective NMS plan initiated by plan sponsors will require approval by Commission order, the SROs should have flexibility to accommodate a variety of technological and other market developments without amending the NMS plan (e.g., through the issuance and updating of technical specifications that are reasonably and fairly implied by the NMS plan). Underscoring this need to ensure the consolidated audit trail is regularly updated to remain compatible with best market practices, the Commission, as discussed in Section III.C.2.a.i., also has added general requirements to Rule 613 with regards to SROs monitoring and planning for the technological evolution of the consolidated audit trail. Further, as noted in Section III.B.3 below, the NMS plan must include a governance structure for the central repository that is designed to ensure efficient decision-making.

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The Commission has also considered the comment that recommended that the Commission should leave it to the SROs, securities information processors ("SIPs") and vendors to develop the specifications for the data elements in the NMS plan.213 The Commission agrees in principle with the commenter, and believes that market participants other than SROs also could have valuable insights regarding the design of the specifications for the data elements, the central repository, and other aspects of the Rule. To address this concern, the adopted Rule requires the SROs to explain in the NMS plan the process by which they solicited views of their members regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members, and how the plan sponsors took such views into account in preparing the NMS plan.214 In addition, the Rule requires the NMS plan submitted to the Commission for its consideration to provide for the creation of an Advisory Committee to afford SRO members, and other interested parties as permitted by the NMS plan,215 the opportunity to have input on the creation, implementation, and maintenance of the consolidated audit trail.216 The Commission also notes that nothing in the Rule precludes the SROs, as plan sponsors, from consulting with others, including the SIPs and vendors, as they craft the NMS plan. Finally, pursuant to Rule 608(b)(1), the NMS plan will be published for public comment.217 Thus, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted to the Commission, which the Commission will review and consider.

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In response to the commenter that believed that the objectives of the consolidated audit trail could be achieved "with a 'few tweaks' to the existing trade reports and by extending OATS,"218 the Commission notes, as described above, that existing trade reports and the current OATS process combined do not meet many of the requirements the Commission believes are essential for a consolidated audit trail. The Commission therefore believes that an NMS plan, as noted above, provides an effective mechanism for the SROs to create, implement, and maintain a consolidated audit trail meeting such requirements. However, it also notes that the adopted Rule does not preclude the infrastructure, nomenclature, format, or any other aspects of an existing order audit trail system, such as OATS, from being used for the consolidated audit trail, provided the NMS plan proposing to establish such an audit trail otherwise meets the requirements of Rule 613. The Commission stresses that existing order audit trails lack critical information such as the identity of the customer, data on principal orders or quotes, and a way to link orders across markets – information that the Commission believes is essential to the consolidated audit trail.219

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pubdate: July 18, 2012 effdate: October 01, 2012 +

B. Elements of the NMS Plan

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan + Compliance User: Broker-dealers + Keywords: + SRO, + NMS Plan, + Implementation, + Submission, + Minimum Requirements, + +

As discussed above, the adopted Rule requires the SROs to submit an NMS plan to create, implement, and maintain a consolidated audit trail.220 As adopted, the Rule permits the SROs to consider a wider array of solutions, in creating, implementing, and maintaining a consolidated audit trail. The Rule, however, also sets forth certain minimum requirements of the consolidated audit trail that must be included in the NMS plan submitted by the SROs to the Commission for its consideration. The Commission believes that it is important to set forth certain minimum requirements to ensure that the consolidated audit trail will be designed in a way that provides regulators with the accurate, complete, accessible, and timely market activity data they need for robust market oversight. The minimum audit trail requirements that must be included in the NMS plan submitted by the SROs are discussed below.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Recording and Reporting
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Recording and Reporting + Compliance User: Broker-dealers + Keywords: + Products, + Covered Transactions, + Orders, + Quotations, + Persons Required to Report, + Central Repository, + Reportable Events, + Data Elements, + Material Terms, + Order Type, + Special Handling Instructions, + National Securities Exchange, + National Securities Association, + Broker-Dealer Identifiers, + Customer Identifier, + +

a. Products and Transactions Covered

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As proposed, Rule 613 would have applied to secondary market transactions in all NMS securities, which includes NMS stocks and listed options.221 In the Proposing Release, the Commission also addressed the possibility of expanding the scope of the consolidated audit trail over time. Specifically, proposed Rule 613(i) would have required the NMS plan to include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how such exchanges and associations would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. The document also would have been required to identify which market participants would be required to provide the additional data and to include an implementation timeline and a cost estimate for including such data in the consolidated audit trail.222 The Commission requested comment on whether expanding the consolidated audit trail to include the products and transactions specified above was an appropriate approach to the eventual expansion of the consolidated audit trail, and, if so, an appropriate and realistic timetable for doing so.

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Several commenters expressed opinions on the scope of the products and transactions proposed to be covered by the Rule and how their inclusion in the consolidated audit trail should be phased in under the Rule.223 One commenter urged the Commission to consider including additional asset classes in the scope of the products covered by the Rule, and specifically questioned the value of the consolidated audit trail without the inclusion of information on futures and other derivatives.224

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The Commission also received comment on the proposed Rule's approach for considering a possible future expansion of the products and transactions covered by the consolidated audit trail. One commenter believed that its technology would allow development of a platform that would support multiple asset classes and expansion of the consolidated audit trail for use by other regulators.225 Other commenters expressed general support for expanding the scope of products covered.226 One specifically suggested expanding the scope of the Rule, for example, to include the "creation of instruments that underlie the securities that make up [mortgage-backed securities] and [asset-backed securities]."227 Another suggested expanding the consolidated audit trail to all securities submitted to an exchange or clearing agency.228 Yet another commenter, however, argued against allowing the exchanges, through the NMS plan, to have primary responsibility for specifying the data requirements of non-exchange-traded asset classes, stating that exchanges lacked experience with these instruments.229

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The Commission has considered the comments discussed above and is adopting the Rule as proposed with respect to the scope of the securities that must be covered at this time, but, as described below, acknowledges the importance of a mechanism for considering other types of products in the future. Specifically, the adopted Rule requires that consolidated audit trail data be collected for all NMS securities.230 However, the Commission also is adopting the requirement that the NMS plan require the SROs to jointly submit a document outlining a possible plan for expansion of the consolidated audit trail, as proposed, but with three modifications from the proposed Rule.

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Rule 613(i) requires that the SROs jointly provide the Commission a document outlining how the SROs could incorporate the following additional products into the consolidated audit trail: equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities ("expansion document"). The adopted Rule also requires the expansion document to include details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline and a cost estimate. The first modification from the proposed Rule is a technical change clarifying that Rule 613(i) is requiring the SROs to provide the Commission with a document that outlines how an expansion of the consolidated audit trail could be accomplished in the future and is not, at this time, requiring that the SROs commit to expanding the consolidated audit trail beyond secondary market transactions in NMS securities.231 However, the Commission notes that Rule 613(i) retains the requirement that SROs include an implementation timeline and a cost estimate; in this regard, the Commission expects that the SROs will address fully in the expansion document how any such expansion of the consolidated audit trail could be implemented in practice, and that such document would include sufficient detail for the Commission to ascertain how the SROs could proceed with such expansion. The Commission would expect to make the expansion document publicly available on its website and to solicit a wide range of comment on it to further inform and facilitate the expansion of the consolidated audit trail if appropriate, taking into account the relevant considerations contemplated by Rule 613(a)(1). In addition, the expansion document could inform the detailed plans that are to be prepared at least every two years by the CCO of the NMS plan.232

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In addition, after considering the comments received relating to the potential expansion of the consolidated audit trail and how such an expansion might occur,233 the Commission is making the second modification to the proposed Rule to extend the deadline for submitting the expansion document from two months to six months from the date of effectiveness of the NMS plan approved by the Commission. The Commission believes that the additional four months will provide the time necessary after the approval of the NMS plan by the Commission for the SROs to consider how they might expand the consolidated audit trail to capture orders and trading in these additional securities and thus will aid the Commission in receiving an outline or plan from the exchanges and associations that has had the benefit of additional time for analysis and planning. Finally, given the extension of the deadline for submitting the expansion document and the importance of information regarding primary market information in NMS stocks relative to other types of transactions as discussed in Section III.B.1.a. below, the Commission is removing the requirement that the expansion document discuss all primary market transactions in NMS stocks and is, instead, as discussed later, requiring that a discussion of the feasibility, benefits, and costs of incorporating into the consolidated audit trail information about allocations in primary market transactions in NMS securities be addressed with the NMS plan submission.234 However, the expansion document must still include a discussion of primary market transactions in equity securities that are not NMS securities.

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The Commission agrees in principle with the commenters that advocated a phased approach to implementation.235 The Commission, however, has determined not to modify the proposed scope of the Rule, which applies to orders in NMS securities. The Commission also adopts substantially its proposed implementation timeframes that apply if and when the NMS plan is approved,236 except that the NMS plan may provide up to one additional year before small broker-dealers will be required to provide information to the central repository.237

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The Commission continues to believe that the Rule's requirement to include secondary market transactions in all NMS securities (i.e., both listed equities and options) is a reasonable first step in the implementation of the consolidated audit trail. In addition, the Commission believes that applying the Rule solely to NMS securities should allow for a less burdensome implementation of the consolidated audit trail as compared to applying the Rule to a broader set of securities,238 in large part because market participants already have experience with audit trails for transactions in these securities. And, as discussed in detail above,239 there are many significant benefits of a consolidated audit trail that includes NMS securities (even if it is only limited to NMS securities).

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With regards to a phased approach to implementation, the Commission notes that the data recording and reporting requirements would apply initially, as proposed, to the SROs but not to their members. This will allow members additional time to, among other things, implement the systems and other changes necessary to provide the required information to the central repository, including capturing customer and order information that they may not have previously been required to collect. Should the SROs determine that additional implementation phases might be appropriate (e.g., applying the Rule first to equities and then to listed options), the Commission notes that the Rule does not preclude the SROs from proposing such phases, so long as the outer time parameters specified in the Rule, which the Commission is adopting as proposed, are met.240

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The Commission agrees with commenters that the inclusion of additional products (even at a later date) could further enhance the ability of the SROs and the Commission to conduct effective market oversight for financial products currently trading in the marketplace.241 The Commission also believes that it could be beneficial for the consolidated audit trail to be expanded over a reasonable period of time to include information on primary market transactions in equity and debt securities, as this data could be used to quickly assess potential violations of various rules under the Exchange Act such as, for example, Regulation M and Rule 10b-5.242 For example, the primary market transaction data would allow regulators to more quickly identify whether any participant in an offering sold short prior to the offering in violation of Regulation M. The primary market transaction data would allow for identification of the cost basis for purchases by intermediaries and make it easier to assess whether subsequent mark-ups to investors in primary offerings are fair and reasonable and, if not, whether there has been a violation of the antifraud provisions of the federal securities laws, including Rule 10b-5.

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The Commission considered the comment letter that agreed that "policing the market requires a comprehensive approach" but asserted the exchanges should not be primarily responsible for specifying requirements relating to asset-backed securities and other debt instruments, including swap instruments that are not exchange-traded.243 In response, the Commission notes the Rule requires the SROs to submit a document outlining a plan for the possible expansion of the NMS plan to non-NMS securities – namely debt securities and equity securities that are not NMS securities.244 The Commission also notes that FINRA, the SRO responsible for oversight of trading in the over-the-counter market, would participate in the preparation of such expansion document, and expects that FINRA would provide substantial input as to how the consolidated audit trail might be expanded to include non-NMS securities. Because the consolidated audit trail will be jointly owned and operated by the SROs pursuant to the NMS plan, however, the Commission believes that the involvement of all of the SROs in any potential expansion process is appropriate.

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The Commission also notes that any expansion of the consolidated audit trail to include transactions in non-NMS securities would be effected through public notice and comment, and take into account the relevant considerations contemplated by Rule 613(a)(1). Furthermore, adopted Rule 613(b)(7), discussed in more detail later in this Release,245 requires the NMS plan to include an Advisory Committee, which includes members of the plan sponsors and other interested parties as set by the NMS plan,246 that would be available to provide consultation on matters concerning the central repository, including the securities subject to the Rule. Therefore, the Commission believes that the participation of FINRA, the public, and the Advisory Committee should assist the SROs in devising a document outlining the expansion of the consolidated audit trail to other securities.

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The Commission continues to believe that the expansion document required by Rule 613(i) will provide valuable information to the Commission and help inform the Commission about the likely efficacy of expanding the scope of the consolidated audit trail to include information on equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. In addition, the expansion document will aid the Commission in assessing the feasibility and impact of the plan sponsors' proposed approach.

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The Commission acknowledges that plan sponsors will incur costs to prepare the expansion document. For example, plan sponsors will be required to address, among other things, details for each order and reportable event for which data may be submitted; which market participants may be required to provide the data; an implementation timeline; and a cost estimate. Thus, the plan sponsors must, among other things, undertake an analysis of technological and computer system acquisitions and upgrades that would be required to incorporate such an expansion. The Commission, however, believes that it would be beneficial to receive a document outlining how the plan sponsors could incorporate into the consolidated audit trail securities in addition to NMS securities, such as over-the-counter equity and debt securities, as soon as practicable. This is because such an expansion document will aid the Commission in assessing both the feasibility of expanding the audit trail to these additional securities, possibly including, as commenters urged, instruments that underlie mortgage-backed securities and asset-backed securities, and the resulting potential benefits to the securities markets as a whole if the consolidated audit trail is expanded in the manner described in the document submitted by the plan sponsors pursuant to Rule 613(i).

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b. Orders and Quotations

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As proposed, Rule 613 would have required that information be provided to the central repository for every order in an NMS security originated or received by a member of an exchange or FINRA. Proposed Rule 613(j)(4) would have defined "order" to mean: (1) any order received by a member of a national securities exchange or national securities association from any person; (2) any order originated by a member of a national securities exchange or national securities association; or (3) any bid or offer.247 In sum, the Commission proposed that the Rule cover all orders (whether for a customer or for a member's own account), as well as quotations in NMS stocks and listed options.248

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The Commission requested comment about the scope of its proposed definition of "order," including whether principal orders249 should be included in the scope of the consolidated audit trail and whether there are any differences between orders and quotations that should be taken into account with respect to the information that would be required to be provided to the central repository. The Commission also requested comment on whether non-firm quotations should be included in the consolidated audit trail and marked to show that they are not firm.250

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Commenters generally supported the inclusion of principal orders in the definition of "order,"251 but some expressed concern about including market maker quotations in the consolidated audit trail.252 In particular, these commenters thought that the volume of quotes proposed to be collected was so large that it would require market participants to increase the capacity of their systems that would transmit data to the central repository, and thus recommended that market maker quotations be exempted from the Rule's reporting requirements.253 One of these commenters specifically suggested that the Rule use the same approach as is currently used for the COATS – which contains order, quote (but only the top of market quote) and transaction data for all market participants.254

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The Commission also received two comments regarding the inclusion of non-firm orders and quotes in the consolidated audit trail. One commenter, consistent with the proposed Rule, stated that only firm orders and quotes should be included.255 Another commenter, however, believed that the proposed Rule did not go far enough, and stated that the Rule should require that information relating to indications of interest or similar communications be reported to, among other things, assist the SROs and the Commission in detecting "spoofing,"256 where a market participant enters and quickly cancels limit orders or quotations with the intent of having those non-bona fide orders or quotations change the NBBO or create a misperception of the available market liquidity to induce others to change their trading decisions.

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In addition to the comments regarding inclusion of principal and non-firm orders and quotes in the consolidated audit trail, some commenters suggested ways to narrow the definition of "order." One commenter would exempt "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit," from the mandatory reporting requirements.257 Another commenter – an options exchange - recommended that the Commission only require consolidated NBBO data to be reported with respect to options quotations, noting that there are millions of quotes per day on its exchange and that certain options, including out-of-the-money options, are subject to a high volume of quotation updates but generate limited trading activity.258

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The Commission considered the comments regarding the scope of the quotes and orders that should be included in the Rule's definition of "order," and acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.259 The Commission also acknowledges that requiring the recording and reporting of all quotes and orders may entail more costs, such as additional development time and storage capacity, than if the Commission did not require the recording and reporting of market maker quotes or out-of-the-money options. Nevertheless, because the Commission continues to believe that many of the benefits of a consolidated audit trail can only be achieved if all orders and quotations are included, the Commission is adopting the definition of "order" in Rule 613(j)(4) (renumbered as Rule 613(j)(8)), as proposed, to include orders received by a member of an exchange or FINRA from any person, any order originated by a member of an exchange or FINRA, and any bid or offer, including principal orders.260

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The Commission believes it is important for the consolidated audit trail to capture information for all principal orders and market maker quotations because principal orders and market maker quotations represent a significant amount of order and transaction activity in the U.S. markets. Effective surveillance of their trading is critical to detecting a variety of types of potential misconduct such as manipulation and trading ahead. By providing regulators comprehensive information about principal orders and market maker quotations throughout the U.S. markets – information that is not available to regulators today using existing audit trails – the consolidated audit trail would allow regulators to efficiently surveil for manipulative and other illegal activity by market making and other proprietary trading firms. In addition, any comprehensive market reconstruction or other market analysis would need to take into account principal orders and market maker quotations – which, as noted above, constitute a large percentage of the orders and trades in today's markets – to provide a complete and accurate picture of market activity.

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Furthermore, the Commission believes that including principal orders and market maker quotations in the consolidated audit trail would permit SROs to more efficiently monitor the market for violations of SRO rules. Such monitoring requires determination of the exact sequence of the receipt and execution of customer orders in relation to the origination and execution of principal orders or market maker quotations. For example, SROs would be able to use the consolidated audit trail data to more efficiently detect instances when a broker-dealer receives a customer order and then sends a principal order or quote update to an exchange ahead of the customer order, potentially violating the trading ahead prohibitions in SRO rules.261

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In addition, information on principal orders or market maker quotations could be useful in investigating illegal "spoofing." The availability to regulators of comprehensive information about principal orders and market maker quotations would allow them to more efficiently and effectively identify the source of the orders or quotations and, thus, better determine whether the quoted price was manipulated or simply a response to market forces.

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A further example where information on principal orders and market maker quotations would enhance regulatory efforts is in reviewing "layering" or other manipulative activity. Layering is a form of market manipulation where orders are placed close to the best buy or sell price with no intention to trade in an effort to falsely overstate the liquidity in a security. Layering attempts to manipulate the shape of the limit order book to move the price of a security or influence the trading decisions of others. Layering is often effected with principal orders, so inclusion of principal orders in the consolidated audit trail would aid regulators in the detection of this manipulative practice.262

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The Commission considered the comment that recommended excluding certain quotations, such as those generated for out-of-the-money options, from the definition of "orders" required to be reported to the central repository.263 The Commission, however, believes that such quotations must be included in the consolidated audit trail. Although there may be a high volume of quotations in out-of-the-money options with limited resulting trading activity, the Commission believes that having a record of those quotations is necessary to allow regulators to surveil high-speed quoting strategies for manipulative or other illegal behavior and to assess the impact of market making and other high-frequency quoting behaviors on the quality of the markets. Including these quotations is necessary for example, because the Commission may investigate allegations of a broker-dealer engaging in the practice of flooding the market with out-of-the-money option quotations for the purpose of manipulating the price of the option or related security, or to overload exchange execution systems. Based on the foregoing, to ascertain whether any illegal activity might be occurring through the misuse of quoting, the consolidated audit trail must require all bids and offers to be collected and reported to the central repository.

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The Commission also considered the comment that asserted that "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit" should be exempt from the reporting requirements of the Rule.264 In response to this comment, the Commission notes that Rule 613 does not require the reporting of such transfers because they are not "orders," as defined under Rule 613(j)(8). However, Rule 613 does require the NMS plan to require the reporting of the internal routing of orders at broker-dealers.265

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The Commission also considered the comment that recommended including indications of interest in the definition of "order."266 The Commission, however, is not including indications of interest in the definition of "order" for purposes of the consolidated audit trail because the Commission believes that the utility of the information such data would provide to regulators would not justify the costs of reporting the information. Indications of interest are different than orders because they are not firm offers to trade, but are essentially invitations to negotiate. As such, the Commission believes that indications of interest are less likely to be used as a vehicle for illegal activity, such as manipulation or layering, because they would be less likely to induce a response from other market participants.

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c. Persons Required to Report Information to the Central Repository

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Under proposed Rule 613(c)(5), each national securities exchange and its members would have been required to collect and provide to the central repository certain data for each NMS security registered or listed on a national securities exchange, or admitted to unlisted trading privileges on such exchange; and, under proposed Rule 613(c)(6), each national securities association and its members would have been required to collect and provide to the central repository certain data for each NMS security for which transaction reports would be required to be submitted to a national securities association. Proposed Rule 613(c)(7) would have required each national securities exchange, national securities association, and any member of such exchange or association to collect and provide to the central repository certain details, delineated in such Rule, for each order and each reportable event. The Commission requested comment on whether requiring SROs and their members to report the required order information to the central repository was appropriate.

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Several commenters broadly objected to the requirement that all broker-dealers report consolidated audit trail information to the central repository and/or proposed alternatives to such a requirement.267 One commenter suggested that introducing brokers should be permitted to rely on their clearing firms for reporting to the central repository, arguing that requiring separate reporting by introducing brokers and clearing firms "will only dilute the economic benefits realized by Introducing Brokers through such clearing arrangements and may result in increased costs to customers."268 This commenter also stated that it does not believe there is appreciable benefit to the Commission, FINRA or the markets in general in mandating reporting by introducing brokers.269

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Similarly, another commenter urged the Commission to exclude broker-dealers from the consolidated audit trail reporting requirements if they route their orders exclusively to another reporting firm that is solely responsible for further routing decisions, on the basis that this would essentially result in duplicative reporting.270 In addition, this commenter recommended the Commission exempt small broker-dealers from the reporting requirements if compliance would be unduly burdensome.271 Another commenter, a small broker-dealer that manually handles orders, specifically suggested that the Commission adopt a provision similar to FINRA Rule 7470, which provides FINRA staff the authority to grant exemptions to broker-dealers that solely handle orders manually from OATS recording and data transmission requirements.272

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Three commenters argued that broker-dealers should not be required to report quotation information to the central repository that is available from other market participants.273 Specifically, one commenter argued that broker-dealers should not be required to report information to the central repository that has already been reported to an SRO (e.g., market maker quotes) because the SRO would also be reporting the information to the central repository.274 Another commenter stated that it "believes that, rather than requiring quote reporting by broker-dealers, only the exchanges and FINRA (through its Alternative Display Facility and proposed Quotation Consolidation Facility) should be required to report quotations," and added that "[t]he exchanges and FINRA are in a position to provide quotation information at a lower cost and with more accuracy."275 Similarly, a third commenter urged the Commission to consider "whether surveillance systems could rely on quotation information disseminated by the SROs," instead of requiring all quotation data to be sent separately to the repository.276

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The Commission considered the comments objecting to the requirement that broker-dealers report all consolidated audit trail information to the central repository. However, for the reasons discussed below, the Commission is adopting the requirements as proposed with regard to the obligation of members to report required data to the central repository.277 Specifically, the Commission is adopting Rules 613(c)(5) and (6) as proposed. Rule 613(c)(5) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by [Rule 613(c)(7)] for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange," and Rule 613(c)(6) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association."

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In essence, the Commission believes these provisions are appropriate because they require each party – whether a broker-dealer, exchange or ATS – that takes an action with respect to an order, and thus has the best information with respect to that action, to record and report278 that information to the central repository.279 For example, the broker-dealer originating an order – whether received from a customer or generated as a principal order – is in the best position to record the terms of that order, including the time of origination, as well as the unique customer and order identifiers. If the originating broker-dealer is required to record the time each order in a rapid series of principal orders is generated, for example, regulators will be able to more accurately reconstruct the sequence of those orders for purposes of conducting market surveillances for manipulative or other illegal activity, or for performing market reconstructions. In addition, requiring the originating broker-dealer to record the time an order was received from a customer could then help regulators more accurately determine whether the broker-dealer quickly traded ahead of the customer order. On the other hand, if the recording and reporting requirements initially applied only to the executing or routing broker-dealer, or the exchange in the case of market maker quoting, regulators would not know the precise time the order or quote was originated, and would not be able to implement or perform as efficiently effective surveillances, such as those discussed above. In addition, the lack of precise order origination time could interfere with the ability of regulators to perform accurate market reconstructions or analyses, particularly with respect to high frequency trading strategies. Thus, the Commission believes that every broker-dealer (and exchange) that touches an order must record the required data with respect to actions it takes on the order, contemporaneously with the reportable event, to ensure that all relevant information, including the time the event occurred, is accurately captured and reported to the consolidated audit trail.280

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While a broker-dealer will be required to record any actions it takes with respect to an order because such recordation would capture information, particularly the time stamp, which is needed by regulators for the reasons discussed above, the Commission notes that nothing in the Rule precludes the NMS plan submitted to the Commission for its consideration from allowing an introducing broker or other broker-dealer to use a third party, such as a clearing broker-dealer, to report the data recorded by the introducing broker or other broker-dealer to the central repository.

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The Commission acknowledges that SROs and their members will incur costs to record and report the audit trail data required by Rules 613(c)(5), 613(c)(6) and 613(c)(7).281 The Commission also acknowledges that, in some instances, the information required to be recorded and reported by some market participants, for example, market makers, may indeed be available from other market participants (in the case of market makers, the exchanges) and that there might be additional costs for all market participants to record and report information. However, for the reasons noted above, the Commission believes that requiring every market participant that touches an order to record and report the required audit trail data to the central repository, and thus requiring these market participants to incur these costs is appropriate. The Commission believes that such costs will depend on the exact details of how information is to be recorded and reported to the central repository, including whether third-parties, such as clearing-brokers or exchanges, facilitate the transmission of such data. But because these costs depend on details that are not being prescribed by the Commission, Rule 613 requires that the SROs must, in their proposal of the specific mechanisms by which data will be reported to the central repository, include cost estimates of their solution, as well as a discussion of the costs and benefits of the various alternatives considered but not chosen.282 More so, as discussed above in Section I, once the Commission receives the submitted NMS plan, it will be able to use such plan-specific details and costs estimates, as well as public comment on the NMS plan, in determining whether to approve the NMS plan.

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The Commission also considered the comment that small broker-dealers should be granted an exemption from the Rule,283 and, as discussed in Section III.D., is adopting Rule 613(a)(3)(vi), which provides that the NMS plan shall require each SRO to require small broker-dealers to provide audit trail data to the central repository within three years after effectiveness of the NMS plan, as opposed to within two years as proposed.284 The Commission believes that completely exempting small broker-dealers from reporting requirements would be contradictory to the goal of Rule 613, which is to create a comprehensive audit trail. In effect, an exemption to small broker-dealers from the requirements of the Rule would eliminate the collection of audit trail information from a segment of the broker-dealer community and would thus result in an audit trail that does not capture all orders by all participants in the securities markets for NMS securities. The Commission notes that illegal activity, such as insider trading and market manipulation, can be conducted through accounts at small broker-dealers just as readily as it can be conducted through accounts at large broker-dealers. In addition, granting an exemption to certain broker-dealers might create incentives for prospective wrongdoers to utilize such firms to evade effective regulatory oversight through the consolidated audit trail. The Commission recognizes, however, that small broker-dealers, particularly those that operate manual systems, might be particularly impacted because of their more modest financial resources and may need additional time to upgrade to an electronic method of reporting audit trail data to the central repository, and thus believes that allowing the NMS plan to permit such broker-dealers up to an extra year to begin reporting data to the central repository if the plan sponsors believe such an accommodation is reasonable, is appropriate. The Commission believes up to an additional year could allow small broker-dealers extra time to explore the most cost-effective and most efficient method to comply with the Rule. The Commission acknowledges that permitting small broker-dealers up to three years to begin reporting the required audit trail data to the central repository will delay the ability of regulatory authorities to obtain full information about all orders from all participants, which in turn will result in delaying the full regulatory benefit of the consolidated audit trail. However, the Commission believes that such an accommodation to small broker-dealers is reasonable, given the fact that small broker-dealers may face greater financial constraints in complying with Rule 613 as compared to larger broker-dealers. 285 The Commission also notes that many small broker-dealers are introducing broker-dealers and may be able to use their clearing broker-dealers to report the data to the central repository, thereby potentially reducing some of their costs.

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d. Reportable Events and Consolidated Audit Trail Data Elements

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As proposed, Rule 613 would have required SROs and their respective members to provide certain information regarding each order and each "reportable event" to the central repository. A reportable event would have been defined in proposed Rule 613(j)(5) to include, but not be limited to, the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order.

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For the reportable event of receipt and origination of an order, proposed Rule 613(c)(7)(i) would have required the reporting of the following data elements: (1) information of sufficient detail to identify the customer; (2) a unique customer identifier for each customer; (3) customer account information; (4) a unique identifier that would attach to an order at the time of receipt or origination by the member; (5) a unique identifier for the broker-dealer receiving or originating an order; (6) the unique identifier of the branch office and registered representative receiving or originating the order; (7) the date and time (to the millisecond) of order receipt or origination; and (8) the material terms of the order.

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For the reportable event of routing of an order, proposed Rule 613(c)(7)(ii) would have required the reporting of the following information by the member or SRO that is doing the routing, each time an order is routed: (1) the unique order identifier; (2) the date on which an order was routed; (3) the exact time (in milliseconds) the order was routed; (4) the unique identifier of the broker-dealer or national securities exchange that routes the order; (5) the unique identifier of the broker-dealer or national securities exchange that receives the order; (6) the identity and nature of the department or desk to which an order is routed if a broker-dealer routes the order internally; and (7) the material terms of the order.

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Rule 613(c)(7)(iii), as proposed, also would have required the collection and reporting by the SRO or member receiving a routed order of the following information: (1) the unique order identifier; (2) the date on which the order is received; (3) the time at which the order is received (in milliseconds); (4) the unique identifier of the broker-dealer or national securities exchange receiving the order; (5) the unique identifier of the broker-dealer or national securities exchange routing the order; and (6) the material terms of the order.

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For the reportable events of modification or cancellation of an order, proposed Rule 613(c)(7)(iv) would have required the following data be collected and reported: (1) the date and time (in milliseconds) that an order modification or cancellation was originated or received; (2) the price and remaining size of the order, if modified; (3) the identity of the person responsible for the modification or cancellation instruction; and (4) other modifications to the material terms of the order.

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For full or partial executions of an order, proposed Rule 613(c)(7)(v) would have required the following information to be collected and reported to the central repository: (1) the unique order identifier; (2) the execution date; (3) the time of execution (in milliseconds); (4) the capacity of the entity executing the order (whether principal, agency, or riskless principal); (5) the execution price; (6) the size of the execution; (7) the unique identifier of the national securities exchange or broker-dealer executing the order; and (8) whether the execution was reported pursuant to an effective transaction reporting plan or pursuant to the OPRA Plan.

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The Commission received comments on the information proposed to be recorded and reported to the central repository for each reportable event (i.e., the consolidated audit trail data elements) but did not receive comments on the proposed definition of reportable event in proposed Rule 613(j)(5) (i.e., the events that trigger consolidated audit trail reporting requirements). However, the Commission is making clarifying changes to proposed Rule 613(j)(5) (renumbered as Rule 613(j)(9)) to define a "reportable event" as including the original receipt of a customer's order by a broker-dealer; the origination of an order by a broker-dealer (i.e., a principal order); and the receipt of a routed order. Thus, Rule 613(j)(9), as adopted, provides that "[t]he term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order." The Commission believes these changes from the proposal are appropriate because they conform Rule 613(j)(9) to the provisions of Rule 613(c)(7). Specifically, Rule 613(c)(7) is structured around each "reportable event;" therefore, audit trail data is listed according to the data that must be reported upon "original receipt or origination" of an order (Rule 613(c)(7)(i)); "routing" of an order (Rule 613(c)(7)(ii)); "receipt of an order that has been routed" (Rule 613(c)(7)(iii)); "modification or cancellation" of an order (Rule 613(c)(7)(iv)); and "execution" of an order (Rule 613(c)(7)(v) and (vi)).

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As noted above, the Commission received comments on the information proposed to be recorded and reported to the central repository with each reportable event (i.e., the consolidated audit trail data elements) and, in response, is adopting the Rule with certain modifications from the proposed Rule with respect to certain of the consolidated audit trail data elements. In so adopting the Rule, the Commission acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.286 However, the Commission believes that the costs to SRO members for reporting this information, and the costs to the central repository for collecting and storing this information, will significantly depend on the exact details of how this information will be gathered and transmitted by the various types of market participants covered by Rule 613. The Commission is therefore requiring the SROs to include as part of the NMS plan submitted to the Commission for its consideration pursuant to the Rule, details of how each of the different data elements would be recorded, reported, collected, and stored, as well as cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed. The Commission also notes that the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of the Rule.

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Once the SROs have submitted an NMS plan with these details, the Commission will be able to use this information to determine whether to approve the NMS plan. The Commission at this time is only directing the SROs to develop and submit a detailed NMS plan that includes each of the data elements. The Commission is not making a final determination of the nature and scope of the data elements to be included in the consolidated audit trail – as discussed above, these determinations will be made after the SROs submit the NMS plan, and the Commission and public have had an opportunity to consider the proposed data elements.

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Rather, at this time the Commission is only making a more limited determination. The benefits the Commission and the public will receive from being able to consider the detailed costs and benefits of the specific set of data elements submitted to the Commission for its consideration pursuant to the Rule justify the costs of preparing the NMS plan with such data elements included.

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A discussion of these consolidated audit trail data elements follows.

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i. Material Terms of the Order

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As proposed, Rule 613 would have required broker-dealers to report the material terms of the order upon origination or receipt of an order and upon routing, modification, and cancellation of an order.287 Proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) defined material terms of the order to include, but not be limited to, the following information: (1) the NMS security symbol; (2) the type of security; (3) price (if applicable); (4) size (displayed and non-displayed); (5) side (buy/sell); (6) order type; (7) if a sell order, whether the order is long, short, or short exempt;288 (8) if a short sale, the locate identifier; (9) open/close indicator; (10) time in force (if applicable); (11) whether the order is solicited or unsolicited; (12) whether the account has a prior position in the security; (13) if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and (14) any special handling instructions.

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The Commission requested comment on whether there are any items of information that are required to be recorded and reported by existing audit trail rules, or to be provided to the SROs or the Commission upon request, that were not proposed but should have been included in the Rule. One commenter suggested that two data elements be added to aid regulators in detecting the original source of orders that violate laws or are involved in market manipulations.289 Specifically, this commenter recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order.290 Another commenter questioned the need for information regarding whether an account has a prior position in a security.291 The commenter expressed skepticism about the value of knowing, in real time, whether the customer has a prior position in the security, since the length of time the position has been held would not be captured. This commenter also questioned how the Commission's requirement that the prior position in a security be reported would work in the situation where a client has multiple accounts but it is the first time the client has opened a position in one of the accounts.292 Another commenter provided specific information on the exact data elements that it could incorporate into the consolidated audit trail if it were chosen as the central processor under Rule 613.293

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The Commission considered the views of the commenter that questioned the value of knowing whether a customer has a prior position in a security. The Commission also considered the commenter's concern about potential reporting complications for clients with multiple accounts, as well as general comments urging the Commission to reduce the burdens of the Rule, and is adopting proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) with modifications to delete certain data elements.

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After considering the commenters' views, and re-evaluating the necessity of requiring certain specific data elements, the Commission has determined not to require the locate identifier (if a short sale); whether the order is solicited or unsolicited; and whether the account has a prior position in the security. The Commission believes the consolidated audit trail can still achieve significant benefits without requiring the routine recording and reporting of these specific data elements to the central repository.294 While this information may be useful for certain investigations and market analyses, the Commission believes that this additional data could be readily obtained from a follow-up request to a broker-dealer if the other data required by proposed Rule 613(j)(3), particularly relating to the customer behind the order, is included in the consolidated audit trail. Thus, the Commission believes that it is unnecessary to require this additional data to be reported as a standard part of the consolidated audit trail. In effect, the Commission believes that the benefits of having these specific audit trail data elements are minimal. As such, the Commission does not believe the benefits to the Commission and the public to consider the detailed costs and benefits of such data elements justify the costs to SROs for including them in their NMS plan submission.

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In response to the commenter who recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order,295 the Commission notes that Rule 613 defines "customer" as: "(i) the account holder(s) of the account at a registered broker-dealer originating the order; and (ii) any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)."296 The Rule does not require the identification of the individual registered representative who placed the order.297 Further, the Commission does not believe that "the system he or she used to originate the order" is of significant enough regulatory value to require that information to be recorded and reported under Rule 613 at this time.

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(A) Order Type

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As proposed, the Rule would have required that members report the order type as an element of the material terms of an order. In the Proposing Release, the Commission explained that the proposed Rule does not specify the exact order types (e.g., market, limit, stop, pegged, stop limit) that could be reported under the Rule in recognition that order types may differ across markets and an order type with the same title may have a different meaning at different exchanges.298 The Commission also noted that markets are frequently creating new order types and eliminating existing order types. Thus, the Commission preliminarily believed that it would not be practical to include a list of order types in the proposed Rule as part of the required information to be reported to the central repository.

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The Commission received one comment in response to its request for comment on its proposed approach to handling order types. This commenter believed that the Commission did not think that order types were needed for the consolidated audit trail, and argued that this information is "essential for any attempts to use the order data to reconstruct the state of the limit order book at any point in time."299 The Commission agrees that information about an order's type is important and notes that the Rule, as proposed, did require order types to be reported.300 Thus, the Commission is adopting the Rule, as proposed, to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for SROs and members to report the order type as an element of the material terms of an order. The Rule, however, does not provide an exhaustive list of order types, as the Commission continues to believe that it is not feasible to do so in its Rule, for the reasons stated in the Proposing Release.301 Rather, the Commission believes the plan sponsors should be responsible for determining how to describe and categorize specific order types in the NMS plan or in the NMS plan's technical specifications, as there is more flexibility to amend such documents and the SROs would have the most familiarity with the variations among the order types on their markets. The Commission notes that specific order types may differ across markets, and even an order type with the same title may have a different meaning at different exchanges. Further, SROs regularly develop new order types to respond to changes in market structures and trading strategies, and any list of order types will likely need to be updated over time.

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(B) Special Handling Instructions

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The proposed Rule also would have required that that any special handling instructions be reported as part of the material terms of an order.302 The Commission specifically requested comment in the Proposing Release on whether the Rule should require, as part of the disclosure of special handling instructions, the disclosure of an individual algorithm that may be used by a member or customer to originate or execute an order, and, if so, how such an algorithm should be identified. The Commission received one comment noting the importance of requiring the special handling instructions to be included in the consolidated audit trail.303 This commenter believed that special handling instructions were important for reconstructing the limit order book.304 Regarding algorithms, commenters generally were not in favor of unique identifiers for algorithms.305 One commenter urged against requiring customer information at the level of "individual strategy, trading desk, or particular algorithm . . . ."306 Another commenter stated that the proposed rule should not require that unique customer identifiers be affixed to computer algorithms.307 This commenter pointed out that algorithms change daily, which would result in uncertainty about whether new identifiers are needed. Further, the commenter argued that firms would need to develop safeguards to ensure proprietary algorithms and trading strategies are not appropriated by competitors. This commenter suggested that, instead of requiring a unique customer identifier, the Commission could require that a "flag" be appended to orders generated by an algorithm.

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The Commission agrees with the commenter that supported the proposed requirement that special handling instructions be reported308 and is adopting this requirement as proposed.309 The Commission believes that such information will be useful to regulators in attempting to recreate an SRO's limit order book for market reconstructions. When performing market reconstructions, it is important for regulators not only to have information regarding what orders were on the book, but the conditions or special instructions attached to those orders. Such information can be of key importance in determining the amount of accessible liquidity at any price point and whether or not certain orders were entitled to be executed at various price levels.

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Additionally, the Commission considered the comments received regarding whether an individual algorithm should be reported and identified as part of an order's special handling instructions, and has determined not to adopt that requirement in recognition that algorithms change frequently and therefore it may be difficult to determine when and if new algorithm identifiers are necessary. The Commission also considered one commenter's concern regarding the proprietary nature of algorithms and the risk of competitors appropriating algorithms if they were required to be identified in the consolidated audit trail. However, the Commission notes that, because the disclosure of whether an order is a result of an algorithm that makes trading decisions based on a programmed investment strategy might be useful for the Commission and the SROs to sort or filter trade data to re-construct market events or to better evaluate potentially manipulative behavior or intent, the SROs may want to consider whether it would be feasible to include a "flag" or other indicator that would reveal whether an order was the result of an algorithmic trading calculation. Such a flag would not identify the actual algorithm used, but could instead indicate whether the order was the result of an algorithmic trade. Appending such a "flag" or indicator may aid regulatory authorities in their efforts to make preliminary assessments about market activity and better allow the SROs and the Commission to monitor the usage of algorithms over time. The Commission acknowledges that by not requiring that algorithms be recorded and reported to the central repository, the consolidated audit trail may not contain an audit trail data element that might prove useful to regulatory authorities. The Commission, however, believes that, should regulatory authorities need such information, regulators can submit a request for this information and obtain the information about whether the order was the result of an algorithm readily from the broker-dealer that handled the order.

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ii. Unique National Securities Exchange, National Securities Association and Broker-Dealer Identifiers

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The Commission proposed to require each member originating or receiving an order from a customer, and each national securities exchange, national securities association, and member that subsequently handles the order to report its own unique identifier to the central repository. Proposed Rule 613(c)(7)(i)(E) (renumbered as 613(c)(7)(i)(C)) would have provided that any member of an SRO, that originally receives from a customer or originates a principal order, shall collect and electronically report "the unique identifier of the broker-dealer receiving or originating the order." Similarly, proposed Rule 613(c)(7)(ii)(D) provided that the SRO or any member of such SRO that routes an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(ii)(E) provided that the SRO or any member of such SRO routing an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(D) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(E) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(iv)(E) required, for a modification or a cancellation of an order, the identity of the person giving such instruction. Proposed Rule 613(c)(7)(v)(F) provided that the SRO or any member of such SRO that executes an order in whole or part report "the unique identifier of the broker-dealer or national securities exchange executing the order." Further, the Commission proposed to require a member receiving an order from a customer to report, if applicable, "the unique identifier of the branch office and the registered representative receiving or originating the order."310

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Commenters generally supported the proposed use of unique identifiers for exchanges and broker-dealers.311 One commenter explained that cross-market surveillance efforts are unduly complicated if a single market participant has a different identifier for each market, and stated that the current market participant identifier ("MPID") system needed to be updated.312 This commenter, however, questioned whether it was necessary for branch office and registered representative information to be included in the consolidated audit trail, stating that the information would increase the amount of data reported to the consolidated audit trail, but would be useful only in certain circumstances.313 In another letter, the same commenter proposed to use Central Registration Depository ("CRD") numbers to uniquely identify broker-dealers.314 Under this system, the commenter suggested that SROs would be required to link the CRD numbers to unique MPIDs to create a cross-referenced database, so that data could be searched and retrieved at the firm level (by CRD number) or by the unique market center identifiers used by firms for each transaction on a specific market center.315 For activity not occurring on a national securities exchange, the commenter proposed continued reporting with MPIDs currently used for OATS reporting.316 Another commenter supported the use of MPIDs as unique identifiers for broker-dealers, suggesting that the MPIDs of the firms originating each order should be added to the trade report, but stated that only FINRA and the Commission should be allowed to access this information.317

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After considering commenters' views requesting additional flexibility with respect to the unique identifiers requirement for national securities exchanges, national securities associations, and members, the Commission has determined to adopt the Rule to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for such unique identifiers, substantially as proposed. The Commission, however, has made two technical changes to the Rule text from the proposal to: (1) add a defined term, "CAT-Reporter-ID," in adopted Rule 613(j)(2) to refer to these unique identifiers, and (2) expressly permit that a "code" be used that uniquely and consistently identifies the national securities exchange, national securities association, or member. Specifically, adopted Rule 613(j)(2) provides that "[t]he term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository."

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In response to the commenters that stated that firms' current MPIDs or CRD numbers may work as a viable unique broker-dealer identifier, the Commission believes it is appropriate to leave the decision of whether to specify an existing identifier, such as a firm's MPID or CRD number, or some other identifier such as one created under the unique legal entity identifier (LEI) standard under development by the International Standards Organization ("ISO") (ISO 17442),318 as the unique broker-dealer identifier, to the plan sponsors to assess and propose in the NMS plan. Therefore, while the adopted Rule continues to require the NMS plan to require these unique identifiers, the Rule does not specify which identifier to use, nor does the Rule specify the process for assigning unique broker-dealer identifiers.319 In this regard, the Commission expects the plan sponsors to establish a process, to be described in the NMS plan, by which every national securities exchange, and every member of a national securities exchange or national securities association, can obtain a CAT-Reporter-ID.

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The Commission also is adopting, substantially as proposed, rules requiring the NMS plan submitted to the Commission for its consideration to require each SRO and its members to report the unique identifier of the broker-dealer or SRO for each reportable event in the life of an order to the central repository, except to make two technical changes: to include the new defined term, "CAT-Reporter-ID" and to require the CAT-Reporter-ID or Customer-ID, if applicable, of the person giving a cancellation or modification instruction.320 Specifically, Rule 613(c)(7)(i)(C), as adopted, provides that any member of an SRO that originally receives from a customer or originates a principal order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer receiving or originating the order." Rule 613(c)(7)(ii)(D) provides that any national securities exchange or any member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(ii)(E) provides that any national securities exchange or member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed." Rule 613(c)(7)(iii)(D) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order." Rule 613(c)(7)(iii)(E) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(iv)(F) provides that the SRO or any member of an SRO that receives an instruction to modify or cancel an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction." Rule 613(c)(7)(v)(F) provides that the national securities exchange or any member of an SRO that executes an order in whole or part shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange executing the order." Rule 613(c)(7)(vi)(B) provides that, if an order is executed in whole or part, a member of an SRO shall record and report "[t]he CAT-Reporter-ID of the clearing broker or prime broker, if applicable."

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The Commission notes that CAT-Reporter-IDs will be reported to the central repository for each reportable event that the member or SRO is reporting to the central repository. The requirement to report CAT-Reporter-IDs in this manner will help ensure that regulators can determine which market participant took action with respect to an order at each reportable event. The Commission does not believe that the CAT-Reporter-ID of each member or market that touches an order needs to be tagged to and travel with an order for the life of the order, as long as the CAT-Reporter-ID of the member or exchange taking the action is reported to the central repository, and an order identifier(s) is reported at every reportable event of the order. The Commission believes the details of how these data are reported to the central repository, and the specific methodologies used by the central repository to assemble time-sequenced records of the full life-cycle of an order, is best left to the expertise of the SROs as they develop the NMS plan to be submitted to the Commission for its consideration. Instead, as adopted, Rule 613 requires that data in the central repository be made available to regulators in a linked fashion so that each order can be tracked from origination through modification, cancellation, or execution, and that the parties routing or receiving routes, or otherwise performing such actions, are identified for every reportable event.

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After considering the comment opposing the requirement to report to the central repository the unique identifier of the branch office and registered representative receiving or originating an order,321 the Commission has reconsidered the requirement in proposed Rule 613(c)(7)(i)(F) and is not adopting this requirement.322 While this audit trail data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that this information need not be required by Rule 613 because it is not critical information to help identify the customer responsible for trading a security, nor to capturing the entire life of an order as it moves from origination to execution or cancellation. In addition, the Commission believes that a requirement that a unique identifier of the branch office and registered representative receiving or originating the order be reported may not provide enough information in an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that this information be required in the audit trail created by Rule 613. Further, should regulators determine that the identity of the branch office and registered representative receiving or originating the order is needed to follow-up on a specific issue, they may request the information directly from the broker-dealer as broker-dealers are required to make and keep records identifying the registered representative that receives an order pursuant to Exchange Act Rules 17a-3(a)(6)(i)323 and 7a-4(b)(1).324 As such, the Commission does not believe the benefits of including this information in the consolidated audit trail justify the costs to SROs for requiring them to devise a methodology to identify the branch offices and registered representatives receiving or originating an order, and a mechanism for reporting this type of data to the central repository.

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iii. Unique Customer Identifier

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(A) Proposed Rule

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As proposed, Rule 613 would have required every SRO and broker-dealer to report a unique customer identifier to the central repository for any order originated by or received from such customer.325 Specifically, proposed Rule 613(c)(7)(i)(B) (renumbered as Rule 613(c)(7)(i)(A)) would have required that a national securities exchange, national securities association or any member of such exchange or association that originally receives or originates an order to collect and electronically report "a unique customer identifier for each customer." In the Proposing Release, the Commission noted that the unique customer identifier should remain constant for each customer, and have the same format, across all broker-dealers.326

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The Commission requested comment on possible ways to develop and implement unique customer identifiers. For example, the Commission solicited input about who should be responsible for generating the identifier; whether a unique customer identifier, together with the other information with respect to the customer that would be required to be provided under the proposed Rule, would be sufficient to identify individual customers; and whether there were any concerns about how the customer information would be protected. The Commission specifically requested comment on what steps should be taken to ensure that appropriate safeguards are implemented with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository.

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(B) Comments on Proposed Rule 613(c)(7)(i)(B)

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The Commission received comments that supported the general notion that identifying customers in an audit trail would be beneficial for regulatory purposes.327 One commenter stated that a customer identifier on an order-by-order basis would "enhance significantly the audit trails of the markets."328 Similarly, another commenter agreed that identifying the customer would be useful to regulators for purposes of market surveillance and enforcement.329 Another commenter noted that it "fully supports more granularity in an order audit trail, such as obtaining high-level customer identity information (e.g., large trader identification), so that patterns of trading across multiple market centers can be quickly and readily identified, and [the commenter] agrees that the timeframe needed to identify customers should be greatly reduced; however, [the commenter] question[s] the utility of receiving the identity of both the beneficial owner and the person exercising the investment discretion, if different, for each and every order reported to the consolidated audit trail."330

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However, other commenters disagreed with the need for a unique customer identifier and the proposed Rule's requirements for reporting a unique customer identifier with every order. These commenters generally focused on the complexity and cost of the systems changes required to implement the unique customer identifier requirement for every customer;331 the complexity in the process for assigning unique customer identifiers;332 the alternative ways that a customer could be identified without requiring a unique customer identifier as proposed;333 and the concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.334

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One commenter discussed the complexity and cost of the systems changes required to implement the unique customer identifier requirement, as set forth in the Rule.335 This commenter, who did not believe the Commission should require a unique customer identifier for every customer, noted the "complexity of the technology development work involved" in adding this identifier to the audit trail.336 The commenter added that the work required to update internal architecture to report customer identifiers would be "substantial" because broker-dealer systems and processes may access and maintain customer (and proprietary) identification information in different ways and at different levels of specificity, and that sales and trading systems would need to be modified to report the unique customer identifiers with every order. This commenter also noted the "significant costs" generally associated with requiring a unique customer identifier.337

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A few commenters also submitted their views on the complexity of the process for assigning unique customer identifiers.338 One commenter noted that the process for assigning unique customer identifiers that the Commission discussed in the Proposing Release (i.e., generating unique customer identifiers based on the input by a broker-dealer of a customer's social security number or tax identification number) would not create an administrative burden on individuals and non-broker-dealer entities.339 Another commenter, however, noted difficulties associated with implementing a centralized process for assigning, storing and utilizing standardized customer identifiers340 and another commenter characterized the "implementation of a centralized customer identification system" as a "monumental task."341 Another commenter believed that to satisfy the Rule's requirements, the industry would need to implement a completely new market-wide system to satisfy the unique customer identifier requirement, noting that this might not be feasible on the proposed timeline.342 Another commenter characterized the collection of a unique customer identifier as a "significant project unto itself."343 One commenter observed that given the large number of retail investors (some with multiple accounts), the complexities associated with tracking retail investors' accounts, and the relatively small and infrequent amount of trading by typical retail investors, the Rule should not require unique customer identifiers for every customer.344 Another commenter urged the Commission to specify whether the process required that a unique customer identifier be submitted at the time an order is originated or received and the procedure to be followed if an identifier is not available.345

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A few commenters suggested alternative ways to identify a customer, rather than through a unique customer identifier.346 One commenter suggested that customers could be identified by amending the current trade report.347 Another commenter believed that "sophisticated analysis could identify trading activity that might be coordinated, without using an account identifier, and that regulators could then perform further analysis to determine who traded by using [EBS] and other methods already available to the staff."348 Another commenter noted that a possible method for identifying customers could be by linking customer information in EBS to trading information in OATS.349 Another commenter noted that "[i]t makes economical sense to use the current OATS and COATS audit trails and to expand those audit trails to include additional customer information, thereby providing a more complete audit trail for regulatory oversight for post trade analysis rather than building another audit trail system."350

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Commenters also discussed the need for both a large trader identification number under Rule 13h-1 under the Exchange Act, the Commission's Rule implementing the large trader reporting system,351 and a unique customer identifier under Rule 613.352 One commenter stated that the Commission could alleviate some of the burdens of the proposed Rule, and increase the effectiveness of an identification system, if it required only large trader identification numbers to be reported instead of requiring a unique customer identifier for every customer.353 This commenter believed that the Commission and the SROs are unlikely to be interested in routine transactions by small investors and would much more likely need accurate information about the orders of large traders because they are most likely to engage in transactions large enough to impact prices.354 Another commenter noted that an alternative would be to only identify entities that have sponsored or direct access to market centers via a relationship with a sponsoring market participant and to identify customers whose trading activity would be required to be disclosed pursuant to Rule 13h-1.355

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Certain commenters discussed concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.356 One commenter, noting the Commission's discussion in the Proposing Release that the unique customer identifiers could be based on a customer's social security number or taxpayer identification number, believed that the Commission's approach raises "serious privacy concerns."357 Another commenter noted that "there is a legitimate privacy concern with having the unique customer identifier available to the marketplace, and creating a means to protect that privacy would add tremendous incremental cost to the [consolidated audit trail]."358 One commenter questioned how long and at what level customer information would be encrypted,359 and another noted that "[t]he proposal needs to clarify who will have access to customer data and how confidentiality will be ensured."360

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(C) Adopted Rule

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(1) Need for a Unique Customer Identifier

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The Commission recognizes that the implementation of the unique customer identifier requirement may be complex and costly, and the reporting of a unique customer identifier will require SROs and their members to modify their systems to comply with the Rule's requirements. The Commission, however, believes that unique customer identifiers are vital to the effectiveness of the consolidated audit trail. The inclusion of unique customer identifiers should greatly facilitate the identification of the orders and actions attributable to particular customers and thus substantially enhance the efficiency and effectiveness of the regulatory oversight provided by the SROs and the Commission. Without the inclusion of unique customer identifiers, many of the benefits of a consolidated audit trail as described above in Section II.2. would not be achievable.

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For example, unique customer identifiers will make regulatory inquiries and investigations more efficient by eliminating delays resulting from the current need to send information requests to individual market participants in search of this key information, as well as reducing the burden on regulators and market participants of such requests.361 The identity of the customer is often necessary to tie together potential manipulative activities that occur across markets and through multiple accounts at various broker-dealers. Existing audit trails, however, do not identify the customer originating the order and thus do not allow SRO and Commission regulatory staff to quickly and reliably track a person's trading activity wherever it occurs in the U.S. securities markets. A unique customer identifier connected to each order will allow the SROs and the Commission to more quickly identify the customer that originated each order and therefore potentially more quickly and efficiently stop manipulative behavior through the submission of orders. In certain cases this might limit the losses of parties injured by malfeasance who currently may suffer losses during the weeks or months that it can currently take for regulators to obtain customer information through written requests for information.

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Further, unique customer identifiers will aid regulators in reconstructing broad-based market events. Specifically, having unique customer identifiers will aid regulators in determining how certain market participants behaved in response to market conditions and may even reveal the identity of the market participant(s) who caused or exacerbated a broad-based market event. More so, unique customer identifiers would enable regulators to disaggregate the market activity of different participants in ways that could help address many important questions related to equity and equity options market structure, ranging from more detailed analyses of the potential impacts of high frequency trading, to studies of market liquidity, to trend analyses of the trading costs and general efficiency by which investors use our public markets to acquire or dispose of their securities holdings.

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The Commission has considered commenters' concerns about the complexity of the process for creating and assigning unique customer identifiers and understands and acknowledges that the process of creating and assigning unique customer identifiers may not be simple and may result in additional costs to SROs and their members.362 The Commission also considered the commenters' views that there may be alternative ways to identify the customer responsible for orders, and that, in the view of some commenters, every individual customer need not be identified for purposes of an audit trail. As noted above, the Commission believes that the identification of each customer responsible for every order is critical to the effectiveness of a consolidated audit trail and does not agree that the commenters' alternative means of identifying a customer would be as effective as the method proposed by Rule 613. For example, the Commission considered the comment that customers could be identified by amending the trade report, but this approach would fail to identify customers associated with orders that are not executed.363 Additionally, account numbers are assigned by broker-dealers for their own customers only, and account numbers vary between broker-dealers. Thus, the identity of a customer from a specific account number would not be apparent to regulators without the time-consuming requests for information Rule 613 specifically is seeking to avoid. The use of unique customer identifiers would permit regulators to readily trace market activity by the same customer back to that unique customer identifier even if such market activity were affected across multiple accounts and broker-dealers.

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The Commission also considered the recommendations of some commenters that the consolidated audit trail should use the large trader identifier instead of a unique customer identifier.364 The Commission, however, does not believe that the commenters' approach will address the regulatory need to obtain information on and to identify the holders of accounts for all order activity in the market for NMS securities because the use of the large trader identifier alone would identify only those traders that self-report as "large traders" pursuant to Rule 13h-1 and are assigned a large trader unique identifier. Thus, under the commenters' suggested approach, only a very small portion of customers – the very largest traders in the market – would be assigned a unique identifier for purposes of the consolidated audit trail. Smaller traders, however, also can be perpetrators of illegal activity, or otherwise impact the market. Accordingly, the Commission believes that information on all customers is necessary to achieve the goal of Rule 613.

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Despite the wide and disparate array of views from commenters on the costs, complexities, and most efficient methodologies to generate and collect unique customer identifiers, the Commission believes that the potential benefits of including this information in the consolidated audit trail justify the costs to the SROs in requiring that they develop and include a detailed framework for unique customer identification as part of the NMS plan to be submitted for consideration by the Commission and the public. Therefore, the Commission is adopting the Rule substantially as proposed to provide that the NMS plan must require every member to report a unique customer identifier to the central repository upon origination or receipt of an order as required by Rule 613(c)(7)(i)(A). The Commission, however, is changing the term "unique customer identifier," as used in the proposed Rule, to the term "Customer-ID." Adopted Rule 613(j)(5) defines the term "Customer-ID" to mean, "with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository."365

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Given the complexity and the various existing options for identifying a customer, the Commission believes that the plan sponsors, by engaging in a detailed process that combines their own expertise with that of other market participants, are in the best position to devise a methodology for, and estimate the costs of, including customer identifiers in the consolidated audit trail. Once the NMS plan was submitted, the Commission and the public would then be able to consider the details and costs of such a framework.

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The Commission notes that the Rule does not specify the process for assigning the unique customer identifiers, or the format for such identifiers; rather, the Rule contemplates that the plan sponsors have the flexibility to determine the precise way to assign or "code" these identifiers. In this regard, the Commission expects the plan sponsors to establish a process by which every broker-dealer can, in a cost-effective manner, obtain a unique customer identifier, or Customer-ID, for each of their customer(s).366 The Commission also expects the plan sponsors to establish a process by which unique customer identifiers are reported to the central repository, and how this information is linked to the name and address of customers as stored in the central repository. The Commission further notes that Rule 613 does not specify that unique customer identifiers must be attached to every reportable event as orders are routed from one market or broker-dealer to another, or that these identifiers are reported at the same time and fashion as other customer-identifying information. Rather, the Commission is relying on the SROs, and other market participants,367 to develop a proposal that maximizes efficiency and security, and that data in the central repository be made available to regulators in a linked fashion so that each order, and all subsequent reportable events, can be readily traced back to one or more customers through their unique identifiers.

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In response to the commenter that questioned what should happen if a unique customer identifier was not available,368 the Commission notes that the Rule does not set out a process for addressing a situation where a unique customer identifier is not available to a broker-dealer and/or customer. Instead, the Commission believes that the plan sponsors are in the best position to address this situation as they develop the overall process for assigning unique customer identifiers. In response to the comment that requested the Commission specify whether a unique customer identifier is required to be reported at the time an order is originated or received,369 the Commission notes that Rule 613(c)(7)(i)(A) requires that the NMS plan require that this information be recorded contemporaneously with the reportable event, but permits the reporting of the identifier by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded.370 In addition, in response to the commenter that believed that the consolidated audit trail should identify market participants with direct or sponsored access to markets,371 the Commission notes that under the Rule, to assure the Commission and the SROs of an accurate and complete audit trail for every action that every market participant takes with respect to an order, the sponsored party will be assigned a Customer-ID and the sponsoring broker-dealer will be assigned a CAT-Reporter ID under Rule 613.

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The Commission also considered the privacy and security concerns that commenters raised with respect to the use of Customer-IDs.372 In response to these comments, the Commission is revising proposed Rule 613, as discussed in more detail in Section III.B.2.e. below, to include additional mechanisms to safeguard the privacy and confidentiality of the audit trail data, including the Customer-ID, in large part to address the privacy concerns raised by commenters.373 In response to the commenter that questioned when and at what level customer information would be encrypted,374 the Commission notes that, while Rule 613 does not explicitly require that this information be encrypted, the Rule contains several safeguards to ensure the privacy and confidentiality of the audit trail data. Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, reported to the central repository, will be ensured.375 Based on these provisions, the Commission believes that plan sponsors would need to make sure customer information is protected, and the plan sponsors could require such data to be encrypted.

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Additionally, the Commission believes that privacy concerns also could be mitigated if the plan sponsors determine, as permitted by Rule 613, that the unique customer identifiers not travel with the order, and instead be reported to the central repository only upon the receipt or origination of an order. Therefore, if the plan sponsors make this decision, the SROs and their members will not be able to use the unique customer identifier to track the identity of a customer(s) or a customer's order flow.376 While the unique customer identifier will be linked to information that is sufficient to identify a customer (e.g., the name and address of the customer) and customer account information377 at the central repository, this information will be accessible only by regulators for regulatory purposes.378 The Commission also notes that the plan sponsors could determine not to require that a customer's social security number or tax identification number be used as a customer's unique identifier to the extent they believe that there are privacy and confidentiality concerns.

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(2) Definition of "Customer"

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As proposed, Rule 613(j)(1) (renumbered as Rule 613(j)(3)) defined "customer" as "[t]he beneficial owner(s) of the account originating the order; and [t]he person exercising investment discretion for the account originating the order, if different from the beneficial owner(s)." The Commission received two comments regarding the inclusion of beneficial owners in the definition of customer. One commenter questioned the use of a unique customer identifier for both a beneficial owner of an account and the person exercising investment discretion, if different, and noted that if a trade comes into question, the person exercising investment discretion, not the beneficial owner, likely will be the "first person of interest in any type of review or investigation of such trading activity."379 Another commenter requested further clarity regarding the definition of "customer" for purposes of Rule 613, and suggested that the Commission should define "beneficial owner" to be sure this term is applied correctly.380 This commenter specifically stated that "[t]he SEC should also provide a definition for the terms 'beneficial owner' and 'customer' to eliminate any doubts as to whom these labels apply. For example, is the 'customer' the entity directing the trade or the beneficial owner of the account?" and added that, "for registered investment advisers, the unique customer identifier should be associated with the investment adviser rather than the underlying beneficial owner. Frequently, investment advisers aggregate orders for multiple beneficial owners in 'bulk' orders that are routed together and allocated on an average-priced basis to ensure best execution."381 In response to commenters' concerns about the use of the term "beneficial owner," the Commission is revising Rule 613(j)(1), as proposed (renumbered as Rule 613(j)(3)), to state that "[t]he term 'customer' shall mean: (i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." The Commission believes that the revised Rule will provide it with the customer information required to achieve the objectives of the consolidated audit trail.382

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In adopting this revised definition, the Commission is clarifying its intent that, with respect to the "account holder" reference under Rule 613(j)(3), the NMS plan submitted to the Commission for its consideration must require broker-dealers to capture information on only the individuals or entities that currently are required to be recorded in the books and records of the broker-dealer pursuant to Rule 17a-3(a)(9) under the Exchange Act.383 Because this provision does not require broker-dealers to obtain information about their account holders beyond what they are required to obtain today, the Commission believes the modification to the proposed Rule is appropriate because it will reduce the proposed Rule's burden on broker-dealers in recording and reporting information about a "customer," as that term will be defined under Rule 613(j)(3). The Commission notes that, under the Rule, as adopted, for joint accounts – where two individuals are required to provide information under Rule 17a-3 of the Exchange Act for one account – information for both persons listed on the joint account would be recorded and reported under Rule 613.384

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The Commission also believes that it is important to capture the person that has authority to give trading instructions to a broker-dealer for an account, if different from the account holder, because such person likely will be of interest in a review or investigation of activity in such account. Thus, the Commission is modifying the proposed Rule to clarify its intent that under Rule 613 the NMS plan also must capture, in the definition of customer, "[a]ny person from whom the broker-dealer is authorized to accept trading instructions, if different from the account holder(s)."385 Knowing the identity of the person who is authorized to give the broker-dealer trading instructions for an account, whether the account holder or an adviser or other third party, is a vital component in the investigative process. Further, when investigating violations of the federal securities laws, it is important to promptly identify all potentially relevant parties who may have made trading or investment decisions, which could include both the person authorized to give the broker-dealer trading instructions for such account and the account holder.386

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Pursuant to the revised definition of "customer" under adopted Rule 613, for example, if an order is entered to buy or sell securities for the account of an investment company or other pooled investment vehicle (a "fund"), the Rule will capture, in the definition of customer, the fund itself or, if the account at the broker-dealer is held only in the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions, the Rule will capture the investment adviser.387 If the account at the broker-dealer is held in the name of the fund itself, the Rule will capture both the name of the fund (pursuant to Rule 613(j)(3)(i)), as well as the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions (pursuant to Rule 613(j)(3)(ii)). In addition, if an adviser enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would capture both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)). If an adviser instead enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule would capture the adviser (pursuant to Rule 613(j)(3)(i)) but would only capture any client accounts to which the adviser allocates executed trades (pursuant to Rule 613(c)(7)(vi)) if those client accounts were held separately at the same broker-dealer as well.

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Furthermore, in cases where multiple individuals in the same trading firm transact through a single account maintained at a broker-dealer in the name of that trading firm, the Rule will require the NMS plan to require recording and reporting of the Customer-ID of the trading firm associated with that account, and not the Customer-IDs of the individual traders who had placed the orders.388 The Commission understands that in some cases broker-dealers may have knowledge of the individual traders transacting within the same firm-wide account, and may even provide reports to the firm holding the account that summarizes trade activity according to individual trader. Because such information is not captured by the Rule, but may be useful in informing regulators about the potential manipulative activities, the SROs may wish to consider how such information might be incorporated into the consolidated audit trail in the future.

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The Commission is also modifying a related provision of the Rule, Rule 613(c)(7)(i)(A), to reflect that more than one Customer-ID must be provided upon original receipt or origination of an order if the account holder and the person authorized to give the broker-dealer trading instructions for such account are different or if more than one person is an account holder for the account (such as, for example, joint account holders). Specifically, Rule 613(c)(7)(i)(A) provides that "Customer-ID(s)" (i.e., multiple Customer-IDs) must be provided for each customer, if that is applicable. In addition, the Commission notes that every "customer," as defined by Rule 613(j)(3) will be assigned a Customer-ID; thus, two Customer-IDs maybe associated with one order under the Rule.

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iv. Unique Order Identifier

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As proposed, the Rule would have required the NMS plan to require each member of an exchange or FINRA to attach, to each order received or originated by the member, a unique order identifier that would be reported to the central repository and that would remain with that order throughout its life, including routing, modification, execution, or cancellation. Specifically, proposed Rule 613(c)(7)(i)(D) (renumbered as Rule 613(c)(7)(i)(B)) would have provided that the national market system plan shall require each national securities exchange, national securities association, and any member of such exchange or association to collect and electronically provide to a central repository details for each order and each reportable event, including, but not limited to, "a unique identifier that will attach to the order at the time the order is received or originated by the member and remain with the order through the process of routing, modification, cancellation, and execution (in whole or in part)." In the Proposing Release, the Commission stated that the use of such an identifier would allow the SROs and the Commission to efficiently link all events in the life of an order and help create a complete audit trail across all markets and broker-dealers that handle the order.389 Proposed Rules 613(c)(7)(ii)(A), 613(c)(7)(iii)(A), and 613(c)(7)(v)(A) would have required the reporting of a unique order identifier to the central repository for the reportable events of routing and execution. The Commission did not propose to mandate the format of such an identifier or how the identifier would be generated.

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The Commission requested comment on whether a unique order identifier that would remain with the order for its life would be necessary or useful for an effective consolidated audit trail. The Commission also specifically requested comment on, among other things, the feasibility and merits of its proposed approach for attaching a unique order identifier to an order, as well as on how multiple "child" orders that may result if the original "parent" order is subsequently broken up, or an aggregation of multiple original orders into a single order, should be addressed.

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Several commenters expressed opinions on the proposed unique order identifier requirement, with some noting that the Commission's proposal imposed "significant" burdens or challenges on market participants, and others offering alternatives to the Commission's approach to identifying orders.390 For example, some commenters suggested that the Rule permit the approach used for OATS reporting, in which the broker-dealer initiating or receiving an order would generate its own order identifier, but pass on a separate routing identifier to the entity to which it routes the order, which would generate its own order identifier, but retain and report that routing identifier as well, so that information about the order can be linked together as it is passed from venue to venue.391 One of these commenters also believed that the OATS approach would avoid certain complexities that could occur with a unique order identifier, such as when the original order is broken up into multiple "child" orders.392 In a subsequent comment letter, the commenter stated that it could require two new order event types that would allow customer orders handled on a riskless principal or agency basis to be linked to the related representative orders.393 Another of the commenters suggested that "the adopted CAT filing should require that an order be tracked through its lifecycle and [the Commission should] leave the technical details to [a] requirements analysis."394

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Another commenter was concerned that, if the originating firm's or customer's name was used as part of the unique order identifier, this could create "potential privacy information risks as every new destination (both internally across information barriers within a firm and externally across broker-dealers) would see where an order originated."395 Similarly, a third commenter supported the OATS approach of linking a series of separate order identifiers in part because it believed that, if a unique identifier were to pass from firm-to-firm, there was a risk that information about the origin of an order might be inferred.396 Yet another commenter recommended that the Commission standardize how the order identifier should be structured to ensure consistent reporting between firms, instead of leaving this decision to the plan sponsors.397

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The Commission has considered the comments received regarding the requirement that the NMS plan mandate a unique order identifier, and is adopting Rule 613 with significant modifications398 that provide more flexibility for the SROs, as the plan sponsors, to determine whether the NMS plan will require a single unique order identifier or a "series of order identifiers." Specifically, the Rule, as adopted, requires that every order have a "CAT-Order-ID," defined as "a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of the order."399

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The Commission has modified the Rule from the proposal so that the SROs can draw upon their own expertise, as well as those of other market participants, in developing the most accurate and efficient methodology for tracking an order through its life. Thus, the SROs may submit an NMS plan in which they require a single unique order ID to travel with each originating order; the SROs may submit an NMS plan in which, as suggested by a number of commenters, a series of order IDs, each generated by different market participants, is reported to the central repository in a manner that allows for the accurate linking of reportable events; or the SROs may submit an NMS plan based on any other methodology that meets the requirements of the Rule.

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The Commission expects that the details of the methodology proposed by the SROs in the NMS plan will, in part, be based on how the generation and reporting of order identifiers would interact with other technical details involving order tracking in the consolidated audit trail, such as the potential for multiple orders to be aggregated, routed, and disaggregated. However, though the Commission is not prescribing a particular methodology, the Rule does require that SROs take into account a number of considerations, such as accuracy and cost, in designing their methodology.400

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The Commission notes that, with this modification, a wider array of possible solutions is now available to the SROs as they develop the NMS plan to be submitted to the Commission for its consideration, including those that may better accommodate the infrastructure of existing audit trails and thereby potentially, and possibly significantly, reduce implementation burdens. As indicated above, several commenters suggested that the Rule accommodate the linked order identifier approach, currently used by OATS.401 However, the Commission also notes that, though the adopted Rule could accommodate such an approach, there historically have been limitations on the accuracy and reliability of linking orders in OATS.402 It will therefore be very important for the NMS plan to demonstrate how the approach it has selected will ensure that information about all reporting events pertaining to an order will be efficiently and accurately linked together in a manner that allows regulators efficient access to a complete order audit trail.403 As discussed below, the reliability, accuracy, and confidentiality of the data reported to and maintained by the central repository, as well as the method by which the data in the central repository can be accessed by regulators, are considerations for the Commission in evaluating the NMS plan.404

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The Commission emphasizes that, under the adopted Rule, regardless of the specific method chosen by the SROs, all orders reported to the central repository must be made available to regulators in a uniform electronic format and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information for all reportable events for that order.405 The Commission believes the consolidated audit trail will still achieve significant benefits with this modification.

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The Commission recognizes the complexities of order routing in today's markets, including, as noted by a commenter,406 the frequent splitting of larger orders into numerous "child" orders or the bundling of smaller orders into one larger order. The Commission believes, however, that since, in today's complex markets, orders are currently and routinely aggregated and disaggregated, practical solutions to record such orders can be developed by the plan sponsors to ensure they are accurately and efficiently tracked through a variety of aggregation and disaggregation events.

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With regard to the concern expressed by a commenter that the use of an order identifier(s), as required by Rule 613, could provide the ability to deduce the origin of an order, thereby revealing confidential trading strategies or raising privacy concerns,407 the Commission notes that this commenter assumed that a unique order identifier "would very likely require members to include the originating firm's or customer's name as part of the identifier."408 The Commission believes, however, that the SROs will be able to devise a way to assign order identifiers – through random number sequences or otherwise – that would protect the identity of broker-dealers and their customers from disclosure to persons other than authorized regulatory personnel. The Commission also notes that, as discussed in Section III.B.2.e. infra, the adopted Rule requires the NMS plan submitted to the Commission for its consideration to incorporate a variety of policies and procedures to ensure the security and confidentiality of all information reported to the central repository.

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Furthermore, because the Rule requires the SROs to discuss the details of each aspect of the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider how well the methodology the SROs developed to link reportable events for the same order meets the considerations of accuracy and reliability, as well as those of security and confidentiality. The Commission will then be able to use this information in determining whether to approve the NMS plan submitted.

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v. Time Stamp

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The proposed Rule would have required SROs and their members to report the date and time, to the millisecond, that an order was originated or received, routed out, and received upon being routed, modified, cancelled, and executed.409 Specifically, proposed Rules 613(c)(7)(i)(H) (renumbered as 613(c)(7)(i)(E)), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B) (renumbered as 613(c)(7)(iv)(C)), and 613(c)(7)(v)(C) provided that the "time of order receipt or origination (in milliseconds)" would be recorded for every order originated or received, routed, modified, cancelled or executed, by a broker-dealer or SRO.

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Several commenters expressed opinions on the time stamp requirement. One commenter believed a millisecond standard was not precise enough, explaining that many exchanges currently execute orders in less than a millisecond.410 This commenter explained that, to detect the manipulative or fraudulent behavior of high frequency traders, it is necessary that time stamps be accurate to a level more detailed than the speed at which trades are executed; otherwise, it would not be possible to determine the time sequence in which trades occurred. The commenter suggested that reports from execution venues (e.g., exchanges, ATSs, dark pools, and large internalizers) should be required to be accurate to 0.01 milliseconds.411 This commenter also suggested that a more liberal time stamp standard of one second might be more appropriate for low-volume broker-dealers.412 Another commenter, however, expressed concern about the proposed millisecond time stamp requirement, explaining that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second."413 Another commenter believed that, because computers have a certain rate of error when keeping time ("time drift"), it is difficult to sequence orders based on millisecond time stamps.414 As a result, according to this commenter, there is "no real value in requiring data to this level of specificity [based on milliseconds], especially if the goal of time stamping is to sequence the lifecycle of a single order as it moves from origination to execution."415

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The Commission has considered the comments regarding the precision of the proposed time stamp requirement for the consolidated audit trail and is adopting the millisecond time stamp requirement with modifications from the proposal.416 As adopted, the Rule provides that the NMS plan submitted shall require the time stamps as set forth in Rule 613(d)(3).417 Rule 613(d)(3) provides that the NMS plan must require each SRO and its members to "[u]tilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in any national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond." Rule 613(d)(3) also provides that, "[t]o the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, such plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced." Rule 613(d)(3) further provides that "[t]he national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments."

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The Commission notes that SIPs currently support millisecond time stamps418 and other entities in the securities industry currently conduct business in millisecond increments or finer.419 The Commission believes that, given the speed with which the industry currently handles orders and executes trades, it is important that the consolidated audit trail utilize a time stamp that will enable regulators to better determine the order in which reportable events occur. The entry time of orders can be critical to enforcement cases. For example, the timing between order origination and order entry is important in investigating possible market abuse violations, such as trading ahead of a customer order. In general, determining whether a series of orders rapidly entered by a particular market participant is manipulative or otherwise violates SRO rules or federal securities laws, otherwise being able to reconstruct market activity, or performing other detailed analyses, requires the audit trail to sequence each order accurately. The Commission believes that, for many types of common market activities that operate at the level of milliseconds or less, time stamps in increments greater than a millisecond would not allow this sequencing with any reasonable degree of reliability.

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In response to the comment that a millisecond standard is not sufficiently precise, as many exchanges currently execute orders in less than a millisecond,420 adopted Rule 613(d)(3) provides that the NMS plan must require that, to the extent that the order handling and execution systems of any SRO or broker-dealer utilize time stamps in increments finer than the minimum required by the NMS plan time stamps, such SRO or member must use time stamps in such finer increments when reporting data to the central repository, so that reportable events reported to the central repository by any SRO or member can be accurately sequenced. The Commission believes this approach will improve the accuracy of records with respect to the sequencing of events that occur very rapidly, especially with respect to those market participants that have elected to use time stamps in increments finer than a millisecond.

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The Commission recognizes, as a commenter noted,421 that computers have a certain rate of deviation when keeping time. The requirement that clocks be synchronized within a level of granularity to be specified in the NMS plan422 is designed to ensure that time drift does not exceed a defined level of deviation. However, the Commission believes that time stamps reported with a millisecond or finer granularity would still provide significant benefits even, contrary to one commenter's assertion,423 if the time drift between systems is larger than a millisecond. This is because such time stamps would still allow an accurate sequencing of reportable events as may commonly occur within in a single system, tied to a single clock, at levels of a millisecond or finer (e.g., high-frequency trading algorithms). Any drift of such a system's clock relative to the clocks of other systems may of course hinder the time-sequencing of cross-system events, but it would not preclude the ability of regulators from performing a detailed, accurate time-sequenced analysis of all the orders, cancellations, modifications, and executions performed by the specific system of interest.424 In this regard, the Rule is analogous to the current requirements for OATS reporting: FINRA requires clocks to be synchronized to the second, and requires time stamps to be reported to FINRA in seconds, unless those time stamps are captured by the FINRA member in milliseconds, in which case they must reported to FINRA in milliseconds (notwithstanding the clock sync remaining at a second).425

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The Commission acknowledges that changes (with their associated costs) might be required to internal broker-dealer systems to comply with a millisecond time stamp requirement. However, given the benefits outlined above, and the apparent widespread use of millisecond time stamps in the industry today,426 the Commission believes the cost of requiring the SROs to develop a plan that provides for millisecond time stamps, and to discuss the costs and benefits of the specific solution chosen, is justified.

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The Commission also acknowledges that broker-dealers who presently report time stamps to OATS in millisecond increments, but whose systems direct and capture their order activity in finer time increments, could incur costs associated with these time stamps being reported to the central repository with the same granularity at which they are recorded by the broker-dealers.427 The Commission recognizes that there may be alternatives to reporting events in finer than millisecond increments that enable the central repository to use a different method for accurately time-sequencing sub-millisecond events originating from within a system or systems on a single clock. Therefore, in developing the NMS plan to be submitted to the Commission for its consideration, if the SROs identify one or more such alternatives, the Commission believes that they should address such alternatives in the NMS plan,428 how such alternatives (i.e., an alternative to reporting in finer than millisecond increments) would ensure that reportable events may be accurately time-sequenced at the sub-millisecond level, and the costs associated with such alternatives both on their own terms and relative to a requirement to report events in the same sub-millisecond time stamp as used by a broker-dealer for directing and capturing orders.429

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The Commission also notes that, because millisecond time stamps may become inadequate to investigate trading as technology evolves and trading speeds increase, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require the plan sponsors to annually evaluate whether industry standards have evolved such that a finer increment time stamp is appropriate. As this approach is tied to the then-current industry standard used to assess whether to shorten the future time stamp increment, the Commission also believes that this approach helps assure that the time stamps in the consolidated audit trail will be in line with technological developments. Should the industry standard move to a finer time standard, the plan sponsors could modify the minimum standard required by the NMS plan by submitting an amendment to the NMS plan under Rule 608 of Regulation NMS. Such an amendment would need to be considered and would be subject to approval by the Commission, as well as subject to public notice and comment.430

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vi. Additional Routing Data Elements

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Proposed Rules 613(c)(7)(ii) and (iii) would have required that certain additional information be collected and reported specifically to allow regulators to track the life of an order through the routing process. The Commission requested comment as to whether information regarding the routing of orders would be necessary or useful for an effective consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to routing.

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One commenter noted that the proposed Rule would capture the routing of an order internally within a broker-dealer, but not the routing of an order internally within an exchange from one execution system to another.431 This commenter also noted that, as proposed, the Rule would not require an SRO or member to report information indicating that an order was "flashed" or otherwise displayed in a "step-up" mechanism.432 The commenter believed that this information would be important for the consolidated audit trail to capture.433

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The Commission believes that it is important to capture the routing of an order internally within a broker-dealer to, for example, evaluate best execution practices.434 Capturing the time at which a broker-dealer received a customer's order and the time that such order was executed can help determine if the broker-dealer delayed acting on its customer's order. The time at which an order was routed can affect the evaluation of whether the broker-dealer fulfilled its best execution obligations, and, thus, the Commission believes that this internal broker-dealer routing information should be captured by Rule 613. The Commission, however, does not believe that data regarding order processing (i.e., management of an order) within exchange systems is as useful as data regarding internal routing within a broker-dealer435 because, for example, unlike broker-dealers, exchanges do not have best execution obligations. Further, any issues with an SRO's internal processing would occur at a single venue – the SRO – and, thus, there could be direct follow-up with the SRO. Additionally, the Commission notes that the consolidated audit trail will not collect information indicating whether orders were flashed or displayed in a "step-up" mechanism as it concerns an exchange's internal processing and dissemination to its members of an order in the instance when the exchange cannot execute the order because the exchange does not have any available trading interest at the NBBO (depending on the side of the order).436 Orders that are flashed or displayed through a "step-up" mechanism are not executable because they are displayed only to members of an exchange as an indication of a broker-dealer's interest. The Commission believes it is appropriate not to require the reporting of these flashed or "stepped-up" orders to the central repository because, as noted above, the Commission believes that the tracing of processes within an exchange is not as material to regulators as the routing of orders between markets. Further, as stated, SROs do not have the same legal obligations with regard to handling customer orders as broker-dealers; therefore, the Commission does not believe it is necessary, at this time, to require the consolidated audit trail to track an SRO's internal processing of orders.

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The Commission has considered the comments related to the data that is required to be recorded and reported when an order is routed and is adopting Rules 613(c)(7)(ii) and (iii) substantially as proposed.437 The Commission notes that the Rule requires that the NMS plan require the broker-dealer routing an order and the broker-dealer receiving a routed order – both actions that are defined as "reportable events" under Rule 613 – record and report the CAT-Reporter-ID of the broker-dealer routing the order and the CAT-Reporter-ID of the broker-dealer receiving the routed order. The Commission believes the requirement to report this information on both the routing and receiving end of a route is not duplicative but, rather, is useful. Specifically, information regarding when a broker-dealer received a routed order could prove useful in an investigation of allegations of best execution violations to see if, for example, there were delays in executing an order that could have been executed earlier. In addition, if a market participant is required to report when it receives an order, regulators could solely rely on information gathered directly from that market participant when examining or investigating the market participant. For example, if a regulator needs to investigate a delay between the time a market participant received an order and the time the market participant acted on the order, under Rule 613, as adopted, the regulator could use information recorded and reported by the market participant itself, rather than rely on information about the receipt and action taken on the order that would be provided by a third party. Information from a third party may be less accurate in general and may not accurately reflect events to the extent there are latencies in order transmission. In addition, the Commission relies on data such as that which would be recorded under Rule 613(c)(7)(ii) and (iii) to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. For these reasons, the Commission believes that it is important to have both the routing broker-dealer and the receiving broker-dealer report their CAT-Reporter-IDs to the central repository, and that such information could aid regulatory authorities when analyzing the trades of market participants.438

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To reflect terms that have been modified elsewhere in the Rule as adopted, the terms "unique order identifier" and "unique identifier" in Rule 613(c)(7)(ii) and (iii) have been replaced with the terms "CAT-Order-ID" and "CAT-Reporter-ID." In addition, Rule 613(c)(7)(ii) and (iii) now reflect the new time stamp requirement contained in Rule 613(d)(3). Specifically, Rules 613(c)(7)(ii)(C) and 613(c)(7)(iii)(C) provide that the time at which an order is routed or received must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed. The Commission believes these conforming changes are appropriate to reflect the revised terms in the adopted Rule.

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vii. Additional Modification, Cancellation, or Execution Data Elements

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In addition to the data elements discussed above, proposed Rules 613(c)(7)(iv) and (v) would have required that certain information be collected and provided specifically to allow regulators to track the life of an order through modification, cancellation, or execution. The Commission requested comment as to whether information required under the Rule as proposed would be sufficient to create a complete and accurate consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to modifications, cancellations, or executions.

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In response, one commenter noted that broker-dealer order management systems may differ in their treatment of order modifications and cancellations, as some, for example, may capture or report only modified data elements, and not necessarily all of the elements of a modified order.439 The commenter recommended that the consolidated audit trail accommodate such differences, and further suggested requiring only the submission of the order identifier for a cancelled order, not the order's other data elements.440 Another commenter believed that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."441

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After consideration of the comments regarding the specific audit trail data required for orders that are modified, cancelled, or executed, the Commission is adopting Rules 613(c)(7)(iv) and (v) substantially as proposed, with a modification to require that the NMS plan include a requirement that the CAT-Order-ID for such orders also be recorded and reported to the central repository. This modification is designed to ensure that an order identifier be reported for orders that have been modified or cancelled. The Commission believes that the order identifier is a critical piece of information that will efficiently link an order across markets. Adopted Rules 613(c)(7)(iv) and (v) will also require that the NMS plan submitted to the Commission for its consideration require the recording and reporting of the CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction to reflect the new terminology of the adopted Rule. In addition, Rules 613(c)(7)(iv) and (v) reflect the new time stamp requirement contained in Rule 613(d)(3), as adopted. Specifically, Rules 613(c)(7)(iv)(C) and 613(c)(7)(v)(C) provide that the time at which an order is modified, cancelled, or executed must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed.

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The Commission believes it is necessary to require the NMS plan to require the information under Rule 613(c)(7)(iv) and (v) for each order and reportable event because it will assist the Commission and SROs in identifying all changes made to an order (including an execution) and those market participants responsible for the changes (or execution). The Commission believes this information, in combination with the proposed information pertaining to order receipt or origination, will provide regulators with a comprehensive view of all material stages and participants in the life of an order. Among other things, this order information should help regulators investigate suspicious trading activity in a more efficient manner than is currently possible. Regulators will have access to information identifying the customer behind the order and will also see how a customer's order is handled across markets. This data also will improve regulators' understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. In addition, the Commission believes that most of the data proposed to be recorded and reported by the Rule for order modification, cancellation, and execution is data that most broker-dealers already generate in the course of handling an order pursuant to the existing audit trail requirements of several SROs.442

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The Commission notes that regulatory staff at an SRO or the Commission could use execution information required under Rule 613(c)(7)(v), which will be consolidated with the other audit trail information required under Rule 613 to, for example, detect patterns of reported and unreported transactions effected by a broker-dealer in a particular security by comparing the data reported to the central repository regarding an execution with information reported pursuant to a transaction reporting plan or the OPRA Plan. Depending on the results of that analysis, regulators may undertake further inquiry into the nature of trading by that broker-dealer to determine whether the public received accurate and timely information regarding executions, and whether the broker-dealer complied with the trade reporting obligations contained in SRO rules. Patterns of reported and unreported transactions by a particular broker-dealer could also be indicia of market abuse, including the failure to obtain the best execution for customer orders, or possible market manipulation. Thus, the ability to compare the consolidated order execution data, including customer information, with the trades reported to the consolidated tape would be an important component of an effective market surveillance program that is not possible today because regulators currently do not have access to comprehensive cross-market audit trail data, and the process of identifying customers is very labor intensive, time-consuming, and error prone.

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In response to the commenter that recommended that the consolidated audit trail accommodate differences in the treatment of modifications by broker-dealer order management systems (i.e., those that report only the modified data elements, not the entire order), and suggested that only an order identifier be reported for a cancellation, not the cancelled order's other data elements,443 the Commission notes that Rule 613 does not require all of the data elements of a modified order to be reported to the central repository. The Rule only requires the NMS plan to require the reporting of the CAT-Order-ID; the date and time the modification is received or originated; the CAT-Reporter ID of the broker-dealer or the Customer-ID of the person giving the modification instruction; if modified, the price and remaining size of the order; and any other changes to the material terms of the order. The adopted Rule also requires the NMS plan to require the date and time a cancellation is received or originated and the CAT-Reporter-ID of the broker-dealer, or Customer-ID of the person, giving the cancellation instruction to be reported to the central repository. The Commission believes this will ensure that regulators can determine the market participant or person responsible for the cancellation of an order,444 and the date and time of the cancellation.

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In response to the commenter that suggested that the Rule should require that the execution data be linked with the public trade report using a common identifier,445 the Commission notes that Rule 613(c)(7)(v)(G) requires the NMS plan submitted to the Commission for its consideration to require that, for an order that has been executed, the SRO or member that executes the order must report to the central repository whether the execution was reported pursuant to an effective transaction reporting plan or OPRA, as applicable. The Commission has considered the commenter's further suggestion that a common identifier link the audit trail execution reports for the buy and sell orders to the public trade report and is not mandating such a requirement under Rule 613; the Commission believes that Rule 613 and its requirements provide a sufficient initial framework for collecting audit trail data that will enhance the ability of regulators to surveil the market for NMS securities.446 Accordingly, the Commission is adopting Rule 613(c)(7)(v)(G), as proposed, which requires that the plan sponsors include in the NMS plan submitted to the Commission for its consideration a requirement that the broker-dealer report to the central repository whether a trade was reported pursuant to an effective transaction reporting plan or OPRA.

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e. Rule 613(c)(3): Information to Be Recorded Contemporaneously with the Reportable Event and Reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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i. Proposed Rule 613(c)(3)

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As proposed, Rule 613(c)(3) would have required the NMS plan to require each SRO and member to collect and provide to the central repository, on a "real time" basis, key data for each order and each reportable event, including the origination or receipt of an order, as well as the routing, cancellation, modification, or execution of the order.447 Specifically, the proposed Rule would have provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraphs (c)(7)(i) through (v) of this section on a real time basis."448 In the Proposing Release, the Commission noted that "real time" meant "immediately and with no built in delay from when the reportable event occurs."449

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ii. Comments on Proposed Rule 613(c)(3)

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The Commission received a variety of comments about the achievability of the real-time requirement; the accuracy of audit trail data that would be collected and provided in real time; the necessity, merits and usefulness of real-time audit trail data; the costs of real-time reporting; and the proposed Rule's requirement that all audit trail data be collected and reported in real time. These comments are discussed below.

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Several commenters believed that reporting data on a real-time basis was achievable.450 Of these comments, one commenter stated that its current systems could be used to support real-time reporting, and that real-time reporting may be easier to achieve than intraday or end-of-day batch processing.451 Similarly, another commenter, endorsing the use of FIX Protocol, stated that FIX Protocol is already widely used throughout the financial industry, and that "[a]ll FIX messages are generated in real time for trading."452

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A significant number of commenters, however, expressed concern about the proposed requirement that the audit trail data be collected and provided to the central repository in real time.453 Some of these commenters focused on the effect a real-time reporting requirement would have on their systems, and the systems changes that might be needed to achieve real-time reporting. Specifically, commenters argued that a real-time collection and provision requirement would require many industry participants to build entirely new systems or to undertake significant technological upgrades to comply with a real-time reporting requirement.454 Other commenters stated that real-time reporting would strain their order handling systems and result in latencies and delays in the processing of customer orders.455 Additionally, one commenter questioned the ability of a real-time consolidated audit trail system to handle periods of immense volume, like the volume on May 6, 2010.456

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Other commenters who expressed concern about the real-time reporting requirement questioned the accuracy of data that would be reported in real time.457 One commenter, for example, noted that there would not be an opportunity for data validation if consolidated audit trail data were required to be reported in real time.458 Another commenter stated that the real-time processing required by real-time reporting would create data integrity issues and, thus, lead to poorer data quality as compared to an approach with a more liberal timeframe, such as next day, or "T+1," reporting.459 FINRA similarly commented that the data integrity issues that arise when audit trail data is provided on a T+1 basis would be exacerbated by a real-time system.460 FINRA stated that it performs over 40 billion data validations of order events submitted through OATS every day, and requires its members to repair rejected OATS data.461

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A number of commenters discussed whether a real-time reporting requirement is necessary. One commenter stressed that the real-time availability of data would facilitate the identification of cross-market events and their origins.462 This commenter explained that a platform developed using FTEN and SMARTS technology would include real-time risk management and surveillance capabilities.463 However, most commenters did not believe that real-time data typically would be useful to the Commission and SROs.464 One commenter explained that using audit trail data before having an opportunity to validate it "may result in a severely distorted picture of trading and interfere with effective oversight."465 Another commenter stated that "real-time order information is inherently incomplete and could even be inaccurate and therefore misleading to the users of the data."466 Some commenters were of the view that the Commission had significantly overvalued the regulatory benefit of real-time data.467 One of these commenters noted that, "[b]ased on its experience in conducting surveillance, [it] does not believe that it is essential that all of the information proposed to be captured in the CAT be received real time or near-real-time."468 A commenter suggested that, to the extent any information had to be submitted in real time, it should be limited to data related to certain key events, such as order receipt and origination, order transmittal, execution, modification, and cancellation.469 Other commenters generally questioned the value of real-time audit trail data, arguing that regulators would still need to rely on traditional investigative techniques, such as taking testimony, to establish securities law violations.470 Another commenter believed that "[m]any potential uses for the data, including enforcement inquiries probing market behavior, may require either multiple days' worth of data, or data from other markets that is not available on a real-time basis," limiting the ability to use such real-time data provided by the consolidated audit trail.471

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Some commenters questioned whether the substantial costs that would be associated with providing the data on a real-time basis would outweigh the benefits.472 One commenter believed that "the SEC has significantly overestimated the incremental utility of real-time data over data received on a T+1 basis" and that "the costs associated with the breadth of real-time reporting proposed by the Commission would be significant and far outweigh the minimal regulatory benefit gained by such a reporting system."473

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Some commenters who questioned the value of the real-time reporting requirement also suggested that the Commission consider a different timeframe for the reporting of audit trail information. Several commenters, for example, suggested a later timeframe for reporting audit trail data to the central repository. One commenter, an exchange, stated that "[o]ur strong preference would be for submission of information to the central repository through a batch process after the close of the trading day involved."474 Another commenter suggested a compromise whereby broker-dealers would be subject to next day (or later) reporting requirements, while the SROs could leverage their existing real-time monitoring tools and provide real-time trading information for use in the consolidated audit trail.475 Several commenters recommended that the Commission permit end-of-day reporting.476 One commenter noted that end-of-day reporting would alleviate some of the practical challenges firms would face with a requirement to identify beneficial owners on a real-time basis.477 Another commenter suggested that a reporting deadline of 10-15 minutes would be substantially more workable than a "real-time" reporting requirement.478 Finally, one commenter suggested that broker-dealers and SROs should retain audit trail information, and submit it only upon regulatory request, so that the central repository would only collect data needed for investigations or surveillance purposes.479

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One commenter, who did not specifically advocate either real time or reporting on an end-of-day basis, supported a requirement that all trades be reported in a standardized format that will be accessible to the SEC at the end of each trading day.480

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Some commenters suggested alternative means of collecting audit trail information, assuming such audit trail data would not be on a real-time basis and would not be through the reporting regime set forth by Rule 613. For example, one commenter suggested the Commission consider "a consolidation" of [OATS] and [COATS], audit trails that are produced on a T+1 basis; and a review of the prospect of extracting specific real-time data from surveillance reports currently used by SROs to perform post trade analysis, such as the Large Option Position Report . . . and large trader reports, to obtain real-time risk information that may impact a particular NMS issue or the market in general."481 This commenter believed that a requirement of real-time reporting should be considered only after other available sources of data have been carefully reviewed, and only to the extent that such a requirement is both necessary and economically feasible.482 Another commenter, however, urged the Commission not to "lower its expectations for the CAT and accept a more limited audit trail based exclusively on existing systems."483 One commenter suggested that the Commission consider a "hybrid" approach that would enhance elements of the quotation and transaction information reported in real time, while collecting and reporting more specific order information on a T+1 basis or later.484

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Two commenters commented on the meaning of "real time."485 One commenter noted that "[our members] request clarification on the definition of real-time data submission as it relates to each data element required by CAT. The granularity/definition of real-time for each element will have a major impact on SROs, their members and CAT system development from both a data quality and database design perspective . . . ."486 The other commenter noted that the "[t]he term 'real time' is used throughout the document, but never defined. (There are several distinct meanings in the computer industry.)"487

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The Commission also received comments specifically relating to the cost of reporting the audit trail information in real time under the Rule as proposed. One commenter believed it would cost $1.25 million in initial costs to comply with the Rule as proposed.488 The commenter divided its $1.25 million estimate into development costs of $750,000 and hardware costs of $500,000 (including hardware, circuits, etc.).489 In addition, this commenter believed the development timeframe would be 9-12 months "once final architecture is drafted," and would require approximately 6,000 hours of development work.490 Notably, this commenter said that "[t]he assumptions that drove this analysis were that any real time reporting of order events would leverage the capabilities contained within the [OATS] reporting today and that the revised real time system would retire the legacy systems of Bluesheets, OATS, OTS and TRACE."491 With respect to ongoing costs to provide information, this commenter also stated that it believed the Commission had underestimated the ongoing costs of the proposal.492 However, another commenter, who opined that the goals of the consolidated audit trail could be achieved for significantly lower costs than the Commission originally estimated, stated that, if the Rule permitted market participants to modify existing systems for collecting and reporting audit trail information, the consolidated audit trail objectives could "be achieved and perhaps even surpassed."493

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iii. Adopted Rule 613(c)(3)

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As described in detail below, the Commission is adopting Rule 613 with two significant modifications to the proposed requirement that the NMS plan submitted to the Commission for its consideration require the collection and provision of key audit trail data to the central repository on a "real time" basis. First, the Rule, as adopted, no longer requires the real-time reporting of consolidated audit trail data but, instead, provides that order event audit trail data must be reported "by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."494 Second, the adopted Rule clarifies that this data is to be recorded "contemporaneously with the reportable event," instead of in "real time."495

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(A) Reporting of Audit Trail Data by 8: 00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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The Commission has considered the commenters' concerns regarding a "real-time" reporting requirement for audit trail data, including its achievability and cost effectiveness; the accuracy of audit trail data recorded and reported in real time; and the necessity, merits, and usefulness of real-time audit trail data.496

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On the one hand, the Commission recognizes that there may be very considerable costs imposed on the industry if audit trail data was required to be reported to the central repository in real time – indeed, the Commission, in the Proposing Release, estimated the costs of creating a real-time consolidated audit trail by assuming that such a requirement would necessitate the wholesale creation of new industry-wide systems. On the other hand, the Commission also received a variety of comments suggesting that real-time reporting could be achieved in a cost-effective manner.497 And yet other commenters suggested a hybrid approach. For example, SIFMA commented that, although it believed real-time reporting as originally proposed by the Commission would be too costly, intra-day reporting of a subset of audit data delayed 10-15 minutes would be possible. SIFMA further described how such reporting might be accomplished through the use of "drop-copy" data.498

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With respect to concerns about the accuracy of consolidated audit trail data if real-time reporting were required, the Commission recognizes that the real-time reporting of data could result in accuracy issues to the extent SROs and broker-dealers would need to re-enter the required audit trail data into a separately prepared regulatory report containing the required audit trail data for submission to the central repository, as is the case today with OATS reports.499 The Commission notes, however, that the use of certain existing technologies, such as "drop copies" described by SIFMA, could provide reliable and accurate audit trail data to the central repository because such "drop copies" would reflect the information captured by an SRO or member's order management and execution systems to enter, route, modify, and execute or cancel orders.

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The Commission believes that, whether or not real-time reporting of data is required, the creation, implementation, and maintenance of a consolidated audit trail will likely be a complex and significant undertaking for the industry. It therefore recognizes the practical advantages of a more incremental, or more gradual, approach to such an undertaking. After considering the many comments received on the use of real-time data by regulators, the Commission has recognized that, although there might be some additional benefits to receiving data and monitoring the markets intra-day (such as for certain enforcement investigations and the facilitation of real-time cross-market surveillance), the majority of the regulatory benefits gained from the creation of an industry-wide consolidated audit trail, as described in the Proposing Release, do not require real-time reporting. Indeed, the extent of the potential uses of a consolidated audit trail discussed in Section II.A.2., supra, which do not rely on a real-time reporting requirement, illustrate the value of a consolidated audit trail even if data is not reported in real-time. Instead, the Rule, as adopted, provides that the NMS plan must require that order event data be reported "by 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."500

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The Commission notes that, while the Rule provides that the NMS plan must impose a reporting deadline of 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member, the Rule also provides that the NMS plan may accommodate SROs and members that voluntarily satisfy their reporting obligations earlier.501

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The Commission acknowledges that, by replacing the requirement that the SROs develop a plan for real-time reporting with a requirement for reporting by 8: 00 a.m. the next trading day, the Commission has precluded the possibility that, as some commenters suggested, a mandatory real-time reporting NMS plan might be developed by the SROs for consideration by the Commission and the public.502 However, given the overall scope and complexity of creating a consolidated audit trail, the Commission has determined that it would be more beneficial to have the SROs and their members focus on those key aspects of a consolidated audit trail that the Commission believes would be the most useful for improving regulatory oversight and monitoring (including, but not limited to, the use of unique customer identifiers, the ability to accurately link an order across its lifecycle, the inclusion of market making quotes, and the addition of options data), rather than focus on how to develop an NMS plan for real-time reporting that may not yield benefits that are equally as useful.503 The Commission also believes that, as a consequence of this modification, the Rule, as adopted with the 8: 00 a.m. reporting deadline, will more readily accommodate a consolidated audit trail that could build upon existing audit trail infrastructures. Meeting the requirement of the Rule may no longer necessitate the creation of completely new infrastructures. In particular, the Commission notes that the OATS technical specifications require OATS data to be reported by 8: 00 a.m. the following calendar day.504 Thus, the Rule, as adopted, would permit the SROs to submit an NMS plan to the Commission for its consideration with reporting timeframes comparable to OATS' requirement, with which all FINRA members are presently capable of complying.505 As a result, broker-dealers might need to make fewer systems changes to comply with the Rule than they would have had to make if real-time reporting were required, though, as discussed in Section II.C.4., supra, OATS in its present form would still need to be modified to meet certain of the other requirements of this Rule.506 Nevertheless, as suggested by many commenters, fewer systems changes to comply with the Rule should lead to lower costs incurred by broker-dealers.507

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An additional consequence of the Commission's decision not to require real-time reporting is that, since meeting the requirements of the Rule may no longer necessitate the wholesale creation of new systems, the Commission's proposed cost estimates, which were based on this assumption, may no longer be applicable. As discussed in Section II.C.2., supra, the Commission believes that given the many different ways in which the SROs may develop an NMS plan that meets an 8: 00 a.m. reporting requirement, the costs of such reporting will be highly dependent on the details of the specific plan proposed. The Rule, as adopted, therefore directs the SROs to provide these details, along with associated costs, in the NMS plan submitted to the Commission for the Commission and the public to consider. The Commission will be able to consider this information when determining whether to approve the NMS plan submitted.

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(B) Recording of Audit Trail Data Contemporaneously with the Reportable Event

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As noted above, the Rule as proposed would have required SROs and their members to "collect" audit trail data "on a real time basis." In response to commenters who commented on the meaning of "real time," the Commission is adopting this provision with modifications from the proposed Rule. Specifically, Rule 613(c)(3), as adopted, requires that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event."

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The Commission believes that the term "contemporaneously" better reflects its intent, as noted in the Proposing Release, that information should be collected immediately and with no built-in delay from when the reportable event occurs. While, in response to commenters, the Commission is no longer requiring the real-time reporting of information, the Commission believes it is important for SROs and broker-dealers to "record" the events contemporaneously. The Commission expects that compliance with this requirement will not be difficult for SROs and broker-dealers with automated systems, which will contain much, if not all, of the data to be reported to the central repository as a result of processing and saving a record of any actions taken by the SRO or broker-dealer. On the other hand, broker-dealers that do not use automated systems will have to ensure that reportable events are manually recorded as they are occurring. In addition, the adopted Rule uses the term "record" in Rule 613(c)(3), instead of the proposed term "collect," because the Commission believes that term more accurately reflects its intent that a contemporaneous record be made when an order event occurs.

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f. More Flexible Format for Reporting Consolidated Audit Trail Data to the Central Repository

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In the Proposing Release, the Commission expressed its preliminary view that data would need to be collected and provided by SROs and their members to the central repository in a uniform electronic format to assure regulators that they will have ready access to comparable cross-market data.508 Specifically, Rule 613(c)(2), as proposed, provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format."

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However, the Commission received comments suggesting that audit trail data does not necessarily need to be provided by SROs and their members to the central repository in a uniform electronic format, and that such data instead could be converted automatically into a uniform format by the central repository or a third party using existing technology, which could result in lower cost for the securities industry than originally estimated.509 Specifically, two commenters indicated that technology exists today to convert or "normalize" data that may be produced from disparate systems into a uniform format and that, as a result, implementation of the consolidated audit trail could be simpler and less costly than originally contemplated by the Commission.510 One of these commenters stated that a number of risk management services and surveillance systems currently receive automatically-generated copies, or "drop copies," of order and execution messages, in real time, from a variety of broker-dealers and exchanges, and convert that information into a common standard format.511 Two other commenters suggested that firms that currently use FIX should be allowed to continue utilizing FIX,512 stating that FIX's prevalence in the financial industry would make it cheaper and easier to use FIX as the protocol of the consolidated audit trail.513 Another commenter stated it could collect information directly from exchanges and other sources of information to minimize reporting obligations, and could leverage its own technology to get information directly from exchanges.514

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In response to these comments, the Commission has modified this aspect of the proposed Rule. Specifically, adopted Rule 613(c)(2) allows the NMS plan to provide that SROs and their members can report data either "in a uniform electronic format" or "in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage."515 In light of the comments that data from multiple sources could be converted into a uniform format,516 this modification provides SROs with the flexibility, in devising the NMS plan, to better accommodate a range of proposals, including those based on leveraging technology in a cost-effective manner by permitting data to be converted to a uniform electronic format at the broker-dealer level or at the central repository. The Commission does not believe this change will reduce the accuracy or accessibility of the audit trail data provided to regulators (since the Rule still requires data to ultimately be provided to regulators in a uniform electronic format).

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Further, by providing the SROs the ability to use a number of approaches to normalization, broker-dealers and SROs may not need to make substantial changes to their order management and execution systems to comply with Rule 613; instead, the central repository or the broker-dealers could convert such data into a uniform electronic format, and the Rule now provides the plan sponsors with the flexibility to use this approach in the NMS plan submitted to the Commission for its consideration. The Commission believes that, to the extent it avoids requiring broker-dealers and SROs to make substantial changes to their order management and execution systems to comply with Rule 613 regarding a uniform electronic format, this type of approach could be a more efficient and cost-effective method for collecting the specified audit trail data required by the Rule.517 The Commission expects that the NMS plan submitted for its consideration will specify how any normalization approach that might be included in the plan will lead to accurate and reliable data.518

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g. Timeframe for Reporting Other Data Elements to the Central Repository

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i. Proposed Rule 613(c)(4)

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While most order and execution information would have been required to be reported to the central repository on a real-time basis under the proposed Rule, the Commission also recognized that not all information required to be reported to the consolidated audit trail would be available to the SROs and their members in real time.519 In general, the audit trail data required under this timeframe reflected information not typically available until later in the order handling and execution process. This information that would have been provided on an extended timeframe included: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique order identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) the cancelled trade indicator (if applicable) (collectively, "supplemental audit trail data").520 Proposed Rule 613(c)(4) would have permitted the supplemental audit trail data to be reported to the central repository promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information.

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The Commission solicited comments on proposed Rule 613(c)(4) and its requirement that certain audit trail information not available in real time be reported promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information. One commenter believed that the timeframe for reporting the specific consolidated audit trail data listed above should be lengthened to T+1 or later.521 This commenter was concerned that requiring broker-dealers to report certain data elements by midnight could disrupt the trading of certain products.

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ii. Adopted Rule 613(c)(4)

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After considering the commenter's views on proposed Rule 613(c)(4), the Commission is adopting the Rule with three modifications from the proposed Rule. First, to parallel the 8: 00 a.m. deadline by which order event data must be reported to the central repository under adopted Rule 613(c)(3), adopted Rule 613(c)(4) requires that the NMS plan provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the member receives the audit trail data, and provides that the plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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Second, the adopted Rule no longer requires the reporting of (1) special settlement terms, (2) the amount of commission, if any, paid by the customer, and the unique identifier of the broker-dealer to whom the commission is paid, and (3) the short sale borrow information and identifier. Third, adopted Rule 613(c)(4) requires that the NMS plan provide for the reporting of certain customer identification and customer account information by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such data, instead of in "real time," as proposed.522 These modifications are discussed in more detail below.

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(A) Reporting Timeframe

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In response to the comments regarding the timing for reporting of consolidated audit trail data elements,523 the Commission is adopting Rule 613(c)(4) with modifications to the timeframe for reporting supplemental audit trail data. Specifically, the Rule no longer requires that supplemental audit trail data be reported "promptly" after the broker-dealer receives the information but no later than midnight of the day that the reportable event occurred; rather, adopted Rule 613(c)(4) requires the NMS plan to provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the broker-dealer receives such information. Although the NMS plan may permit broker-dealers to report such information prior to that time, it may not require such earlier reporting. The Commission believes it is appropriate that there be an extended timeframe for reporting this data because this information (e.g., allocation to subaccounts) might not be available until later in the order handling and execution process and, on balance, the Commission does not believe it is necessary that it be reported to the central repository "promptly". Instead, the modification to Rule 613(c)(4), as proposed, now requires that the NMS plan provide that the supplemental audit trail data be reported by 8: 00 a.m. Eastern Time following the day the member receives the information, which parallels the adopted Rule 613(c)(3) timeframe for reporting event data. The Commission believes this more flexible standard should reduce implementation burdens and simplify the requirements of adopted Rule 613, without materially reducing the utility of the consolidated audit trail.

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The Commission notes that it has made a clarifying change to Rule 613(c)(4), as proposed, to specify that the obligation to report the supplemental audit trail data to the central repository only falls on a broker-dealer, and not on a national securities exchange or national securities association.524 The Commission believes that this change is appropriate because only broker-dealers receive the types of audit trail data described in Rule 613(c)(vi) through (viii).525

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(B) Elimination of Certain Data Elements

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As previously noted, proposed Rule 613(c)(4) would have required that the following information be reported to the central repository: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) cancelled trade indicator (if applicable).526

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After considering general comments suggesting that the Commission reduce the proposed reporting obligations under Rule 613, the Commission is not requiring the following data elements to be reported to the central repository: (1) special settlement terms; (2) the amount of commission, if any, paid by the customer; (3) the unique identifier of the broker-dealer to whom the commission is paid; and (4) the short sale borrow information and identifier.527 While this data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that these data elements should not be required by Rule 613 because the Commission does not typically find that these particular audit trail data elements provide enough information relevant to an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that they be required as a standard part of the audit trail created by Rule 613. If the Commission or the SROs find that such information would be useful to their regulatory responsibilities, they may request the information directly from the broker-dealer with the obligation to record this information, although requests related to short sale borrow information may pose unique challenges. In effect, the Commission believes that the benefit of having these specific audit trail data elements in the consolidated audit trail at this time is unlikely to justify the recording and reporting burden on broker-dealers of providing these elements, particularly in light of the other information required to be reported under Rule 613 and the regulators' ability to obtain this information through a follow-up request. The Commission notes that, if the SROs believe that having such data elements as part of the consolidated audit trail could be useful to their regulatory responsibilities, the SROs could determine to require SROs and their members to record and report such data as part of the NMS plan.

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With respect to the account number for any subaccounts to which the execution is allocated (in whole or in part) – an audit trail data element that will be required by Rule 613(c)(4), as adopted – the Commission notes that obtaining allocation information is important because part of the goal of Rule 613 is to obtain audit trail information for the life of an order, which would include how an order was ultimately allocated (i.e., to which specific customer and account). The Commission notes, however, that the Rule requires the NMS plan to require a broker-dealer to report only the account number of any subaccounts to which an execution is allocated that is contained in its own books and records for accounts and subaccounts it holds; there is no obligation for the broker-dealer to obtain any additional information about accounts or subaccounts from other broker-dealers or non-broker-dealers who submitted the original order. The Commission further notes that broker-dealers will remain subject to existing regulatory requirements, including recordkeeping and suitability requirements (e.g., "know your customer" rules). Including the account number of any subaccounts to which an execution is allocated in the consolidated audit trail will allow regulators to understand how an allocation of the securities was made among customers of a broker-dealer to, for example, determine if the broker-dealer was favoring a particular customer, to better understand the economic interests of the customer, or as it relates to possible enforcement actions. Similarly, having information regarding the identity of the clearing broker or prime broker for the transaction, the identity of any contra-side order(s), and a cancelled trade indicator by 8: 00 a.m. Eastern Time on the trading day following the day that the member receives such information will aid the Commission and the SROs in knowing all of the parties that touched an order (including the clearing broker, prime broker, and contra-side party to the order), and whether the order was cancelled. The Commission believes that all of this information will facilitate regulatory improvements as discussed above in Section II.A.2.

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(C) Movement of Certain Data Elements from Event Data to Supplemental Audit Trail Data

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As proposed, Rule 613 would have required that, in addition to the Customer-ID, customer account information and other specified information sufficient to identify a customer be reported in real time.528 The Commission requested comment about the feasibility of this requirement. Several commenters expressed concern over the proposed requirement that customer information be reported in real time upon origination or receipt of an order.529 One commenter believed that leakage of customer information could "negatively impact investor willingness to trade in the U.S. markets,"530 and, instead, urged regulators to rely on EBS to provide customer information.531 Another commenter did not think it was feasible to provide customer information in real time.532 Another commenter suggested that the Commission "pare down its list of data points to focus on what would appear on a trade ticket and certain client demographic information."533 This commenter explained that its suggested approach "makes sense because for most brokers pulling trade ticket information from frontend systems will be straightforward, and client demographics should be easily pulled and populated onto a system for easy retrieval."534 Another commenter was of the view that only customer information regarding the person exercising investment discretion for the account originating the order, such as an investment adviser, should be required to be reported.535 This commenter explained that if a trade is not executed an investment advisor would not typically provide information about the owners of the underlying accounts to the broker-dealer and thus this commenter suggested that it would be more practical to disclose underlying account information in relation to executed trades.536 Another commenter suggested that there be a "requirements analysis" that considers the availability of order and trade data, and noted that allocation data is not available at the time of order entry.537

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In recognition of commenters' concerns that this information may not be available in real time538 and to reduce the reporting burdens on broker-dealers, the Commission is moving data elements, including the customer's name, address, and account information, and large trader identifier (if applicable) (collectively defined as "customer attributes") from the order event data category to the supplemental audit trail data category.539 As a result, the Commission is adopting the Rule to provide that the NMS plan require that customer attributes540 including the customer's name, address,541 and customer account information be reported under Rule 613542 no later than 8: 00 a.m. Eastern Time on the trading day following the day that the member receives the information.543 The Commission expects that the Customer-ID will be able to be linked to the customer attributes in the consolidated audit trail.

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The Commission believes that, to realize many of the objectives of a consolidated audit trail, the specific attributes of a customer must be recorded and, when needed, made available to regulators. Without these customer attributes, the data recorded is effectively anonymized, which would prevent regulators from using the enhanced consolidated audit trail data to take any enforcement action against specific individuals. The Commission believes customer attributes544 are necessary because regulatory authorities need to accurately and efficiently identify the customer to effectively surveil and analyze the markets, and enforce the securities laws. For example, as noted in the Proposing Release,545 a trader may trade through multiple accounts at multiple broker-dealers. Being able to identify the account holder aids in the identification and investigation of suspicious trading activity. Accordingly, the unique customer identifier that is required to be reported to the central repository for original receipt, origination, modification, or cancellation of an order,546 and that links together all reportable events by the same customer, must ultimately link back to information regulators could use to identify the party. With this information, regulators could more quickly initiate investigations, and more promptly take appropriate enforcement action. While this information could be requested from broker-dealers by the Commission and the SROs on a case-by-case basis, the Commission believes that achieving these benefits requires having such information maintained in a uniform format that is readily accessible to the Commission and the SROs.

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Furthermore, in response to the commenters concerns with respect to the confidentiality of this sensitive information,547 and as discussed in more detail below, the adopted Rule includes requirements for enhanced safeguards with respect to the privacy and confidentiality of consolidated audit trail data, including customer information.548

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In response to the commenter who suggested only information appearing on the trade ticket and certain client demographic information549 be collected, the Commission notes that it may be feasible for the NMS plan to allow customer identifying and account information to be reported by a broker-dealer to the central repository only when the customer opens or closes an account (or at the time the consolidated audit trail is first implemented for pre-existing accounts) -- this information may not need to be re-reported with every order.550 Under this approach, the specified customer attributes may be stored in the central repository and automatically linked to an order whenever an order with the applicable Customer-ID is reported. As the Commission noted in the Proposing Release,551 broker-dealers today, as part of their books and records requirements, must take reasonable and appropriate steps to ensure the accuracy of the customer information with respect to orders received.552 Following adoption of the Rule, and the creation and implementation of the consolidated audit trail, broker-dealers will continue to be subject to this requirement as they report customer information to the central repository. The Commission believes that allowing the specified customer attributes to be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that a broker-dealer first receives this information appropriately balances the regulatory need with the practical burdens of supplying it in real time as originally proposed.

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In response to the commenter who stated that an investment adviser would not typically provide information about the owners of the underlying accounts to the broker-dealer if the trade is not executed,553 the Commission notes that, in the case of an adviser that enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule, as adopted, would only require the NMS plan to require the capture of information about the owners of the underlying client accounts for which the order was placed if there is an executed trade, and if the executed trade is allocated (pursuant to Rule 613(c)(7)(vi)) to the accounts of the adviser's clients at the same broker-dealer.554 However, the Commission notes that, in the case of an adviser that enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would require the NMS plan to require the capture of both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)), even if the order did not result in execution.

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Finally, in the Proposing Release,555 the Commission specifically requested comment on whether there are laws or other regulations in other jurisdictions that would limit or prohibit members from obtaining the proposed customer information for non-U.S. customers. The Commission also requested comment on how members currently obtain such information. If broker-dealers did encounter special difficulties in obtaining customer information from other jurisdictions, the Commission requested comment on how the proposed consolidated audit trail requirements should be modified to address such difficulties.

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The Commission received one comment on this issue.556 The commenter expressed concern that, if broker-dealers were forced to refuse orders from non-U.S. customers because the laws of another jurisdiction prohibited disclosure of certain customer information, U.S. broker-dealers would be penalized and trading activity may shift offshore.557 The commenter recommended that the Commission adopt a limited exemption that would allow broker-dealers to accept orders from non-U.S. broker-dealers without providing customer information, in recognition of the fact that these broker-dealers are subject to regulation in their home countries.558

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In the Rule, as adopted, "customer" is defined as "(i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." Under this definition, the non-U.S. broker-dealer referred to above is the "customer" of the U.S. broker-dealer for purposes of the rule. The U.S. broker-dealer would be required to record customer information for transactions in NMS securities only with respect to its foreign broker-dealer customer. There is no requirement to record information about the customers of such foreign broker-dealer. Because the Rule as adopted does not require a non-U.S. broker-dealer placing orders in NMS securities through a U.S. broker-dealer to provide information about its customers to the consolidated audit trail, the Commission believes that the requested limited exemption is unnecessary.

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Although the Commission is aware that the privacy laws of some, but not all, foreign jurisdictions may hinder a foreign broker-dealer's ability to disclose personal identifying and account information of their customers absent customer authorization, the Rule as adopted does not require the foreign broker-dealer to disclose this information about its customers.559 Accordingly, a non-U.S. customer desiring to trade in the U.S. markets would be permitted to do so through a foreign broker-dealer without having to disclose its personal data to the consolidated audit trail. Because the Rule as adopted does not require a foreign broker-dealer to disclose personal identifying and account information of its customers to the consolidated audit trail, the Commission does not believe that trading in NMS securities will shift offshore as a result of the customer identification requirements.

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h. Clock Synchronization

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As proposed, Rules 613(d)(1) and (2) required that the NMS plan filed with the Commission include a requirement that each SRO and its members synchronize their business clocks that they use for the purposes of recording the date and time of any event that must be reported to the time maintained by the National Institute of Standards and Technology ("NIST"), consistent with industry standards.560 The SROs and their members also would have been required to annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes to industry standards.561 This clock synchronization would have been required to occur within four months after effectiveness of the NMS plan.562

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A few commenters expressed concerns with the Commission's proposed approach to clock synchronization, and a few commenters provided comments specifically relating to the Commission's estimated costs relating to clock synchronization.563 One commenter preferred a synchronization standard measured in seconds and believed that synchronizing at the millisecond level would require specialized software configurations and expensive hardware.564 This commenter also was of the view that there could be material problems with systems latency if processors were required to re-synchronize clocks every few seconds to address "time drift" issues – further deviations from the time maintained by the NIST that may occur after a clock is synchronized.565 Another commenter suggested that a clock synchronization standard shorter than the three second standard currently required by FINRA for OATS compliance might be impossible to achieve across market participants.566 A third commenter was concerned that implementing clock synchronization could require firms to make modifications to a variety of related applications.567 One commenter noted that synchronizing clocks to milliseconds would require costly specialized software and hardware.568

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On the other hand, one commenter – a provider of data capture and time stamping technology – noted that "[t]he advent of relatively low cost GPS receivers that derive absolute timing information accurate to better than 0.1 micro-seconds has significantly eased the problem of clock synchronization across multiple global locations," that "[s]uch technology costs a few thousands of dollars per installation," and that "[i]t is already in use by exchanges and high frequency traders."569 Another commenter expressed support generally for the Commission's proposed approach to clock synchronization.570

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After considering the comments received on this issue, the Commission is adopting Rule 613(d)(1) as proposed. As this provision requires that the NMS plan require clock synchronization consistent with industry standards, the Commission expects the NMS plan that is submitted to specify the time increment within which clock synchronization must be maintained, and the reasons the plan sponsors believe this represents the industry standard. The Commission notes that FINRA currently requires its members to synchronize their business clocks used for OATS reporting to within one second of the time maintained by NIST.571 The Commission believes that the current industry standard for conducting securities business is more rigorous than one second. For example, as one commenter noted, technology used today by exchanges and high frequency trading firms synchronizes clocks to increments well within the millisecond level.572 The Commission recognizes, as another commenter noted, that some firms may need to upgrade their technology to meet the industry standard,573 and that there will be attendant costs for such upgrading.574

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The Commission continues to believe that it is appropriate to require members of the securities industry to synchronize their clocks to the time maintained by NIST. Effective clock synchronization is essential to maintaining an accurately time-sequenced consolidated audit trail, particularly one where time stamps will be in millisecond increments or less. Because the consolidated audit trail will capture trading activity occurring across markets, if the business clocks used by SROs and their members for the purposes of recording the date and time for reportable events are not properly and consistently synchronized, the consolidated audit trail data will not be accurately time-sequenced. It is critical for the consolidated audit trail to allow regulators the capability to accurately determine the order in which all reportable events occur.575

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The Rule as proposed required that both the SROs and their members annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes in the industry standard.576 The Commission believes that the obligation to evaluate the clock synchronization standard annually should be borne by the SROs as the plan sponsors, not SRO members. The Commission believes that it is appropriate for the SROs, as regulators of the securities markets and users of the consolidated audit trail data, to have the obligation to evaluate whether a change in the clock synchronization standard is warranted.577 Therefore, the adopted Rule provides that the NMS plan shall require SROs to evaluate annually the clock synchronization standard set forth in the NMS plan.578

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The Commission recognizes, as a commenter noted,579 that time drift is an issue that must be addressed by the plan sponsors, to prevent a deterioration of the accuracy of the data in the consolidated audit trail. Therefore, the Commission expects the NMS plan to address the maximum amount of time drift that would be allowed before clocks must be re-synchronized, and why this is consistent with the industry standard.

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As with many other aspects of the Rule, the costs of this requirement are highly dependent on the details of the solution proposed by the SROs because the Commission is leaving it up the SROs to determine the maximum allowable time drift. As such, the SROs must discuss in their submitted plan the clock-synchronization standard they proposed, what alternatives were considered, and the rationale behind their choice. Once the NMS plan is received, the Commission, as well as the public, will be able to consider the extent to which the proposed synchronization standard supports the ability of regulators to fully achieve the benefits afforded by the creation of a cross-market consolidated audit trail.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
2. Central Repository
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Central Repository + Compliance User: Broker-dealers + Keywords: + NMS Plan, + Receipt, + Consolidation, + Retention of Data, + Audit Trail Data, + NBBO Information, + Transaction Reports, + Last Sale Reports, + Retention, + Timeliness, + Accuracy, + Integrity, + Completeness, + Consolidated Data, + Access, + Confidentiality, + +

a. Central Repository as a Facility of the SROs

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As proposed, Rule 613(e) required that the NMS plan provide for the creation and maintenance of a central repository,580 which would have been a "facility" of each exchange and FINRA.581 The central repository would have been jointly owned and operated by the exchanges and FINRA, and the NMS plan would have been required to provide, without limitation, the Commission and SROs with access to, and use of, the data reported to and consolidated by the central repository for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.582 Each of the exchanges and FINRA would have been a sponsor of the plan583 and, as such, would have been jointly responsible for selecting a plan processor to operate the central repository.584

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The Commission requested comment on the need for a central repository to receive and retain the consolidated audit trail information, whether there would be alternatives to creating a central repository for the receipt of order audit trail information, and whether it would be practical or appropriate to require the SROs to jointly own and operate the central repository.

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A few commenters discussed the proposed ownership structure of the central repository.585 One commenter argued that the central repository should be owned and operated by the Commission, or a non-SRO formed specifically to operate the central repository, and expressed concern that the central repository could be used by SROs as a source of revenue through the imposition of penalties.586 Another commenter recommended that the Commission own the repository and not outsource it to a third party, explaining that, in systemically important events, it may be necessary to have immediate and direct access to the data, without an intermediary.587 Yet another commenter noted that the decision to use OATS or another system as the basis for the consolidated audit trail system should be separate from the choice of the party that will be responsible for building and operating the central repository.588

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The Commission received a couple of comments specifically regarding the costs of the creation and maintenance of the central repository. FINRA, in one of its comment letters, submitted a "blueprint" for a version of a consolidated audit trail based on enhancements to OATS – though without certain key elements proposed to be required by the adopted Rule – and estimated initial costs for developing the repository to be between $100 million and $125 million, with ongoing annual costs to be between $30 million and $40 million.589 Another commenter suggested the use of cloud computing for the central repository which it believed would cost less than $10 million per year.590

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The Commission has considered the comments and is adopting as proposed the requirement in Rule 613(e)(1) that the NMS plan provide for the creation of a central repository. The Commission believes that having a central repository is important to ensuring access to consolidated data for the Commission and SROs, and for ensuring consistency, quality, and security in the audit trail data.

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As adopted, Rule 613(e)(1) does not dictate a particular audit trail collection system to be used as the central repository for the consolidated audit trail, but, instead, delineates the required core features of such a system.

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The Commission considered the commenter's recommendation that it should own the central repository591 but determined that such ownership is not necessary as long as the central repository has the core features articulated in the Rule, the Commission and SROs have full access to the audit trail data for regulatory purposes, and the central repository is a facility of each SRO subject to Commission oversight.592 The Commission notes that, because the central repository will be jointly owned by, and a facility of, each SRO, it will be subject to Commission oversight. The Commission will have unfettered access to the data in the central repository without being its owner.

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The Commission also considered the comment that the central repository should be owned by a non-SRO specifically formed to operate the central repository.593 The Commission, however, believes that it will have more regulatory authority over the central repository as a facility of each SRO than it would have if the central repository were owned or operated by a non-SRO. First, the Commission has the statutory obligation to oversee the SROs, including facilities thereof, and to ensure that SROs enforce compliance by their members with the respective SRO's rules, and the federal securities laws, rules, and regulations.594 Second, a facility of an SRO is subject to the rule filing requirements of Section 19(b) of the Exchange Act.595

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In response to the commenter who expressed concern that the plan sponsors would use the central repository to generate revenue through penalties,596 the Commission notes that any penalty provisions must be provided in the NMS plan submitted to the Commission for its consideration, or in a future amendment to the NMS plan, if the NMS plan is approved. The Commission will review the NMS plan submitted for its consideration, which also will be subject to public notice and comment, to assure itself that the NMS plan is designed to be applied fairly and otherwise in a manner consistent with the Exchange Act. The Commission expects that the NMS plan's penalty provisions would provide sufficient detail regarding the circumstances in which any penalties would apply, and any restrictions on how payments of such penalties may be used, to permit the Commission to determine that such penalty provisions are fair and consistent with the Exchange Act. As the central repository will be a facility of the plan sponsors, the rules governing it must be consistent with the Exchange Act.597 In addition, future amendments to the penalty provisions would either be reviewed as an amendment to the NMS plan, under Rule 608 of Regulation NMS, or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.598 Additionally, the Commission has the authority to review any action taken or failure to act by any person under an effective NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS.599 Lastly, any penalty provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure they are implemented fairly in a manner consistent with the Exchange Act.600

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In response to the comments regarding the costs of the creation and maintenance of a central repository, the Commission notes that the costs would be highly dependent on the decisions the SROs make with respect to each of the areas in which the Commission has provided flexibility to the SROs in crafting the NMS plan to be submitted to the Commission for its consideration. For example, cost estimates could vary depending on whether the NMS plan requires unique order identifiers or permits "a series of order identifiers." Such cost estimates also could vary because the Rule does not specify details regarding, among other things, the security and confidentiality procedures of the central repository, the system for assigning customer identifiers, the format(s) of data reported to the central repository, the methods by which regulators will access data in the central repository, whether an annual independent evaluation will be required, how reportable events related to the same order will be linked, or how errors will be processed. Such information will be known only after the filing of the NMS plan and, thus, the Commission believes it is appropriate to defer consideration of such costs until the NMS plan is submitted for its consideration. Once it is submitted, the Commission will be able to use this information in determining whether to approve the NMS plan.

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The Commission notes that other provisions of the Rule that are applicable to the central repository, discussed below, have been modified from the proposal, including provisions relating to the format in which the data may be reported,601 and to the security and confidentiality of the consolidated audit trail data.602

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b. Receipt, Consolidation, and Retention of Data

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1. Audit Trail Data

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In addition to providing for the creation and maintenance of the central repository, Rule 613(e), as proposed, also would have required the central repository to receive, consolidate, and retain all data reported by the SROs and their members pursuant to the Rule and the NMS plan.603

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The Commission is adopting, substantially as proposed, the provisions in Rule 613(e) regarding the responsibility of the central repository to receive, consolidate, and retain the audit trail data, but with a few modifications to reflect changes the Commission made to other sections of Rule 613.604

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The first change to Rule 613(e)(1) is a conforming change to the modification in adopted Rule 613(c)(2) that permits the NMS plan to provide that audit trail data be reported to the central repository either in a uniform electronic format, or in a manner that would allow the central repository or a third party to convert the data to a uniform electronic format for consolidation and storage.605 Given the need for cross-market comparability and ready access,606 the adopted Rule requires that, to the extent the NMS plan does not require that data be reported to the central repository in a uniform electronic format, the central repository must convert the data to a uniform electronic format for consolidation and storage.607 The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to have the central repository normalize audit trail data reported, the Rule requires the central repository to consolidate and store the data in a uniform electronic format.

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The second change to Rule 613(e)(1) reflects the Commission's view that, while it is appropriate to provide the plan sponsors with the flexibility to determine how an order will be identified, audit trail data must be stored in the central repository in a manner that will allow order information to be retrieved in a timely and accurate fashion. Accordingly, adopted Rule 613(e)(1) requires that the audit trail data consolidated in the central repository be stored "in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval . . . for all reportable order events for that order." The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to use a series of order identifiers or a unique order identifier, the Rule requires the central repository to be able to link together all reporting events pertaining to an order.

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In looking ahead to considering the overall cost of creating, implementing, and maintaining a consolidated audit trail in connection with the NMS plan, the Commission recognizes that, in addition to the costs to SRO members who would be required to record and report data to the central repository, there also will be costs associated with creating and maintaining a central repository. These costs may include: (1) the purchase and maintenance of servers and systems to receive, consolidate, and retain audit trail data, and to allow access to and searches on the data; (2) the development of policies and procedures relating to the timeliness, accuracy, completeness, security, and confidentiality of the data collected; (3) the development and maintenance of a comprehensive information security program for the central repository; and (4) dedicated staff, including a CCO.

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2. NBBO Information, Transaction Reports, and Last Sale Reports

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In addition to receiving, consolidating, and retaining audit trail data reported pursuant to Rule 613(c), Rule 613(e)(5), as proposed, would have required the central repository to collect and retain, on a current and continuing basis and in a format compatible with the information collected pursuant to Rule 613(c)(7),608 the NBBO information for each NMS security,609 as well as transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act.610 In addition, last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act would have been required to be collected and retained.611

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One commenter expressed its belief that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."612 The Commission believes that the proposed requirement for the central repository to collect and retain NBBO information, as well as transaction reports and last sale reports,613 would facilitate the ability of SRO and Commission staff to search across order, NBBO, and transaction databases. Moreover, inclusion of NBBO information would permit regulators to compare order execution information to the NBBO information readily as all of the information will be available in a compatible format in the same database. This information also would be available to the Commission to assist in its oversight efforts.

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Additionally, requiring the central repository to collect and retain the NBBO and transaction information in a format compatible with the order execution information would aid in monitoring for regulatory compliance (e.g., Rule 201 of Regulation SHO). Also, this information would be useful in conducting market analyses (e.g., how order entry affects NBBO prices and depth). The Commission believes that the requirement that the central repository collect transaction reports reported pursuant to the CTA, UTP, and OPRA plans614 would allow regulators to more efficiently evaluate certain trading activity. For example, a pattern of unreported trades may cause the staff of an SRO to make further inquiry into the nature of the trading to determine whether the public is receiving accurate and timely information regarding executions and that market participants are continuing to comply with the trade reporting obligations under SRO rules. Similarly, a pattern of unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. The Commission believes that having the quotation and transaction information currently collected with respect to NMS securities in the same data repository – and in a compatible format – as part of the consolidated audit trail would enhance regulatory efficiency when analyzing the data.

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After considering the comment on this provision,615 the Commission is adopting proposed Rule 613(e)(5)(ii) and (e)(5)(iii) (renumbered as Rule 613(e)(7)(ii) and (e)(7)(iii)), as proposed, and the requirement of proposed Rule 613(e)(5)(i) (renumbered as Rule 613(e)(7)(i)) for the NMS plan to require the central repository to collect and retain NBBO information for each NMS security substantially as proposed, but is clarifying that the NBBO information must include size and quote condition.616 NBBO size information is integral to determining whether best execution and order handling requirements were satisfied for a particular order because these requirements depend on the relationship between the size of the order and the displayed size at the NBBO. NBBO quote condition information is integral to determining whether or not quotes are immediately accessible. For example, quote condition information that identifies whether the quote reflecting the NBBO was automated, and therefore subject to trade-through protection, or manual617 may be an important consideration in determining whether the duty of best execution was satisfied. The NBBO price, size, and quote condition is used by regulators to evaluate members for compliance with regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS.618 The Commission acknowledges that there will be costs to the central repository to purchase and to retain NBBO information, transaction reports, and last sale reports. However, the Commission believes that the benefits associated with having such information included in the central repository justify the costs to the SROs of requiring that they include this in the NMS plan submitted to the Commission for its review.

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3. Retention of Information

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As proposed, Rule 613(e)(6) would have provided that the NMS plan require the central repository to retain the information collected pursuant to Rule 613(c)(7) and (e)(5) in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would have been required to be available immediately, or, if immediate availability could not reasonably and practically be achieved, a search query would have been required to begin operating on the data not later than one hour after the search query is made.619

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One commenter suggested that the Commission modify the time standard for the availability of older data to a next day (or later) standard, as the need for regulators to have immediate access to the data diminishes over time. The commenter stated that a requirement that the data be made available the next day, or after another longer period of time, would be less burdensome on the consolidated audit trail system and less costly, while still meeting the needs of regulators.620 Another commenter believed that there could be difficulties in querying and analysis because the proposal did not specify how the data would be stored in the central repository.621

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In response to the commenters' concerns, the Commission is modifying the proposed Rule. Specifically, Rule 613(e)(8) (renumbered from proposed Rule 613(e)(6)) provides that "[t]he national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to [Rules 613(c)(7) and (e)(7)] in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years." The adopted Rule does not require, as was proposed, that the consolidated audit trail data be available immediately, or if immediate availability cannot reasonably and practically be achieved, any search query must begin operating on the data not later than one hour after the search query is made.622

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The Commission believes that it is unnecessary for the Rule to require a timeframe within which consolidated audit trail data must be available or a timeframe for when a search must begin after the query is made because, as discussed below,623 the Rule, as adopted, includes a provision that requires the NMS plan to specifically address the "time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."624 The Commission will consider the response to this provision contained in the NMS plan submitted by the plan sponsors to the Commission, regarding the time and method by which the data in the central repository can be accessed and used by regulators as part of their regulatory and oversight responsibilities – which would encompass queries – as it evaluates the NMS plan. The Commission believes this provision provides flexibility to the SROs to devise an access requirement that meets the needs of regulators in a cost-effective and timely manner, 625 rather than establishing a strict deadline for all data to be accessible from the central repository.

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c. Timeliness, Accuracy, Integrity, and Completeness of the Consolidated Data

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As proposed, Rule 613(e)(4)(ii) would have required the NMS plan to include policies and procedures, including standards, for the plan processor to ensure the timeliness, accuracy, and completeness of the data provided to the central repository. In addition, proposed Rule 613(e)(4)(iii) would have required that the NMS plan include policies and procedures, including standards for the plan processor to reject data provided to the central repository that does not meet these validation parameters, and for SROs and members to re-transmit corrected data. Finally, proposed Rule 613(e)(4)(iv) would have required that the NMS plan include policies and procedures, including standards, to ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository.

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The Commission requested comment on these proposed requirements.626 The Commission asked if this approach was practical to ensure the integrity of the data, and whether there were alternative methods that would achieve the same purpose that would be preferable. The Commission also requested comment on how much latency would result from a validation procedure.

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The Commission received comments focusing concern on the potential for errors in the consolidated audit trail and the negative effects of errors in the consolidated audit trail.627 One commenter stated that the "key principles [that] best ensure that the regulatory goals of the consolidated audit trail are met in a cost efficient manner" include a system that "avoids data quality issues through data validation safeguards and a structure that reads data as close to the point of origin as possible to avoid data translation errors when data is processed through intermediary applications."628 Another commenter stated that "the CAT facility would also need a mechanism to identify and correct data that was inaccurate."629 Another commenter noted that, "if any other protocol [other than FIX] is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data."630

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As a point of reference, summary data about OATS provided by FINRA to Commission staff indicates that approximately 0.25% of the intra-firm data reported daily by members contains errors. 631 Additionally, according to FINRA, when errors relating to the linkage of order reports are detected, members have no obligation to correct the errors.632 As a result, approximately 1-2% of each day's recorded events remain unmatched (i.e., multi-firm events, such as order routing, that cannot be reconciled).633 This deficiency in the OATS process diminishes the completeness and overall usefulness of the audit trail OATS creates.

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In a comment letter, FINRA discussed the challenge of obtaining accurate audit trail information if the data was required in real time, and it noted the actions it undertakes to ensure the accuracy and completeness of its audit trail data and minimize errors.634 FINRA stated that, "to ensure the integrity of OATS data submitted, FINRA performs over 152 separate OATS data validations on each order event, each of which can result in OATS data submissions being rejected and generating an error message.635 As a result, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.636 Members are then required by rule to repair and resubmit such data that did not meet OATS specifications.637 Although members' OATS compliance rates are very high on average, almost 425,000 reports per day, on average, are rejected and must be corrected.638 Accordingly, to use audit trail data before such validations have been performed may result in a severely distorted picture of trading and interfere with effective oversight."639

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With respect to mechanisms to ensure compliance by SROs with the requirements of the plan, one commenter stated that "Commission rules should focus on the reasonable design of systems, processes and procedures to fulfill their objectives and patterns and practice of noncompliance rather than looking to any failure as a rule violation. This is particularly important in the context of data errors or similar matters."640

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Finally, another commenter believed that "major market participants" should retain "detailed information of all network packets and trade data at both the ingress and egress of their infrastructure."641 This commenter believed that this information would not need to be forwarded to "any audit authority" but explained that such information could be used by regulators in the event a "denial of service" attack were to occur at a network level to slow market activities or hinder the flow of market information. This commenter further explained that having this information would "greatly improve confidence in the integrity of data and act as a further deterrence for fraudulent activity."642

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After consideration of the comments received, the Commission is adopting Rule 613(e)(4)(ii) substantially as proposed. Thus, the NMS plan must have policies and procedures, including standards, to ensure the timeliness, accuracy, and completeness of the data received. The Commission believes that audit trail data that is timely, accurate, and complete is critical to the usefulness and effectiveness of Rule 613. However, the Commission is adding the term "integrity" to the list of items that the policies and procedures adopted by the plan sponsors, as set forth in Rule 613(e)(4)(ii), must address.643 The addition of "integrity" is designed to help emphasize that data should not be subject to benign or malicious alteration, so that such data would be consistent and reliable at each point of transmission throughout its lifecycle (i.e., transmission from the SRO or member to the central repository, data extraction, transformation and loading at the central repository, data maintenance and management at the central repository, and data access by regulators). The Commission believes that the integrity of the audit trail data is critical to the usefulness and effectiveness of the consolidated audit trail.

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The Commission also is adopting Rule 613(e)(4)(iv), renumbered as Rule 613(e)(4)(iii), as proposed, which provides that the NMS plan submitted shall include policies and procedures, including standards, to be used by the plan processor to ensure the accuracy of the consolidation by the plan processor of the data reported to the central repository. The Commission believes that policies and procedures, including standards, to be used to ensure accuracy of the consolidated data are important and necessary because the benefits of ensuring that data is accurately reported to the central repository would be lost if the consolidation process is not as equally robust. The regulatory benefits of a consolidated audit trail are therefore based, in part, on the timeliness, accuracy, completeness, and integrity of the data ultimately available to regulators from the central repository.

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As described above in Sections III.B.1.f. and III.B.1.d.iv., the adopted Rule provides the SROs with more flexibility than the proposed Rule in developing (a) the format(s) of data to be reported to the central repository, and (b) the methods by which order identifiers will be used to link reportable events. Accordingly, the Commission expects the policies and procedures included in the NMS plan submitted to the Commission for its consideration to apply to both the transmission of audit trail data from SROs and their members to the central repository, and the consolidation and retention of that data, and other information collected pursuant to the Rule, by the central repository, including, but not limited to, any normalization or conversion of the data to a uniform electronic format, and procedures for how reportable events are accurately linked. The Commission believes that it is critical to the usefulness of the consolidated audit trail that the SROs and their members report data in a manner that is accurate and complete, and that the central repository takes any and all appropriate measures to consolidate and retain that data in the same manner. To the extent the data is not accurate or complete, the ability of SRO and Commission staff to utilize the data to accomplish the goal of the consolidated audit trail will be compromised.644

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In light of the comments the Commission received that noted the concern about the potential for errors in the consolidated audit trail, as well as the impact such errors may have on the consolidated audit trail,645 the Commission is revising Rule 613(e)(4)(iii) as proposed (renumbered as Rule 613(e)(6)(i)). Specifically, Rule 613(e)(6)(i) requires the NMS plan submitted to the Commission for its consideration to "[s]pecify a maximum error rate to be tolerated by the central repository for any data reported pursuant to Rule 613(c)(3) and (c)(4); describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce the maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof."646 Rule 613(e)(6)(ii) states that the NMS plan shall "[r]equire the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan." Rule 613(e)(6)(iii) and (iv) provide that the NMS plan shall "[s]pecify a process for identifying and correcting errors in the data reported to the central repository pursuant to [Rule 613(c)(3) and (c)(4)], including the process for notifying the national securities exchanges, national securities associations, and members who reported erroneous data to the central repository about such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and . . . [s]pecify the time by which data that has been corrected will be made available to regulators."647

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As noted above, the Commission believes the availability of accurate consolidated data is a critical component of a useful and effective audit trail. Ideally, there would be no errors in the recording or reporting of any audit trail data element, and every data element of every reportable event would be accurately recorded by the SROs and their members, and then accurately reported to the central repository under Rule 613, resulting in a consolidated audit trail that reflects all actions relating to every order in the market for securities. However, because the Commission understands that, to some extent, errors in reporting audit trail data to the central repository will occur, the Commission believes it is appropriate to adopt a provision in Rule 613 that requires the NMS plan to set forth the maximum error rate to be tolerated by the central repository in the reporting of audit trail data, as well as to specify a process for identifying and correcting such errors.648

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The Commission notes that the Rule leaves to the plan sponsors the ability to determine the acceptable maximum error rate, although the Rule does require that the NMS plan must explain the basis for selecting such rate. The Rule also requires the NMS plan submitted to the Commission for its consideration to set forth how the plan sponsors will seek to reduce such maximum error rate over time, thereby increasing the accuracy of audit trail data. Further, the Rule requires the NMS plan to have in place a means to ensure compliance with the maximum error rate so that SROs and their members are incentivized to comply with the maximum error rate, and to set forth a plan for promptly remedying the causes for any noncompliance.

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Since the Rule leaves many of the specific details regarding error rates and error-correction processes for the plan sponsors to determine, and because the accuracy and completeness of data ultimately received by regulators is of such significance to the effective use of a consolidated audit trail, the Commission, as well as the public, would likely consider such details very important in their overall evaluation of the submitted plan. Furthermore, given that the approval of any plan by the Commission would, in part, be based on expectations of maximum error rates, the Commission believes it is equally important for objective measures to be reported that track how well the plan is meeting such expectations. Thus, to ensure the accuracy of the audit trail data generally meets these expectations, Rule 613(e)(6)(ii) also requires that the error rate identified in the NMS plan be measured each business day and that remedial action be taken if, on any given day, the error rate exceeds the maximum error rate set forth in the NMS plan.649

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The Commission also believes it is appropriate to require the SROs to formulate a process for identifying and dealing with errors, and to require that the SROs or the members reporting erroneous data be notified that an error in reporting has occurred.650 In addition, the Commission believes it is appropriate to require the SROs to develop a process to help ensure that errors are promptly corrected by the reporting SRO or member. The Commission understands that requirements similar to these are currently implemented by FINRA as part of their OATS process, though cross-firm errors, such as those leading to irreconcilable or unmatched routes, are not generally corrected under the OATS process.651 The Commission further believes that disciplining SROs and members that repeatedly report erroneous audit trail data, as required by Rule 613(e)(6)(iii), is appropriate given the need to maintain an accurate consolidated audit trail for regulatory purposes. Finally, given that the NMS plan submitted to the Commission for its consideration is required to specify a process for correcting errors, the Commission also believes it is appropriate to require, pursuant to Rule 613(e)(6)(iv), that the NMS plan submitted to the Commission for its consideration specify the time by which data that has been corrected will be made available to regulators. In reviewing the NMS plan submitted for its consideration, the Commission will therefore be able to consider the time that uncorrected but consolidated data (which was reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information was recorded) would be available for use by regulators, the expected error rate of this data, and the time at which a corrected version of this data would be made available to regulators. These three parameters will help inform regulators as to the potential effectiveness of starting different types of surveillance and monitoring activities at different times.652

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The Commission acknowledges there would be costs to the central repository associated with developing policies and procedures related to the timeliness, accuracy, integrity, and completeness of data, including, but not limited to, processes for identifying and correcting errors in the audit trail data received, and measuring the error rate on a daily basis. However, the size of these costs depends significantly on the specific details of the NMS plan submitted to the Commission for its consideration. Once the SROs submit the NMS plan to the Commission for its consideration specifying the details, parameters, and estimated costs of such processes, as well as the maximum error rate expected under such processes, the Commission and the public will be able to consider this information when determining whether to approve the NMS plan.

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d. Access to the Central Repository and Consolidated Audit Trail Data for Regulatory and Oversight Purposes

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As proposed, each national securities exchange and national securities association, as well as the Commission, would have had access to the central repository for the purposes of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.653 This access would have included all systems of the central repository, and the data reported to and consolidated by the central repository.654 In addition, the Commission proposed to require that the NMS plan include a provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data.655 This method of access would have been required to be designed to include search and reporting functions to optimize the use of the consolidated data. The Commission requested comment on whether it should allow the consolidated audit trail data to be made available to third parties, such as for academic research.

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One commenter supported limiting access to the consolidated audit trail data to the Commission and SROs for regulatory purposes, but suggested it would also be appropriate to share the data with the CFTC.656 Other commenters supported the idea of providing "anonymized" data for academic use, as long as appropriate controls were established to assure regulators and market participants that confidential trading information could not be revealed.657 Specifically, one commenter endorsed the use of the data "with appropriate safeguards" by academic researchers, explaining that it will "promote understanding of the markets," and "lead to better policy decisions and thus more fair and orderly markets."658 Similarly, another commenter also supported the use of the data by certain third parties and stated that "[a]ccess to real-world data can help research immensely."659

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The Commission also received a comment that argued for extending access to the consolidated audit trail data to certain individuals who have a fiduciary responsibility to shareholders of a company. This commenter explained that such access would allow them to audit all trading activity in the equity or other derivative securities of that company.660

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The Commission recognizes there may be certain benefits to the types of expanded access to data in the central repository that has been suggested by various commenters, but, for the reasons discussed below, it is adopting the provisions in Rule 613 regarding access by regulatory authorities at the SROs and the Commission to the systems operated by the central repository, and to the data received, consolidated, and retained by the central repository, substantively as proposed in Rule 613(e)(3), but with one clarification regarding the requirement for access by regulators.661 Specifically, Rule 613(e)(3), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports." As proposed, Rule 613(e)(3) would have provided that the central repository must have a "reporting function." The Commission believes that this language is ambiguous and may have implied that the central repository was required to do more than respond to search queries. Accordingly, the Commission is replacing the requirement in proposed Rule 613(e)(3) that the central repository provide "search and reporting functions" with the requirement that there be "the ability to run searches and generate reports." The change in language from that contained in the Rule, as proposed, is not intended to change the substance of the requirement.

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In response to the commenter who suggested sharing data with the CFTC, the Commission notes that it has shared information with the CFTC in the past and that it intends to continue sharing information when the situation so warrants. The Commission notes that, among other arrangements, it currently has information-sharing agreements with other regulators. The Commission also agrees with commenters that there may be benefits to allowing academics or other third parties to have access to data collected by the central repository. Academic and other third-party analyses are helpful to the Commission in performing its own evaluation of the economic costs and benefits of regulatory policy. The Commission also notes that one commenter believes that the ability of companies to detect manipulative trading activity in their securities could be enhanced if certain individuals, who have a fiduciary responsibility to shareholders, were given access to limited consolidated audit trail data. However, because the creation and implementation of the consolidated audit trail is in the formative stage, and in light of commenters' concerns about the privacy and security of the information, the Commission believes it is premature to require that the NMS plan require the provision of data to third parties.

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Though the Commission is not specifying a particular process, or any details, regarding the mechanism(s) by which regulators will access data in the central repository, the Rule requires the SROs to provide such details and cost estimates in its NMS plan submitted to the Commission for its consideration.662 Further, as discussed below in Section III.C.2.c., the Commission is providing the SROs with detailed regulator use cases for how regulators would likely make use of the data in the central repository. These regulator use cases are designed to help the SROs respond with sufficient details in the NMS plan submitted to the Commission for its consideration so that, along with associated cost estimates also required to be provided by the SROs, the Commission and the public will be able to fully consider the NMS plan submitted.

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e. Confidentiality of Consolidated Data

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Rule 613(e)(4)(i), as proposed, would have required that the NMS plan include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository. The plan sponsors and employees of the plan sponsors and central repository would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.663 As proposed, Rule 613 also would have required the NMS plan to include mechanisms to ensure compliance by the plan sponsors and their members with the requirements of the plan.664

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In the Proposing Release, the Commission solicited comments regarding what steps should be taken to ensure appropriate safeguards with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository. The Commission requested comment on the issue of appropriate safeguards to be put in place by the SROs and the central repository to help ensure confidentiality. The Commission also asked whether the proposed Rule should: (1) require that SROs put in place specific information barriers or other protections to help ensure that data is used only for regulatory purposes; (2) provide for an audit trail of the SROs' personnel access to, and use of, information in the central repository to help monitor for compliance with appropriate usage of the data; and (3) include a requirement that the NMS plan include policies and procedures to be used by the plan processor to ensure the security and confidentiality of information reported to, and maintained by, the central repository be expanded to include the content of any searches or queries performed by the SROs or the Commission on the data.665

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Several commenters expressed concern about how to best ensure the confidentiality of the data collected.666 One commenter generally argued that safeguards for the audit trail data had not been sufficiently addressed in the Proposing Release.667 Another commenter recommended that the operator of the central repository and the SROs be required to implement security policies, processes, and practices consistent with industry best practices for the protection of sensitive information and that such policies, processes, and practices be audited on an annual basis by a third-party expert.668 Similarly, one commenter suggested that vendors also should implement best practices with regard to security, reliability, and integrity of data.669 Another commenter stated that SROs should be subject to the same privacy and data protection standards as those to which broker-dealers are subject, and that SRO members should not be held responsible, and be indemnified by the SROs, for any breaches of customer or firm information.670

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One commenter offered several specific recommendations for enhancing the security of audit trail information.671 This commenter suggested that the Commission should expressly state who would have access to the data, when they could access it, and how they could use it, and further recommended that all data sent to the central repository be encrypted, and that certain fields be "masked" or be subject to delayed end-of-day reporting.672 In addition, this commenter suggested that the Commission and each SRO should adopt a robust information security program, and that the Commission should explain how it intends to treat requests for audit trail data.673

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Another commenter suggested that the Rule more explicitly enunciate permissible and impermissible uses of the consolidated audit trail and suggested including a requirement regarding the SROs' personnel access to and use of audit trail data, as well as a commitment by the Commission to review each SRO with respect to the adequacy of information barriers.674 Similarly, a commenter suggested that access to audit trail data be limited to employees of regulators whose function is to monitor and surveil that market.675 This commenter supported the restriction that consolidated audit trail data only be used for regulatory purposes.676

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One commenter asked how and at what level customer data would be encrypted.677 This commenter listed specific aspects of data encryption that would need to be addressed, and noted that potential burdens could be associated with encryption.678 Finally, one commenter recommended that the Commission express its intention to withhold audit trail data from the public pursuant to Freedom of Information Act ("FOIA")679 exemptions.680

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The Commission considered the concerns expressed by commenters about the sensitivity of much of the information that will be consolidated by the central repository, and believes that maintaining the confidentiality of customer and other information reported to the central repository is essential. Without adequate protections, market participants would risk the exposure of highly-confidential information about their trading strategies and positions.

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The Commission notes that that it currently has controls and systems for its own use and handing of audit trail information. Nevertheless, given the sensitivity of certain information that will be produced by the consolidated audit trail – as well as the fact that such information should be more readily available and provided in a more usable format than existing audit trail information – the Commission intends to review the controls and systems that it currently has in place for the use and handling of audit trail information. The Commission further intends to evaluate whether any additional controls and systems may be required to adequately protect the sensitive information provided to it under the consolidated audit trail.681

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In addition, adopted Rule 613(e)(4)(i) requires that the NMS plan include policies and procedures that are designed to ensure implementation of the privacy protections that are necessary to assure regulators and market participants that the NMS plan provides for rigorous protection of confidential information reported to the central repository. Specifically, adopted Rule 613(e)(4)(i)(A) requires that "[a]ll plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in [Rule 613(e)(4)(i)(A)] shall be construed to prevent a plan sponsor from using the data that it submits to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation." Further, in response to a comment,682 adopted Rule 613(e)(4)(i)(B) adds the requirement to the Rule, as proposed, that the plan sponsors adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository, and (2) permit only persons designated by plan sponsors to have access to the data in the central repository.683 In addition, the Commission is modifying the Rule, as proposed, to require that the plan processor must: (1) develop and maintain a comprehensive information security program, with dedicated staff, that is subject to regular reviews by the central repository's CCO, (2) require the central repository to have a mechanism to confirm the identity of all persons permitted to access the data, and (3) maintain a record of all instances where such persons access the data.684

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The Commission believes these provisions should create a framework for the SROs to establish a thorough and exacting process for helping ensure the continued effectiveness of the confidentiality safeguards. Further, the Commission believes these additional provisions are appropriate because they clarify the types of confidentiality safeguards that the NMS plan submitted to the Commission for its consideration must have to preserve the confidentiality of the information that is received, consolidated, and retained by the central repository. The provision requiring information barriers is designed to, for example, protect and prevent audit trail data, which are to be used only for regulatory purposes, from being communicated to any personnel at an SRO that are engaged in non-regulatory or business activities. Additionally, the Rule's requirement that policies and procedures submitted as part of the NMS plan provide that: (i) only persons designated by the plan sponsors have access to the central repository data, (ii) the plan processor have a mechanism to confirm the identity of all persons permitted access to the data, and (iii) the plan processor maintain a record of all instances where such persons access the data. These provisions are designed to assure regulators and market participants that only designated persons are allowed access to the consolidated audit trail data, and that the central repository will have a method to track such access. With respect to the commenter that suggested the Commission more explicitly enunciate permissible and impermissible uses of the consolidated audit trail,685 the Commission notes that any security and confidentiality provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure that they are implemented fairly in a manner consistent with the Exchange Act.686

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The Commission believes that an outline or overview description of the policies and procedures that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan submitted to the Commission to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.

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The Commission considered the comment that asked when and at what level customer information would be encrypted.687 The Commission notes that, while Rule 613 does not require that this information be encrypted, the Rule contains several safeguards, discussed in this section, to ensure the privacy and confidentiality of the audit trail data. Based on these provisions,688 the Commission believes that plan sponsors would need to make sure customer information is protected, which could be accomplished by data encryption, if they so choose. Additionally, the Commission notes that the unique customer identifier is only reported once to the central repository – by the broker-dealer that is either originating the order or is the original recipient of the order. Because the unique customer identifier does not travel with the order as it is routed to other market participants, only the originating broker-dealer should be able to determine the identity of the customer of the order. The Commission considered the comment that recommended that the Commission express its intention to withhold audit trail data from the public pursuant to FOIA.689 The adopted Rule places no affirmative obligations on the Commission to provide information to any third parties. Further, the Commission believes there are bases under FOIA to withhold customer information, including 5 U.S.C. 552(b)(4) (trade secrets, commercial or financial information), 5 U.S.C. 552(b)(6) (personal information affecting an individual's privacy), and 5 U.S.C. 552(b)(8) (records related to examinations of financial institutions). The Commission intends to assert all appropriate exemptions in response to a FOIA request for information related to the consolidated audit trail's customer information.

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The Rule, as adopted, also states that the NMS plan must require the SROs to adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository, described above, with respect to information security.690 The Commission believes this provision is appropriate because it provides an incentive to SROs to comply with the central repository's information security program. The Commission encourages SROs to include in their comprehensive information security program developed and maintained by the plan processor provisions for notifying any customer or other market participant whose information may have been compromised by a security breach, so that appropriate remedial steps may be taken.

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Additionally, given the importance of the security of data consolidated in the central repository, and in response to the commenter who recommended an annual third-party audit of the security of the central repository,691 the Commission has added Rule 613(e)(5) to require the NMS plan submitted to the Commission for its consideration to address whether there will be an annual, independent evaluation of the security of the central repository and (1) if so, provide a description of the scope of such planned evaluation, and (2) if not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead. As with most information technology systems, the central repository's system will include measures to assure regulators and market participants of the security of the system. An independent evaluation of the security of the central repository could aid the central repository in identifying and correcting potential areas of weakness or risk. While the Commission is leaving it to the plan sponsors to determine whether the NMS plan will require an annual audit, given the confidential nature of information that will be stored at the central repository, the Commission believes that the NMS plan submitted to the Commission for its consideration must, at a minimum, address whether such an audit is appropriate.

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The Commission also notes that, as discussed below,692 it is adding a specific provision that requires the NMS plan submitted to the Commission for its consideration to discuss the security and confidentiality of the information reported to the central repository.693 With this information, the Commission, as well as the public, will be able review in detail how the NMS plan proposes to ensure the security and confidentiality of such information in deciding whether to approve the NMS plan.

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The Commission believes that, collectively, these provisions are appropriate because of the confidential and commercially valuable information that the central repository will contain. The Commission believes that the purpose and efficacy of the consolidated audit trail would be compromised if the Commission, the SROs and their members could not rely on the confidentiality and security of the information stored in the central repository. The Commission acknowledges there would be costs associated with a comprehensive information security program, including, but not limited to, compensating a CCO and a dedicated staff, and establishing policies and procedures, as well as for an annual, independent evaluation of the central repository's security (if such an evaluation is required by the NMS plan submitted to the Commission for its consideration) or alternative measures (if such an evaluation is not). Once the SROs have submitted the NMS plan to the Commission that, as required, contains details about the security and confidentiality of the audit trail data, the Commission and the public will be able to consider this information when evaluating the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
3. Other Required Provisions of the NMS Plan
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Other Required Provisions of the NMS Plan + Compliance User: Broker-dealers + Keywords: + Exchanges, + Associations, + Penalties, + Members, + Operation, + Administration, + NMS Plan, + +

a. Compliance with the NMS plan

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1. Exchanges and Associations

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As proposed, Rule 613(h) would have provided that each plan sponsor shall comply with the provisions of an NMS plan submitted pursuant to the proposed Rule and approved by the Commission.694 In addition, the proposed Rule would have provided that any failure by a plan sponsor to comply with the provisions of the NMS plan could be considered a violation of the proposed Rule.695 The proposed Rule also would have required that the NMS plan include a mechanism to ensure compliance by the sponsors with the requirements of the plan.696

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One commenter expressed concern that there would be competitive implications if the NMS plan were to include provisions that would permit SROs to assess penalties against one another for non-compliance.697 This commenter recommended, instead, that the NMS plan include a "fee recoupment" provision so the plan administrator could recoup costs incurred as a result of an error by a particular SRO.698 The commenter maintained that a "fee recoupment" provision, coupled with the risk of Commission disciplinary action for a "pattern or practice" of non-compliance, would be a sufficient penalty.699

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After considering the comment received on the issue of compliance with the NMS plan by exchanges and associations,700 the Commission is adopting Rule 613(h) substantially as proposed, with a modification to Rule 613(h)(3) to specify that a mechanism to ensure compliance by the sponsors of the NMS plan with the requirements of the plan "may include penalties where appropriate" and a technical modification to proposed Rule 613(h)(1) and (2).701 The Commission believes that specifying that the mechanism to ensure compliance by the sponsors of the NMS plan may include a penalty provision where appropriate provides the plan sponsors with an appropriate tool – including potential disciplinary action – to help ensure compliance by SROs with the terms and provisions of the NMS plan.702 The Commission notes that a penalty provision could provide an incentive for each SRO to comply with all the provisions of the NMS plan because each SRO will seek to avoid incurring any penalty under the Rule. The incentive to avoid a penalty could also reduce the risk of non-compliance with the Rule. The Commission notes, however, that the adopted Rule does not mandate that the NMS plan's enforcement mechanism include penalties, as there might be other mechanisms to enforce or encourage compliance with the Rule, and the Commission believes that the SROs, in the first instance, should design such mechanisms in their role as plan sponsors. However, the Commission expects that if the SROs design compliance mechanisms that do not incorporate penalties, they would explain in the NMS plan how such mechanisms are expected to help ensure compliance by SROs with the terms and provisions of the NMS plan.703

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With respect to the comment concerning the potential competitive implications of allowing the plan sponsors to impose penalties against each other for non-compliance, the Commission notes that it will carefully review the NMS plan submitted for its consideration, including any proposed mechanisms to help ensure compliance with the NMS plan and the adopted Rule, to help ensure that penalty provisions, if any, are designed to be applied fairly and in a manner consistent with the Exchange Act.704 As the central repository will be a facility705 of the SROs, the rules governing it must be consistent with the Exchange Act. In addition, any future amendment to the penalty provisions applicable to the SROs would either be reviewed as an amendment to the NMS plan (effected through public notice and comment and taking into account the relevant considerations contemplated by Rule 613(a)(1)) or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.

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The Commission notes that the Commission's examination authority under Section 17 of the Exchange Act706 extends to the central repository because it is a facility of the SROs and, thus, the Commission will have the opportunity to inspect the central repository and its books and records for compliance with any penalty provisions set out in the NMS plan. Additionally, the Commission has the authority to review any actions taken under the NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS,707 for burdens on competition, among other matters.708

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In response to the comment suggesting a "fee recoupment" provision in the NMS plan, the Commission notes that Rule 613(b)(4), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan." In this regard, to the extent a "fee recoupment" is a method for recouping costs incurred by the central repository as a result of an error in reporting to the consolidated audit trail, as stated by a commenter,709 the Commission notes that, pursuant to Rule 613(b)(4), the plan sponsors may, if they deem it appropriate, include a fee recoupment provision in the NMS plan submitted to the Commission for its consideration.710

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2. Members

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Proposed Rule 613(g) would have included provisions to subject members of each SRO to the requirements of Rule 613. Specifically, as proposed, the Rule would have required each SRO to file with the Commission, pursuant to Section 19(b)(2) of the Exchange Act711 and Rule 19b-4 thereunder,712 a proposed rule change to require its members to comply with the requirements of the proposed Rule and the NMS plan.713 Further, the proposed Rule directly would have required each member to (1) collect and submit to the central repository the information required by the Rule, and (2) comply with the clock synchronization requirements of the proposed Rule.714 The proposed Rule also would have required that the NMS plan include a provision that each SRO, by subscribing to and submitting the plan to the Commission, agrees to enforce compliance by its members with the provisions of the plan.715 Finally, the proposed Rule would have required the NMS plan to include a mechanism to ensure compliance with the requirements of the plan by the members of each SRO that is a sponsor of the NMS plan submitted pursuant to this Rule and approved by the Commission.716

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One commenter expressed the view that "enforcement of [the consolidated audit trail] . . . should be accomplished through a policies and procedures rule framework – similar to that of Regulation NMS. To enforce the rule from a strict liability perspective would simply be the wrong approach and would result in thousands of technical (non-material) violations, which is clearly not the intent of the rule."717

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After considering the comment regarding Rule 613's provisions on compliance with the Rule by members of the SROs, the Commission is adopting Rule 613(g) substantially as proposed, with technical modifications to proposed Rule 613(g). These technical modifications simplify the language of Rule 613(g). Adopted Rule 613(g) does not include the phrase that applied the requirements therein to each member of an SRO "that is a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the deleted language.

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In addition, the Commission modified Rule 613(g)(2) as proposed to provide that, "[e]ach member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members." This change requires members to comply with all applicable provisions of the NMS plan as approved by the Commission instead of with the specific provisions contained in the Rule relating to recording and reporting data and clock synchronization since the requirements contained in the NMS plan may differ or be more specific than the requirements stated in the Rule.

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To be in compliance with the NMS plan, members must record and report all data elements required by the NMS plan within the time specified in the plan. To this end, the plan sponsors must develop a way to ensure that each member that takes action with respect to an order (e.g., originates, receives, routes, modifies, cancels or executes an order) records and reports all required elements associated with a reportable event, as the plan sponsors must also develop a mechanism to address any lapses in compliance with the NMS plan with a goal of ensuring the central repository is receiving a complete record of the life of an order.

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The Commission does not agree with the commenter that believed that enforcement of the consolidated audit trail will necessarily "result in thousands of technical (non-material) violations, which is clearly not the intent of the rule." 718 The Commission notes that the adopted Rule does not address the means of achieving compliance with the requirements of the consolidated audit trail. Rather, adopted Rule 613(g) simply provides that the SROs must submit proposed rule changes to require their members to comply with the requirements of an NMS plan approved by the Commission.

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The Commission acknowledges there would be costs to the SROs for filing with the Commission proposed rule changes to require their members to comply with Rule 613 and the NMS plan approved pursuant thereto. The Commission, however, believes that the Rule should include these rule filing requirements for the reasons discussed above.

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b. Operation and Administration of the NMS Plan

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Proposed Rule 613(b) sets forth requirements concerning the operation and administration of the NMS plan. As proposed, Rule 613(b)(1) would have required that the NMS plan include a governance structure to ensure fair representation of the plan sponsors and provisions governing the administration of the central repository, including the selection of a plan processor. Rule 613(b)(2), as proposed, also would have required the plan sponsors to include in the NMS plan a provision addressing the requirements for the admission of new sponsors to the plan and the withdrawal of sponsors from the plan. In addition, proposed Rule 613(b)(3) would have required the NMS plan to include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, and proposed Rule 613(b)(4) would have required that the plan sponsors develop a process for allocating among themselves the costs associated with creating and maintaining the central repository, including a provision addressing the manner in which such costs would be allocated to sponsors who join the plan after it has been approved.

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Finally, proposed Rule 613(b)(5) would have required the NMS plan to require the appointment of a CCO to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations to the plan sponsors for enhancement to the nature of the information collected and the manner in which it is processed. In the Proposing Release, the Commission stated that it expected the CCO would establish the procedures necessary to ensure that the operations of the central repository keep pace with technical developments and to make any necessary upgrades or changes to the central repository to maintain its efficacy.719

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The Commission received comments addressing the proposed requirements for operation and administration of the NMS plan.720 One commenter suggested that the NMS plan should contain a voting mechanism that requires less than unanimity, and with an effective tie breaking mechanism.721 This commenter also recommended that the governance structure "limit the ability of individual SROs to make modifications on a unilateral basis that could escalate costs by forcing the operator and firms to absorb costs that do not advance the interests of investors."722

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Two commenters expressed views on the selection and role of the plan processor.723 One suggested that the SROs should select the processor through a "request for proposal."724 Another commenter generally believed that the allocation of plan processor costs warranted more consideration.725 This commenter expressed concern with regard to the SROs owning the plan processor, noting in particular that unanimous consent would be required for all board actions.726 This commenter stated that the plan processor alone should handle rulemaking and compliance, subject to oversight by an "industry group."727 Another commenter stated that, "[r]egarding the governance of the national market system plan [contemplated] by the proposal, we wish to reiterate that the SEC should provide the broker-dealer industry with an official 'seat at the table' alongside the SROs, so that [the broker-dealers] can review and comment on system requirements as they are being developed and vote on plan amendments going forward."728

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After considering these comments, for the reasons discussed below, the Commission is adopting Rule 613(b) as proposed, but with the addition of two new requirements. Specifically, in addition to the provisions included in the proposed rule,729 Rule 613(b), as adopted, provides that the national market system plan submitted shall include: "a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail . . ., [and] an Advisory Committee . . . includ[ing] representatives of the member firms of the plan sponsors."730

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The requirement that the NMS plan require the appointment of a CCO to regularly review the operation of the central repository and make any appropriate recommendations for enhancements731 is one method to facilitate the consolidated audit trail's ability to evolve over time in terms of technology, functionality, and accuracy. Adopted Rule 613(b)(6) supplements this requirement by now requiring that the NMS plan "include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum: (i) [a]n evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with [Rule 613(e)(6)]), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with [Rule 613 (e)(4)]), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics; (ii) [a] detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the NMS plan to include new instruments, and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer; (iii) [a]n estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and (iv) [a]n estimated implementation timeline for any such potential improvements, if applicable."732 The Commission believes these provisions will help plan sponsors understand and evaluate any deficiencies in the operation of the consolidated audit trail and to propose potential enhancements to the NMS plan, as appropriate, taking cost effectiveness into consideration. These provisions also will allow the Commission to assess any such potential improvements, accounting for the considerations contemplated by Rule 613(a)(1), the specific requirements of the approved NMS plan, and any changes or additions to these requirements that the Advisory Committee, the SROs, or the Commission may wish to consider in the future. The Commission believes that such enhancements, if any, to the consolidated audit trail could improve the ability of the SROs and the Commission to conduct effective market oversight by keeping up with continually-changing technologies and markets, by, for example, allowing the SROs and the Commission to conduct their market oversight more quickly, accurately, and/or comprehensively, as well as possibly at lower costs. Similarly, the Commission believes that adding granularity and details regarding the scope and nature of Customer-IDs, adding new instruments, or including new trading or order activities could allow regulators to have a more complete picture of the markets and market participants, which could also lead to more effective market oversight. The Commission believes that performing this assessment no later than every two years is reasonable given the rapid speed at which the markets and related technologies are evolving. The Commission also believes that the written assessment, required by Rule 613(b)(6), will help inform the Commission about the likely feasibility, costs, and impact of, and the plan sponsors' approach to, the consolidated audit trail evolving over time. The Commission would expect to make the document publicly available on its website.

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In response to the comment requesting that the broker-dealer industry receive a "seat at the table" regarding governance of the NMS plan,733 the adopted Rule requires that the NMS plan submitted to the Commission for its consideration include a provision requiring the creation of an Advisory Committee, composed at least in part by representatives of the members of the plan sponsors, "to advise the plan sponsors on the implementation, operation and administration of the central repository."734 Further, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require that "[m]embers of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors."735 Pursuant to the Rule, the NMS plan also shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsor.736 The Rule further provides that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.737 The Commission believes that, given the scope of the Rule, both in terms of the market participants that may be affected by the Rule and the breadth of the audit trail information that will be collected, it is important that the plan sponsors solicit input from their members because this could help inform the plan sponsors of any expected or unexpected operational or technical issues that may arise in the implementation of the Rule and/or the operation of the central repository, and help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the burdens on SRO members. The Commission believes that the Advisory Committee could provide members of the SROs with a forum for informing the plan sponsors of any potential implementation or operational issues faced by them in connection with the consolidated audit trail. Plan sponsors also will be able to draw on the knowledge and experience of these members to help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the costs to SRO members. The Commission also believes that an Advisory Committee could help foster industry consensus on how to approach and resolve possible issues that may be disputed, and approaches that may conflict, regarding operation of the consolidated audit trail. In this regard, the Commission encourages the plan sponsors to, in the NMS plan, provide for an Advisory Committee whose composition includes SRO members from a cross-section of the industry, including representatives of small-, medium- and large-sized broker-dealers.

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The Commission believes the requirement for the NMS plan to create the Advisory Committee, as well as the requirement in Rule 613(a)(1)(xi), discussed below, that requires the NMS plan to require a discussion of the process by which the plan sponsors solicited the views of their members on the creation, implementation, and maintenance of the consolidated audit trail, a summary of those views, and how the plan sponsors took those views into account when preparing the NMS plan, are responsive to commenters' views that more input by industry representatives, such as members of the SROs who are subject to the requirements of Rule 613, would be advantageous to the creation, implementation, and maintenance of the consolidated audit trail.738

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In addition, because the members of the Advisory Committee will have the right to attend all meetings of the plan sponsors (with the exception of executive sessions), to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors, the governance process of the central repository will be more transparent to all market participants that will be affected by Rule 613. Further, the Commission believes the inclusion of SRO members on the Advisory Committee will increase the efficacy of the central repository. These market participants will have first-hand experience with the operation of the central repository, as they are required to report data to the facility, allowing them to provide informed input on any problems currently facing the central repository of which they are aware, and on any future actions that the central repository might or should take to address such problems. Finally, the Commission believes that an Advisory Committee structure that also permits the plan sponsors to meet in executive session without members of the Advisory Committee appropriately balances the need to provide a mechanism for industry input into the operation of the central repository, against the regulatory imperative that the operations and decisions regarding the consolidated audit trail be made by SROs who have a statutory obligation to regulate the securities markets, rather than by members of the SROs, who have no corresponding statutory obligation to oversee the securities markets.

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The Commission also considered the comment that provided other suggestions on the governance of the NMS plan and believes that the commenter's concerns regarding a unanimity requirement in the NMS plan have merit.739 Accordingly, the Commission urges the SROs to take into account the need for efficient and fair operation of the NMS plan governing the consolidated audit trail, and consider the appropriateness of a unanimity requirement and the possibility of a governance requirement other than unanimity, or even super-majority approval, for all but the most important decisions. The Commission believes that an alternate approach may be appropriate to avoid a situation where a significant majority of plan sponsors – or even all but one plan sponsor – supports an initiative but, due to a unanimous voting requirement, action cannot be undertaken.740 Therefore, the Commission believes the SROs should consider alternative governance structures that would ensure that decisions made by the SROs are both achieved and implemented efficiently, in the interest of advancing the Commission's mission. The Commission notes that the NMS plan submitted to the Commission for its consideration will be published for public comment, and industry participants will have an opportunity at that time to submit comments on the governance structures proposed by the plan sponsors. Further, the Commission believes, as discussed above, that unanimity need not be the standard for decision-making with regard to matters relating to the operation of the consolidated audit trail. Thus, the plan sponsors have flexibility under the Rule to determine the governance structures that will facilitate the effective and efficient oversight of the plan processor.

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In response to the comments regarding the selection and role of the plan processor,741 the Commission believes that the SROs, as the plan sponsors of the NMS plan governing the operation of the consolidated audit trail, should retain the authority to select and oversee the plan processor. The Commission believes that the SROs are in the best position to understand how the plan processor should operate and to address the need for changes when necessary. The SROs also have the flexibility under the Rule to consult the Advisory Committee, for example, to assist the SROs in their selection process and in their determination of whether modifications are necessary to address innovations in the industry if they believe that such participation is needed.

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The Commission acknowledges that, in addition to the many costs and burdens associated with the creation, implementation, and maintenance of a consolidated audit trail, with regards to the specific requirements discussed in this section, there would be costs to the SROs for appointing a CCO to the central repository, providing the Commission with the written assessment of the operation of the consolidated audit trail, and creating an Advisory Committee.742 For the reasons discussed above, the Commission believes these requirements are important to the efficient operation and practical evolution of the consolidated audit trail, and are responsive to many commenters' concerns about governance structure, cost allocations, and the inclusion of SRO members as part of the planning process. The Commission is therefore requiring the SROs to include these requirements in the NMS plan submitted to the Commission for its consideration. After the SROs submit the NMS plan, the Commission and the public will have more detailed information in evaluating the NMS plan.

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c. Surveillance

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As proposed, Rule 613(f) would have required each SRO subject to the Rule to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated audit trail data. The Rule, as proposed, also would have required each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan.743

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Commenters generally expressed support for the proposal's requirement that SROs implement surveillance systems that make use of the consolidated information.744 One commenter stated that the enhanced surveillance that could be achieved with the audit trail would likely attract additional trading volume to the U.S. markets and that the consolidated audit trail would benefit the SROs by permitting them to conduct surveillance themselves, thus "reducing their risks and their costs."745 Another commenter noted that the proposed consolidated audit trail would be a "critical first step toward consolidated market surveillance," and would lower costs for markets and their participants through economies of scale.746 A third commenter opined that a centralized database such as the consolidated audit trail is necessary to bring together data from exchanges, ECNs, and dark pools to properly regulate trading.747 However, one commenter maintained that a "Commission-mandated market regulator" would be costly for the securities industry and create the potential for a lack of surveillance innovation.748 A commenter recommended that the Commission monitor the surveillance systems and provide guidance to the SROs in establishing their surveillances.749 Finally, one commenter suggested that outsourcing surveillance to regulators could result in lower costs for markets, and recommended several specific security and analytical features for such a surveillance system.750

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After considering the comments, for the reasons discussed below, the Commission is adopting Rule 613(f) as proposed. Specifically, the Rule requires that each SRO develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.751 The Commission believes that it is appropriate to require SROs to enhance their surveillance programs to make full use of the increased functionalities and the timeliness of the consolidated audit trail. Additionally, because trading and potentially manipulative activities could take place across multiple markets, the Commission supports efforts to coordinate surveillance among the SROs, such as through a plan approved pursuant to Rule 17d-2 under the Exchange Act,752 or through regulatory services agreements between SROs. In this regard, as commenters have noted, SROs could "outsource" surveillance efforts to another SRO, if there are efficiencies to be gained. With respect to the comment regarding the benefits to be gained by creating a "single market regulator," the Commission believes that mandating such an entity or structure goes beyond the scope of the Rule.753

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The Commission notes that it intends to review its own surveillance activities in light of the consolidated audit trail and intends to take steps to enhance its surveillance capabilities to take advantage of consolidated audit trail data. The Commission anticipates that such steps will be informed by – and may in turn help inform – the surveillance enhancement measures required to be taken by the SROs under adopted Rule 613(f).

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The Commission also is adopting Rule 613(a)(3)(iv) as proposed, which requires the NMS plan to require each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan. Since Rule 613(a)(3)(iii) will require the NMS plan to require SROs to begin reporting to the central repository within one year after effectiveness of the NMS plan, the Commission believes the two additional months provided by this timeframe is reasonable and sufficient to allow SROs to update their surveillance systems and allow for testing of new surveillances.

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The Commission acknowledges there would be costs to the SROs for developing and implementing surveillance systems, or enhancing existing surveillance systems, reasonably designed to make use of the consolidated audit trail. However, the Commission believes it may be possible for SROs to retire some of their existing, and perhaps less-efficient, audit trail and surveillance systems once the consolidated audit trail is operational. As discussed in Section III.C.a.iv. below, the adopted Rule requires the SROs to consider and discuss the potential for costs savings if other SRO systems, and their associated surveillances, were migrated to the consolidated audit trail.754 Once such information is submitted in the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider the information in evaluating the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 +

C. NMS Plan Process

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process + Compliance User: Broker-dealers + Keywords: + Comments, + Adopted Rule, + Cost, + +

As proposed, Rule 613(a)(1) would have required each SRO to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository. Section III.A. above discusses the use of an NMS plan to create, implement, and maintain a consolidated audit trail. This Section focuses on the process the SROs must follow when submitting to the Commission the NMS plan that satisfies the requirements discussed in Section III.B. above and the process the Commission will undergo when evaluating whether to approve the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Comments on the NMS Plan Process
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Comments on the NMS Plan Process + Compliance User: Broker-dealers + Keywords: + Comments, + NMS Plan, + Analysis, + +

The Commission received several comments regarding how best to develop an NMS plan that will govern the creation and implementation of a consolidated audit trail, as well as the time needed to do so. Several commenters suggested that the Commission undergo a RFP or RFI process to create a consolidated audit trail.755 Specifically, one commenter suggested that the Commission outline a set of goals it intends to achieve through creation of a consolidated audit trail and allow an industry working group to determine the data elements that must be reported and other technical requirements.756 Another commenter opined that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.757 Further, some commenters requested more specific information about the audit trail system to determine the best approach for implementing the consolidated audit trail.758

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Some of these commenters stressed that more time should be allotted for the planning and design of the NMS plan due to the comprehensive business analysis that would be needed in the initial stages of the consolidated audit trail.759 Commenters recommended extensive, "up-front business analysis,"760 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."761 The commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.762 The commenters also suggested that the business analysis could include an RFI "to engage potential solution providers early in the process,"763 and stated that the time needed to perform the analysis to produce a "detailed blueprint for CAT"764 would be closer to six months,765 rather than the proposed 90 days.766 As a basis for their suggestions, one of the commenters provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.767 This commenter noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.768

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In addition, some commenters noted that a consolidated audit trail could be implemented in a number of ways, and thus recommended that the Commission replace the specific system requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal RFP process.769

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pubdate: July 18, 2012 effdate: October 01, 2012 +
2. Adopted Rule
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Adopted Rule + Compliance User: Broker-dealers + Keywords: + Rule 613(a)(1), + SRO, + NMS Plan, + Considerations, + Features and Details, + Analysis, + Process, + Implementation, + Commission Review, + Cases, + Analyses related to Investigation, + Analyses related to Monitoring, + Order Tracking, + Time Sequence, + Database Security, + Database Access, + Submission, + Extension of Time, + +

After considering the comments regarding the NMS plan process, the Commission is adopting proposed Rule 613(a)(1) with modifications. First, the Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, and when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on efficiency, competition, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., solicitation of input from members of the SROs); and (4) the information about the implementation and milestones of the consolidated audit trail. Second, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." Third, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register. A discussion of these modifications and the "use cases" follows.

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a. NMS Plan Considerations

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As noted above,770 the Commission believes that the collective effect of the modifications and additions described above will be to significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining the consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule. Further, given these changes to the Rule discussed above and the wide array of commenter's views on how to best implement a consolidated audit trail,771 the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration. The costs and benefits of the consolidated audit trail are highly dependent on the specific solutions proposed by SROs.

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Accordingly, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule772) until such time as it may approve the NMS plan submitted to the Commission for its consideration. In light of the expanded set of solutions that should be available as a result of the changes described above and to facilitate a more robust economic analysis, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. The Commission is therefore requiring the SROs to discuss, as part of their NMS plan "considerations" that detail how the SROs propose to implement the requirements of the plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.

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This additional information and analysis are intended to ensure that the Commission and the SROs have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of the extent to which the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. The NMS plan submitted by the SROs will be published for public comment and reviewed by the Commission for consistency with the Exchange Act and the rules thereunder. As a result, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted, which the Commission will review and consider.

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i. Features and Details of the NMS Plan

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The first six considerations the Rule requires the SROs to address in the NMS plan relate to the features and details of the NMS plan. These six considerations require the NMS plan to specify and explain the choices made by the SROs to meet the requirements specified in the Rule for the consolidated audit trail. The Commission intends to use the discussion of these considerations to evaluate the NMS plan submitted for its consideration and how well it meets the objectives described in Section II.B.2.

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Rule 613(a)(1)(i)

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Rule 613(a)(1)(i) requires the NMS plan submitted to discuss "[t]he method(s) by which data is reported to the central repository, including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load and retain such data. . . ." The Rule also requires the NMS plan to discuss the basis for selecting such method(s).

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The Commission believes that requiring that the NMS plan discuss the method(s) by which data is reported to the central repository is important because the method for reporting data and the source of the data are significant to the effectiveness of the consolidated audit trail and could affect, and potentially enhance, the reliability and the accuracy of the data that is reported to the central repository.773 Discussing such method(s), as well as the basis for selecting such method(s), should help assure the Commission that the plan sponsors have considered the various alternatives and selected the method(s) that best achieves the objectives of the consolidated audit trail in a cost-effective manner.774 In addition, Rule 613(a)(1)(i) requires that the NMS plan describe how the central repository will receive, extract, transform, load and retain data because the Commission believes that this information is integral to a comprehensive understanding of the operation of the central repository proposed in the NMS plan.

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Rule 613(a)(1)(ii)

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Rule 613(a)(1)(ii) requires the NMS plan to address "[t]he time and method by which the data in the central repository will be made available to regulators, in accordance with [Rule 613(e)(1)] to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."

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The time and method by which data will be made available to regulators are fundamental to the utility of the consolidated audit trail because the purpose of the consolidated audit trail is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.775 The NMS plan submitted should discuss these issues in detail, guided, in particular, by the issues and questions raised in the "Regulator Use Cases" described in Section III.C.2.b., below.

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The importance of this consideration was discussed in the Proposing Release.776 The Commission emphasized the necessity of the data being in a uniform electronic format so that regulators would be able, among other things, to effectively and efficiently detect and investigate illegal trading across markets, without having to spend valuable time and resources reconciling audit trail formatting differences in the data.777 In addition, the Proposing Release noted that requiring the order and trade data to be collected in one location in a single format would allow regulators ready access to the data for use in market reconstructions, market analyses, surveillance and investigations,778 as regulators could then retrieve the information that they need much faster than the current process of requesting data from multiple parties without having to reconcile disparate audit trail information. Also, in the Proposing Release, the Commission noted the importance of SRO regulatory staff having direct access to consolidated audit trail data.779 The Commission continues to believe that it is vital that regulators have ready access to the consolidated audit trail data in the central repository so that this information can be effectively and efficiently used in fulfilling their regulatory responsibilities.

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Rule 613(a)(1)(iii)

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Rule 613(a)(1)(iii) requires the NMS plan to address "[t]he reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators."

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The Commission believes the reliability and accuracy of the data is a critical aspect of the consolidated audit trail, because the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate. If the reliability and accuracy of reported data is not maintained by the central repository during the period it is required to be retained and throughout the various uses to which it may be put by regulators, then its value to regulators will be substantially diminished.

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Accordingly, the NMS plan submitted should discuss in detail, among other things, how the consolidated audit trail envisioned by the sponsors would be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained by the central repository (e.g., during transmission from the SRO or member to receipt by the central repository,780 data extraction, transformation and loading at the central repository,781 data maintenance and management at the central repository,782 and data access by regulators783).

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The Commission notes that, when proposing Rule 613, it highlighted the importance of this consideration by emphasizing that the reliability and accuracy of the data are critical to the integrity and effectiveness of the consolidated audit trail.784 Indeed, Rule 613(e)(4)(ii), like the proposed Rule, specifically requires the plan sponsors to establish policies and procedures for the plan processor to ensure the timeliness, accuracy and completeness of the audit trail data reported to the central repository.

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Rule 613(a)(1)(iv)

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Rule 613(a)(1)(iv) requires the NMS plan to discuss "[t]he security and confidentiality of the information reported to the central repository."

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The Commission is including this consideration because it believes that keeping the data secure and confidential is crucial to the efficacy of the consolidated audit trail and the confidence of market participants. Exposure of highly-confidential information about the trading strategies and positions of market participants through a security breach, for example, could impact the confidence of the public in the central repository and in trading on the U.S. markets. The Commission understood the importance of security and confidentiality provisions when it proposed Rule 613(e)(4) to require the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository.785 Numerous commenters also noted the importance of maintaining the security and the confidentiality of the data collected pursuant to the proposed Rule.786

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Rule 613(a)(1)(v)

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Rule 613(a)(1)(v) requires the NMS plan to address "[t]he flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments."

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The Commission believes that the flexibility and scalability of the systems used by the central repository are important to the effectiveness of the consolidated audit trail, and, accordingly, the Commission believes the NMS plan under Rule 613 should address potential "built-in" obsolescence that may arise as a result of the SROs' choice of systems or technology. For this reason, the NMS plan should address how, taking into consideration the costs and benefits, including the potential impact on competition, efficiency, and capital formation, the consolidated audit trail systems might be designed to accommodate: (1) potential growth in the trading volume or message traffic relating to NMS securities; (2) possible expansion to include other non-NMS securities;787(3) additional data fields that the SROs or the Commission might determine to require in the future (such as new order characteristics); and (4) potential technological developments that might allow the consolidated audit trail to be operated in a more timely, reliable, and cost-effective manner.

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As noted in the Commission's Concept Release on equity market structure,788 the market for trading securities has changed dramatically in recent years and, as technology advances, trading systems and trading strategies also change. The Commission believes that it is important for the consolidated audit trail to keep pace with market developments. It must be designed in a way that allows it to do so efficiently and in a cost-effective manner to assure regulators of its continued usefulness. Thus, the Commission has identified the flexibility and scalability of the systems used by the central repository to collect, consolidate and store audit trail data as a consideration that must be discussed in the NMS plan submitted to the Commission for its consideration. To sufficiently address this consideration, the Commission expects the NMS plan to describe in detail how the consolidated audit trail envisioned by the sponsors would be designed to accommodate additional message traffic for orders in NMS securities, how readily capacity could be expanded, and the existence of any capacity limits. The Commission also would expect the NMS plan to discuss in detail the extent to which the proposed consolidated audit trail could accommodate potential additional data elements, order characteristics, and other types of securities such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, how quickly this could be done, and whether any limits exist on the ability of the proposed system to accommodate these types of changes. Additionally, the Commission would expect the NMS plan to further discuss whether and how the consolidated audit trail could be upgraded to keep pace with improvements in technology, such as improvements to the speed of systems processing.

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The Commission believes these descriptions are important because, otherwise, what initially appears to be an effective and cost-effective NMS plan could become significantly less so over time as markets evolve and if, for example, order volumes increase, new order types are developed, and additional data elements or other types of securities, such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, are potentially incorporated into the consolidated audit trail.

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The Commission notes that issues relating to the potential flexibility and scalability of the consolidated audit trail were raised in the Proposing Release. For example, the Commission stated that, while the proposal was limited to NMS securities, the Commission ultimately intended the consolidated audit trail to cover secondary market transactions in other securities and information on primary market transactions.789 In fact, as discussed above, the Commission specifically proposed that the NMS plan contain provisions relating to the possible expansion of the consolidated audit trail to products other than NMS securities.790 In addition, in the Proposing Release, the Commission specifically noted its concerns with the lack of scalability of the existing EBS system and the fact that the volume of transaction data subject to reporting under the EBS system can be significantly greater than the system was intended to accommodate in a typical request for data.791

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Rule 613(a)(1)(vi)

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Rule 613(a)(1)(vi) requires the NMS plan to address "[t]he feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner: (A) [t]he identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction; (B) [t]he number of such securities each such market participant is allocated; and (C) [t]he identity of the broker-dealer making each such allocation."

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In the Proposing Release, the Commission stated that "it would be beneficial to provide for the possible expansion of the consolidated audit trail to include information on primary market transactions in NMS stocks" and required in proposed Rule 613 that the plan sponsors address such expansion in a document provided to the Commission within two months after effectiveness of the NMS plan.792 The Commission continues to believe, for the reasons set forth below, that a potential expansion of the consolidated audit trail to cover primary market transactions would be beneficial. Specifically, the Commission believes that the SROs should address – at the time of the submission of the NMS plan to the Commission, rather than as part of a later expansion plan – the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail.

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As with the data sources discussed in Section II.A, the sources of information currently available to the Commission regarding allocations of NMS securities in primary market transactions are each limited in their ability to provide accurate, complete, accessible, and timely information.793 For example, while the Commission and FINRA can request information about allocations from the books and records of broker-dealers, such requests are unduly cumbersome for both regulators and market participants, potentially involving multiple time-consuming individual requests.794 Other sources of information about allocations of NMS securities in primary market transactions – including public sources795 – are also limited in certain respects.796

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In light of these limitations, data about the allocations of NMS securities in primary market transactions could also improve market analysis by the Commission and the SROs, which could in turn help better inform rulemaking and other policy decisions. Specifically, such data might aid the Commission and the SROs in better understanding the role of such allocations in the capital formation process. Combining this data with the secondary market data to be collected by the consolidated audit trail could allow regulators to calculate investor positions and when and how the investors receiving allocations sell their securities. Such data could also facilitate a better understanding of how securities are allocated in a primary market transaction, how allocations differ across broker-dealers and investors, and what types of investors are allocated securities. This analysis is virtually infeasible on a market-wide basis today because the data collection process using current sources of information is so cumbersome.

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In addition, if the consolidated audit trail included data regarding the allocations of NMS securities in primary market transactions, SROs could be better able to monitor for compliance with their rules related to such transactions.797 The data also could more broadly assist SROs in their examinations and investigations related to allocations in initial public offerings ("IPOs") and other primary market transactions by providing a richer data set for evaluating possible compliance issues. For example, the SROs could use IPO allocation information, combined with the secondary market transaction information in a consolidated audit trail, to run surveillance on whether sales in the IPO auction were marked accurately (i.e., "long" or "short") and in compliance with applicable requirements.798 Allocation data could also allow SROs to conduct surveillance for "red flags" they might develop regarding potential suitability issues related to customer allocations, as well as potentially improper allocations to customers (such as kickbacks).

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The Commission could also enhance its own examination and investigation processes if data regarding the allocations of NMS securities in primary market transactions were included in the consolidated audit trail. Without access to a single centralized database of allocations, Commission staff must rely on more limited data sources that generally enable only either broad-based sweeps or one-off investigations based on particularized suspicion of wrongdoing. Because the relevant data would be readily available for analysis, including information about allocations as part of the consolidated audit trail could facilitate the Commission's identification of particular risks and exam candidates. Other examinations undertaken by the Commission staff address whether employees of a regulated entity are in compliance with the rules applicable to their transactions related to primary market transactions. Having allocation information available before such an examination commences could allow staff to enhance their pre-examination research, better focus on the sources of potential violations, and ultimately foster more effective and efficient examinations.

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In investigations related to primary market transactions, the Commission staff generally must obtain data from underwriters post-transaction, which can take considerable time owing to the limitations on current sources of data noted above.799 Including data about the allocations of NMS securities in primary market transactions in the consolidated audit trail could enable investigations to proceed more efficiently and to more quickly assess whether alleged violations of various rules under the Exchange Act, such as Regulation M and Rule 10b-5, warrant investigation.800 In addition, the Commission believes that information about allocations could help the SROs and Commission investigate allegations of improper allocations, such as allocations subject to "spinning"801 or "laddering."802 Currently, these types of investigations would require requesting data from underwriters, and in some cases, other parties (such as investment advisors) involved in the primary market transaction.

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Given these potential benefits, the Commission believes that it is important – consistent with its view in the Proposing Release – for the SROs to address the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail. However, unlike other potential additions to the consolidated audit trail – e.g., the inclusion of debt securities – that will be contemplated later in expansion plans, allocations of NMS securities in primary market transactions are uniquely tied to the central element of the NMS plan – the reporting of data regarding trading in NMS securities. For example, allocations in primary market transactions may have a significant impact on trading and other activity in the secondary market, and behavior in the primary market may influence behavior in the secondary market through initial pricing and other mechanisms. More broadly, IPOs and other primary market transactions continue to be a source of particular interest for market participants and observers because of, among other things, their role in the capital formation process. In light of these considerations, the Commission believes it is appropriate to require the SROs to address allocations of NMS securities in primary market transactions at the time that the NMS plan is submitted under adopted Rule 613(a)(1), rather than as part of an expansion plan under adopted Rule 613(i).

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At the same time, the Commission recognizes that firms may use systems and methods to handle information regarding allocations of NMS securities in primary market transactions that differ from those used to handle information regarding secondary market transactions in such securities. Such differences may affect the extent to which information regarding allocations may be readily incorporated into the consolidated audit trail described by the NMS plan mandated by Rule 613. For example, the unique features of allocations of NMS securities in primary market transactions may require different reporting timeframes, different information security controls, or additional data elements that would not be required for other information being reported to the central repository and that are not contemplated by Rule 613. Because of these potential differences, the Commission believes it is appropriate to require the SROs to address the feasibility, costs, and benefits of their members reporting information regarding allocations of NMS securities in primary market transactions, rather than require the NMS plan to require such reporting at the outset.

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The Commission acknowledges that plan sponsors nevertheless will incur costs to address the feasibility, benefits, and costs of incorporating information about allocations of NMS securities in primary market transactions into the consolidated audit trail. Among other things, the plan sponsors will need to undertake an analysis of technological and computer system acquisitions and upgrades that would be required to include information about such allocations. However, given the potential benefits described above of including such information in the consolidated audit trail, the Commission believes these costs are justified.

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ii. Analysis of the NMS Plan

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As noted above, in consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to a number of the proposed requirements. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means the SROs may use to meet certain requirements. These modifications significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and thus provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the solution set that would have been available under the requirements of the proposed Rule.

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Because these modifications permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards,803 the assumptions underlying the Commission's cost estimate in the Proposing Release that new, large-scale market systems would need to be developed from scratch may no longer be valid.804 Thus, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule)805 until such time as it may approve any NMS plan submitted to the Commission for its consideration – that is, after the NMS plan, together with its detailed information, including cost estimates for the creation, implementation, and maintenance of the consolidated audit trail, and analysis, has been submitted by the SROs to the Commission and there has been an opportunity for public comment. The Commission believes that the information and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can be better informed about the costs for the development, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs in conjunction with – and guided by – their development of an NMS plan that complies with the requirements of the adopted Rule. In addition, as noted above,806 the Rule includes a mandate that in determining whether to approve the plan and whether the plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation.

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Rule 613(a)(1)(vii)

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Rule 613(a)(1)(vii) requires the NMS plan to include "[t]he detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify: (A) [a]n estimate of the costs to the plan sponsors for creating and maintaining the central repository; (B) [a]n estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; (C) [a]n estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and (D) [h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."807

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Commenters opined on the costs of funding the consolidated audit trail in general.808 One commenter stated that the Commission should give "important consideration to alternative means to help fund the creation of what is essentially a public utility in [the consolidated audit trail]," suggesting the Commission "should itself pay user fees to help build and run the [consolidated audit trail]," or that the government should underwrite low-cost loans for market participants aimed to pay the costs of the consolidated audit trail.809 Another commenter suggested that the cost of creating and maintaining the central repository should be shared among all market participants, including broker-dealers, ATSs, and exchanges.810 Another commenter stated that, if the Commission requires the SROs to fund the creation of the consolidated audit trail (i.e., the central repository), SROs may be forced to raise transaction fees, which would "resurrect the distortions caused by high transaction fees, potentially increase the use of flash orders, if allowed, and discourage trading activity."811

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The Commission also received comments regarding the allocation of the costs of the consolidated audit trail.812 One commenter emphasized that the NMS plan must provide for an equitable allocation of costs, including the sharing of expansion costs by the parties that benefit from any new products added to the consolidated audit trail.813 One commenter suggested that the Commission should require trading venues to allocate system costs for the consolidated audit trail "at least partially based on message traffic . . . ."814 Similarly, another commenter, opining that exchanges currently bear a disproportionate amount of the costs for market surveillance and noting that exchanges would also be forced to shoulder the costs of the consolidated audit trail, suggested that other venues, such as ATSs and internal broker-dealer platforms, should bear a proportionate share of the costs of creating, implementing, and maintaining the consolidated audit trail.815 This commenter also suggested that the Commission fund the audit trail using fees assessed on high frequency traders who cancel a "disproportionately high" percentage of their orders,816 arguing that this "would have the added benefit of deterring a practice that, at best, adds little value in the price discovery process and, at worst, is potentially manipulative or even fraudulent."817

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The Commission believes that the issues surrounding how the consolidated audit trail should be funded, and how costs in creating, implementing, and maintaining the consolidated audit trail should be allocated, are important, and the Rule requires information about those issues to be provided by the SROs in the NMS plan submitted to the Commission for its consideration. In response to comments and in recognition that an initiative of the size and scope of the consolidated audit trail necessarily will require substantial expenditures by the SROs and their members, the Commission is requiring, pursuant to Rule 613(a)(1)(vii), the SROs to include in the NMS plan, a discussion of costs and how such costs will be allocated. As discussed above, the Commission believes that the SROs will incur costs to create and maintain the central repository.818 Also, as discussed above, SROs and their members may need to make systems changes or to purchase new systems to record and report the data required by the NMS plan to the central repository.819 SROs and their members will incur upfront costs, as well as ongoing costs to record and report such information. Because, as noted above, these costs can only be analyzed once the SROs narrow the array of choices they have and develop a detailed NMS plan,820 the Commission believes that the most robust approach for estimating these costs is for the SROs to provide such cost estimates in conjunction with, and guided by, their development of the NMS plan. The Commission believes that a fulsome discussion in the NMS plan of the estimated costs to SROs and their members will aid commenters in providing useful comments that will further the Commission's understanding of the cost implications of the consolidated audit trail. In addition, a fulsome discussion will aid the Commission in its evaluation of whether to approve the NMS plan and in conducting its own analysis of the costs and benefits of the NMS plan.

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There also would be costs associated with establishing and operating the central repository that will be jointly owned by the plan sponsors. The Commission believes it is important to understand how the plan sponsors plan to allocate such costs among themselves to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan amongst the SROs. In addition, although the plan sponsors likely would initially incur the costs to establish and fund the central repository directly, they may seek to recover some or all of these costs from their members. If the plan sponsors seek to recover costs from their members, the Commission believes that it is important to understand the plan sponsors' plans to allocate costs between themselves and their members, to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan.

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Rule 613(a)(1)(viii)

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Rule 613(a)(1)(viii) requires the NMS plan to include "[a]n analysis of the impact on competition, efficiency, and capital formation of creating, implementing, and maintaining the national market system plan."

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Rule 608(a)(4)(ii)(C) under Regulation NMS already requires every NMS plan submitted to the Commission to be accompanied by an analysis of the impact on competition of implementation of the plan.821 This requirement is designed to help inform the Commission's evaluation of whether the NMS plan will impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Rule re-states the application of the Rule 608(a)(4)(ii)(C) requirement to provide an analysis of the NMS plan's impact on competition and imposes a requirement that the NMS plan also include an analysis of the impact on efficiency and capital formation.822

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These requirements are designed to help inform the Commission's understanding of whether the NMS plan may promote efficiency and capital formation. As an initial matter, the SROs will be providing an analysis of the economic consequences of the NMS plan they develop and propose. As noted above, because the specific requirements of the NMS plan will not be known until the NMS plan is submitted, and the SROs will be providing that analysis, the Commission will consider the impact of the proposed consolidated audit trail on efficiency, competition, and capital formation in deciding whether to approve the NMS plan. The Commission, however, will consider such analysis in determining whether to approve the NMS plan and whether the plan is in the public interest under Rule 608(b)(2). 823

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iii. Process Followed to Develop the NMS Plan

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The following two considerations require the NMS plan to address how the SROs solicited the input of their members and other appropriate parties in their design of the NMS plan, and to detail the alternative consolidated audit trail designs considered and rejected by the SROs. These considerations will inform the Commission's evaluation of the NMS plan submitted for its consideration.

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Rule 613(a)(1)(xi)

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Rule 613(a)(1)(xi) requires the NMS plan to discuss "[t]he process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan."

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The Commission believes that the SROs' consideration of the views of their members is important because, given the scope of the Rule, it will affect many market participants and will require them to report a broad range of audit trail information. Ensuring that market participants with varied perspectives have a role in developing the NMS plan submitted to the Commission for its consideration could help inform the plan sponsors of operational or technical issues that may arise in the implementation of the NMS plan, and help assure the Commission and market participants that the requirements imposed on members are done so in an efficient and cost-effective manner.824 Similarly, the Commission believes it is important that the SROs consider the views of other parties – such as back office service providers, market operations specialists, and technology and data firms – as may be appropriate in light of the Rule's goal of creating, implementing, and maintaining a complex system that may entail changes to multiple other systems and functionalities involved across the lifecycle of an order. Such parties could offer operational and technical expertise to the SROs, including, among other things, by identifying issues that may arise in the interface between legacy and new systems. In addition, the inclusion of such parties in the deliberative process could also result in the introduction of additional alternative approaches.

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The Commission also believes that it is appropriate to require the SROs to set out in the NMS plan a summary of the views expressed by such members and other parties and how the SROs took those views into account in developing the NMS plan. This requirement is designed to inform the Commission about the extent to which the SROs considered the views of their members and other appropriate parties as they undertook the complex task of developing the NMS plan for a consolidated audit trail, to facilitate a cost estimate by the SROs that takes into account the costs members will incur in creating, implementing, and maintaining the consolidated audit trail, as well as to encourage the consideration of reasonable alternative approaches contemplated by Rule 613(a)(1)(xii) in the plan formulation process.

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The Commission received several comments advocating inclusion of the broker-dealer community and other appropriate parties in the planning of the consolidated audit trail.825 One commenter, with respect to NMS plan governance, urged the inclusion of "an official 'seat at the table' alongside the SROs" for members of the broker-dealer industry.826 Another commenter recommended that the Commission seek greater SRO and broker-dealer involvement in the front-end planning before adopting a final rule to make all parties aware of potential design tradeoffs, and establish appropriate timelines for implementation and compliance.827 A further commenter advocated allowing working groups to engage in dialogue with the Commission, broker-dealers and the SROs to effectively conduct the business analysis needed to build the consolidated audit trail.828 Additionally, one commenter suggested that the Commission staff should form and engage working groups comprised of representatives from the "affected constituents," specifically brokers and "key technology vendors,"829 and that such working groups could work with the Commission to develop a request for proposal."830 Similarly, another commenter urged the Commission to require an industry working group of SROs and a representative group of broker-dealers to address the "complexities involved in developing such a system."831 One commenter suggested encouraging the participation of issuers and other market participants in the creation of the consolidated audit trail,832 and another commenter advocated the inclusion of "broad industry participation from the SEC, FINRA, exchange, broker dealer and vendor communities."833

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The Commission considered the comments recommending wider industry involvement in the creation of the consolidated audit trail and believes that, since the consolidated audit trail will be a regulatory tool used by the SROs and the Commission, it is appropriate for the SROs, when developing the NMS plan, to request input from the securities industry as well as technological advice. The Commission believes that this input should be sought during the preparation of the NMS plan submitted to the Commission for its consideration,834 during the comment process,835 and subsequent to the approval of an NMS plan.836

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Rule 613(a)(1)(xii)

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Rule 613(a)(1)(xii) requires the NMS plan to discuss "[a]ny reasonable alternative approaches to creating a consolidated audit trail that the plan sponsors considered in developing the national market system plan, including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan."837 The Commission believes this consideration is appropriate because it reflects the view, supported by commenters, that there are alternative approaches to creating, implementing, and maintaining the consolidated audit trail. The Commission believes that requiring the SROs to discuss alternatives considered helps ensure that the plan sponsors have appropriately weighed the merits of the various approaches that might be considered to create, implement, and maintain the consolidated audit trail, by requiring the NMS plan to describe the alternatives that the plan sponsors considered before making any significant decision with respect to the consolidated audit trail, and the relative advantages and disadvantages, including costs and benefits, of such alternatives. The Commission also believes that requiring transparency with respect to alternative approaches and the decision-making process of the SROs will facilitate public comment on the NMS plan and the wisdom of the approach selected by the plan sponsors. Similarly, such transparency should provide the Commission with useful insights into the rationale for the approach chosen by the plan sponsors as it considers whether to approve the NMS plan submitted to the Commission. The Commission also notes that this consideration complements Rule 613(a)(1)(vii), discussed above, which requires that the NMS plan discuss the detailed estimated costs to the plan sponsors for creating, implementing, and maintaining the consolidated audit trail, because this consideration requires the NMS plan to provide the costs of the alternatives that were not adopted by the plan sponsors in the NMS plan submitted to the Commission.

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iv. Implementation and Milestones of the Consolidated Audit Trail

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The following two considerations are designed to elicit additional information from the plan sponsors about the implementation and milestones of the consolidated audit trail. These will inform the Commission's evaluation of the NMS plan submitted to the Commission for its consideration, particularly in the degree to which the consolidated audit trail can replace existing data sources and in how effectively the proposed plan will meet the objectives discussed in Section II.B.2.

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Rule 613(a)(1)(ix)

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Rule 613(a)(1)(ix) requires the NMS plan to discuss "[a] plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of: (A) [w]hether collection of such information remains appropriate; (B) [i]f still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and (C) [i]f no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of the phasing-in of the consolidated audit trail and phasing-out of such existing rules and systems (or components thereof)."838

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As noted in the Proposing Release and above, many exchanges and FINRA each have their own disparate audit trail rules.839 Thus, a member of the various exchanges and FINRA could be subject to the audit trail rules of, and be required to submit different information to, more than one exchange and FINRA. In addition, several commenters discussed the potential reduction in costs for the creation, implementation, and maintenance of a consolidated audit trail if existing SRO audit trail requirements were eliminated. In particular, one commenter stated that, "over the long-term, the costs of developing a carefully designed and appropriately scaled consolidated audit trail could be offset in part by eliminating the individual SRO reporting requirements imposed under existing audit trail systems."840 This commenter also urged the SROs and the Commission "to rely to the fullest extent possible on the consolidated audit trail data for market reconstructions, investigations, and analysis, rather than requesting data from broker-dealers. This would be more efficient for both firms and regulators and would help maximize the utility of the consolidated audit trail."841

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Another commenter similarly stated that "a consolidated trail and consolidated market surveillance should achieve economies of scale that ultimately lower costs for both the markets themselves and the market participants."842 This commenter further reasoned that, "[r]ather than each SRO separately maintaining its own surveillance staff and surveillance programs that are searching for the same behavior, and thus creating redundancies, certain technology and staff resources can be consolidated into a single enterprise with costs equitably allocated across all SROs."843 However, the commenter also pointed out that "[s]uch consolidation, of course, would not preclude individual SROs from conducting surveillance for unique attributes and rules of its marketplace, ensuring that specialized market expertise continues to inform surveillance and oversight of trading on that market."844

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Many other commenters shared similar opinions with regards to the efficiency effects that a consolidated audit trail would have on market participants and their requirements to provide data to regulators. One commenter, for example, listed as one of seven benefits of a consolidated audit trail that "it would reduce the time and resources required by market participants to respond to case-by-case requests from regulators."845 Another commenter stated that it "agrees with the Commission that the implementation of the proposed consolidated audit trail would likely render unnecessary existing audit trails and data obtained through the equity blue sheets system."846 Similarly, another commenter also "agree[d] with the Commission that in calculating the total cost to the industry of the audit trail it is important to consider offsetting savings from the retirement of redundant data feeds such as OATS, OTS, COATS, ISG Equity Audit Trail, and EBS. In addition, the industry may be able to avoid the cost of compliance with the Commission's proposed Large Trader Reporting System if the consolidated audit trail contains sufficient information to meet those requirements."847

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The Commission recognizes that the creation of a consolidated audit trail could result in efficiency gains for market participants with respect to their regulatory data reporting requirements and for regulators with respect to their surveillance activities. The Commission also recognizes that the consolidated audit trail could render existing rules and systems that contain the same requirements as the consolidated audit trail redundant. While the Commission is not at this time requiring that existing rules and systems be eliminated, the Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof), including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also provide the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).

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The Commission believes that the implementation of a plan to eliminate duplicative existing rules, systems, and/or components of such rules and systems, will result in increased efficiency to market participants who need to comply with the disparate reporting requirements for orders and with repeated requests for data by regulators who cannot obtain the data they need from existing sources of information.

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Rule 613(a)(1)(x)

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Rule 613(a)(1)(x) requires the NMS plan to include "[o]bjective milestones to assess progress toward the implementation of the national market system plan."

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The creation of a consolidated audit trail is crucial to the effective oversight of the U.S. securities markets, but at the same time is an initiative of substantial scope and complexity. Accordingly, to ensure that the consolidated audit trail is established in a timely and logical manner, and that the SROs can be held accountable for maintaining a workable implementation schedule, the NMS plan submitted is required to set forth a series of detailed objective milestones, with projected completion dates, toward implementation of the consolidated audit trail. In addition to being useful for the Commission in its evaluation of the NMS plan, the milestones will be used by the Commission in its supervision of the implementation of the consolidated audit trail. Such milestones could include, but are not limited to: publication and implementation of the methods for obtaining a CAT-Reporter-ID and the Customer-ID database, testing of the collection of order and execution data from a representative subset of broker-dealers, initial access to the central repository for regulators, demonstration of linking the full lifecycle of events for select test orders, cancels, modifications, and executions, and integration of trade and quote data as currently reported by trading venues into the central repository.

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v. Commission Review

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The Commission believes these considerations represent fundamental characteristics of a meaningful plan to establish an effective and efficient consolidated audit trail. The Commission will assess the NMS plan's discussion of the considerations described as part of its evaluation of the NMS plan.848 The Commission notes that, if the NMS plan submitted does not comply with the requirements of the Rule, or if the Commission determines changes are necessary or appropriate, the Commission may amend the NMS plan pursuant to Rule 608(b)(2 of Regulation NMS with such changes or subject to such conditions as the Commission may deem necessary or appropriate, taking into account the considerations contemplated in Rule 613(a)(1).849 In addition, should the NMS plan and the consolidated audit trail not keep pace with market or technological developments, such that its efficiency or effectiveness becomes impaired,850 the Commission itself may, pursuant to Rule 608(b), propose an amendment to the NMS plan.851

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b. Regulator Use Cases

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In light of the comments recommending that the Commission undertake an RFP process and provide more "business requirements"852 the Commission believes that it is useful to provide further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases," as might typically be found in an RFP. These "use cases" and accompanying questions set forth below are derived directly from the considerations described in adopted Rule 613(a)(1), which, as discussed in Section III.C.2.a., originated from key principles of the consolidated audit trail that had been highlighted by the Commission in the Proposing Release. Specifically, these "use cases" describe the various ways in which, and purposes for which, regulators would likely use, access, and analyze consolidated audit trail data. By describing how regulators would use the consolidated audit trail data, the "use cases" and the related questions are meant to elicit a level of detail about the considerations that should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule. They should also aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail. In particular, the "use cases" will assist in gauging how well the NMS plan will specifically address the needs outlined in this Rule, by describing the features, functions, costs, benefits, and implementation times of the plan.

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The Commission notes that it is not including these "use cases" and accompanying questions to endorse a particular technology or approach to the consolidated audit trail; rather, these "use cases" and accompanying questions are designed to aid the SROs' understanding of the types of useful specific information that the NMS plan could contain that would assist the Commission in its evaluation of the NMS plan. The Commission also notes that its description of "use cases" includes a non-exclusive list of factors that SROs could consider when developing the NMS plan. The SROs also may include in the NMS plan submitted to the Commission for its consideration any other information regarding how data would be stored or accessed that the SROs believe the Commission or the public may find useful in evaluating the NMS plan submitted.

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1. Analyses Related to Investigations and Examinations

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The Commission expects that the consolidated audit trail will provide regulators the ability to more efficiently conduct targeted investigations and examinations. These generally require being able to conduct several types of queries on large amounts of data and extract targeted segments of such data. These targeted segments are likely to be much smaller than the bulk extractions discussed in Section III.C.2.b.2., below.

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Off-Line Analysis. Regulators are likely to frequently require the extraction of relatively small amounts of select data from the consolidated audit trail database at the central repository for their own "off-line" analyses.853 For example, a regulator may need to extract data on all orders in a particular stock, by a particular customer, on a particular day, or based on any other combination of fixed search criteria.854 Though the total data extracted may be small, the number of records that need to be searched to find such data may be enormous.

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i. What technical or procedural mechanisms will regulators be required to use to request data extractions? Does the NMS plan provide for a front-end user interface to perform search and extractions? If not, what types of tools or technologies would regulators need to implement to send search and extract requests to the database? Would regulators be permitted to write and submit their own queries (e.g., Structure Query Language or "SQL") to the database directly? Would the central repository write and submit queries on behalf of a regulator at the regulator's request?

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ii. What response times should regulators expect from search and extract requests? Would a search for all trades in a given security by a given customer over a specified period of time return a response with all requested data in one minute? One hour? Overnight? How would this response time scale with the amount of data requested? With the amount of data being searched?

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iii. How would the database effectively process simultaneous requests by multiple users at one or more regulators? Will each request be queued serially? Can they be processed in parallel? What is the effect of simultaneous requests on response times? Would there be limits to the number of search queries that can be performed at the same time? Would there be limitations on the size of the extractions from such queries?

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iv. A wide range of users at regulators may need to search and extract data for analysis. How are users to be administered? If the NMS plan contemplates a front-end user interface, what validation and security mechanisms will ensure that only permitted users will have access to such data? If the plan contemplates direct access through a means other than a front-end user interface, what security and validation mechanisms would regulators need to deploy to interact with the database?

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Dynamic Search and Extraction. At times, regulators may need to identify and extract small amounts of data from the database based on dynamic search criteria that might require the database to perform calculations on stored data to meet the specified criteria. A few examples of dynamic criteria are: searching for trades with trade sizes above a certain threshold, searching for trades in securities with execution prices that change more than a certain percentage in a given period of time, and searching for orders that are canceled within a certain period of time.

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i. Does the NMS plan contemplate allowing for dynamic search criteria to operate directly on the database? If so, how would the dynamic search criteria be specified and run? What, if any, limitations would there be on the types of search criteria that can be requested? What are the implications for response times? If the plan contemplates a front-end user interface, will dynamic search criteria be included? If the plan allows for dynamic search criteria through a means other than a front-end user interface, what types of tools or technologies would regulators need to implement to request dynamic searches? Have the plan sponsors considered whether such tools or technologies and the personnel to use them are currently available to the regulators?

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ii. If the NMS plan does not contemplate dynamic search criteria, please explain how regulators would be able to use the consolidated audit trail data to perform such searches. Would data need to be downloaded in bulk by the regulators to accomplish these types of searches off-line (see below for related questions)?

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2. Analyses Related to Monitoring, Surveillance, and Reconstruction

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In addition to targeted analysis of select data from the consolidated audit trail database, regulators will also require the analysis of data in bulk form. For example, the Commission is likely to use consolidated audit trail data to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform SRO and Commission rulemaking. To satisfy the surveillance requirements of Rule 613(f), regulators may want the ability to feed consolidated audit trail data into analytical "alert" programs designed to screen for potential illegal activities such as insider trading or spoofing. Surveillances might also benefit if regulators are able to link consolidated audit trail data with databases on certain types of material news events or market participants. This would allow regulators to isolate and aggregate data on trading in advance of those news events or by those participants. If preliminary analyses showed problems, the regulators could then request significant amounts of data for a more thorough and detailed follow-up analysis. In the event of a large scale market event like the May 6, 2010 "flash crash," regulators are likely to use consolidated audit trail data to reconstruct market events on the day of the event, including but not limited to reconstructing entire order books and trading sequences.

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i. What, if any, SRO surveillance data could be replaced by the consolidated audit trail while still improving SROs' ability to surveil?

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ii. How will the NMS plan allow regulators to address these types of large-scale, on-going data analyses?

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iii. In addition to providing regulators with the ability to search and extract data, will the NMS plan provide regulators with access to any plan-hosted applications or interfaces (i.e., those that operate on plan-based systems and resources) that would enable users to perform data analyses on, or create reports or graphs from, data stored in the database (such application or interfaces collectively known as "hosted analytical tools")? If so, how would regulators use and access such tools? What are the limitations of such tools? Would the tools allow regulators to perform the analyses discussed in the examples presented above?

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iv. If the NMS plan does not provide regulators with hosted analytical tools, how would regulators be expected to use their own resources, software, and hardware to perform such analyses? Would the plan provide regulators with an application programming interface ("API") that allows regulators to develop their own tools that interact directly with the consolidated audit trail database? If so, what will the form of such API be? Are there limitations to the number of systems that could connect to the database? How will the plan negotiate priorities for connectivity, searches and queries done via the API? Will there be limitations to the types of queries that could be performed through the API? What types of in-house technologies and systems would be required for regulators to connect to the consolidated audit trail in this fashion?

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v. If the NMS plan does not provide regulators with analytical tools and services and does not provide an API for regulators to connect their own analytics systems to the database, what mechanism would the plan provide to regulators for accessing bulk data in a way that allows for large-scale analyses? Would the plan allow for end-of-day downloads of an entire day's activity so that regulators could load this information into their own systems for such analysis? If so, how is access to such a download to be controlled and implemented? How long would it take to transmit an entire day's worth of consolidated audit trail data to each of the regulators that requires such access? 10 minutes? One hour? Multiple hours? Longer than overnight? Do these time estimates reflect that multiple regulators are likely to simultaneously download consolidated audit trail data each night? What types of technologies or systems would be required for regulators to download this data? What are the expected sizes of such a data download? What type of systems would each regulator need to deploy to store and analyze this data? Have the plan sponsors considered whether such systems and the personnel to operate them are currently available to the regulators?

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vi. Does the plan contemplate data streaming as a method of transmitting bulk data to each regulator? If so, what is the form and mechanism of such data streaming? Would the streaming occur intraday as data is reported to, and processed by, the database, or would the streaming occur after all (or a majority of, or such other criteria) data was reported to, and processed by the database (e.g. overnight streaming)? How would intraday streaming impact the accuracy or completeness of the data received by regulators? Would data be transmitted through different methods or with varying delays by different SROs?

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vii. If the plan does not contemplate any bulk data analyses or means of transmitting data to regulators on a bulk overnight basis or in an intraday or overnight streaming fashion, describe what alternative mechanisms, if any, could be used to enable regulators to perform the types of analyses described at the beginning of the section (b), as well as the various examples described throughout this document of how regulators would make use of consolidated audit trail data.

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3. Order Tracking and Time Sequencing

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As discussed in detail throughout this Release, one of the key requirements of the consolidated audit trail is to provide regulators with a complete record of all of the events that stem from a particular order, from routing to modification, cancellation, or execution. In addition, these events must be stored by the central repository in a linked manner – using either a unique order identifier or a series of unique order identifiers, as discussed in Section III.B.1.d.iv. – so that regulators can quickly and accurately extract a time-sequenced history of each event related to an order.

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i. What methods will the plan use to create the linkages for order events as described above? How will regulators access and search on data in a linked fashion?

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ii. What is the technical form of the order identifier(s) that broker-dealers will be required to send to the consolidated audit trail database so that these linkages can be created? To what extent will broker-dealers be able to generate such identifier(s) using their current systems? To what extent will broker-dealers need to collect or track new data, or modify their systems, to generate such identifier(s)?

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iii. Will the transmission of economic data (such as a price) be sent separately, or via a different technical mechanism, from noneconomic data (such as the identity of a customer)?

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iv. What other changes, if any, will be required of systems typically in use by broker-dealers to provide such data? To what extent can existing broker-dealer systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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v. What changes, if any, will be required of the systems currently in use by regulators to receive such data? To what extent can existing regulatory systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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vi. If data reformatting is required, how much must be done by each broker-dealer using its own systems and resources prior to sending data to the central repository, versus being done on the receiving end by the central repository using plan-based systems and resources?

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vii. If multiple methods for collecting and aggregating are contemplated by the NMS plan, what are the pros and cons of each method?

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viii. How will the plan ensure orders and subsequent events are properly time-sequenced? At what level of granularity will time stamps be stored for each event? Milliseconds? Microseconds? Picoseconds? Describe any differences in the accuracy at which events originating in the same broker-dealer system can be sequenced versus events across different systems at the same broker-dealer, or systems at different broker-dealers. What type of synchronization of clocks will be employed to minimize inter-system timing inaccuracies?

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ix. If time stamps are not stored at a sufficient level of granularity to properly sequence events, what other data or mechanisms will the NMS plan provide to meet the requirement that regulators be able to time-sequence events?

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x. Even if time stamps are sufficiently granular to meet the time-sequencing requirements of today, how would the plan contemplate increasing that granularity as the speed of trading increases?

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4. Database Security, Contingency Planning, and Prospects for Growth

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The data stored in the consolidated audit trail database will contain confidential detailed records of trade and order flow by customer.

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i. How will the plan ensure the security of the database in a way that provides for flexible access by permitted users at multiple regulators (i.e., the Commission and the SROs), but denies access to all other non-permitted users?

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ii. What are the plan's policies and procedures with regards to security? Will the plan make use of any specific national or international security standards? If so, which ones? Will the plan make use of third-party reviews of its security procedures?

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iii. What types of contingency and backup plans will be employed by the plan to safeguard against the loss of data due to technical failures? Will the plan make use of live failover mechanisms so that data being sent to the database is not inadvertently lost in the event of a failure? Will contingency plans provide regulators with uninterrupted access to the database? If not, what are the expectations for recovery times under different failure scenarios?

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iv. As order and trade volumes increase, how does the plan contemplate handling the need for increased capacity and throughput? Would the plan be able to accommodate a doubling in daily volume without materially altering the basic technologies and architecture? A ten-time increase? A 100-times increase?

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5. Database Access

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As part of an investigation or examination, regulators may need to analyze historical trades and orders in the database maintained by the central repository (though not trade and order events occurring prior to the implementation of the consolidated audit trail).

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i. How much historical data will be stored "on-line" in the database and be available for immediate search and extraction?

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ii. How will data be archived if it is no longer stored on-line? How will regulators access and search data that has been archived?

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iii. Will third parties have access to historical data? How will this access differ from the regulatory access?

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c. Extension of time for submission of NMS plan

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Proposed Rule 613 required the SROs to jointly file the NMS plan within 90 days from approval of Rule 613. The Commission received a comment letter specifically suggesting that a six-month period, rather than the 90-day period originally proposed, would be more appropriate for the submission of the NMS plan to ensure that the NMS plan is drafted with an informed understanding of how order and trade processing works so that the consolidated audit trail systems are capable of achieving the Commission's objectives.855 To this end the commenter recommended that the Rule mandate the formation of cross‐market participant working groups; outline the objectives of consolidated audit trail rather than identify technical requirements; and allow six months for the cross‐participant working groups to perform a requirements analysis as part of the development of the NMS plan.856

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In response to this commenter and other commenters that suggested that the Commission rely on an industry working group to create the consolidated audit trail857 and to provide sufficient time for the SROs to draft the additional provisions required by the Rule858 and to prepare responses to the considerations and the use cases for inclusion in the NMS plan,859 the Commission is extending the timeframe for the submission of the NMS plan from 90 days from approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register.860

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pubdate: July 18, 2012 effdate: October 01, 2012 +
3. NMS Plan Costs
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, NMS Plan Costs + Compliance User: Broker-dealers + Keywords: + Cost Estimate, + Preliminary, + Revised, + Programmer Analyst, + Business Analyst, + Attorney, + Compliance Manager, + +

a. NMS Plan Cost Estimates

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This section sets forth the Commission's estimates of the costs to prepare and file the NMS plan. As noted above, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs to the Commission for its consideration and there has been an opportunity for public comment.861 The Commission believes that an economic analysis of the consolidated audit trail is more appropriately performed once the SROs narrow the expanded array of choices they have and developed a detailed NMS plan.862 At that time, the Commission will have available to it detailed information provided by the SROs, and any additional information provided by commenters once the NMS plan is published for comment. The cost estimates set forth below, therefore, only reflect the Commission's estimates as to the costs to the SROs for developing an NMS plan to be submitted to the Commission. These cost estimates do not reflect the much more significant initial and ongoing costs that would be incurred if such NMS plan were approved by the Commission and the implementation of the consolidated audit trail begins.

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The Commission notes that the requirement to develop and submit the NMS plan also is a collection of information within the meaning of the Paperwork Reduction Act of 1995 ("PRA").863 Section IV. below describes in detail the burdens associated with the requirement that the SROs develop and submit an NMS plan.

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i. Preliminary Cost Estimates from Proposing Release

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In the Proposing Release, the Commission estimated that each SRO, on average, would incur an aggregate one-time cost of approximately $234,000864 to prepare and file the NMS plan, for an estimated aggregate cost of about $3.5 million.865

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In making these estimates, the Commission assumed that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be comparable to the cost to create other existing NMS plans.866 Underlying the Commission's estimates were estimates of the amount of time the Commission believed would likely be spent by Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers. The Commission did not receive any comments on these specific cost estimates.

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ii. Revised Cost Estimates

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As noted above, the Commission based its original estimates of the cost to prepare and file the NMS plan on the costs incurred with existing NMS plans. The adopted Rule, however, has been modified from the proposed Rule in several significant ways that differentiate the costs to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to: (1) provide additional information and analysis while addressing the considerations that are set forth in Rule 613(a)(1);867 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,868 security and confidentiality,869 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;870 (3) address error rates;871 and (4) provide for the creation of an Advisory Committee.872

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(A) Revised Initial Costs to Create and File the NMS Plan

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In light of these modifications to the proposed Rule, the Commission no longer believes that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be sufficiently comparable to the cost to create other existing NMS plans to use those costs as a basis for developing a cost estimate for the NMS plan required by Rule 613. Instead, as discussed in more detail below, the Commission is increasing its estimated costs for the development and filing of the NMS plan due to the increases in the hours that likely would be spent to create the NMS plan by the SROs.873 The Commission also is adjusting its preliminary cost estimate for the creation and filing of an NMS plan to reflect updated 2011 wage figures, as well as the registration of two additional SROs, since the preliminary estimates were developed.874 Specifically, the Commission now estimates that the aggregate one-time cost for creating and filing an NMS plan would be approximately $718,000 per SRO,875 or approximately $12.2 million in the aggregate,876 compared to an initial estimate of $234,000 per SRO, or approximately $3.5 million in the aggregate, to prepare and file an NMS plan.877

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The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;878 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that the Commission underestimated the time the SROs would spend on business analyses to be performed in designing the NMS plan based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.879 In response, as discussed below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney, and Compliance Manager hours.

+

The Commission notes that the average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

+

(i) Programmer Analyst

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The Commission is increasing its Programmer Analyst hour estimates from 220 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.i., the Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase substantially its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

+

(ii) Business Analyst

+

The Commission is increasing its Business Analyst hour estimates from 360 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.ii., the Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases," and overall, an amount of time that is comparable to the time that would likely be spent by Programmer Analysts because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, but have separate responsibilities as well.

+

(iii) Attorney

+

The Commission is increasing its estimates for the hours an Attorney would likely spend to prepare and file an NMS plan from 400 hours to 700 hours per SRO. As discussed in more detail in Section IV.D.2.a.iii. below, the Commission anticipates that an Attorney would spend substantially more time than previously estimated to draft the NMS plan.

+

(iv) Compliance Manager

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The Commission is increasing its Compliance Manager hour estimate from 100 hours to 300 hours per SRO. As discussed in more detail below in Section IV.D.2.a.iv., the Commission anticipates that a Compliance Manager would spend substantially more time than previously estimated to draft the NMS plan.

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +
4. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation + Compliance User: Broker-dealers + Keywords: + Effective Analysis, + Competition, + Promotion, + NMS Plan, + +

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition. Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

+

The Commission has focused its economic analysis in this Release on the requirement that the SROs develop an NMS plan, rather than on the actual creation, implementation, and maintenance of a consolidated audit trail itself, and is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself until such time as it may approve the NMS plan submitted to the Commission for its consideration. The Commission's consideration of the Rule's impact on efficiency, competition, and capital formation is consistent with this approach. Because the Rule focuses only on the process and the requirement of the development of an NMS plan, the Commission believes that the adopted Rule will have minimal, if any, impact on efficiency, competition, and capital formation.

+

The Commission regards the adopted Rule as only a step in the multi-step process of developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail and the Commission recognizes that the creation, implementation, and maintenance of a consolidated audit trail itself could potentially have effects on efficiency, competition, and capital formation. Therefore, Rule 613(a)(5) specifically provides that the Commission will consider the impact of the NMS plan submitted to the Commission for its consideration on efficiency, competition, and capital formation in determining whether to approve the plan or any amendment thereto. A complete consideration of the impact of the NMS plan, or any amendment thereto, on efficiency, competition, and capital formation, however, requires information that will not be known until the SROs submit their NMS plan or any amendment thereto. Accordingly, the Commission is deferring this analysis until such time as it may approve the NMS plan, or any amendment thereto, submitted by the SROs. To facilitate the consideration of such possible impacts, the Rule requires SROs to provide their own analysis of the plan's potential impact on efficiency, competition, and capital formation.

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+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

D. Implementation of Rule 613 after Approval of the NMS Plan

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Implementation of Rule 613 after Approval of the NMS Plan + Compliance User: Broker-dealers + Keywords: + Rule 613, + Implementation, + +

Proposed Rule 613(a)(3) sets forth a timetable for the implementation of the consolidated audit trail once the Commission has approved an NMS plan. The Commission proposed that the data collection and submission requirements would have applied first to the national securities exchanges and FINRA, and then to their individual members.880 Specifically, proposed Rule 613(a)(3)(iii) would have required the plan sponsors to provide to the central repository the data to be required by the Rule within one year after effectiveness of the NMS plan. Members of the exchanges and FINRA would have been required to begin providing to the central repository the data required by the proposed Rule two years after the effectiveness of the NMS plan.881 This phased approach was intended to allow members additional time to implement the systems changes necessary to begin providing the information to the central repository, including developing procedures to capture any new information required, such as the unique customer and order identifiers.

+

Additionally, proposed Rule 613(g)(1) would have required each SRO to file a proposed rule change with the Commission on or before 120 days from approval of Rule 613 to require its members to comply with Rule 613. Further, proposed Rule 613(i) would have required the plan sponsors to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how the plan sponsors would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that would be required to be provided, which market participants would be required to provide the data, an implementation timeline, and a cost estimate.

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Although one commenter agreed that the consolidated audit trail could be implemented according to the timeline originally proposed,882 and another urged the Commission to expedite implementation of Rule 613,883 several commenters stated that more time would be necessary to develop and implement the NMS plan.884 Many commenters suggested extended timelines for various aspects of the consolidated audit trail.885 Two commenters, however, argued that the timetable for implementation should be shortened,886 and one of the commenters suggested that the Commission use existing infrastructure, naming OATS as an example, as the basis of the audit trail to save implementation time.887 Another commenter requested that the Commission move the deadline for submission of the joint document from the SROs outlining a proposal of how an expansion could occur from two months, as proposed, to one year after approval of the NMS plan, to allow time to choose a technology provider and build the infrastructure of the system, stating that "[i]t would be far better to develop the design for the initial products and leverage this knowledge to later phases."888

+

The Commission also received two comment letters recommending that the Rule contain an exemption to accommodate the business model of small broker-dealers.889

+

After considering the comments regarding the proposed timeline for implementation of the Rule, the Commission is adopting Rule 613 with changes to the proposed Rule. First, the Commission is adopting a deadline of 60 days from effectiveness of the NMS plan (rather than 120 days from approval of the Rule, as originally proposed) by when each SRO must file with the Commission proposed rule changes to require its members to comply with the requirements of the Rule and the adopted NMS plan,890 so that SROs can sequence their efforts by acting first on developing the NMS plan to be submitted to the Commission for its consideration, and then on proposed rules requiring compliance by their members. Second, in response to the commenter that advocated extending the deadline for the plan sponsors for submission of the joint document outlining how an expansion could occur from two months, as proposed, to one year after effectiveness of the approved NMS plan, the Commission is modifying the proposed Rule so that the document will be due to the Commission within six months (rather than two months as proposed) after the approval of the NMS plan. The Commission believes that this additional four months will provide the time necessary after the submission of the NMS plan to the Commission for the SROs to plan how to expand the consolidated audit trail to capture orders and trading in these additional securities.891

+

The Commission has considered the comment letters that requested an exemption from the proposed Rule for small broker-dealers,892 but, as discussed above,893 does not believe that it is appropriate to completely exempt smaller broker-dealers from the requirements of the consolidated audit trail. While the Commission does not believe that it is appropriate to completely exempt smaller broker-dealers from the Rule, the Commission, in response to commenters' concerns regarding the potential difficulties for small broker-dealers, is modifying the time by when the NMS plan may require small broker-dealers to comply with Rule 613. The Commission is permitting the SROs in the NMS plan to allow small broker-dealers up to three years after effectiveness, rather than two years as proposed, to begin reporting data to the central repository in recognition that some of these firms may still be handling orders manually and thus will need additional time to upgrade to an electronic method.894 Additionally, because many of these broker-dealers may have limited resources, the Commission encourages plan sponsors to propose in the NMS plan a requirement that small broker-dealers report data to the central repository within three years after effectiveness of the NMS plan, as the Commission believes that providing small broker-dealers a longer implementation time should assist such broker-dealers in identifying the most cost-effective and the most efficient manner in which to procure third-party software or make any systems modifications or other changes to comply with Rule 613.

+

Rule 613(a)(3)(vi) uses the definition of "small broker-dealer" contained in Exchange Act Rule 0-10: "Small entities under the Securities Exchange Act for purposes of the Regulatory Flexibility Act."895 Rule 0-10(c) defines a "small broker-dealer" as a broker or dealer that: (1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this section.896 The Commission believes that applying this definition is appropriate because it is an existing regulatory standard that is an indication of small entities for which regulators should be sensitive when imposing regulatory burdens.

+

The Commission notes that not all of the timeframes for implementation are being revised.897 As discussed in Section III.B.1.f., above, the Commission has learned through the comment process that technology exists today to "normalize" information collected for the consolidated audit trail into a uniform electronic format, which will allow the required data to be captured and reported to the central repository more readily than the Commission originally anticipated. Accordingly, the Commission believes the remaining proposed implementation timeframes are reasonable and is adopting them as proposed.

+
+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

IV. Paperwork Reduction Act

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act + Compliance User: Broker-dealers + Keywords: + Information, + NMS Plan, + +

Certain provisions of the Rule contain "collection of information requirements" within the meaning of the PRA. The Commission published notice requesting comment on the collection of information requirements in the Proposing Release and submitted the proposed collection to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The control number for Rule 613 is OMB Control No. 3235-0671 and the title of the new collection of information is "Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules thereunder."

+

This Release includes the Commission's estimates of the costs to create and file the NMS plan.898 As noted above, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.899 Similarly, the Commission is discussing below its estimates of the burden hours associated with the development and filing of the NMS plan but is deferring its discussion of the much more significant burden hours associated with the other paperwork requirements of the consolidated audit trail. The Commission also is deferring its discussion of the ongoing burden hours associated with the NMS plan because such ongoing burdens would only be incurred if the Commission approves the NMS plan. Instead, the Commission will defer these discussions until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

+
pubdate: July 18, 2012 effdate: October 01, 2012 +

A. Summary of Collection of Information under Rule 613

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Summary of Collection of Information under Rule 613 + Compliance User: Broker-dealers + Keywords: + Filing of NMS Plan, + SRO, + Paperwork, + +

Rule 613 requires the SROs to develop and file an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository for the collection of information for NMS securities.900 The NMS plan must require each SRO and its respective members to provide certain data to the central repository in compliance with Rule 613.901 The NMS plan also must include a discussion of specified considerations,902 and certain provisions related to administration and operation of the plan903 and the operation of the central repository.904 Further, the NMS plan is required to include certain provisions related to compliance by the SROs and their members with the requirements of the Rule and the NMS plan.905

+

The Commission believes that requiring an NMS plan imposes a paperwork burden on the SROs associated with preparing and filing the joint NMS plan.

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +

B. Use of Information

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Use of Information + Compliance User: Broker-dealers + Keywords: + Consolidated Audit trail, + Commission, + NMS Plan, + +

The information contained in the NMS plan submitted to the Commission for its consideration will provide the Commission and the public with detailed information regarding how the consolidated audit trail will be created, implemented, and maintained in order for the Commission and the public to be able to carefully consider all aspects of the NMS plan. Further, the information contained in the NMS plan should facilitate an analysis of how well the NMS plan will allow regulators to effectively and efficiently carry out their responsibilities.

+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

C. Respondents

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Respondents + Compliance User: Broker-dealers + Keywords: + Securities association, + +

Rule 613 applies to the 16 national securities exchanges and to one national securities association (FINRA) currently registered with the Commission.906

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +

D. Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan + Compliance User: Broker-dealers + Keywords: + Estimated Hours, + +
pubdate: July 18, 2012 effdate: October 01, 2012 +
1. Preliminary Burden Hour Estimates from Proposing Release
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Preliminary Burden Hour Estimates from Proposing Release + Compliance User: Broker-dealers + Keywords: + Estimated Hours, + +

In the Proposing Release, the Commission estimated that each SRO, on average, would spend approximately 840 hours of legal, compliance, information technology, and business operations time to prepare and file the NMS plan. All together the SROs would spend an estimated 12,600 hours.907 The Commission's 840 hour estimate included internal personnel time and external legal costs - 400 Attorney hours, 100 Compliance Manager hours, 220 Programmer Analyst hours, and 120 Business Analyst hours. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal time to develop and draft the NMS plan, at an average hourly rate of $400, for a total external cost of $20,000 per SRO.908 All together, the SROs would spend an estimated $300,000 in external costs.909

+

In making these estimates, the Commission assumed that the burden hours necessary for preparing and filing the NMS plan pursuant to the proposed Rule would be comparable to the burden hours needed to create other existing NMS plans.910 The Commission's estimates included anticipated work hours for Programmer Analysts, Business Analysts, Attorneys and Compliance Managers. The Commission did not receive comments on any of these burden estimates.

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +
2. Revised Burden Hour Estimates
+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Revised Burden Hour Estimates + Compliance User: Broker-dealers + Keywords: + Estimated Hours, + Revised Initial, + Filing NMS Plan, + Programmer Analyst, + Business Analyst, + Attorney, + Compliance Manager, + +

As noted above, the Commission based its original estimates of SRO burden hours to prepare and file the NMS plan on the burden hours spent for existing NMS plans. The Commission, however, has modified the proposed Rule in several significant ways that differentiate the burden hours to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to expand the NMS plan in the following four ways: (1) provide additional information and analysis to address the considerations that are set forth in Rule 613(a)(1);911 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,912 security and confidentiality,913 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;914 (3) address error rates;915 and (4) provide for the creation of an Advisory Committee.916

+

a. Revised Initial Burden Hours Needed to Prepare and File the NMS Plan

+

In light of these modifications to the proposed Rule, the Commission is increasing substantially its estimated burden hours needed for the development and filing of the NMS plan. The Commission also is adjusting its preliminary burden hour estimates for the preparation and filing of an NMS plan to reflect the registration of two additional SROs after it issued the preliminary estimates.917 The Commission now estimates that the aggregate one-time burden hour amount for preparing and filing an NMS plan would be approximately 2,760 burden hours with $20,000 in external costs per SRO,918 or approximately 46,920 burden hours and $340,000 in external costs in the aggregate,919 compared to an initial estimate of 840 burden hours per SRO with $20,000 in external costs, or approximately 12,600 burden hours in the aggregate and $300,000 in external costs, to prepare and file an NMS plan.920

+

The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the Commission's analysis, set forth below, of the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;921 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that asserted that the Commission underestimated the time the SROs would spend on the business analyses to be performed in designing the NMS plan, based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.922 In response, as discussed in more detail below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney and Compliance Manager hours.

+

The Commission notes that these revised average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these revised hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

+

(i) Programmer Analyst

+

The Commission is increasing its estimates for the hours a Programmer Analyst would likely spend with respect to the preparation and filing of the NMS plan from 220 hours, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Specifically, the SROs will need to rely on Programmer Analysts to help address many of the considerations, as many of those are of a technical nature. For example, several of the considerations relate to the specific features and details of the NMS plan. Programmer Analysts likely will be consulted when the SROs are considering the specific features and details of the NMS plan. The Programmer Analysts likely will provide guidance and information regarding whether a particular feature or detail is technologically possible. The SROs also likely will consult Programmer Analysts when drafting the additional provisions required by the Rule. For example, in drafting the security and confidentiality provisions, Programmer Analysts, who may have knowledge about the information security practices and issues, may be consulted to provide input on a draft provisions in light of technologies with respect to security and confidentiality. Programmer Analysts also may be consulted with respect to addressing errors rates because such analysts may have a technical understanding of trading and reporting systems and be able to provide recommendations on how errors that are introduced can be addressed. In each of these instances, Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

+

(ii) Business Analyst

+

The Commission is increasing its estimates for the hours a Business Analyst would likely spend with respect to the preparation and filing of an NMS plan from 360 hours per SRO, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases." Overall, the Commission anticipates that this amount of additional time will be comparable to the additional time that would likely be spent by Programmer Analysts for the same reasons because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, albeit with separate responsibilities. The SROs will need to rely on Business Analysts to help address many technical considerations that have relevance to the business and operations of SROs. The Commission also believes that the SROs will need to rely on Business Analysts to work with the Programmer Analysts and the Compliance Managers to analyze the business impact of particular features and details of the NMS plan. Because Rule 613 is less prescriptive than the proposed Rule, Business Analysts may have a larger role in helping to determine which option the NMS plan will propose. Business Analysts also will likely be involved in determining the cost estimates and in analyzing the NMS plan's impact on efficiency, competition, and capital formation. The SROs also likely will consult with Business Analysts when drafting the responses to the considerations and the "use cases," as well as the additional provisions required by the Rule. For example, the SROs likely will consult with Business Analysts on the feasibility, benefits, and costs of any technological upgrades that may be required in order to provide the allocation information described in Rule 613(a)(1)(vi). Further, in drafting the security and confidentiality provisions, Business Analysts may have knowledge about the costs and the business risks of certain security and confidentiality decisions. Business Analysts also may be consulted with respect to addressing error rates because any decisions made may impact business operations and the cost estimates. Further, Business Analysts may likely be consulted by Attorneys with respect to the performance assessment and improvement plan. In each of these instances, Business Analysts may be involved in the NMS plan research, any industry discussions (particularly with members and other SROs), negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Business Analysts in the creation and filing of the NMS plan.

+

(iii) Attorney

+

The Commission is increasing its Attorney hour estimates from 400 hours to 700 hours per SRO. The Commission now anticipates that an Attorney would spend substantially more time than the Commission had previously estimated to draft the NMS plan. The NMS plan that Attorneys would draft must now include a discussion of the considerations and the additional provisions required by the Rule, and must reflect additional consultations with Programmer Analysts, Business Analysts and Compliance Managers. Further, the NMS plan drafted also would likely reflect additional consultation on the "use cases." The NMS plan proposal would also likely require Attorney work on the Advisory Committee requirement and on the NMS plan policies and procedures to be used by the plan processor923 to ensure the security and confidentiality and accuracy of the information submitted to the central repository.924 Attorney work would also be required on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. The Commission believes that an Attorney would also be involved in the NMS plan research, any industry discussions, negotiations with vendors, negotiations with SROs (in particular, to reach consensus on an NMS plan), and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Attorneys in the creation and filing of the NMS plan.

+

(iv) Compliance Manager

+

The Commission is increasing its Compliance Manager hour estimates from 100 hours to 300 hours per SRO. The Commission now anticipates that a Compliance Manager would spend substantially more time than the Commission had previously estimated to draft the NMS plan. Compliance Managers likely will help shape provisions of the NMS plan that deal with monitoring member and SRO compliance with the NMS plan's requirements. Compliance Managers likely will also be involved in the Advisory Committee requirement. They likely will also work on NMS plan policies and procedures to be used by the plan processor to ensure the security and confidentiality and accuracy of the information submitted to the central repository, and to ensure that these policies and procedures are feasible for SRO compliance and for member compliance.925 They will likely also work on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. Further, Compliance Managers will also work on NMS plan provisions that address error rates and performance assessment and improvement. The Commission believes that Compliance Managers may also be involved in the NMS plan research and industry discussions (particularly with regard to SRO and member compliance issues). Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Compliance Managers in the creation and filing of the NMS plan.

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+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

E Collection of Information is Mandatory

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Collection of Information is Mandatory + Compliance User: Broker-dealers + Keywords: + Collection, + +

The collection of information discussed above is a mandatory collection of information.

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +

F. Confidentiality

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Confidentiality + Compliance User: Broker-dealers + Keywords: + Policies, + Reporting, + Central Repository, + +

The Rule requires that the data to be recorded and reported to the central repository will only be available to the SROs and the Commission for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.926 Further, the NMS plan submitted to the Commission for its consideration pursuant to the adopted Rule is required to include policies and procedures to ensure the security and confidentiality of all information submitted to the central repository, and to ensure that all plan sponsors and their employees, as well as all employees of the central repository, use appropriate safeguards to ensure the confidentiality of such data and shall agree not to use such data for any purpose other than surveillance and regulatory purposes.927

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+
pubdate: July 18, 2012 effdate: October 01, 2012 +

G. Retention Period of Recordkeeping Requirements

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Retention Period of Recordkeeping Requirements + Compliance User: Broker-dealers + Keywords: + Rule 17a-1, + Retention, + +

The SROs are required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.928 Members are required to retain records and information in accordance with Rule 17a-4 under the Exchange Act.929

+
+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

V. Regulatory Flexibility Act Certification

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Regulatory Flexibility Act Certification + Compliance User: Broker-dealers + Keywords: + Administrative Procedure Act, + RFA, + Rule 605(b), + FINRA, + NMS Plan, + +

The Regulatory Flexibility Act ("RFA")930 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative Procedure Act, as amended by RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on "small entities."931 Rule 605(b) of the RFA states that this requirement shall not apply to any proposed rule or proposed rule amendment, which if adopted, would not "have a significant economic impact on a substantial number of small entities."932

+

In the Proposing Release, the Commission requested comment on whether proposed Rule 613 would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities.933 The Commission also requested that commenters provide empirical data to support the extent of such impact.934 The Commission received two comments on the general anticipated effect of the proposed Rule on small-broker dealers; FINRA and a small broker-dealer that solely handles orders manually requested that an exemption from the proposed Rule be adopted to accommodate the business model of small broker-dealers.935 In response to the commenters, the Commission amended the Rule as proposed to provide additional time for small broker-dealers to comply with the reporting requirements of Rule 613.936 The Commission notes that none of the comment letters received specifically responded to the Commission's initial regulatory flexibility analysis.

+

As proposed and as adopted, Rule 613 requires the SROs to file an NMS plan to create, implement, and maintain the consolidated audit trail. In response to commenters and as discussed in this release, the Commission has modified the proposed Rule to provide the SROs with a range of options and greater flexibility for how they choose to meet the requirements of the Rule. As a result, the Commission will not know the specific requirements of the NMS plan until it is filed with the Commission, and cannot analyze how the NMS plan will impact small entities until then. At this time, there are no small entities "subject to the requirements" of Rule 613.937

+

However, because Rule 613 requires that the national securities exchanges and national securities associations (i.e., FINRA) file an NMS plan with the Commission, for purposes of the RFA, the Commission is undertaking an analysis of how the NMS plan filing requirement will impact the exchanges and FINRA to ascertain whether the exchanges and FINRA are "small businesses." Paragraph (e) of Rule 0-10 provides that for the purposes of the RFA, an exchange is considered a "small business" if it has been exempted from the reporting requirements of Rule 601 of Regulation NMS,938 and is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0-10. Under this standard, none of the national securities exchanges subject to Rule 613 is a "small business" for purposes of the RFA. In addition, FINRA is not a small entity as defined in Rule 0-10.939 Therefore, the Commission believes that Rule 613, which requires that the SROs file an NMS plan with the Commission to create, implement, and maintain the consolidated audit trail, will not have a significant economic impact on a substantial number of small entities because this requirement will only apply to the existing national securities exchanges and national securities associations, which do not qualify as small entities pursuant to the RFA.

+

For the foregoing reasons, the Commission hereby certifies that, pursuant to 5 U.S.C. 605(b), Rule 613 will not have a significant economic impact on a substantial number of small entities.

+
+
pubdate: July 18, 2012 effdate: October 01, 2012 +

VI. Statutory Authority

+ Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Statutory Authority + Compliance User: Broker-dealers + Keywords: + 17 CFR Part 242, + § 242.613, + Data Recording, + Data Reporting, + CAT-Order, + +

Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), the Commission is adopting Rule 613 of Regulation NMS, as set forth below.

+

Text of Rule

+

List of Subjects in 17 CFR Part 242

+

Brokers, Reporting and recordkeeping requirements, Securities.

+

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows.

+

PART 242 — REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

+

1. The authority citation for part 242 continues to read as follows:

+

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.

+

2. Add § 242.613 to read as follows:

+

§ 242.613 Consolidated Audit Trail.

+

(a) Creation of a National Market System Plan Governing a Consolidated Audit Trail.

+

(1) Each national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section. The national market system plan shall discuss the following considerations:

+

(i) The method(s) by which data will be reported to the central repository including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load, and retain such data; and the basis for selecting such method(s);

+

(ii) The time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities;

+

(iii) The reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators;

+

(iv) The security and confidentiality of the information reported to the central repository;

+

(v) The flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments;

+

(vi) The feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

+

(A) The identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction;

+

(B) The number of such securities each such market participant is allocated; and

+

(C) The identity of the broker-dealer making each such allocation;

+

(vii) The detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify:

+

(A) An estimate of the costs to the plan sponsors for establishing and maintaining the central repository;

+

(B) An estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan;

+

(C) An estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and

+

(D) How the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors;

+

(viii) An analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining of the national market system plan;

+

(ix) A plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of:

+

(A) Whether the collection of such information remains appropriate;

+

(B) If still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and

+

(C) If no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof);

+

(x) Objective milestones to assess progress toward the implementation of the national market system plan;

+

(xi) The process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan; and

+

(xii) Any reasonable alternative approaches to creating, implementing, and maintaining a consolidated audit trail that the plan sponsors considered in developing the national market system plan including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan.

+

(2) The national market system plan, or any amendment thereto, filed pursuant to this section shall comply with the requirements in § 242.608(a), if applicable, and be filed with the Commission pursuant to § 242.608.

+

(3) The national market system plan submitted pursuant to this section shall require each national securities exchange and national securities association to:

+

(i) Within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor;

+

(ii) Within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with paragraph (d) of this section;

+

(iii) Within one year after effectiveness of the national market system plan provide to the central repository the data specified in paragraph (c) of this section;

+

(iv) Within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by paragraph (f) of this section;

+

(v) Within two years after effectiveness of the national market system plan require members of each such exchange and association, except those members that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter, to provide to the central repository the data specified in paragraph (c) of this section; and

+

(vi) Within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter to provide to the central repository the data specified in paragraph (c) of this section.

+

(4) Each national securities exchange and national securities association shall be a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

+

(5) No national market system plan filed pursuant to this section, or any amendment thereto, shall become effective unless approved by the Commission or otherwise permitted in accordance with the procedures set forth in § 242.608. In determining whether to approve the national market system plan, or any amendment thereto, and whether the national market system plan or any amendment thereto is in the public interest under § 242.608(b)(2), the Commission shall consider the impact of the national market system plan or amendment, as applicable, on efficiency, competition, and capital formation.

+

(b) Operation and Administration of the National Market System Plan.

+

(1) The national market system plan submitted pursuant to this section shall include a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor.

+

(2) The national market system plan submitted pursuant to this section shall include a provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan.

+

(3) The national market system plan submitted pursuant to this section shall include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.

+

(4) The national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan.

+

(5) The national market system plan submitted pursuant to this section shall require the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

+

(6) The national market system plan submitted pursuant to this section shall include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum:

+

(i) An evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with paragraph (e)(6) of this section), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with paragraph (e)(4) of this section), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics;

+

(ii) A detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the national market system plan to include new instruments and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer;

+

(iii) An estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and

+

(iv) An estimated implementation timeline for any such potential improvements, if applicable.

+

(7) The national market system plan submitted pursuant to this section shall include an Advisory Committee which shall function in accordance with the provisions set forth in this paragraph (b)(7). The purpose of the Advisory Committee shall be to advise the plan sponsors on the implementation, operation, and administration of the central repository.

+

(i) The national market system plan submitted pursuant to this section shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsors.

+

(ii) Members of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors; provided, however, that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.

+

(c) Data Recording and Reporting.

+

(1) The national market system plan submitted pursuant to this section shall provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part) of the order.

+

(2) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to report to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format, or in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage.

+

(3) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event. The national market system plan shall require that information recorded pursuant to paragraphs (c)(7)(i) through (v) of this section must be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association, or member. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

+

(4) The national market system plan submitted pursuant to this section shall require each member of a national securities exchange or national securities association to record and report to the central repository the information required by paragraphs (c)(7)(vi) through (viii) of this section by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such information. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

+

(5) The national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

+

(6) The national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association.

+

(7) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and any member of such exchange or association to record and electronically report to the central repository details for each order and each reportable event, including, but not limited to, the following information:

+

(i) For original receipt or origination of an order:

+

(A) Customer-ID(s) for each customer;

+

(B) The CAT-Order-ID;

+

(C) The CAT-Reporter-ID of the broker-dealer receiving or originating the order;

+

(D) Date of order receipt or origination;

+

(E) Time of order receipt or origination (using time stamps pursuant to paragraph (d)(3) of this section); and

+

(F) Material terms of the order.

+

(ii) For the routing of an order, the following information:

+

(A) The CAT-Order-ID;

+

(B) Date on which the order is routed;

+

(C) Time at which the order is routed (using time stamps pursuant to paragraph (d)(3) of this section);

+

(D) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order;

+

(E) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed;

+

(F) If routed internally at the broker-dealer, the identity and nature of the department or desk to which an order is routed; and

+

(G) Material terms of the order.

+

(iii) For the receipt of an order that has been routed, the following information:

+

(A) The CAT-Order-ID;

+

(B) Date on which the order is received;

+

(C) Time at which the order is received (using time stamps pursuant to paragraph (d)(3) of this section);

+

(D) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order;

+

(E) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order; and

+

(F) Material terms of the order.

+

(iv) If the order is modified or cancelled, the following information:

+

(A) The CAT-Order-ID;

+

(B) Date the modification or cancellation is received or originated;

+

(C) Time the modification or cancellation is received or originated (using time stamps pursuant to paragraph (d)(3) of this section);

+

(D) Price and remaining size of the order, if modified;

+

(E) Other changes in material terms of the order, if modified; and

+

(F) The CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction.

+

(v) If the order is executed, in whole or part, the following information:

+

(A) The CAT-Order-ID;

+

(B) Date of execution;

+

(C) Time of execution (using time stamps pursuant to paragraph (d)(3) of this section);

+

(D) Execution capacity (principal, agency, riskless principal);

+

(E) Execution price and size;

+

(F) The CAT-Reporter-ID of the national securities exchange or broker-dealer executing the order; and

+

(G) Whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information.

+

(vi) If the order is executed, in whole or part, the following information:

+

(A) The account number for any subaccounts to which the execution is allocated (in whole or part);

+

(B) The CAT-Reporter-ID of the clearing broker or prime broker, if applicable; and

+

(C) The CAT-Order-ID of any contra-side order(s).

+

(vii) If the trade is cancelled, a cancelled trade indicator.

+

(viii) For original receipt or origination of an order, the following information:

+

(A) Information of sufficient detail to identify the customer; and

+

(B) Customer account information.

+

(8) All plan sponsors and their members shall use the same Customer-ID and CAT-Reporter-ID for each customer and broker-dealer.

+

(d) Clock Synchronization and Time Stamps. The national market system plan submitted pursuant to this section shall require:

+

(1) Each national securities exchange, national securities association, and member of such exchange or association to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event that must be reported pursuant to this section to the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

+

(2) Each national securities exchange and national securities association to evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards; and

+

(3) Each national securities exchange, national securities association, and member of such exchange or association to utilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in the national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond. To the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, the plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced. The national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments.

+

(e) Central Repository.

+

(1) The national market system plan submitted pursuant to this section shall provide for the creation and maintenance of a central repository. Such central repository shall be responsible for the receipt, consolidation, and retention of all information reported pursuant to paragraph (c)(7) of this section. The central repository shall store and make available to regulators data in a uniform electronic format, and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information required by paragraph (c)(7) of this section for all reportable events for that order.

+

(2) Each national securities exchange, national securities association, and the Commission shall have access to the central repository, including all systems operated by the central repository, and access to and use of the data reported to and consolidated by the central repository under paragraph (c) of this section, for the purpose of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. The national market system plan submitted pursuant to this section shall provide that such access to and use of such data by each national securities exchange, national securities association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.

+

(3) The national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports.

+

(4) The national market system plan submitted pursuant to this section shall include policies and procedures, including standards, to be used by the plan processor to:

+

(i) Ensure the security and confidentiality of all information reported to the central repository by requiring that:

+

(A) All plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in this paragraph (A) shall be construed to prevent a plan sponsor from using the data that it reports to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation;

+

(B) Each plan sponsor adopt and enforce rules that:

+

(1) Require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository; and

+

(2) Permit only persons designated by plan sponsors to have access to the data in the central repository;

+

(C) The plan processor:

+

(1) Develop and maintain a comprehensive information security program for the central repository, with dedicated staff, that is subject to regular reviews by the Chief Compliance Officer;

+

(2) Have a mechanism to confirm the identity of all persons permitted to access the data; and

+

(3) Maintain a record of all instances where such persons access the data; and

+

(D) The plan sponsors adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository with respect to information security.

+

(ii) Ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository pursuant to paragraph (c) of this section; and

+

(iii) Ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository pursuant to paragraph (c) of this section.

+

(5) The national market system plan submitted pursuant to this section shall address whether there will be an annual independent evaluation of the security of the central repository and:

+

(i) If so, provide a description of the scope of such planned evaluation; and

+

(ii) If not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead.

+

(6) The national market system plan submitted pursuant to this section shall:

+

(i) Specify a maximum error rate to be tolerated by the central repository for any data reported pursuant to paragraphs (c)(3) and (c)(4) of this section; describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce such maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof;

+

(ii) Require the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan;

+

(iii) Specify a process for identifying and correcting errors in the data reported to the central repository pursuant to paragraphs (c)(3) and (c)(4) of this section, including the process for notifying the national securities exchanges, national securities association, and members who reported erroneous data to the central repository of such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and

+

(iv) Specify the time by which data that has been corrected will be made available to regulators.

+

(7) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information consolidated and stored pursuant to paragraph (c)(7) of this section:

+

(i) Information, including the size and quote condition, on the national best bid and national best offer for each NMS security;

+

(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, § 242.601; and

+

(iii) Last sale reports reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, § 242.608.

+

(8) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years.

+

(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

+

(g) Compliance by Members.

+

(1) Each national securities exchange and national securities association shall file with the Commission pursuant to section 19(b)(2) of the Act> (15 U.S.C. 78s(b)(2)) and § 240.19b-4 of this chapter on or before 60 days from approval of the national market system plan a proposed rule change to require its members to comply with the requirements of this section and the national market system plan approved by the Commission.

+

(2) Each member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members.

+

(3) The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to agree to enforce compliance by its members with the provisions of any approved plan.

+

(4) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance with the requirements of any approved plan by the members of a national securities exchange or national securities association.

+

(h) Compliance by National Securities Exchanges and National Securities Associations.

+

(1) Each national securities exchange and national securities association shall comply with the provisions of the national market system plan approved by the Commission.

+

(2) Any failure by a national securities exchange or national securities association to comply with the provisions of the national market system plan approved by the Commission shall be considered a violation of this section.

+

(3) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance by the sponsors of the plan with the requirements of any approved plan. Such enforcement mechanism may include penalties where appropriate.

+

(i) Other Securities and Other Types of Transactions. The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission within six months after effectiveness of the national market system plan a document outlining how such exchanges and associations could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

+

(j) Definitions.

+

(1) The term CAT-Order-ID shall mean a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of such order.

+

(2) The term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository.

+

(3) The term customer shall mean:

+

(i) The account holder(s) of the account at a registered broker-dealer originating the order; and

+

(ii) Any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

+

(4) The term customer account information shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

+

(5) The term Customer-ID shall mean, with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository.

+

(6) The term error rate shall mean the percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market.

+

(7) The term material terms of the order shall include, but not be limited to, the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator; time in force (if applicable); if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions.

+

(8) The term order shall include:

+

(i) Any order received by a member of a national securities exchange or national securities association from any person;

+

(ii) Any order originated by a member of a national securities exchange or national securities association; or

+

(iii) Any bid or offer.

+

(9) The term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order.

+

By the Commission.

+

Elizabeth M. Murphy

+

Secretary

+

Dated: July 18, 2012

+

Exhibit A

+

Key to Comment Letters Cited in Adopting Release Proposal to Implement Consolidated Audit Trail (File No. S7-11-10)

+

1. Letter from Rep. Melissa L. Bean, U.S. Congress, to Mary Schapiro, Chairman, Commission, dated May 20, 2010 ("Bean Letter").

+

2. Letter from Norris W. Beach to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Beach Letter").

+

3. Letter from Steven Vannelli to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Vannelli Letter").

+

4. Letter from Simhan Mandyam, Managing Partner, Triage Life Sciences LLC, to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Triage Letter").

+

5. Letter from Paul Drescher, Registered Principal, Foothill Securities, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated May 28, 2010 ("Foothill Letter").

+

6. Letter from Chandler Green to Elizabeth M. Murphy, Secretary, Commission, dated June 1, 2010 ("Green Letter").

+

7. Letter from Dan T. Nguyen, Wealth Management Company, to Elizabeth M. Murphy, Secretary, Commission, dated June 5, 2010 ("Wealth Management Letter").

+

8. Letter from Nicos Anastaspoulos to Elizabeth M. Murphy, Secretary, Commission, dated June 6, 2010 ("Anastaspoulos Letter").

+

9. Letter from Ning Wen, Sales Director, Know More Software, Inc., to Heather Seidel, Division of Trading and Markets, Assistant Director, Commission, dated June 9, 2010 ("Know More Letter").

+

10. Letter from John McCrary to Elizabeth M. Murphy, Secretary, Commission, dated June 11, 2010 ("McCrary Letter").

+

11. Letter from Howard Meyerson, General Counsel, and Vlad Khandros, Market Structure and Public Policy Analyst, Liquidnet, to Elizabeth M. Murphy, Secretary, Commission, dated July 19, 2010 ("Liquidnet Letter").

+

12. Letters from Justin S. Magruder, President, Noetic Partners, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated July 22, 2010 and August 3, 2010 ("Noetic Partners Letter I" and "Noetic Partners Letter II).

+

13. Letter from Martin Koopman, Director, Aditat, to Elizabeth M. Murphy, Secretary, Commission, dated July 28, 2010 ("Aditat Letter").

+

14. Letter from Courtney Doyle McGuinn, FPL Operations Director, FIX Protocol Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("FIX Letter").

+

15. Letter from Senator Edward E. Kaufman, U.S. Senate, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kaufman Letter").

+

16. Letter from Mahesh Kumaraguru to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kumaraguru Letter").

+

17. Letter from R. T. Leuchtkafer to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Leuchtkafer Letter").

+

18. Letter from Horst Simon, Associate Laboratory Director for Computing Sciences and Division Director, Computational Research Department, and David Leinweber, Director, LBNL Center for Innovative Financial Technology Computing Sciences, Lawrence Berkeley National Laboratory, to Elizabeth M. Murphy, Secretary, Commission, dated August 8, 2010 ("Berkeley Letter").

+

19. Letter from Peter A. Bloniarz, Dean, College of Computing & Information, University of Albany, George Berg, Associate Professor and Chair, Department of Computer Science, University of Albany, Sandor P. Schuman, Affiliated Faculty, Department of Informatics, University of Albany, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Albany Letter").

+

20. Letter from Christopher Nagy, Managing Director Order Strategy, Co-Head Government Relations, and John Markle, Deputy General Counsel, Co-Head Government Relations, TD AMERITRADE, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Ameritrade Letter").

+

21. Letter from James J. Angel, Associate Professor of Finance, Georgetown University, Commission, dated August 9, 2010 ("Angel Letter").

+

22. Letter from Eric J. Swanson, Senior Vice President and General Counsel, BATS Exchange, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BATS Letter").

+

23. Letter from Anthony D. McCormick, Chief Executive Officer, Boston Options Exchange Group, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BOX Letter").

+

24. Letter from Charlie J. Marchesani, President Broadridge Financial Solutions, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Broadridge Letter").

+

25. Letter from Eric W. Hess, General Counsel, Direct Edge Holdings, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Direct Edge Letter").

+

26. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA Letter").

+

27. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, and Janet McGinness Kissane, Senior Vice President and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA/NYSE Euronext Letter").

+

28. Letter from Ted Myerson, Chief Executive Officer, Doug Kittelsen, Chief Technology Officer, and M. Gary LaFever, General Counsel and Chief Corporate Development Officer, FTEN, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FTEN Letter").

+

29. Letter from Karrie McMillan, General Counsel, Investment Company Institute, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("ICI Letter").

+

30. Letter from Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel, Managed Funds Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Managed Funds Association Letter").

+

31. Letter from Dror Segal and Lou Pizzo, Mansfield Consulting, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Mansfield Letter").

+

32. Letter from Andrew C. Small, General Counsel, Scottrade, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Scottrade Letter").

+

33. Letter from Devin Wenig, Chief Executive Officer, Markets Division, Thomson Reuters, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Thomson Reuters Letter").

+

34. Letter from Jon Feigelson, Senior Vice President, General Counsel and Head of Corporate Governance, TIAA-CREF Individual and Institutional Services, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("TIAA-CREF Letter").

+

35. Letter from Ronald C. Long, Director, Regulatory Affairs, Wells Fargo Advisors, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Wells Fargo Letter").

+

36. Letter from John A. McCarthy, General Counsel, GETCO, to Elizabeth M. Murphy, Secretary, Commission, dated August 10, 2010 ("GETCO Letter").

+

37. Letter from Michael Erlanger, Managing Principal, Marketcore, Inc., to Commission, dated August 10, 2010 ("Marketcore Letter").

+

38. Letter from Edward J. Joyce, President and Chief Operating Officer, Chicago Board Options Exchange, Inc., to Commission, dated August 11, 2010 ("CBOE Letter").

+

39. Letter from Leonard J. Amoruso, Senior Managing Director and General Counsel, Knight Capital Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 11, 2010 ("Knight Letter").

+

40. Letter from Jose Manso, Executive Vice President, Sales and Marketing, Middle Office Solutions LLC, to Commission, dated August 11, 2010 ("Middle Office Letter").

+

41. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("FIF Letter").

+

42. Letter from John Harris, Chief Executive Officer, BondMart Technologies, Inc., to Commission, dated August 12, 2010 ("BondMart Letter").

+

43. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("Nasdaq Letter I").

+

44. Letter from Patrick J. Healy, Chief Executive Officer, Issuer Advisory Group LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 15, 2010 ("IAG Letter").

+

45. Letter from James T. McHale, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 17, 2010 ("SIFMA Letter").

+

46. Letter from Mike Riley, Chief Executive Officer, Endace Technology Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 30, 2010 ("Endace Letter").

+

47. Letter from Terry Keene, Chief Executive Officer, Integration Systems LLC, to Elizabeth M. Murphy, Secretary, Commission, dated November 12, 2010 ("iSys Letter").

+

48. Letter from Bonnie K. Wachtel, Wachtel & Co., Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 24, 2010 ("Wachtel Letter").

+

49. Letter from Richard A. Ross to Elizabeth M. Murphy, Secretary, Commission, dated December 6, 2010 ("Ross Letter").

+

50. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to David Shillman, Associate Director, Division of Trading and Markets, Commission, dated January 12, 2011 ("SIFMA Drop Copy Letter").

+

51. Letter from Daniel J. Connell, Chief Executive Officer, Correlix, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated February 4, 2011 ("Correlix Letter").

+

52. Letter from Richard A. Ross, Founder, High Speed Analytics, to Elizabeth M. Murphy, Secretary, Commission, dated February 9, 2011 ("High Speed Letter").

+

53. Letter from Michael Belanger, President, Jarg Corporation; Joseph Carrabis, Chief Regulatory Officer and Founder, NextStage Evolution; Wayne Ginion, Vice President, Enterprise Infrastructure Services; and David Morf, Partner, Senior Regional Economics Advisor, Founding Member, Center for Adaptive Solutions, to Elizabeth M. Murphy, Secretary, Commission, dated April 6, 2011 ("Belanger Letter") (note, this letter is an amended letter that replaces a letter submitted by the same parties on March 30, 2011).

+

54. Letter from Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, to Robert Cook, Director, Division of Trading and Markets, and Carlo DiFlorio, Director, Office of Compliance Inspections and Examinations, Commission, dated April 6, 2011 ("FINRA Proposal Letter").

+

55. Letter from Senator Charles E. Schumer, U.S. Senate, to Mary L. Schapiro, Chairman, Commission, dated May 9, 2011 ("Schumer Letter").

+

56. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 18, 2011 ("Nasdaq Letter II").

+

57. Letter from Geraldine M. Lettieri to Elizabeth M. Murphy, Secretary, Commission, dated November 29, 2011 ("Lettieri Letter").

+

58. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to Robert Cook, Director, Division of Trading and Markets, Commission, dated February 7, 2012 ("SIFMA February 2012 Letter").

+

59. Letter from John M. Damgard, President, Futures Industry Association, to Elizabeth M. Murphy, Secretary, Commission, dated February 22, 2012 ("FIA Letter").

+

60. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, Commission, dated March 2, 2012 ("FIF Letter II").

+

61. Letter from Jennifer Setzenfand, Chairman, Security Traders Association, dated March 7, 2012 ("STA Letter").

+

62. Letter from Dr. Gil Van Bokkelen, Chairman and Chief Executive Officer, Athersys, Inc., to Mary Schapiro, Chairman, Commission, dated March 14, 2012 ("Van Bokkelen Letter").

-
pubdate: June 22, 2015 effdate: N/A -

III. Summary of Comment Letter and Response

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Summary of Comment Letter and Response - Compliance User: Self-Regulatory Organization - Keywords: - FIF, - Comment Letter, - Shortlisted Bidders, - Order Audit Trail System, - EBS, - -

As noted above, the Commission received one comment letter from FIF. FIF, on behalf of its Consolidated Audit Trail Working Group, supports Amendment No. 1 but offers two recommendations.24 First, FIF recommends, in the interest of efficiency, that the Participants narrow the list of Bidders before any revision of Bids takes place. FIF believes that in view of the substantial efforts already undertaken by the Participants, there should be sufficient information for the Participants to take action and narrow the list of Bidders. FIF argues that it is unnecessary to require all six of the current Shortlisted Bidders to revise their Bids. Further, FIF argues that narrowing the list of Bidders prior to permitting the revision of Bids would reduce the amount of effort the SROs would need to expend in reviewing the revised Bids.

-

Second, FIF recommends that once the Participants further narrow the list of Shortlisted Bidders, each of the remaining Bidders should receive detailed information on Order Audit Trail System (“OATS”), electronic blue sheets (“EBS”), and Large Trader so that Bidders can consider all of the required functionality to retire these systems in preparing their revised Bids. FIF notes that the retirement of these systems is critical to managing the cost of CAT’s implementation, and additional information concerning the functionality required to retire these systems would aid in revising Bids. FIF believes that understanding the precise functional requirements for retiring OATS is critical and imperative for a level playing field among Bidders.

-

The SROs considered FIF’s recommendations, but declined to propose modifications to the Amendment.25 With regard to FIF’s suggestion that the SROs narrow the list of Bidders before allowing any revisions to the Bids, the SROs state that one of the main purposes of the Amendment is to provide greater flexibility to the SROs to narrow the list of Bidders.26 The SROs, however, note that they recognize the value of a streamlined process for all parties and intend to consider this factor, among others, in determining when to narrow the list of Shortlisted Bidders.27

-

The SROs concur with FIF in the significance of retiring overlapping and redundant systems, but do not see this as linked to the proposed amendment to the Selection Plan. The SROs reiterate their commitment to the retirement of systems as provided in the CAT NMS Plan,28 noting that the Plan describes the major data attributes that will be required to retire such systems. Going forward, as additional technical specifications are developed in accordance with milestones included in the CAT NMS Plan, the SROs will provide this information to Bidders.

-
-
pubdate: June 23, 2015 effdate: N/A -

IV. Discussion

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Discussion - Compliance User: Self-Regulatory Organization - Keywords: - Amendment No. 1, - Shortlisted Bids, - Plan Processor, - CAT NMS plan, - SRO, - OATS, - EBS, - Large Trader, - -

After careful review of Amendment No. 1, the comment received, and the SROs’ response, the Commission finds that Amendment No. 1 is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system. The Commission believes Amendment No. 1 would provide the SROs with additional flexibility with respect to the process of reviewing Shortlisted Bids and selecting the CAT Plan Processor. Such additional flexibility is aimed at allowing the SROs to be more efficient in selecting the CAT Plan Processor, which is particularly important given additional deadlines contained in Rule 613(a)(3).29 The Commission believes that the SROs’ explanation that they prefer to retain flexibility in the process to select the Plan Processor, without any additional conditions or restrictions, in response to FIF’s suggestion that they narrow the list of Bidders before allowing Bidders to revise their Bids, is reasonable. Permitting the SROs to accept revised Bids prior to Commission approval of the CAT NMS Plan, and to narrow the number of Shortlisted Bids prior to Commission approval of the CAT NMS Plan,30 will allow the SROs to position themselves to avoid any delays in selecting the CAT Plan Processor,31 thus removing any impediments to meeting the additional deadlines set forth in Rule 613(a)(3).32

-

Regarding FIF’s recommendation that, prior to any Bid revisions, the SROs provide Bidders with detailed functional requirements concerning OATS, EBS, and Large Trader to facilitate retirement of those systems, the Commission notes that the SROs’ Response Letter outlines the steps taken to date by the SROs to furnish pertinent information to assist in eliminating redundant systems and contains commitments to supplement that material in the future as outlined in the CAT NMS Plan.

-
-
pubdate: June 24, 2015 effdate: N/A -

IV. Conclusion

- Topic: SEC Release, Release No. 34-75192, Joint Industry Plan; Order Approving Amendment No. 1, Conclusion - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan, - Approval of Order, - -

For the reasons discussed above, the Commission finds that Amendment No. 1 is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

-

IT IS THEREFORE ORDERED, pursuant to Section 11A of the Act,33 and the rules thereunder, that Amendment No. 1 to the Selection Plan be, and it hereby is, approved.

-

By the Commission.

-

Brent J. Fields

-

Secretary

-
-
fn -

1 15 U.S.C. 78k-1.

+
fn +

1 EBSs are trading records requested by the Commission and SROs from broker-dealers that are used in regulatory investigations to identify buyers and sellers of specific securities. See Securities Exchange Act Release No. 44494 (June 29, 2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (adopting Rule 17a-25). See also Securities Exchange Act Release Nos. 26235 (November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the Chicago Board Options Exchange's ("CBOE") rule for the electronic submission of transaction information); 26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the National Association of Securities Dealers' (n/k/a FINRA) rule for the electronic submission of transaction information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 1989) (approving the Philadelphia Stock Exchange's (n/k/a NASDAQ OMX PHLX LLC) ("Phlx") rule for the electronic submission of transaction information). To partially address some of the current limitations of the EBS system, and to provide the Commission, in the short term, with more detailed and timely trade information for large traders, the Commission recently adopted new Rule 13h-1 concerning large trader reporting. See Securities Exchange Act Release No. 61908 (July 27, 2011), 76 FR 46960 (August 3, 2011) ("Large Trader Release"). Rule 13h-1 requires "large traders" to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See also Section II.A.3., infra. On April 20, 2012, the Commission, among other things, extended the time by which registered broker-dealers were required to comply with Rule 13h-1 to allow broker-dealers additional time to develop, test, and implement enhancements to their recordkeeping and reporting systems as required under Rule 13h-1. See Securities Exchange Act Release No. 66839, 77 FR 25007 (April 26, 2012) (Order Temporarily Exempting Broker-Dealers From the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 Under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions) ("Large Trader Extension").

+
+
fn +

2 The Commission uses the National Securities Clearing Corporation's ("NSCC") equity cleared report for initial regulatory inquiries. This report is generated on a daily basis by the SROs and is provided to the NSCC in a database accessible by the Commission, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.

+
+
fn +

3 See Large Trader Extension, supra note 1.

+
+
fn +

4 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) ("Proposing Release"). The comment file is on the Commission's website at: http://www.sec.gov/comments/s7-11-10/s71110.shtml.

+
+
fn +

5 In this release, "consolidated audit trail" means both a system capable of capturing a complete record of all transactions relating to an order, from origination to execution or cancellation, and the complete record for an order generated by such a system, as the context may require.

-
fn -

2 17 CFR 242.608.

+
fn +

6 NMS plan is defined in Rule 600(b)(43) to mean "any joint self-regulatory organization plan in connection with: (i) [t]he planning, development, operation or regulation of a national market system (or a subsystem thereof) or one or more facilities thereof; or (ii) [t]he development and implementation of procedures and/or facilities designed to achieve compliance by self-regulatory organizations and their members with any section of [Regulation NMS] . . . ." 17 CFR 240.600(b)(43). Such NMS plan may be subject to modification prior to approval by the Commission pursuant to Rule 608 of Regulation NMS, as discussed in Section III.C.2.a.v., infra.

-
fn -

3 The Selection Plan is an NMS Plan approved by the Commission pursuant to Section 11A of the Act and Rule 608 thereunder. See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (“Order Approving Selection Plan”); see also Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (“Notice of Selection Plan”).

+
fn +

7 "NMS security" is defined in Rule 600(a)(46) of Regulation NMS to mean "any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options." 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) to mean "any NMS security other than an option." 17 CFR 242.600(a)(46). A listed option is defined in Rule 600(a)(35) of Regulation NMS to mean "any option traded on a registered national securities exchange or automated facility of a national securities association." 17 CFR 242.600(a)(35).

-
fn -

4 See Securities Exchange Act Release No. 74223 (Feb. 6, 2015), 80 FR 7654 (“Notice of Amendment No. 1”).

+
fn +

8 See Exhibit A for a citation key to the comment letters received by the Commission on the proposed rule. The Commission also received four comment letters that do not address the substance of the consolidated audit trail proposal. See Ericson Letter; Kondracki Letter; Grady Letter; Deep Liquidity Letter.

-
fn -

5 See letter to Brent J. Fields, Secretary, Commission, from Manisha Kimmel, Managing Director, Financial Information Forum (“FIF”), dated March 13, 2015 (“FIF Letter”).

+
fn +

9 The Commission notes that, in some cases, commenters fell into more than one such category.

-
fn -

6 See letter to Brent J. Fields, Secretary, Commission, from the SROs, dated March 27, 2015 (“SRO Response Letter”).

+
fn +

10 See Vannelli Letter; Beach Letter; Foothill Letter; Green Letter; Wealth Management Letter; McCrary Letter; Anastasopoulos Letter; Triage Letter; FTEN Letter; Middle Office Letter; Correlix Letter; Lettieri Letter; Bean Letter.

-
fn -

7 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).

+
fn +

11 See ICI Letter; Thomson Reuters Letter; Scottrade Letter; Liquidnet Letter; FINRA/NYSE Euronext Letter; BOX Letter; Nasdaq Letter I; Nasdaq Letter II; TIAA-CREF Letter; GETCO Letter; BATS Letter; SIFMA Letter; SIFMA February 2012 Letter; CBOE Letter; Direct Edge Letter; Angel Letter; IAG Letter; Managed Funds Association Letter; Mansfield Letter; Marketcore Letter; Kumaraguru Letter; Ameritrade Letter; FINRA Letter; Wells Fargo Letter; Noetic Partners Letters; Knight Letter; FIF Letter; FIF Letter II; Albany Letter; Endace Letter; Ross Letter; FINRA Proposal Letter; Schumer Letter; FIA Letter; STA Letter; Van Bokkelen Letter.

-
fn -

8 Unless otherwise noted, capitalized terms are used as defined in Rule 613, in the Selection Plan, or in this Order.

+
fn +

12 See Belanger Letters; SIFMA Drop Copy Letter; Wachtel Letter; High Speed Letter (recommending next steps in the development of the consolidated audit trail).

-
fn -

9 See Notice of Amendment No. 1, supra note 4, at 7655.

+
fn +

13 See BondMart Letter; Leuchtkafter Letter.

-
fn -

10 See Order Approving Selection Plan, supra note 3.

+
fn +

14 See Broadridge Letter; FIX Letter; Know More Letter; Aditat Letter; iSys Letter; Kaufman Letter; Berkeley Letter.

-
fn -

11 See id. at 11154. The Selection Committee is composed of one senior officer from each SRO and is charged with evaluating the Bids and selecting the Plan Processor. Id. at 11153.

+
fn +

15 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

-
fn -

12 See id. at 11154.

+
fn +

16 See Ameritrade Letter, p. 3; Kumaraguru Letter, p. 1; FINRA Proposal Letter, p. 6-8, 13 and Appendix A.; Angel Letter, p. 2-3; Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11-12, 14; SIFMA Drop Copy Letter, p. 2; Liquidnet Letter p. 6-7; FINRA Letter, p. 4, 7-9; CBOE Letter, p. 2; Knight Letter, p. 2; Scottrade Letter, p. 1; DirectEdge Letter, p. 3; FIF Letter, p. 2-3, 6-7; FIF Letter II, p. 2; BOX Letter, p. 2; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; Thomson Reuters Letter, p. 3; Endace Letter, p. 1-2; GETCO Letter, p. 4.

-
fn -

13 See Notice of Amendment No. 1, supra note 4, at 7655.

+
fn +

17 See Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2, 4-5; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 3-4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; FINRA Proposal Letter, p. 2-3.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Correlix Letter, p. 2.; FTEN Letter, p. 13; SIFMA Letter, p.1-8, 15-16; FINRA/NYSE Euronext Letter, p 4, 7; FINRA Letter, p. 3, 10-13; Scottrade Letter, p. 1; ICI Letter, p. 4-6; GETCO Letter, p. 2; BATS Letter, p. 1-2; Direct Edge Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; SIFMA February 2012 Letter; FIA Letter, p. 1-2; Noetic Partners Letter II, p. 2; High Speed Letter, p. 1.

-
fn -

14 Id.

+
fn +

18 See FINRA Proposal Letter; Angel Letter, p. 3; BOX Letter, p. 2; BATS Letter, p. 2; CBOE Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIF Letter, p. 1-3; FINRA Letter, p. 3, 6; FINRA/NYSE Euronext Letter, p. 8, 14; SIFMA Drop Copy Letter.

-
fn -

15 Id.

+
fn +

19 As used herein, the term "order event data" is used to refer to the information reported pursuant to Rule 613(c)(3) and identified in Rule 613(c)(7)(i) through (v), generally including: (1) the Customer-ID(s) for each customer, including the person giving a modification or cancellation instruction; (2) the CAT-Order-ID; (3) the CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving, originating, routing, modifying, cancelling or executing an order, and to which an order is being routed; (4) the identity and nature of the department or desk to which an order is routed, if routed internally at the broker-dealer; (5) the date an order was received, originated, routed, modified, cancelled, or executed; (6) the time an order was received, originated, routed, modified, cancelled, or executed; (7) material terms of an order and any changes of such terms, if modified; (8) the price and remaining size of an order, if modified; (9) execution capacity (principal, agency, riskless principal); (10) execution price and size; and (11) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("OPRA"). See Section III.B.1.d., infra. Information reported pursuant to Rule 613(c)(4) and identified in Rule 613(c)(7)(vi) through (viii) is referred to as "supplemental data."

-
fn -

16 Id.

+
fn +

20 See Rule 613(c)(3); Sections II.A., III.B.1.e., infra.

-
fn -

17 Id.

+
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21 See Rule 613(c)(2); Sections III.B.1.f., III.B.2., infra.

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18 Id.

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22 See Rule 613(j)(1); Section III.B.1.d.iv., infra.

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19 Id. at 7655, 57.

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23 See Rule 613(a)(3)(vi); Section III.B.1.c., infra.

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20 See Order Approving Selection Plan, supra note 3, at 11154.

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24 See Rule 613(a)(1)(xii); Section III.C.2.a., infra.

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21 This additional narrowing round would occur prior to the two-round voting process for selection of the CAT Plan Processor under Section VI.(E) of the Selection Plan. See id.

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25 See Rule 613(a)(1)(ix); Section III.C.2.a., infra.

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22 See Notice of Amendment No. 1, supra note 4, at 7655, 57. In voting to narrow the list of of Shortlisted Bids, the voting representative from each SRO would choose a first, second, and third choice of Shortlisted Bid, with each choice receiving a weight of, respectively, three points, two points, and one point. The three Bids receiving the highest cumulative number of points would constitute the new set of Shortlisted Bids. The Amendment also provides for a tie-breaking process, which could result in more than three Shortlisted Bids continuing in the process for selection of the CAT Plan Processor.

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26 See Rule 613(a)(1)(xi).

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23 See id. The SROs have also submitted, and the Commission is currently considering, a second proposed amendment to the Selection Plan extending this recusal requirement to all selection voting rounds. See Securities Exchange Act Release No. 75193 (June 17, 2015).

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27 See Rule 613(b)(7). For a further discussion of the composition of the Advisory Committee, see Section III.B.3.b., infra.

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24 See FIF Letter, supra note 5.

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28 See Section III.B.2., infra.

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25 See SRO Response Letter, supra note 6, at 3.

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29 See Rule 613(e)(4).

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26 Id. at 2.

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30 See Rule 613(e)(6); Section III.B.2., infra.

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27 Id.

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31 See Section II.A., infra, for a discussion of the objectives of the consolidated audit trail.

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28 Rule 613(a)(viii) requires “a plan to eliminate existing audit trail rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such audit trail rules and systems (or components thereof); to the extent that any existing audit trail rules or systems provide information that is not rendered duplicative by the consolidated audit trail, an analysis of whether collection of such information continues to be appropriate and, if so, whether such information could instead be incorporated into the consolidated audit trail; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such audit trail rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing audit trail rules and systems (or components thereof)[.]” 17 CFR 242.613(a)(viii).

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32 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail).

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29 17 CFR 242.613(a)(3).

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33 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

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30 See Notice of Amendment No. 1, supra note 4, at 7655, 57.

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34 See Section III.C.2.b., infra.

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31 Rule 613(a)(3)(i) requires the Participants to select the CAT Plan Processor within two months after effectiveness of the CAT NMS Plan. 17 CFR 242.613(a)(3)(i).

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35 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597, n. 352.

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32 See, e.g., Rule 613(a)(3)(iii), which requires Participants to begin providing data to the central repository within one year after effectiveness of the CAT NMS Plan.

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36 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

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37 See Rule 613(a)(1).

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38 See Rule 613(a)(5).

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39 The proposed Rule would have required SROs to submit such proposed rule changes on or before from 120 days from approval of the Rule. Because the adopted Rule permits the SROs up to 270 days from the date of publication of the Adopting Release in the Federal Register to submit NMS plans, the Commission believes that the more appropriate deadline for SROs to submit rule changes is 60 days from the date the Commission approves an NMS plan.

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40 Specifically, the adopted Rule provides SROs six months, instead of two months, after effectiveness of the NMS plan to submit this document to the Commission.

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41 See Proposing Release, supra note 4, at 32558-61.

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42 See FINRA/NYSE Euronext Letter, p. 1-3; Nasdaq Letter I, p. 1-5.

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43 See note 1, supra; Proposing Release, supra note 4, at 32557-58.

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44 See note 2, supra.

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45 The term "market reconstruction" is used to refer to the efforts by SRO and Commission staff to collect and process detailed trade and order data, often from multiple and varied data sources (e.g., market participants, trading venues, and other SROs) to recreate the sequence of events and market conditions that existed over a given period of time. A recent example of this occurred following the "Flash Crash" of May 6, 2010, with the market reconstruction analysis undertaken by Commission and the Commodity Futures Trading Commission ("CFTC") staff, which can be found in the "Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." See http://www.sec.gov/news/studies/2010/marketevents-report.pdf.

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46 The Commission recognizes that the accuracy of the data available may also be subject to occasional errors, including errors caused by rare and unexpected events.

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47 The effectiveness of such efforts with respect to cross-market activities within the Commission's jurisdiction depends on the qualities of data from multiple sources, such as separate SRO audit trails used for equities and equity options. See Section II.A.1.c., infra. This dependency also exists with respect to market activities that involve other products outside the Commission's jurisdiction, such as futures and certain swaps. See note 239, infra.

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48 17 CFR 240.17a-25. Rule 17a-25 codified the requirement that broker-dealers submit to the Commission, upon request, information on their customer and proprietary securities transactions in an electronic format. The rule requires submission of the same standard customer and proprietary transaction information that SROs request through the EBS system in connection with their market surveillance and enforcement inquiries.

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49 See Rule 17a-25; supra note 1, and accompanying text.

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50 See FIF Letter I, p. 3; SIFMA Letter, p. 18-19.

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51 As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See Large Trader Release and Large Trader Extension, supra note 1.

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52 A 1990 Senate Report acknowledged the immense value of the EBS system, but noted that "it is designed for use in more narrowly focused enforcement investigations that generally relate to trading in individual securities. It is not designed for use for multiple inquiries that are essential for trading reconstruction purposes." See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.

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53 See, generally, Sections II.A.1. and II.A.2., infra.

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54 See note 2, supra, and accompanying text.

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55 The Commission also uses the Options Cleared Report, with data supplied by the Options Clearing Corporation ("OCC"), for analysis of trading in listed options. The OCC is an equity derivatives clearing organization that is registered as a clearing agency under Section 17A, 15 U.S.C. 78q-1, of the Exchange Act, and operates under the jurisdiction of both the Commission and the CFTC.

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56 A CUSIP number is a unique alphanumeric identifier assigned to a security and is used to facilitate the clearance and settlement of trades in the security.

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57 In 2007, NASD and the member-related functions of NYSE Regulation, Inc., the regulatory subsidiary of New York Stock Exchange LLC ("NYSE"), were consolidated. As part of this regulatory consolidation, the NASD changed its name to FINRA. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (August 1, 2007). FINRA and the National Futures Association ("NFA") are currently the only national securities associations registered with the Commission; however, the NFA has a limited purpose registration with the Commission under Section 15A(k) of the Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 2001).

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58 See In the Matter of National Association of Securities Dealers, Inc., Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions, Exchange Act Release No. 37538 (August 8, 1996), Administrative Proceeding File No. 3-9056 and Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and The Nasdaq Stock Market LLC ("Nasdaq"). See also Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules comprising OATS) ("OATS Approval Order").

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59 See Securities Exchange Act Release No. 47689 (April 17, 2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule change by NYSE relating to order tracking) ("OTS Approval Order").

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60 See In the Matter of Certain Activities of Options Exchanges, Administrative Proceeding File No. 3-10282, Securities Exchange Act Release No. 43268 (September 11, 2000) (Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions) ("Options Settlement Order"). See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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61 See Securities Exchange Act Release No. 63311 (November 12, 2010), 75 FR 70757 (November 18, 2010) (SR-FINRA-2010-044) (order approving proposed rule change by FINRA relating to the expansion of OATS to all NMS stocks).

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62 See Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011) (SR-NYSE-2011-49); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011) (SR-NYSEAmex-2011-74); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (SR-NYSEArca-2011-69).

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63 See FINRA Rule 7410(j) (defining "Order" for purposes of OATS, to mean "any oral, written, or electronic instruction to effect a transaction in an NMS stock or an OTC equity security that is received by a member from another person for handling or execution, or that is originated by a department of a member for execution by the same or another member, other than any such instruction to effect a proprietary transaction originated by a trading desk in the ordinary course of a member's market making activities." Additionally, Nasdaq, Nasdaq OMX BX, Inc. ("BX") and Phlx equities ("PSX") members that are registered as market makers in a certain security are similarly exempted from recording OATS audit trail data for the security in which they are registered to make a market. See Nasdaq and BX Rules 6951(i); PSX Rule 3401(i). The Commission notes that members of Nasdaq, BX and PSX, that are not also members of FINRA, are required by those exchanges to record the audit trail data required by OATS; however, they are only required to report that data through OATS upon request by their respective exchanges. See Nasdaq and BX Rules 6955(b); PSX Rule 3405(b). Additionally, as of October 17, 2011, members of NYSE and NYSE Amex, who are not also FINRA members, are required to record their trade and order activity. These non-FINRA members are not required to report this data through OATS unless requested. See NYSE and NYSE Amex Equities Rules 7450(b); see, e.g., Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE and NYSE Amex Equities rules). Members of NYSE Arca, who are not also FINRA members, were required to record their trade and order activity as of March 31, 2012. See NYSE Arca Equities Rule 7450(b); see Securities Exchange Act Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE Arca Equities rules). See also Securities Exchange Act 66094 (January 4, 2012), 77 FR 1545 (January 10, 2012) (notice of immediate effectiveness to extend the implementation date of the NYSE Arca Equities Rule 7400 Series, the OATS rules, for Equity Trading Permit Holders that are not FINRA members from January 31, 2012 to March 31, 2012).

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64 FINRA has represented to Commission staff that, as part of its own surveillance activities, FINRA acquires some of this order handling system data from non-FINRA members to supplement the data it receives from its members via OATS, but that matching data across the audit trails yields varying levels of success and accuracy due to the disparate methods used by the different order handling systems to collect and store data. FINRA represented that, during the period from November 28, 2011 to February 24, 2012, approximately 2% of reportable OATS data related to exchange orders could not be linked with matching exchange data. See Commission Staff Memorandum to File No. S7-11-10 regarding telephone conversations with FINRA, dated April 17, 2012 ("Commission Staff Memorandum"). Also, since this process only involves acquiring trade and order data from select sources, it still does not produce a complete record of all market activity. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of reportable OATS data related to exchange orders that could not be linked with matching exchange data remained at approximately 2%. Id.

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65 Common reasons given by FINRA for syntax rejections include: missing mandatory fields, invalid fields, and invalid field combinations (e.g., a Limit Price without a Time in Force Code). OATS will reject records as duplicates if more than one record is submitted with the same Order Receiving Firm Market Participant Identifier, Order Received Date, and Order Identifier or if more than one record contains all of the same information. http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085542 (last viewed on May 23, 2012).

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66 See Commission Staff Memorandum, supra note 64. FINRA estimates that, from the period November 28, 2011 to February 24, 2012 approximately 0.10% of the intra-firm data reported daily by broker-dealers were rejected for errors. Id. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of the intra-firm data reported daily by broker-dealers rejected for errors was more than double this amount. Id.

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67 See FINRA Letter, p. 11. FINRA represented to Commission staff that many of the validation errors result from problems encountered in translating order information from broker-dealer formats into OATS format. See Commission Staff Memorandum, supra note 64.

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+
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68 Id.

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69 Id.

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70 FINRA estimates that during the period from November 28, 2011 to February 24, 2012 approximately 0.5% of each day's reportable events remained unmatched (i.e., multi-firm events, such as routes, that cannot be reconciled). See Commission Staff Memorandum, supra note 64. When considering data covering a time period of approximately 26 months, the percentage of each day's reportable events remaining unmatched was more than double this amount. Id.

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71 For example, FINRA has been given access to order audit trail information from certain SROs pursuant to Regulatory Services Agreements.

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72 ISG is an international group of exchanges, market centers, and regulators that perform market surveillance in their respective jurisdictions. The organization provides a forum for its members to share information and coordinate regulatory efforts to address potential intermarket manipulation and trading abuses.

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73 See Section II.A.2.b., infra.

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74 See FINRA/NYSE Euronext Letter, p. 3.

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75 Examples of schemes that typically rely on orders from accounts at multiple brokers include: (1) "network" insider trading schemes in which the participants cultivate multiple sources of non-public information and trade on the information they receive over an extended period of time and through accounts at a large number of broker-dealers; (2) wash trading; and (3) order layering. Unlike insider trading, for example, which is neither defined nor expressly prohibited in the Act, wash trading is specifically prohibited in the statute. The entering of matched orders for the purpose of creating the illusion of market activity or to artificially affect the price is one of the oldest and most difficult to detect manipulative practices. Technology that permits the routing of thousands of orders to different venues in micro seconds has made cross market surveillance for this activity extremely difficult. "Order layering" is similar to wash trading. In this practice, a market participant can enter numerous non-bona fide market moving orders, often in substantial size relative to a security's legitimate volume to create the false impression of buy or sell side pressure. When such orders induce others to execute against profitable limit orders, the market participants immediately cancel the pending orders that manipulated the price. As with wash sales, multiple traders can enter orders on different venues, impacting the NBBO and making the activity difficult to detect.

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76 For example, implementation of a consolidated audit trail also will help regulators monitor reliance on the use of the safe harbor provision for issuer repurchases in Rule 10b-18 under the Exchange Act. 17 CFR 240.10b-18. Rule 10b-18 under the Exchange Act provides issuers with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, when they repurchase their common stock in the market in accordance with the Rule's manner, timing, price, and volume conditions. The data required to be included in the consolidated audit trail will assist regulators in monitoring issuer repurchases that rely on Rule 10b-18's safe harbor protections to ensure that they comply with all required criteria.

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77 The Commission receives an average of over 200 market-related TCRs each month.

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78 See FINRA/NYSE Euronext Letter, p. 2.

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79 See Rule 613(f).

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80 See note 45, supra.

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81 See "Preliminary Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." (May 18, 2010). See http://www.sec.gov/sec-cftc-prelimreport.pdf.

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82 For detailed discussions and chronologies of the investigation into the events of May 6, 2010, see SEC (http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml) and CFTC (http://www.cftc.gov/PressRoom/Events/AdvisoryCommitteeMeetings/index.htm) webcasts and minutes of public meetings held with the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on May 24, 2010, June 22, 2010, August 11, 2010, November 5, 2010, and February 18, 2011.

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83 See note 45, supra, at p. 11.

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84 Id.

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85 Id.

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86 Id. at p. 18, 80.

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87 See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) ("Concept Release on Equity Market Structure").

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88 See note 1, supra.

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89 See ICI Letter, p. 6-7; Liquidnet Letter, p. 4-5; SIFMA Letter, p. 18-19; CBOE Letter, p. 6 (questioning the need for a large trader reporting system if a consolidated audit trail is implemented).

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90 See FINRA/NYSE Euronext letter, p. 7.

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91 See SIFMA Letter, p. 18.

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92 See Liquidnet Letter, p. 5.

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93 Id.

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94 See Rule 613(j)(4).

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95 Though certain reporting requirements of Rule 13h-1 may eventually be unnecessary due to Rule 613, the Commission notes that Rule 13h-1 will be implemented much more expeditiously compared to the consolidated audit trail, and therefore will address the Commission's near-term need for access to more information about large traders and their activities.

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96 Section 3(a)(3)(A) of the Exchange Act defines the term "member" to mean: "(i) any natural person permitted to effect transactions on the floor of the exchange without the services of another person acting as broker; (ii) any registered broker or dealer with which such a natural person is associated; (iii) any registered broker or dealer permitted to designate as a representative such a natural person; and (iv) any other registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of the [Exchange Act], the rules and regulations thereunder, and its own rules." Section 3(a)(3)(A) further provides that, "[f]or purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 17(d), 19(d), 19(e), 19(g), 19(h), and 21 of [the Exchange Act], the term 'member' when used with respect to a national securities exchange also means, to the extent of the rules of the exchange specified by the Commission, any person required by the Commission to comply with such rules pursuant to Section 6(f) of this title." Finally, Section 3(a)(3)(B) provides that "[t]he term 'member' when used with respect to a registered securities association means any broker or dealer who agrees to be regulated by such association and with respect to whom the association undertakes to enforce compliance with the provisions of [the Exchange Act]." See 15 U.S.C. 78c(a)(3)(A) and 15 U.S.C. 78c(a)(3)(B).

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97 The proposed Rule would have explicitly required each national securities exchange and national securities association to be a sponsor of the NMS plan submitted pursuant to the Rule and approved by the Commission. See proposed Rule 613(a)(4). "Sponsor," when used with respect to an NMS plan, is defined in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory organization which is a signatory to such plan and has agreed to act in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).

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98 Proposed Rule 613(j)(1) would have defined the term "customer" to mean the beneficial owner(s) of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner(s).

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99 The proposed Rule would have defined "material terms of the order" to include, but not be limited to: the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, or short exempt; if a short sale, the locate identifier, open/close indicator, time in force (if applicable), whether the order is solicited or unsolicited, and whether the account has a prior position in the security; if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions. See proposed Rule 613(j)(3).

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100 "The OPRA Plan" is the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS. The OPRA Plan governs the dissemination of trade and quotation information for listed options. In this capacity, it provides real-time quotation and transaction information to market participants. See 17638 (March 18, 1981), 22 SEC Docket 484 (March 31, 1981) (order approving the OPRA Plan).

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101 The effective transaction reporting plans include the Consolidated Tape Association Plan ("CTA Plan") and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis ("UTP Plan").

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102 See Proposing Release, supra note 4, at 32586 and 32594.

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103 Id.

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104 For comments on general costs of the proposed Rule, see, e.g., Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; SIFMA Letter, p. 1-2, FINRA Letter, p. 3; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8.

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105 See Section II.C., infra, for a discussion of specific concerns raised by commenters.

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106 See FINRA/NYSE Euronext Letter, p. 1. NYSE Euronext is the publicly traded parent of a number of subsidiaries, including three SROs, NYSE, NYSE Amex, and NYSE Arca.

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107 See Nasdaq Letter I, p. 2. The NASDAQ OMX Group, Inc. is the publicly traded parent of a number of subsidiaries, including three SROs, Nasdaq, Phlx, and BX.

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108 See Direct Edge Letter, p. 1. Direct Edge is the parent of two SROs, EDGA Exchange, Inc. and EDGX Exchange, Inc.

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109 See CBOE Letter, p. 2.

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110 See, e.g., Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; euchtkafer Letter; Broadridge Letter, p. 3; SIFMA Proposal Letter, p. 1; FINRA Proposal Letter, p. 3.; Liquidnet Letter, p. 3 & p. 5-6; Ameritrade Letter, p. 2-3

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111 Id.

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112 Id.

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113 See BATS Letter, p. 1.

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114 See Liquidnet Letter, p. 1.

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115 Id. at p. 1-2.

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116 See SIFMA Letter, p. 1-2.

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117 Id. at p. 2.

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118 See, e.g., FINRA/NYSE Euronext Letter, p. 7, FINRA Letter, p. 3, FINRA Proposal Letter, p. 1-16, FTEN Letter, p.1, 4-5, Correlix Letter, p. 2-3; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2; Angel Letter, p. 2; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1.

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119 See FIF Letter, p. 1.

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120 See Nasdaq Letter I, p. 2.

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121 See Thomson Reuters Letter, p. 2; Noetic Partners Letter, p. 2; FTEN Letter, p. 1; Ross Letter; Correlix Letter, p. 2.; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Aditat Letter, p. 2 (stating that FIX protocol is already used in the industry today, making it cheaper to create systems to handle consolidated audit trail data as the data already exists in a "suitable format").

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122 See FTEN Letter, p. 13; Thomson Reuters Letter, p. 2-3.

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123 See FTEN Letter, p. 1.

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124 Id. at p. 3.

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125 See Know More Software Letter, p. 1.

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126 See Belanger Letter, p. 4.

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127 See Leuchtkafer Letter, p. 4. See also IAG Letter, p. 3.

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128 See, e.g., SIFMA Letter, p. 2, 15-16; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; Angel Letter, p. 2; CBOE Letter, p. 2-6 (suggesting several ways that the costs of the proposal could be reduced, including: leveraging existing SRO experience with audit trail systems and imposing uniformity across markets in those systems; requiring the submission of audit trail information through a batch process after the close of the trading day; deleting the requirement that all market maker quotes be submitted to the proposed consolidated audit trail; making clear that broker-dealers have no obligation to report order information that has already been reported to an exchange; and revisiting the need for a large trader reporting system if that proposed rule is adopted.).

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129 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 1-2.

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130 See Section III.F.2., infra; see also, e.g., BATS Letter, p. 1-2; Broadridge Letter, p. 3; FIF Letter, p. 4-5; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; ICI Letter, p. 4-5; Knight Letter, p. 2; Scottrade Letter, p. 1-2; SIFMA Letter, p. 3-6; SIFMA February 2012 Letter. Some commenters also questioned whether the costs to provide data on a real-time basis would outweigh the benefits. See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; ICI Letter, p. 4-6; GETCO Letter, p. 2; Direct Edge Letter, p. 3; Leuchtkafer Letter; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 2.

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131 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4; Knight Letter, p. 2. See also Broadridge Letter, p. 3; FIF Letter, p. 4; FIA Letter, p. 2.

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132 See SIFMA Letter, p. 4-6.

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133 Id. at p. 5.

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134 See SIFMA Letter, p. 3-4.

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135 See SIFMA Drop Copy Letter.

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136 Id.

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137 A "drop copy" is an electronic copy of a message automatically generated by the existing order management and execution systems used by broker-dealers and SROs.

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138 See SIFMA Drop Copy Letter.

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139 See GETCO Letter, p. 3-4.

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140 See Wells Fargo Letter, p. 3.

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141 See Correlix Letter, p. 2-3.

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142 Id.

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143 As discussed in Section II.C.4, infra, both SIFMA and FINRA submitted several comment letters with increasing levels of detail on the extent to which existing infrastructures could be used to achieve different forms of the various reporting requirements of the proposed Rule. In one of its later comment letters, FINRA submitted a detailed blueprint describing how it would build a consolidated audit trail that it believed would meet the primary objectives of the proposed Rule in a relatively short timeframe and with minimum costs to the industry. See FINRA Proposal Letter; SIFMA Letter, p. 16-18. See also BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 3.

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144 See, e.g., FINRA/NYSE Euronext Letter; FINRA Letter; Schumer Letter, p. 1.

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145 See Noetic Partners Letter II, p. 2; High Speed Letter, p. 1 (opining that estimated costs could be reduced if data were stored in an off-the-shelf cloud-based storage system or if a petabyte storage facility was built to store data and also estimating that "an integrated analysis system combining bespoke software for first-cut filtering of data from the repository, along with [commercial off-the-shelf software] for detailed analysis, could be developed for less than $10M"). See also Know More Software Letter, p. 1; Belanger Letter, p. 4; FTEN Letter, p. 1, 13.

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146 See Noetic Partners Letter II, p. 2.

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147 Id.

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148 See Section I., supra.

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149 See, generally, Section III., infra.

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150 See Section I., supra, for a summary of the changes to proposed Rule 613.

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151 See Rule 613(c)(3); Section I., supra; Section III.B.1.e., infra.

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152 See Rule 613(j)(1); Section I., supra; Section III.B.1.d.iv., infra.

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153 See Rule 613(a)(1)(i) through (xii); Section I., supra; Section III.C.2.a., infra.

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154 See FIF Letter II, p. 2-3; STA Letter, p. 2; Nasdaq Letter I, p. 6-7.

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155 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3.

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156 See FIF Letter II, p. 2; STA Letter, p. 1.

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157 See FIF Letter II, p. 1; STA Letter, p. 1-2.

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158 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5.

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159 See FIF Letter, p. 1.

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160 See FIF Letter II, p. 2.

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161 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3 (recommending the use of working groups comprising the Commission, FINRA, exchanges, broker-dealers, investors, vendors, and institutional asset managers to conduct business analysis and requisite discussions with the industry in planning a consolidated audit trail that meets the Commission's goals).

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162 Id. at p. 3.

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163 See Broadridge Letter, p. 2.

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164 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

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165 See FIF Letter II, p. 1-2; STA Letter, p. 2.

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166 See FIF Letter II, p. 2; STA Letter, p. 2-3; see also Nasdaq Letter I, p. 7 (arguing for "scheduling flexibility at the initial stage" of designing the consolidated audit trail).

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167 See proposed Rule 613(a)(1).

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168 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely applicable to the cost of the creating and filing the NMS plan required by Rule 613.

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169 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

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170 See Section III.C.2.a., infra.

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171 See Section III.C.2.b., infra.

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172 17 CFR 242.608.

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173 17 CFR 242.608(b)(2).

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174 See FINRA Proposal Letter.

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175 See FINRA Proposal Letter, p. 4, 6 (arguing against requiring the name and address of the beneficial owner of an account, as well as of the individual making the investment decision, and against requiring tax identification or social security numbers for individual investors).

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176 Id. at p. 7 and Appendix B.

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177 Id.

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178 Id. at p. 3-4 (noting that this information would be available for query by regulators within one hour of receipt, would include a unique order identifier and MPID, and would be added on T+1 to the "order lifecycle" using OATS and TRF data).

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179 Id. at p. 4.

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180 See Angel Letter, p. 3 (also noting, "While the OATS data are extremely useful for understanding market behavior and for searching for various violations, these data are not really needed for real time surveillance. Real time surveillance is generally focused on the question of whether or not some change needs to take place immediately . . . . The extensive OATS data regarding the handling of individual orders are more useful for economic analysis and enforcement activities and do not need to be reported in real time.")

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181 Id.

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182 See FINRA Proposal Letter; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 1-3.

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183 See FINRA/NYSE Euronext Letter, p. 7. See also FINRA Letter, p. 3 (stating that "the necessary components to an effective, comprehensive, and efficient consolidated audit trail are: (1) uniform data (both data content and data format); (2) reliable data; and (3) timely access to the data by SROs and the SEC. FINRA believes this can be achieved most effectively, efficiently, and expeditiously by expanding FINRA's existing OATS requirements to additional securities and non-FINRA member broker-dealers and by consolidating exchange data in a central repository to be used with OATS data").

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184 See BATS Letter, p. 2.

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185 See FINRA/NYSE Euronext Letter, p. 14; FINRA Letter.

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186 Id.

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187 See FINRA Letter, p. 6. Specifically, FINRA proposed enhancements to OATS and outlined a phased approach for implementation. It explained that, under its approach, implementation would begin with equity securities in the first two phases, followed by options in the third and fourth phases. FINRA further proposed that it could "establish an intraday abbreviated order submission capability based on SIFMA's drop-copy proposal." FINRA estimated the initial cost for the first two phases of the OATS enhancement would be between $100 to $125 million and the ongoing annual costs to be between $30 million and $40 million. While FINRA's proposal appears to include many of the elements required by Rule 613, the Commission notes that the proposal does not include a Customer-ID (which was similarly lacking in the SIFMA proposal), nor would all broker-dealers be required to report order information to the central repository (certain firms that route orders exclusively to another reporting firm that is solely responsible for further routing decisions would be exempt from reporting obligations; additionally, FINRA proposed retaining exemptive authority in certain limited situations to provide relief to small member firms that do not otherwise qualify for exclusion from the definition of an OATS Reporting Member). Further, FINRA's proposal would not collect customers' names, addresses and account numbers. See FINRA Proposal Letter, p. 10; 14-16; Appendix. The Commission believes a unique Customer-ID and customer account information are critical to the efficacy and usefulness of the consolidated audit trail, and therefore is requiring the NMS plan submitted for its consideration to include such information.

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188 Id. This commenter also noted that OATS compliance rates have improved to over 99% since the system was first implemented, and emphasized that creating a new system would result initially in low compliance rates until users became familiar with the system. Id. at p. 11; see also FINRA/NYSE Euronext Letter, p. 8.

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189 See FIF Letter, p. 6 (also providing thoughts on the functionalities of OATS that should be considered in creating the consolidated audit trail, such as OATS' ability to identify and reject duplicative reporting; to link reports between firms and Nasdaq exchanges without using a unique customer identifier; its possible flexibility in incorporating additional order types; its current incorporation of quote data; and its current identification of index arbitrage and program trading, and ability to possibly add a large trader identification field "to enhance analysis of high volume, algorithm trading").

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190 See BOX Letter, p. 2; CBOE Letter, p. 2.

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191 See BOX Letter, p. 2.

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192 See CBOE Letter, p. 2.

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193 See SIFMA Drop Copy Letter. The FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. These market participants share a vision of a common, global language for the automated trading of financial instruments. See http://fixprotocol.org/what-is-fix.shtml (last viewed on May 30, 2012).

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194 Id. at p. 1.

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195 Id. at p. 1-2.

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196 See Section II.A.1.c., supra.

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197 This Section III.A. discusses the use of a NMS plan to create, implement, and maintain a consolidated audit trail. Section III.C., infra, focuses on the process the SROs must follow when submitting the NMS plan to the Commission.

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198 17 CFR 242.608. See Rule 613(a)(2).

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199 See Proposing Release, supra note 4, at 32568.

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200 See Thomson Reuters Letter, p. 2; CBOE Letter, p. 7.

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201 See Thomson Reuters Letter, p. 2.

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202 See CBOE Letter, p. 7.

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203 See FINRA Letter, p. 15; Angel Letter, p. 3.

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204 See FINRA Letter, p. 15.

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205 See Angel Letter, p. 3.

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206 See Rule 613(a). The proposed Rule provided that the NMS plan must be filed with the Commission pursuant to Rule 608. Adopted Rule 613(a)(2) clarifies that the NMS plan must also satisfy the requirements set forth in Rule 608(a). See Rule 608(a) of Regulation NMS; 17 CFR 242.608(a).

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207 See Section III.C., infra.

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208 17 CFR 242.608. See Rule 613(a)(2).

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209 See Thomson Reuters Letter, p. 2.

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210 See Section I., supra; Sections III.B., III.C., infra.

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211 See Section III.B.1.d.i.(A)., infra.

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212 See FINRA Letter, p. 15.

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213 See CBOE Letter, p. 7.

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214 See Rule 613(a)(1)(xi).

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215 See Rule 613(b)(7)(i). Because members of the SROs will be required to report data pursuant to the NMS plan, the Rule provides that the plan must require that the Advisory Committee include representatives of the member firms of the SROs. However, the Commission believes that it is advisable for the SROs to consider including other interested parties such as SIPs, vendors, investors, and/or academics on the Advisory Committee. In addition, the Commission expects that the Advisory Committee would include the Commission's Chief Technology Officer as an observer. See Section III.B.3.b., infra.

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216 See Rule 613(b)(7).

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217 17 CFR 242.608(b)(1).

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218 See Angel Letter, p. 3.

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219 See Section II.A., supra. The Commission notes that, in the Proposing Release, it used the term "proprietary orders" to describe orders that were generated for the account of a broker-dealer. See Proposing Release, supra note 4, at 32570. To avoid confusion with the proposed "Volcker Rule," which proposes new regulations with respect to "proprietary" trading by commercial banks and their affiliates, the Commission is using the term "principal orders" in this Release to describe orders that were generated for the account of a broker-dealer. See Securities Exchange Act Release No. 65545 (October 12, 2011), 76 FR 68846 (November 7, 2011) (File No. S7-41-11).

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220 See Section I., supra.

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221 See proposed Rule 613(c)(5).

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222 The Commission notes that any expansion of the consolidated audit trail to cover non-NMS securities would be effectuated through notice and comment.

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223 See Liquidnet Letter, p. 2 (suggesting limiting the scope of the first phase of audit trail implementation to end-of-day-reporting to ensure that it can be completed in a timely and cost-effective manner; this commenter also recommended that the first phase apply the consolidated audit trail to all market participants, not just the SROs, as proposed). See also FIF Letter, p. 7 (suggesting that the consolidated audit trail cover just NMS stocks - then at a later date, all NMS securities, including options); FINRA Proposal Letter, p. 5 (suggesting several phases of expansion, beginning with NMS stocks and over-the-counter ("OTC") equity securities, and ultimately including standardized options, fixed income securities, conventional options, and security-based derivatives in the consolidated audit trail); SIFMA Letter, p. 16-17 (believing that OATS could form the basis for the consolidated audit trail, stating that OATS should be modified to include non-Nasdaq-listed securities, listed options, quotes, street side and exchange-to-exchange routing and market making and recommending phasing in NMS stocks first, then any additional data elements, then listed options and, finally, non-NMS securities); FIF Letter II, p. 2 (suggesting that the consolidated audit trail have "multi-instrument capabilities, most importantly options and futures but also fixed income and other instruments).

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224 See Broadridge Letter, p. 4.

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225 See Nasdaq Letter II, p. 3.

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226 See Liquidnet Letter, p. 2; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17; Marketcore Letter, p. 1.

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227 See Marketcore Letter, p. 1.

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228 See Ameritrade Letter, p. 3. See also Mansfield Letter, p. 1 (suggesting other data, including "metrics" and "market environmental information" to be included in the consolidated audit trail).

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229 See Direct Edge Letter, p. 4.

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230 See Proposing Release, supra note 4, at 32568-70; Rule 613(c)(5).

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231 See Rule 613(i). Specifically, Rule 613(i) now provides that the SROs provide a document outlining how such exchanges and associations "could" incorporate non-NMS securities into the consolidated audit trail, rather than how the exchanges and associations "would propose to" incorporate non-NMS securities; and that the exchanges and associations should provide details for each order and reportable event that "may" be required to be provided, and which market participants "may" be required to provide the data. As proposed, the comparable provision of Rule 613(i) required that the exchanges and associations should provide details for each order and reportable event that "would" be required to be provided, and which market participants "would" be required to provide the data.

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232 See Section III.B.3.b., infra.

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233 See Ameritrade Letter, p. 3; Liquidnet Letter, p. 2; Marketcore Letter, p. 1; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17.

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234 See Rule 613(a)(1)(vi). See also Section III.C.2.a.i., infra.

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235 See note 222, supra.

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236 See Rule 613(a)(3), which states that the NMS plan must require the plan sponsors: (i) within two months after effectiveness of the NMS plan to select a plan processor; (ii) within four months after effectiveness of the NMS plan to synchronize their business clocks and require the members of each such exchange and association to synchronize their business clocks; (iii) within one year after effectiveness of the NMS plan to provide to the central repository the data specified in Rule 613(c); (iv) within fourteen months after effectiveness of the NMS plan to implement a new or enhanced surveillance system(s) as required by Rule 613(f); (v) within two years after effectiveness of the NMS plan to require their members, except those members that qualify as small broker-dealers as defined in § 240.0–10(c), to provide to the central repository the data specified in Rule 613(c); and (vi) within three years after effectiveness of the NMS plan to require their members that qualify as small broker-dealers as defined in § 240.0–0(c) to provide to the central repository the data specified in Rule 613(c).

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237 See Section III.D., infra.

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238 The Commission also believes that limiting the application of the Rule initially to only NMS securities should help ensure that the implementation schedule prescribed by the Rule is achievable. See Section III.D., infra.

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239 See Section II.A.2, supra.

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240 See note 223, supra.

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241 The Commission notes that the financial markets have become increasingly interrelated, with transactions occurring in the futures markets affecting transactions in the securities markets. To the extent that instruments other than NMS securities (e.g., futures on a securities index or security-based swaps) can be substitutes for trading in NMS securities, or are otherwise linked to such trading (e.g., as part of a strategy that involves multiple products), having access to an audit trail that includes these instruments would improve regulators' ability to more quickly detect potentially manipulative or other illegal activity that could occur across markets. The Commission recognizes, however, that any such expansion to include products not under the Commission's jurisdiction, and thus not contemplated by this Rule, would need to be coordinated with the CFTC or other applicable regulatory authorities, and would likely require a separate rulemaking, which would include a consideration of the costs and benefits of such an expansion. In this regard, the Commission believes that it could be beneficial to discuss with the CFTC, at the appropriate time, the possibility of including within the consolidated audit trail data relating to futures or swap products regulated by the CFTC that are based on securities. The Commission is therefore directing the Commission staff to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail. The information from such an expanded consolidated audit trail could benefit both the CFTC and the Commission. An example of a non-NMS security is a security-based swap. The Commission notes that, separately, it has proposed rules requiring the reporting of security-based swap information to registered security-based swap data repositories ("SDR") or the Commission. See Securities Exchange Act Release No. 63446, File No. S7-34-10 (November 19, 2010), 75 FR 75208 (December 2, 2010) (proposing Regulation SBSR under the Exchange Act providing for the reporting of security-based swap information to registered security-based SDR or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information); see also Securities Exchange Act Release No. 63447, File No. S7-35-10 (November 19, 2010), 75 FR 77306 (December 10, 2010) (proposing rules governing the SDR registration process, duties, and core principles).

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242 See 17 CFR 242.100 et seq.; 17 CFR 240.10b-5. Rule 105 of Regulation M prohibits the short selling of equity securities that are the subject of a public offering for cash and the subsequent purchase of the offered securities from an underwriter or broker or dealer participating in the offering if the short sale was effected during a period that is the shorter of the following: (i) beginning five business days before the pricing of the offered securities and ending with such pricing; or (ii) beginning with the initial filing of such registration statement or notification on Form 1-A or Form 1-E and ending with the pricing. Thus, Rule 105 prohibits any person from selling short an equity security immediately prior to an offering and purchasing the security by participating in the offering. Rule 10b-5 provides that "[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

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243 See Direct Edge Letter, p. 4.

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244 See Rule 613(i).

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245 See Section III.B.3.b., infra.

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246 See note 2145, supra.

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247 See Proposing Release, supra note 4, at 32570; proposed Rule 613(j)(4).

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248 Id.

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249 See note 219, supra.

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250 See Proposing Release, supra note 4, at 32571.

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251 See FINRA Letter, p. 10; SIFMA Letter, p. 15; Liquidnet Letter, p. 3; FINRA Proposal Letter, p. 6.

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252 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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253 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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254 See CBOE Letter, p. 5. See also Options Settlement Order, supra, note 60. See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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255 See Liquidnet Letter, p. 3.

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256 See Ameritrade Letter, p. 3.

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257 See SIFMA Letter, p. 15.

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258 See BOX Letter, p. 3.

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259 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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260 See Rule 613(j)(4).

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261 See, e.g., FINRA Rule 5320; NYSE Arca Equities Rule 6.16.

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262 See Section II.A., supra.

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263 See BOX Letter, p. 3.

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264 See SIFMA Letter, p. 15.

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265 See Rule 613(c)(7)(ii)(F). The Commission notes that the NMS plan submitted by the plan sponsors would need to provide appropriate detail as to how orders routed within a single broker-dealer would be reported. For example, the NMS plan would need to address the routing of an order received by a customer-facing sales desk within a broker-dealer to a separate trading or market-making desk within the same broker-dealer that actually determines how to execute the order.

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266 See Ameritrade Letter, p. 3.

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267 See CBOE Letter, p. 5; TIAA-CREF Letter, p. 2; Wachtel Letter, p. 1; SIFMA Letter p. 13; FINRA Proposal Letter, p. 5-6; GETCO Letter, p. 3-4; Nasdaq Letter II, p. 3.

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268 See TIAA-CREF letter, p. 2-3. Another commenter echoed this concern and recommended that the consolidated audit trail develop a means to avoid such duplicative reporting, explaining that this is a problem with the current OATS system. See Wells Fargo Letter, p. 2.

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269 See TIAA-CREF letter, p. 2.

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270 See FINRA Proposal Letter, p. 5-6.

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271 Id.

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272 See Wachtel Letter, p. 1. The Commission notes any exemptions granted by FINRA under FINRA Rule 7470 may not exceed a period of two years, unless extended. See FINRA Rule 7470. FINRA's authority to grant exemptions under FINRA Rule 7470 expires on July 10, 2015. See FINRA Rule 7470(c).

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273 See CBOE Letter, p. 5-6; SIFMA Letter, p. 13; GETCO Letter, p. 3-4.

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274 See CBOE Letter, p. 5-6 (stating its belief that "it would be redundant for both the market makers and the exchanges to all submit this information to the CAT. We recommend that the exchanges be permitted to submit information on market maker quotes to the CAT. Market makers who submit quotes to an exchange would have no obligation other than to correctly identify themselves to the exchange as the party submitting the quotation. The exchange could add the rest of the required information (participant identifier, unique order identifier, etc.) to the quote and transmit it to the CAT").

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275 See SIFMA Letter, p. 13.

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276 See GETCO Letter, p. 3-4. Another commenter proposed to develop a platform that would collect audit trail information from the SROs and other sources of information, and thus reduce the obligations on broker-dealers to report data. See Nasdaq Letter II, p. 3.

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277 See Rules 613(c)(5) through (7).

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278 The Commission notes that the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf. In particular, the Commission recognizes that introducing brokers may wish to contract with clearing broker-dealers for this purpose and that the SROs may need to amend their rules to address the allocation of responsibility between the parties. In such cases, the Commission expects that the clearing contract, as mandated by the SRO's rules, as amended, would address the allocation of responsibility for the reporting of required data.

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279 The Commission has adopted Rule 613(c)(5) and (6) using the terms "record" and "report" the required audit trail data, rather than "collect" and "provide" the required audit trail data, as proposed. See also Section III.B.1.e., infra.

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280 The Rule as adopted requires the NMS plan submitted to the Commission for its consideration to require broker-dealers and SROs to record and report to a central repository only the audit trail information for actions each took with respect to an order. For example, if a member receives an order from a customer, the member will be required to report its receipt of that order (with the required information) to the central repository. If the member then routes the order to an exchange for execution, the member will be required to report the routing of that order (with the required information) to the central repository. Likewise, the exchange receiving the routed order will be required to report the receipt of that order from the member (with the required information) to the central repository. If the exchange executes the order on its trading system, the exchange will be required to report that execution of the order (with the required information) to the central repository, but the member will not also be required to report the execution of the order. If the member executes the order in the OTC market, however, rather than routing the order to an exchange (or other market center) for execution, the member will be required to report the execution of the order (with the required information) to the central repository. In this regard, there is no duplicative reporting of audit trail information because each market participant is required to report only the audit trail data for the actions it has taken with respect to an order. The Commission notes that, for orders that are modified or cancelled, Rule 613(c)(7)(iv) would require the broker-dealer who received the modification from a customer, for example, to report the order modification to the central repository. Thus, if broker-dealer A received a modification to a customer's order from the customer, broker-dealer A would be required to report such modification to the central repository. If broker-dealer A had already routed the customer's order to another broker-dealer ("broker-dealer B"), the customer's modification would also need to be reported by broker-dealer A to broker-dealer B. The receipt of the customer's modification by broker-dealer B would also need to be reported to the central repository, pursuant to Rule 613(c)(7)(iv). The same reporting obligations would apply if the modification were originated by broker-dealer A.

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281 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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282 See Section III.C.2.iii., infra.

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283 See Wachtel Letter, p. 1.

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284 See Section III.D., infra.

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285 If a clearing broker-dealer receives an order from a small broker-dealer during the period between the time the Rule is applicable to large broker-dealers and the time the Rule is applicable to small broker-dealers, the broker-dealer performing the clearing function for the small introducing broker will be subject to only the requirements of the Plan applicable directly to the clearing broker-dealer, while the small introducing broker will not be subject to the reporting requirements at that time.

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286 In particular, the Commission acknowledges that certain elements are not collected by existing audit trails and thus SROs and members would incur additional costs to record and report such information. The Commission also acknowledges that there might be additional costs with respect to assigning customer identifiers, the broker-dealer identifiers and the order identifiers because such assignments might, depending on the NMS plan, require coordination amongst various different entities and possibly further systems changes.

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287 See proposed Rules 613(c)(7)(i)(I), 613(c)(7)(ii)(G), 613(c)(7)(iii)(F) and 613(c)(7)(iv)(D).

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288 A broker or dealer currently must mark all sell orders of any equity security as long, short, or short exempt. See Rule 200(g)(1) under the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked short exempt only if the conditions of Rule 201(c) or (d) under the Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 200(g)(2) under the Exchange Act, 17 CFR 242.200(g)(2).

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289 See Kumaraguru Letter, p. 1.

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290 Id.

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291 See Ameritrade Letter, p. 3.

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292 Id.

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293 See FINRA Proposal Letter, Appendix A.

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294 See Section II.A.2., supra.

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295 See Kumaraguru Letter, p. 1.

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296 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C).(2)., infra (discussing the definition of "customer" as applied to investment advisers).

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297 See Section III.B.1.d.ii., infra, for a discussion of the proposed requirement to report the unique identifier of the registered representative receiving or originating an order.

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298 See Proposing Release, supra note 4, at 32575.

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299 See Angel Letter, p. 2-3.

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300 Order type information is important because it reflects the intention of the person originating an order with regard to how an order should be handled, and also provides information regarding the potential impact of orders on the market.

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301 See Proposing Release, supra note 4, at 32575.

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302 See proposed Rule 613(j)(3).

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303 See Angel Letter, p. 2-3.

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304 Id.

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305 See Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11; SIFMA Drop Copy Letter, p. 2.

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306 See Managed Funds Association Letter, p. 25-7">

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307 See SIFMA Letter, p. 11. SIFMA subsequently submitted an alternative proposal that did not include a flag for algorithms, citing lack of clarity in the Commission's definition of algorithmic order, and stating that the FIX standard lacks existing fields to flag such orders. Id. at 2.

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308 See Angel Letter, p. 2-3.

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309 See Rule 613(j)(7).

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310 See Proposed Rule 613(c)(7)(i)(F).

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311 See SIFMA Letter, p. 12; Liquidnet Letter, p. 6; FINRA Letter, p. 4; FINRA Proposal Letter, p. 6.

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312 See FINRA Letter, p. 4 (explaining that "multiple firms can currently be represented by a single MPID that is used for market access arrangements and is assigned to another firm that has no direct relationship to the trading activity being reported under that MPID"). This commenter also supported the use of more specific "sub-identifiers" to allow regulators to distinguish between desks or trading units within a firm.

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313 Id. at p. 9. FINRA also requested that the Commission reconsider the need for reporting the identification of the beneficial owner, the identification of the person exercising investment discretion, and the unique identifier of the branch office and registered representative. For further discussion of this comment, see note 170 supra and accompanying text.

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314 See FINRA Proposal Letter, p. 6, 13. The CRD is the central licensing and registration system operated by FINRA which contains employment, qualification and disciplinary histories for securities industry professionals who do business with the public.

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315 See FINRA Proposal Letter, p. 6, 13.

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316 Id. at p. 6.

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317 See Angel Letter, p. 2.

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318 This standard is being developed by Technical Committee 68 (TC68) of ISO, in whose meetings a Commission staff representative participates. Its final publication is subject to the resolution of specific issues on implementation, operating procedures, and the need to coordinate with a global legal entity identifier initiative conducted by the global regulatory community, in which a Commission staff representative is also participating.

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319 One commenter requested the Commission consider how the Department of Treasury's newly-created Office of Financial Research ("OFR") would impact reporting requirements imposed by the consolidated audit trail. See SIFMA Letter, p. 22-23. The commenter noted that the collection powers granted to the OFR, as well as its authority to require standardized reporting of data, could affect how data is submitted to the consolidated audit trail. Id. at p. 22. The commenter suggested that any information that is provided to the consolidated audit trail should not be required to be provided to the OFR again or in a different format. Id. The Commission understands that the OFR has been participating in and encouraging efforts by interested parties to have a standard for assigning unique entity identifiers created by an internationally recognized standards body ("IRSB") and that the ISO has issued a draft ISO standard, ISO 17442, for the financial services industry that is proposed to provide a viable global solution for the accurate and unambiguous identification of legal entities engaged in financial transactions. See ISO Press Release "ISO Financial Services Standard Wins Industry Support Six Months Ahead of Publication," July 25, 2011. Because the ISO standard is still in draft form and issues of implementation, governance and operating procedures remain to be resolved, the Commission does not believe that it is appropriate for it to mandate the use of the ISO standard at this time. The Commission notes, however, that to the extent that unique entity identifiers become available from an IRSB, Rule 613 provides SROs with sufficient flexibility to submit, if they so chose, an NMS plan that makes use of those identifiers and requires all or some reporting parties to obtain such identifiers, assuming such identifiers otherwise meet the requirements of the Rule.

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320 See proposed Rule 613(c)(7)(iv)(E) (requiring the reporting of the identity of the person giving a modification or cancellation instruction for an order); adopted Rule 613(c)(7)(iv)(F) (requiring the CAT-Reporter-ID or Customer-ID of such person instead).

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321 See note 313, supra.

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322 See proposed Rule 613(c)(7)(i)(F).

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323 17 CFR 240.17a-3(a)(6)(i).

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324 17 CFR 240.17a-4(b)(1).

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325 See Rule 613(j)(3) for a definition of "customer."

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326 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(B).

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327 See CBOE Letter, p. 2; Managed Funds Association Letter, p. 2; FINRA Letter, p. 9; SIFMA Drop Copy Letter, p. 1; SIFMA Letter, p. 9.

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328 See CBOE Letter, p. 2.

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329 See Managed Funds Association Letter, p. 2.

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330 See FINRA Letter, p. 9.

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331 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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332 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4.

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333 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, 2.

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334 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; FIF Letter, p. 2.

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335 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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336 Id.

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337 See SIFMA Letter p. 9, 10.

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338 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4; SIFMA Letter, p. 11.

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339 See Proposing Release, supra note 4, at 32573; Liquidnet Letter, p. 4.

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340 See SIFMA Letter, p. 10.

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341 See Knight Letter, p. 2.

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342 See Scottrade Letter, p. 1. See also Knight Letter, p. 2; Direct Edge Letter, p. 4.

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343 See Direct Edge Letter, p. 3.

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344 See FINRA Proposal Letter, p. 4.

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345 See SIFMA Letter, p. 11.

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346 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, p 2.

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347 See Angel Letter, p. 2. This commenter stated that "[i]t would be relatively simple and cheap to add four fields to each trade report that would contain the account numbers of the buyer and seller and the Market Participant Identifier (MPID) for the original order entry firms."

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348 See FIF Letter, p. 2. This commenter recommended that the requirement for such unique customer identifiers be tabled until after regulators have experience using CAT without this identifier.

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349 See FIF Letter, p. 2.

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350 See BOX Letter, p. 2.

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351 See Section II.A.3., supra.

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352 See SIFMA Letter, p. 11; FINRA Proposal Letter, p. 6-7.

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353 See SIFMA Letter, p. 11.

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354 Id. See also FINRA Proposal Letter, Appendix B (setting forth a method for identifying large traders through the "registration of unique market participant identifiers rather than by requiring broker-dealers to provide the CAT processor with any large trader numbers assigned by the SEC in order reports, thereby minimizing the ability of market participants to reverse engineer a large trader's identity or trading strategy").

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355 See FINRA Proposal Letter, p. 6-7.

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356 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 2; FIF Letter, p. 2.

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357 See SIFMA Letter, p. 10 (noting that "in recent years, increased concerns about identity theft and client confidentiality have led the securities industry to move away from using social security identification numbers or taxpayer identification numbers as a way to monitor clients and customers. The SEC has affirmed that it would guard access to customer social security and taxpayer identification numbers with even more safeguards than it does other information in the central repository of the consolidated audit trail. Although the SEC has a strong record of protecting investor privacy, the very presence of potentially billions of unique customer identifiers tied to personal information in a central repository would create a substantial risk of misuse and identity theft. The risk of unique customer identifiers being stolen or misused would be magnified in a real-time reporting system").

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358 See Wells Fargo Letter, p. 3. However, this commenter also noted that, "[w]hile the full panoply of privacy concerns that flow from having a unique order identifier being available to every participant in the order execution process may be difficult to assess, creating a system that has that unique identifier available for primarily the post trade review likely solves both the privacy and cost issues in a manner reasonable for both clients, market participants and regulators." Id.

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359 See Ross Letter, p. 1 (asking at what level of security to encrypt customer data, and for how long to encrypt it for, as well as how long the Commission would need to decrypt the customer's name – whether on a real time or overnight basis, and noting that data encryption is expensive and could enlarge message sizes.) See also ICI, p. 3 (suggesting that the Commission expressly state who would have access, when they could access it, and how they could use it; and also recommending requiring that all data sent to the central repository be encrypted and that certain fields be "masked" or that reporting of information in such fields be delayed until end-of-day to reduce concerns about leaked information being used for frontrunning).

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360 See FIF Letter, p. 2.

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361 Because existing SRO audit trails do not require customer information to be reported, regulators must request that information identifying the customer, often from a multitude of sources, which can result in significant delays in investigating market anomalies or violative trading. Additionally, indirect access to an exchange (such as "sponsored access" arrangements) also has made it more difficult to use the current EBS system and Rule 17a–25 to identify the originating customer because the broker-dealer through whom an order is sent to an exchange may not know or have direct access to information identifying the customer who originally submitted the order.

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362 See notes 331-334, supra, and accompanying text.

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363 See Angel Letter, p. 2.

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364 See SIFMA Letter, p. 9-11; FINRA Proposal Letter, p. 4 and 6.

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365 For purposes of the following discussion, the Commission will use the terms "unique customer identifier" and "Customer-ID" interchangeably.

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366 Under the Rule, each customer would be assigned a unique customer identifier, or Customer-ID. However, an order may have more than one Customer-ID if the account holder differs from the person from whom the broker-dealer is authorized to take trading instructions or if more than one person is an account holder for the account or is authorized to give trading instructions for the account.

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367 See Rule 613(a)(1)(xi).

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368 See SIFMA Letter, p. 11.

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369 See SIFMA Letter, p. 11.

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370 See Section III.B.1.e., infra.

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371 See FINRA Letter, p. 8-9.

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372 See ICI Letter, p. 2-4; SIFMA Letter, p. 10-11; Angel Letter, p. 2; Ross Letter, p. 1.

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373 See Section III.B.2.e., infra.

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374 See Ross Letter, p. 1.

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375 See Rule 613(a)(1)(iv).

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376 See also Section III.B.2.e., infra, for a discussion of the provisions in the NMS plan designed to protect the privacy and confidentiality of the consolidated audit trail data.

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377 See Rule 613(j)(4).

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378 See Rule 613(e)(2). See also Section III.B.2.d., infra.

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379 See FINRA Letter, p. 9.

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380 See SIFMA Letter, p. 11.

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381 Id.

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382 The Commission also notes that it retains the authority to request additional information from broker-dealers (and other market participants it regulates) where information about a customer of a broker-dealer beyond that required by Rule 613(j)(3) is needed to fulfill its mission.

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383 Rule 17a-3(a)(9), among other things, requires a broker-dealer to make and keep a record of the name and address of the "beneficial owner" of each cash or margin account with the broker-dealer. 17 CFR 240.17a-3(a)(9). Rule 613 is not intended to alter in any way the information that a broker-dealer is currently required to obtain under Rule 17a-3(a)(9).

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384 The Commission notes that, under Rule 613, both joint account holders would also receive their own unique customer identifier.

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385 See Rule 613(j)(3)(ii).

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386 For the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(i).

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387 Pursuant to the definition of "customer" under adopted Rule 613, the Rule would not capture owners of a fund because they are not the account holders at the broker-dealer.

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388 This is because, for the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(ii). If an individual creates and operates two separate entities (as an employee of each such entity) that each maintain a trading account at one or more broker-dealers, the broker-dealers would be required to record and report the Customer-IDs of those entities, and not the customer ID of the individual trader.

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389 See Proposing Release, supra note 4, at 32576.

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390 See Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3; FIF Letter II, p. 2.

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391 See Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3.

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392 See FINRA Letter, p. 7-8. FINRA expressed concern that, if two child orders from the same parent order are sent to the same market center, regulators would need to look at time stamps and other attributes, such as share quantity and price, to attempt to create an accurate linkage for each individual child order. FINRA stated that this complexity could be avoided if members used a separate unique routed order identifier for each routed order. Id.

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393 See FINRA Proposal Letter, p. 7-8.

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394 See FIF Letter II, p. 2.

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395 See SIFMA Letter, p. 12. See also SIFMA Drop Copy Letter, p. 2 (suggesting a routed order identifier or a child order identifier which would be separate from the unique order identifier of the parent order, and would be reported to the consolidated audit trail separately on a non-real-time basis, as well as linkage information).

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396 See FIF Letter, p. 3 (recommending the linking of the order information in a fashion similar to OATS whereby the information would only be available to regulators).

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397 See SIFMA Letter, p. 12. In addition, another commenter suggested that order identifiers should be unique by broker and day, similar to the approach used by OATS. See Liquidnet Letter, p. 7.

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398 See Rule 613(c)(7)(i)(B); Rule 613(c)(7)(ii)(A); Rule 613(c)(7)(iii)(A); Rule 613(c)(7)(iv)(A); Rule 613(c)(7)(v)(A); Rule 613(c)(7)(vi)(C); and Rule 613(j)(1).

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399 See Rule 613(j)(1).

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400 See Section III.C.2.a., infra.

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401 See FIF Letter, p. 3; Liquidnet Letter, p. 7; SIFMA Letter, p. 12; SIFMA Drop Copy Letter, p. 12; FINRA Letter, p. 8.

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402 See Section II.A., supra.

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403 See Rule 613(j)(1). For example, one of the methods that the SROs could consider using to demonstrate the efficacy of their approach would be to engage appropriate third party experts to confirm that the system's proposed design and functionality would achieve its stated accuracy and reliability benchmarks.

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404 See Section III.C.2.a.i., infra; Rule 613(a)(1)(iii) and (iv).

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405 See Rule 613(e)(1).

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406 See FINRA Letter, p. 4-7.

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407 See SIFMA Letter, p. 12. See also FIF Letter, p. 3.

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408 See SIFMA Letter, p. 12.

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409 See proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), 613(c)(7)(v)(C).

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410 See Endace Letter, p. 1-2.

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411 See Endace Letter, p. 1. The Commission notes that this commenter also suggested that the same time increment be extended to market data feeds to help increase transparency and deter fraudulent activity; however, this comment is outside the scope of this Release.

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412 Id. at 2-3.

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413 See SIFMA Letter, p. 14.

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414 See FIF Letter, p. 6-7.

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415 Id. See Section III.B.1.d.v., infra, for further discussions of "time drift" and the issues raised by this commenter in that regard.

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416 See Proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), and 613(c)(7)(v)(C).

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417 See Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(C), and 613(c)(7)(v)(C).

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418 See, e.g., Securities Industry Automated Corporation's ("SIAC") Consolidated Quotation System ("CQS") Output Specifications Revision 40 (January 11, 2010); SIAC's Consolidated Tape Service ("CTS") Output Specifications Revision 55 (January 11, 2010); and Nasdaq's Unlisted Trading Privileges Plan Quotation Data Feed Interface Specifications Version 12.0a (November 9, 2009).

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419 See, e.g., http://batstrading.com/resources/features/bats_exchange_Latency.pdf (describing, among other things, the time it takes to accept, process, and acknowledge or fill a member order).

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420 See Endace Letter, p. 1.

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421 See FIF Letter, p. 7.

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422 See Section III.B.1.h., infra, for a discussion of clock synchronization.

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423 See FIF Letter, p. 6-7.

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424 Similarly, although reporting in increments finer than a millisecond would also enable the accurate time-sequencing of events originating from within a single system or systems operating off the same clock, the Commission recognizes that the effects of time drift across the clocks of different systems could limit the efficacy of time-sequencing sub-millisecond events across those systems.

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425 See FINRA's Order Audit Trail System, Frequently Asked Questions, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/P122893 (last visited on May 15, 2012).

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426 See Endace Letter, p. 1 (stating that "[t]oday Exchanges such as NYSE Euronext and BATS are claiming that they are executing orders in less than a millisecond (see Wall Street Journal on the January 6th 2010) and are displaying details of these trades in increments of milliseconds on their market data feeds. Clearly from an Exchange perspective the publishing of trade data at one millisecond increments is not just possible, its current practice. However, Endace believes that one millisecond increments is not good enough"); SIFMA Letter, p. 14 (acknowledging that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second").

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427 See SIFMA Letter, p. 14.

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428 See Rule 613(a)(1)(xii).

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429 See Rule 613(a)(1)(vii).

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430 See Rule 608(b)(1) under Regulation NMS, 17 CFR 242.608(b)(1).

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431 See GETCO Letter, p. 4.

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432 Id.

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433 Id.

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434 OATS rules currently require the recording and reporting of orders routed internally. See FINRA Rule 7440(c).

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435 The Commission acknowledges that certain orders received by an exchange may be routed to another exchange; however, the routing of such an order to the other exchange is largely subject to the rules of the exchange and Rule 613 will capture such routing as a reportable event.

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436 In general, flash orders are communicated to certain market participants and either executed immediately or withdrawn immediately after communication. The Commission has proposed and sought comment on whether to amend Rule 602 of Regulation NMS under the Exchange Act to eliminate an exception for the use of flash orders by equity and options exchanges. See Securities Exchange Act Release Nos. 60684 (September 18, 2009), 74 FR 48632 (September 23, 2009); 62445 (July 2, 2010), 75 FR 39625 (July 9, 2010).

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437 See Section III.B.1.d.vi., supra, for a discussion of the modifications to Rule 613(c)(7)(ii) through (iii).

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438 The Commission notes that OATS rules also require both the FINRA reporting member routing an order and the FINRA reporting member receiving the order to record and report certain audit trail data. See FINRA Rule 7440(C). See also Rule 613(c)(7)(ii)(D) and Rule 613(c)(7)(iii)(D) through (E).

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439 See SIFMA Drop Copy Letter, p. 4.

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440 Id.

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441 See Liquidnet Letter, p. 7.

+
+
fn +

442 See, e.g., FINRA Rule 7440(d); Nasdaq Rule 6950; NYSE Rule 132B.

+
+
fn +

443 See SIFMA Drop Copy Letter, p. 4.

+
+
fn +

444 See Section III.B.1.iii., supra.

+
+
fn +

445 See Liquidnet Letter, p. 7.

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+
fn +

446 While the Commission is not requiring that execution data be linked with the public trade report using a common identifier, the Commission notes that the Rule does not prohibit the SROs from including a provision in the NMS plan for the establishment of a common identifier to link the audit trail execution reports for buy and sell orders to the public trade report.

+
+
fn +

447 See Rule 613(j)(9) for a definition of "reportable event."

+
+
fn +

448 See proposed Rule 613(c)(3).

+
+
fn +

449 See Proposing Release, supra note 4, at 32572.

+
+
fn +

450 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

+
+
fn +

451 See Ameritrade Letter, p. 1.

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+
fn +

452 See Aditat Letter, p. 1-2. FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. See What is FIX? available at http://fixprotocol.org/what-is-fix.shtml (last visited on May 7, 2011).

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+
fn +

453 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

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fn +

454 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4-5; Knight Letter, p. 2. See also BATS Letter, p. 2; Broadridge Letter, p. 3; FIF Letter, p. 4; GETCO Letter, p. 3-4; CBOE Letter, p. 4; FIA Letter, p. 2. In particular, FIA noted its belief that "real-time reporting accounts for a significant portion of the considerable costs associated with the CAT." See FIA Letter, p. 2.

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455 See FINRA/NYSE Euronext Letter, p. 5; FINRA Letter, p. 13; SIFMA Letter, p. 5; CBOE Letter, p. 4 (stating that, "given the increased speed of order submission, quote changes, and order cancellation, modifications and executions, a real time submission requirement could strain the systems capacities and computer resources of SROs and many member firms").

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fn +

456 See FINRA Letter, p. 13. See also Berkeley Letter, p. 2 (noting the "peta-scale" problem of collecting audit trail data generally).

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+
fn +

457 See FINRA/NYSE Euronext Letter, p. 5-6; Knight Letter, p. 2-3; CBOE Letter, p. 4; Wells Fargo Letter, p. 3; FINRA Letter, p. 11-12; SIFMA Letter, p. 5; Direct Edge Letter, p. 3; FIA Letter, p. 2.

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458 See FINRA/NYSE Euronext Letter, p. 5-6 (noting that "drawing conclusions based solely on real time data increases the potential for inaccuracy because the data has not gone through the full range of validations . . . ."). See also Wells Fargo Letter, p. 3 ("[A]ccurate market information often does not happen in real time."); FINRA Letter, p. 11-12 (stating that current order-handling practices make "accurate real time order reporting problematic, and automated surveillance is only useful if the underlying data is accurate and complete . . . ."); SIFMA Letter, p. 5 ("There also would be data integrity costs in the form of less reliable data, or data that would have to be revised or resubmitted where it otherwise may not have been required if firms had a short window of time to more thoroughly 'scrub' or validate their submissions."); Direct Edge Letter, p. 3 ("Real-time data may be less reliable than information collected after the validations that come with settling a transaction.").

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459 See Knight Letter, p. 2-3. See also CBOE Letter, p. 4 ("[G]enerally our belief is that next day (T+1) data, which incorporates additional information such as cleared trade data, is a better report resource for generating surveillance and compliance reviews."); FINRA/NYSE Euronext Letter, p. 6 (stating that, "from a market surveillance standpoint, reliable and complete data received on a T+1 basis . . . is generally superior to unvalidated real-time data"); FIA Letter, p. 2 ("We believe the Commission's Proposal overvalues any potential benefits achieved by real-time reporting as compared to reporting on day after trade, or 'T+1,' basis.").

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+
fn +

460 See FINRA Letter, p. 11-12.

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+
fn +

461 Id. at p. 11.

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fn +

462 See Nasdaq Letter I, p. 9-10.

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fn +

463 See Nasdaq Letter II, p. 3.

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fn +

464 See ICI Letter, p. 5; Leuchtkafer Letter; GETCO Letter, p. 2; FIA Letter, p. 2; Scottrade Letter, p. 2; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3; CBOE Letter, p. 4; FINRA/NYSE Euronext Letter, p. 4, 6; FINRA Letter, p. 11; SIFMA Letter, p. 3, 7; SIFMA Drop Copy Letter, p. 1; FINRA Proposal Letter, p. 4, 10-11.

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+
fn +

465 See FINRA Letter, p. 11.

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fn +

466 See SIFMA February 2012 Letter, p. 1.

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fn +

467 See FINRA/NYSE Euronext Letter, p. 4; FINRA Letter, p. 11; FIA Letter, p. 2.

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fn +

468 See FINRA Proposal Letter, p. 4.

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fn +

469 See SIFMA Drop Copy Letter, p. 1-2. See also FINRA Proposal Letter, p. 10.

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+
fn +

470 See GETCO Letter, p. 2; BATS Letter, p. 2.

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fn +

471 See FIA Letter, p. 2.

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fn +

472 See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; FIA Letter, p. 2.

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473 See FINRA/NYSE Euronext Letter, p. 4. Similarly, FINRA believes "the SEC has significantly overvalued the regulatory benefits to be achieved . . . while underestimating some of the problems with relying on real-time data. This is true not only because certain information is difficult, if not impossible, to provide on a real-time basis, but also because real-time data is less reliable." See FINRA Letter, p. 10-11. See also SIFMA February 2012 Letter, p. 1 (stating, "[a]ny potential incremental benefit of receiving this information on a real-time basis is, in our view, substantially outweighed by the additional expense and implementation delays associated with building and maintaining a real-time system"); FIA Letter, p. 2 ("It is not apparent to us from the Proposal that the additional costs associated with a real-time audit trail, compared to a T+1 audit trail, would be offset by any incremental benefits to the Commission.").

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+
fn +

474 See CBOE Letter, p. 4.

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fn +

475 See SIFMA Letter, p. 3; see also SIFMA February 2012 Letter, p. 1 (questioning the regulatory need for real-time data versus data provided on an "end-of-day or 'T+1" basis); FIA Letter, p. 2.

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fn +

476 See Scottrade Letter, p. 2; ICI Letter, p. 5; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3.

+
+
fn +

477 See ICI Letter, p. 6.

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478 See SIFMA Drop Copy Letter, p. 1. The commenter stated that "implementation options and complexity are significantly different if the reporting regime is within'minutes' rather than 'seconds.' If real-time reporting is required in seconds, then significant re-engineering is required within broker-dealer order management systems and trading systems to support such a requirement (e.g., passing additional information between systems, performance tuning to compensate for additional processing of payload). Instead, if the definition of real-time allows for reporting within minutes (e.g., 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications, as described below. Also, as with prior implementations of new trade reporting regimes in the U.S. (e.g., ACT and TRACE), having more liberal reporting timeframes for an appropriate initial period (e.g., 12 months or more) to provide a sufficient period to optimize processes would be very helpful." This commenter also questioned "the need for real-time reporting of the entire set of data elements in the CAT proposal," and believed that "reporting on a T+1 (or in some cases later) basis should satisfy the SEC's stated regulatory objectives more efficiently." Id. See also Nasdaq Letter II, p. 3 (stating its proposed platform could support the provision of data in real time or within 10-15 minutes using drop copies).

+
+
fn +

479 See GETCO Letter, p. 4. The commenter also believed this approach would lower the costs of the consolidated audit trail.

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+
fn +

480 See Bean Letter, p. 1.

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+
fn +

481 See BOX Letter, p. 2.

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+
fn +

482 Id. at p. 3.

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+
fn +

483 See Nasdaq Letter II, p. 2.

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484 See FINRA/NYSE Euronext Letter, p. 6. This commenter stated that "[a]n alternative to the all-encompassing real time order audit trail set forth in the Proposal would be to standardize and consolidate existing real time reporting systems (e.g., enhancing trade reporting and quotation systems with standardized and uniform identification for all broker-dealers) and enhance existing reporting requirements where the need is narrowly focused." See also FINRA Proposal Letter, p. 3-4, 10-11.

+
+
fn +

485 See FIF Letter, p. 4; Ross Letter, p. 1.

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+
fn +

486 See FIF Letter, p. 4.

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+
fn +

487 See Ross Letter, p. 1.

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+
fn +

488 See Ameritrade Letter, p. 2.

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+
fn +

489 Id.

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+
fn +

490 Id.

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+
fn +

491 Id.

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+
fn +

492 Id.

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+
fn +

493 See Thomson Reuters Letter, p. 2.

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+
fn +

494 See Rule 613(c)(3). The Rule further provides that the NMS plan "may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties." Id.

+
+
fn +

495 Id.

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+
fn +

496 See Scottrade Letter, p. 1-2; Angel Letter, p. 3; ICI Letter, p. 3-6; FINRA/NYSE Euronext Letter, p. 4, 6; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; Nasdaq Letter II, p. 3-4; FIA Letter, p. 1-2.

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+
fn +

497 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

+
+
fn +

498 See SIFMA Drop Copy Letter.

+
+
fn +

499 See Section II.A.1.c., supra.

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+
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500 See Rule 613(c)(3). The Commission notes that Rule 613, as proposed, was inconsistent in its use of the terms "provide" and "report." To eliminate this inconsistency, the Commission is replacing all uses of "provide" with "report," which the Commission believes more accurately describes the requirement the Commission is imposing on national securities exchanges, national securities associations, and members.

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+
fn +

501 See note 494, supra.

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+
fn +

502 See note 453, supra, and accompanying text.

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+
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503 The Commission notes that, consistent with adopting an incremental approach to the creation of a consolidated audit trail, even though it is not requiring audit-trail data to be reported in real time, it is adding various additional requirements, discussed in Section III.C.2.a., infra, to the Rule regarding the evolution of the consolidated audit trail, including the possibility for reduced reporting times in the future as technologies evolve.

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+
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504 The current OATS technical specifications require OATS reporting by 8: 00 a.m. on the calendar day after the reportable event. The Commission notes that the FINRA rules for OATS reporting, however, require that data "shall be transmitted on the day such event occurred" – unless information required by FINRA Rule 7440(b), (c), or (d) (order receipt and origination; order transmittal; order modifications, cancellations, and executions) is unavailable – in such cases, OATS requires reporting on the day the information becomes available. See FINRA Rule 7450(b)(2). Because of the discrepancy between the technical specifications and the applicable FINRA rule, the Commission approved FINRA's proposed rule change to allow OATS reporting as late as 8: 00 a.m. the next day. See Securities Exchange Act Release No. 66021 (December 21, 2011), 76 FR 81551 (December 28, 2011).

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fn +

505 The Commission notes that the Rule, as adopted, provides that an NMS plan must require information to be reported by 8: 00 a.m. the following trading day, while OATS requires information to be reported by 8: 00 a.m. the following calendar day. Thus, the Rule as adopted provides for a longer reporting period than does OATS with respect to weekends and holidays.

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+
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506 As noted in the Proposing Release, supra note 4, at 32592, broker-dealers that rely mostly on their own internal order routing and execution management systems would have needed to make changes to or replace those systems to collect and report the required order and reportable event information to the central repository to comply with the proposed Rule.

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+
fn +

507 See e.g., BATS Letter, p. 2; CBOE Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; High Speed, p. 1; FTEN Letter p. 1; Correlix Letter, p. 2; Thomson Reuters Letter, p. 2; FINRA Proposal Letter, p. 16; FINRA/NYSE Euronext Letter, p. 7.

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+
fn +

508 See Proposing Release, supra note 4, at 32572.

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+
fn +

509 See FTEN Letter, p. 3-4, 13-15; Thomson Reuters Letter, p. 2-3.

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+
fn +

510 Id.

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+
fn +

511 See FTEN Letter, p. 4, 12, 14. See also SIFMA Drop Copy Letter.

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fn +

512 See FIX Letter, p. 1; Aditat Letter, p. 2.

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fn +

513 Id.

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+
fn +

514 See Nasdaq Letter II, p. 3.

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fn +

515 See Rule 613(c)(2).

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fn +

516 See FTEN Letter, p. 3-4, 13; Thomson Reuters Letter, p. 2-3. See also SIFMA Drop Copy Letter.

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517 The Commission believes that, if the NMS plan does not require data to be reported to the central repository in a uniform format, broker-dealers and SROs may not have to make substantial changes to their order management and execution systems to comply with Rule 613, and thus may face lower costs than if data were required to be reported in a uniform format because in that instance, broker-dealers may need to make substantial changes to their order management and execution systems to comply with Rule 613. The Commission acknowledges, however, that there would be costs to convert data to a "uniform electronic format for consolidation and storage." On balance, however, the Commission preliminarily believes that broker-dealers might benefit from economies of scale when normalizing data.

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fn +

518 See Rule 613(a)(1)(iii).

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+
fn +

519 See Proposing Release, supra note 4, at 32578.

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fn +

520 See proposed Rule 613(c)(4), 613(c)(7)(vi) through (vii).

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521 See SIFMA Letter, p. 8; SIFMA Drop Copy Letter, p. 1.

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fn +

522 See Rule 613(c)(7)(viii).

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fn +

523 See Section III.B.1.g.i., supra.

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524 Rule 613(c)(4) now requires that "each member of a national securities exchange or national securities association" provide the information set forth in the Rule; as proposed, Rule 613(c)(4) required "each national securities exchange, national securities association, and member" to provide the information set forth in the Rule.

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+
fn +

525 The Commission has also amended Rule 613(c)(4), as proposed, to include the provision of information sufficient to identify the customer and customer account information. See Rule 613(c)(7)(viii); Section III.B.1.g.ii.(C)., supra.

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fn +

526 See proposed Rule 613(c)(4), 613(c)(7)(vi), 613(c)(7)(vii).

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527 See proposed Rules 613(c)(7)(vi)(D), 613(c)(7)(vi)(E), and 613(c)(7)(vi)(F).

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fn +

528 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(A), (C).

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529 See Liquidnet Letter, p. 3; Direct Edge Letter, p. 4 (emphasizing that it would be more important for exchanges to obtain the identity of the brokers on both sides of an execution for cross-market surveillance purposes); SIFMA Letter, p. 6, 9; Ameritrade Letter, p. 3.

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fn +

530 See FIF Letter, p. 2-3.

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fn +

531 This commenter suggested an alternative if the Commission believed customer information was necessary, using both EBS and OATS: EBS could send the central repository customer account information (including account number), and OATS would add a field for the account number to link the OATS reports and customer information together. Id. at p. 2-3.

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fn +

532 See SIFMA Letter, p. 6, 9.

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fn +

533 See Ameritrade Letter, p. 2-3.

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fn +

534 Id.

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fn +

535 See Liquidnet Letter, p. 3.

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fn +

536 See Liquidnet Letter, p. 3, 5-6.

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537 See FIF Letter II, p. 2.

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538 See SIFMA Letter, p. 6; Liquidnet Letter, p. 3.

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fn +

539 See also Rule 613(j)(4) which defines "customer account information" to include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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540 Rule 613(j)(3), as adopted, defines the term "customer" to mean the account holder(s) of the account at a registered broker-dealer originating the order; and any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

+
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fn +

541 See Proposing Release, supra note 4, at 32573.

+
+
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542 The Commission notes that, under the Rule, a broker-dealer must only report the account number for the account the customer used to submit an order, not the account numbers for all accounts of a customer.

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+
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543 See Rule 613(c)(4).

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+
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544 As adopted, Rule 613(c)(7)(viii) provides that, "[f]or original receipt or origination of an order, the following information: (A) Information of sufficient detail to identify the customer; and (B) Customer account information" be recorded and reported to the central repository.

+
+
fn +

545 See Proposing Release, supra note 4, at 32578.

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+
fn +

546 See Section III.B.1.d.iii., supra.

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+
fn +

547 See FIF Letter, p. 3.

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+
fn +

548 See Section III.B.3.b., infra.

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+
fn +

549 See Ameritrade Letter, p. 2-3.

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550 However, if any information previously reported by a broker-dealer to the central repository changes, the broker-dealer would need to report the updated information to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that the broker-dealer receives the updated information

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+
fn +

551 See Proposing Release, supra note 4, at 32566.

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+
fn +

552 See, e.g., Rules 17a-3, 17a-4, 17a-25 under the Exchange Act, 17 CFR 240.17a-3, 17a-4, 17a-25.

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553 See Liquidnet Letter, p. 3, 5-6.

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+
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554 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C)(2)., supra (discussing the definition of "customer" as applied to investment advisers).

+
+
fn +

555 See Proposing Release, supra note 4, at 32573.

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+
fn +

556 See SIFMA Letter, p. 21.

+
+
fn +

557 Id.

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+
fn +

558 Id.

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+
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559 The Rule does, of course, require the NMS plan submitted to the Commission for its consideration to require the foreign broker-dealer to disclose information about itself to the U.S. broker-dealer, as such information would be expected to be part of the records of the U.S. broker-dealer holding a foreign broker-dealer account.

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+
fn +

560 See proposed Rule 613(d)(1).

+
+
fn +

561 See proposed Rule 613(d)(2).

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+
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562 See proposed Rule 613(a)(3)(ii).

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+
fn +

563 See SIFMA Letter, p. 14; FIF Letter, p. 6-7; Broadridge Letter, p. 3; Endace Letter, p. 2.

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+
fn +

564 See FIF Letter, p. 6.

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fn +

565 See FIF Letter, p. 6-7 (stating that currently "time drift" is an issue, despite advancements in synchronization technology, with at least one exchange experiencing time drifts between one and three seconds, and the SIP having its own time drift).

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+
fn +

566 See SIFMA Letter, p. 14.

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fn +

567 See Broadridge Letter, p. 3.

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fn +

568 See FIF Letter, p. 7.

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+
fn +

569 See Endace Letter, p. 2.

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+
fn +

570 See Liquidnet Letter, p. 8.

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fn +

571 See OATS Reporting Technical Specifications (May 3, 2011), available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p123579.pdf (last accessed December 8, 2011). In addition, FINRA allows clock drift of an additional two seconds before re-synchronization is required.

+
+
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572 See Endace Letter, p. 2.

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+
fn +

573 See FIF Letter, p. 6-7.

+
+
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574 The Commission notes that one commenter suggested that the cost might be limited because GPS receivers could be used and installed for a few thousand dollars per installation. See Endace Letter, p. 2.

+
+
fn +

575 See Section III.B.1.d.v., supra (explaining the importance to enforcement cases of an accurately timed record of order events).

+
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576 See proposed Rule 613(d)(2).

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+
fn +

577 See Rule 613(d)(2).

+
+
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578 Rule 613(d)(2) provides that "[e]ach national securities exchange and national securities association [shall] evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards . . . ."

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+
fn +

579 See FIF Letter, p. 7.

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fn +

580 See proposed Rule 613(e)(1).

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581 The term "facility" is defined in Section 3(a)(2) of the Exchange Act, with respect to an exchange, to include "its premises, tangible or intangible property whether on the premises or not, any right to use such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service." 15 U.S.C. 78c(a)(2).

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582 See proposed Rule 613(e)(2).

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583 See proposed Rule 613(a)(4).

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584 See proposed Rule 613(a)(3)(i).

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585 See Ameritrade Letter, p. 4; High Speed Letter, p. 1; BATS Letter, p. 2.

+
+
fn +

586 See Ameritrade Letter, p. 4.

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+
fn +

587 See High Speed Letter, p. 1.

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+
fn +

588 See BATS Letter, p. 2.

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+
fn +

589 See FINRA Proposal Letter, p. 14-16.

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+
fn +

590 See High Speed Letter, p. 1.

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+
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591 See Ameritrade Letter, p. 4.

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fn +

592 See note 581, supra (describing the nature of a "facility").

+
+
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593 See Ameritrade Letter, p. 4.

+
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594 See, e.g., 15 U.S.C. 78b; 15 U.S.C. 78f(b); 15 U.S.C. 78o-3(b); 15 U.S.C. 78s(h)(1).

+
+
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595 Section 19(b)(1) of the Exchange Act defines the term "proposed rule change" to mean "any proposed rule or rule change in, addition to, or deletion from the rules of [a] self-regulatory organization." Pursuant to Section 3(a)(27) and 3(a)(28) of the Exchange Act, the term "rules of a self-regulatory organization" means (1) the constitution, articles of incorporation, bylaws and rules, or instruments corresponding to the foregoing, of an SRO, and (2) such stated policies, practices and interpretations of an SRO (other than the Municipal Securities Rulemaking Board) as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules.

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596 See Ameritrade Letter, p. 4.

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597 See note 581, supra (describing the nature of a "facility").

+
+
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598 15 U.S.C. 78s.

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599 17 CFR 242.608(d)(1). If the Commission does not make a finding that the action or failure to act is consistent with the provisions of the NMS plan and was applied in a manner consistent with the Act, or if it finds that such action or failure to act imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, the Commission, by order, can set aside such action and/or require such action with respect to the matter reviewed as the Commission deems necessary or appropriate in the public interest, for the protection of investors, and the maintenance of fair and orderly markets, or to remove impediments to, and perfect the mechanisms of, the NMS plan. 17 CFR 242.608(d)(3).

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600 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any penalty provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any penalty provisions set out in the NMS plan approved by the Commission.

+
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601 See Section III.B.2.b., infra; Rule 613(e)(1).

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+
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602 See Section III.B.2.e., infra; Rule 613(e)(4)(i).

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+
fn +

603 See proposed Rule 613(e)(1).

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+
fn +

604 See Sections III.B.1.d. and III.B.1.f., supra.

+
+
fn +

605 See Rule 613(c)(2); see Section III.B.1.f., supra.

+
+
fn +

606 See Proposing Release, supra note 4, at 32564. See also Section III.B.2.d., infra.

+
+
fn +

607 See note 516, supra.

+
+
fn +

608 See Section III.B.1.d., supra.

+
+
fn +

609 See proposed Rule 613(e)(5)(i).

+
+
fn +

610 The effective transaction reporting plans include the CTA Plan and the UTP Plan. See note 101, supra; proposed Rule 613(e)(5)(ii).

+
+
fn +

611 See proposed Rule 613(e)(5)(iii).

+
+
fn +

612 See Liquidnet Letter, p. 7. See also Section III.B.d.vii., supra.

+
+
fn +

613 See proposed Rule 613(e)(5)(i) through (iii).

+
+
fn +

614 See proposed Rule 613(e)(7)(i) through (iii).

+
+
fn +

615 See Liquidnet Letter, p. 7.

+
+
fn +

616 Quote condition is a field in the CQS feed that provides information on a quote, including whether such quote is an opening quote, closing quote, news pending, slow on ask side, slow on bid side, order imbalance or non-firm quote. See CQS Output Multicast Line Interface Specification, Version 48 (October 11, 2011), Appendix G.

+
+
fn +

617 Manual quotes are not eligible for automatic execution and do not have trade through protection under Rule 611 of Regulation NMS. See 17 CFR 242.600(57) for a definition of a protected bid or protected offer.

+
+
fn +

618 17 CFR 242.611.

+
+
fn +

619 See proposed Rule 613(e)(6).

+
+
fn +

620 See Nasdaq Letter I, p. 10-11.

+
+
fn +

621 See Ross Letter, p. 1.

+
+
fn +

622 See proposed Rule 613(e)(6).

+
+
fn +

623 See Section III.C.2.a.i., infra.

+
+
fn +

624 See Rule 613(a)(1)(ii).

+
+
fn +

625 The Commission acknowledges there would be costs to the central repository for retaining data received or collected by the central repository pursuant to Rule 613. As discussed in Section I., supra, the NMS plan submitted to the Commission for its consideration will include a detailed analysis of the costs of the Rule for the Commission and the public to consider after the NMS plan has been submitted.

+
+
fn +

626 See Proposing Release, supra note 4, at 32582.

+
+
fn +

627 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

+
+
fn +

628 See Nasdaq Letter I, p. 8.

+
+
fn +

629 See FIF letter, p. 4.

+
+
fn +

630 See Aditat Letter, p. 2.

+
+
fn +

631 See Commission Staff Memorandum, supra, note 64.

+
+
fn +

632 Id.

+
+
fn +

633 Id.

+
+
fn +

634 See FINRA Letter, p. 11.

+
+
fn +

635 Id.

+
+
fn +

636 Id.

+
+
fn +

637 Id.

+
+
fn +

638 Id.

+
+
fn +

639 Id. FINRA also noted, however, that "compliance rates for OATS steadily improved over time as members gained experience with the system. For example, when the OATS rules were first implemented, the match rate between executed orders and the related trade report submitted to an NASD transaction reporting system was only 76%. Currently, this match rate is consistently over 99%, which reflects the significant time and effort that has been expended by the industry to make their systems OATS compliant. FINRA believes that creation of a new system, rather than building off of an existing reporting infrastructure, will necessarily create a learning curve and lead to reduced compliance rates over the short-term." Id. The Commission acknowledges that there could be a learning curve for compliance with the NMS plan requirements for the reporting of data. The Commission, however, expects the NMS plan to minimize such reduced compliance rates to the extent reasonably practicable.

+
+
fn +

640 See Nasdaq Letter I, p. 13.

+
+
fn +

641 See Endace Letter, p. 2-3.

+
+
fn +

642 Id. at p. 3.

+
+
fn +

643 Rule 613(e)(4)(ii) provides that the NMS plan shall include policies and procedures, including standards, to ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository.

+
+
fn +

644 See Section II.A., supra.

+
+
fn +

645 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

+
+
fn +

646 See Rule 613(e)(6)(i). The term "error rate" is defined in Rule 613(j)(6) to mean "[t]he percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market." The SROs should consider calculating an aggregate error rate as well as error rates for subcategories such as trade reporting and quote reporting.

+
+
fn +

647 See Rule 613(e)(6)(iii) through (iv).

+
+
fn +

648 See Rule 613(e)(6).

+
+
fn +

649 The Commission recognizes that in any complex system there is always a risk of occasional unexpected errors, or errors caused by rare and unexpected events. However, the Commission believes that, by tracking error rates on a daily basis, the SROs, and the Commission would be able to observe any repeated patterns or longer-term trends that suggest more systematic problems or concerns with data collection, reporting, or consolidation processes.

+
+
fn +

650 See Rule 613(e)(6)(iii) through (iv).

+
+
fn +

651 See Commission Staff Memorandum, supra note 64.

+
+
fn +

652 See Rule 613(a)(1)(ii).

+
+
fn +

653 See proposed Rule 613(e)(2).

+
+
fn +

654 Id.

+
+
fn +

655 See proposed Rule 613(e)(3).

+
+
fn +

656 See Liquidnet Letter, p. 8-9. See also SIFMA Letter, p. 19.

+
+
fn +

657 See Angel Letter, p. 3; Albany Letter, p.1-4; and TIAA-CREF Letter, p.4.

+
+
fn +

658 See Angel Letter, p. 3.

+
+
fn +

659 See Albany Letter, p. 1-3. This commenter acknowledged the privacy concerns involved in making the data available for academic research, but stated that researchers have faced similar challenges before and researchers are capable of developing a way to access and share information without the risk of divulging trading strategies or identities. The commenter also stated that data released after a delay would limit the data's usefulness.

+
+
fn +

660 See Van Bokkelen Letter, p. 1.

+
+
fn +

661 See Rule 613(e)(3). See also Rule 613(a)(1)(ii) (requiring the NMS plan to detail how readily the NMS plan will allow data in the central repository to be accessed by regulators, as well as the regulators' manner of access); see also Section III.C.2.a.i., infra.

+
+
fn +

662 See Sections III.C.2.a.i through ii., infra; Rule 613(a)(1)(ii) through (vii).

+
+
fn +

663 See proposed Rule 613(e)(4)(i). However, a plan sponsor also would be permitted to use the data it submits to the central repository for commercial or other purposes as otherwise permitted by applicable law, rule or regulation. Id.

+
+
fn +

664 See proposed Rule 613(h)(3), Rule 613(g)(4).

+
+
fn +

665 See Proposing Release, supra note 4, at 32582.

+
+
fn +

666 See Scottrade Letter, p. 2 (expressing concern that trading strategies and confidential customer information could be at risk from cyber-attacks or accidental data breaches); ICI Letter, p. 2-4; Ross Letter, p.; 1 Liquidnet Letter, p. 4. See also Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3.

+
+
fn +

667 See Ameritrade Letter, p. 3-4.

+
+
fn +

668 See Liquidnet Letter p. 4.

+
+
fn +

669 See Thomson Reuters Letter, p. 4.

+
+
fn +

670 See TIAA-CREF Letter, p. 4.

+
+
fn +

671 See ICI Letter, p. 2-4.

+
+
fn +

672 Id. at 3.

+
+
fn +

673 Id.

+
+
fn +

674 See BATS Letter, p. 3.

+
+
fn +

675 See Managed Funds Association Letter, p. 2-3.

+
+
fn +

676 Id.

+
+
fn +

677 See Ross Letter, p. 1.

+
+
fn +

678 Id.

+
+
fn +

679 5 U.S.C. 552.

+
+
fn +

680 See ICI Letter, p. 4.

+
+
fn +

681 For example, appropriate confidentiality protections will need to be programmed in any Commission systems that collect, store, or access data collected from the central repository. In addition, it may be appropriate to establish multiple access levels for Commission staff so that staff members are allowed only as much access as is reasonably necessary in connection with their duties.

+
+
fn +

682 See ICI Letter, p. 3

+
+
fn +

683 Rule 613(e)(4)(i)(B); see ICI Letter, p. 3 (recommending that "the confidential nature of the information supports limiting access to the CAT data to regulators and repository staff").

+
+
fn +

684 See Rule 613(e)(4)(i)(C). The Commission expects that the central repository's CCO would be responsible for determining the frequency of these regular reviews in the first instance, in accordance with industry standards for the review of information security, taking into account the sensitivity of the data stored in the central repository. See Rule 613(b)(5) for a description of the CCO.

+
+
fn +

685 See BATS Letter, p. 3. See also Managed Funds Association Letter, p. 2-3.

+
+
fn +

686 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any security and confidentiality provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any such provisions set out in the NMS plan approved by the Commission, and whether their uses of the consolidated audit trail were consistent with the plan and the Exchange Act.

+
+
fn +

687 See Ross Letter, p. 1.

+
+
fn +

688 Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, submitted to the central repository, will be ensured. See Rule 613(a)(1)(iv).

+
+
fn +

689 See ICI Letter, p. 4.

+
+
fn +

690 See Rule 613(e)(4)(i)(D).

+
+
fn +

691 See Liquidnet Letter, p. 4.

+
+
fn +

692 See Section III.C.2.a.i., infra.

+
+
fn +

693 See Rule 613(a)(1)(iv).

+
+
fn +

694 See proposed Rule 613(h)(1).

+
+
fn +

695 See proposed Rule 613(h)(2).

+
+
fn +

696 See proposed Rule 613(h)(3).

+
+
fn +

697 See Nasdaq Letter I, p. 13.

+
+
fn +

698 Id.

+
+
fn +

699 Id.

+
+
fn +

700 Id.

+
+
fn +

701 This technical modification simplifies the language of Rule 613(h)(1) and (2) from the proposal. Adopted Rule 613(h)(1) and (2) deletes the language "submitted pursuant to this section" and "of which it is a sponsor." Adopted Rule 613(h)(1) and (2), like the proposed Rule, requires each SRO to comply with the provisions of the NMS plan "approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the phrases not adopted.

+
+
fn +

702 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

+
+
fn +

703 The Commission notes that any failure by a national securities exchange or national securities association to comply with the provisions of the NMS plan approved by the Commission will be considered a violation of Rule 613, and that the Commission could take appropriate steps to address such a violation, including imposing penalties as appropriate. See Rule 613(h)(2).

+
+
fn +

704 See Section III.B.2.a., supra.

+
+
fn +

705 See supra note 581 (describing the nature of a "facility").

+
+
fn +

706 15 U.S.C. 78q.

+
+
fn +

707 17 CFR 242.608(d)(1).

+
+
fn +

708 Id.

+
+
fn +

709 See Nasdaq Letter I, p. 13.

+
+
fn +

710 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

+
+
fn +

711 15 U.S.C. 78s(b)(2).

+
+
fn +

712 17 CFR 240.19b-4.

+
+
fn +

713 See proposed Rule 613(g)(1). This provision in the proposed Rule echoes the requirement contained in Rule 608 that "each self-regulatory organization also shall, absent reasonable justification or excuse, enforce compliance with any such plan by its members and persons associated with its members." 17 CFR 242.608(c).

+
+
fn +

714 See proposed Rule 613(g)(2).

+
+
fn +

715 See proposed Rule 613(g)(3).

+
+
fn +

716 See proposed Rule 613(g)(4).

+
+
fn +

717 See Knight Letter, p. 3.

+
+
fn +

718 See Knight Letter, p. 3.

+
+
fn +

719 See Proposing Release, supra note 4, at 32585.

+
+
fn +

720 See Nasdaq Letter I, p. 3, 13; Direct Edge Letter, p. 5; FIF Letter, p. 1, 8; FINRA Letter, p. 15; SIFMA February 2012 Letter, p. 1.

+
+
fn +

721 See Nasdaq Letter I, p. 3, 13.

+
+
fn +

722 Id. at p. 3.

+
+
fn +

723 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

+
+
fn +

724 See FIF Letter, p. 8.

+
+
fn +

725 See Direct Edge Letter, p. 4-5.

+
+
fn +

726 Id. at p. 5.

+
+
fn +

727 Id.

+
+
fn +

728 See SIFMA February 2012 Letter, p. 1.

+
+
fn +

729 Proposed Rule 613(b) required that the NMS plan include "a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor, . . . [a] provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan, . . . [a] provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, . . . [a] provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan. . . [and the] appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed."

+
+
fn +

730 See Rule 613(b)(6); Rule 613(b)(7).

+
+
fn +

731 See Rule 613(b)(5).

+
+
fn +

732 See Rule 613(b)(6). The written assessment could also further inform the extent to which it could be appropriate to share certain information collected by the consolidated audit trail with third parties. See Section III.B.2.d.

+
+
fn +

733 See SIFMA February 2012 Letter, p. 1.

+
+
fn +

734 See Rule 613(b)(7)(i).

+
+
fn +

735 See Rule 613(b)(7)(ii).

+
+
fn +

736 See Rule 613(b)(7)(i).

+
+
fn +

737 See Rule 613(b)(7)(ii).

+
+
fn +

738 See Rule 613(a)(1)(xi); Section III.C.2.a.iii.c., infra, for a discussion of the tenth consideration.

+
+
fn +

739 See Nasdaq Letter I, p. 3, 13.

+
+
fn +

740 See, e.g., Options Order Protection and Locked/Crossed Market (Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009)) (including a unanimous voting requirement).

+
+
fn +

741 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

+
+
fn +

742 As discussed and for the reasons set forth in Section I., supra, in light of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring a detailed analysis of costs and benefits of this requirement of the Rule until after the NMS plan has been submitted.

+
+
fn +

743 See proposed Rule 613(a)(3)(iv).

+
+
fn +

744 See Nasdaq Letter I, p. 10; Thomson Reuters Letter, p. 4.

+
+
fn +

745 See Thomson Reuters Letter, p. 4.

+
+
fn +

746 See FINRA/NYSE Euronext Letter, p. 3-4. See also Nasdaq Letter I, p. 8.

+
+
fn +

747 See IAG Letter, p. 2.

+
+
fn +

748 See BATS Letter, p. 2-3.

+
+
fn +

749 See Nasdaq Letter I, p. 10.

+
+
fn +

750 See iSys Letter, p. 2-3.

+
+
fn +

751 See Rule 613(f).

+
+
fn +

752 17 CFR 240.17d-2.

+
+
fn +

753 The Commission has examined the issue of a single market regulator in the past, specifically in the Intermarket Trading Concept Release (see Securities Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20, 2003)); however, a single regulator structure is not suggested by the adopted Rule.

+
+
fn +

754 These cost savings may accrue to any SRO that would no longer need to operate a retired system, as well as to any SRO members that would no longer be required to report to such systems.

+
+
fn +

755 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5. See also Section II.C.3.

+
+
fn +

756 See FIF Letter II, p. 2.

+
+
fn +

757 Id. at p. 3.

+
+
fn +

758 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

+
+
fn +

759 See FIF Letter II, p. 2-3; STA Letter, p. 2. See also Nasdaq Letter I, p. 6.

+
+
fn +

760 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3. See also Nasdaq Letter I, p. 6.

+
+
fn +

761 See FIF Letter II, p. 2; STA Letter, p. 1.

+
+
fn +

762 See FIF Letter II, p. 1; STA Letter, p. 1-2.

+
+
fn +

763 See FIF Letter II, p. 2; STA Letter, p. 2.

+
+
fn +

764 See FIF Letter II, p. 1-2; STA Letter, p. 2.

+
+
fn +

765 See FIF Letter II, p. 2; STA Letter, p. 2-3.

+
+
fn +

766 See proposed Rule 613(a)(1).

+
+
fn +

767 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely attributable to the cost of the creation and filing of the NMS plan required by Rule 613.

+
+
fn +

768 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

+
+
fn +

769 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

+
+
fn +

770 See Section I., supra.

+
+
fn +

771 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail). See also Section II.C.4., supra.

+
+
fn +

772 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

+
+
fn +

773 See Section III.B.2.c., supra.

+
+
fn +

774 The Commission notes that another related consideration that must be discussed by the NMS plan includes the alternative approaches to creating the consolidated audit trail that the plan sponsors considered. See Rule 613(a)(1)(xii).

+
+
fn +

775 See Section II.A., supra, for additional discussion of the timeliness of access to current audit trail data.

+
+
fn +

776 See Proposing Release, supra note 4, at 32564.

+
+
fn +

777 Id. at 32564-32565 and 32594. Differences in audit trail data requirements between markets can hinder the ability of regulators to piece together related illegal trading activity occurring across several markets.

+
+
fn +

778 Id. at 32594.

+
+
fn +

779 Id. at 32567.

+
+
fn +

780 "Transmission from the SRO or member to receipt by the central repository" refers to the process through which SROs and their members report data to the central repository.

+
+
fn +

781 "Data extraction, transformation and loading at the central repository" is the process during which the central repository accepts data reported by the SROs and their members, converts it into a uniform electronic format, if necessary, and receives it into the central repository's internal systems.

+
+
fn +

782 "Data maintenance and management at the central repository" refers to the process for storing data at the central repository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.

+
+
fn +

783 As noted in Section III.B.1.d.iv., supra, for example, regardless of whether the NMS plan elects to use a series of order identifiers or a unique order identifier, it will be very important to demonstrate how the approach selected in the NMS plan will ensure that information about all events pertaining to an order will be reliably and accurately linked together in a manner that allows regulators efficient access to complete order information.

+
+
fn +

784 See Proposing Release, supra note 4, at 32582, 32596.

+
+
fn +

785 In addition, proposed Rule 613(e)(4)(i) required plan sponsors, and employees of the plan sponsors and central repository to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.

+
+
fn +

786 See Scottrade Letter, p. 2; ICI Letter, p. 2-4; Liquidnet Letter, p. 4; Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3; Ross Letter, p. 1. The Commission notes that it is adopting Rule 613(e)(4) with modifications – the Commission has added provisions to the Rule to help ensure the confidentiality of the data submitted to and retained by the central repository. See Section III.B.2.e., supra.

+
+
fn +

787 Rule 613(i) requires the NMS plan to include a provision requiring each SRO to jointly provide to the Commission a document outlining how the consolidated audit trail could be expanded to products other than NMS securities. See also Section III.B.1.a., supra. The consideration of flexibility and scalability of the systems requires the SROs to address whether the system proposed in the SRO's NMS plan submission can accommodate the expansion, while the document required by Rule 613(i) will discuss more broadly how the SROs could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

+
+
fn +

788 See Concept Release on Equity Market Structure, supra note 87.

+
+
fn +

789 See Proposing Release, supra note 4, at 32568-32569.

+
+
fn +

790 Id. at 32569-70.

+
+
fn +

791 Id. at 32567.

+
+
fn +

792 See Proposing Release, supra note 4, at 32569 and 32610. The Commission noted in the Proposing Release that a "primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering." Proposing Release at n. 167.

+
+
fn +

793 See Section II.A. for a discussion of these four qualities.

+
+
fn +

794 See, e.g., Exchange Act Rules 17a-3 and 17a-4 (requiring broker-dealers to make and keep "records of purchases and sales of securities").

+
+
fn +

795 Regulation S-K requires registrants to provide information related to the number of offered securities that are underwritten by each syndicate member in an effort to describe the nature of the obligation of the syndicate members with respect to the offered securities. See 17 CFR 229.508(a). This information comprises investor-focused disclosures, rather than information that may be needed by regulators for investigative and other purposes, such as the information contemplated by Rule 613(a)(1)(vi).

+
+
fn +

796 For example, FINRA rules require the lead underwriters of an IPO to collect and provide issuers – but not the public, FINRA, or the Commission – with names of institutional investors who received allocations and aggregated information regarding the allocation to retail investors. See FINRA Rule 5131(d). The Depository Trust Company ("DTC") also collects information on some IPO allocations in its IPO Tracking System at the discretion of the lead underwriter. See 61 FR 25253 (May 20, 1996). However, as well as being discretionary and therefore only addressing a subset of primary market transactions, the IPO Tracking System only includes allocations to persons with DTC accounts, which generally excludes retail investors.

+
+
fn +

797 See, e.g., FINRA Rules 5130 and 5131. FINRA Rule 5130 imposes certain restrictions on primary market transactions. FINRA Rule 5131 prohibits certain allocation practices such as "spinning," which refers to an underwriter's allocation of IPO shares to directors or executives of investment banking clients in exchange for receipt of investment banking business. See Securities Exchange Act Release No. 64521 (May 18, 2011), 76 FR 29808 (May 23, 2011) (Order Approving SR-FINRA-2011-017). Certain "quid pro quo" practices are also addressed by FINRA Rule 5131.

+
+
fn +

798 Currently, SROs must request customer account information during examinations of broker-dealers to check for compliance with order marking rules.

+
+
fn +

799 This approach also may unduly burden the lead underwriter as the "gatekeeper" of such information and prevents the Commission and SROs from pursuing investigative techniques that may rely on reaching out to individual market participants for preliminary information without using the underwriter.

+
+
fn +

800 See note 242, supra.

+
+
fn +

801 See note 795, supra.

+
+
fn +

802 "Laddering" is a practice that generally refers to inducing investors to give orders to purchase shares in the aftermarket at particular prices in exchange for receiving IPO allocations. See NYSE/NASD IPO Advisory Committee report and Recommendations (May 2003), at 6, available at http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p010373.pdf.

+
+
fn +

803 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

+
+
fn +

804 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597 n. 352. See also Section I., supra.

+
+
fn +

805 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

+
+
fn +

806 See Section I., supra.

+
+
fn +

807 See Rule 613(a)(1)(vii).

+
+
fn +

808 See Wells Fargo Letter, p. 4; SIFMA Letter, p. 22.

+
+
fn +

809 See Wells Fargo Letter, p. 4.

+
+
fn +

810 See Liquidnet Letter, p. 9.

+
+
fn +

811 See SIFMA Letter, p. 22.

+
+
fn +

812 See Nasdaq Letter I, p. 13-14; BOX Letter, p. 3; Liquidnet Letter, p. 9; Kaufman Letter, attachment p. 3.

+
+
fn +

813 See Nasdaq Letter I, p. 13-14.

+
+
fn +

814 See Kaufman Letter, attachment p. 3.

+
+
fn +

815 See Schumer Letter, p. 1.

+
+
fn +

816 Id. at p. 1-2.

+
+
fn +

817 Id. at p. 2.

+
+
fn +

818 See Section III.B.2., supra.

+
+
fn +

819 See Section III.B.1., supra.

+
+
fn +

820 See Section I., supra.

+
+
fn +

821 See 17 CFR 242.608(a)(4)(ii)(C).

+
+
fn +

822 See Rule 613(a)(1)(viii).

+
+
fn +

823 See Rule 613(a)(5).

+
+
fn +

824 See Section II.C.3., supra, for a summary of comments suggesting wider involvement in the development of the consolidated audit trail.

+
+
fn +

825 See FIF Letter II, p. 2; SIFMA February 2012 Letter, p. 1; STA Letter, p. 1-2.

+
+
fn +

826 See SIFMA February 2012 Letter, p. 1.

+
+
fn +

827 See Broadridge Letter, p. 2.

+
+
fn +

828 See FIF Letter II, p. 2, STA Letter, p. 1-2.

+
+
fn +

829 See Direct Edge Letter, p. 2.

+
+
fn +

830 See Direct Edge Letter, p. 2.

+
+
fn +

831 See Ameritrade Letter, p. 2.

+
+
fn +

832 See IAG Letter, p. 3 (also recommending that the consolidated audit trail, in general, should involve a reduction in its size and scope, as well as a review of the capabilities of existing systems).

+
+
fn +

833 See FIF Letter II, p. 1-3. See also STA Letter, p. 1-3 (recommending the same, but with the inclusion of the investor community and institutional asset managers).

+
+
fn +

834 See also Rules 613(a)(1)(vii)(A) and (D), respectively requiring "[a]n estimate of the costs to the plan sponsors for establishing and maintaining the central repository" and an explanation of "[h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."

+
+
fn +

835 The Commission notes that any NMS plan submitted and any amendment to the plan would be subject to notice and public comment, during which members of the industry and other interested persons may provide comments on the NMS plan. 17 CFR 242.608(b)(1).

+
+
fn +

836 See Rule 613(b)(7). See also Section III.B.3.b., supra.

+
+
fn +

837 See Rule 613(a)(1)(xii).

+
+
fn +

838 See Rule 613(a)(1)(ix).

+
+
fn +

839 See Proposing Release, supra note 4, at 32595.

+
+
fn +

840 See SIFMA Letter, p. 2.

+
+
fn +

841 Id.

+
+
fn +

842 See FINRA Letter, p. 2.

+
+
fn +

843 Id. at p. 2-3.

+
+
fn +

844 See FINRA/NYSE Euronext Letter, p. 4.

+
+
fn +

845 See Liquidnet Letter, p. 1.

+
+
fn +

846 See BATS Letter, p. 4. See also FIA Letter, p. 1; FIF Letter II, p. 2.

+
+
fn +

847 See Nasdaq Letter I, p. 11. The Commission notes that this comment letter was submitted prior to the adoption of the Large Trader Reporting Rule. See note 1, supra, and accompanying text.

+
+
fn +

848 To further facilitate this review, the Commission expects that the plan sponsors would keep minutes of their meetings to formulate the NMS plan, and that such minutes would be readily reviewable by the Commission.

+
+
fn +

849 17 CFR 242.608(b)(2). To approve such a plan, the Commission must find that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

+
+
fn +

850 See Rules 613(a)(1)(v), (b)(6), (d)(2). See also Sections III.B. and III.C.2.a.i., supra (discussing the consideration of flexibility and scalability of the systems used by the central repository; the requirement that the NMS plan require the plan sponsors to provide a written assessment with an evaluation of, and a detailed plan to improve, the performance of the consolidated audit trail at least every two years; and the requirement to annually evaluate the clock synchronization and time stamp standards).

+
+
fn +

851 17 CFR 242.608(a)(2). For example, if the requirements of the plan are not amended after the annual evaluation of the clock synchronization and time stamp standards to be consistent with changes in the industry standards, the Commission has the authority and means to propose an amendment to those requirements of the plan. The Commission can approve an amendment to an effective national market system plan that was initiated by the Commission, by rule. 17 CFR 242.608(b)(2).

+
+
fn +

852 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; Direct Edge Letter, p. 2-3, 5; Section III.C.1.a., supra.

+
+
fn +

853 For purposes of these use-cases, an "off-line" analysis is defined to be any analysis performed by a regulator based on data that is extracted from the consolidated audit trail database, but that uses the regulator's own analytical tools, software, and hardware.

+
+
fn +

854 Fixed search criteria are those that are based on specific pre-defined data elements that are stored in the consolidated audit trail database. In contrast, dynamic search criteria are those that are based on numerical levels, thresholds, or other combinations of mathematical formula or logic that would require some amount of additional calculations to be performed on, and derived from, pre-defined data elements already stored in the database to complete the search operation and return to the user the data that meets the requested criteria.

+
+
fn +

855 See FIF Letter II, p. 2. See also STA Letter, p. 2 (stating "[t]he SEC should allow six months for the CAT selection process rather than the two months currently identified in the proposed release").

+
+
fn +

856 See FIF Letter II, p. 3.

+
+
fn +

857 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3.

+
+
fn +

858 These additional provisions relate to: (1) the security and confidentiality of the central repository (see Rule 613(e)(4)(i)(A) through (D) and Section III.B.2.e., supra); (2) error rates (see Rule 613(e)(6) and Section III.B.2.c., supra); (3) an Advisory Committee (see Rule 613(b)(7) and Section III.B.3.b., supra); (4) a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance (see Rule 613(b)(6)(i) through (iv) and Section III.B.3.b., supra); and (5) potential penalties (see Rule 613(h)(3) and Section III.B.3.a.1., supra).

+
+
fn +

859 See Sections III.C.2.a. and c., supra.

+
+
fn +

860 See Section I., supra. See also Section III.D., infra, for a discussion of the timelines pertaining to the implementation of the consolidated audit trail.

+
+
fn +

861 See Section I., supra. See also Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan, or amendment, as applicable, on efficiency, competition, and capital formation").

+
+
fn +

862 See Section I., supra.

+
+
fn +

863 44 U.S.C. 3501 et. seq.

+
+
fn +

864 Commission staff estimated that each SRO would expend (400 Attorney hours x $305 per hour) + (100 Compliance Manager hours x $258 per hour) + (220 Programmer Analyst hours x $193 per hour) + (120 Business Analyst hours x $194 per hour) = $213,540 per SRO to prepare and file the NMS plan. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal work, at an average hourly rate of $400, for a total of $20,000 per SRO, for an aggregate one-time cost to prepare and file an NMS plan of $233,540 per SRO. See Proposing Release, supra note 4, at 32596. The $305 per hour figure for an Attorney; the $258 per hour figure for a Compliance Manager; the $193 per hour figure for a Programmer Analyst; and the $194 per hour figure for a Business Analysis (Intermediate) were from SIFMA's Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

+
+
fn +

865 Commission staff estimated that the SROs would incur an aggregate one-time cost of ($233,540 per SRO) x (15 SROs) = $3,518,100 to prepare and file an NMS plan.

+
+
fn +

866 See Proposing Release, supra note 4, at note 299.

+
+
fn +

867 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

+
+
fn +

868 See Rule 613(h)(3); Section III.B.3.a.1., supra.

+
+
fn +

869 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

+
+
fn +

870 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

+
+
fn +

871 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See also Rule 613(e)(6)(iii) through (iv).

+
+
fn +

872 See Rule 613(b)(7).

+
+
fn +

873 Commission staff now estimates that each SRO would expend 700 Attorney hours, 300 Compliance Manager hours, 880 Programmer Analyst hours, and 880 Business Analyst hours.

+
+
fn +

874 The $378 per-hour figure for an Attorney; the $279 per hour figure for a Compliance Manager; the $196 per hour figure for a Programmer Analyst; and the $201 per hour figure for a Business Analyst (Intermediate) are from SIFMA's Management & Professional Earnings in the Securities Industry 2011, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

+
+
fn +

875 Commission staff estimates that each SRO would incur an aggregate one-time cost of (700 Attorney hours x $378 per hour) + (300 Compliance Manager hours x $279 per hour) + (880 Programmer Analyst hours x $196 per hour) + (880 Business Analyst hours x $201 per hour) = $697,660 per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a one-time external cost of (50 legal hours x $400 per hour) = $20,000. As a result, the Commission staff estimates that the aggregate one-time cost to each SRO to prepare and file an NMS plan, including external costs, would be ($20,000 in external costs) + ($697,660 in aggregate internal costs) = $717,660 per SRO to prepare and file an NMS plan.

+
+
fn +

876 Commission staff estimates that the SROs would incur an aggregate one-time cost of ($717,660 per SRO) x (17 SROs) = $12,200,200 to prepare and file an NMS plan.

+
+
fn +

877 See Proposing Release, supra note 4, at 32596.

+
+
fn +

878 See Section I., supra.

+
+
fn +

879 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

+
+
fn +

880 See proposed Rule 613(a)(3)(iii).

+
+
fn +

881 See proposed Rule 613(a)(3)(v).

+
+
fn +

882 See Nasdaq Letter I, p. 3.

+
+
fn +

883 See Bean Letter, p. 1.

+
+
fn +

884 See FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15; Scottrade Letter, p. 1; CBOE Letter, p. 7; FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Nasdaq Letter I, p. 6-7; Wells Fargo Letter, p. 2-3; Direct Edge Letter, p. 2-3.

+
+
fn +

885 See CBOE Letter, p. 6; Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 2-3, 9; Ameritrade Letter, p. 3; Nasdaq Letter I, p. 7-9; Scottrade Letter, p. 1; SIFMA Letter, p. 13. See also FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Wells Fargo Letter, p. 2-3; FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15.

+
+
fn +

886 See Kaufman Letter, Attachment p. 1; Schumer Letter, p. 1.

+
+
fn +

887 See Schumer Letter, p. 1.

+
+
fn +

888 See Nasdaq Letter I, p. 7.

+
+
fn +

889 See FINRA Proposal Letter, p. 5-6; and Wachtel Letter, p. 1.

+
+
fn +

890 See Rule 613(g)(1).

+
+
fn +

891 The Commission notes that the SROs could begin drafting the document even before an NMS plan is approved by the Commission.

+
+
fn +

892 See FINRA Proposal Letter, p. 5-6; Wachtel Letter, p. 1.

+
+
fn +

893 See Section III.B.1.c., supra.

+
+
fn +

894 See Rule 613(a)(3)(vi); see also Rule 613(a)(3)(v).

+
+
fn +

895 17 CFR 240.0-10.

+
+
fn +

896 17 CFR 240.0-10(c).

+
+
fn +

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

+

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

+
+
fn +

898 See Section III.C.3., supra.

+
+
fn +

899 See Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan on efficiency, competition, and capital formation"). See also Section I., supra.

+
+
fn +

900 See Rule 613(a)(1).

+
+
fn +

901 See Rule 613(c).

+
+
fn +

902 See Rule 613(a)(1)(i) through (xii).

+
+
fn +

903 For example, the NMS plan must include provisions: (1) to ensure fair representation of the plan sponsors; (2) for administration of the central repository, including selection of the plan processor; (3) addressing the requirements for admission of new plan sponsors and withdrawal of existing plan sponsors; (4) addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan; (5) addressing the manner in which the costs of operating the central repository would be allocated among the SROs that are sponsors of the plan, including a provision addressing the manner in which costs would be allocated to new sponsors to the plan; (6) requiring the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed; and (7) including an enforcement mechanism to ensure that each SRO and member is collecting and providing to the central repository the information required. See Rule 613(b), 613(g)(4), and 613(h)(3).

+
+
fn +

904 For example, the NMS plan must include a provision requiring the creation and maintenance by the plan processor of a method of access to the data stored in the central repository, that includes the ability to run searches and generate reports. See Rule 613(e)(3). Additionally, the NMS plan is required to include policies and procedures, including standards, to be used by the plan processor to: (1) ensure the security and confidentiality of all information submitted to the central repository; (2) ensure the timeliness, accuracy, integrity and completeness of the data provided to the central repository; (and (3) ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository. See Rule 613(e)(4). The NMS plan also must include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. See Rule 613(b)(6). The NMS plan is also required to include an Advisory Committee to advise the plan sponsors on the implementation, operation and administration of the central repository. See Rule 613(b)(7). Further, the NMS plan must specify a maximum error rate to be tolerated by the central repository for the data it collects, and processes for identifying and correcting errors in the data, for notifying the entities responsible for the reporting of the erroneous data, and for disciplining those who repeatedly report erroneous data. See Rule 613(e)(6)(i) through(iv). The NMS plan must also specify as a time by which the corrected data will be available to regulators. See Rule 613(e)(6)(iv).

+
+
fn +

905 The NMS plan must include: (1) a provision that makes each SRO that sponsors the plan responsible for enforcing compliance by its members with the provisions of the plan; and (2) mechanisms to ensure that plan sponsors and their members comply with the requirements of the plan. See Rules 613(g)(3), 613(g)(4), and 613(h)(3).

+
+
fn +

906 At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

+
+
fn +

907 Commission staff estimated that each SRO would spend an aggregate one-time amount of (400 Attorney hours) + (100 Compliance Manager hours) + (220 Programmer Analyst hours) + (120 Business Analyst hours) x (15 SROs) = 12,600 burden hours to prepare and file the NMS plan.

+
+
fn +

908 Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

+
+
fn +

909 Commission staff estimated that the SROs would spend ($20,000 per SRO) x (15 SROs) = $300,000 in external costs to develop and draft the NMS plan.

+
+
fn +

910 See Proposing Release, supra note 4, at 32596.

+
+
fn +

911 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

+
+
fn +

912 See Rule 613(h)(3); Section III.B.3.a.1., supra.

+
+
fn +

913 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

+
+
fn +

914 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

+
+
fn +

915 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See Rule 613(e)(6)(iii) through (iv).

+
+
fn +

916 See Rule 613(b)(7).

+
+
fn +

917 See note 906, supra.

+
+
fn +

918 Commission staff estimates that each SRO would spend an aggregate one-time amount of (700 Attorney hours) + (300 Compliance Manager hours) + (880 Programmer Analyst hours) + (880 Business Analyst hours) = 2,760 burden hours per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a onetime external cost of (50 legal hours x $400 per hour) = $20,000.

+
+
fn +

919 Commission staff estimates that the SROs would incur an aggregate one-time amount of (2,760 burden hours per SRO) x (17 SROs) = 46,920 burden hours to prepare and file an NMS plan. Commission staff estimates that ($20,000 per SRO) x (17 SROs) = $340,000 in external costs to prepare and file the NMS plan.

+
+
fn +

920 See Proposing Release, supra note 4, at 32596.

+
+
fn +

921 See Section I., supra.

+
+
fn +

922 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

+
+
fn +

923 See Rule 613(e)(4). The Commission believes that an outline or overview description of the policies and procedures, including standards, to be used by the plan processor that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed. See Section III.B.2.e., supra.

+
+
fn +

924 See Rule 613(e)(4)(i)(A) through (D).

+
+
fn +

925 See Rule 613(e)(4)(i)(A) through (D).

+
+
fn +

926 See Rule 613(e)(2).

+
+
fn +

927 See proposed Rule 613(e)(4)(i).

+
+
fn +

928 17 CFR 240.17a-1.

+
+
fn +

929 17 CFR 240.17a-4.

+
+
fn +

930 5 U.S.C. 601 et seq.

+
+
fn +

931 Although Section 601(6) of the RFA defines the term "small entity," the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term "small entity" for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).

+
+
fn +

932 5 U.S.C. 605(b).

+
+
fn +

933 See Proposing Release, supra note 4, at 32607.

+
+
fn +

934 Id.

+
+
fn +

935 See FINRA Proposal Letter, p. 5-6 and Wachtel Letter, p. 1.

+
+
fn +

936 See Rule 613(a)(3)(vi).

+
+
fn +

937 Section 604(a)(4) of the RFA.

+
+
fn +

938 17 CFR 242.601.

-
fn -

33 15 U.S.C. 78k-1.

+
fn +

939 13 CFR 121.201.

\ No newline at end of file diff --git a/spider/files/data000021.html b/spider/files/data000021.html index 58d9eda..36be3dc 100644 --- a/spider/files/data000021.html +++ b/spider/files/data000021.html @@ -1,441 +1,2719 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic - document_title: Joint Industry Plan (Order Approving Plan Amendment No. 2 Release 34-75980) - document_type: Orders - source: US/SEC/Orders/Order Approving Plan Amendment - source_type: Order Approving Plan Amendment + document_title: SEC Proposed Rule 613 (SEC Release 34-62174) + document_type: Releases + source: US/SEC/Releases/Proposed Rule Release + source_type: Proposed Rule Release language: English - citation: Order Approving Plan Amendment No. 2 Release 34-75980 -
pubdate: September 24, 2015 effdate: N/A -

Joint Industry Plan (Order Approving Plan Amendment No. 2 Release 34-75980)

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2 + citation: SEC Release 34-62174 +
pubdate:  May 26, 2010 effdate: N/A +

SEC Proposed Rule 613 (SEC Release 34-62174)

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174) Compliance User: Self-Regulatory Organizations - Keywords: - SRO, - NMS Plan, - -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-75980; File No. 4-668)

-

September 24, 2015

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Joint Industry Plan; Order Approving Amendment No. 2 to the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail by BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

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pubdate: September 24, 2015 effdate: N/A -

I. Introduction

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Introduction + Keywords: +

34-62174 Consolidated Audit Trail

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+ 17 CFR PART 242 +

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[Release No. 34-62174;

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File No. S7-11-10]

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RIN 3235-AK51

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AGENCY: Securities and Exchange Commission.

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ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing new Rule 613 under Section 11A(a)(3)(B) of the Securities Exchange Act of 1934 (“Exchange Act”) that would require national securities exchanges and national securities associations (“self-regulatory organizations” or “SROs”) to act jointly in developing a national market system (“NMS”) plan to develop, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities.

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The Commission preliminarily believes that with today’s electronic, interconnected markets, there is a heightened need for regulators to have efficient access to a more robust and effective cross-market order and execution tracking system. Currently, many of the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) have audit trail rules and systems to track information relating to orders received and executed, or otherwise handled, in their respective markets. While the information gathered from these audit trail systems aids the SRO and Commission staff in their regulatory responsibility to surveil for compliance with SRO rules and the federal securities laws and regulations, the Commission preliminarily believes that existing audit trails are limited in their scope and effectiveness in varying ways. In addition, while the SRO and Commission staff also currently receive information about orders or trades through the electronic bluesheet (“EBS”) system, Rule 17a-25 under the Exchange Act,1 or from equity cleared reports, the information is limited, to varying degrees, in detail and scope.

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A consolidated audit trail would significantly aid in SRO efforts to detect and deter fraudulent and manipulative acts and practices in the marketplace, and generally to regulate their markets and members. In addition, such an audit trail would benefit the Commission in its market analysis efforts, such as investigating and preparing market reconstructions and understanding causes of unusual market activity. Further, timely pursuit of potential violations can be important in seeking to freeze and recover any profits received from illegal activity.

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DATES: Comments should be received on or before August 9, 2010.

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ADDRESSES: Comments may be submitted by any of the following methods:

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Electronic Comments:

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• Use the Commission’s Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

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• Send an e-mail to rule-comments@sec.gov. Please include File No. S7-11-10 on the subject line; or

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• Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

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Paper Comments:

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• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

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All submissions should refer to File No. S7-11-10. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10: 00 a.m. and 3: 00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

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FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202) 551-5665; Jennifer Colihan, Special Counsel, at (202) 551-5642, or Leigh W. Duffy, Attorney-Adviser, at (202) 551-5928, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

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pubdate:  May 26, 2010 effdate: N/A +

SUPPLEMENTARY INFORMATION:

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION: Compliance User: Self-Regulatory Organizations - Keywords: - SRO, - NMS Plan, - Rule 608, - Securities and Exchange Act - Section 11A, - Selecting a Plan Processor, - Selection Plan, - -

On March 6, 2015, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, ISE Gemini, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 an amendment (“Amendment No. 2”) to the National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Selection Plan”).3 Amendment No. 2 was published for comment in the Federal Register on June 23, 2015.4 The Commission received no comment letters on this proposal. This Order approves Amendment No. 2 to the Selection Plan.

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pubdate: September 24, 2015 effdate: N/A -

II. Background and Description of the Proposal

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal - Compliance User: Self-Regulatory Organizations - Keywords: - Sec Rule 613, - NMS Plan, - -
pubdate: September 24, 2015 effdate: N/A -

A. Background

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal, Background + Keywords: +
pubdate:  May 26, 2010 effdate: N/A +

I. Background

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background + Compliance User: Self-Regulatory Organizations + Keywords: + OTC, + ETF, + U.S. Securities Markets, + SRO, + National Association of Securities Dealers, + Order Audit Trail System, + New York Stock Exchange, + Consolidated Options Audit Trail System, + FINRA, + +

The U.S. securities markets have undergone a significant transformation over the last few decades, and particularly in the last few years. Regulatory changes and technological advances have contributed to a tremendous growth in trading volume and the further distribution of order flow across multiple trading centers. Today’s markets are widely dispersed, with securities often trading on multiple markets, including over-the-counter (“OTC”). Additionally, products that are closely related in nature and objective are also traded on different markets. For example, various markets trade either options on the S&P 500 index,2 futures on the S&P 500 index,3 exchange traded funds (“ETFs”) based on the S&P 500 index,4 and options and futures on those ETFs.5 This dispersion of significant trading volume has led the Commission in the past to ask for comment on how best to enhance the capability of SROs and the Commission to effectively and efficiently conduct cross-market supervision of trading activity.6

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The individual SROs are responsible for regulating their markets and their members.7 Further, the Commission has responsibilities to oversee the SROs, the securities markets, and registered broker-dealers, and routinely conducts examinations of or investigations into trading activity as part of its oversight and enforcement programs.8 The SROs and the Commission need tools to effectively carry out these responsibilities even when trading occurs on multiple markets. For example, it is important that the SRO and Commission staff have order and trade data sufficient to monitor cross-market trading activity, assist with investigations of potential violations of federal securities laws and exchange rules, and perform market reconstructions or other analysis necessary to understand trading activity.9 Such information also is important to the Commission in carrying out its oversight responsibilities.

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The SROs’ staff currently uses both EBS10 and SRO audit trail data to help fulfill their regulatory obligations.11 Commission staff also uses this data to perform its regulatory oversight obligations. The Commission and SROs have depended on the bluesheet system for decades to request trading records from broker-dealers needed for regulatory inquiries. Most SROs also maintain their own specific audit trail requirements applicable to their members. As discussed more fully below, for example, the National Association of Securities Dealers (“NASD”)12 established the Order Audit Trail System (“OATS”)13 in 1996, and the New York Stock Exchange (“NYSE”) implemented its Order Tracking System (“OTS”)14 in 1999. Beginning in 2000, several of the current options exchanges implemented the Consolidated Options Audit Trail System (“COATS”).15

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Currently, there is significant disparity in the audit trail requirements among the exchanges and FINRA, especially with respect to the information captured by each.16 Further, the information for each must be provided in different formats. The differences result in inconsistent requirements imposed on exchange and FINRA members, and also make it difficult to view trading activity across multiple markets. The lack of uniformity in, and cross-market compatibility of, SRO audit trails can make detection of illegal trading activity carried out across multiple markets and multiple products more difficult. The Commission has voiced concern about the lack of uniformity in, and cross-market compatibility of, the audit trails in the past.17 The Commission preliminarily believes that these differences may hinder the ability of the SROs and the Commission to effectively view and regulate trading activity across markets.

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Further, risks imposed on the markets by violative conduct can be substantially increased by automated trading, as market participants have the ability to trade numerous products and enormous volume in mere seconds. As trading venues have become more automated, and trading systems have become computerized, trading volumes have increased significantly,18 and trading has become more dispersed across more trading centers and therefore more difficult to monitor and trace.19 The Commission is concerned that current audit trail requirements are insufficient to capture in a timely manner all of the information necessary to efficiently and effectively monitor trading activity in today’s highly automated and dispersed markets. The Commission also is concerned that the current lack of cohesive, readily available order and execution information impacts the ability of the SROs and the Commission staff to effectively perform their respective regulatory and oversight responsibilities with respect to trading activity by market participants across markets and products.

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pubdate:  May 26, 2010 effdate: N/A +

A. Electronic Bluesheets and Rule 17a-25

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, Electronic Bluesheets and Rule 17a-25 + Compliance User: Self-Regulatory Organizations + Keywords: + Bluesheets, + SRO, + EBS System, + Securities Industry Automation Corporation, + Exchange Act - Rule 17a, + +

The Commission and the SROs frequently request bluesheets from broker-dealers to aid in investigations of possible federal securities law violations and to create market reconstructions.20 Until the late 1980s, bluesheets consisted of questionnaire forms that Commission and SRO regulatory staff mailed to firms to be manually completed and returned.21 Obtaining bluesheets in this manner was particularly onerous as there were substantial delays in the production and receipt of the requested information. Additionally, the data was submitted in a variety of formats, making analysis time-consuming, and requests could result in vast amounts of information requiring lengthy manual examination.22

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In the late 1980s, as the volume of trading and securities transactions dramatically increased, the manual bluesheet system was replaced by the EBS system.23 The EBS system allows broker-dealers to electronically submit the requested information in a specific format and transmit it to the Securities Industry Automation Corporation (“SIAC”).24 SIAC then routes the information to the Commission or to an SRO as applicable.

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The EBS system, supplemented by the requirements of Rule 17a-25 under the Exchange Act,25 currently is used by Commission and SRO regulatory staff primarily to assist the staff in the investigation of possible federal securities law violations primarily involving insider trading and other market manipulations, and to conduct market reconstructions, especially following periods of significant market volatility.26 In its electronic format, the EBS system provides detailed execution information upon request by the Commission and the SROs’ staff for specific securities during specified time frames.27 However, because the EBS system is designed for use in narrowly-focused enforcement investigations that generally involve trading in particular securities, it is less useful for large-scale market reconstructions and analyses involving numerous stocks during peak trading volume periods.28

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In 2000, the Commission proposed Rule 17a-25 under the Exchange Act to supplement the existing EBS system with data elements incorporating institutional and professional trading strategies, to assist regulatory staff in reviewing and analyzing EBS data.29 Adopted in June 2001,30 the rule codified the requirement that broker-dealers submit to the Commission, upon request, information on their customer and proprietary securities transactions in an electronic format.31 Rule 17a-25 requires submission of the same standard customer and proprietary transaction information that SROs request through the EBS system in connection with their market surveillance and enforcement inquiries.32

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Specifically, for a proprietary transaction, Rule 17a-25 requires a broker-dealer to provide the following information electronically upon request: (1) clearing house number or alpha symbol used by the broker-dealer submitting the information; (2) clearing house number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite side to the trade; (3) security identifier; (4) execution date; (5) quantity executed; (6) transaction price; (7) account number; (8) identity of the exchange or market where the transaction was executed; (9) prime broker identifier; (10) average price account identifier; and (11) the identifier assigned to the account by a depository institution.33 For customer transactions, the broker-dealer also is required to include the customer’s name, customer’s address, the customer’s tax identification number, and other related account information.34 The new data elements added by Rule 17a-25 – prime broker identifiers, average price account identifiers, and depository institution account identifiers – assist the Commission in aggregating, without double-counting, securities transactions by entities trading through multiple accounts at more than one broker-dealer.35

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pubdate:  May 26, 2010 effdate: N/A +

B. Equity Cleared Reports

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, Equity Cleared Reports + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Clearing Corporation, + Exchange Act - Rule 17a, + +

In addition to the EBS system and Rule 17a-25, the Commission also relies upon the National Securities Clearing Corporation’s (“NSCC”)36 equity cleared report for initial regulatory inquiries.37 This report is generated on a daily basis by the SROs and is provided to the NSCC, in a database accessible by the Commission, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end of day data and is searchable by security name and CUSIP number.38 Since the information made available on the report is limited to the date, the clearing firm, and the number of transactions cleared by each clearing firm on each SRO, it basically serves as a starting point for an investigation, providing a tool the Commission can use to narrow down which clearing firms to contact concerning a transaction in a certain security.

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pubdate:  May 26, 2010 effdate: N/A +

C. FINRA’s Order Audit Trail System

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, FINRA’s Order Audit Trail System + Compliance User: Self-Regulatory Organizations + Keywords: + NASD, + Broker-dealer, + OATS, + Nasdaq Stock Market, Inc., + FINRA, + FINRA Rule 7440, + +

In 1996, the Commission instituted public administrative proceedings against the NASD, alleging that it failed to enforce and investigate potential misconduct by its members.39 In settling the Commission’s enforcement action, the NASD was ordered to design and implement an audit trail to enable it to reconstruct its markets promptly and effectively surveil them.40 The Commission mandated that the audit trail at a minimum: (1) provide an accurate time-sequenced record of orders and transactions, beginning with the receipt of an order at the first point of contact between the broker-dealer and the customer or counterparty, and further documenting the life of the order through the process including execution, modification and cancellation; and (2) provide for market-wide synchronization of clocks used in connection with the new audit trail system.41 In response to the order, the NASD created OATS.42

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Currently, OATS is used to capture order information reported by FINRA members in equity securities listed on the Nasdaq Stock Market, Inc. (“Nasdaq”) and OTC equity securities.43 OATS requires reporting members44 to record and report to FINRA45 detailed information covering the receipt and origination of an order,46 order terms, transmission, and modification, cancellation and execution.47 Specifically, for each of these stages in the life of an order, FINRA Rule 7440 requires the recording and reporting of the following information, as applicable, including but not limited to:

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• for the receipt or origination of the order,48 the date and time the order was first originated or received by the reporting member; a unique order identifier; the market participant symbol of the receiving reporting member; and the material terms of the order;49

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• for the internal or external routing of an order, the unique order identifier; the market participant symbol of the member to which the order was transmitted; the identification and nature of the department to which the order was transmitted if transmitted internally; the date and time the order was received by the market participant or department to which the order was transmitted; the material terms of the order as transmitted;50 the date and time the order is transmitted; and the market participant symbol of the member who transmitted the order;

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• for the modification or cancellation of an order, a new unique order identifier; original unique order identifier; the date and time a modification or cancellation was originated or received; and the date and time the order was first received or originated;51 and

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• for the execution of an order, in whole or in part, the unique order identifier; the designation of the order as fully or partially executed; the number of shares to which a partial execution applies and the number of unexecuted shares remaining; the date and time of execution; the execution price; the capacity in which the member executed the transaction; the identification of the market where the trade was reported; and the date and time the order was originally received.52

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FINRA uses this information to recreate daily market activity for FINRA’s market surveillance activities.53

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pubdate:  May 26, 2010 effdate: N/A +

D. NYSE’s Order Tracking System

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, NYSE’s Order Tracking System + Compliance User: Self-Regulatory Organizations + Keywords: + NYSE, + OATS, + OTS, + NYSE Amex, + +

The Commission instituted public administrative proceedings against the NYSE in 1999, alleging that the exchange had failed to detect violations of federal securities laws and its own rules by its independent floor broker members, failed to police for performance-based compensation arrangements involving these members, and failed to adequately surveil them.54 In settling the Commission’s enforcement action, the NYSE was ordered to continue its development of an electronic floor system for the entry of order details prior to representation on the exchange floor, as well as to design and implement an audit trail to enable it to effectively surveil and reconstruct its market promptly, and facilitate the NYSE’s effective enforcement of the federal securities laws and exchange rules.55 Like OATS, this audit trail was required to provide an accurate, time-sequenced record of orders, quotations and transactions, documenting the life of an order from receipt through execution or cancellation. The NYSE also was required to provide for synchronization of all clocks used in connection with the audit trail.56

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In response to the Commission’s order, the NYSE created OTS. 57 OTS currently is used for the provision of audit trail data for orders58 in NYSE and NYSE Amex-listed cash equity securities by NYSE and NYSE Amex members, including for orders in NYSE or NYSE Amex-listed cash equity securities initiated by a NYSE or NYSE Amex member or routed by a NYSE or NYSE Amex member to another market center for execution.59 OTS is similar in scope to OATS, as detailed information is required to be recorded for the stages of an order’s life, from origination and receipt and transmittal, through order modification, cancellation, and/or execution.60 Specifically, for each of these stages in the life of an order, OTS requires the recording of the following information, as applicable, including but not limited to:

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• for order receipt or origination,61 the date and time the order is originated or received by a member or member organization; a unique order identifier; market participant symbol; and the material terms of the order;62

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• for the internal or external routing of an order, the unique order identifier; the identification of the department to which an order was transmitted if transmitted internally; the date and time the order was received by the department receiving a transmitted order; the market participant symbol assigned to the member or member organization receiving the transmitted order or notation that the order was transmitted to a non-member;63 the material terms of the order as transmitted;64 and the date and time the order is transmitted; and

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• for the modification or cancellation of an order, a new unique order identifier; the original unique order identifier; and the date and time a modification or cancellation was originated or received.65

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Additionally, the NYSE and NYSE Amex require the recording of detailed information concerning the receipt, cancellation or execution of orders in NYSE and NYSE Amex-listed cash equity securities originated on or transmitted to the exchange floor.66 Immediately following receipt of an order on the floor, the member receiving the order must record the following information: (1) the material terms of the order;67 (2) a unique order identifier; (3) the clearing member organization and the identification of the member or member organization recording order details;68 and (4) modification of terms of the order or cancellation of the order.69

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Further, once an order is executed, the following information must be recorded: (1) the material terms of the execution;70 (2) the unique order identifier; (3) the identity of the firms involved in the execution;71 and (4) certain other information related to the execution.72

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pubdate:  May 26, 2010 effdate: N/A +

E. Consolidated Options Audit Trail System

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, Consolidated Options Audit Trail System + Compliance User: Self-Regulatory Organizations + Keywords: + CBOE, + Philadelphia Stock Exchange, + COATS, + Exchange, + Options Settlement Order, + International Securities Exchange LLC, + Nasdaq Options Market, + Boston Options Exchange Group LLC, + BATS Options Exchange Market, + +

In September 2000, the Commission instituted public administrative proceedings against Amex,73 CBOE, the Pacific Exchange,74 and the Philadelphia Stock Exchange75 for failing to uphold their obligations to enforce compliance with exchange rules and the federal securities laws, including those relating to reporting. Specifically, the Commission alleged that they had either conducted no automated surveillance, or inadequate automated surveillance, of trade reporting and consequently failed to adequately detect noncompliance with their rules.76 In settling the Commission’s enforcement action, the exchanges were required to jointly design and implement COATS to enable them to reconstruct markets promptly, surveil them, and enforce compliance with trade reporting, firm quote, order handling, and other rules.77 The exchanges were required to complete this undertaking in five phases.78

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In particular, each exchange was required to achieve the following through its audit trail: (1) synchronize trading and support system clocks with all other options exchanges; (2) design and implement a method to merge all options exchanges’ reported and matched transaction data on a daily basis in a common computer format; (3) incorporate its quotations and the national best bid and offer as displayed in its market with the merged transaction data so that it could be promptly retrieved and merged in the common computer format with other options exchanges’ merged transactions and quotation data; (4) design and implement an audit trail readily retrievable (in the common computer format) providing an accurate, time-sequenced record of electronic orders, quotations and transactions on such exchange, beginning with the receipt of an electronic order, and further documenting the life of the order through the process of execution, partial execution, or cancellation; (5) incorporate into the audit trail all non-electronic orders so that such orders were also subject to the audit trail requirements for electronic orders; and (6) design effective surveillance systems to use this newly available data to enforce the federal securities laws and the exchange’s rules.79

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The exchanges subject to the Options Settlement Order fully implemented the requirements in 2005. In addition, the International Securities Exchange, LLC (“ISE”), Boston Options Exchange Group, LLC (“BOX”), the Nasdaq Options Market (“NOM”), and BATS Options Exchange Market (“BATS Options”) also comply with the COATS requirements.80

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A majority of options exchanges require their members to provide the following information with respect to orders entered onto their exchange: (1) the material terms of the order;81 (2) order receipt time;82 (3) account type; (4) the time a modification is received; (5) the time a cancellation is received; (6) execution time; and (7) the clearing member identifier of the parties to the transaction.83

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pubdate:  May 26, 2010 effdate: N/A +

F. Other Audit Trail Requirements

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, Other Audit Trail Requirements + Compliance User: Self-Regulatory Organizations + Keywords: + SRO Audit Trail, + FINRA, + Audit Trail Rules, + Exchange Act - Section 17, + +

SRO audit trail rules regarding information on orders for NMS stocks to be recorded by their members, and in some cases provided to the SRO, tend to be less uniform than SRO audit trail rules relating to listed options.84 Some exchanges and FINRA have detailed audit trail data submission requirements for their members covering order entry, transmittal, and execution.85 For example, the rules of one exchange require the recording of the following information for each order originating with an exchange participant that is given to or received from another participant for execution, transmitted by an exchange participant to another market, or originating off the exchange and transmitted to an exchange participant, and subsequent execution of any such orders: 86

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• information relating to receipt or transmission of the order, including the material terms of the order;87 a unique order identifier; the identification of the clearing participant and the participant recording the order details; the date and time of order receipt or transmission (if applicable); the market or participant to which the order was transmitted or from which the order was received (if applicable);

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• information relating to modifications to or cancellation of the order, including any modifications to the order, any cancellation of all or part of the order; the date and time of receipt and transmission of any modifications to the order or cancellations; and the identification of the party canceling or modifying the order;88

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• for executions of the order,89 in whole or in part, the transaction price; the number of shares or quantity executed; the date and time of execution; the contra party to the execution; and any settlement instructions.90

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The audit trail rules of the other exchanges incorporate only standard books and records requirements in accordance with Section 17 of the Exchange Act.91

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pubdate:  May 26, 2010 effdate: N/A +

G. Prior Commission Request for Comment

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Background, Prior Commission Request for Comment + Compliance User: Self-Regulatory Organizations + Keywords: + OATS, + NASD, + SRO, + Intermarket Surveillance Group, + ISG Consolidated Equity Audit Trail, + Comments, + +

The Commission has previously requested comment regarding cross-market regulation, including whether changes should be made to existing audit trail rules, in two concept releases in 2003 and 2004.92

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In 2003, the Commission sought public comment on a petition submitted by Nasdaq that raised concerns about the impact of market fragmentation on the trading in, and regulation of trading in, Nasdaq-listed securities.93 Nasdaq, through OATS, collected data from its members trading Nasdaq-listed securities, which the NASD then used to surveil for potential rule violations.94 Nasdaq requested that the Commission require all SROs trading Nasdaq-listed securities to implement an electronic audit trail identical to OATS.95 Nasdaq also noted that the available cross-market audit trail information provided by the Intermarket Surveillance Group (“ISG”)96 was comprised of audit trail information from each of the exchanges and provided two day delayed data at the clearing firm level, with time data from non-synchronized clocks.97 Nasdaq believed that the information provided by ISG was insufficient to identify potentially violative activity.98

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In response to the Intermarket Trading Concept Release, the Commission received a variety of comments on intermarket surveillance and order audit trail issues.99 Of those commenters that addressed the general concept of creating a uniform electronic audit trail, some supported the concept while others did not.100

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One commenter expressed the view that once broker-dealers have implemented systems necessary to comply with audit trail requirements, it would not be incrementally significant from a cost perspective to supply the same data in a common format to additional SROs, but that there would be a significant cost if the data to be captured and the methods of encoding and delivering the data differed from market to market.101 This commenter urged the Commission, if it were to require all market centers to adopt audit trail requirements, to ensure that the requirements are uniform and standardized. This commenter recommended a single standard for real time electronic trade and audit trail reporting, which would be applicable to all equity securities traded in the national market regardless of where listed or traded, and where data would be captured in a central depository, aggregated and made immediately available to each relevant market center, possibly through direct electronic data feeds.102 Likewise, another commenter stated that it would be preferable for there to be one uniform audit trail system, rather than each SRO adopting its own audit trail requirements and systems, to reduce the potential for conflicting rules and regulations and duplicative systems and technology requirements.103 Another commenter recommended that if the Commission determined that the need for a particular SRO to have enhanced audit trail information outweighs costs to member firms, SROs be required to coordinate efforts so as to reduce duplication of systems and regulatory efforts.104

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Several commenters urged the Commission to consider the costs to broker-dealer firms of supplying the audit trail data when considering the appropriateness of extending OATS-like audit trail requirements to other market centers.105 One commenter stated the belief that firms already are required to maintain all of the customer and transaction information that regulators would want under their current books and records requirements and that most firms do not believe there is a justification for requiring firms to spend the money necessary to send this information to every market center where an order may be routed.106 Another commenter was concerned about the impact on each individual market's structure of mandating uniformity.107

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Some commenters supported the ISG as a facilitator of a coordinated regulation.108 One commenter noted that the ISG Consolidated Equity Audit Trail was a valuable supplement to existing SRO market data.109 One commenter also endorsed the ISG audit trail as well as CSE’s Firm Order Submission system,110 stating that it was preferable to enhance these systems rather than conduct a “mass migration” to OATS.111 The ISG itself stated that no other market had reported any problems with ISG’s timing of the incorporation of the clearing data into the Consolidated Equity Audit Trail, nor with the delivery of its audit trail information.112

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In 2004, in a release seeking comment on a variety of issues relating to self-regulation, the Commission again sought public comment on intermarket surveillance.113 The Commission discussed the individual audit trails developed by several equity markets, COATS, and ISG’s clearing level audit trail.114 The Commission suggested that a more robust intermarket order audit trail for options and equity markets could enhance the surveillance of order flow and requested comment on the issue.115

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One commenter on the Concept Release Concerning Self-Regulation stated that, because trading in most liquid securities now occurs on multiple markets, no single SRO could capture a complete picture of all the trading in each product, all trading by one broker-dealer, and even all the trading related to a single order.116 This commenter stated its belief that the lack of uniform order and transaction data creates regulatory gaps and may provide incentives for market participants to conduct activities on markets where less regulatory data is collected on an automated basis.117 This commenter believed that minimum data-collection standards should be required to ensure adequate regulation across all markets, and that consolidating that data would permit effective intermarket regulation while ensuring that no single market has a competitive advantage.118

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Another commenter gave an example of how it believed the lack of real time reporting across markets was detrimental to surveillances relating to certain illegal activities. This commenter stated its belief that “effective surveillances relating to insider trading, market manipulation and stock or options frontrunning in multiple markets can be hindered because away-market data such as order information, position limit reports and large position reports (for options) are not available electronically on a real time or near real time basis to the SRO that has generated an alert or flag in the course of its routine surveillance.119 This commenter suggested that consolidating this type of data in real time or near real time would permit SROs to immediately detect and review all aberrational activity in the multiple market centers, which could significantly deter or prevent violative conduct.120

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Another commenter stated its belief that the lack of a coordinated surveillance system is potentially one of the more significant problems facing the markets, and that as trading strategies become more sophisticated across multiple markets and national borders, the potential for sophisticated fraud also increases.121 One commenter recommended a consolidated information base that all regulators could access, stating that “having separate and uncoordinated regulatory data is inefficient and detracts from the quality of regulation.”122 Further, another commenter suggested a voluntary regulatory cooperative, jointly owned by participant exchanges, that would be the central regulator for surveillance, investigations and examinations and would include an electronic interface with the SEC; this commenter believed that the costs of developing an intermarket consolidated order audit trail system should be justified by the regulatory value of the data to be captured.123

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pubdate:  May 26, 2010 effdate: N/A +

II. Basis for Proposed Rule

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule Compliance User: Self-Regulatory Organizations Keywords: - Sec Rule 613, + SRO, + Exchange Act - Section 11A, + NMS, + NMS Securities, NMS Plan, - CAT NMS plan, -

The Commission adopted Rule 613 on July 11, 2012, to require the SROs to jointly submit an NMS plan to create, implement, and maintain a consolidated audit trail (“CAT NMS Plan”).5 In response, the SROs engaged in a request for proposal (“RFP”) process to help them develop an NMS Plan proposal and solicit bids (“Bids”) for the role of Plan Processor6 to build, operate, administer, and maintain the consolidated audit trail. The Selection Plan, which was approved by the Commission on February 21, 2014, sets forth the process by which the Participants will review, evaluate, and narrow down the Bids submitted in response to the RFP to “Shortlisted Bids,” and ultimately select the Plan Processor following Commission approval of the proposed CAT NMS Plan.7 Amendment No.1 to the Selection Plan, which the Commission approved on June 17, 2015, among other things, permits the SROs to vote to narrow the set of Shortlisted Bids to an even shorter list prior to Commission approval of the proposed CAT NMS Plan.8 The Selection Plan, as amended, provides that the SROs’ Selection Committee will vote to select the Plan Processor from among the remaining bidders, using a two-round voting process, within two months of Commission approval of the proposed CAT NMS Plan.9

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As noted above, the U.S. securities markets have experienced a dynamic transformation in recent years. Rapid technological advances and regulatory developments have produced fundamental changes in the structure of the securities markets, the types of market participants, the trading strategies employed, and the array of products traded. Trading of securities has become more dispersed among exchanges and various other trading venues, including the OTC market. The markets have become even more competitive, with exchanges and other trading centers aggressively competing for order flow by offering innovative order types, new data products and other services, and through fees charged or rebates provided by the markets. The Commission preliminarily believes that with today’s fast, electronic and interconnected markets, there is a heightened need for a single uniform electronic cross-market order and execution tracking system that includes more information than is captured by the existing SRO audit trails, and in a uniform format. Such a system would enable SROs to better fulfill their regulatory responsibilities to monitor for and investigate illegal activity in their markets and by their members. Further, the Commission preliminarily believes that such a system would enable the Commission staff to better carry out its oversight of the NMS for securities and to perform market analysis in a more timely fashion, whether on one market or across markets.

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Each national securities exchange and national securities association must be organized and have the capacity to comply, and enforce compliance by its members, with its rules, and with the federal securities laws, rules, and regulations.124 The Commission preliminarily believes that the exchanges and FINRA could more effectively and efficiently fulfill these statutory obligations if the SROs had direct, electronic real time access to consolidated and more detailed order and execution information across all markets.125 Likewise, the Commission has the statutory obligation to oversee the exchanges and associations,126 and to enforce compliance by the members of exchanges and associations with the respective exchange’s or association’s rules, and the federal securities laws and regulations.127 The Commission also preliminarily believes that electronic real time access to consolidated information and more detailed cross market order and execution information also would aid the Commission in carrying out its statutory obligations.

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Section 11A(a)(3)(B) of the Exchange Act provides in part that the Commission may, by rule, require SROs to act jointly with respect to matters as to which they share authority under the Exchange Act in regulating a NMS for securities.128 Pursuant to this authority, the Commission today is proposing a rule that would require all national securities exchanges and national securities associations to jointly submit to the Commission an NMS plan to create, implement, and maintain a consolidated audit trail that would be more comprehensive than any audit trail currently in existence.129 The proposed Rule would require the consolidated audit trail to capture certain information about each order for an NMS security, including the identity of the customer placing the order and the routing, modification, cancellation or execution of the order, in real time. In effect, the proposal would create a time-stamped “electronic audit trail record or report” for every order, and each market participant that touches the order would be required to report information about certain reportable events, such as routing or execution of the order.

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The Commission preliminarily believes that a consolidated order audit trail, such as the one proposed today, could enhance the ability of the SROs to carry out their obligations to regulate their markets and their members. The Commission also preliminarily believes that the proposed consolidated order audit trail could aid the Commission in fulfilling its statutory obligations to oversee SROs,130 monitor for the manipulation of security prices,131 and detect the use of manipulative or deceptive devices in the purchase or sale of a security,132 as well as to perform market reconstructions.

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The Commission preliminarily believes that proposed Rule 613 would benefit the industry, through potential cost reductions, by eliminating the need for certain SRO and Commission rules that currently mandate the collection and provision of information, at least with respect to NMS securities.133 The Commission also preliminarily believes that the proposal would benefit SROs, as well as the NMS for NMS securities, by ultimately reducing some regulatory costs, which may result in a more effective re-allocation of overall costs.134

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The Commission recognizes that SRO rules requiring members to capture and disclose audit trail information already exist, and considered whether more modest improvements to existing rules, and corresponding SRO and member systems, would achieve the proposed Rule’s objective at lower cost. For example, the Commission considered whether to standardize and expand the order information collected by existing audit trails, the EBS system, Rule 17a-25 and equity cleared reports. Without centralization of the trading data in a uniform electronic format, however, the Commission’s goals of cross-market comparability and ready access could not be achieved. Additionally, this approach would not resolve concerns over how long it takes to obtain order and execution information because the data is often not available in real time and is provided only upon request.135 Similarly, the Commission considered whether assuring access to existing audit trails to other SROs and the Commission would sufficiently advance its goals. Even if SROs could view order activity on a real time basis on other exchanges, this would not eliminate the need for SROs to check multiple repositories to view and obtain order information. Moreover, the information may be captured, stored and displayed in a variety of formats, making comparisons more difficult. The Commission, therefore, preliminarily does not believe that “retrofitting” existing rules and systems would be a more effective way to achieve the goals of the proposed consolidated audit trail than having the requirements contained in a single Commission rule, and a single NMS plan.

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As discussed below, the Commission preliminarily believes that existing audit trails are limited in their scope and effectiveness in varying ways. SRO and Commission staff also currently obtain information about orders or trades through the EBS system, Rule 17a-25,136 and from equity cleared reports.137 However, as discussed below, the information provided pursuant to the EBS system, Rule 17a-25, and the equity cleared reports also is limited, to varying degrees, in detail and scope.

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pubdate:  May 26, 2010 effdate: N/A +

A. Lack of Uniformity of, and Gaps in, Current Required Audit Trail Information

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule, Lack of Uniformity of, and Gaps in, Current Required Audit Trail Information + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + Exchange Act - Rule 17a, + FINRA’s OATS rules, + Broker-dealer, + +

As noted above, the type of information relating to orders and executions currently collected by the exchanges and FINRA differs widely. For example, FINRA’s OATS rules and NYSE/NYSE Amex’s OTS rules (as supplemented by the requirements of NYSE and NYSE Amex Rule 123) both set forth in relative detail the information required to be recorded by a FINRA, NYSE or NYSE Amex member upon receipt or origination of an order; following transmission of an order to another FINRA, NYSE or NYSE Amex member; and following modification, cancellation or execution of such order.138 In contrast, some other exchanges’ rules only require their members to keep records in compliance with the member’s recordkeeping obligations under Section 17(a) of the Exchange Act and rules thereunder,139 rather than requiring that specific information be captured for orders sent to and executed on the exchange.140 Although Rule 17a-3 under the Exchange Act141 requires that a member make and keep detailed information with respect to each brokerage order, it does not, for instance, require information with respect to the routing of the order, or that each order be assigned a unique order identifier.142 Similarly, the scope of securities covered by existing audit trail rules also differs among the exchanges and FINRA. FINRA’s OATS rules, for instance, apply to orders for equity securities listed on Nasdaq and OTC securities, while OTS captures information for orders in NYSE and NYSE Amex-listed cash equity securities.143

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While there is no current requirement that all SROs record the same information for orders and executions in the same or different securities, each SRO has a statutory obligation to regulate its market and its members. The Commission is concerned that the lack of uniformity as to the type of audit trail information gathered by the different exchanges and FINRA, and the lack of compatibility in the format of each SRO’s audit trail data, may hinder the ability of SRO and Commission staff to effectively and efficiently monitor for, detect, and deter illegal trading that occurs across markets. If a market participant is engaging in manipulative behavior across various markets, but the rules of one market do not require its members to provide detailed information regarding the orders sent to its market, it may be difficult for regulators to determine that trading activity on one market was related to trading activity on another market. For example, Section 9 of the Exchange Act expressly prohibits "wash sales."144 A trader could attempt to disguise such trading by executing various legs of wash transactions on different markets. Individual market surveillance based on individual SRO audit trail data would not always be able to detect this kind of cross-market abuse.

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Further, while current order audit trail rules provide a framework for capturing order information, the Commission is concerned that certain information about orders and executions that would be useful to efficient and effective regulation of inter-market trading activity and prevention of manipulative practices is not captured by existing audit trails. Most importantly, the existing audit trails do not require members to provide information identifying the customer submitting an order, the person with investment discretion for the order, or the beneficial owner. The identity of this “ultimate customer,” however, often is necessary to tie together potential manipulative activity that occurs across markets and through multiple accounts at various broker-dealers. While the Commission notes that exchange and FINRA regulatory staff, as well as Commission staff, eventually can obtain identifying customer or beneficial account information by submitting requests for information through ISG or to various broker-dealers involved in potentially wrongful activities, this process can result in significant delays in investigating market anomalies or potentially manipulative behavior. The Commission preliminarily believes that gaps such as this in required audit trail information may hinder the ability of regulatory authorities to enforce compliance with SRO rules and the federal securities laws, rules, and regulations in a timely manner.

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In addition, an exchange’s audit trail information effectively ends when an order is routed to another exchange. For example, although the NYSE’s OTS rule requires a NYSE member or member organization to record the fact that an order was transmitted to a non-member, the rules do not require the recording of what subsequently happens to the order.145 Likewise, FINRA’s OATS data collection effectively ends if an order is routed from a member of FINRA to an exchange.146 As a result, key pieces of information about the life of an order may not be captured, or easily tracked, if an order is routed from one exchange to another, or from one broker-dealer to an exchange. For example, the name, or identifier, of a broker-dealer that initially received an order may be captured by the audit trail of the exchange of which that broker-dealer is a member when the broker-dealer sends the order to the exchange. However, if the order is routed to and executed on a second exchange, the identifying information for that initial broker-dealer may not be captured by the second exchange’s audit trail requirements.

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Similarly, under current audit trail rules, an incoming order may be assigned an order identifier by the initial receiving exchange; however, if the order is routed to a second exchange, there is no requirement that this order identifier be passed along to or maintained by the second exchange. Thus, one order that is routed across markets can have multiple order identifiers, each unique to one exchange. The Commission preliminarily believes that, from a regulatory standpoint, the lack of standardized cross-market order identifiers can pose significant obstacles and delays in effectively detecting and deterring manipulative behavior because SRO and Commission staff cannot readily collect the necessary data (that is, they cannot readily piece together activity related to the same order or the same customer occurring across several markets) to determine whether violative behavior has occurred.

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Additionally, the Commission is concerned that the data generated by the EBS system or that is available through the equity cleared reports also lacks items of information needed to match up order and trade information across markets to fully understand a particular trading pattern or to reconstruct a certain type of trading activity. EBS data does not include the time of execution, and often does not include the identity of the beneficial owner.147 The equity cleared data also lacks the time of execution, as well as time of order receipt, often the identity of the beneficial owner, the identity of the broker-dealer(s) that received and/or executed the order (if different from the clearing broker-dealer), and short sale borrow and fails information. In order to obtain the time an order was received or the identity of the beneficial owner, therefore, SRO or Commission staff may take the additional step of submitting an electronically generated blue sheet request to the clearing broker-dealer identified in the equity cleared report to ask that broker-dealer to identify the beneficial ownership of the account(s) effecting the relevant transactions and/or the introducing broker,148 and this may take a few steps if the clearing broker-dealer does not know the introducing broker, but only the executing broker (if different). If the beneficial ownership of the account(s) was not specified in the clearing broker-dealer’s response, the staff could then ask the introducing broker-dealer for the time an order was received and the beneficial account holder information. Often, additional steps are required to identify the beneficial account holder, such as when the “customer” is an omnibus account. Furthermore, the equity cleared data could be duplicative. For example, one side of a trade can appear multiple times in the equity cleared reports because it may be reported by a specialist, a clearing broker-dealer, and the broker-dealer holding the customer’s allocation account and the customer’s trading account.

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The lack of cohesive, readily available order and execution information creates significant hurdles for investigators at both the SROs and at the Commission. In order for SROs to investigate potential violations of their rules and the federal securities laws and rules by their members, the SROs should have the ability to analyze the activities of their members taking place across different market centers. This requires the accumulation and interpretation of data from numerous, disparate sources sometimes presenting inconsistent information. Similarly, the experience of the Commission staff shows that the lack of a consolidated audit trail results in the investment of significant resources to investigate potential market abuses. For example, when investigating potential insider trading and other market manipulations, Commission staff first obtains an equity cleared report to identify the clearing broker-dealers for trades involving the stock under investigation and the trading volume for a particular period of time. Then staff sends document requests to those clearing broker-dealers to identify the broker-dealers that executed trades in the stock over that period of time. This process can be complicated further by potential market manipulators that trade through small introducing brokers or use offshore corporate accounts and prime brokerage or other arrangements to conduct transactions. Commission staff also may request trade data for additional time periods identified during the course of the investigation, resulting in further delays. Commission staff thus often must make multiple requests to broker-dealers to obtain sufficient order information about the purchase or sale of a specific security to be able to adequately analyze trading. These multiple requests and responses can take a significant amount of time and delay the Commission's efforts to analyze the data on an expedited basis.149 While the investigative protocols of each SRO may differ from those used by the Commission, in each case, collecting, interpreting and analyzing diverse data sources is labor intensive and time consuming.

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The Commission is concerned that inadequacies in the current audit trail rules, EBS system, and equity cleared reports also impede the ability of SRO or Commission staff to promptly analyze trading patterns, particularly to prepare market reconstructions. For example, if Commission staff wants to undertake an analysis of an extreme market movement over a limited period of time, Commission staff would need to analyze audit trail information and EBS submissions of trading data to determine if specific trading strategies, techniques or participants appeared to be associated with the movement. Because of difficulties in linking trades in the audit trails with aggregate day-end trading data in EBS submissions, conducting this analysis is difficult and time-consuming. While the audit trail data could identify the precise execution times of trades by particular clearing broker-dealers, it would not identify the specific customers or beneficial owners involved in the trades. On the other hand, while EBS submissions provide summary trading information for particular accounts at the clearing broker-dealers, they lack execution times for these trades. Further complications can arise due to the common practice for large traders to route their orders through multiple accounts at multiple clearing firms, as well as practices at some firms that use “average price accounts” to effect trades that are eventually settled in multiple proprietary and/or customer accounts. While these practices are not, in themselves, improper, their use makes it more challenging to establish with certainty when trading on behalf of a particular trader was effected during the trading session.

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The Commission preliminarily believes that the proposed consolidated audit trail would help alleviate the difficulties faced by Commission staff in performing market reconstructions, such as those described in the above example, by requiring that national securities exchanges, national securities associations, and their members provide order and execution data to one central location, largely on a real time basis, in a uniform electronic format. Having this information readily available in a central location would reduce the need for staff to request and collect such information from multiple broker-dealers and then examine, analyze and reconcile the disparate information provided to accurately “reconstruct” the market.150

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pubdate:  May 26, 2010 effdate: N/A +

B. Books and Records Requirements

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule, Books and Records Requirements + Compliance User: Self-Regulatory Organizations + Keywords: + Broker-dealer, + SRO, + FINRA, + +

Because brokers-dealers often are members of several exchanges and FINRA, they are subject to and must comply with the differing audit trail rules. Brokers and dealers also have a statutory obligation to maintain records in compliance with Commission and SRO rules.151 As a result of the differing audit trail rules, brokers and dealers may be required to keep records to comply with each audit trail rule relating to trading in a certain security. Thus, some broker-dealers may now face significant costs to comply with varying audit trail rules.152

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+
pubdate:  May 26, 2010 effdate: N/A +

C. Time Lags

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule, Time Lags + Compliance User: Self-Regulatory Organizations + Keywords: + Audit Trail Rules, + End-of-Day Reporting, + OATS, + OTS, + +

Current audit trail rules require that an SRO’s members submit order and execution information by the end of each business day (in the case of OATS), or in certain cases, upon request by the regulating entity (for instance, like OTS).153 End-of-day or upon request reporting, by definition, limits regulators’ ability to carry out real time cross-market surveillance and investigations of market anomalies. The Commission preliminarily believes that end-of-day reporting, coupled with the current laborious process of identifying the ultimate customer responsible for a particular securities transaction that may take several days, weeks or even months, can impact effective oversight by hindering the ability of SRO regulatory staff to identify manipulative activity close in time to when it is occurring, and respond to instances of potential manipulation quickly. This process also hinders the Commission’s ability to detect and investigate potentially manipulative behavior. Manipulative activity by some market participants can result in other market participants, such as retail investors, losing money. The longer that manipulative behavior goes undetected over time, the greater the potential harm to investors. Further, timely pursuit of potential violations can be important in seeking to freeze and recover any profits received from illegal activity.

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pubdate:  May 26, 2010 effdate: N/A +

D. Access to Audit Trail Information

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule, Access to Audit Trail Information + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + FINRA’s audit trail, + +

While each SRO has direct access to audit trail information received from its members, as well as its own data relating to orders received and executed on its market, one SRO cannot directly or easily access the audit trail information collected by other SROs, despite the interconnectedness of today’s securities markets and the fact that orders are often routed from one marketplace to another marketplace for execution. In addition, Commission staff itself does not have immediate access to the exchanges’ and FINRA’s audit trail information, and instead must specifically request that an exchange or FINRA produce its audit trail information.154

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The Commission notes that ISG provides a framework for the voluntary sharing of information and coordination of regulatory efforts among the exchanges and FINRA to address potential intermarket manipulations and trading abuses. The Commission believes that ISG plays an important role in information sharing among markets that trade the same securities, as well as related securities or futures on the same products.155 However, the information provided to ISG, which is drawn from each individual exchange’s audit trail and books and records, is not in any uniform or comparable format. In addition, information is only submitted to ISG upon a request by one of its members, and the information is not provided by ISG members in real time. Further, the operation of ISG is not subject to the Commission’s oversight, including approval of what, and how, information is collected from and shared across SROs. The Commission preliminarily believes that it is now appropriate to mandate a structure whereby the regulatory staff of all exchanges and FINRA, as well as the Commission, can directly access comprehensive uniform cross-market order and execution information in real time pursuant to Commission rule, rather than through an information-sharing cooperative governed only by contract.

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pubdate:  May 26, 2010 effdate: N/A +

E. Scalability of the EBS System and Rule 17a-25

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Basis for Proposed Rule, Scalability of the EBS System and Rule 17a-25 + Compliance User: Self-Regulatory Organizations + Keywords: + EBS System, + Rule 17a, + Broker-dealer, + +

Although the EBS system and Rule 17a-25 can be used to obtain information in conjunction with the SRO audit trail information, the Commission is concerned with the ability of the EBS system, as enhanced by Rule 17a-25, to keep pace with changes in the securities markets over recent years. Various changes in market dynamics have affected the utility of the EBS system and Rule 17a-25. For example, decimal trading has increased the number of price points for securities, and the volume of quotations and orders has correspondingly dramatically increased. Thus, the volume of transaction data subject to reporting under the EBS system can be significantly greater than the EBS system was intended to accommodate in a typical request for data. As a request-based system that is most useful when targeting trading in a specific security for a specific time, the EBS system is not well-suited as a broad-based tool to detect illegal or manipulative activity. The increased use of sponsored access (or other indirect access to an exchange) also has made it more difficult to use the EBS system and Rule 17a-25 to identify the ultimate customer that originates an order because the member broker-dealer through whom an order is sent to an exchange may not know the identity of the underlying customer.156

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In addition, the increasing number of alternative trading venues creates more opportunities for orders to be routed to other markets and thus can result in delays in producing EBS data as requests must be made to several broker-dealers in the “chain” of an order. Finally, the increased trading of derivative instruments and products also has affected the ongoing effectiveness of the EBS system and Rule 17a-25. A market participant can use derivative instruments and products as a substitute for trading in a particular equity, and likewise engage in illegal trading activity in derivative instruments and products. However, because information related to some derivative instruments over which the Commission has anti-fraud authority (such as security-based swaps) is not included within the EBS data or provided pursuant to Rule 17a-25, the EBS system and Rule 17a-25 are not effective tools for ascertaining activity in those markets or how that activity may be affecting the underlying equity market.157

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In the Commission staff’s experience, the EBS is most effective when investigating or analyzing trading in a small sample of securities over a limited period of time. But even under those circumstances, Commission staff often must make multiple requests to broker-dealers to obtain sufficient order information about the purchase or sale of a specific security to be able to adequately analyze the suspect trading. These multiple requests and responses can take a significant amount of time. The Commission preliminarily believes that the EBS system may no longer be able to fully support the regulatory challenges currently facing SRO and Commission regulatory staff.

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The consolidated audit trail that the Commission is proposing today would provide significant improvements in the order and execution information available to SRO and Commission staff in several discrete ways. Among other things, the proposed audit trail would require that national securities exchanges and national securities associations and their members submit uniform order and execution information to a central repository on a real time basis, where possible. National securities exchanges and associations, and their member firms, would be required to identify the person with investment discretion for the order, and beneficial account holder, if different, along with other key information about the customer or proprietary desk that placed or originated the order. The proposed consolidated audit trail also would cover any action taken with respect to the order through execution, or cancellation, as applicable, and thus would allow regulators to more easily trace the order from inception to cancellation or execution.158

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The Commission preliminarily believes that the proposed audit trail information would greatly enhance the ability of SRO staff to effectively monitor and surveil the securities markets on a real time basis, and thus to detect and investigate illegal activity in a more timely fashion, whether on one market or across markets. The Commission also preliminarily believes that the proposal would improve the ability of Commission and SRO staff to conduct more timely and accurate trading analysis, as well as to conduct more timely and accurate market reconstructions, complex enforcement inquiries or investigations, and inspections and examinations of regulated entities and SROs.

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pubdate: September 24, 2015 effdate: N/A -

B. Description of the Proposal

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Background and Description of the Proposal, Description of the Proposal +
pubdate:  May 26, 2010 effdate: N/A +

III. Description of Proposed Rule

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule Compliance User: Self-Regulatory Organizations Keywords: - Bidding Participant, + National Securities Exchanges, + National Securities Associations, + NMS Securities, + NMS Plan, + Rule 608, + +

To help address the deficiencies described above, the Commission is proposing to adopt a rule that would require national securities exchanges159 and national securities associations160 to create and implement a consolidated audit trail that captures customer and order event information, in real time, for all orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

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If adopted, the proposed Rule would require each national securities exchange and national securities association to file jointly with the Commission on or before 90 days from approval of this proposed Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.161 The NMS plan would be required to be filed with the Commission pursuant to, and subject to the requirements of, Rule 608 of Regulation NMS.162 As such, the proposed NMS plan would be published in the Federal Register and subject to public notice and comment in accordance with Rule 608(b). Further, the NMS plan filed pursuant to the proposed Rule, or any amendment to such a plan, would not become effective unless approved by the Commission or otherwise permitted in accordance with Rule 608.163

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The Commission would expect the exchanges and FINRA to cooperate with each other and to take joint action as necessary to develop, file, and ultimately implement a single NMS plan to fulfill this requirement. The Commission requests comment on this approach. Specifically, the Commission requests comment on whether requiring the exchanges and associations to act jointly by filing an NMS plan that would contain the requirements for a consolidated audit trail is the most effective and efficient way to achieve the objectives of a consolidated audit trail. Or, should the Commission require the exchanges and associations to standardize or otherwise enhance their existing rules? What approach would be most efficient in improving the ability to monitor cross-market trading, or undertake market analysis or reconstructions, and why?

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As discussed in further detail below, the proposed Rule would require that the NMS plan include provisions regarding: (1) the operation and administration of the NMS plan; (2) the creation and oversight of a central repository; (3) the data required to be provided by SROs and their members to the central repository; (4) clock synchronization; (5) compliance by national securities exchanges, FINRA, and their members with the proposed Rule and the NMS plan; and (6) the possible expansion of the NMS plan to products other than NMS securities.

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The proposed Rule is designed to allow the national securities exchanges and national securities associations to develop the details of the NMS plan that they believe should govern the creation, implementation and maintenance of the central repository and consolidated audit trail, within the parameters set forth in the proposed Rule. The Commission believes that the national securities exchanges and national securities associations working jointly are in the best position to propose for themselves and their members the specifics of how the consolidated audit trail should be structured and administered. To this end, the proposed Rule contains a broad framework within which the exchanges and associations would provide the details that they believe would result in a functional, cooperative mechanism to create and maintain a consolidated audit trail, as well as certain explicit requirements the NMS plan must meet. As noted above, the proposed NMS plan developed by the exchanges and FINRA would be subject to public comment and approval by the Commission.

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pubdate:  May 26, 2010 effdate: N/A +

A. Products and Transactions Covered

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Products and Transactions Covered + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + NMS Stocks and Listed Options, + NMS Securities, + Debt Securities, + FINRA, + Rule 10b, + Exchange Act - Section 9, + Sec Rule 613, + NBBO, + +

Proposed Rule 613 would apply to secondary market transactions in all NMS securities, which means NMS stocks and listed options.164 The Commission ultimately intends for the consolidated audit trail to cover secondary market transactions in other securities, including equity securities165 that are not NMS securities, corporate bonds, municipal bonds, and asset-backed securities and other debt instruments;166 credit default swaps, equity swaps, and other security-based swaps; and any other products that may come under the Commission's jurisdiction in the future. Further, the Commission preliminarily believes that it would be beneficial to provide for the possible expansion of the consolidated audit trail to include information on primary market transactions in NMS stocks and other equity securities that are not NMS stocks, as well as primary market transactions in debt securities.167 Such information could be used to monitor for violations of certain rules under the Exchange Act, such as Regulation M and Rule 10b-5 under the Exchange Act.168 Further, FINRA’s transaction reporting requirements for debt securities already cover primary market transactions in debt securities,169 and thus FINRA members should already be recording information relating to such transactions that could be included in an audit trail. The Commission proposes that the scope of the Rule initially be limited to secondary market transactions in NMS securities, however, to allow for a manageable implementation of the proposed consolidated audit trail, and because market participants already have experience with audit trails for these types of transactions in these securities.

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As discussed above, the Commission believes that implementing a consolidated audit trail for NMS securities would aid the SROs in more effectively and efficiently carrying out their regulatory responsibilities. It would also assist the Commission in carrying out its statutory responsibilities. The Commission further preliminarily believes that a timely expansion of the scope of the consolidated audit trail beyond NMS securities would be beneficial, as illegal trading strategies that the consolidated audit trail would be designed to help detect and deter, such as insider trading, may involve trading in multiple related products other than NMS securities across multiple markets.

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For example, the Commission routinely receives information relating to possible upward manipulation of security prices in violation of Sections 9(a) and 10(b) of the Exchange Act,170 and alleged abusive short selling in the over-the-counter market, which includes FINRA’s Bulletin Board and Pink Sheets. If the consolidated audit trail were expanded to cover these securities, it would be possible for SROs and the Commission to make comparisons between current and historical data in a more timely manner than is currently possible, to more quickly determine whether or not a complaint merits additional attention and the corresponding commitment of enforcement resources. Similarly, to the extent that instruments currently not considered NMS securities can be substitutes for long or short positions in NMS securities, having access to an audit trail that documents trading activity in such securities would improve the Commission's ability to make a risk assessment as to information it has received about possibly manipulative activity.171 Having ready access to this information in an audit trail also would improve the Commission's inspection process because it would enhance risk assessment and allow for better selection as to which broker-dealers to examine. For example, the information would allow for better trend analysis and outlier identification. It also would improve pre-examination work and the asset verification process,172 and focus document requests, making the examination process more efficient for the Commission staff and the registrants subject to the process.

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To help ensure that such an expansion would occur in a reasonable time and that the systems and technology that would be used to implement the Rule as proposed are designed to be easily scalable, proposed Rule 613(i) would require that the NMS plan contain a provision requiring each national securities exchange and national securities association that is a sponsor of the plan173 to jointly provide the Commission a document outlining how the sponsors could incorporate into the consolidated audit trail information with respect to: (1) equity securities that are not NMS securities; (2) debt securities, including asset-backed securities; and (3) primary market transactions in NMS stocks, equity securities that are not NMS securities, and debt securities. The sponsors specifically would be required to address, among other things, details for each order and reportable event that they would recommend requiring to be provided; which market participants would be required to provide the data; an implementation timeline; and a cost estimate.

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The Commission requests comment on the proposed scope of products to be covered by the consolidated audit trail. Should the consolidated audit trail initially cover securities other than NMS securities? Why or why not? The Commission also requests comment on whether the approach to expand the consolidated audit trail to include the products and transactions specified above represents an appropriate expansion of the consolidated audit trail, and what additional capital commitment would be required by the various market participants to implement such an expansion. Please be specific in your response with respect to different products or transactions (e.g. security-based swaps, or primary market transactions in NMS stocks). Are there other securities or products that should be identified and included in a future expansion? What would be the challenges to any expansion to the products and transactions listed above? Are there any other actions that the Commission or SROs would need to take to be able to expand the audit trail to certain products or transactions? Should the Commission consider expansion to certain products or transactions before others? The Commission also requests comment on an appropriate and realistic time frame for including these other products and transactions in the consolidated audit trail and whether an expansion should be done in phases.

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The Commission also requests comment on whether implementation of the proposed Rule, which would apply to NMS securities, would have an impact on trading activity by market participants in products not initially covered by the proposed Rule. The proposed consolidated audit trail is designed to provide the SROs and the Commission a tool to more effectively, and in a more timely manner, identify potential manipulative or other illegal activity. More timely detection and investigation of such activity may lead to greater deterrence of future illegal activity if potential wrongdoers perceive a greater chance of regulators identifying their activity in a more timely fashion. Do commenters believe that the existence of the proposed audit trail would alter market participants’ trading behavior, such as by shifting their trading to products or markets not covered by the proposed Rule to avoid detection of illegal activity using consolidated audit trail data? Would the proposal impact a market participant’s analysis of the potential risks and benefits of manipulative activity involving NMS securities? If so, how so? In addition, to the extent commenters believe that market participants may alter their trading behavior, such as by shifting trading to products that are not initially covered by the proposed Rule to avoid detection of manipulative activity, the Commission requests comment on the importance of expanding the consolidated audit trail to cover additional products.

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pubdate:  May 26, 2010 effdate: N/A +

B. Orders and Quotations

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Orders and Quotations + Compliance User: Self-Regulatory Organizations + Keywords: + Exchange Act - Section 9, + Sec Rule 613, + NBBO, + +

The proposed Rule would require that information be provided to the central repository for every order in an NMS security originated or received by a member of an exchange or FINRA. The proposed Rule would define “order” to mean: (1) any order received by a member of a national securities exchange or national securities association from any person; (2) any order originated by a member of a national securities exchange or national securities association; or (3) any bid or offer.174 Thus, the proposed consolidated audit trail would cover all orders (whether for a customer or for a member’s own account) as well as quotations in NMS stocks and listed options.175 Each member would be required to report to the central repository the origination of its own orders or quotations, and the SRO to which the member sends its orders and quotations would be required to report receipt and execution, if applicable, of those orders and quotations. Because the origination of the quotations would already be reported to the central repository by the member, an SRO would not be required to separately submit to the central repository its best bids and offers that it is required to submit to the central processors.176

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The Commission preliminarily believes that the inclusion of orders for a member's own account ("proprietary orders") and their bids and offers in the scope of the consolidated audit trail is necessary and appropriate to effectively and efficiently carry out the stated objectives of the consolidated audit trail. The SROs would not be able to use the consolidated audit trail data to surveil trading by broker-dealers through their proprietary accounts if that information is not included in the audit trail. Further, including proprietary orders and quotations in the consolidated audit trail would permit SROs to harness the intended benefits of the consolidated audit trail to more efficiently monitor for violations of SRO rules where the exact sequence of the receipt and execution of customers orders in relation to the creation and execution of proprietary orders or quotations is important to determine whether or not a violation occurred. For example, SROs would be able to use the consolidated audit trail data to more efficiently monitor for instances where a broker-dealer receives a customer order, then sends a proprietary order to one exchange or updates its quotations on an exchange prior to sending the customer order to another exchange, in possible violation of the trading ahead prohibitions in their rules.177

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Another example where information on proprietary orders or quotations would be useful to have included in the consolidated audit trail is in the investigation of a possible “spoofing” allegation. In those cases, a market participant enters and may immediately cancel limit orders or quotations in a specific security with the intent of having those non-bona fide orders or quotations change the national best bid and national best offer (“NBBO”). Because a market participant could conduct this activity across multiple markets, using different accounts, the lack of consolidated data makes it much more difficult to identify the source of the orders or quotations and thus to determine whether the quoted price was manipulated or simply responding to market forces. The Commission therefore preliminarily believes that having information on proprietary orders and quotations in the consolidated audit trail along with customer order information would greatly enhance the ability of the SROs to detect potentially violative activity.

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The Commission requests comment on its proposed definition of "order" and the scope of the proposed consolidated audit trail. Specifically, the definition would include orders received and originated by SRO members, as well as quotations originated by SRO members. Should it include quotations? Why or why not? Are there any differences between orders and quotations that should be taken into account with respect to the information that would be required to be provided to the central repository with respect to each bid or offer, or with respect to how, or which entity, should be required to report quotation information to the central repository? For example, the Commission understands that out-of-the-money options generate a high volume of automated quotation updates to reflect changes in the price of the underlying security, yet these series often have very little trading activity. Should this type of quotation be required to be submitted to the central repository? If not, is there any way to distinguish these quotations from other quotations that commenters believe should be reported, such as quotations generated by a profit-seeking algorithm? What is the magnitude of quotation data compared to order data and trade data, for both NMS stocks and listed options? Please provide any empirical data. Would there be a significant cost savings to the submission and collection of certain quotation information (for example, quotations in listed options) by end-of-day instead of in real time? If so, please quantify.

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The Commission also requests comment with respect to including proprietary orders as well as customer orders in the scope of the consolidated audit trail. Specifically, are there any differences between customer orders and proprietary orders that should be taken into account with respect to the information that would be required to be provided to the central repository with respect to proprietary orders? The Commission also requests comment on how, if at all, the consolidated audit trail should take into account instances where an SRO's quotations (which can include orders received from members as well as quotations) are not actionable, such as when an exchange has a systems failure. Should non-firm quotations be marked in the consolidated audit trail to show they are not firm? If so, how would that be accomplished where it is the exchange making the determination its quotations are not firm, not the member that submitted the order or quotation?

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pubdate:  May 26, 2010 effdate: N/A +

C. Persons Required to Provide Information to the Central Repository

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Persons Required to Provide Information to the Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + NMS Plan, + +

Proposed Rule 613 would require, through the mechanism of an NMS plan and exchange and association rules adopted pursuant to an NMS plan, national securities exchanges, national securities associations, and their respective members178 to provide certain information regarding each order and each reportable event179 to the central repository.180 The Commission notes that requiring all members to provide certain information would capture alternative trading systems (“ATSs”).181

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The Commission’s intent is to require any entity acting in a broker or dealer capacity that would receive an order from a customer or originate an order for its own account to provide information to the central repository. The Commission requests comment on whether requiring all members of each exchange and association to provide the required information would encompass all broker or dealers or other persons that would receive or originate orders, as defined in the proposed Rule. If not, why not? The Commission requests comment on whether it should, in the alternative, require all brokers and dealers registered with the Commission to provide such information, rather than all members of an exchange or association. Would applying the requirements to registered brokers and dealers encompass all persons that would be able to receive or originate orders as defined in the proposed rule? Are there persons that are not registered as a broker or dealer, and that are not a member of an exchange or association, that would still receive or originate orders in NMS securities? How should the Commission address that situation to promote inclusion of all relevant orders and executions in a consolidated audit trail?

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pubdate:  May 26, 2010 effdate: N/A +

D. Provision of Information to the Central Repository

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + NMS Plan, + NMS Securities, + Section III.D., + +

Proposed Rule 613(c)(1) generally would require the NMS plan to provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part). To effectuate this goal, proposed Rule 613(c)(2) would require the NMS plan to require each national securities exchange, national securities association, and member of such exchange or association to collect and provide to the central repository certain information with respect to orders in NMS securities.182

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Specifically, the proposed Rule would require the NMS plan to require each national securities exchange and its members to collect and provide to the central repository certain order information for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.183 The proposed Rule also would require the NMS plan to require each national securities association and its members to collect and provide to the central repository certain order information for each NMS security for which transaction reports are required to be submitted to the association.184 The Commission requests comment on whether requiring exchanges and their members, and associations and their members, to report information for orders for these securities to a central repository is appropriate, and whether the requirements, as proposed, would cover all NMS securities.185

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As discussed below in Section III.D.1., certain of the information would be required to be captured and transmitted to the central repository on a real time basis, meaning immediately and with no built in delay from when the reportable event occurs.186 Other information would be permitted to be captured and transmitted to the central repository promptly after the exchange, association, or member receives the information, but in no instance later than midnight of the day that the reportable event occurs or the exchange, association, or member receives such information.187 The data collected by the national securities exchanges, national securities associations, and their members would be required to be electronically transmitted to the central repository in a uniform electronic format.188

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pubdate:  May 26, 2010 effdate: N/A +
1. Information to be Provided to the Central Repository in Real Time
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time + Compliance User: Self-Regulatory Organizations + Keywords: + Section II.A, + SRO, + Proposed Rule 613, + NMS Plan, + +

As discussed above in Section II.A.4., the Commission preliminarily believes that requiring the submission of consolidated audit trail information on a real time basis would help enable more timely cross-market monitoring or surveillance and investigations of, or other responses to, market anomalies. Regulators therefore could more easily and quickly identify manipulative or other undesirable activity. Having the information available in real time would allow the staff of the SROs to run certain cross-market surveillances in real time to ascertain whether anomalous trading activity is occurring, and the SROs could then more quickly begin an investigation into the suspected anomalous trading. Timely pursuit of potential violations can be important in seeking to freeze any profits received from illegal activity before they are spent or otherwise become unreachable (for instance, by being transferred out of the country). The Commission also preliminarily believes that requiring the submission of audit trail information in real time would enable the Commission to access the information on a more timely basis than currently is the case, to support its examination and enforcement activities, as well as its analysis of market activity.189

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The Commission requests comment as to whether it is feasible to require the submission of the proposed audit trail information, as detailed below, to the central repository on a real time basis. If the information is not submitted on a real time basis, when should the information be submitted to the central repository? Would real time order and execution information be useful for cross-market surveillance and investigations of market anomalies? If so, how? If not, why not? Please discuss the costs and benefits of recording and transmitting the data in real time, or not in real time. For example, how would costs differ between submitting end-of-day data compared to real time data? Are there categories of information that would be easier to produce on a real time basis than others? What types of systems modifications by the exchanges, FINRA, and their respective members would be necessary to collect and submit the required audit trail information to the central repository on a real time basis? Please respond with specificity. The Commission further requests comment on whether the requirement to report information in real time should be limited to a specific time period during the day, such as when the markets for trading NMS stocks and listed options are open for trading? Or some other time period? How much lower would the cost be to submit data in real time during trading hours than during the whole day? Or some other time period? Are there practical issues with requiring real time reporting throughout the day? Would requiring data to be submitted in real time all day, as proposed, allow the ability to perform systems maintenance if necessary? If commenters support the requirement to report information in real time, do they believe that there are times during the day when real time reporting may be unnecessary? Why or why not?

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Proposed Rule 613(c)(3) would require the NMS plan to require each exchange, association, and member to collect and provide to the central repository on a real time basis details for each order and each reportable event,190 as outlined below. Each exchange, association, or member would be required to report the information for each order, for each reportable event, only with respect to an action taken by the exchange, association, or member. For example, if a member receives an order from a customer, the member would be required to report the receipt of that order (with the required information) to the central repository. If the member then routed that order to an exchange for execution, the member would be required to report the routing of that order (with the required information) to the central repository. Likewise, the exchange would be required to report the receipt of that order from the member (with the required information) to the central repository. If the exchange executed the order on its trading system(s), the exchange would be required to report that execution of the order (with the required information) to the central repository, but the member would not also be required to report the execution of the order to the central repository. If the member executed the order in the over-the-counter market, however, rather than routing the order to an exchange (or other market center) for execution, the member would be required to report the execution of the order to the central repository.

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+ i. Customer Information + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time, Customer Information + Compliance User: Self-Regulatory Organizations + Keywords: + Section II.A, + Rule 17a-25, + Audit Trail Information, + NMS Plan, + +

The proposed Rule specifically would require, for the receipt or origination of each order, information to be reported to the central repository with respect to the customer that generates the order -- specifically, the beneficial owner(s) of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner.191 As discussed above in Section II.A.1, such information generally is neither required nor captured on existing audit trails. While Rule 17a-25 requires broker-dealers to electronically submit information about customer and proprietary securities trading, such information is required to be submitted to the Commission only upon request. The Commission preliminarily believes that the usefulness of audit trail information for purposes of effective enforcement and cross-market surveillance of trading activity would be greatly improved by having the identity of the customer electronically attached to the report of the receipt or origination of each order that is sent to the central repository.192

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The proposed Rule would require that the NMS plan require, for the receipt or origination of an order, the provision to the central repository of information of sufficient detail to identify the customer.193 The Commission preliminarily believes that the customer name and address would be sufficient detail to identify the customer. In addition, the proposed Rule would require the provision of customer account information, which would be defined in proposed Rule 613(j)(2) to include but not be limited to: (1) the account number; (2) account type (e.g. options); (3) customer type (e.g., retail, mutual fund, broker-dealer proprietary); (4) the date the account was opened; and (5) the large trader identifier (if applicable).194 The Commission preliminarily believes that information on the type of account and when it was opened would be important to investigations of potential insider trading. For example, knowing when in time the customer opened the account in relation to the suspicious trading activity, or whether the customer changed account authorization to permit options trading just before suspicious options trading, could be evidence of intent. The Commission notes that currently any member receiving orders from a customer would be required, as part of its compliance with its books and records requirements,195 to take reasonable and appropriate steps to ensure the accuracy of the customer information received. This should not change, if this proposal were adopted, with respect to customer information recorded and provided to the central repository.

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The proposed Rule also would require a unique customer identifier for each customer.196 The unique customer identifier should remain constant for each customer, and have the same format, across all broker-dealers. This unique customer identifier would serve a similar purpose to a customer’s social security number or tax identification number, obviating the need to include that information in the consolidated audit trail data. The Commission is not proposing to mandate the method for achieving this requirement, so as to allow those entities subject to the proposed Rule flexibility to determine the most practical way to accomplish the requirement of having unique customer identifiers. However, one alternative could be to have the central repository be responsible for assigning a unique customer identifier in response to an input by a member of a customer’s social security number or tax identification number. If the customer already has been assigned a unique identifier because of a prior request by another member, the central repository would provide to the member that same identifier. If no unique identifier has previously been assigned, the central repository could assign a new one. Access to this part of the central repository’s functionality could be more tightly controlled than access to the consolidated audit trail data, to help ensure the confidentiality of the social security or tax identification numbers.

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The Commission requests comment as to whether each item of information regarding the customer is necessary for an effective consolidated audit trail. Is there any additional data that should be included to help identify the customer submitting the order? The Commission also requests comment on the proposed definition of customer. For example, should the definition only include the person exercising investment discretion? Should the definition include the beneficial owner? Should the customer information requirement also include a unique identifier for the particular computer algorithm used by the firm to generate the order, if applicable? Is there a better way to identify in the audit trail individual algorithmically-generated trading strategies? Should each trading desk at a member be required to have its own unique customer identifier, to the extent the trading desk is originating orders for the account of the member? This information on specific algorithms or trading desks could be useful to focus an inspection or investigation, if regulators could tell from the audit trail data that there was a pattern of suspicious trading activity from a specific algorithm or desk.

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The Commission requests comment as to what systems modifications, if any, would be required for members to collect and to provide this customer identification information to the central repository. Do broker-dealers currently keep this information electronically? If not, what changes would need to be made to collect and provide this information for existing accounts to the central repository? What would be the cost of converting this information into an electronic, accessible and linked format? Please be specific in your response. Further, the Commission requests comment on whether there are laws or other regulations in non-U.S. jurisdictions that would limit or prohibit a member from obtaining the proposed customer information for non-U.S. customers. If so, what are they? How do members currently obtain such information for such customers? If there are special difficulties in obtaining customer information from non-US jurisdictions, how should the consolidated audit trail be modified or otherwise reflect that difficulty?

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The Commission requests comment on other possible ways to develop and implement unique customer identifiers. For example, who should be responsible for generating the identifier? The Commission also requests comment on whether a unique customer identifier, together with the other information with respect to the customer that would be required to be provided under the proposed Rule, is sufficient to identify individual customers. Are there any concerns about how the customer information will be protected? If so, what steps should be taken to ensure appropriate safeguards with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository.

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In addition, the Commission requests comment on whether the requirement to provide customer information to the central repository in real time would impact market participants' trading activity? If so, how so? For example, would market participants be hesitant to engage in certain legal trading activity because of a concern about providing customer information in real time? Would market participants shift their trading activity to products or markets that do not require the capture of customer information to avoid compliance with this requirement of the proposed Rule? If so, how should the Commission address those concerns? On the other hand, would enhanced surveillance of the markets as a result of the consolidated audit trail attract additional trading volume to the U.S. markets?

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+
+ ii. National Securities Exchange, National Securities Association and Broker-Dealer Identifier Information + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time, National Securities Exchange, National Securities Association and Broker-Dealer Identifier Information + Compliance User: Self-Regulatory Organizations + Keywords: + Rule 604 of Regulation NMS, + SRO, + +

Each member originating or receiving an order from a customer, and each national securities exchange, national securities association, and member that subsequently handles the order, would be required to include its own unique identifier in each report it sends to the central repository for a reportable event. Such an identifier would allow the Commission and SRO staff to determine which member facilitated the transaction and assist in assessing compliance with various SRO or Commission rules, such as the limit order display rule (Rule 604 of Regulation NMS).197 This is especially important for ensuring that individual customer orders are handled and executed in accordance with SRO and Commission rules. In addition, routing decisions are an important aspect in assessing order execution quality and compliance with a member’s duty of best execution. Further, if applicable, the member receiving an order from a customer would be required to report an identifier specifying the branch office and the registered representative at the member receiving the order. These identifiers would be unique to the exchange, association, member, branch office, and registered representative.

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The proposed Rule would not require that these unique identifiers "travel" with an order throughout its life, but would require that the unique identifier of each member or SRO that is taking an action with respect to the order be attached to the report of each reportable event that the member, exchange or association is reporting to the central repository. Each report in the life of the order would be able to be linked together at the central repository through the unique order identifier. Therefore, the Commission preliminarily does not believe that the unique identifier of each member or market that touches an order needs to travel with the order for the life of the order as long as the unique identifier of the member or exchange taking the action is included. For example, if Member A receives an order from a customer, Member A would be required to report the receipt of that order to the central repository and include Member A's unique identifier. If Member A then routed that order to another member, Member B, Member A would be required to report the routing of that order to the central repository and include Member A's unique identifier as well as the unique identifier of Member B. Likewise, Member B would be required to report the receipt of that order from Member A to the central repository and include the unique identifiers of Member A and Member B. If Member B then routed the order to Exchange A for execution, Member B would be required to report the routing of the order to the central repository and include the unique identifier of Member B and Exchange A, but not Member A.

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The Commission requests comment as to who should be responsible for generating unique identifiers for national securities exchanges, national securities associations, and their members. Would it be feasible for each national securities exchange, national securities association, or member to develop its own identifier for this purpose? The Commission also requests comment on the level of specificity for each unique member identifier – should it be designed to identify the firm, trading desk or individual registered representative? What are the advantages or disadvantages of requiring a unique identifier that would allow identification of an individual registered representative as opposed to just the member entity? The Commission also requests comment on procedures or safeguards market participants believe are necessary or appropriate so that these unique identifiers are routed accurately.

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+ iii. Receipt or Origination of an Order + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time, Receipt or Origination of an Order + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + FINRA, + Material Terms of the Order, + NMS security symbol, + Exchange Act - Rule 17a-25, + +

The proposed Rule would require the NMS plan to require members of each of the exchanges and FINRA to collect and provide to the central repository certain key items of information about an order as soon as the member receives or originates an order, including the customer information as described above. The proposed Rule would require the member to report the date and time (to the millisecond) that an order was originated or received.198 The member also would be required to report the material terms of the order.199 Material terms of the order would be defined to include, but not be limited to, the following information: (1) the NMS security symbol; (2) the type of security; (3) price(s) (if applicable); (4) size (displayed and non-displayed); (5) side (buy/sell); (6) order type; (7) if a sell order, whether the order is long, short, or short exempt;200 (8) if a short sale, the locate identifier; (9) open/close indicator; (10) time in force (if applicable); (11) whether the order is solicited or unsolicited; (12) whether the account has a prior position in the security; (13) if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and (14) any special handling instructions.201

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The information described would assist the SROs, and the Commission as well, in determining the exact time of order receipt or origination, as well as provide a record of all of the original material terms of an order. The entry time of orders can be critical information in enforcement cases. In insider trading investigations, for example, the entry time of the order may be a critical piece of evidence in determining whether or not an individual acted with the requisite scienter to violate the federal securities laws. Similarly, in investigating possible market abuse violations, such as trading ahead of a customer order, the relationship between order origination, the terms of the order, and order entry of various other orders on multiple venues, may be at issue. As noted above, requiring that the time of a reportable event be reported in milliseconds is consistent with current industry standards. The Commission requests comment on whether this is an appropriate time standard. Do commenters believe that the time standard should be shorter? If so, what should be the standard, and why? Would requiring a shorter time standard for reporting actually provide more precision in the timing of events? How would your answer be impacted by the extent to which market participants’ clocks are synchronized? Alternatively, do commenters believe that it would be more appropriate to require in the proposed Rule that the time of reporting be consistent with industry standards, rather than including a specific time standard (recognizing that the SROs could choose to include a specific time standard in the NMS plan)?

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An open/close indicator currently is required to be submitted to exchanges for listed option orders202 and indicates whether the trade is opening a new position or increasing an existing position rather than closing or decreasing an existing position. The open/close indicator provides information to more easily track the size and holding time for individual positions, and thus to more easily track open interest and short interest. In addition, an open/close indicator could be used to indicate when a buy order in a stock is a buy to cover on a short sale. This information is useful in investigating short selling abuses and short squeezes. For example, a build up of a large short position by one investor along with the spreading of rumors may be indicative of using short selling as a tool to potentially manipulate prices. Information on when the position decreases is also useful for indicating potential manipulation, insider trading, or other rule violations. Information on whether the account has a prior position in the security is useful in a number of investigations. For example, the ability to easily determine whether an order adds to a position, along with the timing of the order, is particularly important in detecting and investigating portfolio pumping or marking the close. Also, information on whether the account has a prior position may be important in investigating “layering” or “spoofing.” Layering and spoofing are manipulations where orders are placed close to the best buy or sell price with no intention to trade in an effort to falsely overstate the liquidity in a security.

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The Commission intends that the items of information required to be reported to the central repository for the receipt or origination of an order, at a minimum, include substantially all of the information currently required to be reported, or provided upon request, under the exchanges’ and FINRA’s existing order audit trail rules, as well as the EBS system rules and Rule 17a-25 under the Exchange Act. The Commission requests comment as to whether there are any items of information that are required to be recorded and reported by existing audit trail rules, or to be provided to the SROs or Commission upon request, that are not included within the proposed Rule that commenters believe should be included. If there are, please identify each item of information and discuss why you believe that such information should be included in the proposed consolidated audit trail. The Commission also requests comment on whether there are items of information included in the current SRO audit trails, and which are proposed to be included in the consolidated audit trail, that are unnecessary for surveillance, investigative or other regulatory purposes. If so, what are these data elements and why are they not necessary as part of a consolidated audit trail? Are they relevant for other purposes? The Commission further requests comment on whether it should require, as part of the disclosure of special handling instructions, the disclosure of an individual algorithm that may be used by a member or customer to originate or execute an order, and if so, how such an algorithm should be identified.

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As noted above, members currently are required to indicate whether an order would open or close a position for listed options.203 The Commission requests comment as to what extent members currently obtain or have access to this information from their customers, or track this information for their own proprietary orders, for all NMS securities. If members currently do obtain this information, is the information collected and stored electronically? If members currently do not have access to or obtain this information for customer orders, what would be the impact of the proposed requirement to collect and provide this information to the central repository? What would be the costs, if any, of collecting and providing this information? Please explain and quantify any potential impact or costs.

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The proposed Rule does not specify exact order types (e.g., market, limit, stop, pegged, stop limit) to be included as material terms of an order because order types may differ across markets, and even an order type with the same title may have a different meaning from one exchange to another. Further, markets are frequently creating new order types and eliminating existing order types. In addition, the Commission notes that it may be difficult to distinguish between an “order type” and a special handling instruction, such as “do not display.” The Commission therefore preliminarily believes that it would not be practical to include in the proposed Rule a list of order types in the required information to be reported to the central repository. The Commission notes, however, that the SROs may choose to include more detail in the NMS plan. The Commission requests comment on this approach. The Commission also requests comment as to whether there are other items of information that would be required to be reported to the central repository that have, or may have, different meanings across different exchanges. If so, what are they? How should these differences be addressed in the proposed Rule?

+

The proposed Rule also would require the NMS plan to require each member of an exchange or FINRA to “tag” each order received or originated by the member with a unique order identifier that would be reported to the central repository and that would stay with that order throughout its life, including routing, modification, execution, and cancellation.204 The members, exchanges, and FINRA would be required to pass along the unique order identifier with the order when routing the order, and the unique order identifier would be required on each reportable event report. For example, Member ABC that receives an order from a customer would immediately assign it a unique order identifier, and would report that identifier to the central repository along with the rest of the required information. If Member ABC subsequently routed the order to another member, Member DEF, Member ABC would be required to pass along to Member DEF the unique order identifier, as well as to attach the unique order identifier when reporting the routing of the order to the central repository. If Member DEF routed the order to Exchange A for execution, Member DEF would pass along to Exchange A with the order the unique order identifier, and would attach the identifier on the report of the route sent to the central repository. Exchange A would be required to attach the unique order identifier when reporting receipt of the order, and an execution of the order (if applicable) to the central repository.

+

The Commission recognizes that the reality of how orders are routed and executed often is complex, and that it likely is not feasible to anticipate how the proposed requirement for a unique order identifier would or would not apply to each different factual scenario. For example, members may often execute customer orders on a “riskless principal” basis,205 rather than on an agency basis. The Commission preliminarily believes that it would not be practical or feasible to "link" through related unique order identifiers the customer order(s) and the member's proprietary order(s) from which the customer order is given an allocation. Rather, the Commission envisions that the member would create a new unique order identifier for each proprietary order, and that the manner in which the execution of the customer order would be “linked” with one (or more) proprietary order(s) (if at all) would be through the inclusion of the unique order identifier for the contra-side order(s) on the report of the execution of the customer order sent to the central repository.206 However, in a situation where a member merely broke up a larger customer order into smaller orders and sent those orders, on an agency basis, to multiple markets for execution, the Commission preliminarily believes that the unique order identifier of the original customer order should carry through in some manner to the individual smaller orders that result when the original order is broken up. For example, it may be necessary to attach two unique order identifiers to an order – the original order identifier (i.e. parent order) and the individual smaller order identifier (i.e. child order). Alternatively, the unique order identifier of the parent order could be modified to carry through to the child orders (for example, the parent order could have an identifier ABC and the child orders could have identifiers of ABC1 and ABC2).

+

The Commission preliminarily believes that a unique order identifier that is essentially transferred along with an order from origination through execution or cancellation is useful for a consolidated audit trail. The use of such an identifier would allow the SROs and the Commission to efficiently link all events in the life of an order and help create a complete audit trail across markets and broker-dealers that handle the order. In this manner, being able to link the parent order with the child orders through the unique order identifiers would allow for ease of tracking of the original parent order throughout its life. While the Commission believes that a unique order identifier is an important data element for the consolidated audit trail, the Commission is not proposing at this time to mandate the format of such an identifier or how the identifier would be generated.

+

The Commission requests comment on whether, and why, a unique order identifier that would stay with the order for the life of the order is useful or essential for an effective consolidated audit trail. In addition, the Commission requests comment on whether there is an alternative to a unique order identifier that would stay with the order for the life of the order. For example, would permitting each member or SRO that receives an order from another member or SRO to attach its own unique identifier to an order allow the SROs to efficiently link all events in the life an order and ensure the creation of a complete audit trail across each market and broker-dealer that handled the order? The Commission requests comment on the feasibility and merits of the manner in which it proposes unique order identifiers be handled for riskless principal transactions. The Commission also requests comment on the feasibility and merits of requiring that a unique order identifier be attached to an order, as well as the multiple orders that may result if the original order is subsequently broken up into several orders, in a manner that would permit regulators to trace the subsequent orders back to the original single order. The Commission also requests comment on the feasibility and merits of requiring that a unique order identifier be attached to an order that is the result of a combination of two more orders in a manner that would permit regulators to trace the combined order back to its component orders. The Commission further requests comment as to how unique order identifiers could be generated for both electronic and manual orders, and who should be responsible for generating them. Given the significant number of orders (including quotations) for which information would be required to be collected and provided to the central repository pursuant to the proposed Rule, the Commission requests comment on the feasibility of allowing unique order identifiers to be reused. If unique order identifiers were to be re-used, at what point should that be allowed? Are there any concerns with re-use that should be addressed? Additionally, the Commission requests comment on whether it is feasible to require unique order identifiers if the consolidated audit trail is implemented in the proposed phased approach? For example, is it appropriate to require that national securities exchanges and national securities associations comply with this requirement before their members are required to do so?

+

The Commission also requests comment on procedures or safeguards market participants may wish to establish to ensure that unique order identifiers are routed and reported accurately. Further, the Commission requests comment on what systems modifications, if any, would be required in order to “tag” every order with a unique order identifier. Please respond to each question with specificity.

+
+
+ iv. Routing + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time, Routing + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Unique Identifier of Broker-Dealer, + Material Terms of the Order, + Consolidated Audit trail, + +

The proposed Rule would require that the NMS plan require the collection and reporting to the central repository of all material information related to the routing of an order. Specifically, the proposed Rule would require the reporting of the following information each time an order is routed by the member or SRO that is doing the routing: (1) the unique order identifier; (2) the date on which an order was routed; (3) the exact time (in milliseconds) the order was routed; (4) the unique identifier of the broker-dealer or national securities exchange that routes the order: (5) the unique identifier of the broker-dealer or national securities exchange that receives the order; (6) the identity and nature of the department or desk to which an order is routed if a broker-dealer routes the order internally;207 and (7) the material terms of the order.208

+

Further, the proposed Rule would require the collection and reporting by the SRO or member receiving an order of the following information each time a routed order is received: (1) the unique order identifier; (2) the date on which the order is received; (3) the time at which the order is received (in milliseconds); (4) the unique identifier of the broker-dealer or national securities exchange receiving the order; (5) the unique identifier of the broker-dealer or national securities exchange routing the order; and (6) the material terms of the order.209

+

This information would allow regulatory staff to easily identify each member or exchange that “touches” the order during its life, as well as the dates and times at which each member or exchange receives and reroutes the order, and any changes that may be made to the original terms of the order along the way. The Commission preliminarily believes that this information for orders that are routed would allow the Commission and SROs to efficiently track an order from inception through cancellation or execution.

+

The Commission requests comment as to whether such information regarding the routing of orders is useful or necessary for an effective consolidated audit trail. Should any additional information be included in the consolidated audit trail relating to routing? The Commission requests comment as to what systems modifications, if any, would be required to provide this information. Do members currently have, or have access to, this information? If not, what changes would need to be made to collect this information for existing accounts for submission to the central repository? Do commenters believe that it would be necessary to achieve the purposes of the proposed Rule to require information from each member or SRO that “touches” an order? Please explain with specificity why or why not. Is it feasible to require information relating to the routing of orders if the consolidated audit trail is implemented in the proposed phased approach? For example, is it appropriate to require that national securities exchanges and national securities associations comply with this requirement before their members are required to do so?

+
+
+ v. Modification, Cancellation, and Execution + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Provided to the Central Repository in Real Time, Modification, Cancellation, and Execution + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Unique Identifier, + Order Modification, + Cancellation, + Central Repository, + OPRA Plan, + +

The proposed Rule would require the NMS plan to require that information be reported to the central repository concerning any modifications to the material terms of an order or partial or full order cancellations. The national securities exchange, national securities association, or member handling the order at the time would be required to immediately report to the central repository the following information: (1) the unique order identifier, (2) the date and time (in milliseconds) that an order modification or cancellation was originated or received; (3) the identity of the person responsible for the modification or cancellation instruction; (4) the price and remaining size of the order, if modified; and (5) other modifications to the material terms of the order.210 Information pertaining to order modifications and cancellations would assist the Commission and SROs in identifying all changes made to an order and the persons and broker-dealers responsible for the changes.

+

The proposed Rule also would require the following information on full or partial executions of orders to be collected and reported to the central repository: (1) the unique order identifier; (2) the execution date; (3) the time of execution (in milliseconds); (4) the capacity of the entity executing the order (whether principal, agency, or riskless principal); (5) the execution price; (6) the size of the execution; (7) the unique identifier of the national securities exchange or broker-dealer executing the order;211 and (8) whether the execution was reported pursuant to an effective transaction reporting plan or pursuant to the OPRA Plan, and the time of such report.212

+

The Commission preliminarily believes that the required execution information, in combination with the proposed information pertaining to order receipt or origination, modification, or cancellation, would provide regulators with a comprehensive, near real time view of all stages and all participants in the life of an order. The proposed Rule would allow the Commission and SROs to identify, for a particular transaction, every member and national securities exchange involved in the receipt or origination, routing, modification, and execution (or cancellation) of the order. This order information, including the readily accessible customer information, should help regulators investigate suspicious trading activity in a more timely manner than currently possible.

+

Additionally, the requirement to report whether and when the execution of the order was reported to the consolidated tape213 should allow regulators to more efficiently evaluate certain trading activity. For example, trading patterns of reported and unreported transactions may cause the staff of an SRO or the Commission to make further inquiry into the nature of the trading to determine whether the public was receiving accurate and timely information regarding executions and that market participants were continuing to comply with the trade reporting obligations under SRO rules. Similarly, patterns of reported and unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. Being able to more efficiently compare the consolidated order execution data with the trades reported to the consolidated tape could thus be an important component of overall surveillance activity.

+

As discussed above, the Commission recognizes that the execution of orders often is complex.214 For example, a customer order may be executed on a riskless principal basis. When a member receives a customer order, rather then sending the customer order as an agency order to an exchange or other marketplace for execution, the member creates an order for its proprietary account that it sends to an exchange or other marketplace to be executed. Once an execution occurs in the proprietary account, the member would then execute the customer order against its proprietary account. This process can be complicated by the member receiving and handling more than one customer order at a time, and creating one or more proprietary orders to send to one or more markets, and the manner in which the member allocates executions from its proprietary account among the customer orders. Each proprietary order would have a unique order identifier that is different from, and not linked to, the unique order identifier for the original customer order. How should the reporting to the central repository of the execution of the proprietary orders and the customer order be handled? As noted above, the Commission envisions that the manner in which the execution of the customer order would be “linked” with one (or more) of the proprietary order(s) would be through the inclusion of the unique order identifier for the contra-side order(s) on the report of the execution of the customer order sent to the central repository.215 Is this practical? Is there another method by which to link the execution of the customer order to the proprietary orders? Is it necessary to do so to achieve the purposes of the consolidated audit trail?

+

The Commission requests comment on whether the information proposed to be collected and reported would be sufficient to create a complete and accurate audit trail. Is there additional information that should be collected and reported? If yes, please describe the information and the value its collection and reporting would add to the consolidated audit trail.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Information to be Collected Other Than in Real Time
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Provision of Information to the Central Repository, Information to be Collected Other Than in Real Time + Compliance User: Self-Regulatory Organizations + Keywords: + Order and Execution Information, + National Securities Exchange, + National Securities Association, + broker-dealers, + +

While the majority of order and execution information would be required to be transmitted to the central repository on a real time basis, the Commission recognizes that this may not be practical or feasible for all information because the information may not be known at the time of the reportable event.216 Thus, the Commission is proposing that certain information be transmitted to the central repository promptly after the national securities exchange, national securities association, or member receives the information, but in no instance later than midnight of the day that the reportable event occurs or the national securities exchange, national securities association, or member receives such information.217 The Commission preliminarily believes that this proposed time frame would provide sufficient time for an exchange, association, or a member to obtain the information required to be reported while still allowing regulators to access the information for regulatory purposes on a more timely basis than today.

+

Each national securities exchange, national securities association and their members would be required to report the account number for any subaccounts to which an execution is allocated.218 By requiring that this data be included in the consolidated audit trail, regulators would be able to more easily identify the “ultimate” customer for the trade. The Commission preliminarily believes that it would be useful to know the account number as well as the required information on the beneficial owner. For example, a person or groups of persons could trade through a single account or numerous accounts. Because individual traders may use multiple accounts at multiple broker-dealers, being able to identify the beneficial owner of the underlying accounts aids in the identification and investigation of suspicious trading activity. Similarly, traders may seek to hide manipulative activity from regulatory oversight by trading anonymously through omnibus accounts. In those instances, linking the trade to the individual trader requires the market center to be able to identify both the accounts trading and the beneficial owner or owners of those accounts to determine what person or group of persons is directing the specific trades at issue. Requiring the identity of the ultimate customer electronically to be attached to each order would make this information easily accessible and searchable and thus would greatly improve the usefulness of audit trail information for purposes of effective enforcement and cross-market surveillance.

+

Each national securities exchange, national securities association and their members also would be required to report the unique identifier of the clearing broker or prime broker for the transaction, if applicable, and the unique order identifier of any contra-side order.219 Finally, if the execution is cancelled, a cancelled trade indicator would be required to be reported. In addition, the proposed Rule also would require the reporting of any special settlement terms for the execution, if applicable; short sale borrower information and identifier; and the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid.220

+

Broker-dealers have a duty of best execution.221 Since commissions can be charged either explicitly through a separate fee or implicitly in the transaction price, the lack of easily accessible commission fee data alongside transaction price data may make it hard to identify the “all-in” price of execution and, thus, hard to determine whether the obligation to seek best execution was met.222 In addition, broker-dealers also must comply with just and equitable principles of trade under NASD rules that require them to charge fair commissions and mark-ups (mark-downs), and the lack of easily accessible commission fee data may make it hard to determine whether just and equitable principles of trade have been observed.223 Also, FINRA rules prohibit certain quid pro quo arrangements in the distribution of IPOs.224

+

The Commission requests comment on the usefulness and necessity of requiring the reporting of each of these items of information to achieve the stated objectives of the consolidated audit trail. Are there practical difficulties associated with providing this information as proposed? Is there additional information that would be useful or necessary in this regard? For example, the proposed Rule would require the reporting of a cancelled trade indicator, for executions that are cancelled. Should the proposed Rule require separate identification of trades that are broken pursuant to the rules of the applicable SRO at the request of one party to a transaction or upon the SRO's own motion, and trades that are cancelled by mutual agreement of the parties? Why or why not? The Commission also requests comment on whether the proposed requirement to report the identity of the clearing broker would provide sufficient information on "give-up" arrangements,225 or whether additional information should be required to be reported.

+

The Commission requests comment on the proposed time frame for reporting of this information. The Commission is proposing that the information not required to be reported in real time be reported promptly after receipt, but in no event later than midnight on the day the reportable event occurs or the exchange, association, or member receives the information. While one of the objectives of the proposed Rule is to collect data on a real time basis, the Commission understands that certain information may not be available at the time of the reportable event (e.g., the execution or cancellation). The Commission, however, believes such information should be provided promptly after receipt, meaning as soon as possible given the capabilities of a market participant’s systems. While the Commission is proposing that the information be reported promptly, the proposed Rule also would provide an objective time limit for providing the information – no later than midnight on the day the event occurs or the information is received by the exchange, association, or member. Is the proposed time frame reasonable with respect to the information that would be required to be reported? Should the proposed Rule only require that information be reported promptly after receipt? How should promptly be measured? Alternatively, should the proposed Rule only require that information not available at the time the reportable event occurs be reported no later than midnight on the day the information was received? How would this standard impact the usefulness of the consolidated audit trail?

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

E. Clock Synchronization

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Clock Synchronization + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + National Institute of Standards and Technology, + +

The Commission believes that clock synchronization is necessary to ensure an accurate audit trail, given the number of market participants with internal order handling and trading systems that would be reporting information to the central repository. Therefore, proposed Rule 613(d) would provide that the NMS plan filed with the Commission include a requirement that each national securities exchange and national securities association, and their members, synchronize their business clocks that are used for the purposes of recording the date and time of any event that must be reported under the proposed Rule. The proposed Rule would require each exchange, FINRA, and their members to synchronize their clocks to the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards.226 Exchanges, associations, and the members would be required to synchronize their business clocks in accordance with these requirements within four months after effectiveness of the NMS plan.227

+

The Commission is not proposing to set a standard within which the clocks must be synchronized to the NIST (e.g., to within one second of the NIST clock), in recognition of how quickly technology can improve and increase the speed at which orders are handled and executed. Rather, the Commission is proposing that the clocks be synchronized “consistent with industry standards.” The exchanges and FINRA would be able, however, to set a limit in the NMS plan to be filed with the Commission. Also, in recognition of the pace at which technology improves, the proposed Rule provides that the NMS plan shall require each national securities exchange, national securities association, and its respective members to annually evaluate the actual synchronization standard adopted to consider whether it should be shortened, consistent with changes in industry standards.228 When engaging in this annual evaluation, exchanges, associations, and members could take into account the feasibility of shortening the time standard, and whether shortening the standard would allow for the conveyance of additional meaningful information to the consolidated audit trail.

+

The Commission requests comment on whether this approach is practical and would provide for sufficient flexibility in determining how closely to synchronize clocks. Is the proposed Rule’s requirement that each exchange, association, and member synchronize its clocks in accordance with the time maintained by NIST reasonable? To what extent do SROs and their members currently synchronize clocks? Please answer with specificity. Would synchronization as proposed require significant systems modifications on behalf of national securities exchanges, national securities association, or their respective members? Is it reasonable to require clocks to be synchronized with the time maintained by NIST within a time frame that is “consistent with industry standards”? Is there another standard that should be used by the Commission? The Commission also requests comment on the feasibility of requiring the exchanges, FINRA, and their members to comply with these requirements within four months of effectiveness of the NMS plan.

+
+
pubdate:  May 26, 2010 effdate: N/A +

F. Central Repository

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + NMS Plan, + +

The proposed Rule would require that the NMS plan provide for the creation and maintenance of a central repository, which would be a facility of each exchange and FINRA.229 The central repository would be jointly owned and operated by the exchanges and FINRA, and the NMS plan would be required to provide, without limitation, the Commission and SROs with access to, and use of, the data reported to and consolidated by the central repository for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. Each of the exchanges and FINRA would be a sponsor of the plan,230 and as such would be responsible for selecting a plan processor to operate the central repository.231

+

The Commission requests comment on the need for a central repository to receive and retain the consolidated audit trail information. Are there alternatives to creating a central repository for the receipt of order audit trail information? The Commission also requests comment on whether it is practical or appropriate to require the exchanges and FINRA to jointly own and operate the central repository.

+
pubdate:  May 26, 2010 effdate: N/A +
1. Responsibilities of Central Repository to Collect, Consolidate, and Retain Information
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Central Repository, Responsibilities of Central Repository to Collect, Consolidate, and Retain Information + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + NMS Plan, + NBBO, + Rule 601, + Rule 611, + +

The central repository would be responsible for the receipt, consolidation, and retention of all data submitted by the national securities exchanges, national securities associations and their members pursuant to the proposed Rule and the NMS plan.232 Further, the central repository would be required to collect from the central processors and retain on a current and continuous basis the NBBO for each NMS security, transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS, and last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS.233 The central repository would be required to maintain this NBBO and transaction data in a format compatible with the order and event information reported pursuant to the proposed Rule.

+

This requirement is intended to allow SRO and Commission staff to easily search across order, NBBO, and transaction databases. The Commission preliminarily believes that having the NBBO information in a format compatible with the order audit trail information would be useful for enforcing compliance with federal securities laws, rules and regulations. The NBBO is used by regulators to evaluate members for compliance with numerous regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS.234 Regulators would be able to compare order execution information to the NBBO information on a more timely basis because the order and execution information would be available on a real time basis and all of the information would be available in a compatible format in the same database. The SROs also may enjoy economies of scale by adopting standard cross-market surveillance parameters for these types of violations. This information also would be available to the Commission to assist in its oversight efforts.

+

The Commission also preliminarily believes that requiring the central repository to collect and retain in its database the transaction information in a format compatible with the order execution information would aid in monitoring for certain market manipulations. As discussed above, the proposed Rule would require that each report of the execution (in whole or in part) of an order sent to the central repository include a notation as to whether the execution was reported to the consolidated tape pursuant to an effective transaction reporting plan or the OPRA Plan.235 This requirement should allow regulators to more efficiently evaluate certain trading activity. For example, trading patterns of reported and unreported trades may cause the staff of an SRO to make further inquiry into the nature of the trading to determine whether the public was receiving accurate and timely information regarding executions and that market participants were continuing to comply with the trade reporting obligations under SRO rules. Similarly, patterns of reported and unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. Being able to more efficiently compare the consolidated order execution data with the trades reported to the consolidated tape could thus be an important component of overall surveillance activity.

+

The Commission requests comment on the usefulness or necessity of requiring the central repository to collect and retain in a format compatible with the order audit trail information the NBBO and transaction report information to help achieve the stated objectives of the consolidated audit trail. Do commenters believe that it is important for achieving the purposes of the consolidated audit trail? If so, why? If not, why not? What are the advantages and disadvantages of maintaining transaction information separately from order and execution data included in the consolidated audit trail? Should the transaction information be included in the consolidated audit trail report? The Commission requests comment on whether the requirement that the transaction and NBBO information be maintained in a format compatible with the order information is practical. Would this requirement achieve the goal of helping SRO and Commission staff conducts searches and run surveillances across databases?

+

The Commission has recently required that issuers report certain data in interactive data format such as XBRL.236 This proposal does not specify any particular or required data format, but allows the SROs to select a data format. Should the Commission require that the data be transmitted or stored in any particular format? What are the relative merits of flat data files, relational data files, and interactive data files? What other formats should be considered? In what format can the SROs and their members efficiently transmit data? In what format would the data required in the proposal be most easily accessed?

+

The proposed Rule would require the NMS plan to require the central repository to retain the information collected pursuant to subparagraph (c)(7) and (e)(5) of the proposed Rule in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would be required to be available immediately, or if immediate availability could not reasonably and practically be achieved, any search query would be required to begin operating on the data not later than one hour after the search query is made.237

+

The Commission preliminarily believes that the information (or the results of a query searching the information) should generally be available immediately. However, the Commission recognizes that the results of an electronic search query may not be immediately available because, for instance, the system must check an extremely large number of records to answer the query or the system may need to retrieve records from electronically archived data. In the case of archived data, the Commission preliminarily proposes requiring that the search query would need to begin operating on the data not later than one hour after the query is made. The Commission requests comment as to whether one hour would be reasonable amount of time to allow for accessing archived data. Under current technological limitations, how long should it take to access, in an electronic query with no manual intervention, archived data of the type to be held by the central repository? The Commission also requests comment on whether it should mandate a time standard, such as one hour, in the proposed Rule. Further, the Commission requests comment on whether the central repository should be required to retain this information for longer or shorter than five years. The Commission also requests comment on the cost impact of these proposed record retention requirements. For example, could comparable functionality be obtained at lower cost with a different standard (for example, what would be the cost comparison for one hour versus two hours)?

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Access to Central Repository and Consolidated Audit Trail Information and Confidentiality of Consolidated Audit Trail Information
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Central Repository, Access to Central Repository and Consolidated Audit Trail Information and Confidentiality of Consolidated Audit Trail Information + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + Central Repository, + SRO, + +

Each national securities exchange and national securities association, as well as the Commission, would have access to the central repository for purposes of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. Such access would include access to all systems of the central repository, and access to and use of the data reported to and consolidated by the central repository.238 The proposed Rule also would require that the NMS plan provide that such access to and use of such data by each exchange, association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.239 In addition, the proposed Rule would require that the NMS plan include a provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data.240 This method of access would be required to be designed to include search and reporting functions to optimize the use of the consolidated data.

+

The Commission's access to the central repository, and access to and use of the data maintained by the central repository, for purposes of performing the Commission’s responsibilities under the federal securities laws, rules, and regulations could not be limited in any way.241 The Commission requests comment as to whether the proposed Rule as proposed would accomplish this objective? If not, why not? If not, please provide comment as to an alternative or additional way to accomplish this objective. The Commission also requests comment on the advantages or disadvantages of Commission ownership or co-ownership of the data maintained by the central repository.

+

As discussed above, the proposed Rule would require the reporting of customer information, as well as information about “live” orders, to the central repository on a real time basis. The Commission recognizes the sensitivity of this information, and believes that maintaining the confidentiality of, and limiting the use of, the data is essential. Without such protections, broker-dealers and the investing public could be at risk for security breaches that would potentially have a detrimental impact on their financial condition, as well as their trading activity and the markets. The consolidated data also would include information about members’ trading activities on competitors’ markets. The Commission therefore is proposing several requirements designed to limit access to, and help assure confidentiality and proper use of, the information.

+

As noted above, the proposed Rule would limit the use of the consolidated data by the SROs for purposes of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.242 This proposed restriction would not prevent any SRO from using the data that it individually collects and provides to the central repository pursuant to the proposed Rule for other purposes as permitted by applicable law, rule or regulation.

+

The Commission requests comment as to whether access to the consolidated audit trail information should be limited to the SROs and the Commission, or whether there should be other access allowed. For example, should SROs or the central repository be allowed to make the data available to third parties, such as for academic research? If so, should the data be permitted to be sold to help offset costs? By SROs? By the central repository? If so, should there be set parameters? If the data were made available to third parties, what protections should be put in place to ensure the confidentiality of the data? Are there particular data elements that are more sensitive and should not be sold to help ensure the privacy of any individual and proprietary information? Are there particular data elements that would pose fewer concerns if released on a significant time lag? How long would such a time lag need to be? What other concerns might arise from the use of the data for non-regulatory purposes? Would use of the data provide certain market participants with undue information advantages over other market participants, increasing informational asymmetry in the markets? Would the provision of market data to third parties affect the willingness of market participants to trade in the U.S. markets? On the other hand, would enhanced surveillance of the markets as a result of the consolidated audit trail attract additional trading volume to the U.S. markets? What would be the implications, if any, under the financial privacy provisions of the Gramm-Leach-Bliley Act?243 The Commission also requests comment as to whether, and to what extent, other regulators, such as the Commodity Futures Trading Commission, should have access to the data? For instance, to what extent do commenters believe it would be beneficial for the Commission to work with other regulators to collectively share information each regulator has with respect to products and trading activity under its jurisdiction, to help the Commission and other regulators carry out their respective oversight of products and trading activity within their own jurisdiction? Would such sharing of information help the Commission better understand the impact of trading in other markets on trading activity and products within the Commission's jurisdiction?

+

The Commission also requests comment on the feasibility of, and need for, a method of access to the consolidated data that includes search and reporting functions. In addition, the Commission requests comment as to whether, in addition to requiring the central repository to provide a method of access, the central repository should be required to bear the cost of making available the raw order data received by the central repository, for purposes of using that data to perform regulatory functions. Commenters are requested to provide cost estimates for the provision of this data by the central repository to the SROs and the Commission.

+

Proposed Rule 613(e)(4)(i) also would require that the NMS plan include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to, and maintained by, the central repository. The plan sponsors, and employees of the plan sponsors and central repository, would be required to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data for other than for surveillance regulatory purposes.244 The Commission is not proposing to mandate the content or format of the policies and procedures and standards that would be required. Rather, the Commission believes that the SROs themselves are in the best position to determine how best to implement this requirement.

+

The Commission requests comment generally on the issue of appropriate safeguards to be put in place by the SROs and the central repository to help ensure confidentiality. Are there specific safeguards that the SROs and the central repository could use to ensure the confidentiality and appropriate usage of the data collected and submitted pursuant to the proposed Rule? For example, should the proposed Rule require that SROs put in place specific information barriers or other protections to help ensure that data is used only for regulatory purposes? Should there be an audit trail of the SROs’ personnel access to, and use of, information in the central repository to help monitor for compliance with appropriate usage of the data? Should the requirement that the NMS plan include policies and procedures to be used by the plan processor to ensure the security and confidentiality of information submitted to, and maintained by, the central repository be expanded to include the content of any searches or queries performed by the SROs or the Commission on the data? What should be required? Please be specific in your answer.

+

The Commission would establish appropriate protections within the agency to help ensure the confidentiality of the records.

+
+
pubdate:  May 26, 2010 effdate: N/A +
3. Reliability of Data Collected and Consolidated
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Central Repository, Reliability of Data Collected and Consolidated + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + Proposed Rule 613, + NMS Plan, + +

An audit trail is only as reliable as the data used to create it. The Commission believes that it is critical to the integrity of the consolidated audit trail that the data submitted by the national securities exchanges, national securities associations and their members be submitted in a timely manner, and be accurate and complete. Proposed Rule 613(e)(4)(ii) therefore would require that the NMS plan include policies and procedures, including standards, for the plan processor to use to help ensure the integrity of the information submitted to the central repository. Specifically, the policies and procedures would be required to be designed to help ensure the timeliness, accuracy, and completeness of the data provided to the central repository by the SROs and their members. The Commission expects that these policies and procedures would include the creation of certain validation parameters that would need to be met before data would be accepted into the central repository.

+

The proposed Rule also would require that the NMS plan include policies and procedures, including standards, governing how and when the plan processor should reject data provided to the central repository that does not meet these validation parameters. Further, the proposed Rule would require the NMS plan to include policies and procedures that would govern how to re-transmit data that was rejected once it has been corrected, and how to help ensure that information is being resubmitted.245 The Commission expects that re-transmitted data would also be subject to the validation parameters to assure that the initial problem(s) with the data has been corrected.

+

In addition, the proposed Rule would require that the NMS plan include policies and procedures to ensure the accuracy of the consolidation of the data by the plan processor provided to the central repository. Again, the Commission notes that it is not proposing to mandate the form and content of such policies and procedures. Rather, it believes the SROs would be in a better position to determine how best to implement this requirement. The Commission requests comment on these proposed requirements. Is this approach practical to ensure the integrity of the data? Are there any alternative methods that would achieve the same purpose that are preferable? How much latency would result from a validation procedure?

+

As noted above, the Commission believes it is critical to the integrity of the consolidated audit trail that data submitted to the central repository be submitted in a timely manner and be accurate and complete. To support this objective, as discussed below in Sections III.H.1 and III.H.2, the proposed Rule also would require the NMS plan to include mechanisms to ensure compliance by the plan sponsors and their members with the requirements of the plan.246 The purpose of the provisions, with respect to SRO compliance, is to require the SROs themselves to implement a method to help ensure compliance with the NMS plan, as is required by Rule 608 of Regulation NMS. Although the Commission is not proposing to mandate the format of the mechanism, the Commission preliminarily believes that it could include the imposition of penalties on an SRO in the event an SRO failed to comply with any provision of the NMS plan. Further, the Commission preliminarily believes that the mechanism to help ensure compliance by members could include the imposition of fines on a member, subject to the rules of the SRO of which it is a member, in the event a member failed to comply with the requirements of the NMS plan or the SRO’s rules.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

G. Surveillance

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Surveillance + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + Proposed Rule 613, + Surveillance Implementation, + Exchange Act - Rule 17d, + +

Proposed Rule 613(f) would require each national securities exchange and national securities association subject to the proposed Rule to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail. The proposed Rule would require each national securities exchange and national securities association to implement such new or enhanced surveillance system within fourteen months after effectiveness of the NMS plan.247 Currently, SROs are required to surveil members’ trading activity for compliance with federal securities laws, rules, and regulations, such as rules relating to front running, trading ahead, market manipulation, and quote rule violations, as well as other Commission and SRO rules. The Commission understands that although SROs carry out certain surveillances in real time, such as for looking for pricing anomalies or other indicators of erroneous transactions, most surveillance currently is not done on a real time basis. The Commission preliminarily believes the systems that carry out this surveillance should be updated, or new systems should be created, to make use of the consolidated audit trail information that would be generated and maintained by the central repository, otherwise the purpose of requiring a consolidated audit trail would not be achieved.

+

The Commission generally requests comment on this proposed requirement, as well as the proposed timing for compliance. To what extent do SROs currently conduct surveillance of trading on their markets on a real time basis? To what extent could SROs make effective use of the proposed consolidated information to enhance or update their existing surveillance and regulation? How would SROs be able to enhance or change their existing surveillance and regulation to make use of the proposed consolidated information? Would the benefits of surveillance that the SROs would be able to undertake be justified by the costs of providing information to the central repository on a real time basis? Under the proposed Rule, national securities exchanges and national securities associations would be required to implement or enhance their surveillance systems prior to their members being required to provide information pursuant to the proposed Rule. Do commenters believe that surveillance systems should be in place in advance of member compliance or should these requirements happen simultaneously, or otherwise?

+

The Commission is not proposing at this time to require coordinated surveillance across exchanges and FINRA. Rather, the Commission intends that each SRO would be responsible for surveillance of its own market and its own members using the consolidated audit trail information. The Commission would, however, encourage any coordinated surveillance efforts by the SROs, such as through a plan approved pursuant to Rule 17d-2 under the Exchange Act,248 or a regulatory services agreement among one or more SROs. The Commission requests comment on whether it should undertake to require coordinated surveillance.

+
+
pubdate:  May 26, 2010 effdate: N/A +

H. Compliance with the NMS Plan

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Compliance with the NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +
pubdate:  May 26, 2010 effdate: N/A +
1. Exchanges and Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Compliance with the NMS Plan, Exchanges and Associations + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + National Securities Exchange, + National Securities Association, + Exchange Act - Rule 608, + Compliance of Requirements, + SRO, + +

Any failure by a national securities exchange or national securities association that is a sponsor of the NMS plan to comply with the requirements of the NMS plan would undermine the effectiveness of the proposed Rule. Therefore, the Commission would consider full compliance by these entities with the NMS plan of the utmost importance. To this end, the proposed Rule would provide that each national securities exchange and national securities association shall comply with the provisions of the NMS plan of which it is a sponsor submitted pursuant to the proposed Rule and approved by the Commission.249 In addition, the proposed Rule would provide that any failure by a national securities exchange or national securities association to comply with the provisions of the NMS plan of which it is a sponsor could be considered a violation of the proposed Rule.250 For example, a failure to provide required information to the central repository, a failure to develop and implement a surveillance system or enhance existing surveillance systems reasonably designed to make use of the consolidated data in the central repository, or any limitation on the ability of an SRO or the Commission to access and use the data maintained by the central repository for regulatory purposes would violate the proposed Rule. The Commission recognizes that its staff, and the SRO staff, may have to undertake certain technical actions to access the data, such as arranging for a live feed, querying the system, or upgrading systems to be able to receive the data. The Commission preliminarily would not view having to take such technical actions, by themselves, as a limitation. The Commission notes that the proposed Rule would require the central repository to maintain the data in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would be required to be available immediately, or if immediate availability could not reasonably and practically be achieved, any search query would be required to begin operating on the data not later than one hour after the search query is made.251 The Commission requests comment on whether other types of technical actions should not be viewed as an impermissible limitation on access. The Commission further notes that Rule 608(c) under the Exchange Act provides that “[e]ach self-regulatory organization shall comply with the terms of any effective national market system plan of which it is a sponsor or a participant.”252 Thus, under this proposed Rule, the Commission may take any action authorized under the Exchange Act to discipline national securities exchanges and national securities associations for failure to comply with a rule under the Exchange Act.

+

The proposed Rule also would require that the NMS plan include a mechanism to ensure compliance by the sponsors with the requirements of the plan.253 The purpose of this provision is to require the SROs themselves to implement a method to help ensure compliance with the NMS plan, as is required by Rule 608 of Regulation NMS. Although the Commission is not proposing to mandate the format of the mechanism, the Commission preliminarily believes that it could include the imposition of penalties on an SRO in the event an SRO failed to comply with any provision of the NMS plan. The Commission request comments on the types of sanctions or penalties that would be appropriate for the plan sponsors to levy for failure of an SRO to comply with the terms of the NMS plan.

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Members
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Compliance with the NMS Plan, Members + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + National Securities Exchange, + National Securities Association, + Exchange Act - Secction 19, + SRO, + +

Any failure by a member of a national securities exchange or national securities association that is a sponsor of the NMS plan to collect and provide to the central repository the required audit trail information also would undermine the effectiveness of the proposed Rule. Therefore, the Commission would consider full compliance by these entities with the NMS plan of the utmost importance.

+

To implement the proposed requirement that the NMS plan require the submission of certain information to the central repository by the members of the exchange and association sponsors of the plan, each exchange and association would be required to file with the Commission pursuant to Section 19(b)(2) of the Exchange Act254 and Rule 19b-4 thereunder,255 a proposed rule change to require its members to comply with the requirements of the proposed Rule and the NMS plan.256 The SROs would be required to file these proposed rule changes by 120 days after approval of the proposed Rule. The Commission preliminarily believes that this proposed time frame would provide the SROs sufficient time to file their proposed rule changes after the NMS plan has been approved,257 as the SRO rule filings would be substantially based on the content of the NMS plan.

+

Further, the proposed Rule would directly require each member to (1) collect and submit to the central repository the information required by the Rule, and (2) comply with the clock synchronization requirements of the proposed Rule.258 In addition, the proposed Rule would require that the NMS plan include a provision that by subscribing to and submitting the plan to the Commission, each exchange and association that is a sponsor to the plan agrees to enforce compliance by its members with the provisions of the plan.259

+

Finally, the proposed Rule would require the NMS plan to include a mechanism to ensure compliance with the requirements of the plan by the members of a national securities exchange or national securities association that is a sponsor of the NMS plan submitted pursuant to this Rule and approved by the Commission.260 The purpose of this provision is to require the SROs to implement a method to help ensure compliance with the NMS plan and the corresponding SRO rules by their members. Although the Commission is not proposing to mandate the format of the mechanism, the Commission preliminarily believes that it could include the imposition of fines on a member by an SRO of which it is a member in the event the member failed to comply with any provision of the NMS plan or the SRO’s rules implementing the NMS plan. Any action taken against the member, including the imposition of the fine by the SRO, would be subject to the requirements of the SRO’s other rules.261

+

The Commission requests comment on these provisions regarding members’ compliance with the proposed Rule and the NMS plan. Do commenters believe that these provisions would encourage members' compliance with the proposed Rule and the NMS Plan? If so, why? If not, what other provisions would be necessary or appropriate to promote compliance? What mechanisms should be part of a plan to promote compliance by members? Would it appropriate to include violations of the proposed Rule, the NMS plan, or the SRO’s rules implementing the NMS plan within existing SRO rules that impose minimum fines for violations of certain SRO rules?262 Would the exchanges or associations have to amend their rules to implement such a requirement? If so, how would they have to amend their rules? Are there other alternatives that would more effectively help ensure the accuracy and reliability of the information reported to the central repository by members? Would requiring the SROs to file their proposed rule changes to implement the requirements of the NMS plan with respect to the members within 120 days after approval of the proposed Rule provide sufficient time for SROs to draft the proposed rule changes? If not, why not?

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

I. Operation and Administration of the NMS Plan

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Operation and Administration of the NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + National Securities Exchange, + National Securities Association, + Administration of the Central Repository, + Rule 600 of Regulation NMS, + Effective National Market System Plan, + Chief Compliance Officer, + CCO, + +

The proposed Rule would require that the NMS plan include a governance structure to ensure fair representation of the plan sponsors.263 The rule as proposed gives flexibility to the SROs to devise a governance structure as they see fit. The proposed rule would require the NMS plan to include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.264 For example, the plan sponsors could determine to provide each plan sponsor one vote on matters subject to a vote.265 Or, if there was a concern that this method would result in “blocs” of plan sponsors under common control exerting control in a one-sponsor, one-vote system, the SROs could choose another alternative to ensure fair representation.

+

Further, most existing NMS plans require unanimous consent from the plan sponsors to effect an amendment.266 The Commission recognizes the unanimous consent requirement could be desirable because it helps to ensure that no plan sponsor is forced to comply with requirements with which it is unable to comply, or forced by the other sponsors to pay fees. However, a unanimous consent requirement also could allow one plan sponsor to effectively “veto” a provision desired by all other plan sponsors for competitive reasons, or permit one sponsor to lag behind in making updates to its systems or rules that would benefit the industry as a whole. The Commission proposes to allow the plan sponsors to determine whether to include in the NMS plan to be filed with the Commission a unanimity requirement for effectuating amendments to the plan, or some other convention.

+

The Commission also recognizes that the scope or purpose of the proposed NMS plan may differ from existing plans. The Commission requests comment on whether there are lessons from previous experience that suggest that the governance structure of the NMS plan to be filed with the Commission should differ from existing plans. The Commission requests comment on these provisions relating to the governance structure of the plan. Should the Commission require certain governance standards to ensure efficient cooperation, or should the exchanges and association be allowed to create a governance structure of their own choosing? What are the relative merits of unanimity or super majority requirements? What are the relative merits of alternative voting mechanisms and other governance structures available to the plan sponsors? Should the voting mechanism vary by the type of decision or should different decision making bodies have authority over different types of decisions to avoid situations where no decision is made because the sponsors cannot agree? How should the governance and voting mechanisms be set up to avoid inefficient operations or paralysis? Should there be limits on the time frames given to make decisions? Should there be mechanisms to resolve impasses once a decision has taken a certain amount of time? The Commission also requests comment on whether the scope of the plan, including the requirements on broker-dealers members, and the expectation of improved surveillances for investor protection dictate that the governance structure should differ from existing plans. In particular, should the SRO sponsors be required to include in the governance structure and decision-making authority representatives of members to address member interests and independent representatives chosen specifically to address investor and other public interests?

+

The proposed Rule also would require that the NMS plan include provisions to govern the administration of the central repository, including the selection of a plan processor. A “plan processor” is defined in Rule 600 of Regulation NMS to mean any SRO or securities information processor acting as an exclusive processor in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan.267 The Commission expects that the plan sponsors would engage in a thorough analysis and formal competitive bidding process to choose the plan processor. As proposed, the plan sponsors would be required to select a person to act as the plan processor for the central repository no later than two months after the effectiveness of the national market system plan.268 The Commission preliminarily believes that this time frame would provide the plan sponsors with sufficient time to choose the plan processor, while providing that such entity would be in place with enough time to create and build the central repository to receive data from the SROs within one year after effectiveness of the NMS plan and from the members within two years after such effectiveness.

+

The Commission requests comment as to whether the proposed Rule should include specific requirements detailing the process for selection of a plan processor. Should the Commission require specific minimum requirements or standards that a plan processor should meet? If so, what requirement or standards would be necessary or appropriate? Should the plan processor be a non-SRO? Would this promote impartiality on the part of the plan processor? The Commission also requests comment on the proposed time frame to choose the plan processor. Is it too short? Too long? If so, why? Please be specific in your response.

+

The proposed Rule also would require that the NMS plan contain a requirement that a Chief Compliance Officer (“CCO”) be appointed to regularly review the operation of the central repository.269 The CCO would be expected to establish reasonable procedures designed to make sure the operations of the central repository keep pace with technical developments. To the extent upgrades or other changes are necessary to assure the central repository’s effectiveness, the CCO would be responsible for making recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

+

The Commission requests comment on the necessity for a CCO to oversee the operation of the central repository. If commenters support the proposal to require a CCO, should the proposed Rule include a requirement that the CCO be independent from the plan sponsors and their members? That is, should the CCO be required to not have any actual or potential conflicts of interest with respect to the plan sponsors and their members (e.g. such as prior or future employment with a plan sponsor or member, or a material business relationship with a plan sponsor or member)? What are the risks of allowing a CCO who is affiliated or associated with a plan sponsor or its members? What types of conflicts of interest should be avoided? Are there any specific qualifications that a CCO should possess? Should there be a specific process in place for appointing a CCO or for removing a CCO for failure to perform his or her assigned duties? Should there be a limit to the number of years a CCO may serve as such?

+

The plan sponsors also would be required to include in the NMS plan a provision addressing the requirements for the admission of new sponsors to the plan and the withdrawal of sponsors from the plan.270 Proposed Rule 613(b)(4) also would require that the sponsors develop a process for allocating among the plan sponsors the costs associated with implementing and operating the central repository, including a provision addressing the manner in which such costs would be allocated to sponsors who join the plan after it was approved. Various NMS plans have developed different ways to ensure that a fair cost or “new participant fee” is assessed upon new plan sponsors.271 For example, when determining a new participation fee, the OPRA Plan requires that the following factors be considered: (1) the portion of costs previously paid by OPRA for the development, expansion and maintenance of OPRA’s facilities which, under generally accepted accounting principles, would have been treated as capital expenditures and would have been amortized over the five years preceding the admission of the new member; (2) an assessment of costs incurred and to be incurred by OPRA for modifying the OPRA System or any part thereof to accommodate the new member, which are not otherwise required to be paid or reimbursed by the new Member; and (3) previous fees paid by other new members. The plan sponsors could choose to include in the NMS plan to be filed a similar provision or develop a new method for determining the cost to join the plan that would better suit the NMS plan proposed to be required by this Rule.

+

The Commission requests comment on whether the rule or plan should specify a method for allocating costs among the plan sponsors. The Commission also requests comment as to what provisions the exchanges and FINRA should include in the NMS plan relating to the admission of new plan sponsors and the withdrawal of existing plan sponsors. Should the Commission specify the process for the admission of new plan sponsors? What are the concerns, if any, that should be taken into account when providing for the admission of new plan sponsors? The Commission requests comment on all aspects of the proposed Rule relating to governance and administration of the NMS plan.

+
+
pubdate:  May 26, 2010 effdate: N/A +

J. Proposed Implementation Schedule

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Description of Proposed Rule, Proposed Implementation Schedule + Compliance User: Self-Regulatory Organizations + Keywords: + COATS, + +

While the Commission preliminarily believes a comprehensive consolidated audit trail would be useful as soon as possible, the Commission also believes that it would be prudent to implement the Rule at a measured pace to ensure that all market participants are fully able to meet the requirements of the proposed Rule. Therefore, the proposed Rule would provide that the proposed data collection and submission requirements would first apply to national securities exchanges and national securities associations, but not to their individual members. As part of operating their businesses, the national securities exchanges and national securities associations are accustomed to handling large volumes of data and many already have in place electronic trading, routing and reporting systems.272 Further, under the proposal the exchanges would not be responsible for providing to the central repository, for each order, information relating to the customer. The Commission therefore preliminarily believes these systems could more readily and quickly be modified than the members’ systems to comply with the requirements of the proposed Rule.

+

Specifically, proposed Rule 613(a)(3)(iii) would require the exchanges and associations to provide to the central repository the data to be required by the Rule within one year after effectiveness of the NMS plan. Members of the exchanges and associations would be required to begin providing to the central repository the data required by the proposed Rule two years after effectiveness of the NMS plan, which would be one year following the implementation deadline for the national securities exchanges and national securities associations.273 This phased approach is designed to allow members additional time to implement systems changes necessary to begin providing the information to the central repository and to develop procedures designed to capture customer and order information that they may not have previously been required to collect to comply with other Commission and SRO rules.

+

The Commission requests comment on the proposed implementation time periods. Are these time periods practical or feasible? Should they be shorter? Longer? Please provide detailed reasons in your response. As proposed, the national securities exchanges and national securities associations would be required to submit data to the central repository for one year before their members are required to submit data. Is requiring the exchanges and FINRA to provide data before requiring their members to do so a feasible way to phase in compliance with the proposed rule? How would this phased-in approach affect the quality of the data and the number of available data items in the audit trail? Are there alternative ways to phase in implementation that would be more practical? For instance, should the Commission consider requiring all exchanges and FINRA and their respective members to begin reporting a subset of the data initially, and phase in the collection of addition data over time? Should the Commission require all exchanges, FINRA, and their members to implement the proposed requirements first for NMS stocks, then for listed options? Or vice versa? How should the Commission take into consideration any concern commenters might have that market participants might shift manipulative or other illegal trading activity to products or markets not covered by the proposed Rule in its analysis of whether, or how, to phase in compliance with the proposed Rule across products classes (meaning, NMS stock and listed options)? If so, how?

+

Should ATSs,274 including so-called dark pools,275 be required to implement the proposed requirements before broker-dealers that are not registered as ATSs? Would ATSs be able to more quickly comply with the proposed recording and reporting requirements, since they generally are highly automated and their business may be more narrowly focused than, for example, broker-dealers that engage in a customer, proprietary, and/or market making business? Are there any cost savings associated with a phased approach to implementation? Would additional unnecessary costs be incurred by implementing the plan in a phased-in approach? Please provide data to support your views.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

IV. Request for Comments

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Request for Comments + Compliance User: Self-Regulatory Organizations + Keywords: + Regulation NMS, + Regulation ATS, + +

We request and encourage any interested person to comment generally on the proposed Rule. In addition to the specific requests for comment throughout the release, the Commission requests general comment on all aspects of proposed Rule 613 of Regulation NMS. The Commission encourages commenters to provide information regarding the advantages and disadvantages of each aspect of the proposed Rule. The Commission invites commenters to provide views and data as to the costs and benefits associated with the proposed Rule. The Commission also seeks comment regarding other matters that may have an effect on the proposed Rule. We request comment from the point of view of national securities exchanges, national securities associations, members, investors, and other market participants. With regard to any comments, we note that such comments are of great assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.

+
+
pubdate:  May 26, 2010 effdate: N/A +

V. Paperwork Reduction Act

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act + Compliance User: Self-Regulatory Organizations + Keywords: +

Certain provisions of the proposal contain “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”)276 and the Commission has submitted them to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The title of the new collection of information is “Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules Thereunder.”

+
pubdate:  May 26, 2010 effdate: N/A +

A. Summary of Collection of Information under Proposed Rule 613

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613 + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + NMS Securities, + +
pubdate:  May 26, 2010 effdate: N/A +
1. Creation and Filing of an NMS Plan
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Creation and Filing of an NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +

As detailed above, the proposed Rule would require each national securities exchange and national securities association to jointly file with the Commission, on or before 90 days from approval of the proposed Rule, an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository for the collection of information for NMS securities.277 The NMS plan would be required to require each exchange or association and its respective members to provide certain data to the central repository in compliance with proposed Rule 613.278 The NMS plan also would need to include certain specified provisions related to administration and operation of the plan,279 and the operation of the central repository.280 Further, the NMS plan would be required to include certain provisions related to compliance by the exchanges and associations and their members with the requirement of the proposed Rule and the NMS plan.281

+

Each national securities exchange and national securities association would be required to be a sponsor of the NMS plan.282 The Commission preliminarily believes that requiring the proposed NMS plan would impose a paperwork burden on national securities exchanges and national securities associations associated with preparing and filing the joint NMS plan.

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Report
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Report + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Stocks, + NMS Securities, + +

Rule 613(i) also would require the national securities exchanges and national securities associations to jointly provide to the Commission a document outlining how such national securities exchanges and national securities associations would propose to incorporate into the consolidated audit trail information for: (1) equity securities that are not NMS securities; (2) debt securities; and (3) primary market transactions in NMS stocks, equity securities that are not NMS securities and debt securities.283 This report would be required to specify in detail the data that would be collected and reported by each market participant, an implementation timeline, and a cost estimate. The Commission preliminarily believes that requiring the proposed report would impose a paperwork burden on national securities exchanges and national securities associations associated with preparing and submitting the report to the Commission.

+
+
pubdate:  May 26, 2010 effdate: N/A +
3. Rule Filings by National Securities Exchanges and National Securities Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Rule Filings by National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Rule 613(g)(1), + +

Each national securities exchange and national securities association would be required to file with the Commission, pursuant to Section 19(b)(2) of the Exchange Act and Rule 19b-4 thereunder,284 a proposed rule change to require its members to comply with the requirements of the proposed Rule and the NMS plan submitted pursuant to the proposed Rule and approved by the Commission of which the national securities exchange or national securities association is a sponsor.285 The burden of filing such proposed rule change would already be included under the collection of information requirements contained in Rule 19b-4 under the Exchange Act.286

+
+
pubdate:  May 26, 2010 effdate: N/A +
4. Collection and Retention of NBBO and Last Sale Data
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Collection and Retention of NBBO and Last Sale Data + Compliance User: Self-Regulatory Organizations + Keywords: + OPRA Plan, + Rule 601 of Regulation NMS, + +

The central repository would be required to collect and retain on a current and continuing basis the national best bid and national best offer for each NMS security, transaction reports reported pursuant to a transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS, and last sale reports reported pursuant to the OPRA Plan.287 The central repository would be required to retain this information for a period of not less than five years.288

+
+
pubdate:  May 26, 2010 effdate: N/A +
5. Data Collection and Reporting
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Data Collection and Reporting + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA's OATS, + EBS System, + Nasdaq Rule 6955, + NYSE Amex Equities Rule 132B, + NYSE Rule 132B, + BX Rule 6955, + FINRA Rule 7440, + +

The proposed Rule would require each national securities exchange, national securities association, and any member of such national securities exchange or national securities association to collect and electronically provide to the central repository details for each order and reportable event documenting the life of an order through the process of routing, modification, cancellation, and execution (in whole or in part).289 The proposed Rule would require the collection and reporting to the central repository of some information that national securities exchanges, national securities associations, and their members already are required to collect, and under certain circumstances, report to a third party, in compliance with existing Commission290 and SRO requirements.291 The proposed Rule would, however, require exchanges, associations, and their members to report to the central repository information not required to be currently collected and reported pursuant to existing SRO audit trail rules.

+

For example, although members of national securities exchanges and national securities associations already should know the identity of their customers, and in some instances may be required to provide that information to the Commission or SRO staff upon request,292 the requirement to electronically capture and report detailed information sufficient to identify the customer to the central repository, in real time, would be new. Further, although some existing audit trail requirements include a unique order identifier,293 the proposed Rule's requirement that the unique order identifier remain with the order throughout its entire life, across markets and market participants, would go beyond the current requirements. In addition, although such members currently have unique market participant identifiers ("MPIDs"), such MPIDs may differ across markets, whereas the proposed Rule would require that each member have a unique identifier that is the same across all markets. The proposed requirements to report whether an order opens or closes a position for NMS stocks, and to report borrow information, also are not required to be marked on orders by current SRO or Commission rules. Further, much of the information that would be required for the first time to be reported to the central repository would be reported in real time, as the event is occurring.

+
+
pubdate:  May 26, 2010 effdate: N/A +
6. Central Repository
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Summary of Collection of Information under Proposed Rule 613, Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +

The proposed Rule would require that the central repository be responsible for the receipt, consolidation, and retention of all data submitted to the central repository by the national securities exchanges, national securities associations, and their members.294 The proposed Rule also would require that (1) the central repository retain the information collected pursuant to subparagraph (c)(7) and (e)(5) of the proposed Rule in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years, and (2) the information be available immediately, or if immediate availability cannot reasonably and practically be achieved, that any search query begin operating on the data not later than one hour after the search query is made.295 The Commission notes that a plan processor would be responsible for operating the central repository in compliance with the proposed Rule and the NMS plan.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

B. Proposed Use of Information

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information + Compliance User: Self-Regulatory Organizations + Keywords: +
pubdate:  May 26, 2010 effdate: N/A +
1. Creation and Filing of NMS Plan
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information, Creation and Filing of NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +

As discussed in detail above, the NMS plan would govern the creation, implementation, and maintenance of a consolidated audit trail for NMS securities, which would aid the Commission and national securities exchanges and national securities associations in effectively and efficiently carrying out their regulatory responsibilities. The information that would be collected pursuant to the NMS plan would allow the SROs to more efficiently monitor trading activity in the securities markets, and would facilitate the Commission and the national securities exchanges and national securities associations’ trading reconstruction efforts as well as enhance their monitoring, enforcement, and regulatory activities.

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Report
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information, Report + Compliance User: Self-Regulatory Organizations + Keywords: + Consolidated Audit trail, + audit trail, + +

As the Commission states above in Section III.A., it ultimately intends for the proposed consolidated audit trail, if adopted, to be expanded to cover other securities, including equity securities that are not NMS securities, corporate bonds and other debt instruments; credit default swaps and other security-based swaps; and any other products that may come under the Commission's jurisdiction in the future. Further, the Commission preliminarily believes that it would be beneficial to expand the consolidated audit trail to include information on primary market transactions in NMS stocks and other equity securities that are not NMS stocks, as well as primary market transactions in debt securities. The Commission preliminarily believes that a timely expansion of the scope of the consolidated audit trail beyond NMS securities would be beneficial as illegal trading strategies that the consolidated audit trail would be designed to help detect and deter, such as insider trading, may involve trading in multiple related products other than NMS securities across multiple markets.

+

To help ensure that such an expansion would occur in a reasonable time and that the systems and technology that would be used to implement the Rule as proposed are designed to be easily scalable, proposed Rule 613(i) would require that the NMS plan contain a provision requiring each national securities exchange and national securities association that is a sponsor of the plan to jointly provide to the Commission within two months after effectiveness of the NMS plan a document outlining how the sponsors would incorporate into the consolidated audit trail information with respect to: (1) equity securities that are not NMS securities; (2) debt securities; and (3) primary market transactions in NMS stocks, equity securities that are not NMS securities, and debt securities. The sponsors specifically would be required to address, among other things, details for each order and reportable event that they would recommend requiring to be provided; which market participants would be required to provide the data; an implementation timeline; and a cost estimate. The Commission would be able to use the information contained in the report in its consideration and analysis of whether to expand the consolidated audit trail.

+
+
pubdate:  May 26, 2010 effdate: N/A +
3. Collection and Retention of NBBO and Last Sale Data
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information, Collection and Retention of NBBO and Last Sale Data + Compliance User: Self-Regulatory Organizations + Keywords: + Audit Trail Information, + Central Repository, + +

As discussed above, the requirement that the central repository collect and retain the NBBO and transaction data in an electronic format compatible with the order and event information collected pursuant to the proposed Rule is intended to allow SRO and Commission staff to easily search across order, NBBO, and transaction data bases. The Commission preliminarily believes that having the NBBO information in an electronic format compatible with the order audit trail information would be useful for SROs to enforce compliance with federal securities laws, rules and regulations.296 The Commission also preliminarily believes that requiring the central repository to collect and retain in its database the transaction information in a format compatible with the order execution information would aid the SROs in being able to monitor for certain market manipulations.297

+
+
pubdate:  May 26, 2010 effdate: N/A +
4. Data Collection and Reporting
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information, Data Collection and Reporting + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + +

As discussed above, the Commission preliminarily believes that the data collection and reporting requirements of the proposed Rule would enhance the ability of SRO staff to effectively monitor and surveil the securities markets and thus detect and investigate potentially illegal activity in a more timely fashion, whether on one market or across markets. Further, the Commission preliminarily believes that the ability to access such data would improve the ability of SRO staff to conduct timely and accurate trading analysis for market reconstructions and complex enforcement inquiries or investigations, as well as inspections and examinations. Further, the Commission preliminarily believes that the ability to access such data would aid the Commission staff in its regulatory and market analysis efforts.

+
+
pubdate:  May 26, 2010 effdate: N/A +
5. Central Repository
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Proposed Use of Information, Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + Central Repository, + National Securities Exchange, + National Seccurities Association, + SROs, + +

The central repository would be required to receive and retain the data required to be submitted by the national securities exchanges, national securities associations, and their members pursuant to the proposed Rule. SROs and Commission staff would then have access to the data for regulatory purposes, as discussed above.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

C. Respondents

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Respondents + Compliance User: Self-Regulatory Organizations + Keywords: +
pubdate:  May 26, 2010 effdate: N/A +
1. National Securities Exchanges and National Securities Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Respondents, National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Seccurities Association, + +

Proposed Rule 613 would apply to all of the fourteen national securities exchanges and to one national securities association (FINRA) currently registered with the Commission.

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Members of National Securities Exchanges and National Securities Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Respondents, Members of National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Seccurities Association, + +

Proposed Rule 613 would apply to the approximately 5,178 broker-dealers that are currently registered with the Commission and are members of the national securities exchanges or FINRA.298

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

D. Total Annual Reporting and Recordkeeping Burden

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + FINRA, + +
pubdate:  May 26, 2010 effdate: N/A +
1. Burden on National Securities Exchanges and National Securities Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + National Securities Exchange, + OPRA Plan, + NYSE Amex Equities Rule 132B, + ISE Rule, + SRO, + +
+ a. Creation and Filing of NMS Plan + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations, Creation and Filing of NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + SRO, + +

Proposed Rule 613 would require the national securities exchanges and FINRA to jointly file with the Commission a joint NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository. The Commission estimates that it would take each national securities exchange and national securities association approximately 840 burden hours of internal legal, compliance, information technology, and business operations time to develop and file the NMS plan, including the required provisions regarding governance, administration, and operation of the plan.299

+

The Commission preliminarily expects that national securities exchange and national securities association respondents may incur one-time external costs for outsourced legal services to develop and draft the NMS plan. While the Commission recognizes that the amount of legal outsourcing used may vary from SRO to SRO, the staff estimates that on average, each national securities exchange and national securities association would outsource 50 hours of legal time to develop and draft the NMS plan, for a capital cost of approximately $20,000 for each national securities exchange and national securities association resulting from outsourced legal work.300 Therefore, the Commission preliminarily estimates that the average one-time initial burden of developing and filing the NMS plan would be 840 burden hours plus $20,000 external costs for outsourced legal counsel per SRO, for an aggregate estimated burden of 12,600 hours plus $300,000 external costs.

+

Once the national securities exchanges and national securities associations have established the NMS plan, the Commission estimates that, on average, each national securities exchange and national securities association would incur 192 burden hours annually to ensure that the NMS plan is up to date and remains in compliance with the proposed Rule,301 for an aggregate estimated burden of 2,880 hours.

+
+
+ b. Report + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations, Report + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + NMS Plan, + +

The Commission estimates that it would take each national securities exchange or national securities association approximately 420 burden hours of internal legal, compliance, business operations and information technology staff time to create the report required by the proposed Rule.302 The Commission also expects that each national securities exchange and national securities association respondent may incur one-time external costs for outsourced legal services helping to prepare the report. Commission estimates that on average, each national securities exchange and national securities association would outsource 25 hours of legal time to create the report, for an aggregate one-time capital cost of approximately $10,000.303 Therefore, the Commission preliminarily estimates that the one-time initial burden of drafting the report required by the proposed Rule would be 420 burden hours plus $10,000 external costs for outsourced legal counsel per SRO, for an aggregate estimated burden of 6,300 hours and $150,000 external costs.

+
+
+ c. Data Collection and Reporting + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations, Data Collection and Reporting + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + Regulation NMS, + NMS Plan, + +

The proposed Rule would require the collection and reporting on a real time basis of some information that national securities exchanges and national securities associations already collect to operate their business, and are required to maintain in compliance with Section 17(a) of the Exchange Act and Rule 17a-1 thereunder.304 For instance, the Commission believes that exchanges keep records pursuant to Section 17(a) of the Exchange Act and Rule 17a-1 thereunder in electronic form, of the receipt of all orders entered into their systems, as well as records of the routing, modification, cancellation, and execution of those orders. However, the proposed Rule would require each SRO to collect and report additional and more detailed information, and to report the information to the central repository in real time in a specified uniform format. The Commission anticipates that exchanges may need to enhance or replace their current systems to be able to comply with the proposed information collection and reporting requirements of the proposed Rule.

+

The Commission recognizes that the extent to which a particular SRO would need to make systems changes would differ depending upon the SRO’s current market structure and existing systems. However, the Commission preliminarily estimates that, on average, the initial one-time burden per national securities exchange and national securities association for development and implementation of the systems needed to capture the required information and transmit it to the central repository in a specified format in compliance with the proposed Rule to be 2,200 hours.305 Further, the Commission estimates that, on average, each exchange and association would incur approximately 40 hours of outsourced legal counsel legal time for the development and implementation of systems needed to capture the required information and transmit it to the central repository, and a one time software and hardware cost of $4,542,940 per SRO to develop and implement the necessary systems. Therefore, the Commission preliminarily estimates that the average one-time initial burden per national securities exchange and national securities association for development and implementation of the systems needed to capture the required information and transmit it to the central repository in a specified format in compliance with the proposed Rule would be 2,200 burden hours plus $16,000 costs for outsourced legal counsel and $4,542,940 for hardware and software costs,306 for an aggregate estimated burden of 33,000 hours and $68,384,100 external and systems costs.

+

Once a national securities exchange or national securities association has established the appropriate systems required for collection and transmission of the required information to the central repository in a specified format, the Commission preliminarily believes that it would be necessary for each national securities exchange or national securities association to undertake efforts to ensure that their system technology is up to date and remains in compliance with the proposed Rule, which could include personnel time to monitor each SRO’s reporting of the required data and the maintenance of the systems to report the required data; activity related to adding extra systems capacity to accommodate new order types that would need to be reported to the central repository; or implementing changes to trading systems which might result in additional reports to the central repository. The Commission preliminarily estimates that, on average, it would take a national securities exchange or national securities association approximately 4,975 hours per year to ensure that the system technology is up to date and remains in compliance with the proposed Rule.307 The Commission also estimates that it would cost, on average, approximately $1.25 million per year per SRO to continue to comply with the proposed requirements to provide information to the central repository, including costs to maintain the systems connectivity to the central repository and purchase any necessary hardware, software, and other materials.308 Therefore, the Commission preliminarily estimates that the average ongoing annual burden per SRO would be approximately 4,975 hours plus $1.25 million external costs to maintain the systems necessary to collect and transmit information to the central repository, for an aggregate estimated annual burden of 74,625 hours and $18,750,000 external systems costs.

+
+
+ d. Central Repository + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations, Central Repository + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + Rule 613(a)(3)(i), + NMS Plan, + +

The proposed Rule would require national securities exchanges and national securities associations to jointly establish a central repository tasked with the receipt, consolidation, and retention of the reported order and execution information. The central repository thus would need its own system(s) to receive, consolidate, and retain the electronic data received from the SROs and their members. The system would be required to be accessible by the sponsors and the Commission for regulatory purposes, with validation parameters allowing the central repository to automatically check the accuracy and completeness of the data submitted, and reject data not conforming to these parameters. It is anticipated that the burdens of development and operation of the central repository would be shared among the plan sponsors.

+

The Commission staff preliminarily estimates that there would be an average initial onetime burden of 17,500 hours per plan sponsor for development and implementation of the systems needed to capture the required information in compliance with the proposed Rule.309 Further, the Commission estimates that each exchange and association would incur software and hardware costs of approximately $4 million per plan sponsor related to systems development. Therefore, the Commission preliminarily estimates a one-time initial burden of 17,500 hours per plan sponsor, plus software and hardware costs of approximately $4 million related to systems development,310 for an aggregate estimated burden of 262,500 hours and $60 million in external systems costs.

+

Once the plan sponsors have established the systems necessary for the central repository to receive, consolidate, and retain the required information, the Commission estimates that the burden per plan sponsor to ensure that the system technology and functionality is up to date and remains in compliance with the proposed Rule would be 192 hours per year, for an estimated aggregate burden per year of 2,880 hours.311 The estimated burden would include actions taken to regularly review the operation of the central repository to assure its continued effectiveness and to determine the need for enhancements to accommodate the information required to be collected, or new information collected, and the manner in which the data is processed, as well as periodic assessments of the adequacy of the system technology and functionality of the central repository.

+

After the central repository systems have been developed and implemented, there would be ongoing costs for operating the central repository, including the cost of paying the CCO; the cost of systems and connectivity upgrades or changes necessary to receive, consolidate, and store the reported order and execution information from SROs and their members; the cost, including storage costs, of collecting and maintaining the NBBO and transaction data in a format compatible with the order and event information collected pursuant to the proposed Rule; the cost of monitoring the required validation parameters, which would allow the central repository to automatically check the accuracy and completeness of the data submitted and reject data not conforming to these parameters consistent with the requirements of the proposed Rule; and the cost of compensating the plan processor. The Commission preliminarily assumes that the plan processor would be responsible for the ongoing operations of the central repository. The Commission estimates that these costs would be approximately $100 million in external costs to the plan processor for operation of the central repository per year, or approximately $6,666,666 per plan sponsor per year.312

+
+
+ e. Collection and retention of the NBBO and transaction reports + Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Burden on National Securities Exchanges and National Securities Associations, Collection and retention of the NBBO and transaction reports + Compliance User: Self-Regulatory Organizations + Keywords: + NBBO, + NMS Security, + +

The proposed Rule would require that the central repository collect and retain on a current and continuous basis the NBBO for each NMS security, transaction reports reported pursuant to an effective transaction reporting plan, and last sale reports reported pursuant to the OPRA Plan. The central repository would be required to maintain this NBBO and transaction data in a format compatible with the order and event information collected pursuant to the proposed Rule.313 Further, the central repository would be required to retain the information collected pursuant to paragraphs (c)(7) and (e)(5) of the proposed Rule in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would be required to be available immediately, or if immediate availability could not reasonably and practically be achieved, any search query would be required to begin operating on the data not later than one hour after the search query is made.314

+

.D.1.d) the: (1) initial one-time hour burden per plan sponsor for development and implementation of the systems at the central repository necessary to receive and retain this NBBO and last sale information; (2) associated software and hardware costs; and (3) ongoing costs of receiving and retaining the NBBO and last sale information.315

+

The Commission estimates that the ongoing external costs to receive the NBBO and last sale data from the SIPs would be approximately $1,370 per year.316

+
+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Members
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden, Members + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Section 19(b)(2) of the Exchange Act, + Rule 19b-4, + SRO, + +

The Commission preliminarily believes that the proposed Rule would require the collection and reporting in real time of much of the information that registered broker-dealers already maintain in compliance with existing regulations.317 For example, Section 17 of the Exchange Act and Rule 17a-3 thereunder mandate that broker-dealers keep certain records of orders handled during the course of business.318 Certain information also is required to be collected and reported by broker-dealers in compliance with a Commission request pursuant to Rule 17a-25 under the Exchange Act.319 The proposed Rule would, however, require SRO members to collect and report additional information for each order in a specified uniform format. In addition to the new information, the members also would be required to report most of the information on a real time basis to the central repository, which is not currently required. The Commission anticipates that SRO members would need to either enhance or replace their current order handling, trading, and other systems to be able to collect and report the required order and reportable event information to the central repository as required by the proposed Rule.

+

The Commission recognizes that the extent to which a particular member would need to make systems changes or replace existing systems would differ depending upon the member’s current business operations and systems. The Commission preliminarily believes that members that rely mostly on their own internal order routing and execution management systems would need to make changes to or replace such systems to collect and report the required order and reportable event information to the central repository as required by the proposed Rule. The Commission estimates that there are approximately 1,114 of these types of members.320 The Commission preliminarily estimates the average initial one-time burden to develop and implement the needed systems changes to capture the required information and transmit it to the central repository in compliance with the proposed Rule for these members would be approximately 6,530 burden hours.321 The Commission also preliminarily estimates that these members would, on average, incur approximately $1.5 million in one-time external costs for hardware and software to implement the systems changes needed to capture the required information and transmit it to the central repository.322 Therefore, the Commission preliminarily estimates that the average one-time initial burden per member would be 6,530 hours and $1.5 million, for an estimated aggregate burden of 7,274,420 hours and $1,671,000,000.

+

This number would likely overestimate the costs for some of these members and underestimate it for others. For example, it may overestimate the cost for ATSs as opposed to members that engage in a customer and proprietary (or market marking) business, in part because of the narrower business focus of some ATSs.323 The Commission also recognizes that some or all of these members may contract with one or more outside vendors to provide certain front-end order management systems. The third-party vendor may make changes to its systems to permit the members that use the system to capture and provide the required information to the central repository. Likewise, some or all of these members may contract with outside vendors to provide back-office functionality. These third-party vendors may make changes to their systems to permit the members that use the systems to capture and provide the required information to the central repository. The cost of these changes may be shared by the various members that use the systems, and thus may result in a reduced cost to an individual member to implement changes to its own systems to comply with the requirements of the proposed Rule.

+

Once such a member has established the appropriate systems and processes required for collection and transmission of the required information to the central repository, the Commission estimates that the proposal would impose on each member ongoing annual burdens associated with, among other things, personnel time to monitor each member’s reporting of the required data and the maintenance of the systems to report the required data; activity related to adding extra systems capacity to accommodate new order types that would need to be reported to the central repository; or implementing changes to trading systems which might result in additional reports to the central repository. The Commission preliminarily estimates that, on average, it would take a member of a national securities exchange or national securities association approximately 3,050 burden hours per year continued compliance with the proposed Rule.324 The Commission also estimates that it would cost, on average, approximately $756,000 per year per member to maintain the systems connectivity to the central repository and purchase any necessary hardware, software, and other materials.325 Therefore, the Commission preliminarily estimates that the average ongoing annual burden per member would be approximately 3,050 hours, plus $756,000 external costs to maintain the systems necessary to collect and transmit information to the central repository, for an estimated aggregate annual burden of 3,397,700 hours and $842,184,000.

+

The Commission preliminarily believes that other members generally would rely on functionality provided by third parties to electronically capture the required information and transmit it to the central repository in real time. For purposes of the proposed Rule, the Commission assumes that these members, which could include broker-dealers defined as “small entities” for purposes of the Regulatory Flexibility Act,326 generally do not clear transactions and may not possess their own internal order routing and execution management systems, but instead rely on third-party providers for such functionality. Further, the Commission assumes that many of these members currently do not themselves report order or trade information and instead rely on their clearing firms or other third parties to do it for them. These smaller members may look for “turn key” systems that could provide the functionality required by the proposed Rule. As such, the Commission preliminarily believes that these members would not undertake a fundamental restructuring of their business to comply with the proposed Rule. Instead, they might continue to rely on their clearing broker-dealer, or they might purchase a standardized software product provided by a third party that would provide the functionality to electronically capture the required information and transmit it to the central repository in real time. The Commission estimates that there are approximately 3,006 of these types of members.327 For these members, Commission staff preliminarily estimates the average external cost to compensate a third party, whether the clearing broker-dealer or other third party, for software that would provide the necessary functionality to electronically capture the required information and transmit it to the central repository, would be approximately $50,000 per member.328 In addition, the Commission preliminarily estimates that each of these members, on average, would incur a one-time burden of 140 hours to incorporate this functionality.329 Therefore, the Commission preliminarily estimates an initial aggregate burden of 420,840 hours and $150,300,000.

+

Once such a member has procured the appropriate third party system(s) for collection and transmission of the required information to the central repository, the Commission preliminarily estimates that such a member would continue to incur, on average, an external cost of $50,000 annually to compensate a third party, whether the clearing broker-dealer or for software that would provide the necessary functionality to capture the required information and transmit it to the central repository. The Commission also preliminarily estimates that each such member would incur a cost for compliance personnel necessary to oversee continued compliance with the proposed Rule, which would result in 64 burden hours annually for such member.330 Therefore, the Commission preliminarily estimates an aggregate ongoing burden of 192,384 hours and $150,300,000 to ensure compliance with the proposed Rule.

+

The Commission requests specific comments on each of its estimates with respect to the estimated burden and costs on members to comply with the proposed Rule. In particular, the Commission requests comment on the specific types and amount of costs, as well as internal staff burden, that would be incurred to modify members’ order handling, trading, and other systems to comply with the proposed Rule. The Commission requests comment whether, and if so how, the estimated costs would be impacted if the members did not have to provide the information in proposed Rule 613(c)(7)(vi) and (vii) (the non-real time information).331 For instance, would requiring the reporting to the central repository of the account numbers for any subaccounts to which an execution is allocated, and the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid, require changes to systems other than order handling and execution systems?

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pubdate:  May 26, 2010 effdate: N/A +

E. Collection of Information is Mandatory

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Collection of Information is Mandatory + Compliance User: Self-Regulatory Organizations + Keywords: +

Each collection of information discussed above would be a mandatory collection of information.

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pubdate:  May 26, 2010 effdate: N/A +

F. Confidentiality

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Confidentiality + Compliance User: Self-Regulatory Organizations + Keywords: +

The proposed Rule would require that the information to be collected and electronically provided to the central repository would only be available to the national securities exchanges, national securities association and the Commission for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.332 Further, the national market system plan submitted pursuant to the proposed Rule would be required to include policies and procedures to ensure the security and confidentiality of all information submitted to the central repository, and to ensure that all plan sponsors and their employees, as well as all employees of the central repository, shall use appropriate safeguards to ensure the confidentiality of such data and shall agree not to use such data for any purpose other than surveillance and regulatory purposes.333

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pubdate:  May 26, 2010 effdate: N/A +

G. Retention Period of Recordkeeping Requirements

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Retention Period of Recordkeeping Requirements + Compliance User: Self-Regulatory Organizations + Keywords: + Rule 17a-1, + +

National securities exchanges and national securities associations would be required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.334 Members would be required to retain records and information in accordance with Rule 17a-4 under the Exchange Act.335

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pubdate:  May 26, 2010 effdate: N/A +

H. Request for Comments

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Paperwork Reduction Act, Request for Comments + Compliance User: Self-Regulatory Organizations + Keywords: +

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comment to: (1) evaluate whether each proposed collection of information is necessary for the performance of the functions of the agency, including whether the information shall have practical utility; (2) evaluate the accuracy of the agency’s estimate of the burden of each proposed collection of information; (3) enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of each collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

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pubdate:  May 26, 2010 effdate: N/A +

VI. Consideration of Costs and Benefits

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits + Compliance User: Self-Regulatory Organizations + Keywords: +

The Commission is sensitive to the anticipated costs and benefits of the proposed Rule and requests comments on the costs and benefits of the proposed Rule. The Commission encourages commenters to identify, discuss, analyze, and supply relevant data regarding any such costs or benefits.

+
pubdate:  May 26, 2010 effdate: N/A +

A. Benefits

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Benefits + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Proposed Rule 613, + SRO, + EBS, + ISG, + +

Proposed Rule 613 would require all national securities exchanges and national securities associations to jointly submit to the Commission an NMS plan to create, implement, and maintain a consolidated audit trail. The proposed consolidated audit trail would capture, in real time, certain information about each order (including quotations) for an NMS security, including the identity of the customer placing the order, and the details of routing, modification, cancellation, and execution (in whole or in part). In effect, an “electronic audit trail report” would be created for every event in the life of the order. The consolidated audit trail would be maintained by a central repository, and all exchanges, FINRA and the Commission would have access to the consolidated audit trail data for regulatory purposes.

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The Commission preliminarily believes that proposed Rule 613 would significantly aid each of the exchanges and FINRA in carrying out its respective statutory obligations to be organized and have the capacity to comply, and enforce compliance by its members, with its rules, and with the federal securities laws, rules, and regulations. Likewise, the Commission believes that proposed Rule 613 would significantly aid the Commission in its ability to oversee the exchanges and associations, and to enforce compliance by the members of exchanges and associations with the respective exchange’s or association’s rules, and the federal securities laws and regulations. The proposed consolidated audit trail also would aid the Commission in its efforts to limit the manipulation of security prices, and to limit the use of manipulative or deceptive devices in the purchase or sale of a security. Further, the proposal would benefit exchanges, FINRA, and Commission staff by improving the ability of exchanges, FINRA and Commission staff to conduct more timely and accurate trading analysis for market reconstructions, complex enforcement inquiries or investigations, as well as inspections and examinations.

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Specifically, the Commission preliminarily believes that, as proposed, Rule 613 would enable exchanges and FINRA to more effectively and efficiently detect, investigate, and deter illegal trading activity, particularly cross-market illegal activity, in furtherance of their statutory obligations. In addition, the Commission preliminarily believes that proposed Rule 613 would enhance the ability of the Commission staff in its regulatory and market analysis efforts. The proposed rule would achieve these objectives in several ways. First, proposed Rule 613 would require the central repository to collect the same data on customer and order event information from each exchange, FINRA, and all members of the exchanges and FINRA, in a uniform format. Currently, the scope and format of audit trail information relating to orders and executions differs, sometimes significantly, among exchanges and FINRA. Thus, by requiring that all exchanges, FINRA and their members submit uniform customer and order event data to the central repository in a uniform format that would more readily allow for consolidation, the proposed Rule would allow regulators to more easily, and in a more timely manner, surveil potential manipulative activity across markets and market participants. The Commission preliminarily believes that this increased efficiency would enhance the ability of SRO and Commission staff to detect and investigate manipulative activity in a more timely manner, whether the activity is occurring on one market or across markets (or across different product classes). Timely pursuit of potential violations can be important in, among other things, seeking to freeze and recover any profits received from illegal activity.

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The Commission also preliminarily believes that the proposed consolidated audit trail would enhance the ability of SRO and Commission staff to regulate the trading of NMS securities by requiring that key pieces of information currently not captured in existing audit trails be reported to the proposed consolidated audit trail. For example, proposed Rule 613 would require that the customer that submits or originates an order be identified in the consolidated audit trail. In addition, the proposed Rule would require the assignment of unique identifiers for each order, each customer, and each broker-dealer and SRO that handles an order. Further, the proposed Rule would greatly enhance the ability to track an order from the time of order inception through routing, modification, cancellation, and execution. The Commission preliminarily believes that this information would allow regulators to more easily track potential manipulative activity across markets and market participants, and would place SRO and Commission staff in a better position to surveil whether exchange rules, as well as federal securities laws, rules and regulations, are complied with.

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The proposal also would require that most of the required audit trail information be submitted on a real time basis. Most existing audit trails currently collect information on orders at the end of the day, or upon request, rather than in real time.336 Other order and execution information, such as EBS data and Rule 17a-25 data, is provided to the Commission only upon request. The proposed consolidated audit trail would require that certain information about orders and executions be provided on a real time basis. The Commission preliminarily believes that this requirement could significantly increase the ability of SRO and Commission staff to identify and investigate manipulative activity in a more timely manner.337

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The Commission preliminarily believes that the proposal also would benefit exchanges, FINRA, and Commission staff by improving the ability of exchanges, FINRA and Commission staff to conduct timely and accurate trading analysis for market reconstructions, complex enforcement inquiries or investigations, as well as inspections and examinations. Today, trading activity is widely dispersed among various market centers, and one or more related orders for one or more securities or other related products may be routed to multiple broker-dealers and more than one exchange, or be executed in the OTC market. Thus, SRO and Commission regulatory staff investigating potentially illegal behavior may have to collect information from multiple broker-dealers and then examine, analyze and reconcile the disparate information provided in widely divergent formats to accurately reconstruct all trading activity during a particular time frame in the course of investigating potentially manipulative activity. Obtaining the necessary order and execution information and undergoing the necessary analysis to determine whether any wrongdoing exists based on the information available today requires substantial investment of time and effort on behalf of regulatory authorities. Under proposed Rule 613, regulatory authorities would be able to access all information about events in the life of an order or related orders, and obtain critical information identifying the customer (or beneficial owner) behind the order(s) directly from the central repository in a uniform format. Thus, the Commission preliminarily believes that ability of SRO and Commission staff to conduct timely and accurate trading analysis for market reconstructions, complex enforcement inquiries and investigation, as well as inspections and examinations, would be significantly improved.

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The Commission also preliminarily believes that the proposal would benefit SROs, as well as the NMS for NMS securities, by ultimately reducing some regulatory costs, which may result in a more effective re-allocation of overall costs. For example, by providing a more comprehensive and searchable database, the Commission preliminarily believes that the consolidated audit trail would significantly decrease the amount of time invested by SRO staff to determine whether any illegal activity is occurring either on one market or across markets. Currently, SRO regulatory staff may need to submit multiple requests to its members during the course of an investigation into possible illegal activity, or submit multiple requests to ISG to obtain audit trail information from other SROs about trading in a particular security, and then commit significant staff time to collating and analyzing the data produced. The proposal would benefit the Commission in similar respects. For example, Commission staff often must submit numerous requests to members after the Commission receives information from equity cleared reports in an attempt to identify the ultimate customer (or beneficial account holder) that entered the order or orders in question. Substantial Commission staff resources currently are invested in analyzing the data that is received in response to these requests.

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Under proposed Rule 613, SRO regulatory staff would have immediate, easily searchable access to the consolidated audit trail data through the central repository for purposes of conducting surveillance, investigations, and enforcement activities. Commission staff likewise would have more efficient and timely access for purposes of conducting risk assessments of referrals received, investigations, and enforcement activities, and for purposes of conducting market reconstructions or other analysis. Thus, the Commission preliminarily believes that the proposal would benefit SRO and Commission staff, as well as the market for NMS securities as whole, by providing immediately accessible audit trail information to regulatory staff, which would in turn reduce staff time and effort that would otherwise be needed to collect and analyze audit trail information and allow such staff time and effort to be redirected to more effective uses, possibly even allowing the staff to engage in more investigations. In other words, if the costs per investigation decreased because of efficiencies in the proposed consolidated audit trail information, SRO or Commission staff may be able to review and investigate a greater amount of suspicious activity.

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Likewise, the Commission preliminarily believes that proposed Rule 613 would benefit the exchanges, FINRA, the Commission, and the members of SROs, as well as investors and the public interest, by reallocating the overall cost of regulating the markets for NMS securities on an ongoing basis toward more efficient regulation. For instance, the Commission preliminarily believes that the proposed consolidated audit trail would eliminate the need for certain SRO and Commission rules that currently mandate the collection and provision of information, at least with respect to NMS securities. As noted above, many exchanges and FINRA each have their own disparate audit trail rules. Thus, a member of the various exchanges and FINRA could be subject to the audit trail rules of, and be required to submit different information to, more than one exchange and FINRA. The Commission intends that the proposed consolidated audit trail replace the need to have disparate SRO audit trail rules. If proposed Rule 613 were adopted, and the consolidated audit trail was implemented, the Commission preliminarily believes that the exchanges and FINRA would not need to have separate and disparate audit trail rules that apply to NMS securities applicable to their members. Thus, the Commission preliminarily believes that the proposed consolidated audit trail would ultimately result in the ability of SROs to repeal their existing audit trail rules because SRO audit trail requirements would be encompassed within proposed Rule 613. Similarly, the proposed consolidated audit trail also may render duplicative and thus unnecessary certain data obtained from the EBS system pursuant to Rule 17a-25 (and the SRO rules implementing the EBS system), and from the equity cleared data, at least as it relates to NMS securities. SRO and Commission staff instead would be able to access the audit trail information for every order directly from the central repository.338

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The Commission requests comment on any ongoing cost savings to SROs or their members that could be achieved by the proposal. Are there any other systems or technologies that could be replaced by the proposed audit trail? Would additional Commission action be required to achieve cost savings due to redundant rules or systems? Are there any new systems or technology requirements that could offset these potential cost savings? To what extent would any cost savings amount to a reallocation of resources towards more effective or efficient uses? Please provide specific examples. The Commission also requests comment as to whether the proposed Rule should require the NMS plan to include provisions relating to transition from the existing audit trails to the proposed consolidated audit trail.

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As discussed above, the Commission preliminarily believes that the proposal would significantly enhance the ability of SRO staff to efficiently and effectively regulate their market and their members, including detecting and investigating potential manipulative activity. The Commission also preliminarily believes that the proposed consolidated audit trail would benefit the Commission in its regulatory and market analysis efforts. More timely detection and investigation of potential manipulative activity may lead to greater deterrence of future illegal activity if potential wrongdoers perceive a greater chance of regulators identifying their activity in a more timely fashion. To the extent investors consider the improvement in regulators’ ability to detect and investigate wrongdoing as significant to their investment decisions, investor trust, which is a component of investor confidence, is improved and investors may be more willing to invest in the securities markets.339 An increase in investor participation in the securities markets, at least to the extent that the increase is allocated efficiently, can potentially benefit the securities markets as a whole, through better capital formation. Thus, the Commission preliminarily believes that the proposed consolidated audit trail would benefit the NMS for NMS securities by encouraging more efficient and potentially a higher level of capital investment.

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The Commission requests comment on how the proposal would impact investor protections and investor confidence. In particular, would the consolidated audit trail better align investor protections to the expectations that investors have about their protections? What would be the economic effect of the potential changes to investor protections or to better alignment of those protections with investor expectations? Would any of the anticipated benefits of the proposed Rule be mitigated if market participants alter their trading behavior, such as by shifting their trading activity to products or markets that do not require the capture of customer information to avoid compliance with the requirements of the proposed Rule? If so, please explain how so, and what, if any, steps the Commission should take in response.

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The Commission also preliminarily believes that proposed Rule 613 would enhance the overall reliability of audit trail data that is available to the Commission and SRO regulatory staff. Because the proposed Rule would require that the NMS plan include policies and procedures, including standards, to be used by the plan processor to ensure the timeliness, accuracy, and completeness of the audit data submitted to the central repository, there would be an automatic check on the incoming audit trail data submitted by exchanges and FINRA, and their members, for reliability and accuracy. The Commission expects that these policies and procedures would include validation parameters that would need to be met before audit trail data would be accepted into the central repository, and that the central repository would reject data that did not meet certain validation parameters, and require resubmission of corrected data. Thus, the Commission preliminarily believes that the integrity of audit trail information available to the Commission and to the regulatory staff of the exchanges and FINRA would be enhanced and safeguarded by the provisions applicable to the central repository pursuant to proposed Rule 613.

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+
pubdate:  May 26, 2010 effdate: N/A +

B. Costs

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + +

As discussed below, the Commission acknowledges that there likely would be significant up-front costs to implement the proposal. However, the Commission preliminarily believes that SRO and Commission staff, as well as SRO members, would realize other cost savings and benefits.

+
pubdate:  May 26, 2010 effdate: N/A +
1. Creation and Filing of NMS Plan
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Creation and Filing of NMS Plan + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + Proposed Rule 613, + +

The proposed Rule would require the exchanges and FINRA to jointly develop and file an NMS plan to create, implement and maintain a consolidated audit trail that would capture customer and order event information in real time for all orders in NMS securities, across all markets, from the time of order inception through execution, cancellation or modification.340 Exchanges and FINRA would be expected to undertake any joint action necessary to develop and file the NMS plan, and there would be attendant costs in doing so. For example, the Commission anticipates that exchange and FINRA staff would need to meet and draft the required terms and provisions of the NMS plan.341 The Commission preliminarily believes that the existing exchanges and FINRA would incur an aggregate one-time cost of approximately $3,503,100 to prepare and file the NMS plan.342 Once exchanges and FINRA have established the NMS plan, the Commission estimates that, on average, each exchange and FINRA would incur a cost of $48,384 per year to ensure that the plan is up to date and remains in compliance with the proposed Rule,343 for an estimated aggregate annual cost of $725,760.

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In estimating the costs for creation of the NMS plan, the Commission considered exchange and FINRA staff time necessary for preparing and filing the plan with the Commission. The Commission also considered the cost of outsourced legal services. The Commission requests comment on whether there are additional costs that would contribute to the expense of creating and filing the NMS plan. Please describe any such cost in detail and provide an estimate of the costs. In estimating the ongoing costs of the NMS plan, the Commission considered exchange and FINRA staff time necessary for periodically reviewing the plan in light of current market trends and technology. The Commission requests comment on these estimates and what types of costs would be incurred to keep the plan up to date.

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pubdate:  May 26, 2010 effdate: N/A +
2. Synchronizing Clocks
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Synchronizing Clocks + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + Proposed Rule 613, + +

The proposed Rule would require each exchange and FINRA, and the members of each exchange and FINRA, to synchronize its business clocks that are used for the purpose of recording the date and time of any reportable event that must be reported pursuant to the proposed Rule to the time maintained by the National Institute of Standards and Technology, consistent with industry standards.344 As part of the initial implementation of the consolidated audit trail, the exchanges, FINRA and their members therefore would have to ensure that their business clocks are synchronized with the time maintained by the National Institute of Standards and Technology. The proposed Rule also would require that the NMS plan provide for the annual evaluation of the synchronization time standard to determine whether it should be shortened, consistent with industry standards.345

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The Commission recognizes that the cost to each SRO and member to synchronize their clocks consistent with the proposed requirements would vary depending upon the SRO or member's existing systems. The Commission preliminarily believes, however, that most SROs and their members currently synchronize their clocks, and that therefore the SROs and their members would not incur significant costs to comply with this requirement.346 The Commission recognizes that each individual member or SRO’s costs may vary depending upon their current synchronization practices, their business structure, their order management and trading systems, and their geographic diversity. The Commission preliminarily estimates that an SRO or member that would need to make system changes to comply with the requirement would incur an average one-time initial cost of approximately $9,650.347

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The Commission also preliminarily estimates that there would be an average ongoing annual cost of approximately $11,580 to each exchange, FINRA, and member to synchronize their business clocks to the time maintained by the National Institute of Standards and Technology, consistent with industry standards.348 Further, the Commission preliminarily estimates that there would be an average cost to exchanges, FINRA and their members of approximately $6,192 per SRO or member to annually evaluate the synchronization time standards to determine whether it should be shortened, consistent with industry standards.349

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As stated above, the Commission preliminarily believes that the costs to the SROs and their members associated with synchronizing their clocks would not be significant because most SROs and their members currently synchronize their clocks. The Commission requests comments on whether commenters agree. If not, what costs would be incurred? Please be specific as to the type of changes necessary and the costs of making them. Further, the proposed Rule would require that all SROs and their members synchronize to same time standard and to the same level of accuracy. The Commission requests comment on its estimate of the cost to SROs and their members of initializing synchronizing business clocks, the ongoing costs for maintaining accurate synchronization, and the costs associated with annual evaluation of the synchronization time standard. Would SROs or their members incur costs, and if so, what types of costs?

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pubdate:  May 26, 2010 effdate: N/A +
3. Costs to Provide Information
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Costs to Provide Information + Compliance User: Self-Regulatory Organizations + Keywords: + SRO, + Rule 611 of Regulation NMS, + NMS Plan, + +

.A.5, the Commission preliminarily believes that the proposed Rule would require the collection and reporting on a real time basis of some information that national securities exchanges and national securities associations already record to operate their business, and are required to maintain in compliance with Section 17(a) of the Exchange Act and Rule 17a-1 thereunder.350 However, the proposed Rule would require each SRO to collect and report additional and more detailed information, and to report the information to the central repository in real time in a specified format. Based on discussions with SROs, the Commission anticipates that exchanges would need to enhance or replace their current systems to be able to comply with the proposed information collection and reporting requirements of the proposed Rule.

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Likewise, the Commission preliminarily believes the proposed Rule would require the collection of much of the information that registered broker-dealers already maintain in compliance with existing regulations.351 The proposed Rule, however, would require members to collect additional information for each order and, in addition to the new information, the members also would be required to report most of the information on a real time basis to the central repository in a specified uniform format. Based on discussions with members, the Commission anticipates that the SRO members would need to enhance or replace their current order handling, trading and other systems to be able to collect and report the required order and reportable event information to the central repository as required by the proposed Rule.

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The Commission recognizes that the extent to which a particular SRO or member would need to make systems changes would differ depending upon the SRO's market structure (e.g., floor vs. electronic) and systems, or the member’s current business operations and systems. The Commission preliminarily estimates that the average one-time, initial cost to exchanges and FINRA to put in place the systems necessary to identify, collect and transmit the consolidated audit trail information to the central repository would total approximately $5 million per SRO,352 for an aggregate estimated cost of $75 million for all SROs. In estimating this cost, the Commission has considered SRO staff time necessary to build new systems or enhance existing systems to comply with the proposed Rule.353 In addition, the Commission estimated costs for system hardware, software, and other materials.354 What other types of costs might SROs incur? Please be specific in your response.

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Once an SRO has implemented the changes necessary to collect and transmit the required information to the central repository as required by the proposed Rule, the Commission estimates that each SRO would incur, on average, an annual ongoing cost of $2.5 million to ensure compliance with the proposed Rule,355 for an estimated ongoing annual aggregate cost of $37.5 million for all SROs.

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The Commission understands that many members, particularly smaller members, currently rely on third parties to report information required to be reported pursuant to SRO audit trail or other rules. For example, a member that is an introducing broker who sends all of its customer order flow to a clearing broker currently may rely on that clearing broker for reporting purposes. The Commission preliminarily believes that these members would not undertake a fundamental restructuring of their business to comply with the proposed Rule. Instead, they might continue to rely on their clearing broker-dealer, or they might look for the ability to purchase a standardized software product provided by a third party that would provide the functionality to electronically capture the required information and transmit it to the central repository in real time. The costs of this approach are likely to be significantly lower than the costs to a member that enhances its own systems, or creates new systems, to comply with the proposed requirements to report information to the central repository. The Commission estimates that there are approximately 3,006 of these types of members, and that the average cost to such members to compensate a third party, whether a clearing broker-dealer or other third party, for software that would provide the necessary functionality to electronically capture the required information and transmit it to the central repository would be approximately $50,000 per member.356 In addition, the Commission estimates that, on average, each member would incur a one-time cost of $35,870 to incorporate the new functionality into its existing systems to ensure compliance with the proposed Rule.357 Thus, the Commission preliminarily estimates that each of these members would incur, on average, a one-time cost of $85,870, for an estimated aggregate cost of $258,125,220.

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The Commission also preliminarily estimates that each of these members would continue to incur, on average, annual costs of $66,512 to ensure continued compliance with the proposed Rule.358

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Do commenters believe that smaller members would likely rely on third parties to provide a functionality that would provide required data to the central repository? Why or why not? Would it be more cost effective for a small member to enhance existing systems or create new systems to comply with the proposed Rule? Why or why not? What would be the costs associated with each approach? Should members that currently rely on another party to report, such as their clearing broker, be able to have their clearing firms report on their behalf? Why or why not? How would allowing third-party reporting impact the ability to report data in real time? Would the manner in which these members currently maintain customer information create practical difficulties for providing the beneficial ownership information, or additional burdens that have not been taken into account in estimating costs? For example, is customer information stored electronically? What is the impact of the manner in which this information is currently stored on the Commission’s cost estimates?

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The Commission preliminarily estimates that there are 1,114 members that would undertake their own development changes to implement the proposed Rule.359 The Commission preliminarily estimates that the average one-time, initial cost to these members for development, including programming and testing of the systems necessary to identify, collect and transmit the consolidated audit trail information to the central repository, would be approximately $3 million per member,360 for an estimated aggregate cost of $3,342,000,000. This number would likely overestimate the costs for some of these members and underestimate it for others. For example, it likely overestimates the cost for ATSs as opposed to broker-dealers that have a customer and proprietary, or market-making, business, in part because of the narrower business focus of some ATSs. The Commission recognizes that some of these members may contract with one or more outside vendors to provide certain front-end order management systems. The third-party vendor may make changes to its systems to permit the members that use the system to capture and provide the required information to the central repository. Likewise, some of these members may contract with outside vendors to provide back-office functionality. These third-party vendors may make changes to their systems to permit the members that use the systems to capture and provide the required information to the central repository. The cost of these changes may be shared by the various members that use the systems, and thus may result in a reduced cost to an individual member to implement changes to its own systems to comply with the requirements of the proposed consolidated audit trail.

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The Commission requests comment on this estimate. Specifically, what types of costs would members incur building new systems, or enhancing existing systems, to comply with the proposed Rule? Would members need to expand their capacity as part of any systems upgrades? What would be the costs associated with this? Would the manner in which these members currently maintain customer information create practical difficulties for providing the beneficial ownership information, or additional burdens that have not been taken into account in estimating costs? For example, is customer information stored electronically? What is the impact of the manner in which this information is currently stored on the Commission’s cost estimates?

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Once these members have largely implemented the changes necessary to collect and report the required order and reportable event information to the central repository as required by the proposed Rule, the Commission estimates that each such member would incur, on average, an annual ongoing cost of approximately $1.5 million,361 for an estimated aggregate ongoing cost of $ 1,671,000,000. These estimates would cover the costs associated with continued compliance with the proposed Rule.362

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The Commission requests comment on what ongoing costs SROs and their members would incur to continue to collect and report the required information in compliance with the proposed Rule. What types of costs would be included? Are there differences in the costs that SROs and their members would incur? Why or why not.

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The proposal would require the transmission of information in real time to the central repository. The Commission preliminarily believes that this approach would have greater benefits and would be lower cost than an alternative of transmitting all reports in batch mode. Real time submission could simply require a "drop copy" of a reportable event be sent to the central repository at the same time that the reportable event is otherwise occurring. Batching, however, would require the build up of reports to be sent periodically, and the amount of data sent in a batch could be significantly larger than the data sent in real time. The Commission requests comment on the technology requirements and other costs of real time transmission of information versus periodically batching the reports. Would real time reporting be more or less costly than batch reporting? Please explain with specificity why or why not and provide cost estimates. If real time reporting would be more expensive, are the greater costs justified by the benefits of real time reporting described above? If batch reporting is the better alternative, what should be the frequency of the batch reporting and why? Does the answer depend on the type of security? The Commission also requests comment on what types of systems changes SROs and members would need to make to implement the proposed Rule and NMS plan requirements, and the attendant costs. What specific types or items of information, if any, would be required to be reported to the central repository by a member that would not already be collected and maintained in an automated format?

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pubdate:  May 26, 2010 effdate: N/A +
4. Cost of Enhanced Surveillance Systems
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Cost of Enhanced Surveillance Systems + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + SRO, + Proposed Rule 613, + +

Pursuant to the proposed Rule, exchanges and FINRA also would be required to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information collected through the proposed consolidated audit trail.363 The Commission preliminarily estimates that the average one-time cost to implement this requirement would be approximately $10 million for each exchange and FINRA, for an estimated aggregate cost of $150 million.364 The Commission also estimates, on average, ongoing annual costs associated with the enhanced surveillance would be approximately $2,610,600,365 for an estimated aggregate, ongoing cost of $39,159,000. Based on discussions with market participants, the Commission recognizes that these estimated costs may vary, perhaps significantly, based on the market model utilized by a particular SRO. For certain SROs, these figures may overestimate the costs associated with developing or enhancing surveillance systems, while for others, it may underestimate the costs. The Commission requests comment on whether these figures accurately estimate the costs for developing or enhancing surveillance systems to comply with the proposed Rule for the SROs. Would these figures be lower or higher for SROs whose trading systems are fully electronic? Would the cost estimates be higher or lower for those SROs that have a trading floor? What other considerations would impact individual SRO costs? Please be specific in your response.

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The Commission also requests comment on whether SROs would be able to enhance their existing surveillance and regulation to make use of the proposed consolidated information or would they need to develop new surveillance systems to comply with the proposed Rule? How would SROs enhance their current surveillance systems? What would be the costs associated with updating current systems as opposed to developing new surveillance systems? Would it be more cost efficient to establish coordinated surveillance across exchanges and FINRA, rather than having each SRO be responsible for surveillance on its own market using the consolidated data? What would be the costs associated with developing consolidated cross-market surveillance?

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pubdate:  May 26, 2010 effdate: N/A +
5. Central Repository System
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Central Repository System + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + SRO, + +

The central repository would be responsible for the receipt, consolidation, and retention of all the data required to be submitted by the exchanges and FINRA, and their members. The proposed Rule also would require that the central repository collect and retain on a current and continuous basis the NBBO for each NMS security, transaction reports reported pursuant to an effective transaction reporting plan, and last sale reports reported pursuant to the OPRA Plan. The central repository would be required to maintain the NBBO and transaction data in a format compatible with the order and event information collected pursuant to the proposed Rule. Further, the central repository would be required to retain the information collected pursuant to paragraphs (c)(7) and (e)(5) of the proposed Rule in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information shall be available immediately, or if immediate availability cannot reasonably and practically be achieved, any search query must begin operating on the data not later than one hour after the search query is made.366

+

The central repository thus would need its own system(s) to receive, consolidate, and retain the electronic data received from the plan sponsors and their members, as well as to collect and retain the NBBO and last sale data. The system would be required to be accessible and searchable by the sponsors and the Commission for regulatory purposes,367 with validation parameters allowing the central repository to automatically check the accuracy and the completeness of the data submitted, and reject data not conforming to these parameters. It is anticipated that the costs of development and operation of the central repository would be shared among the plan sponsors. The Commission preliminarily estimates a one-time initial cost to create the central repository, its systems and structure, of approximately $120 million for an average cost of approximately $8 million per plan sponsor.368

+

Does this estimate accurately reflect SRO staff time needed to create the central repository as well as the costs for any hardware, software and other materials required? Are there other cost components to creating the central repository the Commission should consider? Is the creation of a central repository as described in the proposed Rule for collection and consolidation of data the most cost effective way to achieve the objective of creation of a consolidated audit trail? Are there other alternatives the Commission should consider? Please describe the costs associated with any alternatives described.

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Once the plan sponsors have established the systems necessary for the central repository to receive, consolidate, and retain the required information, the Commission estimates that ongoing annual costs to operate the central repository would be approximately $100 million,369 which would be approximately $6.6 million per year per plan sponsor. The Commission also estimates that each plan sponsor would incur, on average, ongoing costs of $48,384 per year for actions taken to review the operation and administration of the central repository.370 In addition, the Commission estimates that the central repository would incur an ongoing cost of $1,370 per year to purchase the NBBO and last sale data feeds from the SIPs.371

+

The Commission request comment on these estimated costs. Does this estimate accurately reflect the cost of storing data in a convenient and usable standard electronic data format that is directly available and searchable, without any manual intervention, for a period of not less than 5 years? Would these costs estimates change if the scope of the consolidated audit trail were expanded to include equity securities that are not NMS securities; corporate bonds, municipal bonds, and asset-backed securities and other debt instruments; credit default swaps, equity swaps, and other security-based swaps? What systems or other changes would be necessary to accommodate these other products? How would those changes impact costs?

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+
pubdate:  May 26, 2010 effdate: N/A +
6. SRO Rule Filings
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, SRO Rule Filings + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + FINRA, + SRO, + +

The exchanges and FINRA also would be required to file proposed rule changes to implement the provisions of the NMS plan with respect to their members.372 The Commission notes that the exchanges and FINRA would be able to use the NMS plan as a roadmap to draft the content of their required proposed rule changes. The Commission also notes that the rule filing format and process is not new to the exchanges or to FINRA.373 The Commission estimates that the aggregate cost of each SRO filing a proposed rule change to implement the NMS plan to be approximately $590,175.374

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+
pubdate:  May 26, 2010 effdate: N/A +
7. Expansion of the proposed consolidated audit trail
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Expansion of the proposed consolidated audit trail + Compliance User: Self-Regulatory Organizations + Keywords: + NMS, + SRO, + +

The proposed Rule would require the plan sponsors to jointly provide to the Commission a report outlining how the sponsors would incorporate into the consolidated audit trail information with respect to: (1) equity securities that are not NMS securities; (2) debt securities; and (3) primary market transactions in equity securities that are not NMS securities, in NMS stocks, and in debt securities. The sponsors would be required to address, among other things, details for each order and reportable events that they would recommend requiring to be provided; which market participants would be required to provide the data; an implementation schedule; and a cost estimate. Thus, the exchanges and FINRA would need to, among other things, undertake an analysis of technological and computer system acquisitions and upgrades that would be required to incorporate such an expansion. The Commission preliminarily estimates that the one-time cost to the exchanges and FINRA to create and file with the Commission a report for expanding the scope of the consolidated audit trail would be approximately $1,751,550 for a one-time cost of $116,770 per SRO.375

+

Does this estimate accurately reflect the expenses, including SRO staff time and systems analyses, which SROs would incur in preparing the required report? Are there other costs components that should be considered in determining costs associated with preparing the required report? Please provide details on any additional costs that should be considered.

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+
pubdate:  May 26, 2010 effdate: N/A +
8. Other Costs
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Other Costs + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +

Proposed Rule 613 would specifically require, for the receipt or origination of each order, information to be reported to the central repository with respect to the ultimate customer that generates the order. Specifically, members would be required to report to the central repository information about the beneficial owner of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner, and each customer would be identified by a unique customer identifier. Thus, information about "live" orders, as well as overall order and execution information for a particular customer, would be available in the central repository. In recognition of the sensitivity of this data, the proposed Rule requires the NMS Plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to, and maintained by, the central repository.

+

However, a potential cost could be incurred if the security and confidentiality of the information submitted to the central repository is breached, either by malfeasance or accident. In either case, if identifying information about customers and their trading is made public -- contrary to the expectations and intentions of the customers – the Commission preliminarily believes that this may have a negative effect on the securities markets. Specifically, investors may be less willing to allocate their capital to the securities markets if their expectation that their personal identifying and trading information will be adequately protected by the central repository is not met. Under these circumstances, there could be a reduction in the capital invested in the markets for NMS securities by investors, to the detriment of the U.S. securities markets overall.

+

Proposed Rule 613 also would require that the NMS plan include policies and procedures, including standards, for the plan processor to use to ensure the integrity of the information submitted to the central repository. Specifically, the proposed Rule requires that the policies and procedures be designed to ensure the timeliness, accuracy, and completeness of the data provided to the central repository by the exchanges, FINRA and their members, and to require the rejection of data provided if the data does not meet validation parameters, and the retransmission of such data. The Commission notes that, despite such safeguards for ensuring the integrity of the audit trail data, the information submitted by the exchanges, FINRA and their members could be inaccurate, either due to system or human error. If the reliability of the data is compromised, this could reduce the usefulness of the consolidated audit trail data for regulatory purposes.

+

Are there any other non-tangible costs associated with potential breaches of the integrity or confidentiality of the data required to be submitted to the central repository that the Commission should consider?

+
+
pubdate:  May 26, 2010 effdate: N/A +
9. Total Costs
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Costs, Total Costs + Compliance User: Self-Regulatory Organizations + Keywords: + NMS Plan, + +

Based on the assumptions and resulting estimated costs discussed above, the Commission preliminarily estimates the initial aggregate cost the exchanges and FINRA would incur to comply with the proposed Rule, other than costs related to creating and operating the central repository, would be approximately $231 million,376 and ongoing aggregate annual costs would be approximately $77.7 million.377 In addition, the exchanges and FINRA would incur an initial aggregate cost of approximately $120 million to set up the central repository,378 with ongoing annual costs to operate the central repository of approximately $101 million.379 For SRO members that would make changes to their own order management and trading systems to comply with the proposed Rule,380 we estimate the initial aggregate one-time cost for implementation of the proposed Rule would be approximately $3.4 billion381 and aggregate ongoing annual costs would be approximately $1.7 billion.382 For SRO members that are likely to rely on a third party to comply with the proposed Rule (such as their clearing broker),383 we estimate the initial aggregate one-time cost for implementation of the proposed Rule would be approximately $287 million384 and ongoing annual costs would be approximately $253 million.385 Therefore, for all SROs and members, we estimate that the total one-time aggregate cost to implement the proposed Rule would be approximately $4 billion and the total ongoing aggregate annual costs would be approximately $2.1 billion.

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+
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pubdate:  May 26, 2010 effdate: N/A +

C. Request for Comment

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Costs and Benefits, Request for Comment + Compliance User: Self-Regulatory Organizations + Keywords: + Rule 613 of Regulation NMS, + +

The Commission requests general comment on the costs and benefits of proposed Rule 613 of Regulation NMS discussed above, as well as any costs and benefits not already described which could result from the proposed Rule. The Commission also requests data to quantify any potential costs or benefits.

+

The Commission requests comment on what, if any, would be the impact of the proposed Rule on competition among the exchanges and other non-exchange market centers? If commenters believe there would be an impact on competition, please explain and quantify the costs or benefits of such impact. If commenters believe that there would be a cost, what steps could the Commission take to mitigate such costs?

+

The Commission also requests comment on whether the requirements of the proposed Rule, such as the requirement to provide detailed information to the central repository on a real time basis, would have an impact on any form of legal trading activity engaged in by market participants, or the speed with which trading occurs. For example, would requiring additional information to be attached to an order when the order is routed from one member or exchange to another - such as the unique order identifier - impact the speed with which routing and trading occurs? If not, why not? If so, why? If there would be an impact, do commenters believe that the impact would be negative? Why or why not? Also, would the requirement to provide customer and order information to the central repository in real time impact market participant trading activity? If so, how so? If commenters believe the impact would provide a benefit, please explain and quantify. If commenters believe that the impact would impose a cost, please explain and quantify. For example, would market participants be hesitant to engage in certain legal trading activity because of a concern about providing customer and order information in real time? Would market participants shift their trading activity to products or markets that do not require the capture of customer information to avoid compliance with this requirement of the proposed Rule? If so, how should the Commission address those concerns? Please be specific in your responses. The Commission requests comment on any other changes to behavior that commenters believe may result from application of the proposed Rule. For example, do commenters believe that the proposal would cause illegal trading activity to shift to products or markets not covered by the proposed Rule? If so, should that impact the scope of the proposed Rule? If so, how so? If not, why not?

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+
+
pubdate:  May 26, 2010 effdate: N/A +

VII. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation + Compliance User: Self-Regulatory Organizations + Keywords: + Section 3(f) of the Exchange Act, + NMS Plan, + SRO Rules, + +

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation.386 In addition, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition.387 Exchange Act Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. As discussed below, the Commission’s preliminary view is that the proposed Rule should promote efficiency, competition, and capital formation.

+

Section 11A(a)(3)(B) of the Exchange Act provides in part that the Commission may, by rule, require SROs to act jointly with respect to matters as to which they share authority under the Exchange Act in regulating a national market system for securities.388 Proposed Rule 613 would require all national securities exchanges and national securities associations to jointly submit to the Commission an NMS plan to create, implement, and maintain a consolidated audit trail for NMS securities. Under the proposal, pursuant to the NMS plan, and SRO rules adopted thereunder to implement the plan, national securities exchanges and national securities associations, as well as their members, would be required to provide detailed order and execution data to a central repository to populate a consolidated audit trail.389

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pubdate:  May 26, 2010 effdate: N/A +

A. Competition

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation, Competition + Compliance User: Self-Regulatory Organizations + Keywords: + NMS, + SRO, + Rule 613, + +

The Commission considered the impact of proposed Rule 613 on the national securities exchanges, national securities associations, and their members that trade NMS securities. The Commission begins its consideration of potential competitive impacts with observations of the current structure of the markets for trading NMS securities.

+

The industry for the trading of NMS securities is a competitive one, with reasonably low barriers to entry and significant competition for order flow. The intensity of competition across trading platforms that trade NMS securities has increased dramatically in the past decade as a result of technological advances and regulatory changes. This increase in competition has resulted in decreases in market concentration, more competition among market centers, a proliferation of trading platforms competing for order flow, and decreases in trading fees.

+

In addition, the Commission, within the past five years, has approved applications by BATS,390 Direct Edge,391 Nasdaq,392 and C2393 to become registered as national securities exchanges for trading equities, approved proposed rule changes by two existing exchanges – the ISE394 and CBOE395 - to add cash equity trading facilities to their existing options business; and approved proposed rule changes by two existing exchanges – Nasdaq and BATS – to add options trading facilities to their existing cash equities business.396

+

The Commission believes that competition among trading venues for NMS stocks has been facilitated by several Commission rules: Rule 611 (the Order Protection Rule), which encourages quote-based competition between market centers; Rule 605, which empowers investors and brokers to compare execution quality statistics across trading venues; and Rule 606, which enables customers to monitor the order routing practices. Similarly, there is rigorous competition among the options exchanges that has been facilitated by regulatory efforts. These include the move to multiple listing,397 the extension of the Commission’s Quote Rule to options,398 the prohibition against trading outside of the national best bid and offer,399 the adoption of market structures on the floor-based exchanges that permit individual market maker quotations to be reflected in the exchange’s quotation,400 and the Minimum Quoting Increment Pilot Program.401

+

The broker-dealer industry also is a highly competitive industry with low barriers to entry. Most trading activity is concentrated among several dozen large participants, with thousands of small participants competing for niche or regional segments of the market. The reasonably low barriers to entry for broker-dealers are evidenced, for example, by the fact that the average number of new broker-dealers entering the market each year between 2001 and 2008 was 389.402

+

There are approximately 5,178 registered broker-dealers, of which approximately 890 are small broker-dealers.403 To limit costs and make business more viable, the small participants often contract with bigger participants to handle certain functions, such as clearing and execution, or to update their technology. Larger broker-dealers often enjoy economies of scale over smaller broker-dealers and compete with each other to service the smaller broker-dealers, who are both their competitors and customers.

+

In the Commission’s preliminary judgment, the costs of proposed Rule 613 would not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In industries characterized by easy entry and intense competition, the viability of some of the competitors may be sensitive to regulatory costs. Nonetheless, the Commission preliminarily believes that the overall marketplace for NMS securities would remain highly competitive, despite the costs associated with implementing proposed new Rule 613, even if those costs influence the entry or exit decisions of some individual broker-dealer firms.

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As discussed above in Sections V and VI, the Commission acknowledges that the proposal would entail significant costs of implementation. In particular, requiring national securities exchanges, national securities associations, and their members to capture the required information and provide it to the central repository in a uniform format, in particular information that is not currently captured under the existing audit trail or other regulatory requirements, would likely require significant one-time initial expenses to enhance or modify existing order handling, trading, and other systems. In addition, national securities exchanges and national securities associations would need to enhance or create new surveillance procedures to use the consolidated audit trail information. Preliminarily, the Commission does not believe that these implementation expenses would impose an undue burden on competition among SROs or among other market participants. The Commission preliminarily believes that the requirements associated with the proposed Rule are necessary and appropriate, and would apply uniformly to all national securities exchanges, national securities associations and their members, and thus would not result in an undue burden on competition.

+

As discussed above in Section II, the approach of proposed new Rule 613 would advance the purposes of the Exchange Act in a number of significant ways. The Commission preliminarily believes that proposed Rule 613 should aid each of the exchanges and FINRA in carrying out its statutory obligation to be organized and have the capacity to comply, and enforce compliance by its members, with its rules, and with the federal securities laws, rules, and regulations. Likewise, the Commission believes that proposed Rule 613 should aid the Commission in fulfilling its statutory obligation to oversee the exchanges and associations, and to enforce compliance by the members of exchanges and associations with the respective exchange’s or association’s rules, and the federal securities laws and regulations. The proposed consolidated audit trail also would aid the Commission in its efforts to limit the manipulation of security prices, and to limit the use of manipulative or deceptive devices in the purchase or sale of a security. By potentially decreasing the opportunities for illegal activity and market manipulation, the proposed Rule should promote fair competition among market participants on the basis of effective regulation. Further, by imposing uniform audit trail requirements on all SROs and their members, and thus removing any incentive to compete based on regulation (or lack thereof), Commission preliminarily believes that the proposed Rule would allow SROs and their members to more effectively compete on other terms such as the services provided, price, and available liquidity.

+

Based on the analysis above, the Commission preliminarily believes that the proposal would not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. However, we seek comment on the impact of the proposed Rule on competition. The Commission requests comment on what, if any, would be the impact of the proposed Rule on competition among the exchanges and other non-exchange market centers? If commenters believe there would be an impact on competition, please explain and quantify the costs or benefits of such impact. For example, as noted above, exchanges would have access through the central repository to trading information about their competitors’ customers. Do commenters believe that access to this information would have an impact on competition among exchanges? If so, please explain what the potential impact could be, and whether you believe that such impact would be an adverse. If so, please further address what, if any, steps the Commission should take in the proposed Rule to address such concerns.

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+
pubdate:  May 26, 2010 effdate: N/A +

B. Capital Formation

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation, Capital Formation + Compliance User: Self-Regulatory Organizations + Keywords: + Section II, proposed Rule 613, + NMS, + SRO, + Rule 613, + +

As discussed above in Section II, proposed Rule 613 is intended to enhance the ability of the SROs and the Commission to more efficiently and in a more timely manner monitor trading in NMS securities across all markets and market participants, which should further the ability of the SROs and the Commission staff to effectively enforce SRO rules and federal securities laws, rules and regulations. For example, the proposed consolidated audit trail would ensure that all orders are tracked from origination to execution or cancellation. Further, the consolidated audit trail would provide information on any modifications or routing decisions made with regard to an order. The Commission preliminarily believes that the proposed audit trail information would greatly enhance the ability of its staff to effectively monitor and surveil the securities markets. This enhanced ability of the SROs and Commission staff to enforce the federal securities laws, rules, and regulations should help ensure that market participants that engage in fraudulent or manipulative activities are identified more swiftly, which should deter future attempts to do the same. In general, the faster fraudulent or manipulative activity is identified and action is taken, the more likely ill-gotten gains will remain available to pay penalties or compensate victims.

+

The Commission preliminarily believes that by enhancing the SROs’ and the Commission’s ability to enforce the federal securities laws, rules and regulations, proposed Rule 613 could help maintain or increase investor confidence in the fairness of the securities markets. Investor confidence may increase as the potential for the detection of illegal activity is increased and the risk of investment loss due to undetected illegal activity decreases. Bolstering investor confidence in the fairness of the securities markets may increase the level of investment, which could promote capital formation to the extent that the increase is allocated efficiently. This would promote capital formation because as capital is better allocated, issuers with the most productive capital needs may be better able to raise capital.

+
+
pubdate:  May 26, 2010 effdate: N/A +

C. Efficiency

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation, Efficiency + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613, + SRO, + OTC, + +

Proposed Rule 613 would require the creation and maintenance of a consolidated audit trail, which the Commission preliminarily believes would greatly enhance the ability of SRO staff to effectively monitor and surveil the securities markets, and thus detect illegal activity in a more timely manner, whether on one market or across markets. With an audit trail designed to help the SROs reconstruct and analyze time-sequenced order and trading data, the SROs could more quickly investigate the nature and causes of unusual market movements or trading activity and initiate investigations and take regulatory actions where warranted. An increase in detected and prosecuted violations of the securities laws, rules, and regulations would likely act as deterrent to future violations. Likewise, the ability of the Commission to better understand unusual market activity, such as during a period of intense volatility, could lead to better oversight, or more focused regulation where warranted, of the causes of such activity. For example, the possibility of more prompt detection of illegal activity would likely deter future abusive or manipulative trading activity from being used to manipulate market prices to artificial levels or by accelerating a declining market in one or several securities. Thus, the Commission preliminarily believes that proposed Rule 613 would help to ensure that markets function efficiently. As a result, the Commission preliminarily believes that the proposed consolidated audit trail would help promote the efficient functioning of markets, which should help enhance the protection of investors and further the public interest.

+

Further, the Commission preliminarily believes that the proposed Rule, by creating one central repository to which each national securities exchange, national securities association, and their members would be required to provide the same data in the same format, could reduce or eliminate the need for each individual SRO to have it own disparate requirements. Elimination of often inconsistent regulation on members would promote efficiency because members would no longer be required to submit disparate data to multiple regulators pursuant to multiple, and sometimes inconsistent, SRO and Commission rules.

+

The Commission requests comment on all aspects of this analysis and, in particular, on whether the proposed consolidated audit trail would place a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, as well as the effect of the proposal on efficiency, competition, and capital formation. The Commission also requests comment on the impact, if any, of the proposed Rule on investors’ trading activities. Would the proposed Rule impact investors’ incentives to engage in certain types of legal trading in NMS securities, or other products, on the exchanges or OTC markets that would be subject to the proposed Rule? If so, why, and what impact would that have on the competitiveness of the U.S. markets? Would the proposed Rule impact market participants’ incentives to engage in certain types of illegal trading activity in products other than NMS securities or in other markets? If so, how so, and what if any steps should the Commission take to address the expected changes in behavior? Commenters are requested to provide empirical data and other factual support for their views.

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pubdate:  May 26, 2010 effdate: N/A +

VIII. Consideration of Impact on the Economy

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Consideration of Impact on the Economy + Compliance User: Self-Regulatory Organizations + Keywords: + SBREFA, + Rule 613, + +

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,”404 the Commission must advise the Office of Management and Budget as to whether the proposed regulation constitutes a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results or is likely to result in: (1) an annual effect on the economy of $100 million or more (either in the form of an increase or a decrease); (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effect on competition, investment or innovation.

+

The Commission requests comment on the potential impact of proposed Rule 613 on the economy on an annual basis, on the costs or prices for consumers or individual industries, and on competition, investment or innovation. Commenters are requested to provide empirical data and other factual support for their view to the extent possible.

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pubdate:  May 26, 2010 effdate: N/A +

IX. Initial Regulatory Flexibility Act Analysis

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis + Compliance User: Self-Regulatory Organizations + Keywords: + Regulatory Flexibility Act (“RFA”), + Section 603(a), + RFA, + Proposed Rule 613, + NMS Plan, SRO, - Plan Processor, - Selection Plan, - CAT NMS plan, -

Amendment No. 1 included a provision providing that no SRO shall vote in the process narrowing the set of Shortlisted Bidders if a Bid submitted by the SRO or an Affiliate of the SRO is a Shortlisted Bid or if the SRO or its Affiliate is included as a material subcontractor as part of a Bid (a “Bidding Participant”10).11 The same recusal provision exists in the second—but not the first—round of a two-round voting process by the Selection Committee12 to select the Plan Processor from among the Shortlisted Bidders.13 The SROs state that they included the recusal provision to address potential conflicts of interest in selecting the Plan Processor.

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In Amendment No. 2, the SROs propose to modify the Selection Plan to require that an SRO that is a Bidding Participant be recused from voting in any round to select the Plan Processor in which a Bid from or including such Bidding Participant or its Affiliate is being considered.14 Amendment No. 2 therefore would extend to the first selection round the recusal requirement that is currently only in place for the second selection round and the vote, if any, that narrows the list of Shortlisted Bidders.

-

The SROs reiterate that the Selection Plan balances the competing goals of ensuring all SROs participate meaningfully in the process of developing the CAT NMS Plan and mitigating potential conflicts of interest related to the involvement of a bidding SRO through information barriers and the voting limitations.15 The SROs state that, based on their experience with these existing measures, the Selection Plan adequately addresses the potential conflicts of interest related to bidding SROs.16 Nonetheless, the SROs explain that requiring recusal in all rounds of the selection process will further the SROs’ goal of ensuring the fair and impartial consideration and selection of the CAT Plan Processor.17

+

The Regulatory Flexibility Act (“RFA”)405 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a)406 of the Administrative Procedure Act,407 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on “small entities.”408

+

Proposed Rule 613 of Regulation NMS would require the national securities exchanges and national securities associations to jointly develop and file with the Commission a NMS plan to implement and maintain a consolidated audit trail. Pursuant to such NMS plan, and rules that would be adopted by the SROs to implement the plan, national securities exchanges and national securities associations, as well as their members, would be required to provide data to a central repository to populate a consolidated audit trail.409

+
pubdate:  May 26, 2010 effdate: N/A +

A. Reasons for the Proposed Rule

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Reasons for the Proposed Rule + Compliance User: Self-Regulatory Organizations + Keywords: + FINRA, + Rule 17a-25, + SRO, + EBS, + +

The Commission preliminarily believes that with today’s electronic, interconnected markets, there is a heightened need for regulators to have efficient access to a more robust and effective cross-market order and execution tracking system. As discussed above, currently many of the national securities exchanges and FINRA have audit trail rules and systems to track information relating to orders received and executed, or otherwise handled, in their respective markets. While the information gathered from these audit trail systems aids the SRO and Commission staff in their regulatory responsibility to surveil for compliance with SRO rules and the federal securities laws and regulations, the Commission preliminarily believes that existing audit trails are limited in their scope and effectiveness in varying ways.410 In addition, while the SRO and Commission staff also currently receives information about orders and/or trades through the EBS system, Rule 17a-25,411 and from equity cleared reports, the information is limited, to varying degrees, in detail and scope. 412

+

The creation and implementation of a consolidated audit trail, as proposed, would enable regulators to better fulfill their regulatory responsibilities to monitor for and investigate potentially illegal activity in the NMS for securities in a more timely fashion, whether on one market or across markets. A consolidated audit trail also would enhance the ability of the Commission in investigating and preparing market reconstructions, and in understanding the causes of unusual market activity. Further, timely pursuit of potential violations can be important in seeking to freeze and recover any profits received from illegal activity.

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+
pubdate:  May 26, 2010 effdate: N/A +

B. Objectives and Legal Basis

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Objectives and Legal Basis + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + Compliance with Rules, + Federal Securities Laws, + Statutory Obligations, + Rule 613, + Exchange Act - Sections 2, + Exchange Act - Sections 3, + Exchange Act - Sections 11, + Exchange Act - Sections 11A, + Exchange Act - Sections 15, + Exchange Act - Sections 15A, + Exchange Act - Sections 17, + 15 U.S.C. 78, Related Ruale, + +

Each national securities exchange and national securities association must be organized and have the capacity to comply, and enforce compliance by its members, with its rules, and with the federal securities laws, rules, and regulations.413 Likewise, the Commission oversees the exchanges and associations,414 and enforces compliance by the members of exchanges and associations with the respective exchange’s or association’s rules, and the federal securities laws and regulations.415 The Commission preliminarily believes that the exchanges, FINRA and the Commission itself could more effectively and efficiently fulfill these statutory obligations to oversee and regulate the NMS if the SROs and the Commission had direct access to more robust, and timely, order and execution information across all markets.

+

The Commission is proposing Rule 613 under the authority set forth in Exchange Act Sections 2, 3(b), 5, 6, 11, 11A, 15, 15A, 17(a) and (b), 19, 23(a), and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, 78w(a), and 78mm.

+
+
pubdate:  May 26, 2010 effdate: N/A +

C. Small Entities Subject to the Proposed Rule

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Small Entities Subject to the Proposed Rule + Compliance User: Self-Regulatory Organizations + Keywords: + Small Entities, + +
pubdate:  May 26, 2010 effdate: N/A +
1. National Securities Exchanges and National Securities Associations
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Small Entities Subject to the Proposed Rule, National Securities Exchanges and National Securities Associations + Compliance User: Self-Regulatory Organizations + Keywords: + National Securities Exchange, + National Securities Association, + Exchange Act - Sections 6, + Exchange Act - Sections 15A, + Small Entites, + +

The proposed Rule would apply to national securities exchanges registered with the Commission under Section 6 of the Exchange Act and national securities associations registered with the Commission under Section 15A of the Exchange Act. None of the national securities exchanges registered under Section 6 of the Exchange Act or national securities associations registered with the Commission under Section 15A of the Exchange Act that would be subject to the proposed Rule are "small entities" for purposes of the RFA.416

+
+
pubdate:  May 26, 2010 effdate: N/A +
2. Broker-Dealers
+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Small Entities Subject to the Proposed Rule, Broker-Dealers + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613(g), + Regulatory Flexibility Act, + Exchange Act, + +

Proposed Rule 613(g) would apply to all broker-dealers that are members of a national securities exchange or national securities association. Commission rules generally define a broker-dealer as a small entity for purposes of the Exchange Act and the Regulatory Flexibility Act if the broker-dealer had a total capital of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared, and it is not affiliated with any person (other than a natural person that is not a small entity).417

+

The Commission estimates that as of December 31, 2008, there were approximately 890 Commission-registered broker-dealers that would be considered small entities for purposes of the statute. Each of these brokers-dealers, assuming that they are all members of one or more national securities exchange or FINRA, would be required to comply with the proposed Rule.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

D. Reporting, Record Keeping, and Other Compliance Requirements

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Reporting, Record Keeping, and Other Compliance Requirements + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613(g), + Rule 17a, + Audit Trail Rules, + +

Proposed Rule 613(g)(2) would impose new reporting and record keeping requirements on small broker-dealers. While certain elements of order and execution information that such small broker-dealers would be required to collect and submit to the central repository are already required to be maintained by broker-dealers pursuant to Rules 17a-3 and 17a-25 under the Exchange Act or the SRO audit trail rules, the proposed Rule would require the collection of additional information that is not required to be collected under these rules. Further, small broker-dealers would be responsible for complying with the proposed Rule’s requirements for reporting to the central repository the required order and transaction data.

+

The proposed Rule would require that most of the information collected be reported on a real time basis, rather than on an “as requested” basis, and that all required information be submitted in a uniform format. Accordingly, the Commission preliminarily believes that even those small broker-dealers that already have systems in place for submitting order and transaction information to regulators upon request, or to comply with existing SRO audit trail rules, would need to make modifications to their existing order handling and trading systems to comply with the proposed Rule, or rely on outside vendors to provide a functionality that would provide information to the central repository.

+
+
pubdate:  May 26, 2010 effdate: N/A +

E. Duplicative, Overlapping, or Conflicting Federal Rules

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Duplicative, Overlapping, or Conflicting Federal Rules + Compliance User: Self-Regulatory Organizations + Keywords: + Proposed Rule 613(g), + Rule 17a-3, + Rule 17a-25, + +

As stated above, broker-dealers are subject to record keeping and reporting requirements under Rules 17a-3 and 17a-25 under the Exchange Act. Rule 17a-3 requires that broker-dealers maintain records that would capture some of the same information required to be collected and submitted pursuant to the proposed Rule.418 Also, as part of the Commission’s existing EBS system, pursuant to Rule 17a-25 under the Exchange Act, the Commission requires registered broker-dealers to keep records of some of the information that would be captured by proposed Rule 613.419

+

However, data collected pursuant to Rules 17a-3 and 17a-25 is limited in scope and is provided to the Commission only upon request. The proposed Rule would require the collection of significantly more information420 and would require that most of the information about orders and executions be provided to the central repository on a real time basis, not merely be stored and provided upon request. Thus, the Commission preliminarily believes that while these Federal rules overlap with certain requirements of the proposed Rule, the scope and purpose of the proposed Rule is more expansive than what is currently required and will more efficiently provide regulators with the information needed to effectively surveil trading activity across markets.

+
+
pubdate:  May 26, 2010 effdate: N/A +

F. Significant Alternatives

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Significant Alternatives + Compliance User: Self-Regulatory Organizations + Keywords: + RFA 3(a), + Alternatives, + EBS System, + SRO, + Rule 17a-25, + NMS Plan, + Small Broker-Dealers, + +

Pursuant to 3(a) of the RFA, the Commission must consider the following types of alternatives: (1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) clarification, consolidation, or simplification of compliance and reporting requirements under the Rule for small entities; (3) the use of performance rather than design standards; and (4) and exemption from coverage of the proposed Rule, or any part thereof, for small entities.

+

The Commission has considered whether it would more be more cost effective to enhance existing systems to achieve the proposed Rule’s objective, rather than create a central repository. For example, the Commission considered expanding the scope of the information collected by existing audit trails, the EBS system, and/or Rule 17a-25, but determined that this approach would not result in the creation of a comprehensive consolidated audit trail. Under such an approach, SROs would still need to check multiple repositories of data to gather information about trading activity occurring across markets. Further, the goal of capturing data in a uniform format would be complicated if data were collected by multiple repositories. In addition, this approach would not resolve concerns over how long it takes to obtain data when it is not available in real time, but only required to be provided upon request. Without the centralization of data in a uniform electronic format, the Commission preliminarily believes that the goals of the proposed Rule could not be achieved.

+

The Commission preliminarily believes that proposing a new uniform audit trail rule that would apply equally across all SROs and their members would be more efficient and effective than requiring each SRO to separately amend and enhance its existing order audit trail or EBS rules and systems, and amending Rule 17a-25. The scope of the proposed audit trail – requiring each member and SRO to report the same information for each order, for each reportable event, in a uniform format, in real time, across all markets – is fundamentally different than what is collected under existing order audit trails, the EBS system, and Rule 17a-25.

+

The Commission also has considered allowing certain small broker-dealers to submit certain trading data in a manual, rather than an electronic, format.421 However, the Commission preliminarily does not believe that the intent and objectives of proposed Rule 613 could be achieved if small broker-dealers are subject to differing compliance or reporting requirements, such as manual reporting of data, or timetables. The Commission preliminarily believes that to be effective the consolidated audit trail should contain order and execution information from all broker-dealers, including small broker-dealers, in a uniform electronic format. Without this information, the SROs and the Commission would not have a complete and timely cross-market audit trail to utilize in their regulatory oversight of small broker-dealers, their customers, and the securities markets. Further, the Commission preliminarily believes that the timetable contained in the proposed Rule, which would give brokers-dealers two years after effectiveness of the NMS plan to implement the proposed requirements to collect and report the required information to the central repository, would allow small broker-dealers sufficient time to modify existing systems, or procure third party functionality, to comply with the proposed Rule.422

+

Further, the Commission preliminarily believes that it has drafted the proposed Rule to be as straightforward as possible to achieve its objectives. Any simplification, consolidation or clarification of the Rule should occur for all entities, not just small broker-dealers. The Commission does not propose to dictate for entities of any size any particular design standards (e.g., technology) that must be employed to achieve the objectives of the proposed Rule. However, in order to provide consistent, comparable data to the central repository, the nature of the information collected is a design standard.

+

The Commission would be able to rely on its exemptive authority under Section 36 of the Exchange Act to grant relief, when necessary, to small broker-dealers from the requirements of the proposed Rule. The Commission preliminarily believes that a wholesale exemption from the proposed Rule for small broker-dealers, however, would make it harder for the Commission and SROs to recognize the anticipated benefits of the consolidated audit trail.

+
+
pubdate:  May 26, 2010 effdate: N/A +

G. Solicitation of Comments

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Initial Regulatory Flexibility Act Analysis, Solicitation of Comments + Compliance User: Self-Regulatory Organizations + Keywords: +

The Commission invites commenters to address whether the proposed Rule would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities. The Commission requests that commenters provide empirical data to support the extent of such impact.

+
+
+
pubdate:  May 26, 2010 effdate: N/A +

X. Statutory Authority

+ Topic: SEC Proposed Rule 613 (SEC Release 34-62174), SUPPLEMENTARY INFORMATION:, Statutory Authority + Compliance User: Self-Regulatory Organizations + Keywords: + Rule 613 of Regulation NMS, + +

Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), the Commission proposes Rule 613 of Regulation NMS, as set forth below.

+

Text of Proposed Rule

+

List of Subjects in 17 CFR Part 242

+

Brokers, Reporting and recordkeeping requirements, Securities.

+

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is proposed to be amended as follows.

+

PART 242 — REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

+

1. The authority citation for part 242 continues to read as follows: Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.

+

2. Add § 242.613 to read as follows:

+

§ 242.613 Consolidated Audit Trail.

+

(a) Creation of a National Market System Plan Governing a Consolidated Audit Trail.

+

(1) Each national securities exchange and national securities association shall jointly file on or before [90 days from approval of this rule] a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section.

+

(2) The national market system plan, or any amendment thereto, filed pursuant to this section shall be filed with the Commission pursuant to §242.608.

+

(3) The national market system plan submitted pursuant to this section shall require each national securities exchange and national securities association to:

+

(i) By two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor;

+

(ii) By four months after effectiveness of the national market system plan synchronize their business clocks and by four months after effectiveness of the national market system plan require members of each such exchange and association to synchronize their business clocks in accordance with paragraph (d) of this section;

+

(iii) By one year after effectiveness of the national market system plan provide to the central repository the data specified in paragraph (c) of this section;

+

(iv) By fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by paragraph (f) of this section; and

+

(v) By two years after effectiveness of the national market system plan require members of each such exchange and association to provide to the central repository the data specified in paragraph (c) of this section.

+

(4) Each national securities exchange and national securities association shall be a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

+

(5) No national market system plan filed pursuant to this section, or any amendment thereto, shall become effective unless approved by the Commission or otherwise permitted in accordance with the procedures set forth in §242.608.

+

(b) Operation and Administration of the National Market System Plan.

+

(1) The national market system plan submitted pursuant to this section shall include a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor.

+

(2) The national market system plan submitted pursuant to this section shall include a provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan.

+

(3) The national market system plan submitted pursuant to this section shall include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.

+

(4) The national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan.

+

(5) The national market system plan submitted pursuant to this section shall require the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

+

(c) Data Collection.

+

(1) The national market system plan submitted pursuant to this section shall provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part) of the order.

+

(2) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format.

+

(3) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraphs (c)(7)(i) through (v) of this section on a real time basis.

+

(4) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraphs (c)(7)(vi) and (vii) of this section promptly after the national securities exchange, national securities association, or member receives the information, but in no instance later than midnight of the day that the reportable event occurred or the national securities exchange, national securities association, or member receives such information.

+

(5) The national market system plan submitted pursuant to this section shall require each national securities exchange and its members to collect and provide to the central repository the information required by paragraph (c)(7) of this section for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

+

(6) The national market system plan submitted pursuant to this section shall require each national securities association and its members to collect and provide to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association.

+

(7) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and any member of such exchange or association to collect and electronically provide to a central repository details for each order and each reportable event, including, but not limited to, the following information:

+

(i) For the original receipt or origination of the order:

+

(A) Information of sufficient detail to identify the customer;

+

(B) A unique customer identifier for each customer;

+

(C) Customer account information;

+

(D) A unique identifier that will attach to the order at the time the order is received or originated by the member and remain with the order through the process of routing, modification, cancellation, and execution (in whole or in part);

+

(E) The unique identifier of the broker-dealer receiving or originating the order;

+

(F) The unique identifier of the branch office and registered representative receiving or originating the order;

+

(G) Date of order receipt or origination;

+

(H) Time of order receipt or origination (in milliseconds); and

+

(I) Material terms of the order.

+

(ii) For the routing of an order, the following information:

+

(A) The unique order identifier;

+

(B) Date on which the order is routed;

+

(C) Time at which the order is routed (in milliseconds);

+

(D) The unique identifier of the broker-dealer or national securities exchange routing the order;

+

(E) The unique identifier of the broker-dealer or national securities exchange receiving the order;

+

(F) If routed internally at the broker-dealer, the identity and nature of the department or desk to which an order is routed; and

+

(G) Material terms of the order.

+

(iii) For the receipt of an order, the following information:

+

(A) The unique order identifier;

+

(B) Date on which the order is received;

+

(C) Time at which the order is received (in milliseconds);

+

(D) The unique order identifier of the broker-dealer or national securities exchange receiving the order;

+

(E) The unique identifier of the broker-dealer or national securities exchange routing the order; and

+

(F) Material terms of the order.

+

(iv) If the order is modified or cancelled, the following information:

+

(A) Date the modification or cancellation is received or originated;

+

(B) Time the modification or cancellation is received or originated (in milliseconds);

+

(C) Price and remaining size of the order, if modified;

+

(D) Other changes in material terms of the order, if modified; and

+

(E) Identity of the person giving the modification or cancellation instruction.

+

(v) If the order is executed, in whole or in part, the following information:

+

(A) The unique order identifier;

+

(B) Date of execution;

+

(C) Time of execution (in milliseconds);

+

(D) Execution capacity (principal, agency, riskless principal);

+

(E) Execution price and size;

+

(F) The unique identifier of the national securities exchange or broker-dealer executing the order; and

+

(G) Whether the execution was reported pursuant to an effective transaction reporting plan or the Options Price Reporting Authority Plan.

+

(vi) If the order is executed, in whole or in part:

+

(A) The account number for any subaccounts to which the execution is allocated (in whole or part);

+

(B) The unique identifier of the clearing broker or prime broker, if applicable;

+

(C) The unique order identifier of any contra-side order(s);

+

(D) Special settlement terms, if applicable;

+

(E) Short sale borrow information and identifier; and

+

(F) The amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid.

+

(vii) If the execution is cancelled, a cancelled trade indicator.

+

(8) All plan sponsors and their members shall use the same unique customer identifier and unique broker-dealer identifier for each customer and broker-dealer.

+

(d) Clock Synchronization. The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member of such exchange or association subject to this section to:

+

(1) Synchronize on its business clocks that are used for the purposes of recording the date and time of any reportable event that must be reported pursuant to this section to the time maintained by the National Institute of Standards and Technology, consistent with industry standards; and

+

(2) Evaluate annually the synchronization standard to determine whether it should be shortened, consistent with changes in industry standards.

+

(e) Central Repository.

+

(1) The national market system plan submitted pursuant to this section shall provide for the creation and maintenance of a central repository. Such central repository shall be responsible for the receipt, consolidation, and retention of all data submitted pursuant to this section.

+

(2) Each national securities exchange, national securities association, and the Commission shall have access to the central repository, including all systems operated by the central repository, and access to and use of the data reported to and consolidated by the central repository under paragraph (c) of this section, for the purpose of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. The national market system plan submitted pursuant to this section shall provide that such access to and use of such data by each national securities exchange, national securities association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.

+

(3) The national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data that includes search and reporting functions.

+

(4) The national market system plan submitted pursuant to this section shall include policies and procedures, including standards, to be used by the plan processor to:

+

(i) Ensure the security and confidentiality of all information submitted to the central repository. All plan sponsors and their employees, as well as all employees of the central repository, shall agree to use appropriate safeguards to ensure the confidentiality of such data and shall agree not to use such data for any purpose other than surveillance and regulatory purposes. Nothing in this paragraph (i) shall be construed to prevent a plan sponsor from using the data that it submits to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation;

+

(ii) Ensure the timeliness, accuracy, and completeness of the data provided to the central repository pursuant to paragraph (c) of this section;

+

(iii) Require the rejection of data provided to the central repository pursuant to paragraph (c) of this section that does not meet these validation parameters and the retransmission of corrected data; and

+

(iv) Ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository pursuant to paragraph (c) of this section.

+

(5) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information collected pursuant to paragraph (c)(7) of this section;

+

(i) The national best bid and national best offer for each NMS security;

+

(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, §242.601; and

+

(iii) Last sale reports reported pursuant to the Options Price Reporting Authority Plan filed with the Commission pursuant to, and meeting the requirements of, §242.608.

+

(6) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(5) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information shall be available immediately, or if immediate availability cannot reasonably and practically be achieved, any search query must begin operating on the data not later than one hour after the search query is made.

+

(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

+

(g) Compliance by Members.

+

(1) Each national securities exchange and national securities association shall file with the Commission pursuant to section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and §240.19b-4 on or before [120 days from approval of this rule] a proposed rule change to require its members to comply with the requirements of this section and the national market system plan submitted pursuant to this section and approved by the Commission of which the national securities exchange or national securities association is a sponsor.

+

(2) Each member of a national securities exchange or national securities association that is a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission shall collect and submit to the central repository the information required by paragraph (c) of this section and shall comply with the synchronization requirements of paragraph (d) of this section.

+

(3) The national market system plan submitted pursuant to this section shall include a provision that by subscribing to and submitting the plan to the Commission, each national securities exchange and national securities association that is a sponsor to the plan agrees to enforce compliance by its members with the provisions of the plan.

+

(4) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance with the requirements of the plan by the members of a national securities exchange or national securities association that is a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

+

(h) Compliance by National Securities Exchanges and National Securities Associations.

+

(1) Each national securities exchange and national securities association shall comply with the provisions of the national market system plan submitted pursuant to this section and approved by the Commission of which it is a sponsor.

+

(2) Any failure by a national securities exchange or national securities association to comply with the provisions of the national market system plan submitted pursuant to this section and approved by the Commission of which it is as sponsor shall be considered a violation of this section.

+

(3) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance by the sponsors of the plan with the requirements of the plan.

+

(i) Other Securities and Other Types of Transactions. The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission within two months after effectiveness of the national market system plan a document outlining how such exchanges and associations would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that would be required to be provided, which market participants would be required to provide the data, an implementation timeline, and a cost estimate.

+

(j) Definitions.

+

(1) The term customer shall mean:

+

(i) The beneficial owner(s) of the account originating the order; and

+

(ii) The person exercising investment discretion for the account originating the order, if different from the beneficial owner(s);

+

(2) The term customer account information shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

+

(3) The term material terms of the order shall include, but not be limited to, the NMS security symbol, security type, price (if applicable), size (displayed and non-displayed), side (buy/sell), order type; if a sell order, whether the order is long, short, short exempt; if a short sale, the locate identifier, open/close indicator, time in force (if applicable), whether the order is solicited or unsolicited, whether the account has a prior position in the security; if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close, and any special handling instructions.

+

(4) The term order shall mean:

+

(i) Any order received by a member of a national securities exchange or national securities association from any person;

+

(ii) Any order originated by a member of a national securities exchange or national securities association; or

+

(iii) Any bid or offer.

+

(5) The term reportable event shall include, but not be limited to, the receipt, origination, modification, cancellation, routing, and execution (in whole or in part).

+

By the Commission.

+

Elizabeth M. Murphy

+

Secretary

+

May 26, 2010

-
pubdate: September 24, 2015 effdate: N/A -

III. Discussion

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Discussion - Compliance User: Self-Regulatory Organizations - Keywords: - Amendment No. 2, - Plan Processor, - -

After careful review, the Commission finds that Amendment No. 2 is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system. By extending the aforementioned recusal requirement to both selection rounds, Amendment No. 2 adds an additional procedural safeguard that is designed to further the fairness and impartiality of the Plan Processor selection.

-
-
pubdate: September 24, 2015 effdate: N/A -

IV. Conclusion

- Topic: SEC Release, Release No. 34-75980, Joint Industry Plan; Order Approving Amendment No. 2, Conclusion - Compliance User: Self-Regulatory Organizations - Keywords: - Amendment No. 2, - National Market System, - Selection Plan, - -

For the reasons discussed above, the Commission finds that Amendment No. 2 is appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, and to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

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IT IS THEREFORE ORDERED, pursuant to Section 11A of the Act,18 and the rules thereunder, that Amendment No. 2 to the Selection Plan be, and it hereby is, approved.

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By the Commission.

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Robert W. Errett

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Deputy Secretary

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1 15 U.S.C. 78k-1.

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1 17 CFR 240.17a-25.

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2 The Chicago Board Options Exchange, Incorporated (“CBOE”) lists options on the S&P 500 Index (SPX) and on the Mini-S&P 500 Index (XSP) (1/10th the value of the S&P 500 Index).

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3 For example, the Chicago Mercantile Exchange Inc. (“CME”) offers S&P 500 futures and “E-Mini” futures on the S&P 500 Index ($50 x S&P 500 Index price).

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2 17 CFR 242.608.

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4 For example, NYSE Arca, Inc. (“NYSE Arca”) lists an ETF based on the S&P 500 SPDR (SPY) and the iShares S&P 500 Index Fund (IVV).

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3 The Selection Plan is an NMS Plan approved by the Commission pursuant to Section 11A of the Act and Rule 608 thereunder. See Securities Exchange Act Release No. 71596 (Feb. 21, 2014), 79 FR 11152 (Feb. 27, 2014) (“Order Approving Selection Plan”); see also Securities Exchange Act Release No. 70892 (Nov. 15, 2013), 78 FR 69910 (Nov. 21, 2013) (“Notice of Selection Plan”).

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5 For example, OneChicago, LLC lists futures on the SPY, and CBOE lists options on the iShares S&P 500 Value Index Fund.

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4 See Securities Exchange Act Release No. 75193 (June 17, 2015), 80 FR 36006 (June 23, 2015) (“Notice of Amendment No. 2”).

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6 See infra Section I.G. (discussing past Commission requests for comment on regulation of intermarket trading).

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5 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012).

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7 See, e.g., Sections 6(b)(1), 15A(b)(2), and 19(g) of the Exchange Act, 15 U.S.C. 78f(b)(1), 15 U.S.C. 78o-3(b)(2), and 15 U.S.C. 78s(g).

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6 Unless otherwise noted, capitalized terms are used as defined in Rule 613, in the Selection Plan, or in this Order.

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8 See, e.g., Sections 2, 6(b)(1), 10, 15(b)(4)(D) and (E), and 19(h) of the Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b)(1), 15 U.S.C. 78j, 15 U.S.C. 78o(b)(4)(D) and (E), and 15 U.S.C. 78s(h).

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7 See Order Approving Selection Plan, supra note 3.

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9 As discussed below in Sections II and III, the Commission preliminarily believes that the proposal would improve the ability of regulators to conduct timely and accurate trading analyses for market reconstructions and complex investigations, as well as inspections and examinations. Indeed, the Commission believes that the proposed consolidated audit trail, if implemented, would have significantly enhanced the Commission’s ability to quickly reconstruct and analyze the severe market disruption that occurred on May 6, 2010. If approved and implemented, the proposal also would enhance the Commission’s ability to similarly respond to future severe market events.

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8 See Securities Exchange Act Release No. 75192, 80 FR 36028 (June 23, 2015) (“Order Approving Amendment No. 1”).

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10 Bluesheets are trading records requested by the Commission and SROs from broker-dealers that are used in regulatory investigations to identify buyers and sellers of specific securities.

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9 See Order Approving Selection Plan, supra note 3; Order Approving Amendment No. 1, supra note 8.

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11 The Commission recently published for comment a proposal to establish a large trader reporting system. See Securities Exchange Act Release No. 61908 (April 14, 2010), 75 FR 21456 (April 23, 2010) (“Large Trader Proposal”). Under that proposal, large traders would be issued unique identifiers that they would be required to provide to the broker-dealers that execute transactions on their behalf, and the broker-dealers would be required to maintain, and provide to the Commission upon request, transaction records for each large trader customer. The large trader proposal is designed to address in the near term the Commission's current need for access to more information about large traders and their activities. As discussed below, the Commission anticipates that the proposed consolidated audit trail discussed in this release, which is much broader in scope, would take a significant amount of time to fully implement. This proposal would require that, if the Large Trader proposal is adopted, the large trader identification number be reported to the central repository as part of the identifying customer information. See proposed Rule 613(j)(2).

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10 The Selection Plan defines “Bidding Participant” as a Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Notice of Selection Plan, supra note 3, Exhibit A, at 2.

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12 In 2007, the NASD and the member-related functions of NYSE Regulation, Inc., the regulatory subsidiary of the New York Stock Exchange LLC (“NYSE”), were consolidated. As part of this regulatory consolidation, the NASD changed its name to FINRA. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (August 1, 2007). FINRA and the National Futures Association (“NFA”) are currently the only national securities associations registered with the Commission; however the NFA has a limited purpose registration with the Commission under Section 15A(k) of the Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 2001).

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11 See Order Approving Amendment No. 1, supra note 8.

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13 See Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules comprising OATS) (“OATS Approval Order”).

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12 The Selection Committee is composed of one senior officer from each Participant. See Section V.A of the Selection Plan.

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14 See Securities Exchange Act Release No. 47689 (April 17, 2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule change by NYSE relating to order tracking) (“OTS Approval Order”).

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13 This two-round voting process would take place after any further narrowing of the Shortlisted Bids, if such narrowing were to occur pursuant to Amendment No. 1. See Order Approving Amendment No. 1, supra note 8, at 36029 & n.21.

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15 See In the Matter of Certain Activities of Options Exchanges, Administrative Proceeding File No. 3-10282, Securities Exchange Act Release No. 43268 (September 11, 2000) (Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions) ("Options Settlement Order"). See also, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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14 Notice of Amendment No. 2, supra note 4, at 36007.

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16 See infra Sections I.C, I.D, I.E, and I.F.

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15 Id.

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17 See infra Section I.G.

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16 Id.

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18 For example, consolidated average daily share volume and trades in NYSE-listed stocks increased from just 2.1 billion shares and 2.9 million trades in January 2005, to 5.9 billion shares (an increase of 181%) and 22.1 million trades (an increase of 662%) in September 2009. See Large Trader Proposal, supra note 11, at 21456.

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17 Id.

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19 See, e.g., Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (“Concept Release on Equity Market Structure”) at 3594-3596.

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18 15 U.S.C. 78k-1.

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20 See Securities Exchange Act Release No. 44494 (June 29, 2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (“Rule 17a-25 Adopting Release”), at 35836.

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21 Id.

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22 See Securities Exchange Act Release No. 25859 (June 27, 1988), 53 FR 25029 (July 1, 1988) (approving both the NYSE and the American Stock Exchange’s (“Amex”) rules for the electronic submission of transaction information).

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23 See Rule 17a-25 Adopting Release, supra note 20, at 3–4. See also, e.g., id. and Securities Exchange Act Release Nos. 26235 (November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the CBOE rule for the electronic submission of transaction information); 26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the NASD’s rule for the electronic submission of transaction information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 1989) (approving the Philadelphia Stock Exchange’s rule for the electronic submission of transaction information).

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24 See Rule 17a-25 Adopting Release, supra note 20, at 35836. SIAC is a subsidiary of NYSE Euronext and serves as the securities information processor of the Consolidated Tape Plan (“CTA Plan”), which governs the dissemination of trade information; the Consolidated Quotation Plan (“CQ Plan”), which governs the dissemination of quotation information; and the Options Price Reporting Authority Plan (“OPRA Plan”), which governs the dissemination of trade and quotation information for listed options. In this capacity, it provides real time quotation and transaction information to market participants.

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25 17 CFR 240.17a-25.

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26 See Rule 17a-25 Adopting Release, supra note 20, at 35836.

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27 EBS data does not, however, include the time of execution, and often does not include the identity of the beneficial owner. See infra note 147.

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28 A 1990 Senate Report acknowledged the immense value of the EBS system, but noted that “it is designed for use in more narrowly focused enforcement investigations that generally relate to trading in individual securities. It is not designed for use for multiple inquiries that are essential for trading reconstruction purposes.” See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.

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29 See Securities Exchange Act Release No. 42741 (May 2, 2000), 65 FR 26534 (May 8, 2000) (“Rule 17a-25 Proposing Release”).

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30 See Rule 17a-25 Adopting Release, supra note 20.

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31 Id. at 35836, and 17 CFR 240.17a-25.

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32 See e.g. NYSE Rule 410A and FINRA Rule 8211.

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33 See Rule 17a-25(a)(1) and Rule 17a-25(b)(1)-(3), 17 CFR 240.17a-25(a)(1) and 17 CFR 240.17a-25(b)(1)-(3).

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34 See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2). Rule 17a-25 also requires broker-dealers to submit, and keep current, contact person information for requests under the rule. This provision was designed to ensure that the Commission could effectively direct its data requests to broker-dealers. See Rule 17a-25 Proposing Release, supra note 29, at 26537.

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35 This information was deemed especially necessary for the creation of massive market reconstructions performed by Commission staff. See Rule 17a-25 Adopting Release, supra note 20, at 35836.

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36 NSCC is a subsidiary of the Deposit Trust and Clearing Corporation and provides centralized clearing information and settlement services to broker-dealers for trades involving equities, corporate and municipal debt, American depository receipts, exchange traded funds, and unit investment trusts.

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37 The Commission also uses the Options Cleared Report, with data supplied by the Options Clearing Corporation (“OCC”), for analysis of trading in listed options. OCC is an equity derivatives clearing organization that is registered as a clearing agency under Section 17A of the Exchange Act and operates under the jurisdiction of both the Commission and the Commodities Futures Trading Commission (“CFTC”).

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38 A CUSIP number is a unique alphanumeric identifier assigned to a security and is used to facilitate the clearance and settlement of trades in the security.

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39 See In the Matter of National Association of Securities Dealers, Inc., Administrative Proceeding File No. 3-9056, Securities Exchange Act Release No. 37538 (August 8, 1996) (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions).

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40 Id. at 11–12.

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41 Id.

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42 See FINRA Rules 7400 to 7470. See also OATS Approval Order, supra note 13.

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43 FINRA defines an OTC equity security as any equity security that (1) is not listed on a national securities exchange, or (2) is listed on one or more regional stock exchanges and does not qualify for dissemination of transaction reports via the facilities of the Consolidated Tape. See FINRA Rule 7410(l).

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44 A reporting member is a member that receives or originates an order and has an obligation to record and report information under FINRA Rules 7440 and 7450. A member shall not be considered a reporting member in connection with an order if the following conditions are met: (1) the member engages in a non-discretionary order routing process, pursuant to which it immediately routes, by electronic or other means, all of its orders to a single reporting member; (2) the member does not direct and does not maintain control over subsequent routing or execution by the receiving reporting member; (3) the receiving reporting member records and reports all information required under FINRA Rules 7440 and 7450 with respect to the order; and (4) the member has a written agreement with the receiving reporting member specifying the respective functions and responsibilities of each party to effect full compliance with the requirements of Rule 7440 and 7450. See FINRA Rule 7410(o).

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45 Each reporting member must record each item of information required by OATS in electronic form by the end of each business day. See FINRA Rule 7440(a)(3). Reporting members must transmit to OATS a report of order information whenever an order is originated, received, transmitted to another department within the member or to another member, modified, canceled, or executed. Each report shall be transmitted on the day such event occurred if the information is available that day. Order information reports may be aggregated into one or more transmissions. See FINRA Rule 7450(b)(2).

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46 OATS recording and reporting requirements apply to any oral, written, or electronic instruction to effect a transaction in an equity security listed on the Nasdaq Stock Market or an OTC equity security that is received by a member from another person for handling or execution, or that is originated by a department of a member for execution by the same or another member, other than any such instruction to effect a proprietary transaction originated by a trading desk in the ordinary course of a member's market making activities. See FINRA Rule 7410(j).

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47 See FINRA Rules 7440 and 7450.

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48 FINRA Rule 7440 also requires reporting of the account type; the identification of the department or terminal where an order is received from a customer; the identification of the department or terminal where an order is originated by a reporting member; and the identification of a reporting agent if the agent has agreed to take on the responsibilities of a reporting member under Rule 7450. See FINRA Rule 7440(b).

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49 The specific information required to be reported includes: the number of shares; designation as a buy or sell or short sale; designation of the order as market, limit, stop, or stop limit; limit or stop price; date on which the order expires and if the time in force is less than one day, the time when the order expires; the time limit during which the order is in force; any request by a customer that an order not be displayed, or that a block size be displayed, pursuant to Rule 604(b) of Regulation NMS; any special handling requests; and identification of the order as related to a program trade or index arbitrage trade. See FINRA Rule 7440(b).

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50 The specific information required includes the number of shares to which the transmission applies, and whether the order is an intermarket sweep order. See FINRA Rule 7440(c).

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51 For cancellations or modification, the following information also is required: if the open balance of an order is canceled after a partial execution, the number of shares canceled; and whether the order was canceled on the instruction of a customer or the reporting member. See FINRA Rule 7440(d).

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52 For executions, the reporting member also must report its market participant symbol; its number assigned for purposes of identifying transaction data; and the identification number of the terminal where the order was executed. See FINRA Rule 7440(d).

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53 See OATS Reporting Technical Specifications, January 5, 2010, available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p120686.pdf.

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54 See In the Matter of New York Stock Exchange, Inc., Administrative Proceeding File No. 3-9925, Securities Exchange Act Release No. 41574 (June 29, 1999) (Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance with Undertakings), at 4–5.

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55 Id. at 28–29.

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56 Id.

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57 See NYSE Rule 132B, and OTS Approval Order, supra note 14.

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58 OTS is applicable to all orders in NYSE-listed securities, regardless of account type (firm or customer). See NYSE Rule 132B(a)(1).

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59 See Securities Exchange Act Release No. 59022 (November 26, 2008), 73 FR 73683 (December 3, 2008). NYSE Alternext adopted NYSE Rules 1-1004 as the NYSE Alternext Equities Rules to govern all cash equities trading on the NYSE Alternext Trading Systems and NYSE Alternext Bonds. In March 2009, NYSE Alternext changed its name to NYSE Amex LLC (“NYSE Amex”) (the successor to Amex, see infra note 73). See Securities Exchange Act Release No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009).

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60 See NYSE Rule 132B and NYSE Amex Equities Rule 132B. Each member or member organization shall, by the end of each business day, record each item of information required to be recorded under the rule in such electronic form as is prescribed by the NYSE (or NYSE Amex) from time to time. See NYSE Rule 132B(a)(3) and NYSE Amex Equities Rule 132B(a)(3). Members and member organizations shall be required to transmit to the NYSE or NYSE Amex, in such format as the applicable exchange may from time to time prescribe, such order tracking information as the exchange may request. See NYSE Rule 132C and NYSE Amex Equities Rule 132C.

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61 Members are also required to report: the identification of the department or terminal where an order is received directly from a customer; and where the order is originated by a member or member organization, the identification of the department (if appropriate) of the member that originated the order. See NYSE Rule 132B(b) and NYSE Amex Equities Rule 132B(b).

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62 The specific information required to be reported includes: number of shares; designation of the order as a buy or sell; designation of the order as a short sale; designation of the order as a market order, limit order, auction market order, stop order, auction stop order, or ISO; security symbol; limit or stop price; type of account; the date on which the order expires, and, if the time in force is less than one day, the time when the order expires; the time limit during which the order is in force; any request by a customer that an order not be displayed pursuant to Rule 604(c) under the Exchange Act; and special handling requests. See NYSE Rule 132B(b) and NYSE Amex Equities Rule 132B(b).

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63 The information required to be reported also includes whether the order was transmitted and received manually or electronically; the date the order was first originated or received by the transmitting member or member organization; and, for each order to be included in a bunched order, the bunched order route indicator assigned to the bunched order. See NYSE Rule 132B(c) and NYSE Amex Equities Rule 132B(c).

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64 The information required to be reported includes the number of shares to which the transmission applies. See NYSE Rule 132B(c) and NYSE Amex Equities Rule 132B(c).

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65 For cancellations or modifications, the following information also is required: the order identifier assigned to the order prior to modification; if the open balance of an order is canceled after a partial execution, the number of shares canceled; and whether the order was canceled on the instruction of a customer or the member or member organization. See NYSE Rule 132B(d) and NYSE Amex Equities Rule 132B(d).

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66 See NYSE Rule 123 and NYSE Amex Equities Rule 123, each of which require, among other things, a record of the cancellation of an order, which must include the time the cancellation was entered, and a record of the receipt of an execution report, which must include the time of receipt of the report.

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67 The specific information required includes the security symbol; quantity; side of the market; whether the order is a market, auction market, limit, stop, or auction limit order; any limit or stop price, discretionary price range, discretionary volume range, discretionary quote price, pegging ceiling price, pegging floor price and/or whether discretionary instructions are active in connection with interest displayed by other market centers; time in force; designation as held or not held; and any special conditions. See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).

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68 The required information also includes the system-generated time of recording order details. See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).

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69 See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).

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70 The specific information required includes security symbol; quantity; transaction price; and execution time. See NYSE Rule 123(f) and NYSE Amex Equities Rule 123(f).

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71 The specific information required includes the executing broker badge number or alpha symbol; the contra side executing broker badge number or alpha symbol; the clearing firm number or alpha; and the contra side clearing firm number or alpha. See NYSE Rule 123(f) and NYSE Amex Equities Rule 123(f).

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72 The required information includes whether the account for which the order was executed was that of a member or member organization or non-member or non-member organization; the identification of member or member organization which recorded order details; the date the order was entered into an exchange system; an indication as to whether this is a modification to a previously submitted report; settlement instructions; special trade indication (if applicable); and the Online Comparison System control number. See NYSE Rule 123(f) and NYSE Amex Equities Rule 123(f).

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73 Amex was acquired by NYSE Euronext on October 1, 2008. Initially, the successor entity to Amex was established as NYSE Alternext U.S. LLC, but the name was changed in 2009 to NYSE Amex. See Securities Exchange Act Release No. 59575 (March 13, 2009), 74 FR 11803 (March 19, 2009).

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74 In 2001, the Archipelago Exchange LLC (“ArcaEx”) was established as an electronic trading facility for Pacific Exchange’s subsidiary PCX Equities, Inc. (“PCX Equities”). See Securities Exchange Act Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001). In 2005, Archipelago Holdings, Inc., the parent company of ArcaEx, acquired PCX Holdings, Inc., which included subsidiaries Pacific Exchange (PCX) and PCX Equities. See Securities Exchange Act Release No. 52497 (September 22, 2005), 70 FR 56949 (September 29, 2005). The NYSE merged with Archipelago Holdings in 2006. See Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006). NYSE Arca is the successor to PCX.

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75 The Philadelphia Stock Exchange was acquired by The NASDAQ OMX Group, Inc. in 2008, and is now called NASDAQ OMX Phlx (“Phlx”). See Securities Exchange Act Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008).

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76 See Options Settlement Order, supra note 15, at 12.

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77 Id. at 22.

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78 Id. at 22–25.

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79 See Options Settlement Order, supra note 15, at 22–25.

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80 See Securities Exchange Act Release Nos. 61154 (December 11, 2009), 74 FR 67278 (December 18, 2009), at 67280 (stating “ISE and the other options exchanges are required to populate a consolidated options audit trail ("COATS") system in order to surveil member activities across markets”); 61388 (January 20, 2010), 75 FR 4431 (January 27, 2010), at 4433 (Nasdaq OMX BX filing amending BOX’s fee schedule, with similar language as Release No. 61154); and 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (BATS Exchange, Inc. (“BATS”) represented that BATS Options would comply with the specifications of COATS in submitting data to create a consolidated audit trail, as well as receiving COATS data for its own surveillance purposes).

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81 The specific information required includes option symbol; underlying security; expiration month; exercise price; contract volume; call/put; buy/sell; opening/closing transaction; price or price limit; and special instructions.

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82 The required information also includes identification of the terminal or individual completing the order ticket.

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83 See e.g. BATS Rule 20.7; BOX Chapter V, Section 15; CBOE Chapter VI, Rules 6.24 and 6.51; NOM Rule Chapter V, Section 7; NYSE Amex Rules 153, Commentary .01, and 962; NYSE Arca Rules 6.67, 6.68, and 6.69; and Phlx Rules 1063 and 1080.

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84 For purposes of this release, the Commission does not consider SRO EBS rules to be audit trail rules.

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85 See Chicago Stock Exchange (“CHX”) Article 11, Rule 3(b); FINRA Rules 7400 to 7470 (the OATS rules); Nasdaq Rules 6950 to 6958 (substantially similar to the OATS rules); BX Rules 6950 to 6958 (substantially similar to OATS rules); NYSE Rule 123 and 132B; and NYSE Amex Equities Rule 123 and 132B (OTS rules). See supra Sections I.C. and I.D. for a discussion of FINRA's OATS rules and the NYSE and NYSE Amex's OTS rules, respectively.

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86 See CHX Article 11, Rule 3(b).

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87 Id. The specific information required includes the symbol; number or shares or quantity of security; side of the market; order type; limit and/or stop price; whether the order is agency or proprietary; whether an order is a bona fide arbitrage order; whether the order is short; time in force; designation as held or not held; any special conditions or instructions (including any customer display instructions and any all-or-none conditions); and the date and time of any order expiration.

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88 Id.

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89 Id.

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90 Id. The participant also must record the system-generated times of recording this required information. This information must be recorded immediately after the information is received or becomes available. CHX Article 11, Rule 3(c). Additionally, before any such orders are executed, exchange participants must record the name or designation of the account for which the order is being executed. CHX Article 11, Rule 3(d). This rule does not apply to orders sent or received through the exchange's matching system or any other electronic systems the exchange recognizes as providing the required information in a format acceptable to the exchange. See CHX Article 11, Rule 3, Interpretations and Policies .03.

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91 See e.g. National Stock Exchange ("NSX") Chapter VI, Rule 4.1.; BATS Chapter IV, Rule 4.1; CBOE Rule 15.1 (applicable to CBSX); ISE Stock Exchange Rule 1400; NYSE Arca Equities Rule 2.24; 15 U.S.C. 78q et seq. For example, one exchange only requires its members to make and keep books and records and other correspondence in conformity with Section 17 of the Exchange Act and the rules thereunder, with all other applicable laws and the rules, regulations and statements of policy promulgated thereunder, and with the exchange's rules. See NSX Chapter VI, Rule 4.1.

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92 See Securities Exchange Act Release Nos. 47849 (May 14, 2003), 68 FR 27722 (May 20, 2003) (File No. S7-11-03) (“Intermarket Trading Concept Release”) and 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (File No. S7-40-04) (“Concept Release Concerning Self-Regulation”).

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93 See letter to Jonathan G. Katz, Secretary, Commission, from Edward Knight, Executive Vice President and General Counsel, Nasdaq, dated April 11, 2003 (File No. 4-479) (“Nasdaq Petition”). In particular, Nasdaq was concerned over what it deemed “unequal and inadequate regulation” by other markets trading Nasdaq-listed securities. Id. at 2. See also Intermarket Trading Concept Release, supra note 92, at 27223.

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94 See Nasdaq Petition, supra note 93, at 10, and Intermarket Trading Concept Release, supra note 92, at 27224.

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95 See Nasdaq Petition, supra note 93, at 11, and Intermarket Trading Concept Release, supra note 92, at 27224.

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96 The ISG was created in 1983 and its members include all of the registered national securities exchanges and FINRA. ISG states that its goals are to enhance intermarket surveillance, assure the integrity of trading, and provide investor protection. To achieve these goals, ISG members share data such as audit trail information and short interest data among themselves. ISG provides surveillance tools to supplement its participant members’ existing surveillance systems, such as the ISG Unusual Activity Report and the Consolidated Equity Audit Trail. These reports are made available from SIAC to members of ISG and are intended to provide a consolidated view across all markets of trade, quote, and clearing activity. See comment letter from Brian F. Colby, Chairman, Intermarket Surveillance Group, to Jonathan G. Katz, Secretary, Commission, dated June 18, 2003 (“ISG 2003 Comment Letter”) (commenting in response to the Intermarket Trading Concept Release).

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97 See Nasdaq Petition, supra note 93, at 10, and Intermarket Trading Concept Release, supra note 92, at 27224.

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98 See Nasdaq Petition, supra note 93, at 10–11, and Intermarket Trading Concept Release, supra note 92, at 27224.

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99 See comment letters from Darla C. Stuckey, Corporate Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated June 19, 2003 (“NYSE Comment Letter”); Jeffrey T. Brown, General Counsel, Cincinnati Stock Exchange, to Jonathan G. Katz, Secretary, Commission, dated June 19, 2003 (“CSE Comment Letter”); Michael J. Simon, Senior Vice President and Secretary, International Securities Exchange, Inc., to Jonathan G. Katz, Secretary, Commission, dated June 19, 2003 (“ISE Comment Letter”); William O’Brien, Chief Operating Officer, Brut, LLC, to Jonathan G. Katz, Secretary, Commission, dated June 19, 2003 (“Brut Comment Letter”); Kim Bang, President, Bloomberg Tradebook LLC, to Jonathan G. Katz, Secretary, Commission, dated June 20, 2003 (“Bloomberg Tradebook Comment Letter”); Donald D. Kittell, Executive Vice President, Securities Industry Association, to Jonathan G. Katz, Secretary, Commission, dated June 27, 2003 (“SIA Comment Letter”); Edward J. Joyce, President and Chief Operating Officer, CBOE, to Jonathan G. Katz, Secretary, Commission, dated June 30, 2003 (“CBOE Comment Letter”); W. Hardy Callcott, Senior Vice President and General Counsel, Charles Schwab & Co., Inc., to Jonathan G. Katz, Secretary, Commission, dated July 7, 2003 (“Schwab Comment Letter”); Richard Ketchum, General Counsel, Citigroup, to Jonathan G. Katz, Secretary, Commission, dated July 8, 2003 (“Citigroup Comment Letter”); John S. Markle, Associate General Counsel, Ameritrade Holding Corp., to Jonathan G. Katz, Secretary, Commission, dated July 10, 2003 (“Ameritrade Comment Letter”); and Eric Schwartz, Managing Director, Goldman Sachs, and Duncan Niederauer, Co-Chief Executive Officer, Spear, Leeds & Kellogg, to Jonathan G. Katz, Secretary, Commission, dated July 25, 2003 (“Goldman Sachs and Spear, Leeds & Kellogg Comment Letter”).

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100 Of the commenters that clearly commented on the creation of a uniform intermarket audit trail, Citigroup and Goldman Sachs and Spear, Leeds & Kellogg were in favor of the idea, and Bloomberg supported a consolidated audit trail for those SROs trading Nasdaq-listed securities. See Citigroup Comment Letter, supra note 99, at 6; Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3–4; and Bloomberg Tradebook Comment Letter, supra note 99, at 3. Brut, CBOE, and the NYSE did not appear to be in favor of a standardized intermarket audit trail. See Brut Comment Letter, supra note 99, at 5 (arguing for addressing improvements to surveillances falling short of Exchange Act requirements individually instead of “costly and comprehensive technology overhauls”); CBOE Comment Letter, supra note 99, at 2 (explaining that it “supports expanding the use of existing tools and enhancing [SRO] and Commission coordination to strengthen surveillance and to achieve more uniform regulation...” and noting that the Commission could “play a significant role in achieving uniform SRO regulation [by] establishing guiding principles on a variety of areas that affect all SROs.” CBOE also noted that there should be enhanced coordination of SRO regulatory efforts through ISG and through 17d-2 agreements); and NYSE Comment Letter, supra note 99, at 5 (suggesting linking SRO audit trails in the manner of the ISG Consolidated Audit Trail).

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101 See Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3.

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102 Id at 4.

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103 See Citigroup Comment Letter, supra note 99, at 6.

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104 See SIA Comment Letter, supra note 99, at 4. One commenter agreed that the Commission would be justified in requiring all SROs trading Nasdaq-listed securities to coordinate electronic audit trail systems with the NASD. See Bloomberg Tradebook Comment Letter, supra note 99. On the other hand, one commenter stated its belief that if there is a legitimate need to improve on the ISG audit trail, the markets should act jointly to do so, without being forced to adopt Nasdaq's proprietary audit trail. See ISE Comment Letter, supra note 99.

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105 See SIA Comment Letter, supra note 99, at 4; Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3 (stating that any decision about extending OATS to other markets should take into account the costs imposed on SROs, market intermediaries and the markets); and Ameritrade Comment Letter, supra note 99, at 3.

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106 See SIA Comment Letter, supra note 99, at 4.

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107 See CSE Comment Letter, supra note 99, at 6–7 (noting that the data formats among exchanges may vary due to structural needs and system designs; thus, while this commenter advocated that exchanges should be required to have internal audit trails tracking orders from inception to execution, it argued that design flexibility be maintained so that exchanges could create the audit trail systems best suited to monitor their markets).

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108 See Ameritrade Comment Letter, supra note 99, at 2; CSE Comment Letter, supra note 99, at 13; ISE Comment Letter, supra note 99, at 4; and NYSE Comment Letter, supra note 99, at 3.

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109 See NYSE Comment Letter, supra note 99.

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110 In its comment letter, CSE stated that its Firm Order Submission system (“FOS”) was more comprehensive than OATS and that the exchange had pioneered order audit trail development. See CSE Comment Letter, supra note 99. In its petition, Nasdaq argued that FOS was used voluntarily for settling commercial disputes between traders and was not the meant for surveillance. See Nasdaq Petition, supra note 93, at 4.

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111 See Brut Comment Letter, supra note 99, at 6.

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112 See ISG 2003 Comment Letter, supra note 99.

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113 See Concept Release Concerning Self-Regulation, supra note 92, at Sections IV.C and V.A.2.

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114 Id.

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115 Id. at 71277.

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116 See comment letter from Robert R. Glauber, Chairman and Chief Executive Officer, NASD, to Jonathan G. Katz, Secretary, Commission, dated March 15, 2005 (“NASD Comment Letter”), at 10.

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117 Id. at 11.

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118 Id.

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119 See comment letter from Mary Yeager, Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated March 8, 2005, at 8.

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120 Id.

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121 See comment letter from Rebecca T. McEnally, Director, and Linda L. Rittenhouse, Senior Policy Analyst, Centre for Financial Market Integrity, to Nancy M. Morris, Secretary, Commission, dated July 14, 2006, at 6.

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122 See comment letter from Kim Bang, Chief Executive Officer, Bloomberg L.P., to Jonathan G. Katz, Secretary, Commission, dated March 8, 2005, at 4.

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123 See comment letter from Meyer S. Frucher, Chairman and Chief Executive Officer, Philadelphia Stock Exchange, to Jonathan G. Katz, Secretary, Commission, dated March 9, 2005, at 3.

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124 See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o-3(b)(2).

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125 The Commission notes that, if adopted as proposed, its Large Trader Proposal would not amend or impact the scope of any of the existing SRO audit trail rules. See Large Trader Proposal, supra note 11.

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126 See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o-3(b), and 15 U.S.C. 78s(h)(1).

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127 See, e.g., 19(h)(1) of the Exchange Act, 15 U.S.C. 78s(h)(1).

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128 See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 78k-1(a)(3)(B).

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129 See infra Section III for a description of proposed Rule 613.

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130 See, e.g., Sections 6(b)(1) and 19(h) of the Exchange Act, 15 U.S.C. 78f(b)(1) and 78s(h).

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131 See Section 9 of the Exchange Act, 15 U.S.C. 78i.

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132 See Section 10 of the Exchange Act, 15 U.S.C. 78j.

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133 See infra Section VI.A (discussion of benefits of the proposed Rule).

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134 Id.

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135 See infra note 149.

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136 17 CFR 240.17a-25.

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137 See supra Sections I.A. and I.B. for a description of the EBS system, Rule 17a-25, and equity cleared reports.

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138 See FINRA Rules 7400 through 7470, NYSE Rules 123 and 132B, NYSE Amex Equities Rule 123 and 132B, and supra Sections I.C. and I.D. See also CHX Article II, Rule 3; Nasdaq Rules 6950 to 6958; and BX Rules 6950 to 6958.

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139 15 U.S.C. 78q(a).

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140 See, e.g., NSX Rules 4.1 and 4.2, NYSE Arca Equities Rule 9.17, and BATS Rule 4.1.

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141 17 CFR 240.17a-3.

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142 Rule 17a-3(a)(6)(i) under the Exchange Act requires that a member keep a memorandum of each brokerage order given or received for the purchase or sale of securities, whether executed or not, showing the terms and conditions of the order and any modification or cancellation thereof; the account for which it was entered; the time the order was received; the time of entry; the execution price; the identity of each associated person, if any, responsible for the account; the identity of any other person who entered or accepted the order on behalf of the customer, or, if a customer entered the order on an electronic system, a notation of that entry; and, to the extent feasible, the time of execution or cancellation. See 17 CFR 240.17a-3(a)(6)(i).

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143 See supra Sections I.C. and I.D. See also supra the discussion in the introduction to Section II relating to the Commission's consideration of whether "retrofitting" existing SRO audit trail rules and systems would achieve the goals of the proposed consolidated audit trail.

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144 See Section 9(a)(1) of the Exchange Act, 15 U.S.C. 78i(a)(1). Wash sales are transactions involving no change in beneficial ownership. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 205 n. 25 (1976).

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145 See NYSE Rule 132B(c)(3).

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146 See FINRA Rule 7440(c)(6). The Commission understands that FINRA is able to link OATS order information to Nasdaq order and execution data.

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147 If a customer has an account directly with a clearing firm, or if an introducing firm clears its customers' transactions on a fully disclosed basis with the clearing firm, the clearing firm should be able to identify the beneficial owner of the account on its EBS response.

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148 For purposes of this discussion, introducing broker means the broker-dealer that received or originated the order, and that is not also the clearing broker.

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149 Rule 17a-25 (as well as the SRO EBS rules) does not specify a definitive deadline by which such information must be furnished to the Commission and, in the Commission's experience, data collected through the EBS system often is subject to lengthy delays, particularly with respect to files involving a large number of transactions over an extended period of time.

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150 As discussed, the Commission preliminarily believes that the proposal would improve the ability of regulators to conduct timely and accurate trading analyses for market reconstructions and complex investigations, as well as inspections and examinations. Indeed, the Commission believes that the proposed consolidated audit trail, if implemented, would have significantly enhanced the Commission’s ability to quickly reconstruct and analyze the severe market disruption that occurred on May 6, 2010. If approved and implemented, the proposal also would enhance the Commission’s ability to similarly respond to future severe market events.

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151 See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 78q(a)(1), and Rules 17a-3 and 17a-4 under the Exchange Act, 17 CFR 240.17a-3 and 17a-4.

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152 See _Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3, and SIA Comment Letter, supra note 99, at 3 (each commenting on the Nasdaq Petition and Intermarket Trading Concept Release).

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153 See supra Sections I.C. and I.D.

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154 The different data fields and unique formats of each SRO audit trail present difficulties for Commission examinations and investigations, where time constraints can make it impractical to manually consolidate diverse data sets.

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155 See supra note 96.

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156 Indirect access is when a non-member of an exchange accesses an exchange through a member. For example, to comply with regulatory obligations such as Rule 611 of Regulation NMS (17 CFR 242.611), exchanges increasingly rely on indirect access to other exchanges through member broker-dealers of the other exchanges, so called “private linkage” access. Sponsored access is one type of indirect access and is governed by exchange rules. See, e.g., Nasdaq Rule 4611(d). The Commission recently proposed rules that would address sponsored access to exchanges. See Securities Exchange Act Release No. 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010).

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157 See infra Section III.A for a discussion of the scope of products to be covered by the proposed Rule and the intent to expand the scope to cover other products and transactions.

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158 The proposed Rule also would require the reporting of certain post-trade information. See infra Section III.D.2.

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159 National securities exchange is defined in Rule 600(a)(45) of Regulation NMS as any exchange registered pursuant to Section 6 of the Exchange Act (15 U.S.C. 78f). 17 CFR 242.600(a)(45).

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160 National securities association is defined in Rule 600(a)(44) of Regulation NMS as any association of brokers and dealers registered pursuant to Section 15A of the Exchange Act (15 U.S.C. 78o-3). 17 CFR 242.600(a)(44). As noted above, see supra note 12, FINRA currently is the only national securities association to which the proposal would apply, as the NFA is restricted to regulating its members who are registered as broker-dealers in security futures products due to its limited purpose registration with the Commission under Section 15A(k) of the Exchange Act, 15 U.S.C. 78o-3(k). The NFA could, of course, seek to expand its current registration. Thus, for ease of reference, this proposal refers to FINRA but the proposed requirements would apply to any national securities association registered with the Commission.

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161 See infra Section III.F. for a discussion of the central repository. The proposed Rule would explicitly require each national securities exchange and national securities association to be a sponsor of the NMS plan submitted pursuant to the Rule and approved by the Commission. See proposed Rule 613(a)(4).

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162 17 CFR 242.608. See proposed Rule 613(a)(2).

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163 See proposed Rule 613(a)(5) and 17 CFR 242.608.

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164 NMS security is defined in Rule 600(a)(46) of Regulation NMS to mean any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) to mean any NMS security other than an option. 17 CFR 242.600(a)(46). A listed option is defined in Rule 600(a)(35) of Regulation NMS to mean any option traded on a registered national securities exchange or automated facility of a national securities association. 17 CFR 242.600(a)(35).

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165 Equity security is defined in Section 3(a)(11) of the Exchange Act to include any stock or similar security; or any security future on any such security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security. See 15 U.S.C. 78c(a)(11). Rule 3a11-1 under the Exchange Act defines equity security to include any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust; any security future on any such security; or any security convertible, with or without consideration into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any put, call, straddle, or other option or privilege of buying such a security from or selling such a security to another without being bound to do so. See 17 CFR 240.3a11-1.

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166 Asset-backed security means a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases. See 17 CFR 229.1101(c)(1).

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167 A primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering. See, e.g., FINRA Rule 6710 (defining two types of primary market transactions for TRACE-eligible securities, a List or Fixed Offering Price Transaction or a Takedown Transaction).

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168 See 17 CFR 242.100 et. seq. and 17 CFR 240.10b-5. Rule 105 prohibits the short selling of equity securities that are the subject of a public offering for cash and the subsequent purchase of the offered securities from an underwriter or broker or dealer participating in the offering if the short sale was effected during a period that is the shorter of the following: (i) beginning five business days before the pricing of the offered securities and ending with such pricing; or (ii) beginning with the initial filing of such registration statement or notification on Form 1-A or Form 1-E and ending with the pricing. Thus, Rule 105 prohibits any person from selling short an equity security immediately prior to an offering and purchasing the security by participating in the offering. The primary market transaction data would allow for the ability to more quickly identify whether any participant in the offering sold short prior to the offering. Rule 10b-5 prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security. The primary market transaction data for bonds would allow for identification of the cost basis for bond purchases by intermediaries and make it easier to assess whether subsequent mark-ups to retail investors in primary offerings are fair and reasonable and, if not, whether there has been a violation of the antifraud provisions of the federal securities laws.

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169 See FINRA Rule 6730(a)(5).

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170 15 U.S.C. 78i(a) and 78j(b).

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171 The Commission's Division of Enforcement has recently established an Office of Market Intelligence. This Office, among other things, conducts intake and triage of investor and industry referrals that are received by the Commission each year. Currently, a thorough review of referrals requires extensive resource allocation as the primary source for evaluating trading data is the EBS system. Expansion of the consolidated audit trail to non-NMS securities would allow that Office to evaluate the merits of each referral faster and more effectively, and more efficiently allocate enforcement resources to appropriate cases.

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172 Asset verification is an exam process that attempts to locate independent information to verify certain customer positions, transactions, and balances at broker-dealers.

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173 Sponsor, when used with respect to an NMS plan, is defined in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory organization which is a signatory to such plan and has agreed to act in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).

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174 See proposed Rule 613(j)(4). Bid or offer is defined in Rule 600(a)(8) of Regulation NMS to mean the bid price or the offer price communicated by a member of a national securities exchange or member of a national securities association to any broker or dealer, or to any customer, at which it is willing to buy or sell one or more round lots of an NMS security, as either principal or agent, but shall not include indications of interest. 17 CFR 242.600(a)(8).

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175 Quotation is defined in Rule 600(a)(62) of Regulation NMS to mean a bid or an offer. 17 CFR 242.600(a)(62).

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176 See Rule 601 of Regulation NMS, 17 CFR 242.601.

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177 See, e.g., FINRA Rule 5320 and NYSE Arca Equities Rule 6.16.

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178 A member of a national securities exchange is defined in Section 3(a)(3)(A) of the Exchange Act to mean: (1) any natural person permitted to effect transactions on the floor of the exchange without the services of another person acting as broker; (2) any registered broker or dealer with which such a natural person is associated; (3) any registered broker or dealer permitted to designate as a representative such a natural person; and (4) any other registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of the Exchange Act, the rules and regulations thereunder, and its own rules. Further, for purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 17(d), 19(d), 19(e), 19(g), 19(h), and 21 of the Exchange Act, the term “member” when used with respect to a national securities exchange also means, to the extent of the rules of the exchange specified by the Commission, any person required by the Commission to comply with such rules pursuant to Section 6(f) of this title. See 15 U.S.C. 78c(a)(3)(A). A member of a registered securities association is defined in Section 3(a)(3)(B) of the Exchange Act to mean any broker or dealer who agrees to be regulated by such association and with respect to whom the association undertakes to enforce compliance with the provisions of the Exchange Act, the rules and regulations thereunder, and its own rules. See Section 3(a)(3)(B) of the Exchange Act, 15 U.S.C. 78c(a)(3)(B). Section 15(b)(8) of the Exchange Act, 15 U.S.C. 78o(b)(8), states that it shall be unlawful for any registered broker or dealer to effect any transaction in, or induce or attempt to induce the purchase or sale of, any security (other than commercial paper, bankers’ acceptances, or commercial bills), unless such broker or dealer is a member of a securities association registered pursuant to Section 15A of the Exchange Act or effects transactions in securities solely on a national securities exchange of which it is a member. Rule 15b9-1(a) under the Exchange Act, 17 CFR 240.15b9-1(a), generally states that any broker or dealer required by Section 15(b)(8) of the Exchange Act to become a member of a registered national securities association shall be exempt from such requirement if it is a member of a national securities exchange; carries no customer accounts; and has annual gross income derived from purchases and sales of securities otherwise than on a national securities exchange of which it is a member in an amount no greater than $1,000.

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179 Reportable event would be defined in proposed Rule 613(j)(5) to include, but not be limited to, the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order.

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180 See infra Section III.D. for a detailed discussion of the information that would be required to be provided to the central repository, and infra Section III.H.2. for a discussion of the requirement that the exchanges and FINRA adopt rules to implement the requirements of the NMS plan for their members.

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181 An ATS is defined in Rule 300(a) of Regulation ATS. See 17 CFR 242.300(a). Regulation ATS requires ATSs to be registered as broker-dealers with the Commission, which entails becoming a member of FINRA and fully complying with the broker-dealer regulatory regime. See Concept Release on Equity Market Structure, supra note 19, at 3599.

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182 See Sections III.D.1. and III.D.2. below for a detailed discussion of the information that would be required to be provided to the central repository.

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183 See proposed Rule 613(c)(5).

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184 See proposed Rule 613(c)(6).

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185 See infra Section III.F. for a discussion of the central repository.

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186 See proposed Rule 613(c)(3). See supra note 179 for a definition of reportable event.

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187 See proposed Rule 613(c)(4). This requirement to report no later than midnight on the day that the reportable event occurs or the exchange, association or member receives the information would be determined using the local time of the entity reporting the information to the central repository.

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188 See proposed Rule 613(c)(2).

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189 See supra notes 28, 154, and 171 and accompanying text.

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190 See supra note 179 for a definition of reportable event.

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191 The proposed Rule would define “customer” to mean the beneficial owner(s) of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner(s). See proposed Rule 613(j)(1). The Commission notes that this proposed definition of customer is only for purposes of proposed Rule 613, and what information would be required to be collected and disclosed by members to the central repository. The Commission does not intend to alter the responsibilities that broker-dealers are already subject to pursuant to SRO rules, or the federal securities laws, rules or regulations or other laws, with respect to the customers (for example, suitability rules, see, e.g. NASD Rule 2310).

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192 See supra Section II.A.

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193 See proposed Rule 613(c)(7)(i)(A).

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194 See proposed Rule 613(c)(7)(i)(C). See also Large Trader Proposal, supra note 11.

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195 See, e.g., Rules 17a-3, 17a-4, and 17a-25 under the Exchange Act, 17 CFR 240.17a-3, 17a-4, and 17a-25.

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196 See proposed Rule 613(c)(7)(i)(B).

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197 17 CFR 242.604.

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198 See proposed Rule 613(c)(7)(i)(H). Requiring time to the millisecond is consistent with current industry standards. The SIPs currently support millisecond time stamps. See, e.g. SIAC’s CQS Output Specifications Revision 40 (January 11, 2010); SIAC’s CTS Output Specifications Revision 55 (January 11, 2010); and Nasdaq’s UTP Plan Quotation Data Feed Interface Specifications Version 12.0a (November 9, 2009).

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199 See proposed Rule 613(c)(7)(i)(I).

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200 A broker or dealer must mark all sell orders of any equity security as long, short, or short exempt. See Rule 200(g)(1) under the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked short exempt only if the conditions of Rule 201(c) or (d) under the Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 200(g)(2), 17 CFR 242.200(g)(2).

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201 See proposed Rule 613(j)(3).

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202 See, e.g., CBOE Rule 6.51; BATS Rule 20.7; and ISE Rule 1404.

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203 Id.

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204 See proposed Rule 613(c)(7)(i)(D).

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205 For example, a member receives a customer order, and rather then sending the customer order as an agency order to an exchange or other marketplace to execute, the member creates an order for its proprietary account that it sends to an exchange or other marketplace to be executed. Once an execution occurs in the proprietary account, the member would then execute the customer order against its proprietary account. This process can be complicated by the member receiving and handling more than one customer order at a time, and creating one or more proprietary orders to send to one or more markets, and the manner in which the member allocates executions from its proprietary account among the customer orders.

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206 See proposed Rule 613(c)(7)(vi)(C).

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207 Internal routing information can be a critical element in assessing whether a member may be disadvantaging customer orders, either by trading ahead of customer orders, or by executing orders as principal at prices inferior to the NBBO.

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208 See proposed Rule 613(c)(7)(ii).

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209 See proposed Rule 613(c)(7)(iii).

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210 See proposed Rule 613(c)(7)(iv).

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211 Each national securities exchange and national securities association would have its own unique identifier, as well as each broker-dealer (member) (see supra Section III.D.1.ii.).

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212 See proposed Rule 613(c)(7)(v).

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213 Id. See also infra Section III.F.1. for a discussion of the requirement in proposed Rule 613(e)(5) that the NMS plan require the central repository to receive and retain on a current and continuing basis (i) the national best bid and national best offer for each NMS security, (ii) transaction reports reported pursuant to a transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS, and (iii) last sale reports reported pursuant to the OPRA Plan.

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214 See supra notes 205-206 and accompanying text.

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215 See supra note 206 and accompanying text.

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216 For example, a member may receive an order during the day from an advisory customer but not know to which sub-accounts to allocate execution of the order until later in the day.

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217 See proposed Rule 613(c)(4).

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218 See proposed Rule 613(c)(7)(vi)(A).

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219 See proposed Rule 613(c)(7)(vi)(B) and (C).

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220 See proposed Rule 613(c)(7)(vi)(D), (E, and (F).

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221 A broker-dealer has a legal duty to seek to obtain best execution of customer orders. See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); Arleen Hughes, 27 SEC 629, 636 (1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (“Order Handling Rules Release”). A broker-dealer’s duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and, through judicial and Commission decisions, the antifraud provisions of the federal securities laws. See Order Handling Rules Release, 61 FR at 48322. See also Newton, 135 F.3d at 270. The duty of best execution requires broker-dealers to execute customers’ trades at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price. Newton, 135 F.3d at 270. Newton also noted certain factors relevant to best execution - order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities Exchange Act Release No. 25887 (July 6, 1988). See also Securities Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006, 55008-55009 (November 2, 1994) (“Approval of Payment for Order Flow Final Rules”). See also Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“NMS Adopting Release”), at 37537 (discussing the duty of best execution).

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222 The term “all-in” price is intended to capture the total costs for executing a trade.

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223 See FINRA Rule 2010 and IM-2440-1.

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224 See FINRA Rule 5130. The Rule ensures that: (1) FINRA members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including FINRA members and their associated persons, do not take advantage of their insider position to purchase "new issues" for their own benefit at the expense of public customers. For example, information on commissions could help detect a transaction in the secondary market between an underwriter and an investor at an excessively high commission rate that is a “quid pro quo” for the underwriter allocating shares in a “hot” IPO to the investor.

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225 In a typical give-up arrangement, a broker-dealer that is not a member of an exchange (Broker-dealer A) may route the order to another broker-dealer that is a member of an exchange (Broker-dealer B) for execution on that exchange. If Broker-dealer B is not also a clearing member of the exchange, it may "give-up" the execution of that order to another broker-dealer that is a clearing member of that exchange (Broker-dealer C). Further, there may be a corresponding "flip" of the trade from Broker-dealer C's account to the account of the broker-dealer that is the clearing firm for Broker-dealer A.

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226 See proposed Rule 613(d)(1).

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227 See proposed Rule 613(a)(3)(ii).

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228 See proposed Rule 613(d)(2).

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229 See proposed Rule 613(e)(1).

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230 See supra note 173 for a definition of a plan sponsor in Rule 600(a)(70) of Regulation NMS, 17 CFR 242.600(a)(70).

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231 See infra Section III.I. for a definition and discussion of the plan processor.

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232 See proposed Rule 613(e)(1).

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233 See proposed Rule 613(e)(5). The central repository would be required to retain the information collected pursuant to subparagraph (c)(7) and (e)(5) of the proposed Rule in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would be required to be available immediately, or if immediate availability could not reasonably and practically be achieved, any search query would be required to begin operating on the data not later than one hour after the search query is made. See proposed Rule 613(e)(6).

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234 See Rule 611 of Regulation NMS, 17 CFR 242.611. See also ISE Rule 1901, NYSE Arca 6.94, and Phlx Rule 1084.

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235 See supra Section III.D.1.v.

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236 See Securities Act Release No. 9002 (January 30, 2009), 74 FR 6776 (February 10, 2009) (Interactive Data to Improve Financial Reporting adopting release) (File No. S7–11–08).

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237 See proposed Rule 613(e)(6).

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238 See proposed Rule 613(e)(2)

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239 Id.

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240 See proposed Rule 613(e)(3).

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241 As noted above, the central repository would be a facility of each exchange and FINRA (see supra note 229 and accompanying text), and as such, subject to the Commission’s recordkeeping and inspection authority. See, e.g., Section 17 of the Exchange Act, 17 U.S.C. 78q. Further, any amendment to the NMS plan would be filed with the Commission pursuant to Rule 608 of Regulation NMS, and would not become effective unless approved by the Commission or otherwise as permitted in accordance with the requirements of Rule 608. See proposed Rule 613(a)(5), and Rule 608(a) and (b) of Regulation NMS, 17 CFR 242.608(a) and (b).

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242 See proposed Rules 613(e)(2). See also proposed Rule 613(e)(4)(i) (requiring in part that the NMS plan include a provision requiring all plan sponsors and their employees to agree not to use the consolidated data for any purpose other than surveillance and regulatory purposes).

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243 15 U.S.C. 6801–6809.

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244 See proposed Rule 613(e)(4)(i). However, a plan sponsor would be permitted to use the data that it submits to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule or regulation. Id.

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245 See proposed Rule 613(e)(4)(iii).

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246 See proposed Rule 613(h)(3) and Rule 613(g)(4).

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247 See proposed Rule 613(a)(3)(iv). The SROs would be required to begin reporting information to the central repository within twelve months after effectiveness of the NMS plan. The Commission is proposing to allow SROs two additional months (for a total of fourteen months) to update their surveillance systems to allow for testing of new surveillances for some period of time after the SROs begin providing information. The Commission requests comment on this time period. Should it be longer? Shorter? If so, why?

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248 17 CFR 240.17d-2. For example, the exchanges have entered into an agreement for the allocation of regulatory responsibilities pursuant to Rule 17d-2 under the Exchange Act concerning the surveillance, investigation, and enforcement of insider trading rules pertaining to members of the NYSE and FINRA who are also members of at least one of the other participating SROs. See Securities Exchange Act Release No. 58806 (File No. 4-566) (October 17, 2008), 73 FR 63216 (October 23, 2008).

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249 See proposed Rule 613(h)(1)

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250 See proposed Rule 613(h)(2).

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251 See proposed Rule 613(e)(6) and supra note 237 and accompanying text.

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252 17 CFR 242.608(c)

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253 See proposed Rule 613(h)(3).

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254 15 U.S.C. 78s(b)(2).

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255 17 CFR 240.19b-4.

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256 See proposed Rule 613(g)(1). This provision in the proposed Rule echoes the requirement contained in Rule 608 that provides “each self-regulatory organization also shall, absent reasonable justification or excuse, enforce compliance with any such plan by its members and persons associated with its members. 17 CFR 242.608(c).

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257 The proposed Rule would require that the NMS plan be filed within 90 days of approval of the proposed Rule. See proposed Rule 613(a)(1).

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258 See proposed Rule 613(g)(2).

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259 See proposed Rule 613(g)(3).

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260 See proposed Rule 613(g)(4).

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261 See Sections 6(b)(6), 6(b)(7), and 6(d)(1) of the Exchange Act, 15 U.S.C. 78f(b)(6), 78f(b)(7), and 78f(d)(1). See also, e.g. FINRA Rule 9217, CHX Article 12, Nasdaq OMX BX Rule 9216 and IM-9216 and NYSE Rule 476A.

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262 See, e.g., FINRA Rule 9217 (providing for the imposition of fines in lieu of commencing a formal disciplinary proceeding for violations of certain rules, including the recording and reporting requirements of the OATS rules) and NYSE Rule 476A (providing for the imposition of fines in lieu of commencing a formal disciplinary proceeding for violations of certain rules, including the OTS rules).

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263 See proposed Rule 613(b)(1).

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264 See proposed Rule 613(b)(3).

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265 For example, Section 4.3 of the OPRA Plan provides that, except as otherwise provided, each of the members of the Management Committee shall be authorized to cast one vote for each Member that he or she represents on all matters voted upon by the Management Committee, and action of the Management Committee shall be authorized by the affirmative vote of a majority of the total number of votes the members of the Management Committee are authorized to cast, subject to the approval of the Commission whenever such approval is required under applicable provisions of the Exchange Act, and the rules of the Commission adopted thereunder. Action of the Management Committee authorized in accordance with the OPRA Plan shall be without prejudice to the rights of any Member to present contrary views to any regulatory body or in any other appropriate forum.

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266 See, e.g., Securities Exchange Act Release Nos. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (order approving the Options Order Protection and Locked/Crossed Market Plan) and 17638 (March 18, 1981), 22 S.E.C. Docket 484 (March 31, 1981) (order approving the OPRA Plan).

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267 See 17 CFR 242.600(55).

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268 See proposed Rule 613(a)(3)(i).

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269 See proposed Rule 613(b)(5).

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270 See proposed Rule 613(b)(2).

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271 See e.g. Section 7.1 of OPRA Plan.

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272 For example, as part of COATS compliance, the options exchanges are required to have in place systems to electronically capture all order, transaction, and quotation information on the exchange.

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273 See proposed Rule 613(a)(3)(v).

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274 See supra note 181.

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275 Dark pools are ATSs that do not provide their best-priced orders for inclusion in the consolidated quotation data. In general, dark pools offer trading services to institutional investors and others that seek to execute large trading interest in a manner that will minimize the movement of prices against the trading interest and thereby reduce trading costs. Dark pools fall within the statutory definition of an exchange, but are exempted if they comply with Regulation ATS. See Concept Release on Equity Market Structure, supra note 19, at 3599, and supra note 181.

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276 44 U.S.C. 3501 et. seq.

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277 See proposed Rule 613(a)(1) and supra Section III.

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278 See proposed Rule 613(c) and supra Section III.D.

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279 For example, the NMS plan would be required to include provisions: (1) to ensure fair representation of the plan sponsors; (2) for administration of the central repository; (3) addressing the requirements for admission of new plan sponsors and withdrawal of existing plan sponsors; (4) addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan; (5) addressing the manner in which the costs of operating the central repository would be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs would be allocated to new sponsors to the plan. See proposed Rule 613(b).

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280 For example, the NMS plan would be required to include a provision requiring the creation and maintenance by the central repository of a method of access to the data, including search and reporting functions. See proposed Rule 613(e)(3). Additionally, the NMS plan would be required to include policies and procedures, including standards, to be used by the plan processor to: (1) ensure the security and confidentiality of all information submitted to, and maintained by, the central repository; (2) ensure the timeliness, accuracy, and completeness of the data provided to the central repository; (3) require the rejection of data that does not meet validation parameters and the retransmission of corrected data; and (4) ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository. See proposed Rule 613(e)(4).

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281 The NMS plan would be required to include: (1) a provision that by subscribing to and submitting the plan to the Commission, each national securities exchange and national securities association that is a sponsor to the plan agrees to enforce compliance by its members with the provisions of the plan; and (2) a mechanism to ensure compliance by the sponsors of the plan with the requirements of the plan. See proposed Rule 613(g)(3) and (h)(3).

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282 See proposed Rule 613(a)(5).

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283 See proposed Rule 613(i).

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284 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b-4.

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285 See proposed Rule 613(g)(1).

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286 See Securities Exchange Act Release No. 50486 (October 5, 2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) (describing the collection of information requirements contained in Rule 19b-4 under the Exchange Act). The Commission has submitted revisions to the current collection of information titled “Rule 19b-4 Filings with Respect to Proposed Rule Changes by Self-Regulatory Organizations” (OMB Control No. 3235-0045). According to the last submitted revision concluded as of August 5, 2008, the current collection of information estimates 1,279 total annual Rule 19b-4 filings with respect to proposed rule changes by self-regulatory organizations.

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287 See proposed Rule 613(e)(5); 17 CFR 242.601.

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288 See proposed Rule 613(e)(6).

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289 See proposed Rule 613(c)(1) and supra Section III.D.

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290 For example, Rule 17a-3 requires broker-dealers to maintain the following information that would be captured by the proposed Rule: customer name and address; time an order was received; and price of execution. 17 CFR 240.17a-3. Also, Rule 17a-25 requires brokers to maintain the following information with respect to customer orders: date on which the transaction was executed; account number; identifying symbol assigned to the security; transaction price; the number of shares or option contracts traded and whether such transaction was a purchase, sale, or short sale, and if an option transaction, whether such was a call or put option; the clearing house number of such broker or dealer and the clearing house numbers of the brokers or dealers on the opposite side of the transaction; prime broker identifier; the customer’s name and address; the customer’s tax identification number; and other related account information. 17 CFR 240.17a-25. This information would be captured by the proposed Rule. See also Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a), and Rules 17a-1 and 17a-4 under the Exchange Act, 17 CFR 240.17a-1 and 17 CFR 240.17a-4.

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291 The audit trail rules of several of the national securities exchanges and FINRA require the following information be recorded: Date order was originated or received by a member, security or option symbol, clearing member organization, order identifier, market participant symbol, number of shares executed, designation of order as short sale, limit order, market order, stop order or stop limit order, account type or number, date and time of execution, and execution price and size. See BOX Ch. V, Section 4; BX Rule 6955; FINRA Rule 7440; Nasdaq Options Market Chapter IX, Section 4; Nasdaq Rule 6955; NYSE Rule 132B; and NYSE Amex Equities Rule 132B. This information would be captured pursuant to the proposed Rule.

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292 See supra Section I.A. (discussing Rule 17a-25 and the EBS system).

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293 See supra Section I.C. (discussing the requirements of FINRA's OATS).

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294 See proposed Rule 613(e)(1). The Commission notes that a plan processor would be responsible for operating the central repository in compliance with the proposed Rule and the NMS plan.

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295 See proposed Rule 613(e)(6).

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296 The NBBO is used by SROs and the Commission to evaluate members for compliance with numerous regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS. See Rule 611 of Regulation NMS, 17 CFR 242.611. See also ISE Rule 1901, NYSE Arca 6.94, and Phlx Rule 1084. An SRO would be able to compare order execution information to the NBBO information on a more timely basis because the order and execution information would be available on a real time basis and all of the information would be available in a compatible format in the same database. The SROs also may enjoy economies of scale by adopting standard cross-market surveillance parameters for certain types of violations.

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297 See supra Section III.D.1.v. As discussed above, the proposed Rule would require that each report of the execution (in whole or in part) of an order sent to the central repository include a notation as to whether the execution was reported to the consolidated tape pursuant to an effective transaction reporting plan or the OPRA Plan. This requirement should allow regulators to more efficiently evaluate certain trading activity. For example, trading patterns of reported and unreported trades may cause the staff of an SRO or the Commission to make further inquiry into the nature of the trading to ensure that the public was receiving accurate and timely information regarding executions and that market participants were continuing to comply with the trade reporting obligations under SRO rules. Similarly, patterns in the reported and unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. Being able to more efficiently compare the consolidated order execution data with the trades reported to the consolidated tape could thus be an important component of overall surveillance activity.

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298 This is the number of broker-dealers filing FOCUS Reports at year-end 2008. FOCUS Reports are required to be filed by all registered broker-dealers, with a few exceptions. Excluded from this number were recently established broker-dealers that had yet to become active, or broker-dealers no longer doing business that had yet to deregister.

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299 The Commission derived the total estimated burdens from the following estimates, which are based on the Commission’s understanding of, and burden estimates for, existing NMS plans: (Attorney at 400 hours) + (Compliance Manager at 100 hours) + (Programmer Analyst at 220 hours) + (Business Analyst at 120 hours). The Commission preliminarily believes that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be comparable to the cost to create other existing NMS plans, recognizing that the proposed Rule may include more detail as to what must be incorporated and addressed in the NMS plan implementing the proposed Rule.

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300 Based on industry sources, the Commission estimates that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

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301 The Commission derived the total estimated burdens from the following estimates, which are based on prior Commission experience with burden estimates: (Attorney at 64 hours) + (Compliance Manager at 64 hours) + (Programmer Analyst at 64 hours) = 192 burden hours.

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302 The Commission derived the total estimated burden from the following estimates, which assumes preparation of the report would impose approximately half of the approximate burden of preparing the Plan, reflects half of the approximate burden of drafting and filing the NMS plan, and the Commission’s preliminary view that the cost of preparing the report would not be as extensive as the drafting and filing of the NMS plan: (Attorney at 200 hours) + (Compliance Manager at 50 hours) + (Programmer Analyst at 110 hours) + (Business Analyst at 60 hours) = 420 burden hours per SRO.

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303 The Commission derived the total estimated burden for outsourced legal counsel based on the assumption that the report required by the proposed Rule would require approximately half the effort of drafting and filing the proposed NMS plan.

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304 15 U.S.C. 78q(a); 17 CFR 240.17a-1.

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305 The Commission derived the total estimated burdens from the following estimates, which reflect the Commission’s experience with, and burden estimates for, SRO systems changes, and discussions with market participants: (Attorney at 100 hours) + (Compliance Manager at 80 hours) + (Programmer Analyst at 1,960 hours) + (Business Analyst at 60 hours) = 2,200 burden hours per SRO.

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306 These estimates are based on the Commission’s previous experience with, and cost estimates for, SRO systems changes, and discussions with market participants. See Securities Exchange Act Release No. 50870 (December 16, 2004), 69 FR 77424, (December 27, 2004) ("Regulation NMS Reproposing Release") at 77480 (discussing costs to implement Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 of Regulation NMS is not the same as the proposed Rule, the Commission preliminarily believes that the scope of the systems changes would be comparable.

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307 The Commission derived the total estimated burdens from the following estimates, which reflect the Commission’s preliminary view that annual ongoing costs would be approximately half the costs of developing and implementing the systems to capture the required information and transmit it to the central repository, and discussions with market participants: (Attorney at 1,500 hours) + (Compliance Analyst at 1,600 hours) + (Programmer Analyst at 1,375 hours) + (Business Analyst at 500 hours) = 4,975 burden hours per SRO.

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308 This estimate includes an estimated cost of approximately $10,000 per month to maintain systems connectivity to the central repository, including back-up connectivity. This estimate is based on discussions with a market participant.

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309 The Commission derived the total estimated burdens based on the following estimates, which are based on information provided to the Commission regarding the development of reporting systems for the collection, consolidation, and dissemination of quotation and last sale data and discussions with market participants: (Attorney at 3,000 hours) + (Compliance Manager at 4,000 hours) + (Programmer Analyst at 7,500 hours) + (Business Analyst at 3,000 hours) = 17,500 per SRO. This figure excludes the number of burden hours required to create and file the NMS plan.

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310 This cost estimate includes the estimated costs that each exchange and association would incur for software and hardware costs related to systems development. This cost estimate also would encompass (1) costs related to engaging in an analysis and formal bidding process to choose the plan processor, and (2) any search undertaken to hire a CCO. See proposed Rule 613(a)(3)(i) (the plan sponsors would be required to select a person to act as a plan processor for the central repository no later than two months after the effectiveness of the NMS plan) and 613(b)(5) (the plan sponsors would be required to appoint a CCO to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which the information is processed).

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311 The Commission derived the total estimated burdens from the following estimates, which are based on prior Commission experience with burden estimates: (Attorney at 16 hours) + (Compliance Manager at 16 hours) + (Programmer Analyst at 16 hours) = 48 burden hours per quarter, or 192 burden hours per year.

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312 The Commission derived the total estimated burdens based on discussions with market participants. The estimated annual cost includes an annual salary for a CCO of $703,800. This figure is based on a $391 per-hour figure for a Chief Compliance Officer from SIFMA’s Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead.

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313 See proposed Rule 613(e)(5).

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314 See proposed Rule 613(e)(6).

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315 See supra Section V.D.1.d.

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316 The Commission derived this estimate based on the average current cost of obtaining consolidated quotation and transaction information from existing quotation and transaction reporting plans.

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317 See Section 17(a) of the Exchange Act, 14 U.S.C. 78q(a), and Rules 17a-3, 17a-4, and 17a-25 under the Exchange Act, 17 CFR 240.17a-3, 17 CFR 240.17a-4, and 17 CFR 240.17a-25; see also, e.g., BATS Rule 20.7; BOX Chapter V, Section 4; CBOE Chapter VI, Rule 6.24; CHX Article 11, Rule 3; FINRA Rule 7440; Nasdaq Options Market Chapter IX, Section 4; NYSE Rule 132B; and NYSE Amex Equities Rule 132B.

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318 15 U.S.C. 78q et seq.; 17 CFR 240.17a-3. Generally, broker-dealers must keep a memorandum of each brokerage order, including the following information: the terms and conditions of an order or instructions; the account for which an order was entered; time of order entry and receipt and, to the extent feasible, time of execution; any modifications or cancellations (and, to the extent feasible, time of cancellation); execution price; and the identity of each associated person, if any, responsible for the account. See Rule 17a-3(a)(6)(i) under the Exchange Act, 17 CFR 240.17a-3(a)(6)(i). Broker-dealers also are required to keep a record for each cash and margin account they hold, and the name and address of the beneficial owner of each such account. See Rule 17a-3(a)(9) under the Exchange Act, 17 CFR 240.17a-3(a)(9).

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319 See supra Section I.A for a detailed discussion of what information is required to be submitted upon request to the Commission pursuant to Rule 17a-25 under the Exchange Act, 17 CFR 240.17a-25.

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320 This number includes members that are clearing brokers-dealers that carry customer accounts; broker-dealers that accept customer monies but do no margin business; introducing brokers that clear proprietary securities transactions; ATSs registered with the Commission; other clearing firms; and registered market makers. This number was derived from annual FOCUS reports filed with the Commission for the year ending in 2008.

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321 The Commission derived the total estimated burdens on the following estimates, which reflect the Commission’s previous experience with, and burden estimates for, broker-dealer systems changes, and discussions with market participants: (Attorney at 1,240 hours) + (Compliance Manager at 1,540 hours) + (Programmer Analyst at 2,750 hours) + (Business Analyst at 1000 hours) = 6,530 hours.

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322 These estimates are based on the Commission’s previous experience with, and cost estimates for, broker-dealer systems changes, and discussions with market participants. See Regulation NMS Reproposing Release, supra note 306, at 77480 (discussing costs to implement Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 of Regulation NMS is not the same as the proposed Rule, the Commission preliminarily believes that the scope of the systems changes would be comparable. These estimated hour burdens and systems costs would include the burden and costs, if any, that would be incurred by members to obtain the required customer information, including beneficial ownership, store it electronically, and transmit it to the central repository.

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323 See Regulation NMS Reproposing Release, supra note 306, at 77480.

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324 The Commission derived the total estimated burdens on the following estimates, which reflect the Commission’s preliminary view that ongoing costs would be approximately half of the costs of developing and implementing the systems to comply with the proposed Rule: (Attorney at 800 hours) + (Compliance Manager at 1,000 hours) + (Programmer Analyst at 500 hours) + (Business Analyst at 750 hours) = 3,050 burden hours.

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325 This estimate includes an estimated cost of approximately $10,000 per month to maintain systems connectivity to the central repository, including back-up connectivity. This estimate is based on discussions with a market participant.

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326 See infra Section IX.

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327 This number includes introducing broker-dealers that do not clear transactions. This number excludes non-clearing firms that specialize in direct participation programs; non-clearing firms that sell insurance products; and non-clearing firms that are underwriters and retailers of mutual funds because these firms do not deal in NMS securities. This number was derived from annual FOCUS reports filed with the Commission for the year ending in 2008.

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328 This estimate is based on the Commission’s previous experience with, and burden estimates for, broker-dealer systems changes. See Regulation NMS Reproposing Release, supra note 306, at 77480 (discussing costs to implement Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 of Regulation NMS is not the same as the proposed Rule, the Commission preliminarily believes that the scope of the systems changes would be comparable.

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329 The Commission derived the estimated burdens from the following estimates, which are based on prior Commission experience with burden estimates: (Attorney at 50 hours) + (Compliance Manager at 50 hours) + (Programmer Analyst at 40 hours) = 140 hours. These estimated hour burdens and systems costs would include the burden and costs, if any, that would be incurred by members to obtain the required customer information, including beneficial ownership, store it electronically, and transmit it to the central repository.

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330 The Commission bases this estimate one a full-time Compliance Manager spending approximately 2 days per quarter of his time on overseeing ongoing compliance with the proposed Rule.

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331 Proposed Rule 613(c)(7)(vi) would require the reporting to the central repository of the following information: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker, if applicable; (3) the unique order identifier of any contra-side order(s); (4) special settlement terms, if applicable; (5) short sale borrow information and identifier; and (6) the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid. Proposed Rule 613(c)(7)(vii) would require the reporting to the central repository of a cancelled trade indicator, if the trade is cancelled.

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332 See proposed Rule 613(e)(2).

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333 See proposed Rule 613(e)(4)(i).

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334 17 CFR 240.17a-1.

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335 17 CFR 240.17a-4.

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336 See supra Sections I.C., I.D., II.A., and V.A.5.

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337 See supra Section III.D.1.

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338 The Commission notes that, if the proposed Rule were adopted, the SROs would need to consider the continued need for their existing audit trail rules until such time that their members begin complying with the requirements of the proposed Rule.

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339 See Guiso, Sapienza, and Zingales, “Trusting the Stock Market,” available at http://ssrn.acom/abstract=811545.

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340 See proposed Rule 613(c)(1), (c)(3), (c)(7); see also supra Sections III.A., III.B., III.D., and V.A.5.

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341 As discussed above in Section III, these required provisions include provisions relating to: a governance structure to ensure the fair representation of the plan sponsors; administration of the plan, including the selection of the plan processor; the admission of new sponsors of the NMS plan and the withdrawal of existing sponsors from the plan; the percentage of votes required by the plan sponsors to effectuate amendments to the plan; the manner in which costs of operating the central repository would be allocated among the exchanges and FINRA, including a provision addressing the manner in which costs would be allocated to new sponsors of the plan; the appointment of a Chief Compliance Officer; the provision stating that by subscribing to and submitting the plan to the Commission each plan sponsor agrees to enforce compliance by its members with the provisions of the plan; and the provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data that includes search and reporting functions. See proposed Rules 613(b), 613(e)(3), and 613(g)(3). The NMS plan also would be required to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to the central repository; to ensure the timeliness, accuracy, and completeness of the data provided to the central repository; to require the rejection of data provided to the central repository that does not meet the validation parameters set out in the plan and the re-transmission of corrected data; and to ensure the accuracy of the processing of the data provided to the central repository. See proposed Rule 613(e)(4).

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342 This figure includes internal personnel time and external legal costs. Commission staff estimates that each exchange and association would expend (400 Attorney hours x $305 per hour) + (100 Compliance Manager hours x $258 per hour) + (220 Programmer Analyst hours x $193 per hour) + (120 Business Analyst hours x $194 per hour) = $213,540. The $305 per-hour figure for an Attorney; the $258 per hour figure for a Compliance Manager; the $193 per hour figure for a Programmer Analyst; and the $194 per hour figure for a Business Analysis (Intermediate) are from SIFMA’s Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. Commission staff also estimates that each exchange and association would outsource, on average, 50 hours of legal time, at an average hourly rate of $400. Thus, the Commission preliminarily estimates, on average, a total cost of $233,540 per SRO. See supra Section V.D.1.a. (discussing PRA costs for developing and filing the NMS plan).

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343 Commission staff estimates that annually each exchange and association would expend (64 Attorney hours x $305 per hour) + (64 Compliance Manager hours x $258 per hour) + (64 Programmer Analyst hours x $193 per hour) = $48,384, to ensure that the NMS plan is up to date and remains in compliance with the proposed Rule. See supra note 301.

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344 See proposed Rule 613(d)(1).

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fn +

345 See proposed Rule 613(d)(2).

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fn +

346 See CHX Rule 4, Interpretations and Policies .02; FINRA Rule 7430; NYSE and NYSE Amex Equities Rule 123, Supplementary Material .23; NYSE and NYSE Amex Equities Rule 132A; and NYSE Arca Options Rule 6.20.

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fn +

347 Commission staff estimates that, on average, each exchange, association, and member would expend 50 hours of information technology time, at a cost of $193 per hour to make systems changes to comply with the requirement that clocks be synchronized. This estimate is based on discussions with market participants.

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348 Commission staff estimates that each exchange, association and member would expend approximately five hours of information technology time, per month, at $193 per hour. This estimate is based on discussions with industry participants.

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+
fn +

349 This estimate assumes that each SRO or member would expend (16 Programmer Analyst hours x $193 per hour) + (16 Business Analyst hours x $194 per hour) = $6,192 to carry out this annual evaluation.

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fn +

350 15 U.S.C. 78q(a) et. seq.; 17 CFR 240.17a-1. Rule 17a-1 requires an exchange or association to keep and preserve at least one record of all documents or other records that shall be received by it in the course of its business as such and in the conduct of its self-regulatory activity. This would include records of the receipt of all orders entered into their systems, as well as records of the routing, modification, cancellation, and execution of those orders. The Commission understands that SROs have automated this process and thus keep these records in electronic format.

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fn +

351 See supra notes 317 to 319 and accompanying text.

+
+
fn +

352 The Commission based this estimated cost on the Commission’s previous experience with, and burden estimates for, SRO systems changes and discussions with market participants. See Regulation NMS Reproposing Release, supra note 306, at 77480 (discussing costs of implementing Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 is not the same as the proposed Rule, the Commission preliminarily believes that the scope of systems changes would be comparable.

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353 Commission staff estimates that each exchange and association would expend (100 Attorney hours x $305 per hour) + (80 Compliance Manager hours x $258 per hour) + 1,960 Programmer Analyst hours x $193 per hour) + 60 Business Analyst hours x $194) = $441,060 to develop and implement the systems needed to capture the required information and transmit it. In addition, the Commission estimates that each exchange and association would expend 40 hours of outsourced legal time at an average rate of $400 per hour. See supra note 305.

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fn +

354 Commission staff estimates that the cost for system hardware, software, and other materials would be $4,542,940. See supra note 306 and accompanying text.

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355 Commission staff estimates that each exchange and association would expend (1,500 Attorney hours x $305 per hour) + (1,600 Compliance Manager hours x $258 per hour) + (1,375 Programmer Analyst hours x $193 per hour) + (500 Business Analyst hours x $194 per hour) to ensure that the systems technology is up to date and remains in compliance with the proposed Rule, for a total of $1,250,675. In addition, Commission staff estimates that each exchange and association would expend approximately $1.25 million on system hardware, software, connectivity and other materials. These estimates reflect the preliminary view that ongoing costs to maintain compliance with the proposed Rule would be half of the initial costs. See supra notes 307 and 308.

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356 See supra note 328. The Commission based this estimated cost on the Commission’s previous experience with, and burden estimates for, broker-dealer systems changes. See Regulation NMS Reproposing Release, supra note 306, at 77480 (discussing costs of implementing Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 is not the same as the proposed Rule, the Commission preliminarily believes that the scope of systems changes would be comparable.

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357 Commission staff estimates that annually each of these types of members would expend (50 Attorney hours x $305 per hour) + (50 Compliance Manager hours x $258 per hour) + (40 Information Analyst hours x $193 per hour) = $35,870 to incorporate the new functionality into its existing systems. These costs would include any systems or other changes necessary to obtain the required customer information, including the identity of the beneficial owner, and electronically storing it for transmittal to the central repository with the order information.

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358 This estimate is based on a cost of $50,000 per year to compensate a third party for the functionality to capture the required information and transmit it to the central repository, and a cost of $16,512 for personnel time to oversee compliance with the proposed Rule (64 hours Compliance Manager x $258 per hour). See supra note 330.

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359 See supra Section V.D.2 and note 320.

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360 Commission staff estimates that each member would expend (1,240 Attorney hours x $305 per hour) + (1,540 Compliance Manager hours x $258 per hour) + (2,750 Programmer Analyst hours x $193 per hour) + (1,000 Business Analyst hours x $194 per hour) = $1,500,270 to develop and implement the systems needed to capture the required information and transmit it. In addition, the Commission estimates that the cost for system hardware, software, and other materials would be approximately $1.5 million. This estimate is based on the Commission’s previous experience with, and burden estimates for, broker-dealer systems changes. See Regulation NMS Reproposing Release, supra note 306, at 77480 (discussing cost estimates for implementing Rule 611 of Regulation NMS). Although the Commission recognizes that the substance of Rule 611 is not the same as the proposed Rule, the Commission preliminarily believes that the scope of systems changes would be comparable. These costs would include any systems or other changes necessary to obtain the required customer information, including the identity of the beneficial owner, and electronically storing it for transmittal to the central repository with the order information.

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361 Commission staff estimates that each member would expend (800 Attorney hours x $305 per hour) + (1,000 Compliance Manager hours x $258 per hour) + (500 Programmer Analyst hours x $193 per hour) + (750 Business Analyst hours x $194 per hour) = $744,000 to ensure that the systems technology is up to date and remains in compliance with the proposed Rule. In addition, Commission staff estimates that each member would expend approximately $756,000 on system hardware, software, connectivity and other materials. These estimates reflect the preliminary view that ongoing costs to maintain compliance with the proposed Rule would be half of the initial estimated costs.

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362 See supra Section V.D.2.

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363 See proposed Rule 613(f).

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364 This estimate is based on discussions with market participants. This estimate does not separately break out personnel time versus system costs.

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365 Commission staff estimates that each member would expend (3,600 Senior Compliance Examiner hours x $212 per hour) and (1,800 Information Analyst hours x $193 per hour) to operate and monitor the enhanced surveillance systems and carry out surveillance functions. In addition, Commission staff estimates that each member would expend approximately $1.5 million on system hardware, software, connectivity and other technology per year on an on-going basis for this purpose. These estimates are based on discussions with a market participant.

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366 See proposed Rule 613(e)(6).

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367 The proposed Rule would require that the central processor create and maintain a method of access to the consolidated data. See proposed Rule 613(e)(3). The Rule requires that this method of access would be designed to include search and reporting functions to optimize the use of the consolidated data. The cost of creating a method of access to the consolidated audit trail data is included within the overall systems cost estimate.

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368 Commission staff estimates that each exchange and association would expend (3,000 Attorney hours x $305 per hour) + (4,000 Compliance Manager hours x $258 per hour) + (7,500 Programmer Analyst hours x $193 per hour) + (3,000 Business Analyst hours x $194 per hour) = $3,976,500 to create the central repository. In addition, the Commission estimates that the cost per exchange or association for system hardware, software, and other materials would be approximately $4 million. See supra Section V.D.1.d. and note 309. This estimate includes the estimated costs that each exchange and association would incur for software and hardware costs related to systems development. This cost estimate also would encompass (1) costs related to engaging in an analysis and formal bidding process to choose the plan processor, and (2) any search undertaken to hire a CCO. See proposed Rule 613(a)(3)(i) (the plan sponsors would be required to select a person to act as a plan processor for the central repository no later than two months after the effectiveness of the NMS plan) and 613(b)(5) (the plan sponsors would be required to appoint a CCO to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which the information is processed).

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369 See supra Section V.D.1.d. This cost estimate includes ongoing costs for operating the central repository, including the cost of systems and connectivity upgrades or changes necessary to receive, consolidate, and retain and store the reported order information from SROs and their members; the cost, including storage costs, of collecting and maintaining the NBBO and transaction data in a format compatible with the order and event information collected pursuant to the proposed Rule; the cost of monitoring the required validation parameters; the cost of compensating the plan processor; and an ongoing annual cost of $703,800 to compensate the CCO. See supra note 312.

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370 Commission staff estimates that annually each exchange and association would expend (64 Attorney hours x $305 per hour) + (64 Compliance Manager hours x $258 per hour) + (64 Programmer Analyst hours x $193 per hour) = $48,384 to ensure and review the operation and administration of the central repository. See supra note 343 and accompanying text.

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371 See supra Section V.D.1.e.

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372 See proposed Rule 613(g)(1).

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373 The Commission notes that, for its 2009 fiscal year (October 1, 2008 to September 30, 2009), the then existing twelve exchanges and FINRA filed approximately 1,308 proposed rule changes in the aggregate pursuant to Section 19(b) and Rule 19b-4 thereunder.

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374 This figure was calculated as follows: (129 Attorney hours x $305) = $39,345 x 15 SROs= $590,175. Commission staff estimates that each exchange and association would expend approximately 129 hours of legal time x $305 to prepare and file a complex rule change. See Securities Exchange Act Release No. 50486 (October 4, 2004), 69 FR 60287 (October 8, 2004) (File No. S7-18-04). The $305 per-hour figure for an attorney is from SIFMA’s Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. See Securities Exchange Act Release No. 59748 (April 10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7-08-09) (noting the Commission’s modification to the $305 per hour figure for an attorney).

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375 Commission staff estimates that each member would expend (200 Attorney hours x $305 per hour) + (50 Compliance Manager hours x $258 per hour) + (110 Programmer Analyst hours x $193 per hour) + (60 Business Analyst hours x $194 per hour) + (25 Outsourced Legal Counsel hours x $400 per hour) = $116,770 to create and file with the Commission a report for expanding the scope of the consolidated audit trail. See supra Section V.D.1.b and note 302.

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376 This aggregate cost estimate includes the aggregate one-time cost of preparing and filing the NMS plan ($3,503,100); the aggregate average one-time cost for each exchange and FINRA to synchronize clocks consistent with the proposed requirements ($144,750); the aggregate average one-time cost for each exchange and FINRA to identify, collect and transmit the consolidated audit trail information to the central repository ($75 million); the aggregate average one-time cost for each exchange and FINRA to develop and implement surveillance systems, or enhance existing surveillance systems ($150 million); the aggregate one-time cost for each exchange and FINRA to file proposed rule changes to implement the provisions of the NMS plan with respect to their members ($590,175); and the aggregate one-time cost to the exchanges and FINRA of jointly providing to the Commission a report outlining how the exchanges and FINRA would expand the scope of the consolidated audit trail ($1,751,550).

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377 This aggregate cost estimate includes the aggregate average ongoing annual cost to ensure that the plan is up to date and remains in compliance with the proposed Rule ($725,760); the aggregate average ongoing annual cost to synchronize clocks consistent with industry standards ($173,700); the aggregate average ongoing annual cost to evaluate the synchronization standards ($92,880); the aggregate average ongoing annual cost to ensure that each exchange and FINRA is providing information in compliance with the proposed Rule ($37.5 million); and the aggregate average ongoing annual cost associated with enhanced surveillance ($39,159,000).

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378 See supra note 368.

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379 See supra notes 369 to 371 and accompanying text.

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380 We preliminarily estimate there are 1,114 of these broker-dealers, including all clearing firms and alternative trading systems. See supra note 320.

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381 This aggregate cost estimate includes the aggregate average one-time cost for such members to identify, collect and transmit the consolidated audit trail information to the central repository ($3,342,000,000); and the aggregate average initial cost for such members to synchronize clocks consistent with the proposed requirements ($10,750,100).

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382 This aggregate cost estimate includes the aggregate average ongoing annual cost for such members to identify, collect and transmit the consolidated audit trail information to the central repository ($1,671,000,000); and the aggregate average ongoing annual cost for such members to annually evaluate the synchronization time standards and perform any necessary synchronization adjustments ($19,798,008).

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383 We preliminarily estimate there are 3,006 of these broker-dealers, mainly including non-clearing broker-dealers. See supra note 327.

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384 This aggregate cost estimate includes the aggregate average initial cost for such members to identify, collect and transmit the consolidated audit trail information to the central repository ($258,125,220); and the aggregate average initial cost for such members to synchronize clocks consistent with the proposed requirements ($29,007,900).

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385 This aggregate cost estimate includes the aggregate average ongoing annual cost for such members to identify, collect and transmit the consolidated audit trail information to the central repository ($199,935,072); and the aggregate average ongoing annual cost for such members to annually evaluate the synchronization time standards and perform any necessary synchronization adjustments ($53,422,632).

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386 15 U.S.C. 78c(f).

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387 15 U.S.C. 78w(a)(2).

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388 See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 78k-1(a)(3)(B).

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389 See supra Section III.D. for a detailed description of the required data.

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390 See Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (order approving BATS Exchange’s application for registration as a national securities exchange).

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391 See Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (order approving EDGA Exchange and EDGX Exchange’s applications for registration as national securities exchanges).

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392 See Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (order approving Nasdaq’s application for registration as a national securities exchange).

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393 See Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (order approving C2 Options Exchange’s application for registration as a national securities exchange).

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394 See Securities Exchange Act Release No. 54528 (September 28, 2006), 71 FR 58650 (October 4, 2006) (order approving rules to govern trading equities).

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395 See Securities Exchange Act Release No. 55389 (March 2, 2007), 72 FR 10575 (March 8, 2007 (order approving CBOE Stock Exchange LLC as a facility of CBOE).

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396 See Securities Exchange Act Release Nos. 57478 (March 12, 2008), 73 FR 14321 (March 18, 2008) (order approving rules governing the trading of options on the Nasdaq Options Market, LLC); and 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (order approving rules governing the trading of options on BATS Options Exchange, Inc.).

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397 See Securities Exchange Act Release No. 26870 (May 26, 1989), 54 FR 23963 (June 5, 1989) (S7-25-87).

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398 See Securities Exchange Act Release No. 43591 (November 17, 2000), 65 FR 75439 (December 1, 2000).

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399 See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (approved of Options Order Protection and Locked/Crossed Market Plan).

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400 See, e.g., Securities Exchange Act Release No. 47959 (May 30, 2003), 68 FR 34441, 34442 (June 9, 2003) (SR-CBOE-2002-05) (adopting, among other things, amendments to incorporate firm quote requirements in CBOE’s rules).

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401 On January 26, 2007, the then-existing six options exchanges implemented a pilot program to quote certain options series in thirteen classes in one-cent increments (“Minimum Quoting Increment Pilot Program”). Nasdaq became a participant in the Minimum Quoting Increment Pilot Program on March 31, 2008, when it commenced trading on its options platform, and BATS become a participant in the Pilot Program on February 26, 2010, when it commenced trading on BATS Options. Since 2007, the Minimum Quoting Increment Pilot Program has been extended and expanded several times. See, e.g., Securities Exchange Act Release Nos. 56276 (August 17, 2007), 72 FR 47096 (August 22, 2007) (SR-CBOE-2007-98); 56567 (September 27, 2007), 72 FR 56396 (October 3, 2007) (SR-Amex-2007-96); 57579 (March 28, 2008), 73 FR 18587 (April 4, 2008) (SR-Nasdaq-2008-026); 60711 (September 23, 2009), 74 FR 49419 (September 28, 2009) (SR-NYSEArca-2009-44); and 61061 (November 24, 2009), 74 FR 62857 (December 1, 2009) (SR-NYSEArca-2004-44).

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402 This number is based on a Commission staff review of FOCUS Report filings reflecting registered broker-dealers from 2001 through 2008. The number does not include broker-dealers that are delinquent on FOCUS Report filings. New registered broker-dealers for each year during the period from 2001 through 2008 were identified by comparing the unique registration number of each broker-dealer filed for the relevant year to the registration numbers filed for each year between 1995 and the relevant year.

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403 These numbers are based on a review of 2007 and 2008 FOCUS Report filings reflecting registered broker-dealers, and discussions with SRO staff. The number does not include broker-dealers that are delinquent on FOCUS Report filings.

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404 Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601).

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405 5 U.S.C. 601 et seq.

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406 5 U.S.C. 603(a).

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407 5 U.S.C. 551 et seq.

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408 The Commission has adopted definitions for the term small entity for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).

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409 See proposed Rule 613(c) and supra Sections III.B. and III.D.

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410 See supra Section II.A.

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411 17 CFR 240.17a-25.

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412 See supra Sections I.A and I.B. for a description of the EBS system, Rule 17a-25, and equity cleared reports.

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413 See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the Exchange Act, 15 U.S.C. 78(f)(b)(1), 78s(g)(1), and 78o-3(b)(2).

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414 See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the Exchange Act, 15 U.S.C. 78(b), 15 U.S.C. 78(f)(6), 15 U.S.C. 78o-3(b), and 15 U.S.C. 78(h)(1).

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415 See, e.g., 19(h)(1) of the Exchange Act, 15 U.S.C. 78(h)(1).

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416 See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states that the term “small business,” when referring to an exchange, means any exchange that has been exempted from the reporting requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0-10. Under this standard, none of the exchanges subject to the proposed Rule is a “small entity” for the purposes of the RFA. FINRA is not a small entity as defined by 13 CFR 121.201.

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417 See 17 CFR 240.0-10(c).

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418 See 17 CFR 240.17a-3. Pursuant to Rule 17a-3, broker-dealers are, for example, required to maintain the following information that would be captured by the proposed rule: customer name and address; time an order was received; and price of execution.

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419 See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-dealers are, for example, required to maintain the following information with respect to customer orders that would be captured by the proposed Rule, and provide it to the Commission upon request: date on which the transaction was executed; account number; identifying symbol assigned to the security; transaction price; the number of shares or option contracts traded and whether such transaction was a purchase, sale, or short sale, and if an option transaction, whether such was a call or put option; the clearing house number of such broker or dealer and the clearing house numbers of the brokers or dealers on the opposite side of the transaction; prime broker identifier; the customer’s name and address; the customer’s tax identification number; and other related account information.

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420 Such additional information would include: a unique customer identifier for each customer; a unique identifier that would attach to the order at the time the order is received or originated by the member and remain with the order through the process of routing, modification, cancellation, and execution (in whole or in part); a unique identifier of the broker-dealer receiving or originating the order; the unique identifier of the branch office and registered representative receiving or originating the order; the date on which the order is routed; time at which the order is routed (in milliseconds); and if the order is executed, in whole or in part, the account number for any subaccounts to which the execution is allocated; the unique order identifier of any contra-side order(s); and the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid.

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421 See 17a-25 Adopting Release, supra note 20, at 35839–35840.

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422 See supra notes 326-330 and accompanying text and notes 356-358 and accompanying text.

\ No newline at end of file diff --git a/spider/files/data000022.html b/spider/files/data000022.html index 97e47df..ce5f1ac 100644 --- a/spider/files/data000022.html +++ b/spider/files/data000022.html @@ -1,4159 +1,201 @@ - + jurisdiction: US regulatory_authority: US/SEC - content_type: compilation - document_title: LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company - document_type: Plan - source: US/SEC/Plan/NMS Plan - source_type: NMS Plan + content_type: periodic + document_title: Selection of CAT NMS Plan Processor (SEC File Number 4-698) + document_type: Notices + source: US/SEC/Notices/Plan Processor Notice + source_type: Plan Processor Notice language: English - citation: N/A -
pubdate: January 10, 2018 effdate: N/A -

LIMITED LIABILITY COMPANY AGREEMENT OF CAT NMS, LLC a Delaware Limited Liability Company

- Topic: CAT NMS Plan - Compliance User: National Securities Exchanges/National Securities Associations + citation: SEC File Number 4-698 +
pubdate: January 18, 2017 effdate: N/A +

Selection of CAT NMS Plan Processor (SEC File Number 4-698)

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail + Compliance User: Thesys Technologies, LLC Keywords: - National Securities Exchanges, - National Securities Associations, + CAT NMS plan, + SRO, + Rule 608, + Securities Exchange Act, -

This Limited Liability Company Agreement (including its Recitals and the Exhibits, Appendices, Attachments, and Schedules identified herein, this “Agreement”) of CAT NMS, LLC, a Delaware limited liability company (the “Company”), dated as of the __ day of ______, ____, is made and entered into by and among the Participants.

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RECITALS

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A. Prior to the formation of the Company, in response to SEC Rule 613 requiring national securities exchanges and national securities associations to submit a national market system plan to the Securities and Exchange Commission (“Commission” or “SEC”) to create, implement and maintain a consolidated audit trail, such national securities exchanges and national securities associations, pursuant to SEC Rule 608(a)(3), which authorizes them to act jointly in preparing, filing and implementing national market system plans, developed the National Market System Plan Governing the Process for Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (the “Selection Plan”). The Selection Plan was approved by the Commission on February 21, 2014, amended on June 17, 2015 and September 24, 2015, and, by its terms, shall automatically terminate upon the Commission’s approval of this Agreement.

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B. The Participants have now determined that it is advantageous and desirable to conduct in a limited liability company the activities they have heretofore conducted as parties to the Selection Plan, and have formed the Company for this purpose. This Agreement, which takes the place of the Selection Plan, is a National Market System Plan as defined in SEC Rule 600(b)(43), and serves as the National Market System Plan required by SEC Rule 613. The Participants shall jointly own the Company, which shall create, implement, and maintain the CAT and the Central Repository pursuant to SEC Rule 608 and SEC Rule 613.

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C. This Agreement incorporates the exemptive relief from certain provisions of SEC Rule 613 requested in the original and supplemental request letters submitted by the Participants to the Commission, as described further in Appendix C (“Exemptive Request Letters”).

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE I DEFINITIONS

- Topic: CAT NMS Plan, Article I - Definitions - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Definition, - -
pubdate: January 10, 2018 effdate: N/A -

Section 1.1. Definitions.

- Topic: CAT NMS Plan, Article I - Definitions, Definitions - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Definition, - CAT,, - CAT NMS plan, - -

As used throughout this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement):

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“Account Effective Date” means: (a) with regard to those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, (i) when the trading relationship was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), either (A) the date the relationship identifier was established within the Industry Member, (B) the date when trading began (i.e., the date the first order was received) using the relevant relationship identifier, or (C) if both dates are available, the earlier date will be used to the extent that the dates differ; or (ii) when the trading relationship was established on or after the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date the Industry Member established the relationship identifier, which would be no later than the date the first order was received; (b) where an Industry Member changes back office providers or clearing firms prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (c) where an Industry Member acquires another Industry Member prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the date an account was established at the relevant Industry Member, either directly or via transfer; (d) where there are multiple dates associated with an account established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), the earliest available date; (e) with regard to Industry Member proprietary accounts established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), (i) the date established for the account in the Industry Member or in a system of the Industry Member or (ii) the date when proprietary trading began in the account (i.e., the date on which the first orders were submitted from the account). With regard to paragraphs (b) – (e), the Account Effective Date will be no later than the date trading occurs at the Industry Member or in the Industry Member’s system.

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“Active Accounts” means an account that has had activity in Eligible Securities within the last six months.

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“Advisory Committee” has the meaning set forth in Section 4.13(a).

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“Affiliate” of a Person means any Person controlling, controlled by, or under common control with such Person.

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“Affiliated Participant” means any Participant controlling, controlled by, or under common control with another Participant.

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“Agreement” has the meaning set forth in the preamble to this Agreement.

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“Allocation Report” means a report made to the Central Repository by an Industry Member that identifies the Firm Designated ID for any account(s), including subaccount(s), to which executed shares are allocated and provides the security that has been allocated, the identifier of the firm reporting the allocation, the price per share of shares allocated, the side of shares allocated, the number of shares allocated to each account, and the time of the allocation; provided, for the avoidance of doubt, any such Allocation Report shall not be required to be linked to particular orders or executions.

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“Bid” means a proposal submitted by a Bidder in response to the RFP or subsequent request for proposal (or similar request).

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“Bidder” means any entity, or any combination of separate entities, submitting a Bid.

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“Bidding Participant” means a Participant that: (a) submits a Bid; (b) is an Affiliate of an entity that submits a Bid; or (c) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid.

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“Business Clock” means a clock used to record the date and time of any Reportable Event required to be reported under SEC Rule 613.

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“CAT” means the consolidated audit trail contemplated by SEC Rule 613.

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“CAT Data” means data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as “CAT Data” from time to time.

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“CAT NMS Plan” means the plan set forth in this Agreement, as amended from time to time.

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“CAT-Order-ID” has the same meaning provided in SEC Rule 613(j)(1).

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“CAT Reporter” means each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).

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“CAT-Reporter-ID” has the same meaning provided in SEC Rule 613(j)(2).

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“CAT System” means all data processing equipment, communications facilities, and other facilities, including equipment, utilized by the Company or any third parties acting on the Company’s behalf in connection with operation of the CAT and any related information or relevant systems pursuant to this Agreement.

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“Central Repository” means the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT pursuant to SEC Rule 613 and this Agreement.

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“Certificate” has the meaning set forth in Section 2.2.

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“Chair” has the meaning set forth in Section 4.2(b).

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“Chief Compliance Officer” means the individual then serving (even on a temporary basis) as the Chief Compliance Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(a).

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“Chief Information Security Officer” means the individual then serving (even on a temporary basis) as the Chief Information Security Officer pursuant to Section 4.6, Section 6.1(b), and Section 6.2(b).

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“Code” means the Internal Revenue Code of 1986.

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“Company” has the meaning set forth in the preamble to this Agreement.

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“Company Interest” means any membership interest in the Company at any particular time, including the right to any and all benefits to which a Participant may be entitled under this Agreement and the Delaware Act, together with the obligations of such Participant to comply with this Agreement.

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“Commission” or “SEC” means the United States Securities and Exchange Commission.

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“Compliance Rule” means, with respect to a Participant, the rule(s) promulgated by such Participant as contemplated by Section 3.11.

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“Compliance Subcommittee” has the meaning set forth in Section 4.12(b).

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“Compliance Threshold” has the meaning set forth in Appendix C.

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“Conflict of Interest” means that the interest of a Participant (e.g., commercial, reputational, regulatory or otherwise) in the matter that is subject to a vote: (a) interferes, or would be reasonably likely to interfere, with that Participant’s objective consideration of the matter; or (b) is, or would be reasonably likely to be, inconsistent with the purpose and objectives of the Company and the CAT, taking into account all relevant considerations including whether a Participant that may otherwise have a conflict of interest has established appropriate safeguards to eliminate such conflict of interest and taking into account the other guiding principles set forth in this Agreement. If a Participant has a “Conflict of Interest” in a particular matter, then each of its Affiliated Participants shall be deemed to have a “Conflict of Interest” in such matter. A “Conflict of Interest” with respect to a Participant includes the situations set forth in Sections 4.3(b)(iv), 4.3(d)(i) and 4.3(d)(ii).

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“Customer” has the same meaning provided in SEC Rule 613(j)(3).

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“Customer Account Information” shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable); except, however, that (a) in those circumstances in which an Industry Member has established a trading relationship with an institution but has not established an account with that institution, the Industry Member will (i) provide the Account Effective Date in lieu of the “date account opened”; (ii) provide the relationship identifier in lieu of the “account number”; and (iii) identify the “account type” as a “relationship”; (b) in those circumstances in which the relevant account was established prior to the implementation date of the CAT NMS Plan applicable to the relevant CAT Reporter (as set forth in Rule 613(a)(3)(v) and (vi)), and no “date account opened” is available for the account, the Industry Member will provide the Account Effective Date in the following circumstances: (i) where an Industry Member changes back office providers or clearing firms and the date account opened is changed to the date the account was opened on the new back office/clearing firm system; (ii) where an Industry Member acquires another Industry Member and the date account opened is changed to the date the account was opened on the post-merger back office/clearing firm system; (iii) where there are multiple dates associated with an account in an Industry Member’s system, and the parameters of each date are determined by the individual Industry Member; and (iv) where the relevant account is an Industry Member proprietary account.

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“Customer-ID” has the same meaning provided in SEC Rule 613(j)(5).

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“Customer Identifying Information” means information of sufficient detail to identify a Customer, including, but not limited to, (a) with respect to individuals: name, address, date of birth, individual tax payer identification number (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney); and (b) with respect to legal entities: name, address, Employer Identification Number (“EIN”)/Legal Entity Identifier (“LEI”) or other comparable common entity identifier, if applicable; provided, however, that an Industry Member that has an LEI for a Customer must submit the Customer’s LEI in addition to other information of sufficient detail to identify a Customer.

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“Delaware Act” means the Delaware Limited Liability Company Act.

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“Disclosing Party” has the meaning set forth in Section 9.6(a).

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“Effective Date” means the date of approval of this Agreement by the Commission.

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“Eligible Security” includes (a) all NMS Securities and (b) all OTC Equity Securities.

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“Error Rate” has the meaning provided in SEC Rule 613(j)(6).

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“Exchange Act” means the Securities Exchange Act of 1934.

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“Execution Venue” means a Participant or an alternative trading system (“ATS”) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).

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“Exemptive Request Letters” has the meaning set forth in Recital C.

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“FINRA” means Financial Industry Regulatory Authority, Inc.

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“Firm Designated ID” means a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date.

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“Fiscal Year” means the fiscal year of the Company determined pursuant to Section 9.2(a).

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“FS-ISAC” has the meaning set forth in Section 6.2(b)(vi).

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“GAAP” means United States generally accepted accounting principles.

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“Independent Auditor” has the meaning set forth in Section 6.2(a)(v)(B).

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“Industry Member” means a member of a national securities exchange or a member of a national securities association.

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“Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

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“Information” has the meaning set forth in Section 9.6(a).

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“Initial Plan Processor” means the first Plan Processor selected by the Operating Committee in accordance with SEC Rule 613, Section 6.1 and the Selection Plan.

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“Last Sale Report” means any last sale report reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the SEC pursuant to, and meeting the requirements of, SEC Rule 608.

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“Latency” means the delay between input into a system and the outcome based upon that input. In computer networks, latency refers to the delay between a source system sending a packet or message, and the destination system receiving such packet or message.

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“Listed Option” or “Option” have the meaning set forth in Rule 600(b)(35) of Regulation NMS.

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“Majority Vote” means the affirmative vote of at least a majority of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)).

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“Manual Order Event” means a non-electronic communication of order-related information for which CAT Reporters must record and report the time of the event.

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“Material Amendment” has the meaning set forth in Section 6.9(c).

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“Material Contract” means any: (a) contract between the Company and the Plan Processor; (b) contract between the Company and any Officer; (c) contract, or group of related contracts, resulting in a total cost or liability to the Company of more than $900,000; (d) contract between the Company, on the one hand, and a Participant or an Affiliate of a Participant, on the other; (e) contract containing other than reasonable arms-length terms; (f) contract imposing, or purporting to impose, non-customary restrictions (including non-competition, non-solicitation or confidentiality (other than customary confidentiality agreements entered into in the ordinary course of business that do not restrict, or purport to restrict, any Participant or any Affiliate of any Participant)) or obligations (including indemnity, most-favored nation requirements, exclusivity, or guaranteed minimum purchase commitments) on the Company or any Participant or any Affiliate of a Participant; (g) contract containing terms that would reasonably be expected to unduly interfere with or negatively impact the ability of the Company, any Participant or any Affiliate of any Participant to perform its regulatory functions (including disciplinary matters), to carry out its responsibilities under the Exchange Act or to perform its obligations under this Agreement; (h) contract providing for a term longer than twelve (12) months or the termination of which would reasonably be expected to materially and adversely affect the Company, any Participant or any Affiliate of a Participant; (i) contract for indebtedness, the disposition or acquisition of assets or equity, or the lease or license of assets or properties; or (j) joint venture or similar contract for cost or profit sharing.

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“Material Subcontractor” means any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC: (a) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (b) accounts for 5% or more of the total estimated annual cost of the Bid for any given year. An entity shall not be considered a “Material Subcontractor” solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.

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“Material Systems Change” means any change or update to the CAT System made by the Plan Processor which will cause a significant change to the functionality of the Central Repository.

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“Material Terms of the Order” includes: the NMS Security or OTC Equity Security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator (except on transactions in equities); time in force (if applicable); if the order is for a Listed Option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close (except on market maker quotations); and any special handling instructions.

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“National Best Bid” and “National Best Offer” have the same meaning provided in SEC Rule 600(b)(42).

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“NMS Plan” has the same meaning as “National Market System Plan” provided in SEC Rule 613(a)(1) and SEC Rule 600(b)(43).

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“NMS Security” means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.

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“Non-SRO Bid” means a Bid that does not include a Bidding Participant.

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“Officer” means an officer of the Company, in his or her capacity as such, as set forth in Section 4.6.

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“Operating Committee” means the governing body of the Company designated as such and described in Article IV.

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“Options Exchange” means a registered national securities exchange or automated trading facility of a registered securities association that trades Listed Options.

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“Options Market Maker” means a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.

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“Order” or “order” has, with respect to Eligible Securities, the meaning set forth in SEC Rule 613(j)(8).

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“OTC Equity Security” means any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.

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“Other SLAs” has the meaning set forth in Section 6.1(h).

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“Participant” means each Person identified as such on Exhibit A hereto, and any Person that becomes a Participant as permitted by this Agreement, in such Person’s capacity as a Participant in the Company (it being understood that the Participants shall comprise the “members” of the Company (as the term “member” is defined in Section 18-101(11) of the Delaware Act)).

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“Participant Data” has the meaning set forth in Section 6.3(d).

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“Participation Fee” has the meaning set forth in Section 3.3(a).

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“Payment Date” has the meaning set forth in Section 3.7(b).

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“Permitted Legal Basis” means the Participant has become exempt from, or otherwise has ceased to be subject to, SEC Rule 613 or has arranged to comply with SEC Rule 613 in some manner other than through participation in this Agreement, in each instance subject to the approval of the Commission.

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“Permitted Person” has the meaning set forth in Section 4.9.

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“Permitted Transferee” has the meaning set forth in Section 3.4(c).

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“Person” means any individual, partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association and any heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so permits.

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“PII” means personally identifiable information, including a social security number or tax identifier number or similar information; Customer Identifying Information and Customer Account Information.

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“Plan Processor” means the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan Processor, the Selection Plan, to perform the CAT processing functions required by SEC Rule 613 and set forth in this Agreement.

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“Pledge” and any grammatical variation thereof means, with respect to an interest, asset, or right, any pledge, security interest, hypothecation, deed of trust, lien or other similar encumbrance granted with respect to the affected interest, asset or right to secure payment or performance of an obligation.

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“Primary Market Transaction” means any transaction other than a secondary market transaction and refers to any transaction where a Person purchases securities in an offering.

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“Prime Rate” means the prime rate published in The Wall Street Journal (or any successor publication) on the last day of each month (or, if not a publication day, the prime rate last published prior to such last day).

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“Proceeding” has the meaning set forth in Section 4.8(b).

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“Qualified Bid” means a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain the CAT so that such Bid can be effectively evaluated by the Selection Committee. When evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment. The determination of whether a Bid is a Qualified Bid shall be determined pursuant to the process set forth in Section 5.2.

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“Qualified Bidder” means a Bidder that has submitted a Qualified Bid.

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“Quotation Information” means all bids (as defined under SEC Rule 600(b)(8)), offers (as defined under SEC Rule 600(b)(8)), all bids and offers of OTC Equity Securities, displayed quotation sizes in Eligible Securities, market center identifiers (including, in the case of FINRA, the FINRA member that is registered as a market maker or electronic communications network or otherwise utilizes the facilities of FINRA pursuant to applicable FINRA rules, that entered the quotation), withdrawals and other information pertaining to quotations in Eligible Securities required to be reported to the Plan Processor pursuant to this Agreement and SEC Rule 613.

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“Raw Data” means Participant Data and Industry Member Data that has not been through any validation or otherwise checked by the CAT System.

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“Received Industry Member Data” has the meaning set forth in Section 6.4(d)(ii).

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“Receiving Party” has the meaning set forth in Section 9.6(a).

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“Recorded Industry Member Data” has the meaning set forth in Section 6.4(d)(i).

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“Registered Person” means any member, principal, executive, registered representative, or other person registered or required to be registered under a Participant’s rules.

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“Reportable Event” includes, but is not limited to, the original receipt or origination, modification, cancellation, routing, execution (in whole or in part) and allocation of an order, and receipt of a routed order.

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“Representatives” has the meaning set forth in Section 9.6(a).

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“RFP” means the “Consolidated Audit Trail National Market System Plan Request for Proposal” published by the Participants on February 26, 2013 attached as Appendix A, as amended from time to time.

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“Securities Information Processor” or “SIP” has the same meaning provided in Section 3(a)(22)(A) of the Exchange Act.

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“Selection Committee” means the committee formed pursuant to Section 5.1.

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“Selection Plan” has the meaning set forth in Recital A.

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“Shortlisted Bid” means a Bid submitted by a Qualified Bidder and selected as a Shortlisted Bid by the Selection Committee pursuant to Section 5.2(b) and, if applicable, pursuant to Section 5.2(c)(iii).

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“Shortlisted Bidder” means a Qualified Bidder that has submitted a Bid selected as a Shortlisted Bid.

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“SIP Data” has the meaning set forth in Section 6.5(a)(ii).

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“SLA” has the meaning set forth in Section 6.1(h).

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“Small Industry Member” means an Industry Member that qualifies as a small broker-dealer as defined in SEC Rule 613.

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“SRO” means any self-regulatory organization within the meaning of Section 3(a)(26) of the Exchange Act.

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“SRO-Assigned Market Participant Identifier” means an identifier assigned to an Industry Member by an SRO or an identifier used by a Participant.

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“Subcommittee” has the meaning set forth in Section 4.12(a).

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“Supermajority Vote” means the affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)); provided that if two-thirds of all of such members authorized to cast a vote is not a whole number then that number shall be rounded up to the nearest whole number.

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“Tax Matters Partner” has the meaning set forth in Section 9.5(a).

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“Transfer” and any grammatical variation thereof means any sale, exchange, issuance, redemption, assignment, distribution or other transfer, disposition or alienation in any way (whether voluntarily, involuntarily or by operation of law). Transfer shall specifically include any: (a) assignment or distribution resulting from bankruptcy, liquidation, or dissolution; or (b) Pledge.

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“Technical Specifications” has the meaning set forth in Section 6.9(a).

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“Trading Day” shall have such meaning as is determined by the Operating Committee. For the avoidance of doubt, the Operating Committee may establish different Trading Days for NMS Stocks (as defined in SEC Rule 600(b)(47), Listed Options, OTC Equity Securities, and any other securities that are included as Eligible Securities from time to time.

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“Voting Senior Officer” has the meaning set forth in Section 5.1(a).

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pubdate: January 10, 2018 effdate: N/A -

Section 1.2. Principles of Interpretation.

- Topic: CAT NMS Plan, Article I - Definitions, Principles of Interpretation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Interpretation, - Reference, - -

In this Agreement (including, for the avoidance of doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement), unless the context otherwise requires:

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(a) words denoting the singular include the plural and vice versa;

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(b) words denoting a gender include all genders;

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(c) all exhibits, appendices, attachments, recitals, and schedules to the document in which the reference thereto is contained shall, unless the context otherwise requires, constitute an integral part of such document for all purposes;

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(d) a reference to a particular clause, section, article, exhibit, appendix, attachment, recital, or schedule shall be a reference to a clause, section or article of, or an exhibit, appendix, attachment, recital, or schedule to, this Agreement;

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(e) a reference to any statute, regulation, amendment, ordinance or law includes all statutes, regulations, proclamations, amendments or laws varying, consolidating or replacing the same from time to time, and a reference to a statute includes all regulations, policies, protocols, codes, proclamations, interpretations and ordinances issued or otherwise applicable under that statute unless, in any such case, otherwise expressly provided in any such statute or in the document in which the reference is contained;

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(f) a reference to a “SEC Rule” refers to the correspondingly numbered Rule promulgated under the Exchange Act;

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(g) a definition of or reference to any document, instrument or agreement includes an amendment or supplement to, or restatement, replacement, modification or novation of, any such document, instrument or agreement unless otherwise specified in such definition or in the context in which such reference is used;

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(h) a reference to any Person includes such Person’s permitted successors and assigns in that designated capacity;

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(i) a reference to “$”, “Dollars” or “US $” refers to currency of the United States of America;

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(j) unless otherwise expressly provided in this Agreement, wherever the consent of any Person is required or permitted herein, such consent may be withheld in such Person’s sole and absolute discretion;

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(k) words such as “hereunder”, “hereto”, “hereof” and “herein” and other words of similar import shall refer to the whole of the applicable document and not to any particular article, section, subsection or clause thereof; and

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(l) a reference to “including” (and grammatical variations thereof) means “including without limitation” (and grammatical variations thereof).

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE II EFFECTIVENESS OF AGREEMENT; ORGANIZATION

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Effectivity, - CAT NMS LLC, - -
pubdate: January 10, 2018 effdate: N/A -

Section 2.1. Effectiveness.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Effectiveness - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Effectivity, - -

This Agreement shall become effective upon approval by the Commission and execution by all Participants identified on Exhibit A and shall continue until terminated. Notwithstanding any provision in this Agreement to the contrary and without the consent of any Person being required, the Company’s execution, delivery and performance of this Agreement are hereby authorized, approved and ratified in all respects.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.2. Formation.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Formation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Company Formation, - Delaware Act, - -

The Company was formed as a limited liability company under the Delaware Act by filing a certificate of formation (the “Certificate”) with the Delaware Secretary of State.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.3. Name.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Name - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - CAT NMS LLC, - -

The name of the Company is “CAT NMS, LLC.” The name of the Company may be changed at any time or from time to time with the approval of the Operating Committee. All Company business shall be conducted in that name or such other names that comply with applicable law as the Operating Committee may select from time to time.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.4. Registered Office; Registered Agent; Principal Office; Other Offices.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Registered Office; Registered Agent; Principal Office; Other Offices - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Delaware Act, - Principal Office, - Registered Office, - -

The registered office of the Company required by the Delaware Act to be maintained in the State of Delaware shall be the office of the initial registered agent named in the Certificate or such other office (which need not be a place of business of the Company) as the Operating Committee may designate from time to time in the manner provided by law. The registered agent of the Company in the State of Delaware shall be the initial registered agent named in the Certificate or such other Person or Persons as the Operating Committee may designate from time to time in the manner provided by law. The principal office of the Company shall be at such place as the Operating Committee may designate from time to time, which need not be in the State of Delaware. The Company may have such other offices as the Operating Committee may designate from time to time.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.5. Certain Filings.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Certain Filings - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Filings, - Filing Requirements, - Operating Committee, - -

The Company shall cause to be filed such certificates and documents as may be necessary or appropriate to comply with the Delaware Act and any other applicable requirements for the organization, continuation and operation of a limited liability company in accordance with the laws of the State of Delaware and any other jurisdiction in which the Company shall conduct business, and shall continue to do so for so long as the Company conducts business therein. Each member of the Operating Committee is hereby designated as an “authorized person” within the meaning of the Delaware Act.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.6. Purposes and Powers.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Purposes and Powers - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - SEC Rule 608, - Sec Rule 613, - -

The Company may engage in: (a) the creation, implementation, and maintenance of the CAT pursuant to SEC Rule 608 and SEC Rule 613; and (b) any other business or activity that now or hereafter may be necessary, incidental, proper, advisable or convenient to accomplish the foregoing purpose and that is not prohibited by the Delaware Act, the Exchange Act or other applicable law and is consistent with tax exempt status under Section 501(c)(6) of the Code. The Company shall have and may exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Delaware Act.

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pubdate: January 10, 2018 effdate: N/A -

Section 2.7. Term.

- Topic: CAT NMS Plan, Article II - Effectiveness of Agreement;Organization, Term - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Secretary of State of Delaware, - Term of Company, - -

The term of the Company commenced on the date the Certificate was filed with the office of the Secretary of State of Delaware, and shall be perpetual unless dissolved as provided in this Agreement.

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE III PARTICIPATION

- Topic: CAT NMS Plan, Article III - Participation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: -
pubdate: January 10, 2018 effdate: N/A -

Section 3.1. Participants.

- Topic: CAT NMS Plan, Article III - Participation, Participants - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Rights of a participant, - Company Interest, - Section 3.4, - Section 3.7, - -

The name and address of each Participant are set forth on Exhibit A. New Participants may only be admitted to the Company in accordance with Section 3.5. No Participant shall have the right or power to resign or withdraw from the Company, except: (a) upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4; or (b) as permitted by Section 3.6. No Participant may be expelled or required to resign or withdraw from the Company except upon a Transfer of record ownership of all of such Participant’s Company Interest in compliance with, and subject to, the provisions of Section 3.4, or as provided by Section 3.7(a)(ii) or Section 3.7(a)(iii).

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pubdate: January 10, 2018 effdate: N/A -

Section 3.2. Company Interests Generally.

- Topic: CAT NMS Plan, Article III - Participation, Company Interests Generally - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Company Interests, - Participant, - Section 3.3, - -

(a) All Company Interests shall have the same rights, powers, preferences and privileges, and shall be subject to the same restrictions, qualifications and limitations. Additional Company Interests may be issued only as permitted by Section 3.3.

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(b) Without limiting Section 3.2(a), each Participant shall be entitled to one vote on any matter presented to the Participants for their consideration at any meeting of the Participants (or by written action of the Participants in lieu of a meeting).

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(c) Company Interests shall not be evidenced by certificates.

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(d) Each Participant shall have an equal Company Interest as each other Participant.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.3. New Participants.

- Topic: CAT NMS Plan, Article III - Participation, New Participants - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Participants, - Participation Fee, - CAT, - Section 3.3, - SEC Rule 608, - Operating Committee, - -

(a) Any Person approved by the Commission as a national securities exchange or national securities association under the Exchange Act after the Effective Date may become a Participant by submitting to the Company a completed application in the form provided by the Company. As a condition to admission as a Participant, said Person shall: (i) execute a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Person as a Participant (including said Person’s address for purposes of notices delivered pursuant to this Agreement); and (ii) pay a fee to the Company in an amount determined by a Majority Vote of the Operating Committee as fairly and reasonably compensating the Company and the Participants for costs incurred in creating, implementing, and maintaining the CAT, including such costs incurred in evaluating and selecting the Initial Plan Processor and any subsequent Plan Processor and for costs the Company incurs in providing for the prospective Participant’s participation in the Company, including after consideration of the factors identified in Section 3.3(b) (the “Participation Fee”). The amendment to this Agreement reflecting the admission of a new Participant shall be effective only when: (x) it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608; and (y) the prospective Participant pays the Participation Fee. Neither a prospective Participant nor any Affiliate of such prospective Participant that is already a Participant shall vote on the determination of the amount of the Participation Fee to be paid by such prospective Participant. Participation Fees paid to the Company shall be added to the general revenues of the Company.

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(b) In determining the amount of the Participation Fee to be paid by any prospective Participant, the Operating Committee shall consider the following factors:

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(i) the portion of costs previously paid by the Company for the development, expansion and maintenance of the CAT which, under GAAP, would have been treated as capital expenditures and would have been amortized over the five (5) years preceding the admission of the prospective Participant;

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(ii) an assessment of costs incurred and to be incurred by the Company for modifying the CAT or any part thereof to accommodate the prospective Participant, which are not otherwise required to be paid or reimbursed by the prospective Participant;

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(iii) Participation Fees paid by other Participants admitted as such after the Effective Date;

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(iv) elapsed time from the Effective Date to the anticipated date of admittance of the prospective Participant; and

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(v) such other reasonable, equitable and not unfairly discriminatory factors, if any, as may be determined to be appropriate by the Operating Committee and approved by the Commission.

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In the event the Company (following the vote of the Operating Committee contemplated by Section 3.3(a)) and a prospective Participant do not agree on the amount of the Participation Fee, such amount shall be subject to review by the Commission pursuant to Rule 608 of the Exchange Act.

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(c) An applicant for participation in the Company may apply for limited access to the CAT System for planning and testing purposes pending its admission as a Participant by submitting to the Company a completed Application for Limited Access to the CAT System in a form provided by the Company, accompanied by payment of a deposit in the amount established by the Company, which shall be applied or refunded as described in such application. To be eligible to apply for such limited access, the applicant must have been approved by the SEC as a national securities exchange or national securities association under the Exchange Act but the applicant has not yet become a Participant, or the SEC must have published such applicant’s Form 1 application or Form X-15AA-1 application to become a national securities exchange or a national securities association, respectively.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.4. Transfer of Company Interest.

- Topic: CAT NMS Plan, Article III - Participation, Transfer of Company Interest - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Transfer of Company Interest, - Permitted Transferree, - SEC Rule 608, - Section 3.4, - Participant, - Operating Company, - -

(a) No Participant may Transfer any Company Interest except in compliance with this Section 3.4. Any Transfer or attempted Transfer in contravention of the foregoing sentence or any other provision of this Agreement shall be null and void ab initio and ineffective to Transfer any Company Interest and shall not bind or be recognized by or on the books of the Company, and any transferee in such transaction shall not, to the maximum extent permitted by applicable law, be or be treated as or deemed to be a Participant (or an assignee within the meaning of § 18-702 of the Delaware Act) for any purpose.

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(b) No Participant may Transfer any Company Interest except to a national securities exchange or national securities association that succeeds to the business of such Participant as a result of a merger or consolidation with such Participant or the Transfer of all or substantially all of the assets or equity of such Participant.

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(c) Notwithstanding anything to the contrary contained in this Agreement, no Participant may Transfer any Company Interest to any transferee as permitted by Section 3.4(b) (a “Permitted Transferee”) unless: (i) such Permitted Transferee executes a counterpart of this Agreement, at which time Exhibit A shall be amended to reflect the status of said Permitted Transferee as a Participant (including said Permitted Transferee’s address for purposes of notices delivered pursuant to this Agreement); and (ii) the amendment to this Agreement reflecting the Transfer of a Company Interest to a Permitted Transferee is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608. Subject to compliance with this Section 3.4, such amendment and such Transfer shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608, as applicable.

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(d) The Company shall not be required to recognize any Transfer of any Company Interest until the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been delivered to the Company at its principal office for recordation on the books of the Company and the transferring Participant or Permitted Transferee has paid all costs and expenses of the Company in connection with such Transfer. The Company shall be entitled to treat the record owner of any Company Interest as the absolute owner thereof in all respects, and neither the Company nor any Participant shall incur liability for distributions of cash or other property made in good faith to such owner until such time as the instrument conveying such Company Interest, in form and substance satisfactory to the Company, has been received and accepted by the Company and recorded on the books of the Company.

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(e) Notwithstanding anything to the contrary contained in this Agreement, without prior approval thereof by the Operating Committee, no Transfer of any Company Interest shall be made if the Company is advised by its counsel that such Transfer: (i) may not be effected without registration under the Securities Act of 1933; (ii) would result in the violation of any applicable state securities laws; (iii) would require the Company to register as an investment company under the Investment Company Act of 1940 or modify the exemption from such registration upon which the Company has chosen to rely; or (iv) would require the Company to register as an investment adviser under state or federal securities laws.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.5. Admission of New Participants.

- Topic: CAT NMS Plan, Article III - Participation, Admission of New Participants - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Permitted Transferree, - Section 3.4, - Section 3.3, - -

Any Person acquiring a Company Interest pursuant to Section 3.3, or any Permitted Transferee acquiring a Participant’s Company Interest pursuant to Section 3.4, shall, unless such acquiring Permitted Transferee is a Participant as of immediately prior to such acquisition, be deemed to have been admitted to the Company as a Participant, automatically and with no further action being necessary by the Operating Committee, the Participants or any other Person, by virtue of, and upon the consummation of, such acquisition of a Company Interest and compliance with Section 3.3 or Section 3.4, as applicable.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.6. Voluntary Resignation from Participation.

- Topic: CAT NMS Plan, Article III - Participation, Voluntary Resignation from Participation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Voluntary Resignation, - Withdrawing Participant, - Permitted Legal basis, - -

Any Participant may voluntarily resign from the Company, and thereby withdraw from and terminate its right to any Company Interest, only if (a) a Permitted Legal Basis for such action exists and (b) such Participant provides to the Company and each other Participant no less than thirty (30) days prior to the effective date of such action written notice specifying such Permitted Legal Basis, including appropriate documentation evidencing the existence of such Permitted Legal Basis, and, to the extent applicable, evidence reasonably satisfactory to the Company and other Participants that any orders or approvals required from the Commission in connection with such action have been obtained. A validly withdrawing Participant shall have the rights and obligations provided in Section 3.7.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.7. Termination of Participation.

- Topic: CAT NMS Plan, Article III - Participation, Termination of Participation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Termination, - Payment Date, - SEC Rule 608, - Delaware Act § 18-304, - Section 3.7, - -

(a) The participation in the Company of a Participant, and its right to any Company Interest, shall terminate as of the earliest of: (i) the effective date specified in a valid notice delivered pursuant to Section 3.6 (which date, for the avoidance of doubt, shall be no earlier than the date that is thirty (30) days after the delivery of such notice); (ii) such time as such Participant is no longer registered as a national securities exchange or national securities association; or (iii) the date of termination pursuant to Section 3.7(b).

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(b) Each Participant shall pay all fees or other amounts required to be paid under this Agreement within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated) (the “Payment Date”). The Participant shall pay interest on the outstanding balance from the Payment Date until such fee or amount is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law. If any such remaining outstanding balance is not paid within thirty (30) days after the Payment Date, the Participants shall file an amendment to this Agreement requesting the termination of the participation in the Company of such Participant, and its right to any Company Interest, with the SEC. Such amendment shall be effective only when it is approved by the SEC in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

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(c) In the event a Participant becomes subject to one or more of the events of bankruptcy enumerated in § 18-304 of the Delaware Act, that event by itself shall not cause the termination of the participation in the Company of the Participant so long as the Participant continues to be registered as a national securities exchange or national securities association. A terminated Participant shall remain liable for its proportionate share of costs and expenses allocated to it for the period during which it was a Participant, for obligations under Section 3.8(c), for its indemnification obligations pursuant to Section 4.1, and for obligations under Section 9.6, but it shall have no other obligations under this Agreement following the effective date of termination. This Agreement shall be amended to reflect any termination of participation in the Company of a Participant pursuant to this Section 3.7; provided that such amendment shall be effective only when it is approved by the Commission in accordance with SEC Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.8. Obligations and Liability of Participants.

- Topic: CAT NMS Plan, Article III - Participation, Obligations and Liability of Participants - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Company Interest, - Delaware Act, - Limited Liability Company, - Company Liability, - -

(a) Except as may be determined by the unanimous vote of all the Participants or as may be required by applicable law, no Participant shall be obligated to contribute capital or make loans to the Company. No Participant shall have the right to withdraw or to be repaid any capital contributed by it or to receive any other payment in respect of any Company Interest, including as a result of the withdrawal or resignation of such Participant from the Company, except as specifically provided in this Agreement.

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(b) Except as provided in this Agreement and except as otherwise required by applicable law, no Participant shall have any personal liability whatsoever in its capacity as a Participant, whether to the Company, to any Participant or any Affiliate of any Participant, to the creditors of the Company or to any other Person, for the debts, liabilities, commitments or any other obligations of the Company or for any losses of the Company. Without limiting the foregoing, the failure of the Company to observe any formalities or requirements relating to exercise of its powers or management of its business or affairs under this Agreement or the Delaware Act shall not be grounds for imposing personal liability on any Participant or any Affiliate of a Participant for any liability of the Company.

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(c) In accordance with the Delaware Act, a member of a limited liability company may, under certain circumstances, be required to return amounts previously distributed to such member. It is the intent of the Participants that no distribution to any Participant shall be deemed a return of money or other property paid or distributed in violation of the Delaware Act. The payment of any such money or distribution of any such property to a Participant shall be deemed to be a compromise within the meaning of the Delaware Act, and the Participant receiving any such money or property shall not be required to return any such money or property to any Person. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Participant is obligated to make any such payment, such obligation shall be the obligation of such Participant and not of the Operating Committee, the Company or any other Participant.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.9. Loans.

- Topic: CAT NMS Plan, Article III - Participation, Loans - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Loans, - Additional Funds, - Operating Committe, - -

If the Company requires additional funds to carry out its purposes, to conduct its business, to meet its obligations, or to make any expenditure authorized by this Agreement, the Company may borrow funds from such one or more of the Participants, or from such third party lender(s), and on such terms and conditions, as may be approved by a Supermajority Vote of the Operating Committee.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.10. No Partnership.

- Topic: CAT NMS Plan, Article III - Participation, No Partnership - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Partnership, - Joint venturer, - -

The Company is not intended to be a general partnership, limited partnership or joint venture for any purpose, and no Participant shall be considered to be a partner or joint venturer of any other Participant, for any purpose, and this Agreement shall not be construed to suggest otherwise.

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pubdate: January 10, 2018 effdate: N/A -

Section 3.11. Compliance Undertaking.

- Topic: CAT NMS Plan, Article III - Participation, Compliance Undertaking - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Compliance Requirement, - Sec Rule 613, - Participant, - -

Each Participant shall comply with and enforce compliance, as required by SEC Rule 608(c), by its Industry Members with the provisions of SEC Rule 613 and of this Agreement, as applicable, to the Participant and its Industry Members. The Participants shall endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of SEC Rule 613 and this Agreement.

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE IV MANAGEMENT OF THE COMPANY

- Topic: CAT NMS Plan, Article IV - Management of the Company - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Company, - -
pubdate: January 10, 2018 effdate: N/A -

Section 4.1. Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Operating Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Duties of Operating Committee, - Sec Rule 613, - Receiving Party, - -

Except for situations in which the approval of the Participants is required by this Agreement or by non-waivable provisions of applicable law, the Company shall be managed by the Operating Committee, which shall have general charge and supervision of the business of the Company and shall be constituted as provided in Section 4.2. The Operating Committee: (a) acting collectively in accordance with this Agreement, shall be the sole “manager” of the Company within the meaning of § 18-101(10) of the Delaware Act (and no individual member of the Operating Committee shall (i) be a “manager” of the Company within the meaning of Section 18-101(10) of the Delaware Act or (ii) have any right, power or authority to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company); (b) shall have the right, power and authority to exercise all of the powers of the Company except as otherwise provided by applicable law or this Agreement; and (c) except as otherwise expressly provided herein, shall make all decisions and authorize or otherwise approve all actions taken or to be taken by the Company. Decisions or actions relating to the Company that are made or approved by the Operating Committee, or by any Subcommittee within the scope of authority granted to such Subcommittee in accordance with this Agreement (or, with respect to matters requiring a vote, approval, consent or other action of the Participants hereunder or pursuant to non-waivable provisions of applicable law, by the Participants) in accordance with this Agreement shall constitute decisions or actions by the Company and shall be binding on the Company and each Participant. Except to the extent otherwise expressly provided to the contrary in this Agreement, no Participant shall have authority to act for, or to assume any obligation or responsibility on behalf of, the Company, without the prior approval of the Operating Committee, and each Participant shall indemnify and hold harmless the Company and each other Participant for any breach of the provisions of this sentence by such breaching Participant. Without limiting the generality of the foregoing, except as otherwise expressly provided in this Agreement, the Operating Committee shall make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and under this Agreement. Notwithstanding anything to the contrary, the Operating Committee may delegate all or part of its administrative functions under this Agreement, but not its policy making (except to the extent determinations are delegated as specifically set forth in this Agreement) authority, to one or more Subcommittees, and any other Person. A Person to which administrative functions are so delegated shall perform the same as agent for the Company, in the name of the Company. Each Person who performs administrative functions on behalf of the Company (including the Plan Processor) shall be required to: (i) agree to be bound by the confidentiality obligations in Section 9.6(a) as a “Receiving Party”; and (ii) agree that any nonpublic business information pertaining to any Participant or any Affiliate of such Participant that becomes known to such Person shall be held in confidence and not shared with the other Participants or any other Person, except for information that may be shared in connection with joint activities permitted under this Agreement.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.2. Composition and Selection of Operating Committee; Chair.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Composition and Selection of Operating Committee; Chair - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Voting, - Participant, - CAT System, - Majority Vote, - -

(a) The Operating Committee shall consist of one voting member representing each Participant and one alternate voting member representing each Participant who shall have a right to vote only in the absence of that Participant’s voting member of the Operating Committee. Each of the voting and alternate voting members of the Operating Committee shall be appointed by the Participant that he or she represents, shall serve at the will of the Participant appointing such member and shall be subject to the confidentiality obligations of the Participant that he or she represents as set forth in Section 9.6. One individual may serve as the voting member of the Operating Committee for multiple Affiliated Participants, and such individual shall have the right to vote on behalf of each such Affiliated Participant.

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(b) No later than the date the CAT System commences operations, the Operating Committee shall elect, by Majority Vote, one member thereof to act as the initial chair of the Operating Committee (the “Chair”). Such initial Chair, and each successor thereto, shall serve in such capacity for a two (2)-year term or until the earliest of his death, resignation or removal in accordance with the provisions of this Agreement. The Operating Committee shall elect, from the members thereof, a successor to the then serving Chair (which successor, subject to the last sentence of this Section 4.2(b), may be the Person then serving in such capacity) no later than three (3) months prior to the expiration of the then current term of the Person then serving as Chair. The Operating Committee, by Supermajority Vote, may remove the Chair from such position. In the case of any death, removal, resignation, or other vacancy of the Chair, a successor Chair shall be promptly elected by the Operating Committee, by Majority Vote, from among the members thereof who shall serve until the end of the then current term. The Chair shall preside at all meetings of the Operating Committee, shall designate a Person to act as Secretary to record the minutes of each such meeting, and shall perform such other duties and possess such other powers as the Operating Committee may from time to time prescribe. The Chair shall not be entitled to a tie-breaking vote at any meeting of the Operating Committee. Notwithstanding anything in this Agreement to the contrary: (i) no Person shall serve as Chair for more than two successive full terms; and (ii) no Person then appointed to the Operating Committee by a Participant that then serves, or whose Affiliate then serves, as the Plan Processor shall be eligible to serve as the Chair.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.3. Action of Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Action of Operating Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Vote, - Operating Committee, - Majority Vote, - Chief Compliance Officer, - -

(a) Except as otherwise provided herein, each of the members of the Operating Committee, including the Chair, shall be authorized to cast one (1) vote for each Participant that he or she represents on all matters voted upon by the Operating Committee, and action of the Operating Committee shall be authorized by Majority Vote, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder. Action of the Operating Committee authorized in accordance with this Agreement shall be without prejudice to the rights of any Participant to present contrary views to any regulatory body or in any other appropriate forum. Without limiting the generality of the foregoing, the Company shall not take any of the following actions unless the Operating Committee, by Majority Vote, authorizes such action:

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(i) select the Chair pursuant to Section 4.2(b);

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(ii) select the members of the Advisory Committee pursuant to Section 4.13;

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(iii) interpret this Agreement (unless otherwise noted herein);

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(iv) approve any recommendation by the Chief Compliance Officer pursuant to Section 6.2(a)(v)(A);

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(v) determine to hold an Executive Session of the Operating Committee pursuant to Section 4.4(a);

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(vi) determine the appropriate funding-related policies, procedures and practices consistent with Article XI; or

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(vii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee (other than those matters expressly requiring a Supermajority Vote or a different vote of the Operating Committee).

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(b) Notwithstanding Section 4.3(a) or anything else to the contrary in this Agreement, the Company shall not take any of the following actions unless such action shall have been authorized by the Supermajority Vote of the Operating Committee, subject to the approval of the SEC whenever such approval is required under applicable provisions of the Exchange Act and the rules of the SEC adopted thereunder:

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(i) select a Plan Processor, other than the Initial Plan Processor selected in accordance with Article V;

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(ii) terminate a Plan Processor without cause in accordance with Section 6.1(q);

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(iii) approve the Plan Processor’s appointment or removal of the Chief Information Security Officer, the Chief Compliance Officer, or any Independent Auditor in accordance with Section 6.1(b);

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(iv) enter into, modify or terminate any Material Contract (if the Material Contract is with a Participant or an Affiliate of a Participant, such Participant and Affiliated Participant shall be recused from any vote under this Section 4.3(b)(iv));

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(v) make any Material Systems Change;

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(vi) approve the initial Technical Specifications pursuant to Section 6.9 or any Material Amendment to the Technical Specifications proposed by the Plan Processor in accordance with Section 6.9;

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(vii) amend the Technical Specifications on its own motion; or

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(viii) any other matter specified elsewhere in this Agreement (which includes, as stated in the definition of “Agreement,” the Appendices to this Agreement) as requiring a vote, approval or other action of the Operating Committee by a Supermajority Vote.

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(c) Any action required or permitted to be taken at any meeting of the Operating Committee or any Subcommittee may be taken without a meeting, if all of the members of the Operating Committee or Subcommittee, as the case may be, then serving consent to the action in writing or by electronic transmission. Such written consents and hard copies of the electronic transmissions shall be filed with the minutes of proceedings of the Operating Committee or Subcommittee, as applicable.

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(d) If a member of the Operating Committee or any Subcommittee determines that voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall recuse himself or herself from voting on such matter. If the members of the Operating Committee or any Subcommittee (excluding the member thereof proposed to be recused) determine by Supermajority Vote that any member voting on a matter under consideration by the Operating Committee or such Subcommittee raises a Conflict of Interest, such member shall be recused from voting on such matter. No member of the Operating Committee or any Subcommittee shall be automatically recused from voting on any matter, except as provided in Section 4.3(b)(iv) or as otherwise specified elsewhere in this Agreement, and except as provided below:

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(i) if a Participant is a Bidding Participant whose Bid remains under consideration, members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (A) whether another Bidder may revise its Bid; (B) the selection of a Bidder; or (C) any contract to which such Participant or any of its Affiliates would be a party in its capacity as Plan Processor; and

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(ii) if a Participant is (A) then serving as Plan Processor, (B) is an Affiliate of the Person then serving as Plan Processor, or (C) is an Affiliate of an entity that is a Material Subcontractor to the Plan Processor, then in each case members appointed to the Operating Committee or any Subcommittee by such Participant or any of its Affiliated Participants shall be recused from any vote concerning: (1) the proposed removal of such Plan Processor; or (2) any contract between the Company and such Plan Processor.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.4. Meetings of the Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Meetings of the Operating Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Meetings, - Participant, - Representatives, - Advisory Committee, - Participant’s Affiliated Participants, - Form X-15AA-1 Application, - -

(a) Meetings of the Operating Committee may be attended by each Participant’s voting Representative and its alternate voting Representative and by a maximum of two (2) nonvoting Representatives of each Participant, by members of the Advisory Committee, by the Chief Compliance Officer, by other Representatives of the Company and the Plan Processor, by Representatives of the SEC, and by such other Persons that the Operating Committee may invite to attend; provided that the Operating Committee may, where appropriate, determine to meet in an Executive Session, during which only voting members of the Operating Committee and Representatives of the SEC shall be present; provided, that the Operating Committee may invite other Representatives of the Participants, of the Company, of the Plan Processor (including the Chief Compliance Officer and the Chief Information Security Officer), or such other Persons that the Operating Committee may invite to attend, to be present during an Executive Session. Any determination of the Operating Committee to meet in an Executive Session shall be made upon a Majority Vote and shall be reflected in the minutes of the meeting. Regular meetings of the Operating Committee shall be held not less than once each calendar quarter at such times as shall from time to time be determined by the Operating Committee, on not less than ten (10) days’ notice. Special meetings of the Operating Committee may be called upon the request of two or more Participants on not less than two (2) days’ notice; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. Emergency meetings of the Operating Committee may be called upon the request of two (2) or more Participants and may occur as soon as practical after calling for such meeting; provided that each Participant, collectively with all of such Participant’s Affiliated Participants, shall be deemed a single Participant for purposes of this sentence. In the case of an emergency meeting of the Operating Committee, in addition to those Persons otherwise entitled to attend such meeting: (i) each Participant shall have the right to designate a reasonable number of its employees or other Representatives with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; and (ii) each Participant shall use commercially reasonable efforts to designate an employee or other Representative of such Participant with substantial knowledge or expertise relevant to the subject matter of such meeting to attend such meeting; provided, for the avoidance of doubt, that no Person attending any such meeting solely by virtue of this sentence shall have the right to vote on any matter submitted for a vote at any such meeting. The Chair, or in his or her absence, a member of the Operating Committee designated by the Chair or by members of the Operating Committee in attendance, shall preside at each meeting of the Operating Committee, and a Person in attendance designated by the Chair (or the member of the Operating Committee presiding in the Chair’s absence) shall act as Secretary to record the minutes thereof. The location of the regular and special meetings of the Operating Committee shall be fixed by the Operating Committee, provided that in general the location of meetings shall be rotated among the locations of the principal offices of the Participants. Members of the Operating Committee may be present at a meeting by conference telephone or other electronic means that enables each of them to hear and be heard by all others present at the meeting. Whenever notice of any meeting of the Operating Committee is required to be given by law or this Agreement, a written waiver, signed by the Person entitled to notice, or a waiver by electronic transmission by the Person entitled to notice, whether before, at or after the time stated in such notice, shall be deemed equivalent to notice. Attendance at a meeting of the Operating Committee by a member thereof shall constitute a waiver of notice of such meeting, except when such member of the Operating Committee attends any such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

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(b) Any Person that is not a Participant, but for which the SEC has published a Form 1 Application or Form X-15AA-1 Application to become a national securities exchange or a national securities association, respectively, shall be permitted to appoint one primary Representative and one alternate Representative to attend regularly scheduled Operating Committee meetings in the capacity of a non-voting observer but shall not be permitted to have any Representative attend a special meeting, emergency meeting or meeting held in Executive Session of the Operating Committee. If such Person’s Form 1 Application or Form X-15AA-1 Application is withdrawn or returned for any reason, then such Person shall no longer be eligible to be represented in regularly scheduled Operating Committee meetings. The Operating Committee shall have the discretion, in limited instances, to deviate from this policy if it determines, by Majority Vote, that circumstances so warrant; provided, however, that the exercise of such discretion is reasonable and does not impose any unnecessary or inappropriate burden on competition.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.5. Interpretation of Other Regulations.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Other Regulations - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Interpretive questions, - Operating Committee, - -

Interpretive questions arising during the operation or maintenance of the Central Repository with respect to applicable laws, rules or regulations shall be presented to the Operating Committee, which shall determine whether to seek interpretive guidance from the SEC or other appropriate regulatory body and, if so, in what form.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.6. Officers of the Company.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Officers of the Company - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Chief Compliance Officer, - Chief Information Security Officer, - Plan Processor, - Section 4.7, - Operating Committee, - -

(a) Each of the Chief Compliance Officer and the Chief Information Security Officer (each of whom shall be employed solely by the Plan Processor and neither of whom shall be deemed or construed in any way to be an employee of the Company) shall be an Officer with the same respective title, as applicable, as the Chief Compliance Officer of the Company and the Chief Information Security Officer of the Company. Neither such Officer shall receive or be entitled to any compensation from the Company or any Participant by virtue of his or her service in such capacity (other than, if a Participant is then serving as the Plan Processor, compensation paid to such Officer as an employee of such Participant). Each such Officer shall report directly to the Operating Committee. The Chief Compliance Officer shall work on a regular and frequent basis with the Compliance Subcommittee and/or other Subcommittees as may be determined by the Operating Committee. Except to the extent otherwise provided herein, including Section 6.2, each such Officer shall have such fiduciary and other duties with regard to the Plan Processor as imposed by the Plan Processor on such individual by virtue of his or her employment by the Plan Processor. Notwithstanding the foregoing, the Company shall require the Plan Processor, in a written agreement with the Company, to acknowledge that the Officers of the Company owe fiduciary duties to the Company (set forth in Section 4.7(c) of this Agreement), and that, to the extent that the duties owed to the Company by the Officers of the Company, including the Chief Compliance Officer or Chief Information Security Officer, conflict with any duties owed to the Plan Processor, the duties to the Company will control.

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(b) The Plan Processor shall inform the Operating Committee of the individual who has direct management responsibility for the Plan Processor’s performance of its obligations with respect to the CAT. Subject to approval by the Operating Committee of such individual, the Operating Committee shall appoint such individual as an Officer. In addition, the Operating Committee by Supermajority Vote may appoint other Officers as it shall from time to time deem necessary, and may assign any title to any such Officer as it deems appropriate. Any Officer appointed pursuant to this Section 4.6(b) shall have only such duties and responsibilities as set forth in this Agreement or as the Operating Committee shall from time to time expressly determine, but no such Officer shall have any authority to bind the Company (which authority is vested solely in the Operating Committee) or be an employee of the Company, unless in each case the Operating Committee, by Supermajority Vote, expressly determines otherwise. No person subject to a “statutory disqualification” (as defined in Section 3(a)(39) of the Exchange Act) may serve as an Officer. It is the intent of the Participants that the Company have no employees.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.7. Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Interpretation of Certain Rights and Duties of Participants, Members of the Operating Committee and Officers - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Obligations of the Participants, - Operating Committee, - Duties, - -

To the fullest extent permitted by the Delaware Act and other applicable law:

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(a) the respective obligations of the Participants, Officers, and the members of the Operating Committee, to each other and to the Company are limited to the express obligations set forth in this Agreement;

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(b) the Participants hereby expressly acknowledge and agree that each member of the Operating Committee, individually, is serving hereunder solely as, and shall act in all respects hereunder solely as, an agent of the Participant appointing such member of the Operating Committee;

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(c) no Participant or member of the Operating Committee, in such Person’s capacity as such, shall have any fiduciary or similar duties or obligations to the Company or any other Participant or member of the Operating Committee, whether express or implied by the Delaware Act or any other law, in each case subject only to the implied contractual covenant of good faith and fair dealing, and each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Participant or member of the Operating Committee that might otherwise arise in respect of any such fiduciary duty or similar duty or obligation; provided, however, that the provisions of this Section 4.7(c) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member of the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor. Each Officer shall have the same fiduciary duties and obligations to the Company as a comparable officer of a Delaware corporation and in all cases shall conduct the business of the Company and execute his or her duties and obligations in good faith and in the manner that the Officer reasonably believes to be in the best interests of the Company;

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(d) subject to Section 4.7(c), each Participant and each member of the Operating Committee may, with respect to any vote, consent or approval that such Person is entitled to grant or withhold pursuant to this Agreement, grant or withhold such vote, consent or approval in its sole and absolute discretion, with or without cause; and

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(e) for the avoidance of doubt, no Participant shall be entitled to appraisal or dissenter rights for any reason with respect to any Company Interest.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.8. Exculpation and Indemnification.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Exculpation and Indemnification - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Participant's Liability, - Exceptions, - Operating Committee, - Misconduct, - -

(a) Except for the indemnification obligations of Participants under Section 4.1, no Participant or member of the Operating Committee shall be liable to the Company or to any Participant for any loss suffered by the Company or by any other Participant unless such loss is caused by: (i) the fraud, gross negligence, willful misconduct or willful violation of law on the part of such Participant or member of the Operating Committee; or (ii) in the case of a Participant, a material breach of this Agreement by such Participant. The provisions of this Section 4.8(a) shall have no effect on the terms of any relationship, agreement or arrangement between any member of the Operating Committee and the Participant appointing such member to the Operating Committee or between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

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(b) Subject to the limitations and conditions as provided in this Section 4.8(b), the Company shall indemnify any Participant and any member of the Operating Committee (and may, upon approval of the Operating Committee, indemnify any employee or agent of the Company) who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative (hereinafter a “Proceeding”), or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that such Person is or was a Participant, a member of the Operating Committee or any Subcommittee, or an employee or agent of the Company against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys’ fees) actually incurred by such Person in connection with such Proceeding, if and only if the Person seeking indemnification is entitled to exculpation pursuant to Section 4.8(a). Indemnification under this Section 4.8(b) shall continue as to a Person who has ceased to serve in the capacity which initially entitled such Person to indemnification hereunder. As a condition precedent to an indemnified Person’s right to be indemnified pursuant to this Section 4.8(b), such indemnified Person must notify the Company in writing as soon as practicable of any Proceeding for which such indemnified Person will or could seek indemnification. With respect to any Proceeding of which the Company is so notified, the Company shall be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the indemnified Person. If the Company does not assume the defense of any such Proceeding of which the Company receives notice under this Section 4.8(b), reasonable expenses incurred by an indemnified Person in connection with any such Proceeding shall be paid or reimbursed by the Company in advance of the final disposition of such Proceeding upon receipt by the Company of: (i) written affirmation by the indemnified Person of such Person’s good faith belief that such Person has met the standard of conduct necessary for such Person to be entitled to indemnification by the Company (which, in the case of a Person other than a Participant or a member of the Operating Committee, shall be, unless otherwise determined by the Operating Committee, that (A) such Person determined, in good faith, that such conduct was in, or was not opposed to, the best interests of the Company and (B) such conduct did not constitute gross negligence or willful misconduct); and (ii) a written undertaking by such Person to repay such expenses if it shall ultimately be determined by a court of competent jurisdiction that such Person has not met such standard of conduct or is otherwise not entitled to indemnification by the Company. The Company shall not indemnify an indemnified Person to the extent such Person is reimbursed from the proceeds of insurance, and in the event the Company makes any indemnification payments to an indemnified Person and such Person is subsequently reimbursed from the proceeds of insurance, such Person shall promptly refund such indemnification payments to the Company to the extent of such insurance reimbursement. The rights granted pursuant to this Section 4.8(b) shall be deemed contract rights, and no amendment, modification or repeal of this Section 4.8(b) shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any amendment, modification or repeal. It is expressly acknowledged that the indemnification provided in this Section 4.8(b) could involve indemnification for negligence or under theories of strict liability. For Persons other than Participants or members of the Operating Committee, indemnification shall only be made upon the approval of the Operating Committee. Notwithstanding anything to the contrary in this Section 4.8 or elsewhere in this Agreement, no Person shall be indemnified hereunder for any losses, liabilities or expenses arising from or out of a violation of federal or state securities laws or any other intentional or criminal wrongdoing. Any indemnification under this Section 4.8 shall be paid from, and only to the extent of, Company assets, and no Participant shall have any personal liability on account thereof in the absence of a separate written agreement to the contrary.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.9. Freedom of Action.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Freedom of Action - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Premitted Persons, - Section 4.9, - Plan Processor, - -

Each Participant and such Participant’s Affiliates, and their respective Representatives (individually, “Permitted Person” and collectively, the “Permitted Persons”) may have other business interests and may engage in any business or trade, profession, employment, or activity whatsoever (regardless of whether any such activity competes, directly or indirectly, with the Company’s business or activities), for its own account, or in partnership with, or as a Representative of, any other Person. No Permitted Person (other than, if a Participant is then serving as the Plan Processor, any Officer then employed by the Plan Processor) shall be required to devote its entire time (business or otherwise), or any particular portion of its time (business or otherwise) to the business of the Company. Neither the Company nor any Participant nor any Affiliate thereof, by virtue of this Agreement, shall have any rights in and to any such independent venture or the income or profits derived therefrom, regardless of whether or not such venture was initially presented to a Permitted Person as a direct or indirect result of such Permitted Person’s relationship with the Company. No Permitted Person shall have any obligation hereunder to present any business opportunity to the Company, even if the opportunity is one that the Company might reasonably have pursued or had the ability or desire to pursue, in each case, if granted the opportunity to do so, and no Permitted Person shall be liable to the Company or any Participant (or any Affiliate thereof) for breach of any fiduciary or other duty relating to the Company (whether imposed by applicable law or otherwise), by reason of the fact that the Permitted Person pursues or acquires such business opportunity, directs such business opportunity to another Person or fails to present such business opportunity, or information regarding such business opportunity, to the Company. Each Participant and the Company, to the fullest extent permitted by applicable law, waives any claim or cause of action against any Permitted Person for breach of any fiduciary duty or other duty (contractual or otherwise) by reason of the fact that the Permitted Person pursues or acquires any opportunity for itself, directs such opportunity to another Person, or does not present such opportunity to the Company. This Section 4.9 shall have no effect on the terms of any relationship, agreement or arrangement between any Participant (other than solely in its capacity as a Participant) and the Company such as a contract between such Participant and the Company pursuant to which such Participant serves as the Plan Processor.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.10. Arrangements with Participants and Members of the Operating Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Arrangements with Participants and Members of the Operating Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Participant, - Operating Committee, - Section 4.3, - -

Subject to the terms of this Agreement, including Section 4.3(b)(iv) and Section 4.3(d), and any limitations imposed on the Company and the Participants under applicable law, rules, or regulations, the Company may engage in business with, or enter into one or more agreements, leases, contracts or other arrangements for the furnishing to or by it of goods, services, technology or space with, any Participant, any member of the Operating Committee or any Affiliate of any Participant or member of the Operating Committee, and may pay compensation in connection with such business, goods, services, technology or space.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.11. Participant Action Without a Meeting.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Participant Action Without a Meeting - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Without meeting, - Consent, - Participant, - -

Any action required or permitted to be taken by Participants pursuant to this Agreement (including pursuant to any provision of this Agreement that requires the consent or approval of Participants) may be taken without a meeting, by unanimous consent in writing, setting forth the action so taken, which consent shall be signed by all Participants entitled to consent.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.12. Subcommittees.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Subcommittees - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Majority Vote, - Operating Committee, - Compliance, - Confidentiality, - Timeliness, - Section 4.1, - Sec Rule 613, - -

(a) The Operating Committee may, by Majority Vote, designate by resolution one (1) or more subcommittees (each, a “Subcommittee”) it deems necessary or desirable in furtherance of the management of the business and affairs of the Company. For any Subcommittee, any member of the Operating Committee who wants to serve thereon may so serve, and if Affiliated Participants have collectively appointed one member to the Operating Committee to represent them, then such Affiliated Participants may have only that member serve on the Subcommittee or may decide not to have only that collectively appointed member serve on the Subcommittee. Such member may designate an individual other than himself or herself who is also an employee of the Participant or Affiliated Participants that appointed such member to serve on a Subcommittee in lieu of the particular member. Any Subcommittee, to the extent provided in the resolution of the Operating Committee designating it and subject to Section 4.1 and non-waivable provisions of the Delaware Act, shall have and may exercise all the powers and authority of the Operating Committee in the management of the business and affairs of the Company as so specified in the resolution of the Operating Committee. Each Subcommittee shall keep minutes and make such reports as the Operating Committee may from time to time request. Except as the Operating Committee may otherwise determine, any Subcommittee may make rules for the conduct of its business, but unless otherwise provided by the Operating Committee or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in this Agreement for the Operating Committee.

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(b) The Operating Committee shall maintain a compliance Subcommittee (the “Compliance Subcommittee”). The Compliance Subcommittee’s purpose shall be to aid the Chief Compliance Officer (who shall directly report to the Operating Committee in accordance with Section 6.2(a)(iii)) as necessary, including with respect to issues involving:

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(i) the maintenance of the confidentiality of information submitted to the Plan Processor or Central Repository pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members;

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(ii) the timeliness, accuracy, and completeness of information submitted pursuant to SEC Rule 613, applicable law, or this Agreement by Participants and Industry Members; and

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(iii) the manner in and extent to which each Participant is meeting its obligations under SEC Rule 613, Section 3.11, and as set forth elsewhere in this Agreement and ensuring the consistency of this Agreement’s enforcement as to all Participants.

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pubdate: January 10, 2018 effdate: N/A -

Section 4.13. Advisory Committee.

- Topic: CAT NMS Plan, Article IV - Management of the Company, Advisory Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Broker-dealer, - Affiliates, - Participant, - Advisory Committee, - Central Repository, - Sec Rule 613, - -

(a) An advisory committee to the Company (the “Advisory Committee”) shall be formed and shall function in accordance with SEC Rule 613(b)(7) and this Section 4.13.

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(b) No member of the Advisory Committee may be employed by or affiliated with any Participant or any of its Affiliates or facilities. A Representative of the SEC shall serve as an observer of the Advisory Committee (but shall not be a member thereof). The Operating Committee shall select one (1) member to serve on the Advisory Committee from representatives of each category identified in Sections 4.13(b)(i) through 4.13(b)(xii) to serve on the Advisory Committee on behalf of himself or herself individually and not on behalf of the entity for which the individual is then currently employed; provided that the members so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) must include, in the aggregate, representatives of no fewer than three (3) broker-dealers that are active in the options business and representatives of no fewer than three (3) broker-dealers that are active in the equities business; and provided further that upon a change in employment of any such member so selected pursuant to Sections 4.13(b)(i) through 4.13(b)(xii) a Majority Vote of the Operating Committee shall be required for such member to be eligible to continue to serve on the Advisory Committee:

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(i) a broker-dealer with no more than 150 Registered Persons;

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(ii) a broker-dealer with at least 151 and no more than 499 Registered Persons;

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(iii) a broker-dealer with 500 or more Registered Persons;

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(iv) a broker-dealer with a substantial wholesale customer base;

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(v) a broker-dealer that is approved by a national securities exchange (A) to effect transactions on an exchange as a specialist, market maker, or floor broker; or (B) to act as an institutional broker on an exchange;

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(vi) a proprietary-trading broker-dealer;

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(vii) a clearing firm;

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(viii) an individual who maintains a securities account with a registered broker or dealer but who otherwise has no material business relationship with a broker or dealer or with a Participant;

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(ix) a member of academia who is a financial economist;

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(x) three institutional investors, including an individual trading on behalf of an investment company or group of investment companies registered pursuant to the Investment Company Act of 1940;

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(xi) an individual with significant and reputable regulatory expertise; and

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(xii) a service bureau that provides reporting services to one or more CAT Reporters.

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(c) Four of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of one (1) year. Five of the fourteen initial members of the Advisory Committee, as determined by the Operating Committee, shall have an initial term of two (2) years. All other members of the Advisory Committee shall have a term of three (3) years. No member of the Advisory Committee may serve thereon for more than two consecutive terms.

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(d) The Advisory Committee shall advise the Participants on the implementation, operation, and administration of the Central Repository, including possible expansion of the Central Repository to other securities and other types of transactions. Members of the Advisory Committee shall have the right to attend meetings of the Operating Committee or any Subcommittee, to receive information concerning the operation of the Central Repository (subject to Section 4.13(e)), and to submit their views to the Operating Committee or any Subcommittee on matters pursuant to this Agreement prior to a decision by the Operating Committee on such matters; provided that members of the Advisory Committee shall have no right to vote on any matter considered by the Operating Committee or any Subcommittee and that the Operating Committee or any Subcommittee may meet in Executive Session if, by Majority Vote, the Operating Committee or Subcommittee determines that such an Executive Session is advisable. The Advisory Committee may provide the Operating Committee with recommendations of one or more candidates for the Operating Committee to consider when selecting members of the Advisory Committee pursuant to Section 4.3(a)(ii); provided, however, that the Operating Committee, at its sole discretion, will select the members of the Advisory Committee pursuant to Section 4.3(a)(ii) from the candidates recommended to the Operating Committee by the Advisory Committee, the Operating Committee itself, Participants or other persons. The Operating Committee may solicit and consider views on the operation of the Central Repository in addition to those of the Advisory Committee.

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(e) Members of the Advisory Committee shall receive the same information concerning the operation of the Central Repository as the Operating Committee; provided, however, that the Operating Committee may withhold information it reasonably determines requires confidential treatment. Any information received by members of the Advisory Committee in furtherance of the performance of their functions pursuant to this Agreement shall remain confidential unless otherwise specified by the Operating Committee.

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE V INITIAL PLAN PROCESSOR SELECTION

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection - Compliance User: National Securities Exchanges/National Securities Associations +

January 18, 2017

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Secretary

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Brent J. Fields

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Securities and Exchange Commission

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100 F Street, NE

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Washington, DC 20549-1090

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Re: File Number 4-698

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Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail

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Dear Mr. Fields:

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The parties to the National Market System Plan Governing the Consolidated Audit Trail (the "CAT NMS Plan" or "Plan")- Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Investors' Exchange LLC, ISE Gemini, LLC, ISE Mercury, LLC, Miami International Securities Exchange LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, "Participants")- respectfully file with the Securities and Exchange Commission ("SEC" or "Commission") this statement in connection with the selection of a person to act as the Plan Processor for the CAT NMS Plan pursuant to Rule 608(a)(6) of Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act").1

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pubdate: January 18, 2017 effdate: N/A +

A. Identification of Person Selected as Plan Processor

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Identification of Person Selected as Plan Processor + Compliance User: Thesys Technologies, LLC Keywords: CAT NMS plan, + Selection Committe, + Thesys Technologies, LLC, + Plan Processor, -
pubdate: January 10, 2018 effdate: N/A -

Section 5.1. Selection Committee.

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Selection Committee - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Participants, - Selection, - Composition, - Voting, - Quorum, - Qualifications, - Bidding Participants, - Sections 5.1, - Sections 5.2, - Selection Committee, - -

The Participants shall establish a Selection Committee in accordance with this Article V to evaluate and review Bids and select the Initial Plan Processor.

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(a) Composition. Each Participant shall select from its staff one (1) senior officer (“Voting Senior Officer”) to represent the Participant as a member of the Selection Committee. In the case of Affiliated Participants, one (1) individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants. Where one (1) individual serves as the Voting Senior Officer for more than one Affiliated Participant, such individual shall have the right to vote on behalf of each such Affiliated Participant.

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(b) Voting.

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(i) Unless recused pursuant to Sections 5.1(b)(ii), 5.1(b)(iii), or 5.1(b)(iv), each Participant shall have one vote on all matters considered by the Selection Committee.

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(ii) No Bidding Participant shall vote on whether a Shortlisted Bidder shall be permitted to revise its Bid pursuant to Section 5.2(c)(ii) or 5.2(d)(i) below if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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(iii) No Bidding Participant shall vote in the process narrowing the set of Shortlisted Bidders as set forth in Section 5.2(c)(iii) if a Bid submitted by or including the Participant or an Affiliate of the Participant is a Shortlisted Bid.

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(iv) No Bidding Participant shall vote in any round if a Bid submitted by or including the Participant or an Affiliate of the Participant is a part of such round.

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(v) All votes by the Selection Committee shall be confidential and non-public. All such votes shall be tabulated by an independent third party approved by the Operating Committee, and a Participant’s individual votes shall not be disclosed to other Participants or to the public.

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(c) Quorum.

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(i) Any action requiring a vote by the Selection Committee can only be taken at a meeting in which all Participants entitled to vote are present. Meetings of the Selection Committee shall be held as needed at such times and locations as shall from time to time be determined by the Selection Committee. Meetings may be held by conference telephone or other acceptable electronic means if all Participants entitled to vote consent thereto in writing or by other means the Selection Committee deems acceptable.

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(ii) For purposes of establishing a quorum, a Participant is considered present at a meeting only if the Participant’s Voting Senior Officer is either in physical attendance at the meeting or is participating by conference telephone or other acceptable electronic means.

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(iii) Any Participant recused from voting on a particular action pursuant to Section 5.1(b) above shall not be considered “entitled to vote” for purposes of establishing whether a quorum is present for a vote to be taken on that action.

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(d) Qualifications for Voting Senior Officer of Bidding Participants. The following criteria must be met before a Voting Senior Officer is eligible to represent a Bidding Participant and serve on the Selection Committee:

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(i) the Voting Senior Officer is not responsible for the Bidding Participant’s market operations, and is responsible primarily for the Bidding Participant’s legal and/or regulatory functions, including functions related to the formulation and implementation of the Bidding Participant’s legal and/or regulatory program;

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(ii) the Bidding Participant has established functional separation of its legal and/or regulatory functions from its market operations and other business or commercial objectives;

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(iii) the Voting Senior Officer ultimately reports (including through the Bidding Participant’s CEO or Chief Legal Officer/General Counsel) to an independent governing body that determines or oversees the Voting Senior Officer’s compensation, and the Voting Senior Officer does not receive any compensation (other than what is determined or overseen by the independent governing body) that is based on achieving business or commercial objectives;

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(iv) the Voting Senior Officer does not have responsibility for any non-regulatory functions of the Bidding Participant, other than the legal aspects of the organization performed by the Chief Legal Officer/General Counsel or the Office of the General Counsel;

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(v) the ultimate decision making of the Voting Senior Officer position is tied to the regulatory effectiveness of the Bidding Participant, as opposed to other business or commercial objectives;

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(vi) promotion or termination of the Voting Senior Officer is not based on achieving business or commercial objectives;

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(vii) the Voting Senior Officer has no decision-making authority with respect to the development or formulation of the Bid submitted by or including the Participant or an Affiliate of the Participant; however, the staff assigned to developing and formulating such Bid may consult with the Voting Senior Officer, provided such staff members cannot share information concerning the Bid with the Voting Senior Officer;

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(viii) the Voting Senior Officer does not report to any senior officers responsible for the development or formulation of the Bid submitted by or including the Participant or by an Affiliate of the Participant; however, joint reporting to the Bidding Participant’s CEO or similar executive officer by the Voting Senior Officer and senior staff developing and formulating such Bid is permissible, but the Bidding Participant’s CEO or similar executive officer cannot share information concerning such Bid with the Voting Senior Officer;

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(ix) the compensation of the Voting Senior Officer is not separately tied to income earned if the Bid submitted by or including the Participant or an Affiliate of the Participant is selected; and

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(x) the Voting Senior Officer, any staff advising the Voting Senior Officer, and any similar executive officer or member of an independent governing body to which the Voting Senior Officer reports may not disclose to any Person any non-public information gained during the review of Bids, presentation by Qualified Bidders, and selection process. Staff advising the Voting Senior Officer during the Bid review, presentation, and selection process may not include the staff, contractors, or subcontractors that are developing or formulating the Bid submitted by or including a Participant or an Affiliate of the Participant.

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pubdate: January 10, 2018 effdate: N/A -

Section 5.2. Bid Evaluation and Initial Plan Processor Selection.

- Topic: CAT NMS Plan, Article V - Initial Plan Processor Selection, Bid Evaluation and Initial Plan Processor Selection - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Initial Bid Review, - Selection of Shortlisted, - Review of Shortlisted, - Selection of Plan, - Sections 5.2, - Non-SRO Bids, - -

(a) Initial Bid Review to Determine Qualified Bids.

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(i) The Selection Committee shall review all Bids in accordance with the process developed by the Selection Committee.

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(ii) After review, the Selection Committee shall vote on each Bid to determine whether such Bid is a Qualified Bid. A Bid that is deemed unqualified by at least a two-thirds (2/3rds) vote of the Selection Committee shall not be deemed a Qualified Bid and shall be eliminated individually from further consideration.

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(b) Selection of Shortlisted Bids.

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(i) Each Qualified Bidder shall be given the opportunity to present its Bid to the Selection Committee. Following the presentations by Qualified Bidders, the Selection Committee shall review and evaluate the Qualified Bids to select the Shortlisted Bids in accordance with the process in this Section 5.1(b).

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(ii) If there are six (6) or fewer Qualified Bids, all such Qualified Bids shall be Shortlisted Bids.

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(iii) If there are more than six (6) Qualified Bids but fewer than eleven (11) Qualified Bids, the Selection Committee shall select five (5) Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. Each Voting Senior Officer shall select a first, second, third, fourth, and fifth choice from among the Qualified Bids.

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(A) A weighted score shall be assigned to each choice as follows:

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(1) First choice receives five (5) points;

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(2) Second choice receives four (4) points;

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(3) Third choice receives three (3) points;

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(4) Fourth choice receives two (2) points; and

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(5) Fifth choice receives one (1) point.

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(B) The five (5) Qualified Bids receiving the highest cumulative scores shall be Shortlisted Bids.

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(C) In the event of a tie to select the five Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

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(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iii) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iii), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

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(iv) If there are eleven (11) or more Qualified Bids, the Selection Committee shall select fifty percent (50%) of the Qualified Bids as Shortlisted Bids, subject to the requirement in Section 5.2(d) below. If there is an odd number of Qualified Bids, the number of Shortlisted Bids chosen shall be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, then seven Shortlisted Bids shall be selected). Each Voting Senior Officer shall select as many choices as Shortlisted Bids to be chosen.

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(A) A weighted score shall be assigned to each choice in single point increments as follows:

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(1) Last receives one (1) point;

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(2) Next-to-last choice receives two (2) points;

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(3) Second-from-last choice receives three (3) points;

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(4) Third-from-last choice receives four (4) points;

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(5) Fourth-from-last choice receives five (5) points; and

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(6) Fifth-from-last choice receives six (6) points.

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For each additional Shortlisted Bid that must be chosen, the points assigned shall increase in single point increments.

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(B) The fifty percent (50%) of Qualified Bids (or, if there is an odd number of Qualified Bids, the next whole number above fifty percent (50%) of Qualified Bids) receiving the highest cumulative scores shall be Shortlisted Bids.

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(C) In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids shall be Shortlisted Bids.

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(D) To the extent there are Non-SRO Bids that are Qualified Bids, the Shortlisted Bids selected pursuant to this Section 5.2(b)(iv) must, if possible, include at least two Non-SRO Bids. If, following the vote set forth in this Section 5.2(b)(iv), no Non-SRO Bid was selected as a Shortlisted Bid, the two Non-SRO Bids receiving the highest cumulative votes (or one Non-SRO Bid if a single Non-SRO Bid is a Qualified Bid) shall be added as Shortlisted Bids. If one Non-SRO Bid was selected as a Shortlisted Bid, the Non-SRO Bid receiving the next highest cumulative vote shall be added as a Shortlisted Bid.

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(c) Formulation of the CAT NMS Plan.

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(i) The Selection Committee shall review the Shortlisted Bids to identify optimal proposed solutions for the CAT and provide descriptions of such proposed solutions for inclusion in this Agreement. This process may, but is not required to, include iterative discussions with Shortlisted Bidders to address any aspects of an optimal proposed solution that were not fully addressed in a particular Bid.

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(ii) Prior to the approval of the CAT NMS Plan, all Shortlisted Bidders will be permitted to revise their Bids one or more times if the Selection Committee determines, by majority vote, that such revision(s) are necessary or appropriate.

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(iii) Prior to approval of the CAT NMS Plan, and either before or after any revisions to Shortlisted Bids are accepted, the Selection Committee may determine, by at least a two-thirds vote, to narrow the number of Shortlisted Bids to three Bids, in accordance with the process in this Section 5.2(c)(iii).

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(A) Each Voting Senior Officer shall select a first, second, and third choice from among the Shortlisted Bids.

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(B) A weighted score shall be assigned to each choice as follows:

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(1) First receives three (3) points;

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(2) Second receives two (2) points; and

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(3) Third receives one (1) point.

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(C) The three Shortlisted Bids receiving the highest cumulative scores will be the new set of Shortlisted Bids.

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(D) In the event of a tie that would result in more than three final Shortlisted Bids, the votes shall be recounted, omitting each Voting Senior Officer’s third choice, in order to break the tie. If this recount produces a tie that would result in a number of final Shortlisted Bids larger than or equal to that from the initial count, the results of the initial count shall constitute the final set of Shortlisted Bids.

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(E) To the extent there are Non-SRO Bids that are Shortlisted Bids, the final Shortlisted Bids selected pursuant to this Section 5.2(c)(iii) must, if possible, include at least one Non-SRO Bid. If following the vote set forth in this Section 5.2(c)(iii), no Non-SRO Bid was selected as a final Shortlisted Bid, the Non-SRO Bid receiving the highest cumulative votes shall be retained as a Shortlisted Bid.

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(F) The third party tabulating votes, as specified in Section 5.1(b)(5), shall identify to the Selection Committee the new set of Shortlisted Bids, but shall keep confidential the individual scores and rankings of the Shortlisted Bids from the process in this Section 5.2(c)(iii).

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(iv) The Participants shall incorporate information on optimal proposed solutions in this Agreement, including cost-benefit information as required by SEC Rule 613.

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(d) Review of Shortlisted Bids Under the CAT NMS Plan.

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(i) A Shortlisted Bidder shall be permitted to revise its Bid only upon approval by a majority of the Selection Committee, subject to the recusal provision in Section 5.1(b)(ii) above, that revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions in this Agreement. A Shortlisted Bidder may not revise its Bid unless approved to do so by the Selection Committee pursuant to this Section 5.2(d)(i).

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(ii) The Selection Committee shall review and evaluate all Shortlisted Bids, including any permitted revisions thereto submitted by Shortlisted Bidders. In performing the review and evaluation, the Selection Committee may consult with the Advisory Committee established pursuant to paragraph (b)(7) of SEC Rule 613 and Section 4.13, and such other Persons as the Selection Committee deems appropriate.

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(e) Selection of Plan Processor Under this Agreement.

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(i) There shall be two rounds of voting by the Selection Committee to select the Initial Plan Processor from among the Shortlisted Bidders. Each round shall be scored independently of prior rounds of voting, including the scoring to determine the Shortlisted Bids under Section 5.2(b).

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(ii) Each Participant shall have one vote in each round, except that no Bidding Participant shall be entitled to vote in any round if the Participant’s Bid, a Bid submitted by an Affiliate of the Participant, or a Bid including the Participant or an Affiliate of the Participant is considered in such round.

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(iii) First Round Voting by the Selection Committee.

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(A) In the first round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii), shall select a first and second choice from among the Shortlisted Bids.

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(B) A weighted score shall be assigned to each choice as follows:

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(1) First choice receives two (2) points; and

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(2) Second choice receives one (1) point.

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(C) The two Shortlisted Bids receiving the highest cumulative scores in the first round shall advance to the second round.

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(D) In the event of a tie that would result in more than two Shortlisted Bids advancing to the second round, the tie shall be broken by assigning one point per vote, with the Shortlisted Bid(s) receiving the highest number of votes advancing to the second round. If, at this point, the Shortlisted Bids remain tied, a revote shall be taken with each vote receiving one point. If the revote results in a tie, the Participants shall identify areas for further discussion and, following any such discussion, voting shall continue until two Shortlisted Bids are selected to advance to the second round.

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(iv) Second Round Voting by the Selection Committee.

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(A) In the second round of voting, each Voting Senior Officer, subject to the recusal provisions in Section 5.2(e)(ii) above, shall vote for one Shortlisted Bid.

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(B) The Shortlisted Bid receiving the most votes in the second round shall be selected, and the proposed entity included in the Shortlisted Bid to serve as the Plan Processor shall be selected as the Plan Processor.

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(C) In the event of a tie, a revote shall be taken. If the revote results in a tie, the Participants shall identify areas for further discussions with the two Shortlisted Bidders. Following any such discussions, voting shall continue until one Shortlisted Bid is selected.

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE VI FUNCTIONS AND ACTIVITIES OF CAT SYSTEM

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - CAT System, - -
pubdate: January 10, 2018 effdate: N/A -

Section 6.1. Plan Processor.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Plan Processor - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Plan Processor, - Central Repository Requirements, - Advisory Committee, - CAT System, - System Service Level Agreements, - Sec Rule 613, - Operating Committee, - -

(a) The Initial Plan Processor shall be selected in accordance with Article V and shall serve as the Plan Processor until its resignation or removal from such position in accordance with this Section 6.1. The Company, under the direction of the Operating Committee shall enter into one or more agreements with the Plan Processor obligating the Plan Processor to perform the functions and duties contemplated by this Agreement to be performed by the Plan Processor, as well as such other functions and duties the Operating Committee deems necessary or appropriate.

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(b) The Plan Processor may appoint such officers of the Plan Processor as it deems necessary and appropriate to perform its functions under this Agreement and SEC Rule 613; provided that the Plan Processor shall, at a minimum, appoint, in accordance with Section 6.2: (i) the Chief Compliance Officer; (ii) the Chief Information Security Officer; and (iii) the Independent Auditor. Notwithstanding anything to the contrary, the Operating Committee, by Supermajority Vote, shall approve any appointment or removal of the Chief Compliance Officer, the Chief Information Security Officer, or the Independent Auditor.

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(c) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement policies, procedures, and control structures related to the CAT System that are consistent with SEC Rule 613(e)(4), Appendix C, and Appendix D.

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(d) The Plan Processor shall:

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(i) comply with applicable provisions of 15 U.S.C. § 78u-6 (Securities Whistleblower Incentives and Protection) and the recordkeeping requirements of SEC Rule 613(e)(8);

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(ii) consistent with Appendix D, Central Repository Requirements, ensure the effective management and operation of the Central Repository;

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(iii) consistent with Appendix D, Data Management, ensure the accuracy of the consolidation of the CAT Data reported to the Central Repository pursuant to Section 6.3 and Section 6.4; and

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(iv) consistent with Appendix D, Upgrade Process and Development of New Functionality, design and implement appropriate policies and procedures governing the determination to develop new functionality for the CAT including, among other requirements, a mechanism by which changes can be suggested by Advisory Committee members, Participants, or the SEC. Such policies and procedures also shall: (A) provide for the escalation of reviews of proposed technological changes and upgrades (including as required by Section 6.1(i) and Section 6.1(j) or as otherwise appropriate) to the Operating Committee; and (B) address the handling of surveillance, including coordinated, SEC Rule 17d-2 or Regulatory Service Agreement(s) (“RSA”) surveillance queries and requests for data.

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(e) Any policy, procedure or standard (and any material modification or amendment thereto) applicable primarily to the performance of the Plan Processor’s duties as the Plan Processor (excluding, for the avoidance of doubt, any policies, procedures or standards generally applicable to the Plan Processor’s operations and employees) shall become effective only upon approval thereof by the Operating Committee.

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(f) The Plan Processor shall, subject to the prior approval of the Operating Committee, establish appropriate procedures for escalation of matters to the Operating Committee.

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(g) In addition to other policies, procedures and standards generally applicable to the Plan Processor’s employees and contractors, the Plan Processor shall have hiring standards and shall conduct and enforce background checks (e.g., fingerprint-based) for all of its employees and contractors to ensure the protection, safeguarding and security of the facilities, systems, networks, equipment and data of the CAT System, and shall have an insider and external threat policy to detect, monitor and remedy cyber and other threats. Each Participant will also conduct background checks of its employees and contractors that will use the CAT System.

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(h) The Plan Processor shall enter into appropriate Service Level Agreements (“SLAs”) governing the performance of the Central Repository, as generally described in Appendix D, Functionality of the CAT System, with the prior approval of the Operating Committee. The Plan Processor in conjunction with the Operating Committee shall regularly review and, as necessary, update the SLAs, in accordance with the terms of the SLAs. As further contemplated in Appendix C, System Service Level Agreements (SLAs), and in Appendix D, System SLAs, the Plan Processor may enter into appropriate service level agreements with third parties applicable to the Plan Processor’s functions related to the CAT System (“Other SLAs”), with the prior approval of the Operating Committee. The Chief Compliance Officer and/or the Independent Auditor shall, in conjunction with the Plan Processor and, as necessary, the Operating Committee, regularly review and, as necessary, update the Other SLAs, in accordance with the terms of the applicable Other SLA.

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(i) The Plan Processor shall, on an ongoing basis and consistent with any applicable policies and procedures, evaluate and implement potential system changes and upgrades to maintain and improve the normal day-to-day operating function of the CAT System.

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(j) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis and consistent with any applicable operational and escalation policies and procedures, implement such material system changes and upgrades as may be required to ensure effective functioning of the CAT System (i.e., those system changes and upgrades beyond the scope contemplated by Section 6.1(i)).

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(k) In consultation with the Operating Committee, the Plan Processor shall, on an as needed basis, implement system changes and upgrades to the CAT System to ensure compliance with any applicable laws, regulations or rules (including those promulgated by the SEC or any Participant).

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(l) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a securities trading policy, as well as necessary procedures, control structures and tools to enforce this policy. The securities trading policy shall include:

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(i) the category(ies) of employees, and as appropriate, contractors, of the Plan Processor to whom the policy will apply;

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(ii) the scope of securities that are allowed or not allowed for trading;

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(iii) the creation and maintenance of restricted trading lists;

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(iv) a mechanism for declaring new or open account activity;

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(v) a comprehensive list of any exclusions to the policy (e.g., blind trust, non-discretionary accounts);

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(vi) requirements for duplicative records to be received by the Plan Processor for periodic review; and

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(vii) a mechanism to review employee trading accounts.

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(m) The Plan Processor shall develop and, with the prior approval of the Operating Committee, implement a training program that addresses the security and confidentiality of all information accessible from the CAT, as well as the operational risks associated with accessing the Central Repository. The training program will be made available to all individuals who have access to the Central Repository on behalf of the Participants or the SEC, prior to such individuals being granted access to the Central Repository.

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(n) The Operating Committee will review the Plan Processor’s performance under this Agreement at least once each year, or more often than once each year upon the request of two Participants that are not Affiliated Participants. The Operating Committee shall notify the SEC of any determination made by the Operating Committee concerning the continuing engagement of the Plan Processor as a result of the Operating Committee’s review of the Plan Processor and shall provide the SEC with a copy of any reports that may be prepared in connection therewith.

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(o) The Plan Processor shall provide the Operating Committee regular reports on the CAT System’s operation and maintenance. The reports shall address:

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(i) operational performance management information regarding the capacity and performance of the CAT System as specified by the Operating Committee. Such reports shall at a minimum address:

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(A) the capacity and performance of the Central Repository, including at a minimum the requirements set forth in Appendix D, Central Repository Requirements;

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(B) the basic functionality of the CAT System, including the functions set forth in Appendix D, Functionality of the CAT System.

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(ii) data security issues for the Plan Processor and the Central Repository taking into account the data security requirements set forth in Appendix D, Data Security;

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(iii) Participant usage statistics for the Plan Processor and the Central Repository, including capacity planning studies and daily reports called for by Appendix D, Capacity Requirements, as well as business continuity planning and disaster recovery issues for the Plan Processor and the Central Repository, taking into account the business continuity planning and disaster recovery requirements set forth in Appendix D, BCP / DR Process;

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(iv) system improvement issues with the Plan Processor and the Central Repository as contemplated by Appendix D, Upgrade Process and Development of New Functionality;

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(v) Error Rates relating to the Central Repository,1 including, in each case to the extent the Operating Committee determines necessary or advisable, Error Rates by day and by delta over time, and Compliance Thresholds by CAT Reporter, by Reportable Event, by age before resolution, by symbol, by symbol type (e.g., ETF and Index) and by event time (by hour and cumulative on the hour) as set forth in Appendix C, Error Communication, Correction, and Processing;

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(vi) financial statements of the Plan Processor prepared in accordance with GAAP (A) audited by an independent public accounting firm or (B) certified by the Plan Processor’s Chief Financial Officer (which financial statements contemplated by this Section 6.1(o)(vi) shall be provided no later than 180 days after the Plan Processor’s fiscal year end);

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(vii) continued solvency of the Plan Processor;

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(viii) budgetary status of any items subject to Section 6.2(a)(ii);

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(ix) internal audit analysis and the status of any internal audit related deliverables; and

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(x) additional items as requested by the Operating Committee, any Officer of the Company, or the Independent Auditor.

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(p) Upon the request of the Operating Committee or any Subcommittee, the Plan Processor shall attend any meeting of the Operating Committee or such Subcommittee.

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(q) The Operating Committee, by Supermajority Vote, may remove the Plan Processor from such position at any time.

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(r) The Operating Committee may, by Majority Vote, remove the Plan Processor from such position at any time if it determines that the Plan Processor has failed to perform its functions in a reasonably acceptable manner in accordance with the provisions of this Agreement or that the Plan Processor’s expenses have become excessive and are not justified. In making such determination, the Operating Committee shall consider, among other factors: (i) the reasonableness of the Plan Processor’s response to requests from Participants or the Company for technological changes or enhancements; (ii) results of any assessments performed pursuant to Section 6.6; (iii) the timeliness of conducting preventative and corrective information technology system maintenance for reliable and secure operations; (iv) compliance with requirements of Appendix D; and (v) such other factors related to experience, technological capability, quality and reliability of service, costs, back-up facilities, failure to meet service level agreement(s) and regulatory considerations as the Operating Committee may determine to be appropriate.

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(s) The Plan Processor may resign from such position; provided that no such resignation shall be effective earlier than two (2) years (or such other shorter period as may be determined by the Operating Committee by Supermajority Vote) after the Plan Processor provides written notice of such resignation to the Company.

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(t) The Operating Committee, by Supermajority Vote, shall fill any vacancy in the Plan Processor position, and shall establish a Plan Processor Selection Subcommittee in accordance with Section 4.12 to evaluate and review Bids and make a recommendation to the Operating Committee with respect to the selection of the successor Plan Processor. Any successor Plan Processor appointed pursuant to this Section 6.1(t) shall be subject to all the terms and conditions of this Agreement applicable to the Plan Processor commencing from such appointment effective date.

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(u) The Plan Processor shall afford to Participants and the Commission such access to the Representatives of the Plan Processor as any Participant or the Commission may request solely for the purpose of performing such Person’s regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations or any contractual obligations, and shall direct such Representatives to cooperate with any inquiry, investigation, or proceeding conducted by or on behalf of any Participant or the Commission related to such purpose.

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pubdate: January 10, 2018 effdate: N/A -

Section 6.2. Chief Compliance Officer and Chief Information Security Officer.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Chief Compliance Officer and Chief Information Security Officer - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Plan Processor, - Operating Committee, - Chief Compliance Officer, - Duties of Chief Compliance Officer, - SEC Rule 17d-2, - -

(a) Chief Compliance Officer.

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(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Compliance Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Compliance Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Compliance Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Compliance Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Compliance Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Compliance Officer if the employee then serving as the Chief Compliance Officer becomes unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Compliance Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Compliance Officer if the Chief Compliance Officer’s employment with the Plan Processor terminates or the Chief Compliance Officer is otherwise unavailable or unable to serve as the Chief Compliance Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(a)(i) to the SEC.

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(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Compliance Officer has appropriate resources to fulfill the obligations of the Chief Compliance Officer set forth in SEC Rule 613 and in this Agreement.

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(iii) In respect of all duties and responsibilities of the Chief Compliance Officer in such capacity (including those set forth in this Agreement), the Chief Compliance Officer shall be directly responsible and shall directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

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(iv) The compensation (including base salary and bonus) of the Chief Compliance Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Compliance Officer’s annual performance review.

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(v) The Chief Compliance Officer shall:

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(A) regularly review the operation of the Central Repository to ensure its continued effectiveness based on market and technological developments and consistent with Appendix D, Upgrade Process and Development of New Functionality, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed;

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(B) identify and assist the Company in retaining an appropriately qualified independent auditor of national recognition (subject to the approval of the Operating Committee by Supermajority Vote, the “Independent Auditor”) and, in collaboration with such Independent Auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee) which shall at a minimum include a review of all Plan Processor policies, procedures and control structures;

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(C) in collaboration with the Chief Information Security Officer, and consistent with Appendix D, Data Security, and any other applicable requirements related to data security, Customer Account Information and Customer Identifying Information, identify and assist the Company in retaining an appropriately qualified independent auditor (based on specialized technical expertise, which may be the Independent Auditor or subject to the approval of the Operating Company by Supermajority Vote, another appropriately qualified independent auditor), and in collaboration with such independent auditor, create and implement an annual audit plan (subject to the approval of the Operating Committee), which shall at a minimum include a review of all Plan Processor policies, procedures and control structures, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository;

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(D) have the ability to hire or retain adequate resources as needed (e.g., advisors and counsel) to fulfill its obligations;

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(E) perform reviews with respect to the matters referenced in Section 4.12(b) and report periodically, and on an as needed basis, to the Operating Committee concerning the findings of any such reviews;

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(F) report to the Operating Committee and conduct any relevant review of the Plan Processor or the Central Repository requested by the Operating Committee, including directing internal or external auditors, as appropriate, to support any such review;

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(G) perform and provide the regular written assessment to the SEC required by Section 6.6 and SEC Rule 613;

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(H) regularly review the information security program developed and maintained by the Plan Processor pursuant to Section 6.12 and determine the frequency of such reviews;

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(I) report in a timely manner to the Operating Committee any instances of non-compliance by the Plan Processor with any of the Central Repository’s policies or procedures with respect to information security;

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(J) conduct regular monitoring of the CAT System for compliance by each Participant and each Industry Member with SEC Rule 613, this Agreement and Appendix D, Reporting and Linkage Requirements, and provide the results: (1) with regard to Industry Members, to each Participant with oversight of such Industry Member or to such Participant’s agent pursuant to a regulatory services agreement, or to the Participant responsible for enforcing compliance by such Industry Member pursuant to an agreement entered into by the applicable Participant pursuant to SEC Rule 17d-2; and (2) with regard to each Participant, to the chief regulatory officer or equivalent of such Participant;

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(K) develop a mechanism to conduct regular monitoring of the CAT System for compliance by each Participant with SEC Rule 613, this Agreement, and Appendix D, Reporting and Linkage Requirements;

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(L) develop and implement a notification and escalation process to resolve and remediate any alleged noncompliance by a Participant or Industry Member with the rules of the CAT, which process will include appropriate notification and order of escalation to a Participant, the Operating Committee, or the Commission;

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(M) develop and conduct an annual assessment of Business Clock synchronization as specified in Section 6.8(c);

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(N) have access to Plan Processor staff and documentation as appropriate to fulfill its obligations;

-

(O) have access to the Operating Committee, including attending all regular, special and emergency meetings of the Operating Committee as a non-voting observer; provided, however, that the Chief Compliance Officer shall not have the right to attend any Executive Session that the Operating Committee may hold;

-

(P) work on a more regular and frequent basis with the Compliance Subcommittee or other Subcommittee as may be determined by the Operating Committee; and

-

(Q) oversee the Plan Processor’s compliance with applicable laws, rules and regulations related to the CAT System, in its capacity as Plan Processor.

-

(b) Chief Information Security Officer.

-

(i) The Plan Processor shall designate an employee of the Plan Processor to serve, subject to the approval of the Operating Committee by Supermajority Vote, as the Chief Information Security Officer. The Plan Processor shall also designate at least one other employee (in addition to the person then serving as Chief Information Security Officer), which employee the Operating Committee has previously approved, to serve temporarily as the Chief Information Security Officer if the employee then serving as the Chief Information Security Officer becomes unavailable or unable to serve in such capacity (including by reason of injury or illness). Any person designated to serve as the Chief Information Security Officer (including to serve temporarily) shall be appropriately qualified to serve in such capacity based on the duties and responsibilities assigned to the Chief Information Security Officer under this Agreement and shall dedicate such person’s entire working time to such service (or temporary service) (except for any time required to attend to any incidental administrative matters related to such person’s employment with the Plan Processor that do not detract in any material respect from such person’s service as the Chief Information Security Officer). The Plan Processor may, at its discretion: (A) designate another employee previously approved by the Operating Committee by Supermajority Vote to serve in such capacity to temporarily serve as the Chief Information Security Officer if the employee then serving as Chief Information Security Officer becomes unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period not in excess of thirty (30) days; or (B) designate another employee of the Plan Processor to replace, subject to approval of the Operating Committee by a Supermajority Vote, the Chief Information Security Officer. The Plan Processor shall promptly designate another employee of the Plan Processor to replace, subject to the approval of the Operating Committee by Supermajority Vote, the Chief Information Security Officer if the Chief Information Security Officer’s employment with the Plan Processor terminates or the Chief Information Security Officer is otherwise unavailable or unable to serve as Chief Information Security Officer (including by reason of injury or illness) for a period in excess of thirty (30) days. The Operating Committee shall report any action taken pursuant to Section 6.2(b)(i) to the SEC.

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(ii) The Plan Processor, subject to the oversight of the Operating Committee, shall ensure that the Chief Information Security Officer has appropriate resources to fulfill the obligations of the Chief Information Security Officer set forth in SEC Rule 613 and in this Agreement, including providing appropriate responses to questions posed by the Participants and the SEC.

-

(iii) In respect of all duties and responsibilities of the Chief Information Security Officer in such capacity (including those set forth in this Agreement), the Chief Information Security Officer shall be directly responsible and directly report to the Operating Committee, notwithstanding that he or she is employed by the Plan Processor.

-

(iv) The compensation (including base salary and bonus) of the Chief Information Security Officer shall be payable by the Plan Processor, but subject to review and approval by the Operating Committee, and the Operating Committee shall render the Chief Information Security Officer’s annual performance review.

-

(v) Consistent with Appendices C and D, the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, and control structures to monitor and address data security issues for the Plan Processor and the Central Repository including:

-

(A) data security, including the standards set forth in Appendix D, Data Security;

-

(B) connectivity and data transfer, including the standards set forth in Appendix D, Connectivity and Data Transfer;

-

(C) data encryption, including the standards set forth in Appendix D, Data Encryption;

-

(D) data storage and environment, including the standards set forth in Appendix D, Data Storage and Environment;

-

(E) data access and breach management, including the standards set forth in Appendix D, Data Access, and Appendix D, Breach Management;

-

(F) PII data requirements, including the standards set forth in Appendix D, PII Data Requirements;

-

(G) industry standards, including the standards set forth in Appendix D, Industry Standards; and

-

(H) penetration test reviews, which shall occur at least every year or earlier, or at the request of the Operating Committee, set forth in Appendix D, Data Storage and Environment.

-

(vi) At regular intervals, to the extent that such information is available to the Company, the Chief Information Security Officer shall report to the Operating Committee the activities of the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) or other comparable body.

-

(vii) The Chief Information Security Officer shall review the information security policies and procedures of the Participants that are related to the CAT to ensure that such policies and procedures are comparable to the information security policies and procedures applicable to the Central Repository. If the Chief Information Security Officer, in consultation with the Chief Compliance Officer, finds that any such policies and procedures are not comparable to the policies and procedures applicable to the CAT System, and the issue is not promptly addressed by the applicable Participant, the Chief Information Security Officer, in consultation with the Chief Compliance Officer, will be required to notify the Operating Committee of such deficiencies.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.3. Data Recording and Reporting by Participants.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Recording and Reporting by Participants - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Format, - Recording, - Reporting, - Applicable Securities, - Participant Data, - CAT-Reporter-ID, - Transmission, - Section 6.3, - -

This Section 6.3 shall become effective on the first anniversary of the Effective Date and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

-

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall report Participant Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

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(b) Timing of Recording and Reporting.

-

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall record Participant Data contemporaneously with the applicable Reportable Event.

-

(ii) Each Participant shall report Participant Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Participant records such Participant Data. A Participant may voluntarily report Participant Data prior to the 8:00 a.m. Eastern Time deadline.

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(c) Applicable Securities.

-

(i) Each Participant that is a national securities exchange shall report Participant Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

-

(ii) Each Participant that is a national securities association shall report Participant Data for each Eligible Security for which transaction reports are required to be submitted to such association.

-

(d) Participant Data. Subject to Section 6.3(c), and Appendix D, Reporting and Linkage Requirements, and in accordance with the Technical Specifications, each Participant shall record and electronically report to the Central Repository the following details for each order and each Reportable Event, as applicable (“Participant Data”):

-

(i) for original receipt or origination of an order:

-

(A) Firm Designated ID(s) for each Customer;

-

(B) CAT-Order-ID;

-

(C) SRO-Assigned Market Participant Identifier of the Industry Member receiving or originating the order;

-

(D) date of order receipt or origination;

-

(E) time of order receipt or origination (using timestamps pursuant to Section 6.8); and

-

(F) Material Terms of the Order;

-

(ii) for the routing of an order:

-

(A) CAT-Order-ID;

-

(B) date on which the order is routed;

-

(C) time at which the order is routed (using timestamps pursuant to Section 6.8);

-

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order;

-

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant to which the order is being routed;

-

(F) if routed internally at the Industry Member, the identity and nature of the department or desk to which the order is routed; and

-

(G) Material Terms of the Order;

-

(iii) for the receipt of an order that has been routed, the following information:

-

(A) CAT-Order-ID;

-

(B) date on which the order is received;

-

(C) time at which the order is received (using timestamps pursuant to Section 6.8);

-

(D) SRO-Assigned Market Participant Identifier of the Industry Member or Participant receiving the order;

-

(E) SRO-Assigned Market Participant Identifier of the Industry Member or Participant routing the order; and

-

(F) Material Terms of the Order;

-

(iv) if the order is modified or cancelled:

-

(A) CAT-Order-ID;

-

(B) date the modification or cancellation is received or originated;

-

(C) time at which the modification or cancellation is received or originated (using timestamps pursuant to Section 6.8);

-

(D) price and remaining size of the order, if modified;

-

(E) other changes in the Material Terms of the Order, if modified; and

-

(F) whether the modification or cancellation instruction was given by the Customer or was initiated by the Industry Member or Participant;

-

(v) if the order is executed, in whole or in part:

-

(A) CAT-Order-ID;

-

(B) date of execution;

-

(C) time of execution (using timestamps pursuant to Section 6.8);

-

(D) execution capacity (principal, agency or riskless principal);

-

(E) execution price and size;

-

(F) SRO-Assigned Market Participant Identifier of the Participant or Industry Member executing the order;

-

(G) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information; and

-

(vi) other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

-

(e) CAT-Reporter-ID.

-

(i) Each Participant must submit to the Central Repository, on a daily basis,

-

(A) all SRO-Assigned Market Participant Identifiers used by its Industry Members or itself; and

-

(B) information to identify (1) each such Industry Member, including CRD number and LEI if such LEI has been obtained, and itself, including LEI, if such LEI has been obtained.

-

(ii) The Plan Processor will use the SRO-Assigned Market Participant Identifiers and identifying information to assign a CAT-Reporter-ID to each Industry Member or Participant for internal use across all CAT Data in the Central Repository.

-

(f) Means of Transmission. As contemplated in Appendix D, each Participant may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Participant Data to the Central Repository.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.4. Data Reporting and Recording by Industry Members.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Data Reporting and Recording by Industry Members - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Format, - Recording, - Reporting, - Applicable Securities, - Industry Member Data, - Transmission, - Section 6.4, - -

The requirements for Industry Members under this Section 6.4 shall become effective on the second anniversary of the Effective Date in the case of Industry Members other than Small Industry Members, or the third anniversary of the Effective Date in the case of Small Industry Members, and shall remain effective thereafter until modified or amended in accordance with the provisions of this Agreement and applicable law.

-

(a) Format. As contemplated in Appendix D, Data Types and Sources, each Participant shall, through its Compliance Rule, require its Industry Members to report Industry Member Data to the Central Repository for consolidation and storage in a format or formats specified by the Plan Processor, approved by the Operating Committee and compliant with SEC Rule 613.

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(b) Timing of Recording and Reporting.

-

(i) As further described in Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to record Recorded Industry Member Data contemporaneously with the applicable Reportable Event.

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(ii) Consistent with Appendix D, Reporting and Linkage Requirements, each Participant shall, through its Compliance Rule, require its Industry Members to report: (A) Recorded Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member records such Recorded Industry Member Data; and (B) Received Industry Member Data to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such Received Industry Member Data. Each Participant shall, through its Compliance Rule, permit its Industry Members to voluntarily report Industry Member Data prior to the applicable 8:00 a.m. Eastern Time deadline.

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(c) Applicable Securities.

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(i) Each Participant that is a national securities exchange shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

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(ii) Each Participant that is a national securities association shall, through its Compliance Rule, require its Industry Members to report Industry Member Data for each Eligible Security for which transaction reports are required to be submitted to such association.

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(d) Required Industry Member Data.

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(i) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and electronically report to the Central Repository for each order and each Reportable Event the information referred to in Section 6.3(d), as applicable (“Recorded Industry Member Data”).

-

(ii) Subject to Section 6.4(c) and Section 6.4(d)(iii) with respect to Options Market Makers, and consistent with Appendix D, Reporting and Linkage Requirements, and the Technical Specifications, each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository the following, as applicable (“Received Industry Member Data” and collectively with the information referred to in Section 6.4(d)(i) “Industry Member Data”):

-

(A) if the order is executed, in whole or in part:

-

(1) An Allocation Report;

-

(2) SRO-Assigned Market Participant Identifier of the clearing broker or prime broker, if applicable; and

-

(3) CAT-Order-ID of any contra-side order(s);

-

(B) if the trade is cancelled, a cancelled trade indicator; and

-

(C) for original receipt or origination of an order, the Firm Designated ID for the relevant Customer, and in accordance with Section 6.4(d)(iv), Customer Account Information and Customer Identifying Information for the relevant Customer.

-

(iii) With respect to the reporting obligations of an Options Market Maker with regard to its quotes in Listed Options, Reportable Events required pursuant to Section 6.3(d)(ii) and (iv) shall be reported to the Central Repository by an Options Exchange in lieu of the reporting of such information by the Options Market Maker. Each Participant that is an Options Exchange shall, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, any subsequent quote modifications and/or cancellation time when such modification or cancellation is originated by the Options Market Maker). Such time information also shall be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.

-

(iv) Each Industry Member must submit an initial set of the Customer information required in Section 6.4(d)(ii)(C) for Active Accounts to the Central Repository upon the Industry Member’s commencement of reporting to the Central Repository. Each Industry Member must submit to the Central Repository any updates, additions or other changes to the Customer information required in Section 6.4(d)(ii)(C) on a daily basis for all Active Accounts. In addition, on a periodic basis as designated by the Plan Processor and approved by the Operating Committee, each Industry Member will be required to submit to the Central Repository a complete set of all Customer information required in Section 6.4(d)(ii)(C). The Plan Processor will correlate such Customer information across all Industry Members, use it to assign a Customer-ID for each Customer, and use the Customer-ID to link all Reportable Events associated with an order for a Customer.

-

(v) Each Participant shall, through its Compliance Rule, require its Industry Members to record and report to the Central Repository other information or additional events as may be prescribed in Appendix D, Reporting and Linkage Requirements.

-

(vi) Each Industry Member must submit to the Central Repository information sufficient to identify such Industry Member, including CRD number and LEI, if such LEI has been obtained.

-

(e) Means of Transmission. As contemplated in Appendix D, Data Types and Sources, each Industry Member may utilize such methods as may be provided by the Plan Processor and approved by the Operating Committee to transmit Industry Member Data to the Central Repository.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.5. Central Repository.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Central Repository - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Collection, - Retention, - Access, - Accuracy, - Confidentiality, - Confidentiality Policies, - Section 6.1, - -

(a) Collection of Data.

-

(i) The Central Repository, under the oversight of the Plan Processor, and consistent with Appendix D, Central Repository Requirements, shall receive, consolidate, and retain all CAT Data.

-

(ii) The Central Repository shall collect (from a SIP or pursuant to an NMS Plan) and retain on a current and continuing basis, in a format compatible with the Participant Data and Industry Member Data, all data, including the following (collectively, “SIP Data”):

-

(A) information, including the size and quote condition, on quotes including the National Best Bid and National Best Offer for each NMS Security;

-

(B) Last Sale Reports and transaction reports reported pursuant to an effective transaction reporting plan filed with the SEC pursuant to, and meeting the requirements of, SEC Rules 601 and 608;

-

(C) trading halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down indicators; and

-

(D) summary data or reports described in the specifications for each of the SIPs and disseminated by the respective SIP.

-

(b) Retention of Data.

-

(i) Consistent with Appendix D, Data Retention Requirements, the Central Repository shall retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of SEC Rule 613 in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention by the Plan Processor for a period of not less than six (6) years. Such data when available to the Participant regulatory staff and the SEC shall be linked.

-

(ii) The Plan Processor shall implement and comply with the records retention policy contemplated by Section 6.1(d)(i) (as such policy is reviewed and updated periodically in accordance with Section 6.1(d)(i)).

-

(c) Access to the Central Repository

-

(i) Consistent with Appendix D, Data Access, the Plan Processor shall provide Participants and the SEC access to the Central Repository (including all systems operated by the Central Repository), and access to and use of the CAT Data stored in the Central Repository, solely for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules and regulations or any contractual obligations.

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(ii) The Plan Processor shall create and maintain a method of access to CAT Data stored in the Central Repository that includes the ability to run searches and generate reports. The method in which the CAT Data is stored in the Central Repository shall allow the ability to return results of queries that are complex in nature, including market reconstruction and the status of order books at varying time intervals.

-

(iii) The Plan Processor shall, at least annually and at such earlier time promptly following a request by the Operating Committee, certify to the Operating Committee that only Participants and the SEC have access to the Central Repository (other than access provided to any Industry Member for the purpose of correcting CAT Data previously reported to the Central Repository by such Industry Member).

-

(iv) Appendix C, The Security and Confidentiality of Information Reported to the Central Repository, and Appendix D, Data Security, describes the security and confidentiality of the CAT Data, including how access to the Central Repository is controlled.

-

(d) Data Accuracy

-

(i) The Operating Committee shall set and periodically review a maximum Error Rate for data reported to the Central Repository. The initial maximum Error Rate shall be set to 5%.

-

(ii) Consistent with Appendix D, Reporting and Linkage Requirements and Data Security, the Operating Committee shall adopt policies and procedures, including standards, requiring CAT Data reported to the Central Repository be timely, accurate, and complete, and to ensure the integrity of such CAT Data (e.g., that such CAT Data has not been altered and remains reliable). The Plan Processor shall be responsible for implementing such policies and procedures.

-

(iii) Appendix D, Receipt of Data from Reporters, describes the mechanisms and protocols for Participant Data and Industry Member Data submission for all key phases, including:

-

(A) file transmission and receipt validation;

-

(B) validation of CAT Data; and

-

(C) validation of linkages.

-

(e) Appendix D, Receipt of Data from Reporters, also describes the mechanisms and protocols for managing and handling corrections of CAT Data. The Plan Processor shall require an audit trail for corrected CAT Data in accordance with mechanisms and protocols approved by the Operating Committee.

-

(f) Data Confidentiality

-

(i) The Plan Processor shall, without limiting the obligations imposed on Participants by this Agreement and in accordance with the framework set forth in, Appendix D, Data Security, and Functionality of the CAT System, be responsible for the security and confidentiality of all CAT Data received and reported to the Central Repository. Without limiting the foregoing, the Plan Processor shall:

-

(A) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to agree: (1) to use appropriate safeguards to ensure the confidentiality of CAT Data stored in the Central Repository; and (2) not to use CAT Data stored in the Central Repository for purposes other than surveillance and regulation in accordance with such individual’s employment duties; provided that a Participant will be permitted to use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as permitted by applicable law, rule, or regulation;

-

(B) require all individuals who have access to the Central Repository (including the respective employees and consultants of the Participants and the Plan Processor, but excluding employees and Commissioners of the SEC) to execute a personal “Safeguard of Information Affidavit” in a form approved by the Operating Committee providing for personal liability for misuse of data;

-

(C) develop and maintain a comprehensive information security program with a dedicated staff for the Central Repository, consistent with Appendix D, Data Security, that employs state of the art technology, which program will be regularly reviewed by the Chief Compliance Officer and Chief Information Security Officer;

-

(D) implement and maintain a mechanism to confirm the identity of all individuals permitted to access the CAT Data stored in the Central Repository and maintain a record of all instances where such CAT Data was accessed; and

-

(E) implement and maintain appropriate policies regarding limitations on trading activities of its employees and independent contractors involved with all CAT Data consistent with Section 6.1(n).

-

(ii) Each Participant shall adopt and enforce policies and procedures that:

-

(A) implement effective information barriers between such Participant’s regulatory and non-regulatory staff with regard to access and use of CAT Data stored in the Central Repository;

-

(B) permit only persons designated by Participants to have access to the CAT Data stored in the Central Repository; and

-

(C) impose penalties for staff non-compliance with any of its or the Plan Processor’s policies or procedures with respect to information security.

-

(iii) Each Participant shall as promptly as reasonably practicable, and in any event within 24 hours, report to the Chief Compliance Officer, in accordance with the guidance provided by the Operating Committee, any instance of which such Participant becomes aware of: (A) noncompliance with the policies and procedures adopted by such Participant pursuant to Section 6.5(e)(ii); or (B) a breach of the security of the CAT.

-

(iv) The Plan Processor shall:

-

(A) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository and data maintenance by the Central Repository;

-

(B) require the establishment of secure controls for data retrieval and query reports by Participant regulatory staff; and

-

(C) otherwise provide appropriate database security for the Central Repository.

-

(v) The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine.

-

(g) Participants Confidentiality Policies and Procedures. The Participants shall establish, maintain and enforce written policies and procedures reasonably designed to (1) ensure the confidentiality of the CAT Data obtained from the Central Repository; and (2) limit the use of CAT Data obtained from the Central Repository solely for surveillance and regulatory purposes. Each Participant shall periodically review the effectiveness of the policies and procedures required by this paragraph, and take prompt action to remedy deficiencies in such policies and procedures.

-

(h) A Participant may use the Raw Data it reports to the Central Repository for regulatory, surveillance, commercial or other purposes as otherwise not prohibited by applicable law, rule or regulation.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.6. Written Assessments, Audits and Reports.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Written Assessments, Audits and Reports - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Written Assessments, - Reports, - Requirement, - Central Repository, - -

(a) One-Time Written Assessments and Reports. The Participants shall provide the SEC with the following written assessments, audits and reports:

-

(i) at least one (1) month prior to submitting a rule filing to establish initial fees for CAT Reporters, an independent audit of fees, costs, and expenses incurred by the Participants on behalf of the Company prior to the Effective Date of the Plan that will be publicly available;

-

(ii) within six (6) months of effectiveness of the Plan, an assessment of the clock synchronization standard, including consideration of industry standards based on the type of CAT Reporter, Industry Member and type of system, and propose any appropriate amendment based on this assessment;

-

(iii) within twelve (12) months of effectiveness of the Plan, a report detailing the Participants’ consideration of coordinated surveillance (e.g., entering into 17d-2 agreements or regulatory services agreements);

-

(iv) within 24 months of effectiveness of the Plan, a report discussing the feasibility, benefits, and risks of allowing an Industry Member to bulk download the Raw Data it submitted to the Central Repository;

-

(v) within 36 months of effectiveness of the Plan, an assessment of errors in the customer information submitted to the Central Repository and whether to prioritize the correction of certain data fields over others;

-

(vi) within 36 months of effectiveness of the Plan, a report on the impact of tiered-fees on market liquidity, including an analysis of the impact of the tiered-fee structure on Industry Members’ provision of liquidity; and

-

(vii) prior to the implementation of any Material Systems Change, an assessment of the projected impact of such Material Systems Change on the maximum Error Rate.

-

(b) Regular Written Assessment of the Plan Processor’s Performance.

-

(i) Requirement.

-

(A) Annually, or more frequently in connection with any review of the Plan Processor’s performance under this Agreement pursuant to Section 6.1(n), the Participants shall provide the SEC with a written assessment of the operation of the CAT that meets the requirements of SEC Rule 613, Appendix D, and this Agreement.

-

(B) The Chief Compliance Officer shall oversee the assessment contemplated by Section 6.6(b)(i)(A) and shall provide the Participants a reasonable time to review and comment upon such assessment prior to its submission to the SEC. In no case shall the written assessment be changed or amended in response to a comment by a Participant; rather, any comment by a Participant shall be provided to the SEC at the same time as the written assessment.

-

(ii) Contents of Written Assessment. The annual written assessment required by this Section 6.6 shall include:

-

(A) an evaluation of the performance of the CAT, including the items specified in SEC Rule 613(b)(6)(i) and other performance metrics identified by the Chief Compliance Officer, and a description of such metrics;

-

(B) a detailed plan, based on the evaluation conducted pursuant to Section 6.6(b)(i), for any potential improvements to the performance of the CAT with respect to the items specified in SEC Rule 613(b)(6)(ii), as well as:

-

(1) an evaluation of potential technology upgrades based on a review of technological advancements over the preceding year, drawing on technological expertise whether internal or external;

-

(2) an evaluation of the time necessary to restore and recover CAT Data at a back-up site;

-

(3) an evaluation of the information security program to ensure that the program is consistent with the highest industry standards for the protection of data;

-

(4) an evaluation of how the Plan Processor and the Participants are monitoring Error Rates and to explore the imposition of Error Rates based on product, data elements or other criteria;

-

(5) a copy of the evaluation required by Section 6.8(c) as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments;

-

(6) an assessment of whether any data elements should be added, deleted or changed; and

-

(7) any other items identified and described by the Chief Compliance Officer;

-

(C) an estimate of the costs and benefits associated with any potential improvements to the performance of the CAT, including an assessment of the potential impact on competition, efficiency, capital formation, and investor protection; and

-

(D) an estimated implementation timeline for any potential improvements to the performance of the CAT, if applicable.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.7. Implementation.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Implementation - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Effective Date, - Initial Plan Processor, - Section 6.8, - Central Repository Participant Data, - -

(a) Unless otherwise ordered by the SEC:

-

(i) within two (2) months after the Effective Date, the Participants shall jointly select the winning Shortlisted Bid and the Plan Processor pursuant to the process set forth in Article V. Following the selection of the Initial Plan Processor, the Participants shall file with the Commission a statement identifying the Plan Processor and including the information required by SEC Rule 608;

-

(ii) within four (4) months after the Effective Date, each Participant shall, and through its Compliance Rule shall require its Industry Members to, synchronize its or their Business Clocks as required by Section 6.8 and certify to the Chief Compliance Officer (in the case of Participants) or the applicable Participant (in the case of Industry Members) that such Participant has met this requirement;

-

(iii) within one (1) year after the Effective Date, each Participant shall report to the Central Repository Participant Data;

-

(iv) within fourteen (14) months after the Effective Date, each Participant shall implement a new or enhanced surveillance system(s) in accordance with Section 6.10;

-

(v) within two (2) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Industry Members (other than Small Industry Members) to report to the Central Repository Industry Member Data; and

-

(vi) within three (3) years after the Effective Date, each Participant shall, through its Compliance Rule, require its Small Industry Members to report to the Central Repository Industry Member Data.

-

(b) The Chief Compliance Officer shall appropriately document objective milestones to assess progress toward the implementation of this Agreement.

-

(c) Industry Members and Participants shall be required to participate in testing with the Central Repository on a schedule to be determined by the Operating Committee.

-

(d) Appendix C, A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), and Appendix D, Data Types and Sources, set forth additional implementation details concerning the elimination of rules and systems.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 6.8. Timestamps and Synchronization of Business Clocks.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Timestamps and Synchronization of Business Clocks - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Business Clock, - Compliance Rule, - NIST, - Operating Committee, - Sec Rule 613, - -

(a) Each Participant shall:

-

(i) other than such Business Clocks used solely for Manual Order Events, synchronize its Business Clocks at a minimum to within 100 microseconds of the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

-

(ii) other than such Business Clocks used solely for Manual Order Events or the time of allocation on Allocation Reports, through its Compliance Rule, require its Industry Members to:

-

(A) synchronize their respective Business Clocks at a minimum to within fifty (50) milliseconds of the time maintained by the National Institute of Standards and Technology, and maintain such a synchronization;

-

(B) certify periodically (according to a schedule to be defined by the Operating Committee) that their Business Clocks meet the requirements of the Compliance Rule;

-

(C) and report to the Plan Processor and the Participant any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee; and

-

(iii) synchronize its Business Clocks and, through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for Manual Order Events at a minimum to within one second of the time maintained by the National Institute of Standards and Technology (“NIST”), consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for Manual Order Events meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for Manual Order Events to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

-

(iv) through its Compliance Rule, require its Industry Members to synchronize their Business Clocks used solely for the time of allocation on Allocation Reports at a minimum to within one second of the time maintained by NIST, consistent with industry standards, and maintain such synchronization. Each Participant shall require its Industry Members to certify periodically (according to a schedule defined by the Operating Committee) that their Business Clocks used solely for the time of allocation on Allocation Reports meet the requirements of the Compliance Rule. The Compliance Rule of a Participant shall require its Industry Members using Business Clocks solely for the time of allocation on Allocation Reports to report to the Plan Processor any violation of the Compliance Rule pursuant to the thresholds set by the Operating Committee.

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(b) Each Participant shall, and through its Compliance Rule shall require its Industry Members to, report information required by SEC Rule 613 and this Agreement to the Central Repository in milliseconds. To the extent that any Participant’s order handling or execution systems utilize timestamps in increments finer than the minimum required in this Agreement, such Participant shall utilize such finer increment when reporting CAT Data to the Central Repository so that all Reportable Events reported to the Central Repository can be adequately sequenced. Each Participant shall, through its Compliance Rule: (i) require that, to the extent that its Industry Members utilize timestamps in increments finer than the minimum required in this Agreement in their order handling or execution systems, such Industry Members shall utilize such finer increment when reporting CAT Data to the Central Repository; and (ii) provide that a pattern or practice of reporting events outside of the required clock synchronization time period without reasonable justification or exceptional circumstances may be considered a violation of SEC Rule 613 and the CAT NMS Plan. Notwithstanding the preceding sentences, each Participant and Industry Member shall be permitted to record and report: (i) Manual Order Events to the Central Repository in increments up to and including one second, provided that Participants and Industry Members shall be required to record and report the time when a Manual Order Event has been captured electronically in an order handling and execution system of such Participant or Industry Member (“Electronic Capture Time”) in milliseconds; and (ii) the time of allocation on Allocation Reports in increments up to and including one second.

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(c) In conjunction with Participants’ and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate and make a recommendation to the Operating Committee as to whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments. Industry standards should be determined based on the type of CAT Reporter, Industry Member and type of system.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 6.9. Technical Specifications.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Technical Specifications - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Publication, - Content, - Amendments, - Sec Rule 613, - Operating Committee, - -

(a) Publication. The Plan Processor shall publish technical specifications that are at a minimum consistent with Appendices C and D, and updates thereto as needed, providing detailed instructions regarding the submission of CAT Data by Participants and Industry Members to the Plan Processor for entry into the Central Repository (collectively, the “Technical Specifications”). The Technical Specifications shall be made available on a publicly available web site to be developed and maintained by the Plan Processor. The initial Technical Specifications and any Material Amendments thereto shall be provided to the Operating Committee for approval by Supermajority Vote.

-

(b) Content. The Technical Specifications shall include a detailed description of the following:

-

(i) the specifications for the layout of files and records submitted to the Central Repository;

-

(ii) the process for the release of new data format specification changes;

-

(iii) the process for industry testing for any changes to data format specifications;

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(iv) the procedures for obtaining feedback about and submitting corrections to information submitted to the Central Repository;

-

(v) each data element, including permitted values, in any type of report submitted to the Central Repository;

-

(vi) any error messages generated by the Plan Processor in the course of validating the data;

-

(vii) the process for file submissions (and re-submissions for corrected files);

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(viii) the storage and access requirements for all files submitted;

-

(ix) metadata requirements for all files submitted to the CAT System;

-

(x) any required secure network connectivity;

-

(xi) data security standards, which shall, at a minimum: (A) satisfy all applicable regulations regarding database security, including provisions of Regulation Systems Compliance and Integrity under the Exchange Act (“Reg SCI”); (B) to the extent not otherwise provided for under this Agreement (including Appendix C hereto), set forth such provisions as may be necessary or appropriate to comply with SEC Rule 613(e)(4); and (C) comply with industry best practices; and

-

(xii) any other items reasonably deemed appropriate by the Plan Processor and approved by the Operating Committee.

-

(c) Amendments. Amendments to the Technical Specifications may be made only in accordance with this Section 6.9(c). For purposes of this Section 6.9(c), an amendment to the Technical Specifications shall be deemed “material” if it would require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to this Agreement or if it is required to safeguard the security or confidentiality of the CAT Data (“Material Amendment”).

-

(i) Except for Material Amendments to the Technical Specifications, the Plan Processor shall have the sole discretion to amend and publish interpretations regarding the Technical Specifications as needed in furtherance of the purposes and requirements of this Agreement. All non-Material Amendments made to the Technical Specifications and all published interpretations shall be provided to the Operating Committee in writing at least ten (10) days before being published. Such non-Material Amendments and published interpretations shall be deemed approved ten (10) days following provision to the Operating Committee unless two (2) unaffiliated Participants call for a vote to be taken on the proposed amendment or interpretation. If an amendment or interpretation is called out for a vote by two or more unaffiliated Participants, the proposed amendment must be approved by Majority Vote of the Operating Committee. Once a non-Material amendment has been approved, or deemed approved, by the Operating Committee, the Plan Processor shall be responsible for determining the specific changes to the Central Repository and providing technical documentation of those changes, including an implementation timeline.

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(ii) The Operating Committee, by Supermajority Vote, shall approve any Material Amendments to the Technical Specifications.

-

(iii) The Operating Committee, by Supermajority Vote, may amend the Technical Specifications on its own motion.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 6.10. Surveillance.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Surveillance - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Surveillance System, - Coordinated Surveillance, - CAT Data, - -

(a) Surveillance Systems. Using the tools provided for in Appendix D, Functionality of the CAT System, each Participant shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the Central Repository. Unless otherwise ordered by the SEC, within fourteen (14) months after the Effective Date, each Participant shall initially implement a new or enhanced surveillance system(s) as required by SEC Rule 613 and the preceding sentence.

-

(b) Coordinated Surveillance. Participants may, but are not required to, coordinate or share surveillance efforts through the use of regulatory services agreements and agreements adopted pursuant to SEC Rule 17d-2.

-

(c) Use of CAT Data by Regulators.

-

(i) Consistent with Appendix D, Functionality of the CAT System, the Plan Processor shall provide Participants and the SEC with access to all CAT Data stored in the Central Repository. Regulators will have access to processed CAT Data through two different methods; an online targeted query tool, and user-defined direct queries and bulk extracts.

-

(A) The online targeted query tool will provide authorized users with the ability to retrieve CAT Data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields.

-

(B) The user-defined direct queries and bulk extracts will provide authorized users with the ability to retrieve CAT Data via a query tool or language that allows users to query all available attributes and data sources.

-

(ii) Extraction of CAT Data shall be consistent with all permission rights granted by the Plan Processor. All CAT Data returned shall be encrypted, and PII data shall be masked unless users have permission to view the CAT Data that has been requested.

-

(iii) The Plan Processor shall implement an automated mechanism to monitor direct query usage. Such monitoring shall include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or CAT Data extractions. The Plan Processor shall provide the Operating Committee or its designee(s) details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

-

(iv) The Plan Processor shall reasonably assist regulatory staff (including those of Participants) with creating queries.

-

(v) Without limiting the manner in which regulatory staff (including those of Participants) may submit queries, the Plan Processor shall submit queries on behalf of a regulatory staff (including those of Participants) as reasonably requested.

-

(vi) The Plan Processor shall staff a CAT help desk, as described in Appendix D, CAT Help Desk, to provide technical expertise to assist regulatory staff (including those of Participants) with questions about the content and structure of the CAT Data.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 6.11. Debt Securities and Primary Market Transactions.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Debt Securities and Primary Market Transactions - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Market Transactions, - Reportable Event, - NMS Securities, - -

Unless otherwise ordered by the Commission, within six (6) months after the Effective Date, the Participants shall jointly provide to the SEC a document outlining how the Participants could incorporate into the CAT information with respect to equity securities that are not NMS Securities or OTC Equity Securities, including Primary Market Transactions in securities that are not NMS Securities or OTC Equity Securities and in debt securities, which document shall include details for each order and Reportable Event that may be required to be provided, which market participants may be required to provide the data, the implementation timeline, and a cost estimate.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 6.12. Information Security Program.

- Topic: CAT NMS Plan, Article VI - Functions and Activities of CAT System, Information Security Program - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Plan Processor, - Central Repository, - -

The Plan Processor shall develop and maintain a comprehensive information security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee, and which contains at a minimum the specific requirements detailed in Appendix D, Data Security.

-
-
-
pubdate: January 10, 2018 effdate: N/A -

ARTICLE VII INTENTIONALLY OMITTED

- Topic: CAT NMS Plan, Article VII - Intentionally Omitted - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: -
-
pubdate: January 10, 2018 effdate: N/A -

ARTICLE VIII TAX STATUS

- Topic: CAT NMS Plan, Article VIII - Tax Status - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Internal Revenue Service, - Form 1024, - Business League, - Section 501, - -

The Company intends to operate in a manner such that it qualifies as a “business league” within the meaning of Section 501(c)(6) of the Code. The Operating Committee shall cause the Company to: (i) make an election to be treated as a corporation for U.S. federal income tax purposes by filing Form 8832 with the Internal Revenue Service effective as of the date of formation and (ii) file with the Internal Revenue Service, Form 1024, Application for Recognition of Exemption under Section 501(a) to be treated as a “business league” as described in Section 501(c)(6) of the Code.

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-
pubdate: January 10, 2018 effdate: N/A -

ARTICLE IX RECORDS AND ACCOUNTING; REPORTS

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Accounting Records, - -
pubdate: January 10, 2018 effdate: N/A -

Section 9.1. Books and Records.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Books and Records - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Records, - Company Books, - Ownership of Records, - SEC Rule 17a-1, - CAT NMS plan, - Operating Committee, - -

The Company shall maintain complete and accurate books and records of the Company in accordance with SEC Rule 17a-1, which shall be maintained and be available, in addition to any documents and information required to be furnished to the Participants under the Act, at the office of the Plan Processor and/or such other location(s) as may be designated by the Company for examination and copying by any Participant or its duly authorized representative, at such Participant’s reasonable request and at its expense during ordinary business hours for any purpose reasonably related to such Participant’s involvement with the CAT NMS Plan, including for compliance and other regulatory purposes, and in compliance with such other conditions as may be reasonably established by the Operating Committee. For the avoidance of doubt, all CAT Data and other books and records of the Company shall be the property of the Company, rather than the Plan Processor, and, to the extent in the possession or control of the Plan Processor, shall be made available by the Plan Processor to the Commission upon request. Except as provided in this Section 9.1 or required by non-waivable provisions of applicable law, no Participant shall have any right to examine or copy any of the books and records of the Company.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 9.2. Accounting.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Accounting - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - GAAP, - Financial Statement, - Fiscal year, - -

(a) Except as provided in Section 9.3, the Operating Committee shall maintain a system of accounting established and administered in accordance with GAAP, and all financial statements or information that may be supplied to the Participants shall be prepared in accordance with GAAP (except that unaudited statements shall be subject to year-end adjustments and need not include footnotes). The Company shall prepare and provide to each Participant (1) within 30 days after the end of each calendar month, an unaudited balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, (x) such month and (y) the portion of the then current Fiscal Year ending at the end of such month; and (2) as soon as practicable after the end of each Fiscal Year, a balance sheet, income statement, statement of cash flows and statement of changes in equity for, or as of the end of, such year, audited by an independent public accounting firm (which audited balance sheet, income statement, statement of cash flows and statement of changes in equity contemplated by this Section 9.2(a) shall be made publicly available). The Fiscal Year shall be the calendar year unless otherwise determined by the Operating Committee.

-

(b) In all other respects, matters concerning accounting procedures shall be determined by the Operating Committee.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 9.3. Tax Returns.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Tax Returns - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Tax returns, - -

The Operating Committee shall cause federal, state, provincial, and local income tax returns for the Company to be prepared and timely filed with the appropriate authorities.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 9.4. Company Funds.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Company Funds - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Funds, - Investment Policy, - -

Pending use in the business of the Company or distribution to the Participants, the funds of the Company shall be held and/or invested in accordance with the then effective cash management and investment policy adopted by the Operating Committee.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 9.5 Intentionally Omitted.

- Topic: N/A - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: -
-
pubdate: January 10, 2018 effdate: N/A -

Section 9.6. Confidentiality.

- Topic: CAT NMS Plan, Article IX - Records and Accounting Reports; Reports, Confidentiality - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - CAT System, - Disclosing Party, - Receiving Party, - -

(a) For purposes of this Agreement, “Information” means information disclosed by or on behalf of the Company or a Participant (the “Disclosing Party”) to the Company or any other Participant (the “Receiving Party”) in connection with this Agreement or the CAT System, but excludes any CAT Data or information otherwise disclosed pursuant to the requirements of SEC Rule 613. The Receiving Party agrees to maintain the Information in confidence with the same degree of care it holds its own confidential information (but in any event not less than reasonable care). A Receiving Party may only disclose Information to its Representatives (as defined below) on a need-to-know basis, and only to those of such Representatives whom shall have agreed to abide by the non-disclosure and non-use provisions in this Section 9.6. Each Receiving Party that is a Participant agrees that he, she or it shall not use for any purpose, other than in connection with the operation of the Company, and the Company agrees not to use for any purpose not expressly authorized by the Disclosing Party, any Information. The “Representatives” of a Person are such Person’s Affiliates and the respective directors, managers, officers, employees, consultants, advisors and agents of such Person and such Person’s Affiliates; provided, however, that a Participant is not a Representative of the Company. The obligations set forth in this Section 9.6(a) shall survive indefinitely (including after a Participant ceases to hold any Company Interest) but shall not apply to: (i) any Information that was already lawfully in the Receiving Party’s possession and, to the knowledge of the Receiving Party, free from any confidentiality obligation to the Disclosing Party at the time of receipt from the Disclosing Party; (ii) any Information that is, now or in the future, public knowledge through no act or omission in breach of this Agreement by the Receiving Party; (iii) any Information that was lawfully obtained from a third party having, to the knowledge of the Receiving Party, the right to disclose it free from any obligation of confidentiality; or (iv) any Information that was independently developed by the Receiving Party prior to disclosure to it pursuant hereto and without recourse to or reliance upon Information disclosed to it pursuant hereto as established by its written records or other competent evidence. The obligations set forth in this Section 9.6(a) shall not restrict: (x) disclosures that are, in the opinion of the Receiving Party after consultation with counsel; required to be made by applicable laws and regulations, stock market or exchange requirements or the rules of any self-regulatory organization having jurisdiction; (y) disclosures required to be made pursuant to an order, subpoena or legal process; or (z) disclosures reasonably necessary for the conduct of any litigation or arbitral proceeding among the Participants (and their respective Representatives) and/or the Company; provided that the Receiving Party shall, to the extent not prohibited by applicable law, notify the Disclosing Party prior to making any disclosure permitted by the foregoing clause (x) or clause (y), and, in the case of a disclosure permitted by the foregoing clause (y), shall consult with the Disclosing Party with respect to such disclosure, and prior to making such disclosure, to the extent not prohibited by applicable law, shall permit the Disclosing Party, at such Disclosing Party’s cost and expense, to seek a protective order or similar relief protecting the confidentiality of such Information.

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(b) The Company shall not, and shall cause its Representatives not to, disclose any Information of a Participant to any other Participant without the prior written approval of the disclosing Participant.

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(c) A Participant shall be free, in its own discretion, to share Information of such Participant to other Participants without the approval of the Company.

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+

On, January 17, 2017, the Selection Committee of the CATNMS Plan selected Thesys Technologies, LLC ("Plan Processor") as the Plan Processor for the CAT NMS Plan pursuant to Article V of the CAT NMS Plan.

-
pubdate: January 10, 2018 effdate: N/A -

ARTICLE X DISSOLUTION AND TERMINATION

- Topic: CAT NMS Plan, Article X - Dissolution and Termination - Compliance User: National Securities Exchanges/National Securities Associations +
pubdate: January 18, 2017 effdate: N/A +

B. Material Terms under which such Person is to Serve as Plan Processor

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Material Terms under which such Person is to Serve as Plan Processor + Compliance User: Thesys Technologies, LLC Keywords: - Dissolution, + CAT NMS Plan LLC, + Plan Processor Agreement, + CAT NMS plan, -
pubdate: January 10, 2018 effdate: N/A -

Section 10.1. Dissolution of Company.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Dissolution - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Dissolution, - Winding-up, - -

The Company shall, subject to the SEC’s approval, dissolve and its assets and business shall be wound up upon the occurrence of any of the following events:

-

(a) unanimous written consent of the Participants to dissolve the Company;

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(b) an event that makes it unlawful or impossible for the Company business to be continued;

-

(c) the termination of one or more Participants such that there is only one remaining Participant; or

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(d) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 10.2. Liquidation and Distribution.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Liquidation and Distribution - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Winding-up, - Liquidation, - Assets, - Liabilities, - Obligations, - -

Following the occurrence of an event described in Section 10.1, the Operating Committee shall act as liquidating trustee and shall wind up the affairs of the Company by: (a) selling its assets in an orderly manner (so as to avoid the loss normally associated with forced sales); and (b) applying and distributing the proceeds of such sale, together with other funds held by the Company: (i) first, to the payment of all debts and liabilities of the Company; (ii) second, to the establishments of any reserves reasonably necessary to provide for any contingent recourse liabilities and obligations; and (iii) third, to such persons or institutions as is consistent with the purposes of the Company and consistent with Section 501(c)(6) of the Code.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 10.3. Termination.

- Topic: CAT NMS Plan, Article X - Dissolution and Termination, Termination - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Cessation of Participants, - Section 10.2, - -

Each of the Participants shall be furnished with a statement prepared by the Company’s independent accountants, which shall set forth the assets and liabilities of the Company as of the date of the final distribution of the Company’s assets under Section 10.2 and the net profit or net loss for the fiscal period ending on such date. Upon compliance with the distribution plan set forth in Section 10.2, the Participants shall cease to be such, and the liquidating trustee shall execute, acknowledge, and cause to be filed a certificate of cancellation of the Company. Upon completion of the dissolution, winding up, liquidation and distribution of the liquidation proceeds, the Company shall terminate.

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+

The CAT NMS, LLC and the Plan Processor (the "Parties") are in the process of negotiating the terms of the agreement under which the Plan Processor will act as such with regard to the CAT NMS Plan ("Plan Processor Agreement"). Nevertheless, the Participants anticipate that Plan Processor Agreement will contain provisions that require the Plan Processor to: (1) serve as the Plan Processor to perform CAT-related functions and services required by SEC Rule 613 and the CAT NMS Plan (the "Services"); (2) develop and implement the CAT System in accordance with the development and implementation phases, milestones and timeline agreed upon by the Parties; (3) provide the Services in accordance with service level requirements to be agreed upon by the Parties; and (4) develop the CAT System in a manner consistent with the Plan Processor's response to the RFP. The Participants also anticipate that the Plan Processor Agreement will require the Services to be provided in manner that is consistent with and in accordance with the CAT NMS Plan and SEC rules and regulations. Furthermore, the Participants expect that the Plan Processor Agreement will include other provisions related to the Services, including: (1) pricing and fees; (2) term of the agreement; (3) limitations of liability; (4) indemnification; (5) insurance; (6) capitalization of the Plan Processor; and (7) intellectual property. Now that the Plan Processor has been selected, the CAT NMS, LLC and the Plan Processor will finalize their negotiations regarding the Plan Processor Agreement, which will define the terms under which the Plan Processor will act as the Plan Processor for the CAT. The Participants believe that finalizing negotiations with the Plan Processor and executing the Plan Processor Agreement are necessary conditions for the Plan Processor to serve in that role.

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pubdate: January 10, 2018 effdate: N/A -

ARTICLE XI FUNDING OF THE COMPANY

- Topic: CAT NMS Plan, Article XI - Funding of the Company - Compliance User: National Securities Exchanges/National Securities Associations +
pubdate: January 18, 2017 effdate: N/A +

C. Solicitation Efforts for Alternative Plan Processors

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Solicitation Efforts for Alternative Plan Processors + Compliance User: Thesys Technologies, LLC Keywords: - Operating Committee, - Funding, + Request for Proposal, + CAT NMS plan, + Development Advisory Group, + Bidders, -
pubdate: January 10, 2018 effdate: N/A -

Section 11.1. Funding Authority.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Authority - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Budget, - Funding, - Operating Committee, - Consolidated Audit Trail Funding Fees, - Industry Members, - -

(a) On an annual basis the Operating Committee shall approve an operating budget for the Company. The budget shall include the projected costs of the Company, including the costs of developing and operating the CAT for the upcoming year, and the sources of all revenues to cover such costs, as well as the funding of any reserve that the Operating Committee reasonably deems appropriate for prudent operation of the Company.

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(b) Subject to Section 11.2, the Operating Committee shall have discretion to establish funding for the Company, including: (i) establishing fees that the Participants shall pay; and (ii) establishing fees for Industry Members that shall be implemented by Participants. The Participants shall file with the SEC under Section 19(b) of the Exchange Act any such fees on Industry Members that the Operating Committee approves, and such fees shall be labeled as “Consolidated Audit Trail Funding Fees.”

-

(c) To fund the development and implementation of the CAT, the Company shall time the imposition and collection of all fees on Participants and Industry Members in a manner reasonably related to the timing when the Company expects to incur such development and implementation costs. In determining fees on Participants and Industry Members the Operating Committee shall take into account fees, costs and expenses (including legal and consulting fees and expenses) incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT, and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members. Any surplus of the Company’s revenues over its expenses shall be treated as an operational reserve to offset future fees.

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(d) Consistent with this Article XI, the Operating Committee shall adopt policies, procedures, and practices regarding the budget and budgeting process, assignment of tiers, resolution of disputes, billing and collection of fees, and other related matters. For the avoidance of doubt, as part of its regular review of fees for the CAT, the Operating Committee shall have the right to change the tier assigned to any particular Person in accordance with fee schedules previously filed with the Commission that are reasonable, equitable and not unfairly discriminatory and subject to public notice and comment, pursuant to this Article XI. Any such changes will be effective upon reasonable notice to such Person.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 11.2. Funding Principles.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Funding Principles - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Principles, - CAT Reporters, - -

In establishing the funding of the Company, the Operating Committee shall seek:

-

(a) to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company;

-

(b) to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations;

-

(c) to establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share; (ii) Industry Members’ non-ATS activities are based upon message traffic; and (iii) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).

-

(d) to provide for ease of billing and other administrative functions;

-

(e) to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality; and

-

(f) to build financial stability to support the Company as a going concern.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 11.3. Recovery.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Recovery - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Execution Venue, - Fees, - -

(a) The Operating Committee will establish fixed fees to be payable by Execution Venues as provided in this Section 11.3(a):

-

(i) Each Execution Venue that: (A) executes transactions; or (B) in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange, in NMS Stocks or OTC Equity Securities will pay a fixed fee depending on the market share of that Execution Venue in NMS Stocks and OTC Equity Securities, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s NMS Stocks and OTC Equity Securities market share. For these purposes, market share for Execution Venues that execute transactions will be calculated by share volume, and market share for a national securities association that has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities will be calculated based on share volume of trades reported, provided, however, that the share volume reported to such national securities association by an Execution Venue shall not be included in the calculation of such national security association’s market share.

-

(ii) Each Execution Venue that executes transactions in Listed Options will pay a fixed fee depending on the Listed Options market share of that Execution Venue, with the Operating Committee establishing at least two and no more than five tiers of fixed fees, based on an Execution Venue’s Listed Options market share. For these purposes, market share will be calculated by contract volume.

-

(b) The Operating Committee will establish fixed fees to be payable by Industry Members, based on the message traffic generated by such Industry Member, with the Operating Committee establishing at least five and no more than nine tiers of fixed fees, based on message traffic. For the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; and (ii) routing orders to and from any ATS sponsored by such Industry Member.

-

(c) The Operating Committee may establish any other fees ancillary to the operation of the CAT that it reasonably determines appropriate, including fees: (i) for the late or inaccurate reporting of information to the CAT; (ii) for correcting submitted information; and (iii) based on access and use of the CAT for regulatory and oversight purposes (and not including any reporting obligations).

-

(d) The Company shall make publicly available a schedule of effective fees and charges adopted pursuant to this Agreement as in effect from time to time. The Operating Committee shall review such fee schedule on at least an annual basis and shall make any changes to such fee schedule that it deems appropriate. The Operating Committee is authorized to review such fee schedule on a more regular basis, but shall not make any changes on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.

-
-
pubdate: January 10, 2018 effdate: N/A -

Section 11.4. Collection of Fees.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Collection of Fees - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - Fees, - Failure to pay, - -

The Operating Committee shall establish a system for the collection of fees authorized under this Article XI. The Operating Committee may include such collection responsibility as a function of the Plan Processor or another administrator. Alternatively, the Operating Committee may use the facilities of a clearing agency registered under Section 17A of the Exchange Act to provide for the collection of such fees. Participants shall require each Industry Member to pay all applicable fees authorized under this Article XI within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due (as determined in accordance with the preceding sentence), such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (a) the Prime Rate plus 300 basis points; or (b) the maximum rate permitted by applicable law. Each Participant shall pay all applicable fees authorized under this Article XI as required by Section 3.7(b).

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-
pubdate: January 10, 2018 effdate: N/A -

Section 11.5. Fee Disputes.

- Topic: CAT NMS Plan, Article XI - Funding of the Company, Fee Disputes - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Operating Committee, - SEC Rule 608, - -

Disputes with respect to fees the Company charges Participants pursuant to this Article XI shall be determined by the Operating Committee or a Subcommittee designated by the Operating Committee. Decisions by the Operating Committee or such designated Subcommittee on such matters shall be binding on Participants, without prejudice to the rights of any Participant to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum. The Participants shall adopt rules requiring that disputes with respect to fees charged to Industry Members pursuant to this Article XI be determined by the Operating Committee or a Subcommittee. Decisions by the Operating Committee or Subcommittee on such matters shall be binding on Industry Members, without prejudice to the rights of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.

-
+

The Participants utilized a Request for Proposal ("RFP") to seek proposals to implement the main requirements to successfully build and operate the CAT.2 "This approach was designed to solicit imaginative and competitive proposals from the private sector as well as to provide an adequate amount of insight into the costs associated with creating, implementing and maintaining the CAT. To design the RFP process, the Participants consulted with their technology subject matter resources to determine the technical implications and requirements of the CAT and to develop the RFP."3 Based on these requirements, the Participants developed the Proposed RFP Concepts Documents, which identified the high level requirements for which potential Bidders would be expected to design a solution, ahead of publishing the full RFP.4 The Participants also sought the input ofthe Development Advisory Group ("DAG") regarding the RFP and, over time, continued to engage in meaningful dialogue with the DAG regarding the selection process and development ofthe CAT. The Participants then developed the RFP to solicit interest from potential plan processors. The RFP was published on February 26, 2013. In response to the RFP, the Participants received 31 intents to bid, and hosted a Bidders conference on March 8, 2013 to discuss the requirements and provide additional context to the industry and potential Bidders. Two additional conference calls to discuss additional questions on the RFP were held on April 25, 2013 and May 2, 2013. The Participants also established an e-mail box through which questions on the RFP were received. After this process, the Participants received ten competitive proposals on March 21, 2014 in response to the RFP. The Plan Processor was selected from among these Bidders.

-
pubdate: January 10, 2018 effdate: N/A -

ARTICLE XII MISCELLANEOUS

- Topic: CAT NMS Plan, Article XII - Miscellaneous - Compliance User: National Securities Exchanges/National Securities Associations +
pubdate: January 18, 2017 effdate: N/A +

D. Alternative Plan Processors Considered

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Alternative Plan Processors Considered + Compliance User: Thesys Technologies, LLC Keywords: - Industry Members, + Bidders, + AxiomSL, + Cinnober, + EPAM, + FINRA, + First Derivatives, + IBM, + J. Streicher Analytics, + Sungard Data Systems, + TATA America International Corporation, + Thesys Technologies LLC, Participants, -
pubdate: January 10, 2018 effdate: N/A -

Section 12.1. Notices and Addresses.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Notices and Addresses - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Written Notices,, - Delivery, - Effectivity, - -

All notices required to be given under this Agreement shall be in writing and may be delivered by certified or registered mail, postage prepaid, by hand, or by any private overnight courier service. Such notices shall be mailed or delivered to the Participants at the addresses set forth on Exhibit A to this Agreement or such other address as a Participant may notify the other Participants of in writing. Any notices to be sent to the Company shall be delivered to the principal place of business of the Company or at such other address as the Operating Committee may specify in a notice sent to all of the Participants. Notices shall be effective: (i) if mailed, on the date three (3) days after the date of mailing; or (ii) if hand delivered or delivered by private courier, on the date of delivery.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.2. Governing Law; Submission to Jurisdiction.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Governing Law; Submission to Jurisdiction - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Delaware Act, - Jurisdiction, - Rights of Participants, - Exchange Act, - Delaware Act, - -

This Agreement shall be governed by and construed in accordance with the Delaware Act and internal laws and decisions of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware; provided that the rights and obligations of the Participants, Industry Members and other Persons contracting with the Company in respect of the matters covered by this Agreement shall at all times also be subject to any applicable provisions of the Exchange Act and any rules and regulations promulgated thereunder. Each of the Company and the Participants: (a) consents to submit itself to the exclusive personal jurisdiction of the Court of Chancery of the State of Delaware, New Castle County, or, if that court does not have jurisdiction, a federal court sitting in Wilmington, Delaware in any action or proceeding arising out of or relating to this Agreement or any of the transactions contemplated by this Agreement; (b) agrees that all claims in respect of such action or proceeding shall be heard and determined only in any such court; (c) agrees that it shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court; and (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement or any of the transaction contemplated by this Agreement in any other court. Each of the Company and the Participants waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety or other security that might be required of any other Person with respect thereto. The Company or any Participant may make service on the Company or any other Participant by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 12.1. Nothing in this Section 12.2, however, shall affect the right of any Person to serve legal process in any other manner permitted by law.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.3. Amendments.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Amendments - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Written Amendment, - Vote, - SEC Rule 608, - -

Except as provided by Section 3.3, Section 3.4, Section 3.7, and Section 5.3, this Agreement may be amended from time to time only by a written amendment authorized by the affirmative vote of not less than two-thirds of all of the Participants or with respect to Section 3.8 by the affirmative vote of all of the Participants, in each case that has been approved by the SEC pursuant to SEC Rule 608 or has otherwise become effective under SEC Rule 608. Notwithstanding the foregoing or anything else to the contrary, to the extent the SEC grants exemptive relief applicable to any provision of this Agreement, Participants and Industry Members shall be entitled to comply with such provision pursuant to the terms of the exemptive relief so granted at the time such relief is granted irrespective of whether this Agreement has been amended.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.4. Successors and Assigns.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Successors and Assigns - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Transfer of Interest, - -

Subject to the restrictions on Transfers set forth herein, this Agreement: (a) shall be binding upon, and inure to the benefit of, the Company and the Participants, and their respective successors and permitted assigns; and (b) may not be assigned except in connection with a Transfer of Company Interests permitted hereunder.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.5. Counterparts.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Counterparts - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Agreement, - Transmission, - -

This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. Any counterpart may be delivered by facsimile transmission or by electronic communication in portable document format (.pdf) or tagged image format (.tif), and the parties hereto agree that their electronically transmitted signatures shall have the same effect as manually transmitted signatures.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.6. Modifications to be in Writing; Waivers.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Modifications to be in Writing; Waivers - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Waivers, - -

This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, and no amendment, modification or alteration shall be binding unless the same is in writing and adopted in accordance with Section 12.3. No waiver of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Person granting the waiver. No waiver by any Person of any default or breach hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default or breach or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.7. Captions.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Captions - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Caption, - -

The captions are inserted for convenience of reference only and shall not affect the construction of this Agreement.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.8. Validity and Severability.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Validity and Severability - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Effectivity, - Enforceability, - -

If any provision of this Agreement shall be held invalid or unenforceable, that shall not affect the validity or enforceability of any other provisions of this Agreement, all of which shall remain in full force and effect. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, each of the Company and the Participants agrees that the body making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.9. Third Party Beneficiaries.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Third Party Beneficiaries - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Creditor, - Section 12.9, - Participants, - -

Except to the extent provided in any separate written agreement between the Company and another Person, the provisions of this Agreement are not intended to be for the benefit of any creditor or other Person (other than a Participant in its capacity as such) to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Company or any Participants. Moreover, notwithstanding anything contained in this Agreement (but subject to the immediately following sentence), no such creditor or other Person shall obtain any rights under this Agreement or shall, by reason of this Agreement, make any claim in respect of any debt, liability or obligation (or otherwise) against the Company or any Participant. Notwithstanding the foregoing provisions of this Section 12.9, each Person entitled to indemnification under Section 4.8 that is not a party to this Agreement shall be deemed to be an express third party beneficiary of this Agreement for all purposes relating to such Person’s indemnification and exculpation rights hereunder.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.10. Expenses.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Expenses - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Article XI, - Operating Committee, - -

Except as may be otherwise specifically provided to the contrary in this Agreement, including in Article XI, or as may be otherwise determined by the Operating Committee, each of the Company and the Participants shall bear its own internal costs and expenses incurred in connection with this Agreement, including those incurred in connection with all periodic meetings of the Participants or the Operating Committee, and the transactions contemplated hereby.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.11. Specific Performance.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Specific Performance - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Breach, - Court Action, - -

Each of the Company and the Participants acknowledges and agrees that one or more of them would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each such Person agrees that each other such Person may be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having jurisdiction over the Parties and the matter, in each case with no need to post bond or other security.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.12. Waiver of Partition.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Waiver of Partition - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Properties, - Partition, - Appraisal, - -

Each Participant agrees that irreparable damage would be done to the Company if any Participant brought an action in court to partition the assets or properties of the Company. Accordingly, each Participant agrees that such Person shall not, either directly or indirectly, take any action to require partition or appraisal of the Company or of any of the assets or properties of the Company, and notwithstanding any provisions of this Agreement to the contrary, each Participant (and such Participant’s successors and permitted assigns) accepts the provisions of this Agreement as such Person’s sole entitlement on termination, dissolution and/or liquidation of the Company and hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale or other liquidation with respect to such Person’s interest, in or with respect to, any assets or properties of the Company. Each Participant agrees not to petition a court for the dissolution, termination or liquidation of the Company.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.13. Construction.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Construction - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Interpretation, - Participants, - -

The Company and all Participants have participated jointly in negotiating and drafting this Agreement. If an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Company and all Participants, and no presumption or burden of proof shall arise favoring or disfavoring any Person by virtue of the authorship of any provision of this Agreement.

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-
pubdate: January 10, 2018 effdate: N/A -

Section 12.14. Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules.

- Topic: CAT NMS Plan, Article XII - Miscellaneous, Incorporation of Exhibits, Appendices, Attachments, Recitals and Schedules - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Exhibits, - Appendices, - Attachments, - Recitals, - Schedules, - -

The Exhibits, Appendices, Attachments, Recitals and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

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-
-

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

-

PARTICIPANTS:

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BATS BZX EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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BATS BYX EXCHANGE, INC.

-

By: ______________________________

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Name: ____________________________

-

Title: _____________________________

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BOX OPTIONS EXCHANGE LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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C2 OPTIONS EXCHANGE, INCORPORATED

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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CHICAGO BOARD OPTIONS EXCHANGE, INCORPORATED

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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CHICAGO STOCK EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

BATS EDGA EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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BATS EDGX EXCHANGE, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

ISE GEMINI, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

-

ISE MERCURY, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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INTERNATIONAL SECURITIES EXCHANGE, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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INVESTORS’ EXCHANGE, LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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MIAMI INTERNATIONAL SECURITIES EXCHANGE LLC

-

By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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MIAX PEARL, LLC

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By: ______________________________

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Name: ____________________________

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Title: _____________________________

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NASDAQ BX, INC.

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By: ______________________________

-

Name: ____________________________

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Title: _____________________________

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NASDAQ PHLX LLC

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By: ______________________________

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Name: ____________________________

-

Title: _____________________________

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THE NASDAQ STOCK MARKET LLC

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By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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NATIONAL STOCK EXCHANGE, INC.

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By: ______________________________

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Name: ____________________________

-

Title: _____________________________

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NEW YORK STOCK EXCHANGE LLC

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By: ______________________________

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Name: ____________________________

-

Title: _____________________________

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NYSE MKT LLC

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By: ______________________________

-

Name: ____________________________

-

Title: _____________________________

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NYSE ARCA, INC.

-

By: ______________________________

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Name: ____________________________

-

Title: _____________________________

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EXHIBIT A

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PARTICIPANTS IN CAT NMS, LLC

- -
pubdate: January 10, 2018 effdate: N/A -

APPENDIX A

- Topic: CAT NMS Plan, Appendix A - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - Request for Proposal, - -

Consolidated Audit Trail National Market System Plan Request for Proposal, issued February 26, 2013, version 3.0 updated March 3, 2014

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(The Request for Proposal is available at Securities Exchange Act Release No. 77724 (CAT NMS Plan published for comment on May 17, 2016))

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Certain provisions of Articles I-XII have been modified as noted on the cover page of this CAT NMS Plan. To the extent text in the following Appendices conflicts with any such modifications, the modified language of Articles I-XII shall control

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-
pubdate: January 10, 2018 effdate: N/A -

APPENDIX B

- Topic: CAT NMS Plan, Appendix B - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: -

[Reserved]

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-
pubdate: January 10, 2018 effdate: N/A -

APPENDIX C

- Topic: CAT NMS Plan, Appendix C - Compliance User: National Securities Exchanges/National Securities Associations +

The Participants received responses to the RFP from the following ten Bidders:

+

• AxiomSL and Computer Sciences Corporation (CSC) (with subcontractor MIAX)

+

• Cinnober (with subcontractors Equinix, OneMarketData, and Fundamental Interactions)

+

• EPAM (with subcontractor Broadridge Financial Solutions, Inc.)

+

• FINRA (with subcontractor DTCC/Kingland)

+

• First Derivatives (with subcontractors Kx Systems, Inc., Equinix and Steadfast)

+

• IBM

+

• J. Streicher Analytics on behalfofCATPRO Consortium: Hewlett Packard, Booz Allen and Buckley Sandler (with subcontractors CBX Technologies Inc., and Networth Services Inc.)

+

• Sungard Data Systems (with subcontractor Google)

+

• TATA America International Corporation (TAIC) (with subcontractors Promontory Financial Group and Tata Consultancy Services)

+

• Thesys Technologies, LLC

+

The Participants carefully reviewed and considered each of the ten proposals, including holding in-person meetings with each of the ten Bidders. Following this review, the Selection Committee voted to reduce the number of Bidders to six in accordance with the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail ("Selection Plan"). After additional reviews and discussions, the Selection Committee voted to reduce the number of Bidders to three pursuant to the Selection Plan. Finally, after further discussions with the Bidders, the Selection Committee reduced the number of Bidders to two, and then selected the Plan Processor, pursuant to the CAT NMS Plan.

+
+
pubdate: January 18, 2017 effdate: N/A +

E. Reasons for Selection of the Plan Processor

+ Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Reasons for Selection of the Plan Processor + Compliance User: Thesys Technologies, LLC Keywords: - Features, - Consideration, - Background, - Reporting, + Participants, + Plan Processor, + Reporting Requirements, Sec Rule 613, - Sources of Data, - Submission, - Analysis, - Implementation, - Objective, - Process, - Reporting, + Thesys Technologies LLC, -

DISCUSSION OF CONSIDERATIONS

-

SEC Rule 613(a)(1) CONSIDERATIONS

-

SEC Rule 613(a) requires the Participants to discuss various “considerations” related to how the Participants propose to implement the requirements of the CAT NMS Plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.2 This Appendix C discusses the considerations identified in SEC Rule 613(a). The first section below provides a background of the process the Participants have undertaken to develop and draft the CAT NMS Plan. Section A below addresses the requirements, set forth in SEC Rule 613(a)(1)(i) through (a)(1)(vi), that the “Participants specify and explain the choices they made to meet the requirements specified in [SEC Rule 613] for the [CAT].”3 In many instances, details of the requirements (i.e., the specific technical requirements that the Plan Processor must meet) will be set forth in the Plan Processor Requirements document (“PPR”). Relevant portions of the PPR are outlined and described throughout this Appendix C, as well as included as Appendix D.

-

Section B below discusses the requirements in SEC Rule 613(a)(1)(vii) and SEC Rule 613(a)(1)(viii) that the CAT NMS Plan include detailed estimates of the costs, and the impact on competition, efficiency, and capital formation, for creating, implementing, and maintaining the CAT. The information in Section B below is intended to aid the Commission in its economic analysis of the CAT and the CAT NMS Plan.4

-

Section C below, in accordance with SEC Rule 613(a)(1)(x), establishes objective milestones to assess the Participants’ progress toward the implementation of the CAT in accordance with the CAT NMS Plan. This section includes a plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the CAT, as required by SEC Rule 613(a)(1)(ix).

-

Section D below addresses how the Participants solicited the input of their Industry Members and other appropriate parties in designing the CAT NMS Plan as required by SEC Rule 613(a)(1)(xi).

-

Capitalized terms used and not otherwise defined in this Appendix C have the respective meanings ascribed to such terms in the Agreement to which this Appendix C is attached.

-

BACKGROUND

-

SEC Rule 613 requires the Participants to jointly file a national market system plan to govern the creation, implementation, and maintenance of the CAT, and the Central Repository. Early in the process, the Participants concluded that the publication of a request for proposal soliciting Bids from interested parties to serve as the Plan Processor for the CAT was necessary prior to filing the CAT NMS Plan to ensure that potential alternative solutions to creating the CAT could be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis could be performed, both of which are required considerations to be addressed in the CAT NMS Plan. To that end, the Participants published the RFP on February 26, 2013,5 and 31 firms formally notified the Participants of their intent to bid.

-

On September 3, 2013, the Participants filed with the Commission the Selection Plan, a national market system plan to govern the process for Participant review of the Bids submitted in response to the RFP, the procedure for evaluating the Bids, and, ultimately, selection of the Plan Processor. Several critical components of the Participants’ process for formulating and drafting the CAT NMS Plan were contingent upon approval of the Selection Plan, which occurred on February 21, 2014.6 Bids in response to the RFP were due four weeks following approval of the Selection Plan, on March 21, 2014. Ten Bids were submitted in response to the RFP.

-

The Participants considered each Bid in great detail to ensure that the Participants can address the considerations enumerated in SEC Rule 613, including analysis of the costs and benefits of the proposed solution(s), as well as alternative solutions considered but not proposed, so that the Commission and the public will have sufficiently detailed information to carefully consider all aspects of the CAT NMS Plan the Participants ultimately submit. Soon after receiving the Bids, and pursuant to the Selection Plan, the Participants determined that all ten Bids were “qualified” pursuant to the Selection Plan.7 On July 1, 2014, after the Participants had hosted Bidder presentations to learn additional details regarding the Bids and conducted an analysis and comparison of the Bids, the Participants voted to select six Shortlisted Bidders.

-

Under the terms of the Selection Plan, and as incorporated into the CAT NMS Plan, the Plan Processor for the CAT has not been selected and will not be selected until after approval of the CAT NMS Plan.8 Any one of the six remaining Shortlisted Bidders could be selected as the Plan Processor, and because each Shortlisted Bidder has proposed different approaches to various issues, the CAT NMS Plan does not generally mandate specific technical approaches; rather, it mandates specific requirements that the Plan Processor must meet, regardless of approach. Where possible, this Appendix C discusses specific technical requirements the Participants have deemed necessary for the CAT; however, in some instances, provided the Plan Processor meets certain general obligations, the specific approach taken in implementing aspects of the CAT NMS Plan will be dependent upon the Bidder ultimately selected as the Plan Processor.

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SEC Rule 613 also includes provisions to facilitate input on the implementation, operation, and administration of the Central Repository from the broker-dealer industry.9 To this end, the Participants formed a Development Advisory Group (“DAG”) to solicit industry feedback. Following multiple discussions between the Participants and both the DAG and the Bidders, as well as among the Participants themselves, the Participants recognized that some provisions of SEC Rule 613 would not permit certain solutions to be included in the CAT NMS Plan that the Participants determined advisable to effectuate the most efficient and cost-effective CAT. Consequently, the Participants submitted their original Exemptive Request Letter seeking exemptive relief from the Commission with respect to certain provisions of SEC Rule 613 regarding (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking of executions to specific subaccount allocations on allocation reports; and (5) timestamp granularity for Manual Order Events.10 Specifically, the Participants requested that the Commission grant an exemption from:

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Rule 613(c)(7)(ii) and (iv) for options market makers with regard to their options quotes.

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Rule 613(c)(7)(i)(A), (c)(7)(iv)(F), (c)(7)(viii)(B) and (c)(8) which relate to the requirements for Customer-IDs.11

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Rule 613(c)(7)(i)(C), (c)(7)(ii)(D), (c)(7)(ii)(E), (c)(7)(iii)(D), (c)(7)(iii)(E), (c)(7)(iv)(F), (c)(7)(v)(F), (c)(7)(vi)(B) and (c)(8) which relate to the requirements for CAT-Reporter-IDs.

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Rule 613(c)(7)(vi)(A), which requires CAT Reporters to record and report the account number of any subaccounts to which the execution is allocated.

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• The millisecond timestamp granularity requirement in Rule 613(d)(3) for certain Manual Order Events subject to timestamp reporting under Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), and 613(c)(7)(iv)(C).

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The Participants supplemented their original Exemptive Request Letter with a supplemental Exemptive Request Letter (together, the “Exemptive Request Letters”), clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).12 The Participants believe that the requested relief is critical to the development of a cost-effective approach to the CAT.

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The Participants also will seek to comply with their obligations related to the CAT under Reg SCI as efficiently as possible. When it adopted Reg SCI, the Commission expressed its belief that the CAT “will be an SCI system of each SCI SRO that is a member of an approved NMS plan under Rule 613, because it will be a facility of each SCI SRO that is a member of such plan.”13 The Participants intend to work together and with the Plan Processor, in consultation with the Commission, to determine a way to effectively and efficiently meet the requirements of Reg SCI without unnecessarily duplicating efforts.

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A. Features and Details of the CAT NMS Plan

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1. Reporting Data to the CAT

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As required by SEC Rule 613(a)(1)(i), this section describes the reporting of data to the Central Repository, including the sources of such data and the manner in which the Central Repository will receive, extract, transform, load, and retain such data. As a general matter, the data reported to the Central Repository is of two distinct types: (1) reference data (e.g., data concerning CAT Reporters and customer information, issue symbology information, and data from the SIPs); and (2) order and trade data submitted by CAT Reporters, including national securities exchanges, national securities associations and broker-dealers. Each of these types of data is discussed separately below.

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(a) Sources of Data

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In general, data will be reported to the Central Repository by national securities exchanges, national securities associations, broker-dealers, the SIPs for the CQS, CTA, UTP and Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information(“OPRA”) Plans, and certain other vendors or appropriate third parties (“Data Submitters”).14 Specifically, in accordance with SEC Rule 613(c)(5) and Sections 6.3 and 6.4 of the CAT NMS Plan, each national securities exchange and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security registered or listed for trading on such exchange or admitted to unlisted trading privileged on such exchange (subject to relief pursuant to the Exemptive Request Letters).15 Similarly, in accordance with SEC Rule 613(c)(6), each national securities association and its members must report to the Central Repository the information required by SEC Rule 613(c)(7) for each NMS Security for which transaction reports are required to be submitted to the association (subject to relief pursuant to the Exemptive Request Letters). Additionally, the Participants, in consultation with the DAG and with industry support, have determined to include OTC Equity Securities in the initial phase-in of the CAT; thus, CAT Reporters must also include order and trade information regarding orders for OTC Equity Securities in addition to those involving NMS Securities.16

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In addition to order and execution data, SEC Rule 613 requires Industry Members to report customer information, including Customer-IDs, to the CAT so that order and execution data can be associated with particular Customers. However, in the Exemptive Request Letters, the Participants request relief that would permit CAT Reporters to provide information to the Central Repository using Firm Designated IDs instead of Customer-IDs. In addition, Industry Members are permitted to use Data Submitters that are not national securities exchanges, national securities associations, or members thereof to report the required data to the Central Repository on their behalf. The approach proposed in the Exemptive Request Letters also would permit Data Submitters to provide information to the Central Repository using Firm Designated ID for purposes of reporting information to the CAT.

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The Central Repository also is required to collect National Best Bid and National Best Offer information, transaction reports reported to an effective transaction reporting plan filed with the SEC pursuant to SEC Rule 601, and Last Sale Reports reported pursuant to the OPRA Plan.17 Consequently, the Plan Processor must receive information from the SIPs for those plans and incorporate that information into the CAT. Lastly, as set forth in Appendix D, the Plan Processor must maintain a complete symbology database, including historical symbology. CAT Reporters will submit data to the CAT with the listing exchange symbology format, and the CAT must use the listing exchange symbology format in the display of linked data. The Participants will be responsible for providing the Plan Processor with issue symbol information, and issue symbol validation must be included in the processing of data submitted by CAT Reporters.

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After reviewing the Bids and receiving industry input, the Participants do not believe there is a need to dictate that the Plan Processor adopt a particular format for the submission of data to the Central Repository. Rather, regardless of the format(s) adopted, the CAT must be able to monitor incoming and outgoing data feeds and be capable of performing the following functions:

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• Support daily files from each CAT Reporter;

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• Support files that cover multiple days (for re-transmission);

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• Support error correction files;

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• Capture operational logs of transmissions, success, failure reasons, etc.; and

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• Support real-time and batch feeds.

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The Plan Processor will be required to ensure that each CAT Reporter is able to access its submissions for error correction purposes and transmit their data to the Central Repository on a daily basis. The Plan Processer must have a robust file management tool that is commercially available, including key management. In addition, at a minimum, the Plan Processor must be able to accept data from CAT Reporters and other Data Submitters via automated means (e.g., Secure File Transfer Protocol (“SFTP”)) as well as manual entry means (e.g., GUI interface).

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The Plan Processor will be required to ensure that all file processing stages are handled correctly. This will include the start and stop of data reception, the recovery of data that is transmitted, the retransmission of data from CAT Reporters, and the resynchronization of data after any data loss. At a minimum, this will require the Plan Processor to have logic that identifies duplication of files. If transmission is interrupted, the Plan Processor must specify:

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• data recovery process for partial submissions;

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• operational logs/reporting;

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• operational controls for receipt of data; and

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• managing/handling failures.

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The Plan Processor is required to establish a method for developing an audit trail of data submitted to and received by the Central Repository. This must include a validation of files to identify file corruption and incomplete transmissions. As discussed more fully below, an acknowledgement of data receipt and information on rejected data must be transmitted to CAT Reporters.

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(i) Data Submission for Orders and Reportable Events, including Manual Submission

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Sections 6.3 and 6.4 of the CAT NMS Plan require CAT Reporters to provide details for each order and each Reportable Event to the Central Repository.18 In the RFP, the Participants requested that the Bidders describe the following:

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• system interfaces, including data submission, data access and user interfaces;19

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• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);20

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• the process and associated protocols for accepting batch submissions; 21 and

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• the process and any associated protocols for supporting manual data submissions.22

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(ii) The Timing of Reporting Data

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Pursuant to SEC Rule 613(c)(3), Sections 6.3 and 6.4 of the CAT NMS Plan require that CAT Reporters report certain order and transaction information recorded pursuant to SEC Rule 613 or the CAT NMS Plan to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day such information is recorded.23 SEC Rule 613(c)(3) notes, however, that the CAT NMS Plan “may accommodate voluntary reporting prior to 8:00 a.m. Eastern Time, but shall not impose an earlier deadline on the reporting parties.” Sections 6.3 and 6.4 of the CAT NMS Plan explicitly permit, but do not require, CAT Reporters to submit information to the CAT throughout the day. Because of the amount of data that will ultimately be reported to the CAT, the Participants have decided to permit Data Submitters to report data to the CAT as end of day files (submitted by 8:00 a.m. Eastern Time the following Trading Day) or throughout the day. The Participants believe that permitting Data Submitters to report data throughout the day may reduce the total amount of bandwidth used by the Plan Processor to receive data files and will allow CAT Reporters and other Data Submitters to determine which method is most efficient and cost-effective for them. However, the Plan Processor will still be required to have the capacity to handle two times the historical peak daily volume to ensure that, if CAT Reporters choose to submit data on an end-of-day basis, the Plan Processor can handle the influx of data.24

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(iii) Customer and Customer Account Information

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In addition to the submission of order and trade data, broker-dealer CAT Reporters must also submit customer information to the CAT so that the order and trade data can be matched to the specific customer.25 SEC Rule 613(c)(7) sets forth data recording and reporting requirements that must be included in the CAT NMS Plan. Under SEC Rule 613(c)(7)(i)(A), the CAT NMS Plan must require each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting to the CAT order receipt or origination information.26 When reporting the modification or cancellation of an order, the rule further requires the reporting of “the Customer-ID of the Person giving the modification or cancellation instruction.”27 In addition, SEC Rule 613(c)(8) mandates that all CAT Reporters “use the same Customer-ID . . . for each customer and broker-dealer.”28 For purposes of SEC Rule 613, “Customer-ID” means, “with respect to a customer, a code that uniquely identifies such customer for purposes of providing data to the central repository.”29 Also, SEC Rule 613(c)(7)(viii) requires that, for original receipt or origination of an order, CAT Reporters report “customer account information,” which is defined as including “account number, account type, customer type, date account opened, and large trader identifier (if applicable).”30

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After considering the requirements of SEC Rule 613 with respect to recording and reporting Customer-IDs, Customer Account Information, and information of sufficient detail to identify the Customer as well as industry input and the Commission’s reasons for adopting these requirements, the Participants requested that Industry Members and other industry participants provide ideas on implementing the Customer-ID requirement. After careful consideration, including numerous discussions with the DAG, the Participants concluded that the CAT NMS Plan should use a reporting model that requires broker-dealers to provide detailed account and Customer information to the Central Repository, including the specific identities of all Customers associated with each account, and have the Central Repository correlate the Customer information across broker-dealers, assign a unique customer identifier to each Customer (i.e., the Customer-ID), and use that unique customer identifier consistently across all CAT Data (hereinafter, the “Customer Information Approach”).

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Under the Customer Information Approach, the CAT NMS Plan would require each broker-dealer to assign a unique Firm Designated ID to each customer, as that term is defined in SEC Rule 613. For the Firm Designated ID, broker-dealers would be permitted to use an account number or any other identifier defined by the firm, provided each identifier is unique across the firm for each business date (i.e., a single firm may not have multiple separate customers with the same identifier on any given date). Under the Customer Information Approach, broker-dealers must submit an initial set of customer information to the Central Repository, including, as applicable, the Firm Designated ID for the customer, name, address, date of birth, Individual Tax ID (“ITIN”)/social security number (“SSN”), individual’s role in the account (e.g., primary holder, joint holder, guardian, trustee, person with the power of attorney) and Legal Entity Identifier (“LEI”),31 and/or Large Trader ID (“LTID”), if applicable.32 Under the Customer Information Approach, broker-dealers would be required to submit to the Central Repository daily updates for reactivated accounts, newly established or revised Firm Designated IDs, or associated reportable Customer information.33

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Within the Central Repository, each Customer would be uniquely identified by identifiers or a combination of identifiers such as TIN/SSN, date of birth, and, as applicable, LEI and LTID. The Plan Processor would be required to use these unique identifiers to map orders to specific customers across all broker-dealers. Broker-dealers would therefore be required to report only Firm Designated ID information on each new order submitted to the Central Repository rather than the “Customer-ID” as set forth in SEC Rule 613(c)(7), and the Plan Processor would associate specific customers and their Customer-IDs with individual order events based on the reported Firm Designated ID.

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The Customer-ID approach is strongly supported by the industry as it believes that to do otherwise would interfere with existing business practices and risk leaking proprietary order and customer information into the market.34 To adopt such an approach, however, requires certain exemptions from the requirements of SEC Rule 613. Therefore, the Participants included the Customer Information Approach in the Exemptive Request Letters so that this approach could be included in the CAT NMS Plan.

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In addition to the approach described above, the CAT NMS Plan details a number of requirements which the Plan Processor must meet regarding Customer and Customer Account Information.

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The Plan Processor must maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The Plan Processor must document and publish, with the approval of the Operating Committee, the minimum list of attributes to be captured to maintain this association.

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The CAT Processor must maintain valid Customer and Customer Account Information for each Trading Day and provide a method for Participants and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes).

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The CAT Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information.

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The Plan Processor must be able to link accounts that move from one CAT Reporter to another due to mergers and acquisitions, divestitures, and other events. Under the approach proposed by the Participants, broker-dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis.35 In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database.

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In the RFP, the Participants asked for a description of how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each Customer.36 All Bidders anticipated Customer and Customer Account Information to be captured in an initial download of data. The precise method(s) by which CAT Reporters submit Customer data to the Central Repository will be set out in the Technical Specifications provided by the Plan Processor in accordance with Section 6.9 of the CAT NMS Plan. Data capture would occur using both file-based and entry screen methods. Data validation would check for potential duplicates with error messages being generated for follow-up by CAT Reporters. Data Reporters can update data as needed or on a predetermined schedule.

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(iv) Error Reporting

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SEC Rule 613(e)(6) requires the prompt correction of errors in data submitted to the Central Repository. As discussed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, initial validation, lifecycle linkages, and communications of errors to CAT Reporters will be required to occur by 12:00 p.m. Eastern Time T+1 and corrected data will be required to be resubmitted to the Central Repository by 8:00 a.m. Eastern Time on T+3. Each of the Bidders indicated that it was able to meet these timeframes.

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However, the industry expressed concern that reducing the error repair window will constitute a significant burden to Data Submitters and also question whether the proposed error correction timeframe is possible.37 Financial Information Forum (“FIF”) supports maintaining the current OATS Error Handling timelines, which allows for error correction within five OATS business days from the date of original submission.38 Securities Industry and Financial Markets Association (“SIFMA”) also recommends a five-day window for error correction.39 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible and recommend the three-day window for corrections to balance the need for regulators to access corrected data in a timely manner while considering the industry’s concerns.

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(b) The Manner in which the Central Repository will Receive, Extract, Transform, Load, and Retain Data

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The Central Repository must receive, extract, transform, load, and retain the data submitted by CAT Reporters and other Data Submitters. In addition, the Plan Processor is responsible for ensuring that the CAT contains all versions of data submitted by a CAT Reporter or other Data Submitter (i.e., the Central Repository must include different versions of the same information, including such things as errors and corrected data).40

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In the RFP, the Participants requested that each Bidder perform a detailed analysis of current industry systems and interface specifications to propose and develop their own format for collecting data from the various data sources relevant under SEC Rule 613, as outlined in the RFP. Bidders also were requested to perform an analysis on their ability to develop, test and integrate this interface with the CAT.41 In addition, the Participants sought input from the industry regarding different data submission mechanisms and whether there needs to be a method to allow broker-dealers with very small order volumes to submit their data in a non-automated manner.42

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As noted above, since the Central Repository is required to collect and transform customer, order and trade information from multiple sources, the RFP requested that Bidders describe:

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• how Customer and Customer Account Information will be captured, updated and stored with associated detail sufficient to identify each customer;43

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• the system interfaces, including data submission, data access and user interfaces;44

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• the proposed messaging and communication protocol(s) used in data submission and retrieval and the advantage(s) of such protocol(s);45

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• the process and associated protocols for accepting batch submissions;46 and

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• the process and any associated protocols for supporting manual data submissions.47

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Various Bidders proposed multiple methods by which Data Reporters could report information to the Central Repository. Bidders proposed secure VPN, direct line access through TCP/IP or at co-location centers, and web-based manual data entry.

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The RFP also requested that Bidders describe:

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• the overall technical architecture;48 and

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• the network architecture and describe how the solution will handle the necessary throughput, processing timeline and resubmissions.49

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There are two general approaches by which the Central Repository could receive information. Approach 1 described a scenario in which broker-dealers would submit relevant data to the Central Repository using their choice of existing industry messaging protocols, such as the Financial Information eXchange (“FIX”) protocol. Approach 2 provided a scenario in which broker-dealers would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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Following receipt of data files, the Plan Processor will be required to send an acknowledgement of data received to CAT Reporters and third party Data Submitters. This acknowledgement will enable CAT Reporters to create an audit trail of their data submissions and allow for tracing of data breakdowns if data is not received. The minimum requirements for receipt acknowledgement are detailed in Appendix D, Receipt of Data from Reporters.

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Once the Central Repository has received the data from the CAT Reporters, it will extract individual records from the data, and validate the data through a review process that must be described in the Technical Specifications involving context, syntax, and matching validations. The Plan Processor will need to validate data and report back to any CAT Reporter any data that has not passed validation checks according to the requirements in Appendix D, Receipt of Data from Reporters. To ensure the accuracy and integrity of the data in the Central Repository, data that does not pass the basic validation checks performed by the Plan Processor must be rejected until it has been corrected by the CAT Reporter responsible for submitting the data/file. After the Plan Processor has processed the data, it must provide daily statistics regarding the number of records accepted and rejected to each CAT Reporter.

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The Plan Processor also will be required to capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format, and the rejections and daily statistics must also be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend records that contain exceptions. The Plan Processor must also support bulk error correction so that rejected records can be resubmitted as a new file with appropriate indicators for rejection repairs. The Plan Processor must, in these instances, reprocess repaired records. In addition, a web GUI must be available for CAT Reporters to make updates, including corrections, to individual records or attributes. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

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The Plan Processor must provide CAT Reporters with documentation that details how to amend/upload records that fail the required validations, and if a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can be repaired and resubmitted.50 In order for regulators to have access to accurate and complete data as expeditiously as practicable, the Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics must be provided after data has been uploaded and validated. The reports will include descriptive details as to why each data record was rejected by the Plan Processor.

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In addition, on a monthly basis, the Plan Processor should produce and publish reports detailing CAT Reporter performance and comparison statistics, similar to the report cards published for OATS presently. These reports should include data to enable CAT Reporters to assess their performance in comparison to the rest of their industry peers and to help them assess the risk related to their reporting of transmitted data.

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CAT Reporters will report data to the Central Repository either in a uniform electronic format, or in a manner that would allow the Central Repository to convert the data to a uniform electronic format, for consolidation and storage. The Technical Specifications will describe the required format for data reported to the Central Repository. Results of a study conducted of broker-dealers showed average implementation and maintenance costs for use of a new file format to be lower than those for use of an existing file format (e.g., FIX)51, although an FIF “Response to Proposed RFP Concepts Document” dated January 18, 2013 did indicate a preference among its members for use of the FIX protocol.

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As noted above, the specific formats of data submission and loading will depend upon the Bidder chosen as the Plan Processor. Regardless of the ultimate Plan Processor, however, data submitted to the CAT will be loaded into the Central Repository in accordance with procedures that are subject to approval by the Operating Committee.52 The Central Repository will retain data, including the Raw Data, linked data, and corrected data, for at least six years. Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the Data Submitter (e.g., whether the Data Submitter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

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SEC Rule 613 reflects the fact that the Participants can choose from alternative methods to link order information to create an order lifecycle from origination or receipt to cancellation or execution.53 After review of the Bids and discussions with Industry Members, the CAT NMS Plan reflects the fact that the Participants have determined that the “daisy chain” approach to CAT-Order-ID that requires linking of order events rather than the repeated transmission of an order ID throughout an order’s lifecycle is appropriate. This approach is widely supported by the industry, and using the daisy chain approach should minimize impact on existing OATS reporters, since OATS already uses this type of linking.54 The RFP asked Bidders to propose any additional alternatives to order lifecycle creation; however, all of the Bidders indicated that they would use the daisy chain approach to link order events.55

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In the daisy chain approach, a series of unique order identifiers assigned by CAT Reporters to individual order events are linked together by the CAT and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order. Under this approach, each CAT Reporter generates its own unique order ID but can pass a different identifier as the order is routed to another CAT Reporter, and the CAT will link related order events from all CAT Reporters involved in the life of the order.56

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The Participants believe that the daisy chain approach can handle anticipated order handling scenarios, including aggregation and disaggregation, and generally apply to both equities and options. The Participants created a subcommittee of DAG members and Participants to walk through multiple complex order-handling scenarios to ensure that the daisy chain approach can handle even the most complex of order handling methods.57

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Additionally, the daisy chain approach can handle representative order reporting scenarios58 and order handling scenarios sometimes referred to as “complex orders” that are specific to options and may include an equity component and multiple option components (e.g., buy-write, straddle, strangle, ratio spread, butterfly and qualified contingent transactions). Typically, these orders are referenced by exchange systems on a net credit/debit basis, which can cover between two and twelve different components. Such “complex orders” must also be handled and referenced within the CAT. The Bidder must develop, in close consultation with Industry Members, a linking mechanism that will allow the CAT to link the option leg(s) to the related equity leg or the individual options components to each other in a multi-leg strategy scenario.

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Once a lifecycle is assembled by the CAT, individual lifecycle events must be stored so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, and routed through multiple broker-dealers before being sent to the exchange for execution.

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The Plan Processor must transform and load the data in a way that provides the Participants with the ability to build and generate targeted queries against data in the Central Repository across product classes submitted to the Central Repository. The Participants’ regulatory staff and the SEC must be able to create, adjust, and save ad-hoc queries to provide data to the regulators that can then be used for their market surveillance purposes. All data fields may be included in the result set from targeted queries. Because of the size of the Central Repository and its use by multiple parties simultaneously, online queries will require a minimum set of criteria, including data or time range as well as one or more of the parameters specified in Appendix D, Functionality of the CAT System.59

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Because of the potential size of the possible result sets, the Plan Processor must have functionality to create an intermediate result count of records before running the full query so that the query can be refined if warranted. The Plan Processor must include a notification process that informs users when reports are available, and there should be multiple methods by which query results can be obtained (e.g., web download, batch feed). Regulatory staff also must have the ability to create interim tables for access / further investigation. In addition, the Plan Processor must provide a way to limit the number of rows from a result set on screen with full results being created as a file to be delivered via a file transfer protocol.

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The Plan Processor will be reasonably required to work with the regulatory staff at the Participants and other regulators60 to design report generation screens that will allow them to request on-demand pre-determined report queries. These would be standard queries that would enable regulators quick access to frequently-used information and could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader reporting.

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The Central Repository must, at a minimum, be able to support approximately 3,000 active users, including Participants’ regulatory staff and the SEC, authorized to access data representing market activity (excluding the PII associated with customers and accounts).61

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2. Time and Method by which CAT Data will be Available to Regulators (SEC Rule 613(a)(1)(ii))

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SEC Rule 613(a)(1)(ii) requires the Participants to discuss the “time and method by which the data in the Central Repository will be made available to regulators to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities.”62 As the Commission noted, “[t]he time and method by which data will be available to regulators are fundamental to the utility of the Central Repository because the purpose of the repository is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.”63

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(a) Time Data will be Made Available to Regulators

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At any point after data is received by the Central Repository and passes basic format validations, it will be available to the Participants and the SEC. The Plan Processor must ensure that regulators have access to corrected and linked order and Customer data by 8:00 a.m. Eastern Time on T+5.

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As noted above, SEC Rule 613(e)(6) requires the prompt correction of data reported to the Central Repository, and the Participants believe that the timeframes established in Appendix D, Data Availability, meet this requirement. Additionally, each of the Bidders indicated that it would be able to process the reported data within these timeframes. However, the FIF, an industry trade group, expressed concern that the error repair window will constitute a significant burden to CAT Reporters and questioned whether the error repair window “can be reasonably met.”64 FIF supports maintaining the current OATS Error Handling timelines, which allow for error correction within five OATS-business days from the date of original submission.65 SIFMA also recommends a five-day window for error correction.66 Nevertheless, the Participants believe that it is imperative to the utility of the Central Repository that corrected data be available to regulators as soon as possible, and therefore the Participants do not support adopting the five-day repair window permitted under OATS, but instead are providing a three-day repair window for the Central Repository.67

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(b) Method by which Data will be Available to Regulators

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As required by SEC Rule 613(a)(1)(ii), this section describes the ability of regulators to use data stored in the Central Repository for investigations, examinations and surveillance, including the ability to search and extract such data.68 The utility of the Central Repository is dependent on regulators being able to have access to data for use in market reconstruction, market analysis, surveillance and investigations.69 The Participants anticipate that the Plan Processor will adopt policies and procedures with respect to the handling of surveillance (including coordinated, SEC Rule 17d-2 or RSA surveillance) queries and requests for data. In the RFP, the Participants asked that the Bidders describe:

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• the tools and reports that would allow for the extraction of data search criteria;70

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• how the system will accommodate simultaneous users from Participants and the SEC submitting queries;71

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• the expected response time for query results, the manner in which simultaneous queries will be managed and the maximum number of concurrent queries and users that can be supported by the system;72

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• the format in which the results of targeted queries will be provided to users;73

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• the methods of data delivery that would be made available to Participant regulatory staff and the Commission;74

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• any limitations on the size of data that can be delivered at one time, such as number of days or number of terabytes;75 and

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• how simultaneous bulk data requests will be managed to ensure fair and equitable access.76

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All Bidders provide means for off-line analysis77 and dynamic search and extraction. The Bids described a variety of tools that could be used for providing access and reports to the Participants and the SEC, including: Oracle Business Intelligence Experience Edition, SAS Enterprises Business Intelligence, and IBM Cognos. The Bids proposed data access via direct access portals and via web-based applications. In addition, the Bids proposed various options for addressing concurrent users and ensuring fair access to the data, including: processing queries on a first in, first out (FIFO) basis; monitoring to determine if any particular user is using more systems resources than others and prioritizing other users’ queries; or evaluating each users’ demands on the systems over a predetermined timeframe and, if there is an imbalance, working with users to provide more resources needed to operate the system more efficiently.

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The Bids included a multitude of options for formatting the data provided to regulators in response to their queries, including but not limited to FIX, Excel, Binary, SAS data sets, PDF, XML, XBRL, CSV, and .TXT. Some Bidders would provide Participants and the SEC with a “sandbox” in which the user could store data and upload its own analytical tools and software to analyze the data within the Central Repository, in lieu of performing off-line analyses.

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The Participants anticipate that they will be able to utilize Central Repository data to enhance their existing regulatory schemes. The Participants do not endorse any particular technology or approach, but rather set forth standards which the Plan Processor must meet. By doing so, the Participants are seeking to maximize the utility of the data from the Central Repository without burdening the Plan Processor to comply with specific format or application requirements which will need to be updated over time. In addition, the Participants wanted to ensure that the Bidders have the ability to put forth the ideas they believe are the most effective.

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(c) Report Building – Analysis Related to Usage of Data by Regulators

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It is anticipated that the Central Repository will provide regulators with the ability to, for example, more efficiently conduct investigations, examinations, conduct market analyses, and to inform policy-making decisions. The Participants’ regulatory staff and the SEC will frequently need to be able to perform queries on large amounts of data. The Plan Processor must provide the Participants and other regulators the access to build and generate targeted queries against data in the Central Repository. The Plan Processor must provide the regulatory staff at the Participants and regulators with the ability to create, adjust, and save any ad-hoc queries they run for their surveillance purposes via online or direct access to the Central Repository.78 Queries will require a minimum set of criteria that are detailed in Appendix D.79 The Plan Processor will have controls to manage load, cancel queries, if needed, and create a request process for complex queries to be run.80 The Plan Processor must have a notification process to inform users when reports are available, provide such reports in multiple formats, and have the ability to schedule when queries are run.81

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In addition, the Plan Processor will be required to reasonably work with the regulatory staff at the Participants and other regulators to design report generation screens that will allow them to request on-demand pre-determined report queries.82 These would be standard queries that would enable regulators quick access to frequently-used information. This could include standard queries that will be used to advance the retirement of existing reports, such as Large Trader.83

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The Plan Processor should meet the following response times for different query types. For targeted search criteria, the minimum acceptable response times would be measured in time increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time should generally be available within 24 hours of the submission of the request.

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The Central Repository will support a permission mechanism to assign data access rights to all users so that CAT Reporters will only have access to their own reported data, the regulatory staff at the Participants and other regulators will have access to data; except for PII.84 Regulators that are authorized to access PII will be required to complete additional authentications. The Central Repository will be able to provide access to the data at the working locations of both the Participants’ and SEC’s regulatory staff as well as other non-office locations. The Central Repository must be built with operational controls to control access to make requests and to track data requests to support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated.

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In addition to targeted analysis of data from the Central Repository, regulators will also need access to bulk data for analysis. The Participants and other regulators will need the ability to do bulk extraction and download of data, based on a specified date or time range, market, security, and Customer-ID. The size of the resulting data set may require the ability to feed data from the Central Repository into analytical “alert” programs designed to detect potentially illegal activity.85 “For example, the Commission is likely to use data from the Central Repository to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform Participant and SEC rulemaking.”86

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The Plan Processor must provide for bulk extraction and download of data in industry standard formats. In addition, the Plan Processor is required to generate data sets based on market event data to the Participants and other regulators. The Central Repository must provide the ability to define the logic, frequency, format, and distribution method of the data. It must be built with operational controls to track data requests to oversee the bulk usage environment and support an event-based and time-based scheduler for queries that allows Participants to rely on the data generated. Extracted data should be encrypted, and PII data should be masked unless users have permission to view the data that has been requested.

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The Plan Processor must have the capability and capacity to provide bulk data necessary for the Participants and the other regulators to run and operate their surveillance processing. Such data requests can be very large; therefore, the Plan Processor must have the ability to split large requests into smaller data sets for data processing and handling. All reports should be generated by a configurable workload manager that is cost based, while also ensuring that no single user is using a disproportionate amount of resources for query generation.

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(d) System Service Level Agreements (SLAs)

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As further described in Appendix D, Functionality of CAT Systems, the Participants and the Plan Processor will enter into appropriate SLAs in order to establish system and operational performance requirements for the Plan Processor and help ensure timely Regulator access to Central Repository data. Among the items to be included in the SLA(s) will be specific requirements regarding query performance, linkage and order event processing performance of the Central Repository (e.g., linkage and data availability timelines, linkage errors not related to invalid data, and data retention) as well as system availability requirements (e.g., system uptime and DR/BCP performance). The Operating Committee will periodically review the SLAs according to the terms to be established in negotiation with the Plan Processor.

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3. The Reliability and Accuracy of the Data (SEC Rule 613(a)(1)(iii))

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As required by SEC Rule 613(a)(1)(iii), this section discusses the reliability and accuracy of the data reported to and maintained by the Central Repository throughout its lifecycle, including: transmission and receipt from CAT Reporters; data extraction, transformation and loading at the Central Repository; data maintenance at the Central Repository; and data access by the Participants and other regulators. In the Adopting Release, the Commission noted that the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate and as such, the Commission requested that the Participants discuss in detail how the Central Repository will be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained in it.87

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(a) Transmission, Receipt, and Transformation

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The initial step in ensuring the reliability and accuracy of data in the Central Repository is the validation checks made by the Plan Processor when data is received and before it is accepted into the Central Repository. In the RFP, the Participants stated that validations must include checks to ensure that data is submitted in the required formats and that lifecycle events can be accurately linked by 12:00 p.m. Eastern Time on T+1, four hours following the submission deadline for CAT Reporters.88 Once errors are identified, they must be efficiently and effectively communicated to CAT Reporters on a daily basis. CAT Reporters will be required to correct and resubmit identified errors within established timeframes (as discussed in Appendix D, Data Availability).

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The Plan Processor must develop specific data validations in conjunction with development of the Central Repository which must be published in the Technical Specifications. The objective of the data validation process is to ensure that data is accurate, timely and complete at or near the time of submission, rather than to identify submission errors at a later time after data has been processed and made available to regulators. To achieve this objective, a comprehensive set of data validations must be developed that addresses both data quality and completeness. For any data that fails to pass these validations, the Plan Processor will be required to handle data correction and resubmission within established timeframes both in a batch process format and via manual web-based entry.

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To assess different validation mechanisms and integrity checks, the RFP required Bidders to provide information on the following:

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• how data format and context validations for order and quote events submitted by CAT Reporters will be performed and how rejections or errors will be communicated to CAT Reporters;89

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• a system flow diagram reflecting the overall data format, syntax and context validation process that includes when each types of validation will be completed and errors communicated to CAT Reporters, highlighting any dependencies between the different validations and impacts of such dependencies on providing errors back to CAT Reporters;90

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• how related order lifecycle events submitted by separate CAT Reporters will be linked and how unlinked events will be identified and communicated to CAT Reporters for correction and resubmission, including a description of how unlinked records will be provided to CAT Reporters for correction (e.g., specific transmission methods and/or web-based downloads);91

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• how Customer and Customer Account Information submitted by broker-dealers will be validated and how rejections or errors will be communicated to CAT Reporters;92 and

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• the mechanisms that will be provided to CAT Reporters for the correction of both market data (e.g., order, quotes, and trades) errors, and Customer and account data errors, including batch resubmissions and manual web-based submissions.93

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Most Bidders indicated that Customer Account Information including SSN, TIN or LEI will be validated in the initial onboarding processing. Additional validation of Customer Account Information, such as full name, street address, etc., would occur across CAT Reporters and potential duplications or other errors would be flagged for follow-up by the CAT Reporters.

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All Bidders recommended that order data validation be performed via rules engines, which allow rules to be created and modified over time in order to meet future market data needs. Additionally, all Bidders indicated that data validations will be real-time and begin in the data ingestion component of the system. Standard data validation techniques include format checks, data type checks, consistency checks, limit and logic checks, or data validity checks. Some Bidders mentioned the ability to schedule the data validation at a time other than submission, because there may be a need to have rules engines perform validation in a batch mode or customized schedule during a different time. All Bidders indicated that when errors are found, the Raw Data will be stored in an error database and notifications would be sent to the CAT Reporters. Most Bidders permitted error correction to be submitted by CAT Reporters at any time.

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Section 6.3(b) of the CAT NMS Plan sets forth the policies and procedures for ensuring the timeliness, accuracy and completeness of the data provided to the Central Repository as required by SEC Rule 613(e)(4)(ii) and the accuracy of the data consolidated by the Plan Processor pursuant to SEC Rule 613(e)(4)(iii).94 It also mandates that each Participant and its Industry Members that are CAT Reporters must ensure that its data reported to the Central Repository is accurate, timely, and complete. Each Participant and its Industry Members that are CAT Reporters must correct and resubmit such errors within established timeframes. In furtherance thereof, data related to a particular order will be reported accurately and sequenced from receipt or origination, to routing, modification, cancellation and/or execution. Additionally each Participant and its Industry Members that are CAT Reporters must test their reporting systems thoroughly before beginning to report data to the Central Repository and Appendix D sets forth that the Plan Processor must make testing facilities available for such testing.

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Pursuant to SEC Rule 613(e)(4)(iii), the Plan Processor will design, implement and maintain (1) data accuracy and reliability controls for data reported to the Central Repository and (2) procedures for testing data accuracy and reliability during any system release or upgrade affecting the Central Repository and the CAT Reporters.95 The Operating Committee will, as needed, but at least annually, review policies and procedures to ensure the timeliness, accuracy, and completeness of data reported to the Central Repository.

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In order to validate data receipt, the Plan Processor will be required to send an acknowledgement to each CAT Reporter notifying them of receipt of data submitted to the Central Repository to enable CAT Reporters to create an audit trail of their own submissions and allow for tracking of data breakdowns when data is not received. The data received by the Plan Processor must be validated at both the file and individual record level if appropriate. The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. Records that do not pass basic validations, such as syntax rejections, will be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit the data.

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(b) Error Communication, Correction, and Processing

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The Plan Processor will define and design a process to efficiently and effectively communicate to CAT Reporters identified errors. All identified errors will be reported back to the CAT Reporter and other Data Submitters who submitted the data to the Central Repository on behalf of the CAT Reporter, if necessary. The Central Repository must be able to receive error corrections and process them at any time, including timeframes after the standard repair window. The industry supports a continuous validation process for the Central Repository, continuous feedback to CAT Reporters on error identification and the ability to provide error correction at any time even if beyond the error correction timeframe.96 The industry believes that this will better align with the reporting of complex transactions and allocations and is more efficient for CAT Reporters.97 CAT Reporters will be able to submit error corrections through a web-interface or via bulk uploads or file submissions. The Plan Processor must support bulk replacement of records, subject to approval by the Operating Committee, and reprocess such replaced records. A GUI must be available for CAT Reporters to make updates to individual records or attributes. Additionally, the Plan Processor will provide a mechanism to provide auto-correction of identified errors and be able to support group repairs (i.e., the wrong issue symbol affecting multiple reports).

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SEC Rule 613(e)(6) also requires the Participants to specify a maximum Error Rate for data reported to the Central Repository pursuant to SEC Rule 613(c)(3) and (4).98 The Participants understand that the Central Repository will require new reporting elements and methods for CAT Reporters and there will be a learning curve when CAT Reporters begin to submit data to the Central Repository.99 However, the utility of the CAT is dependent on it providing a timely, accurate and complete audit trail for the Participants and other regulators.100 Therefore, the Participants are proposing an initial maximum Error Rate of 5%, subject to quality assurance testing performed prior to launch, and it is anticipated that it will be reset when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and again when Small Industry Members begin to report to the Central Repository. The Participants believe that this rate strikes the balance of making allowances for adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction. Periodically, the Plan Processor will analyze reporting statistics and Error Rates and make recommendations to the Operating Committee for proposed changes to the maximum Error Rate. Changes to the maximum Error Rate will be approved by the Operating Committee. The maximum Error Rate will be reviewed and reset at least on an annual basis.

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In order to help reduce the maximum Error Rate, the Plan Processor will measure the Error Rate on each business day and must take the following steps in connection with error reporting: (1) the Plan Processor will provide CAT Reporters with their error reports as they become available and daily statistics will be provided after data has been uploaded and validated by the Central Repository; (2) error reports provided to CAT Reporters will include descriptive details as to why each data record was rejected by the Central Repository; and (3) on a monthly basis, the Plan Processor will produce and publish reports detailing performance and comparison statistics, similar to the Report Cards published for OATS presently, which will enable CAT Reporters to identify how they compare to the rest of their industry peers and help them assess the risk related to their reporting of transmitted data.

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All CAT Reporters exceeding the Error Rate will be notified each time that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections). Upon request from the Participants or other regulators, the Plan Processor will produce and provide reports containing Error Rates and other metrics as needed on each CAT Reporter’s Compliance Thresholds so that the Participants as Participants or the SEC may take appropriate action for failing to comply with the reporting obligations under the CAT NMS Plan and SEC Rule 613.

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SEC Rule 613(e)(6) requires the prompt correction of data to the Central Repository. As discussed in the NMS Plan, there are a minimum of three validation processes that will be performed on data submitted to the Central Repository. The Plan Processor will be required to identify specific validations and metrics to define the Data Quality Governance requirements, as defined in Appendix D, Receipt of Data from Reporters.

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The Plan Processor will identify errors on CAT file submissions that do not pass the defined validation checks above and conform to the Data Quality Governance requirements. Error Rates will be calculated during the CAT Data and linkage validation processes. As a result, the Participants propose an initial maximum overall Error Rate of 5%101 on initially submitted data, subject to quality assurance testing period performed prior to launch.102 It is anticipated that this Error Rate will be evaluated when Industry Members, excluding Small Industry Members, begin to report to the Central Repository and then again when Small Industry Members begin to report to the Central Repository.

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In determining the initial maximum Error Rate of 5%, the Participants have considered the current and historical OATS Error Rates, the magnitude of new reporting requirements on the CAT Reporters and the fact that many CAT Reporters may have never been obligated to report data to an audit trail.

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The Participants considered industry experience with FINRA’s OATS system over the last 10 years. During that timeframe there have been three major industry impacting releases. These three releases are known as (1) OATS Phase III, which required manual orders to be reported to OATS;103 (2) OATS for OTC Securities which required OTC equity securities to be reported to OATS;104 and (3) OATS for NMS which required all NMS stocks to be reported to OATS.105 Each of these releases was accompanied by significant updates to the required formats which required OATS reporters to update and test their reporting systems and infrastructure.

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The combined average error rates for the time periods immediately following release across five significant categories for these three releases follow. The average rejection percentage rate, representing order events that did not pass systemic validations, was 2.42%. The average late percentage rate, representing order events not submitted in a timely manner, was 0.36%. The average order / trade matching error rate, representing OATS Execution Reports unsuccessfully matched to a TRF trade report was 0.86%. The average Exchange/Route matching error rate, representing OATS Route Reports unsuccessfully matched to an exchange order was 3.12%. Finally, the average Interfirm Route matching error rate, representing OATS Route Reports unsuccessfully matched to a report representing the receipt of the route by another reporting entity was 2.44%. Although the error rates for the 1999 initial OATS implementation were significantly higher than those laid out above, the Participants believe that technical innovation and institutional knowledge of audit trail creation over the past 15 years makes the more recent statistics a better standard for the initial Error Rate.106 Based upon these historical error rates, and given that reporting to the Central Repository will involve reporting on new products (i.e., options) and reporting by new reporters (including both broker-dealers and Participants who have not previously been required to report to OATS), the Participants believe that the initial Error Rate will be higher than the recent rates associated with OATS releases and that an initial Error Rate of 5% is an appropriate standard.

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The Participants believe that to achieve this Error Rate, however, the Participants and the industry must be provided with ample resources, including a stand-alone test environment functionally equivalent to the production environment, and time to test their reporting systems and infrastructure. Additionally, the Technical Specifications must be well written and effectively communicated to the reporting community with sufficient time to allow proper technical updates, as necessary. The Participants believe that the Error Rate strikes the balance of adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction, as well as having a sufficient level of accuracy to facilitate the retirement of existing regulatory reports and systems where possible.

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The Participants are proposing a phased approach to lowering the maximum Error Rate. Under the proposed approach, one year after a CAT Reporter’s respective filing obligation has begun, their maximum Error Rate would become 1%.107 Maximum Error Rates under the proposed approach would thus be as follows:

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In addition to the above mentioned daily Error Rate, CAT Reporters will be required to meet separate Compliance Thresholds,109 which rather than the Error Rate, will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance. Although Compliance Thresholds will not be calculated on a daily basis, this does not: (1) relieve CAT Reporters from their obligation to meet daily reporting requirements set forth in SEC Rule 613; or (2) prohibit disciplinary action against a CAT Reporter for failure to meet its daily reporting requirements set forth in SEC Rule 613. The Operating Committee may consider other exceptions to this reporting obligation based on demonstrated legal or regulatory requirements or other mitigating circumstances.

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In order to reduce the maximum Error Rate and help CAT Reporters to meet their Compliance Thresholds, the Plan Processor must provide support for CAT Reporter “go-live” dates, as specified in Appendix D, User Support.

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(c) Sequencing Orders and Clock Synchronization

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SEC Rule 613(c)(1) requires the Central Repository to provide “an accurate, time-sequenced record of orders,” and SEC Rule 613(d)(1) requires the CAT NMS Plan to require each CAT Reporter “to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event . . . to the time maintained by the National Institute of Standards and Technology (NIST), consistent with industry standards.” As an initial matter, because of the drift between clocks, an accurately-sequenced record of orders cannot be based solely on the time stamps provided by CAT Reporters. As discussed above, the CAT NMS Plan requires that CAT Reporters synchronize their clocks to within 50 milliseconds of the NIST. Because of this permitted drift, any two separate clocks can vary by 100 milliseconds: one clock can drift forward 50 milliseconds while another can drift back 50 milliseconds. Thus, it is possible to have, for example, one firm report the route of an order at 10:40:00.005 while the firm receiving the routed order reports a receipt time of 10:39:59.983 (i.e., the time stamps alone indicate that the routed order was received before it was sent). For this reason, the Participants plan to require that the Plan Processor develop a way to accurately track the sequence of order events without relying entirely on time stamps.110

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There were several different approaches suggested by the Bidders to accomplish the accurate sequencing of order events. Some Bidders suggested using time stamp-based sequencing; however, most Bidders recognized that, while all CAT Reporters should have their time stamp clocks synchronized, in practice this synchronization cannot be wholly relied upon due to variations in computer systems. These Bidders rely on linkage logic to derive the event sequencing chain, such as parent/child orders. To help resolve time stamp issues, one Bidder proposed adding unique sequence ID numbers as well to the event information to help with time clock issues and a few others would analyze the variations on clock time and notify those CAT Reporters that need to resynchronize their clocks.

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The Participants believe that using a linking logic not dependent on time stamps would enable proper sequencing of an order. This decision is supported by the industry since time stamps across disparate systems cannot be guaranteed and are likely to be error-prone.111 The Participants believe that this type of sequencing can be successfully used for both simple and complex orders that will be reported to the Central Repository. The industry supports using event sequencing that is already built into the exchange protocols, which imposes sequencing and determines the true market environment.112

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As required by Section 6.8(a) of the CAT NMS Plan, each Participant will synchronize its Business Clocks (other than Business Clocks used solely for Manual Order Events, which will be required to be synchronized to within one second of the time maintained by the NIST) used for the purposes of recording the date and time of any Reportable Event that must be reported under SEC Rule 613 to within 50 milliseconds of the time maintained by the NIST, and will adopt a Compliance Rule requiring its Industry Members to do the same. Furthermore, in order to ensure the accuracy of time stamps for Reportable Events, the Participants anticipate that Participants and Industry Members will adopt policies and procedures to verify such required synchronization each Trading Day (1) before the market opens and (2) periodically throughout the Trading Day.

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As noted above, Rule 613(d)(1) requires the CAT NMS Plan to impose a clock synchronization requirement “consistent with industry standards.” The Participants believe that the 50 millisecond clock synchronization drift tolerance included in Section 6.8(a) represents the current industry clock synchronization standard and therefore satisfies the Rule. To determine the current industry standard, the Participants relied on survey feedback provided by industry members, as further discussed in Appendix C, D.12.

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Importantly, Section 6.8 requires, pursuant to Rule 613(c)(2), that Participants, together with the Plan Processor’s Chief Compliance Officer, evaluate the clock synchronization standard on an annual basis to reflect changes in industry standards. Accordingly, to the extent existing technology that synchronizes business clocks with a lower tolerance (i.e., within less than 50 milliseconds drift from NIST) becomes widespread enough throughout the industry to constitute a new standard, the clock synchronization requirement of the CAT NMS Plan would be revised to take account of the new standard.

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In accordance with SEC Rule 613(d), Section 6.8(c) of the CAT NMS Plan states that “[i]n conjunction with Participants and other appropriate Industry Member advisory groups, the Chief Compliance Officer shall annually evaluate whether industry standards have evolved such that: (i) the synchronization standard in Section 6.8(a) should be shortened; or (ii) the required time stamp in Section 6.8(b) should be in finer increments.”

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The Participants anticipate that compliance with this provision will require Participants and Industry Members to perform the following or comparable procedures. The Participants and their Industry Members will document their clock synchronization procedures and maintain a log recording the time of each clock synchronization performed, and the result of such synchronization, specifically identifying any synchronization revealing that the discrepancy between its Business Clock and the time maintained by the NIST exceeded 50 milliseconds. At all times such log will include results for a period of not less than five years ending on the then current date.

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In addition to clock synchronization requirements, the Participants considered the appropriate level of time granularity to be required in the CAT NMS Plan. Although millisecond increments are generally the industry standard for trading systems, there is a wide range of time stamp granularity across the industry commonly ranging from seconds to milliseconds to micro-seconds for Latency sensitive applications.113 The disparity is largely attributed to the age of the system being utilized for reporting, as older systems cannot cost effectively support, finer time stamp granularity.114 To comply with a millisecond time stamp requirement, the Participants understand that firms may face significant costs in both time and resources to implement a consistent time stamp across multiple systems.115 This may include a need to upgrade databases, internal messaging applications/protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository.116 Because of this, FIF recommended to the Participants a two year grace period for time stamp compliance.117 FIF and SIFMA also supported an exception for millisecond reporting for order events that are manually processed, which is discussed below.118

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To the extent that any CAT Reporter uses time stamps in increments finer than the minimum required by the CAT NMS Plan, each Participant will, and will adopt a rule requiring its Industry Members that are CAT Reporters to, use such finer increments when providing data to the Central Repository.

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With respect to the requirement under SEC Rule 613(c) and (d)(3) that time stamps “reflect current industry standards and be at least to the millisecond,” the Participants believe that time stamp granularity to the millisecond reflects current industry standards. However, after careful consideration, including numerous discussions with the DAG, the Participants have determined that time stamp granularity at the level of a millisecond is not practical for order events that involve non-electronic communication of information (“Manual Order Events”). In particular, it is the Participants’ understanding that recording Manual Order Events to the millisecond would be both very costly, requiring specialized software configurations and expensive hardware, and inherently imprecise due to the manner in which human interaction is required. The industry feedback that the Participants received through the DAG suggests that the established business practice with respect to Manual Order Events is to manually capture time stamps with granularity at the level of a second because finer increments cannot be accurately captured when dealing with manual processes which, by their nature, take longer to perform than a time increment of under one second. The Participants agree that, due to the nature of transactions originated over the phone, it is not practical to attempt granularity finer than one second, as any such finer increment would be inherently unreliable. Further, the Participants do not believe that recording Manual Order Events to the second will hinder the ability of regulators to determine the sequence in which Reportable Events occur.

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As a result of these discussions, the Exemptive Request Letter requested exemptive relief from the Commission to allow the CAT NMS Plan to require Manual Order Events to be captured with granularity of up to and including one second or better, but also require CAT Reporters to report the time stamp of when a Manual Order Event was captured electronically in the relevant order handling and execution system of the party to the event. Granularity of the Electronic Capture Time will be consistent with the SEC Rule 613(d)(3) requirement that time stamps be at least to the millisecond.

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Thus, the Participants have determined that adding the Electronic Capture Time would be beneficial for successful reconstruction of the order handling process and would add important information about how the Manual Order Events are processed once they are entered into an electronic system. Additionally, Manual Order Events, when reported, must be clearly identified as such.

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(d) Data Maintenance and Management

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Data Maintenance and Management of the Central Repository “refers to the process for storing data at the [C]entral [R]epository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.”119

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The Plan Processor must create a formal records retention policy to be approved by the Operating Committee. All of the data (including both corrected and uncorrected or rejected data) in the Central Repository must be kept online for a rolling six year period, which would create a six year historical audit trail. This data must be directly available and searchable by regulators electronically without any manual intervention. Additionally, the Plan Processor is required to create and maintain for a minimum of six years a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC.

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Assembled lifecycles of order events must be stored in a linked manner so that each unique event (e.g., origination, route, execution, modification) can be quickly and easily associated with the originating customer(s) for both targeted queries and comprehensive data scans. For example, an execution on an exchange must be linked to the originating customer(s) regardless of how the order may have been aggregated, disaggregated, or routed through multiple broker-dealers before being sent to the exchange for execution.

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Most Bidders recommended dividing data in the Central Repository into nodes based on symbol, date or a combination thereof in order to speed query response times. The Participants are not specifying how the data is divided, but will require that it be partitioned in a logical manner in order to optimize access and retrieval.

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All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site. The Participants are requiring that the Plan Processor implement a disaster recover capability that will ensure no loss of data and will support the data availability requirements for the Central Repository and a secondary processing site will need to be capable of recovery and restoration of services at the secondary site within 48 hours of a disaster event.

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(e) Data Access by Regulators

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As detailed in Appendix C, Time and Method by which CAT Data will be Available to Regulators, the Participants and other regulators will have access to raw unprocessed data that has been ingested by the Central Repository prior to Noon Eastern Time on T +1.120 Between Noon Eastern Time on T +1 and T+5, the Participants and other regulators should have access to all iterations of processed data.121 At T+5, the Participants and other regulators should have access to corrected data.122 The Plan Processor must adopt policies and procedures to reasonably inform Participants and the SEC of material data corrections made after T+5. The Participants and other regulators will be able to build and generate targeted queries against data in the Central Repository. More information about the report, query, and extraction capabilities can be found in Appendix D, Functionality of the CAT System.

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(f) Data Recovery and Business Continuity

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As noted above, in addition to describing data security and confidentiality, all of the Bidders were required to set forth an approach to data loss recovery and business continuity in the event of data loss. All of the Bidders addressed data loss through data replication and redundancy. Some of the Bidders proposed a hot-hot design for replication for primary and secondary data, so both sites are fully operational at all times and there would be no recovery time necessary in the case of fall-over to the secondary site. However, this is a more costly solution, and many Bidders therefore proposed data loss prevention by operating in a hot-warm design for replication to a secondary site.

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The Plan Processor must comply with industry best practices for disaster recovery and business continuity planning, including the standards and requirements set forth in Appendix D, BCP / DR Process.

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With respect to business continuity, the Participants have developed the following requirements that the Plan Processor must meet. In general, the Plan Processor will implement efficient and cost-effective backup and disaster recovery capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the Central Repository. The disaster recovery site must have the same level of availability / capacity / throughput and data as the primary site. In addition, the Plan Processor will be required to design a Business Continuity Plan that is inclusive of the technical and business activities of the Central Repository, including the items specified in Appendix D, BCP / DR Process (e.g., bi-annual DR testing and an annual Business Continuity Audit).

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4. The Security and Confidentiality of the Information Reported to the Central Repository (SEC Rule 613(a)(1)(iv))

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As required by SEC Rule 613(a)(1)(iv), this section describes the security and confidentiality of the information reported to the Central Repository. As the Commission noted in the Adopting Release, keeping the data secure and confidential is critical to the efficacy of the Central Repository and the confidence of market participants. There are two separate categories for purposes of treating data security and confidentiality: (1) PII; and (2) other data related to orders and trades reported to the CAT.123

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Because of the importance of data security, the Participants included in the RFP numerous questions to Bidders requesting detailed information on their data security approaches. In the RFP, the Participants requested general information regarding the following:

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• how the Bidder’s solution protects data during transmission, processing, and at rest (i.e., when stored in the Central Repository);124

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• the specific security governance/compliance methodologies utilized in the proposed solution;125

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• how access to the data is controlled and how the system(s) confirms the identity of persons (e.g., username/password), monitors who is permitted to access the data and logs every instance of user access;126

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• what system controls for users are in place to grant different levels of access depending on their role or function;127

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• the strategy, tools and techniques, and operational and management practices that will be used to maintain security of the system;128

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• the proposed system controls and operational practices;129

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• the organization’s security auditing practices, including internal audit, external audit, third-party independent penetration testing, and all other forms of audit and testing;130

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• how security practices may differ across system development lifecycles and environments that support them (e.g., development, testing, and production);131

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• experiences in developing policies and procedures for a robust security environment, including the protection of PII;132

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• the use of monitoring and incident handling tools to log and manage the incident handling lifecycle;133

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• the approach(es) to secure user access, including security features that will prevent unauthorized users from accessing the system;134

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• the processes/procedures followed if security is breached;135

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• the infrastructure security architecture, including network, firewalls, authentication, encryption, and protocols; and136

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• the physical security controls for corporate, data center and leased data center locations.137

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All Bidders acknowledged the importance of data security; however, the proposals varied in the details about security policies, data access management, proactive monitoring and intrusion prevention, and how data security will be implemented. Some Bidders intend to leverage their experience in financial services and adopt their policies and technologies to control data, and many Bidders supported such measures as role-based access controls, two factor authentication, detailed system logs, and segmentation of sensitive data that is isolated in both logical and physical layers. Other Bidders indicated that they would use role-based security policies, data and file encryption, and redundant and layered controls to prevent unauthorized access. Additionally, Bidders noted that the physical locations at which data is stored need security measures to ensure data is not compromised. Some Bidders indicated that physical controls would include background checks for employees working with the system; physical building security measures (e.g., locks, alarms, key control programs, CCTV monitoring for all critical areas, and computer controlled access systems with ID badges).

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The RFP also requested additional information specific to the treatment and control over PII. The RFP required Bidders to specifically address:

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• how PII will be stored;138 and

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• how PII access will be controlled and tracked.139

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All of the Bidders proposed segregating PII from the other data in the Central Repository. Additionally, all of the Bidders recommended limiting access to PII to only those regulators who need to have access to such information, and requiring additional validations to access PII. Although all Bidders proposed to keep a log of access to the Central Repository by user, the Bidders suggested different methods of authentication and utilized varying security policies, including the use of VPNs or HTTPS.

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The RFP also requested information from Bidders on data loss prevention (“DLP”) and business continuity to ensure the continued security and availability of the data in the Central Repository. Specifically, the RFP asked Bidders to describe:

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• their DLP program;140 and

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• the process of data classification and how it relates to the DLP architecture and strategy.141

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Based upon the RFP responses, as well as input from the Participants’ information security teams and discussions with the DAG, information security requirements were developed and are defined in Appendix D, Data Security. These requirements are further explained below.

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(a) General Security Requirements

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SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the Central Repository in accordance with the policies, procedures, and standards in the CAT NMS Plan.142 Based on the numerous options and proposals identified by the Bidders, the Participants have outlined multiple security requirements the Plan Processor will be required to meet to ensure the security and confidentiality of data reported to the Central Repository. The Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing as well as data at rest.

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The Plan Processor must provide a solution addressing physical security controls for corporate, data center and any leased facilities where any of the above data is transmitted or stored. In addition to physical security, the Plan Processor must provide for data security for electronic access by outside parties, including Participants and the SEC and, as permitted, CAT Reporters or Data Submitters. Specific requirements are detailed in Appendix D, Data Security, and include requirements such as role-based user access controls, audit trails for data access, and additional levels of protection for PII.

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Pursuant to SEC Rule 613(i)(C), the Plan Processor has to develop and maintain a comprehensive security program for the Central Repository with dedicated staff: (1) that is subject to regular reviews by the Chief Compliance Officer; (2) that has a mechanism to confirm the identity of all persons permitted to access the data; and (3) that maintains a record of all such instances where such persons access the data. In furtherance of this obligation, the CAT NMS Plan requires the Plan Processor to designate a Chief Compliance Officer and a Chief Information Security Officer, each subject to approval by the Operating Committee. Each position must be a full-time position. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer must develop a comprehensive compliance program covering all CAT Reporters, including the Participants and Industry Members.143 Section 6.2(b) of the CAT NMS Plan provides that the Chief Information Security Officer shall be responsible for creating and enforcing appropriate policies, procedures, standards and control structures to monitor and address data security issues for the Plan Process and the CAT System as detailed in Appendix D, Data Security.

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Section 6.12 of the CAT NMS Plan requires that the Plan Processor develop and maintain a comprehensive information technology security program for the Central Repository, to be approved and reviewed at least annually by the Operating Committee. To effectuate these requirements, Appendix D sets forth certain provisions designed to (1) limit access to data stored in the Central Repository to only authorized personnel and only for permitted purposes; (2) ensure data confidentiality and security during all communications between CAT Reporters and the Plan Processor, data extractions, manipulation and transformation, loading to and from the Central Repository, and data maintenance by the Central Repository; (3) require the establishment of secure controls for data retrieval and query reports by Participants’ regulatory staff and the SEC; and (4) otherwise provide appropriate database security for the Central Repository. Section 6.2(a) of the CAT NMS Plan provides that the Chief Compliance Officer, in collaboration with the Chief Information Security Officer, will retain independent third parties with appropriate data security expertise to review and audit on an annual basis the policies, procedures, standards, and real time tools that monitor and address data security issues for the Plan Processor and the Central Repository.144

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The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and the CAT System, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the system. The solution must also address secure controls for data retrieval and query reports by Participant regulatory staff and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for different components of the system, such as access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter calculated Error Rates.

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In addition, pursuant to SEC Rule 613(e)(4)(i)(C)(2), the Plan Processor will develop and maintain a mechanism to confirm the identity of all persons permitted to access the data. The Plan Processor is responsible for defining, assigning and monitoring CAT Reporter entitlements. Similarly, pursuant to SEC Rule 613(e)(4)(i)(C)(3), the Plan Processor will record all instances where a person accesses the data.

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Pursuant to SEC Rule 613(e)(4)(i)(B), Section 6.5(e)(ii) of the CAT NMS Plan requires each Participant to adopt and enforce rules that require information barriers between its regulatory staff and non-regulatory staff with regard to access to and use of data in the Central Repository, and permit only persons designated by such Participants to have access to and use of the data in the Central Repository.

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The Plan Processor will also develop a formal cyber incident response plan to provide guidance and direction during security incidents, and will also document all information relevant to any security incidents, as detailed in Appendix D, Data Security.

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(b) PII

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As noted above, because of the sensitivity of PII, the Participants have determined PII should be subject to more stringent standards and requirements than other order and trading data. In response to the RFP questions, many Bidders mentioned that a range of techniques were required to ensure safety of PII. These techniques included development of PII policies and managerial processes for use by Plan Processor as well as Participants’ staff and the SEC, physical data center considerations and strong automated levels, such as application, mid-tier, database, and operating systems levels, and use of role-based access and other parameters such as time-limited, case-restricted, and compartmentalized privilege. Most Bidders advocated for separate storage of PII in a dedicated repository to reduce the ability for hacking events to occur.

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In accordance with SEC Rule 613(e)(4)(i)(A), all Participants and their employees, as well as all employees of the Plan Processor, will be required to use appropriate safeguards to ensure the confidentiality of data reported to the Central Repository and not to use such data for any purpose other than surveillance and regulatory purposes. A Participant, however, may use the data that it reports to the Central Repository for regulatory, surveillance, commercial, or other purposes.

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The Participants anticipate that access to PII will be limited to a “need-to-know” basis. Therefore, it is expected that access to PII associated with customers and accounts will have a much lower number of registered users, and access to this data will be limited to Participants’ staff and the SEC who need to know the specific identity of an individual. For this reason, PII such as SSN and TIN will not be made available in the general query tools, reports, or bulk data extraction.145 The Participants will require that the Plan Processor provide for a separate workflow granting access to PII (including an audit trail of such requests) that allows this information to be retrieved only when required by specific regulatory staff of a Participant or the SEC, including additional security requirements for this sensitive data. Specifically, the Plan Processor must take steps to protect PII as defined in Appendix D, Data Security and including items such as storage of PII separately from order and transaction data, multi-factor authentication for access to PII data, and a full audit trail of all PII data access.

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It is anticipated that the Technical Specifications will set forth additional policies and procedures concerning the security of data reported to the Central Repository; however, any such policies and procedures must, at a minimum, meet the requirements set forth in the CAT NMS Plan and Appendix D.

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5. The Flexibility and Scalability of the CAT (SEC Rule 613(a)(1)(v))

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(a) Overview

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As required by SEC Rule 613(a)(1)(v), this section discusses the flexibility and scalability of the systems used by the Central Repository to collect, consolidate and store CAT Data, including the capacity of the Central Repository to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional Eligible Securities or transactions, changes in regulatory requirements, and other developments.

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The Plan Processor will ensure that the Central Repository’s technical infrastructure is scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture. The technical infrastructure should be designed so that in the event of a capacity upgrade or hardware replacement, the Central Repository can continue to receive data from CAT Reporters with no unexpected issues.

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The Plan Processor will perform assessments of the Central Repository’s technical infrastructure to ensure the technology employed therein continues to meet the functional requirements established by the Participants. The Plan Processor will provide such assessments to, and review such assessments with, the Operating Committee within one month of completion. The Operating Committee will set forth the frequency with which the Plan Processor is required to perform such assessments. The Operating Committee must approve all material changes / upgrades proposed by the Plan Processor before they can be acted upon. The Operating Committee may solicit feedback from the Advisory Committee for additional comments and/or suggestions on changes to the capacity study as the Operating Committee determines necessary.

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The Central Repository will employ optimal technology for supporting (1) scalability to increase capacity to handle a significant increase in the volume of data reported, (2) adaptability to support future technology developments and new requirements and (3) maintenance and upgrades to ensure that technology is kept current, supported and operational.

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Participants will provide metrics and forecasted growth to facilitate Central Repository capacity planning. The Plan Processor will maintain records of usage statistics to identify trends and processing peaks. The Central Repository’s capacity levels will be determined by the Operating Committee and used to monitor resources, including CPU power, memory, storage, and network capacity.

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The Plan Processor will ensure the Central Repository’s compliance with all applicable service level agreements concerning flexibility and scalability of the Central Repository, including those specified in the CAT NMS Plan and by the Operating Committee.

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(b) Approaches proposed by Bidders

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Information received from Shortlisted Bidders indicated that all six Shortlisted Bidders considered incoming transaction volumes to be one of their most significant drivers of cost across hardware, software, and full-time employees (“FTEs”), with the expected rate of increase in transaction volumes and retention requirements also being prominent drivers of cost. The approaches described above will facilitate effective management of these factors to provide for a cost-effective and flexible Central Repository.

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As noted in the RFP, the Bidders were required to provide comments on how the Central Repository would be scalable for growth in the following aspects: number of issues accepted by the CAT, types of messages accepted by the CAT, addition of fields stored on individual data records or increases in any data type due to market growth. The Bidders were also requested to describe how the system can be scaled up for peak periods and scaled down as needed.

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Bidders using a network infrastructure of data collection hubs noted the use of Ethernet links throughout a single hub as a method of handling additional throughput and capacity. Other Bidders note access points will be load balanced, allowing for additional capacity. Some Bidders note the need for continued monitoring to facilitate timely addition of capacity or other upgrades. Other Bidders highlighted the ability to scale processing horizontally by adding nodes to the database structure which will allow for additional capacity. In this instance, adding nodes to an existing clustered environment allows for the preservation of processing speed in the existing processing environment. In a cloud solution, Bidders note the systems will scale automatically. That is, the processing load or capacity is determined at the instance the tool is ‘run’ by the processer.146 Some Bidders broadly note that the selection of platform components or features of their proposed solution infrastructure was the key in developing a scalable system. It is further noted that the selection of these elements allows for technological upgrades to incorporate newer technologies without a system replacement. Bidders identify the use of additional server and storage capacity as a key proponent of providing a scalable system.

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6. The Feasibility, Benefits, and Costs for Broker-Dealers Reporting Allocations in Primary Market Transactions to the Consolidated Audit Trail (SEC Rule 613(a)(1)(vi))

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SEC Rule 613(a)(1)(vi) requires the Participants to assess the feasibility, benefits and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

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• The identity of all market participants (including broker-dealers and customers) that are allocated NMS Securities, directly or indirectly, in a Primary Market Transaction;147

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• The number of such NMS Securities each such market participant is allocated; and

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• The identity of the broker-dealer making each such allocation.148

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The objective of this CAT NMS Plan is to provide a comprehensive audit trail that “allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets.” The Participants believe that an eventual expansion of the CAT to gather complete information on Primary Market Transactions would be beneficial to achieving that objective. However, based on the analysis directed to be completed as part of this plan, the Participants have concluded that it is appropriate to limit CAT submissions related to allocations in Primary Market Transactions to sub-account allocations, as described below.

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Specifically, based on comments received by the Participants on this and other topics related to the consolidated audit trail,149 the Participants believe that information related to sub-account allocations – the allocation of shares in a primary market offering to the accounts that ultimately will own them – currently is maintained by broker-dealers in a manner that would allow for reporting to the Central Repository without unreasonable costs and could assist the Commission and the Participants in their regulatory obligations, including a variety of rulemaking and policy decisions. By contrast, the reporting of so-called “top account” information in Primary Market Transactions to the Central Repository would involve significantly more costs which, when balanced against the marginal benefit, is not justified at this time. These issues are discussed further below.

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As a preliminary matter, the analysis required pursuant to this section is limited to Primary Market Transactions in NMS Securities that involve allocations. As the Commission has noted, “‘a primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering.’”150 The Participants understand that Primary Market Transactions generally involve two phases that implicate the allocation of shares. The “book building” phase involves the process “by which underwriters gather and assess investor demand for an offering of securities and seek information important to their determination as to the size and pricing of an issue.”151 This process may involve road shows to market an offering to potential investors, typically institutional investors, including the discussion of the prospective issuer, and its management and prospects. The book building phase also involves efforts by the underwriter to ascertain indications of interest in purchasing quantities of the underwritten securities at varying prices from potential investors.152 Using this and other information, the underwriter will then decide how to allocate IPO shares to purchasers. The Participants understand that these are so-called “top account” allocations – allocations to institutional clients or retail broker-dealers, and that such allocations are conditional and may fluctuate until the offering syndicate terminates. Sub-account allocations occur subsequently, and are made by top account institutions and broker-dealers prior to settlement. Sub-account allocations represent the allocation of IPO shares to the actual account receiving the shares and are based on an allocation process that is similar to secondary market transactions.153

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(a) Feasibility

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In the April 2013 Request for Comment, the Participants requested information on how firms handle Primary Market Transactions. In response to the request, FIF, SIFMA and Thomson Reuters submitted comments explaining current industry practice with respect to Primary Market Transactions.154 Both SIFMA and FIF noted that broker-dealers generally maintain top account allocation information in book building systems that are separate from their systems for secondary market transactions and that differ across the industry, including the use of applications provided by third parties, in house systems and spreadsheets for small firms.155 The Participants also understand that the investment banking divisions of broker-dealers typically use different compliance systems than those used for secondary market transactions.156 The DAG also provided feedback157 indicating that the impacted systems differ across the industry, given differing processes for Primary Market Transactions depending upon the structure of the deal, and that initial allocations are stored in book-building systems with varying levels of sophistication across the industry, including third-party systems, custom-built systems, and spreadsheets. The Participants thus believe that capturing indications of interest and other information about top account allocations in an accurate and consistent manner across the industry would be challenging.

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By contrast, the Participants believe that it would be more feasible to gather information relating to sub-account allocations in Primary Market Transactions. The Participants understand that sub-account allocations are received in a manner and level of detail similar to allocations in secondary market transactions,158 and that the same middle and back office systems that are used for the processing of sub-account allocations for secondary market transactions generally are also used for the sub-account allocations for Primary Market Transactions.159 Similarly, sub-account allocations for Primary Market Transactions generally are maintained in an electronic format that could be converted into a reportable format acceptable for the CAT System. Therefore, these systems could more easily report information about sub-account allocations to the Central Repository than systems containing information regarding top-account allocations.

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(b) Benefits

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As the Commission notes, data about the final allocations of NMS Securities in Primary Market Transactions could improve compliance monitoring and market analyses by the Commission and the Participants, which, in turn, could help inform rulemaking and other policy decisions.160 For example, such data could enhance the Commission’s understanding of the role of the allocations in the capital formation process, when and how investors receiving allocations sell their Eligible Securities and how allocations differ among broker-dealers.161 Such data also could assist the Commission and Participants in conducting their respective examinations and investigations related to Primary Market Transactions.162

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The Participants believe that most of these potential benefits could be achieved through the gathering of information relating to sub-account allocations rather than top account information. For example, sub-account allocation information would aid the Commission and the Participants in gaining a better understanding of how shares allocated in Primary Market Transactions are sold in the secondary market, or how allocations differ across broker-dealers. By contrast, because top account information of conditional and interim allocations for NMS Securities fluctuates throughout the syndicate process and may vary significantly among firms, the marginal benefits of such information over final sub-account allocations are much less clear.

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(c) Costs

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The cost of reporting Primary Market Transaction information will depend on the scope of allocation information subject to the rule, as well as the related technology upgrades that would be necessary to report such information to the Central Repository. Based on the response of commenters, the Participants believe that reporting top account information about conditional allocations to the Central Repository would require significant technology enhancements. As noted above, current market practices capture top account allocations using systems and data sources that are different and separate from those used in secondary market transactions. Commenters also noted that there may be significant variability among underwriters in terms of the systems and applications used to gather such data.

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The DAG provided cost estimates associated with the reporting of Primary Market Transactions.163 These estimates indicated that to report both initial and sub-account allocations would cost the industry as a whole at least $234.8 million164 and require approximately 36 person-months per firm to implement. The DAG’s estimate to report sub-account allocations only was approximately $58.7 million165 for the industry and would require approximately 12 person-months per firm to implement. The DAG commented that given the higher costs associated with reporting initial allocations, if Primary Market Transactions are required to be reported to the Central Repository, that only reporting final sub-account allocations be required.

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Based upon this analysis, the Participants are supportive of considering the reporting of Primary Market Transactions, but only at the sub-account level, and will incorporate analysis of this requirement, including how and when to implement such a requirement, into their document outlining how additional Eligible Securities could be reported to the Central Repository, in accordance with SEC Rule 613(i) and Section 6.11 of the Plan.

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B. ANALYSIS OF THE CAT NMS PLAN: These considerations are intended to help inform the Commission about the cost for development, implementation and maintenance of the CAT and to help determine if such plan is in the public interest.

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7. Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii))

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The analysis of expected benefits and estimated costs presented here is informed by the Commission’s public guidance on conducting economic analysis in conjunction with SEC rulemaking.166 The analysis begins with a statement of the need for regulatory action, describes the sources of information used in the analysis, and provides a description of the economic baseline used to evaluate the impacts associated with the CAT NMS Plan. The analysis then provides estimates of the costs to build, implement, and maintain the CAT, as contemplated, and ends with a description of the alternatives considered.

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(a) Need for Regulatory Action

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SEC Rule 613 further requires the Participants to consider and discuss in the CAT NMS Plan detailed estimated costs for creating, implementing, and maintaining the CAT as contemplated by the CAT NMS Plan. Specifically, SEC Rule 613 requires that the estimated costs should specify: (1) an estimate of the costs to the Participants in establishing and maintaining the Central Repository; (2) an estimate of the costs to broker-dealers, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants and broker-dealers. Set forth below is a discussion of cost estimates, including the studies undertaken to obtain relevant data, as well as the proposed funding model.

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(b) Economic Analysis

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(i) Sources of Cost Information

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Participants relied on two primary sources of information to estimate current audit trail costs (i.e., costs associated with the economic baseline), the costs incurred to meet the requirements of SEC Rule 613 for both the Participants and other CAT Reporters and the costs associated with the creation, implementation and maintenance of the CAT. First, to assess the costs associated with Participant and CAT Reporter obligations, Participants solicited study responses from Participants, broker-dealers and third party vendors. These three constituencies are the primary parties with direct costs arising from SEC Rule 613, as discussed further below. Second, to assess the costs associated with creating, implementing and maintaining the CAT, this analysis relies on estimated costs submitted by the Bidders as part of the bidding process.

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(A) Studies

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(1) Costs to Participants Study

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The first study undertaken collected information from the Participants about current audit trail reporting costs under the existing regulatory reporting framework and the potential costs of reporting to the Central Repository (the “Costs to Participants Study”). Respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. The study also requested information about costs associated with retiring current regulatory systems that would be rendered redundant by the CAT.

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The Costs to Participants Study was distributed to the 19 Participants on August 11, 2014. The initial due date for responses was August 25, 2014; however due to the complexity of the data collection effort, the due date for the study was extended to September 24, 2014. Discussions with respondents suggested that at least some of the costs were more appropriate to measure at the level of the group of Affiliated Participants that hold multiple licenses (“Affiliated Participants Group”). Based on this approach, study results are presented for four Participants holding a single exchange registration and FINRA, which also is a Participant but is a registered securities association, and another five Affiliated Participants Groups representing the remaining fourteen registered exchanges. Subsequent to the filing of the CAT NMS Plan, the Participants determined that additional detail about anticipated costs could be provided to enhance the data collected as part of the Costs to Participants Study and a second data collection was conducted.

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(2) Costs to CAT Reporters Study

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The study sent to broker-dealers (the “Costs to CAT Reporters Study”) was distributed to 4,406 broker-dealers,167 and requested estimates for current costs under the existing regulatory reporting framework as well as future costs for reporting to the Central Repository. Broker-dealer respondents were asked to estimate the future costs to report to the Central Repository under two separate scenarios.168 Approach 1 described a scenario in which broker-dealers would submit data to the Central Repository using their choice of existing industry messaging protocols, such as the FIX protocol. Approach 2 provided a scenario in which broker-dealers would submit data to the Central Repository using a defined or specified format, such as an augmented version of OATS. For each approach, respondents were asked to estimate separately hardware, FTE staffing costs, and third party provider costs, where applicable. Finally, broker-dealers were requested to provide the cost of retirement of existing systems to be replaced by the CAT.

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The development of the Costs to CAT Reporters Study took place over two months, starting in May 2014, and included detailed discussions with the DAG. The Participants developed an initial outline of questions based on the requirements in SEC Rule 613, as well as a detailed assumptions document. To make the Costs to CAT Reporters Study effective and informative, the Participants spent two months formulating the Costs to CAT Reporters Study with detailed input from the DAG. The initial draft of the Costs to CAT Reporters Study was presented to the DAG in May 2014, and was discussed in two additional meetings with the DAG until mid-June 2014. In addition, on June 4, 2014, the Participants received and subsequently incorporated detailed written feedback from DAG members on the Costs to CAT Reporters Study and associated assumptions document.169

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The study link was sent on June 23, 2014, to the compliance contact at each recipient CAT Reporter identified by the applicable designated examining authority or designated options examining authority to receive regulatory update and information requests. The initial due date for the study was August 6, 2014. On June 25, 2014 and July 9, 2014, the Participants hosted a webinar170 to review the materials associated with the Costs to CAT Reporters Study, and to answer any questions from the CAT Reporters. On July 17, 2014, July 30, 2014, and August 4, 2014, reminders were sent to the CAT Reporters to submit their final responses to the Costs to CAT Reporters Study by August 6, 2014. In addition, the Participants requested that industry associations that are part of the DAG encourage their members to respond to the Costs to CAT Reporters Study.

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On August 6, 2014, the first extension was granted for the Costs to CAT Reporters Study, extending the due date to August 20, 2014. On August 20, 2014, an additional extension was granted, extending the due date to September 3, 2014.

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During the process of collecting responses to the Costs to CAT Reporters Study, CAT Reporters were informed that all responses were captured on an anonymous basis and would only be reported to the Participants in an aggregated, anonymous format. The third party facilitator of the Costs to CAT Reporters Study reviewed all responses received through the study portal. Study respondents had the option of identifying their firm should additional follow-up be required; any such follow-up was undertaken by the third-party facilitator, as necessary, to enhance the overall quality of responses received.

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The Participants received 422 responses. Of those responses, 180 were deemed to be materially incomplete171 and, thus, they were considered effectively nonresponsive. An additional 75 responses were determined to be clearly erroneous; for example the responses had repeating values that could not be used in analysis, or the magnitude of reported FTEs or other costs was so high as to be considered an outlier172. As a result, the Participants excluded these incomplete and clearly erroneous responses from the data set, resulting in a population of 167 responses that was used for purposes of conducting the cost analysis described herein.

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(3) Costs to Vendors Study

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A study requested information from various service providers and vendors about the potential costs of reporting to the Central Repository (the “Costs to Vendors Study”). The Participants developed the content of the Costs to Vendors Study, based on the structure and content of the Costs to CAT Reporters Study. The distribution list for the Costs to Vendors Study was provided by the DAG, and was distributed to 13 service bureaus and technology vendors on August 13, 2014. The initial due date for responses was September 1, 2014; however, due to the complexity of the data collection effort, the due date for the study was extended to September 12, 2014. The Participants received five completed responses to the Costs to Vendors Study.

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(B) Bidder Estimates

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To estimate the costs to Participants for creating, implementing and maintaining the CAT, Bidders were asked to provide in their Bid documents total one-year and annual recurring cost estimates. As part of the RFP process, the Bidders were asked to provide a schedule of the anticipated total cost of creating, implementing and maintaining the CAT. As noted above in the Background Section of Appendix C, any one of the six Shortlisted Bidders could be selected as the Plan Processor and each Shortlisted Bidder173 has proposed different approaches to various issues. The Bidder selected as the Plan Processor must meet the specific requirements set forth in the Plan and Appendix D and may be given the opportunity to revise its Bid prior to the final selection of a Plan Processor. Accordingly, the Participants anticipate that the cost estimates to create, implement and maintain the CAT may differ from what is set forth below.174

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In its final rule for the Consolidated Audit Trail, the Commission amended its proposal to include enhanced security and privacy requirements. Specifically, SEC Rule 613(e)(4) requires the NMS Plan to include policies and procedures, including standards, to be used by the Plan Processor to ensure the security and confidentiality of all information reported to the Central Repository. Participants did not ask Bidders to separately assess the costs associated with the enhanced security requirements in SEC Rule 613; rather these costs were embedded in the Bids as a component of the total costs.

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The RFP requested that Bidders provide an estimate of the total one-time cost to build the CAT, including technological, operational, administrative, and any other material costs. The six Shortlisted Bidders provided estimates ranging from a low of $30,000,000 to a high of $91,600,000, with an average one-time cost of $53,000,000.175

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The RFP also requested that Bidders provide an estimate of annual recurring operating and maintenance costs for the five year period following the selection of the Plan Processor, and an estimate of the annual peak year costs (i.e., cost for the year during which it will cost the most to operate the CAT). The six Shortlisted Bidders provided estimates ranging from a low of $135,000,000 to a high of $465,100,000 over the course of the first five years of operation, with an average five-year cost of $255,600,000 and an average annual cost of $51,100,000. Estimates of peak year recurring costs range from a low of $27,000,000 to a high of $109,800,000, with an average of $59,400,000. The table presented below reports the low, median, average, and maximum expected costs for the build, maintenance, and peak year maintenance of the Central Repository arising from the Shortlisted Bids. These figures are subject to change as Bidders may update their cost estimates.

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The Participants note, however, that there may be a relation between the initial construction costs and maintenance costs based on technological choices, among other factors. To better compare estimates, the Participants are providing a range based on the reported combined build and annual recurring costs for the five year period following Plan Processor selection, discounted by a factor of 2%.176 Estimates of total costs range from $159,800,000 to $538,700,000.

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Participants sought insight into the economic drivers of the cost estimates from the Shortlisted Bidders. Specifically, Participants asked each Shortlisted Bidder to identify the factors, such as the amount of message traffic, complexity of order life cycles, number and complexity of Participant and Commission data requests and administration and support costs that were material to its Bid. Bidders identified the following as primary drivers of their Bid costs: (1) reportable volumes of data ingested into the Central Repository; (2) number of technical environments that would be have to be built to report to the Central Repository; (3) likely future rate of increase of reportable volumes; (4) data archival requirements; and (5) user support and/or help desk resource requirements.177

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(ii) Economic Baseline

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In publishing SEC Rule 613, the Commission stated that it “believes that the regulatory infrastructure on which the Participants and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system.”178 The purpose of the CAT NMS Plan is to develop, build and maintain a system that provides an infrastructure to appropriately monitor, surveil and oversee the national market system in its current state and provide sufficient flexibility to reasonably adjust for future financial market innovations.

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Such a system will necessarily impact the Commission, Participants, potential future Participant entrants, broker-dealers and other market participants, issuers and investors. Each party may derive costs, benefits and other economic impacts, depending upon plan implementation, the relevant economic activities of each entity and the allocation of costs and responsibilities across those entities. These estimated costs, benefits, and other economic impacts must be assessed against the current economic baseline, capturing the existing state of regulatory audit trail activity in the markets. The economic baseline for different affected parties is described in greater detail below.

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(A) Description of Current Audit Trail Reporting

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Currently, separate audit trails exist within each exchange in addition to the audit trail requirements for FINRA members to report to OATS.179 For equities, all broker-dealers that are members of FINRA must report their orders in NMS Stocks and OTC Equity Securities, including executions or cancellations, to OATS. Accordingly, for FINRA members, it is possible to match OATS reports to related exchange audit trail entries, provided that the related exchange has a regulatory services agreement with FINRA such that FINRA has access to the exchange data. Broker-dealers that are not FINRA members do not have a regular equity audit trail reporting requirement, although NYSE and NASDAQ member proprietary firms that are not FINRA members have an obligation to record OATS data and report to FINRA upon request. Additionally, each exchange creates its own audit trail for each order received that it receives and processes.

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For options, the options exchanges utilize the Consolidated Options Audit Trail System (“COATS”) to obtain and review information on options transactions. COATS data includes trades, the National Best Bid and National Best Offer at the time of the trade and clearing information for customers at the clearing firm level. It also identifies clearing firm proprietary trading and individual marker maker transactions if they are reported correctly at the time of the trade. However, COATS does not include adjustment data from the Options Clearing Corporation; these adjustments include changes to either the account type or size of the position. Additionally, order information is only available to the Commission upon request from the options exchanges. Currently reports need to be constructed based on order information received from the various options exchanges. As previously noted, only the National Best Bid and National Best Offer at the time of the trade is included in the COATS data; however, this is optional data that the exchanges may or may not provide. The options exchanges utilize their independent quote information to build their reports.

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In sum, each equities and options exchange is built on its own unique platform, utilizes unique entry protocols and requirements and thus creates uniquely formatted audit trails.

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The existence of multiple non-integrated audit trails has direct consequences on the accuracy and efficiency of regulatory oversight. The Commission has stated that:

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…there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, re-routed, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.180

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In addition, the Intermarket Surveillance Group’s (“ISG”) consolidated equity audit trail combines transaction data from all exchanges and is used by all Participants for surveillance purposes. However, the ISG audit trail is limited because it contains clearing member and executing broker’s CRD numbers, but does not contain information about the beneficial owner to a trade. It also does not contain order detail information such as a complete order entry time or routing history.

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COATS and the ISG equity audit trails are utilized to generate various option cross market/cross product exception reports, such as front-running and anticipatory hedges. Since the current data is unable to drill down to beneficial owner or order information, these reports are less effective and produce a large number of false positives.

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(B) Costs, Benefits, and Other Economic Impacts of Audit Trail Reporting on Regulators and Market Participants

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(1) Participants

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There are 19 Participants of varying sizes that have established audit trail reporting requirements for NMS Securities. Of these, one is a registered securities association. The other 18 Participants are exchanges. Fourteen of these exchanges permit quotation and transactions in NMS Securities and 12 permit transactions and quotations in Listed Options.

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Participants expend resources currently to maintain and update their audit trail reporting systems. Costs for current surveillance programs as indicated by Participants responding to the Costs to Participants Study vary significantly, reflecting the various sizes of Participants: total annual costs associated with meeting current regulatory requirements are estimated to be $6,900,000. Total annual costs for current surveillance programs for all Participants are $147,200,000.

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(2) Broker-Dealers

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Broker-dealers benefit from the current regime of audit trail reporting to the extent that reporting today permits the Commission and Participants to monitor for rule compliance. Effective regulatory and compliance oversight ensures increased market integrity and supports investor confidence in participating in financial markets. Conversely, if investors believe that regulators are unable to adequately and effectively monitor activities in a complex market (through current audit trail reporting), broker-dealers bear some of the cost in the form of lower market activity.

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Broker-dealers that are FINRA members must have systems and processes in place to provide FINRA with the reportable data in the required format. These systems also require resources to ensure that data quality and consistency and timeliness of reporting are maintained, and record-keeping obligations are fulfilled.181 Additionally, firm trading and order routing systems send orders and quotations to each exchange in the format required by such exchange. In turn, each exchange must store and convert the data for the purposes of creating internal exchange audit trails. Broker-dealers also commit staff to respond to Participant and Commission requests for additional data and related information based upon surveillance.

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Broker-dealers may take varied approaches to fulfilling their regulatory reporting obligations. For instance, many broker-dealers develop internal systems for the purpose of compiling order and trading data into a reportable format. In these instances, the firms may need to centralize varied and disparate systems. Other broker-dealers typically use third parties to help them comply with their reporting obligations. These third parties may include service bureaus that provide the firms with order management systems. Firms may also contract with their clearing firms to package and submit order data files on their behalf.

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Some broker-dealers that are FINRA members may be exempt from OATS reporting, or are excluded under FINRA rules from OATS requirements. Exempt firms go through a formal exemption request process through which they certify that they meet the exemption criteria which includes: (1) the member firm has total annual revenue of less than $2,000,000; (2) the member firm and current control affiliates and associated persons of the member have not been subject within the last five years to any final disciplinary action, and within the last 10 years to any disciplinary action involving fraud; (3) the member does not conduct any clearing or carrying activities for other firms; (4) the member does not conduct any market making activities in NMS Stocks and OTC Equity Securities; and (5) the member does not execute principal transactions with its customers.182 FINRA also excludes some members from the definition of a reporting member. The criteria to receive this exclusion include: (1) the member must engage in a non-discretionary order routing process where the firm immediately routes all of its orders to a single receiving reporting member; (2) the member cannot direct or maintain control over subsequent routing or execution by the receiving reporting member; (3) the receiving reporting member must record and report all information under applicable FINRA rules; and (4) the member must have a written agreement with the receiving reporting member specifying the respective functions and responsibilities of each party.183 Approximately 660 broker-dealers are either exempt or excluded from OATS requirements, but will be required to report to the Central Repository. These broker-dealers are included in the estimate of broker-dealers currently quoting or executing trades in NMS Securities and/or Listed Options.

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Additionally, the OATS rules do not require that proprietary orders generated in the normal course of market-making be reported.184 While some firms have chosen to voluntarily report such orders, there may be current gaps in the audit trail.

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Broker-dealers that are members of other Participants must also have systems and processes in place to provide the necessary reportable data in the required format. These systems also require resources to ensure data quality and consistency, timeliness of reporting, and record-keeping obligations.185 Broker-dealers that are members of more than one Participant must maintain and manage systems that provide the relevant audit trail data to each Participant for which they have an obligation to report such data, in the manner and by the rules proscribed by each Participant, as applicable.

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Upon request, broker-dealers must submit Electronic Blue Sheet (“EBS”) data to the requesting Participant by the specified due date, which is generally ten business days after receipt of the initial request. An EBS request is made by product and trade date range, with the data providing detailed information about the underlying accounts that transacted in the requested security. EBS requests can only be made for settled transactions in equity, option, or fixed income products, and they include information on allocations and executions of the requested product and may cover a time period of up to seven years from the date requested. Large Trader Reports are similar to EBS reports, except they are requested only by the Commission. Large trader requests may only be requested for NMS Securities, which may include unsettled transactions. In addition to requests being made by security and trade date range, a Large Trader request may be made by a LTID and trade date range. An LTID is an SEC identifier used to identify related entities under the same beneficial ownership structure. Broker-dealers must have systems and processes in place to provide EBS or large trader reportable data in the required format. These systems require resources to ensure that the data quality and timeliness of reporting are maintained, and record-keeping obligations are met. As with OATS, broker-dealers must commit staff to respond to requests for EBS or large trader data and may take varied approaches to fulfilling their regulatory reporting obligations.

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PHLX Rule 1022 initially required members to submit specified data to PHLX for all accounts, however this rule was amended in May 2014 to more closely mirror NYSE Rule 757, ARCA Rule 6.39, and CBOE Rule 8.9, and to only require broker-dealers to report data for all of the accounts for which they engage in trading activities or which they exercise investment discretion upon request, rather than on a continuing basis. PHLX Rule 1022 was in place prior to the existence of the compliance data files from ISG (COATS and ECAT) and OCC (position). The remaining requirement for members to provide data upon request is to enable a review if required for regulatory purposes. PHLX Rule 1022 is anticipated to be retired once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT, rather than from Industry Members.

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CBOE Rule 8.9(b) requires clearing firms to submit, on a daily basis and in a manner prescribed by CBOE, every executed order entered by market makers for securities underlying options traded on CBOE or convertible into such securities or for securities traded on CBOE, as well as for opening and closing positions in all such securities held in each market maker account. To the extent that clearing firms do not report such orders and information, the market maker who entered the order is responsible for reporting the order information. These data files are commonly known as Market Maker Equity Trade (MMET) and Market Maker Stock Position (MMSTK) files. The CBOE daily reporting requirement for market makers is comparable to other option exchange reporting requirements. CBOE Rule 8.9(b) is anticipated to be amended once all CAT Reporters are submitting data to the CAT as the information would be obtainable from CAT rather than from Industry Members.

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As of June 30, 2014, there were 4,406 registered broker-dealers that were members of at least one Participant. The Participants determined that, as of July 31, 2014, approximately 1,800 of these registered broker-dealers quoted or executed transactions in NMS Securities, Listed Options or OTC Equity Securities. Of these 1,800 broker-dealers, approximately 1,700 are FINRA members and are either reporting to OATS or were identified as routing firms in OATS reports submitted by other OATS reporting broker-dealers, but are otherwise excluded from the definition of an OATS reporting member or exempt from the OATS rules. In addition, there are an estimated 100 broker-dealers that reported transactions to another SRO, but that are not FINRA members. This determination was made through a review of the number of broker-dealers that transmitted order information to OATS, reported transaction information or quoted messages to a Participant for each month, over the previous 18 months. The Participants also reviewed message traffic data in the same month in the prior year and found that July 2014 was a reasonable representation of such activity.

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Cost components considered in this process included technology costs (hardware / software costs), FTE costs (including, technology, operational, and compliance staffing requirements), and any outsourcing costs.186 The study also contained questions related to current costs that are intended to capture the baseline costs to broker-dealers for regulatory reporting, including costs related to compliance with OATS, the EBS and Large Trader reporting, and other reporting requirements, such as NYSE Rule 410B, PHLX Rule 1022, FESC/NYSE Rule123(e)/(f), and CBOE Rule 8.9.

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(C) Description of Costs to CAT Reporters Study Results

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Of the 167 responses to the Costs to CAT Reporters Study used in the analysis of costs associated with reporting to the Central Repository, 49 were from large firms and 118 were from small firms.187 Fifty-one respondents indicated that they have OATS reporting obligations and 116 respondents188 stated that they do not currently have OATS reporting obligations.189 Of these 51 OATS reporters, 21 were large and 30 were small broker-dealers, with one firm completing al reporting using in-house staffing, 26% using a combination of in-house staffing and outsourcing, 44% of firms outsourcing to clearing firms, and the remaining 26% outsourcing their reporting to service bureaus. Of the remaining 116 broker-dealers, self-identified as non-OATS reporters,190 28 were large and 88 were small. Figures for each respondent category have been provided for reference to support the cost analysis and include the average, median, minimum, maximum, and number of responses received equal to zero (0) or blank.191

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In analyzing responses to the Costs to CAT Reporters Study, Participants found responses to specific questions to be outliers. However, if the overall response from that respondent was otherwise deemed to be reasonably complete, the response was included in the analysis. As a result, in some cases, this may result in averages or medians being higher or lower than may be expected. In addition, a significant number of firms, in particular large firms, indicated that their current cost for regulatory obligations is $0. It is the Participants’ understanding that this is likely due to current operational practices among broker-dealers that do not differentiate between technology and headcount costs that support business functionality and regulatory reporting.

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Tables 1 and 2 describe the costs associated with current regulatory reporting requirements. Current costs for study respondents consisted of hardware / software costs, FTE costs consisting of development / maintenance, operational, and compliance staffing as well as third party outsourcing costs. Current average (median) hardware / software costs for the 49 large firms were equal to $310,000 ($0) and the 118 small firms were equal to $130,000 ($0).

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Large firms reported that they employ an average (median) of 9.56 (0.00) FTEs for OATS, EBS and other regulatory reporting requirements, while small firms employed 2.36 (0.00) FTEs for the same reporting requirements. Participants estimate the dollar costs associated with these FTEs by applying an annual expenditure of $401,440 per FTE192 to determine cost. The resulting average (median) FTE costs were equal to $3,800,000 ($0) for the 49 large firms and $950,000 ($0) for the 118 small firms.

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Third party / outsourcing costs were also varied by firm size. Average (median) third party / outsourcing costs for large firms was $180,000 ($0) and $130,000 ($0) for small firms.193

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Based on the costs associated with current regulatory reporting requirements, large firms provided an average cost of $4,290,000, and small firms reported an average cost of $1,210,000 for current reporting costs, with a median estimate of $0 for both large and small firms.

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Tables 3 to 6 describe the current regulatory costs for respondents who identified themselves as having OATS reporting obligations versus those that do not (referred to as non-OATS). For the 21 large OATS reporters, current hardware / software costs averaged $720,000, with a median cost of $10,000, while the 28 large non-OATS reporters reported an average hardware / software cost of $2,600, with a median cost of $0. For the 30 small OATS reporters, current hardware / software costs averaged $490,000, with a median value of $3,000, with the 88 small non-OATS reporters reporting an average hardware / software cost of $900 and a median cost of $0.

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Large OATS reporters stated they required, on average, 17.88 FTEs, with a median value of 7.00 FTEs. Applying the FTE rate described above, this translates into an average FTE cost of $7,200,000, and a median value of $2,800,000. Large non-OATS reporters indicated an average FTE requirement of 3.32 and a median requirement of 0.00, translating into an average cost of $1,300,000 and a median cost of $0. On the other side of the spectrum, small OATS reporters stated they required, on average, 6.11 FTEs, with a median value of 3.50 FTEs. Applying the FTE rate described previously, this translates into an average FTE cost of $2,500,000, and a median value of $1,400,000. Small non-OATS reporters indicated average FTE requirements of 1.08 and a median requirement of 0.00, translating into an average cost of $430,000 and median cost of $0.

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Third party / outsourcing costs for Large OATS reporters averaged $400,000, with a median value of $0; large non-OATS reporters indicated average third party / outsourcing costs of $22,000, with a median value of $0. For small OATS reporters, third party / outsourcing costs averaged $510,000 with a median value of $3,000; small non-OATS reporters provided average costs of $2,900, with median costs of $0.

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Based on the cost estimates above, large OATS reporters estimated an average (median) cost equal to $8,320,000 ($2,810,000) while large non-OATS respondents estimated an average (median) cost equal to $1,324,600 ($0). Small OATS reporters estimated an average (median) cost equal to $3,500,000 ($1,406,000) while small non-OATS respondents estimated an average (median) cost equal to $433,800 ($0).

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To understand the current costs associated with regulatory reporting and estimate the direct costs associated with the CAT NMS Plan, the Participants also conducted the Costs to Vendors Study. CAT Reporters may currently rely on third-parties to provide key services necessary to meet the reporting obligations. Smaller broker-dealers may rely wholly or in part on third-party providers for the infrastructure to manage and maintain their electronic records, including all of the data required for audit trail reporting. Larger broker-dealers and Participants may augment their own internal IT capacity and capabilities by purchasing the services of one or more third-party vendor. As a result, it is important to understand the current reporting cost as well as the likely impact of SEC Rule 613 on these vendors and to include them in the estimate of aggregate economic impacts.

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The Participants received five completed responses to the Costs to Vendors Study. One of the respondents indicated that the vendor did not currently have any reporting expenses on behalf of its clients and did not expect to face any costs under the CAT. Of the remaining responses, three respondents supported more than 100 clients, and one supported between 50 and 99 clients. Two of the respondents supported up to 25 million accounts, and two supported up to 50 million accounts. Two of the respondents serviced clients with institutional and retail businesses, while the remaining two supported clients with institutional businesses only.

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For equity order reporting, two respondents indicated that they process up to 1 million equity orders per day on behalf of their clients, and two respondents indicated that they process up to 2 million equity orders per day on behalf of their clients. For options order reporting, three respondents indicated that they report up to 1 million options orders per day on behalf of their clients, and one respondent indicated that it reports up to 2 million options orders per day on behalf of its clients. All four respondents indicated that they report between 3 million and 100 million OATS reportable order events194 per day on behalf of their clients. Three of the four respondents submitted EBS reports for their clients, with two submitting up to 200 responses per month and one submitting up to 400 responses per month.

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Reported costs for current regulatory reporting for vendors varied widely across both dollar costs and FTE requirements. Each respondent provided an FTE rate associated with their FTE requirements; therefore, FTE costs for the vendors are reported using rates provided by each respondent. Dollar costs for hardware and software ranged from $50,000 to $15,000,000, and FTE requirements (cost) ranged from 11 ($2,700,000) to 92 ($8,600,000). While the respondent with the largest number of clients reported the highest costs, costs did not always correlate uniformly with the number of clients for other firms.

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(iii) Estimated Costs, Benefits, and Other Economic Impacts of the CAT NMS Plan on Affected Parties

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As required by SEC Rule 613(a)(1)(vii), this section provides detailed estimated costs for creating, implementing, and maintaining the CAT, specifying (1) an estimate of the costs to Participants for establishing and maintaining the CAT; (2) an estimate of the costs to members of the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; (3) an estimate of the costs to the Participants, initially and on an ongoing basis, for reporting the data required by the CAT NMS Plan; and (4) the Participants’ proposal to fund the creation, implementation, and maintenance of the CAT, including the proposed allocation of such estimated costs among the Participants, and between the Participants and members of the Participants. The Participants are sensitive to the economic impacts of SEC Rule 613. Throughout the development of the CAT NMS Plan, the Participants have continued to focus on minimizing the costs associated with the CAT. The Participants note that the figures presented in this analysis are estimates based on research completed and currently available data and are inherently subject to uncertainties.

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Through the RFP, review of proposals received, and interaction with industry, the Participants have identified the sources of the costs associated with the CAT NMS Plan. These include direct costs associated with creating, implementing and maintaining the CAT necessary to meet the requirements of the CAT NMS Plan. There are also direct costs associated with developing and adapting applicable CAT Reporter systems to meet the requirements of the CAT NMS Plan and comply with the Plan on an ongoing basis. Additionally, Participants and broker-dealers may incur direct costs associated with the retirement of redundant reporting systems, although there may also be significant savings to broker-dealers associated with retiring those systems over time.

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In order to meet the responsibilities outlined in SEC Rule 613, the Participants have accrued, and will continue to accrue, direct costs associated with the development of the CAT NMS Plan. These costs include staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration. The Participants estimate that they have collectively contributed 20 FTEs in the first 30 months of the CAT NMS Plan development process. In addition, the Participants have incurred public relations, legal, and consulting costs in the preparation of the CAT NMS Plan. The Participants estimate the costs of these services to be $8,800,000. These public relations, legal, and consulting costs are considered reasonably associated with creating, implementing, and maintaining the CAT upon the Commission’s adoption of the CAT NMS Plan.

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Given the size and scope of the CAT initiative, estimating the costs of the creation, implementation and maintenance of the CAT is a complex task, and one that necessarily relies on input from parties not directly charged under SEC Rule 613 with the responsibility to create and file the CAT NMS Plan. In light of this, the Participants have used a multi-pronged approach to assess the potential costs of the CAT. Among other things, the Participants have evaluated the many cost-related comments received in response to the Commission’s rule proposal for SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants have considered cost analyses and considerations provided by Bidders as well as the views and related information provided by the DAG and written feedback from the SIFMA and the FIF.

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The economic baseline against which the potential costs and benefits of the CAT must be compared are discussed above in Section B(7)(b)(ii). The potential impacts and estimated costs of the CAT are discussed separately below, presenting study results where applicable.

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(A) Investors

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Approximately 52% of Americans hold individual stocks, stock mutual funds or stocks through their retirement plan,195 and the retail options industry continues to grow.196

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Investors benefit from the protections provided through the use of audit trail data, permitting regulators to adequately and effectively monitor activities in today’s complex securities markets. In SEC Rule 613, the Commission identified several ways that the CAT would enhance the protections to investors. These include: facilitating risk-based examinations, better identification of potentially manipulative trading activity, improved processes for evaluating tips, complaints and referrals of potential misconduct made to regulators, increased efficiency of cross-market and principal order surveillance, improved analysis and reconstruction of broad-based market events, improved ability to monitor and evaluate changes to market structure, and efficiencies from a potential reduction in disparate reporting requirements and data requests.

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For instance, as shown in academic literature, surveillance has been demonstrated to increase investor confidence, by mitigating manipulative behavior and increasing trading activity.197 Academic literature provides support for the notion that investors associate enhanced surveillance with greater investment opportunity across a larger number of listed companies and with higher market capitalizations.198 Cross-market surveillance – an opportunity expected to be improved by CAT – is likely more effective in detecting manipulative behavior than single-market surveillance. A more recent study provides evidence that better surveillance is associated with reduced insider trading, as it would be harder to hide such trades.199

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To the extent that better surveillance leads to more effective rulemaking,200 investors should also benefit from the improvements in market quality that might arise from such rulemaking. For example, one study shows that detailed trading rules are positively correlated with liquidity measures evidenced by lower volatility and bid-ask spreads.201 Similarly, a separate study finds that European Union countries that have more effective rules to prevent market abuse and enhance transparency experience higher market liquidity.202

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Investors may also bear the costs associated with maintaining and enhancing the current audit trail systems. In some cases, broker-dealers may pass on regulatory charges that support Participant supervision, such as with respect to Section 31 fees.203 In other cases, broker-dealers may cover some of their regulatory charges through commissions and other charges. Similarly, broker-dealers may seek to pass on to investors their costs to build and maintain the CAT, which may include their own costs and any costs passed on to them by Participants. This analysis does not measure either the likelihood of these costs being passed through to investors nor the potential dollar impact on investors. The extent to which these costs are passed on to investors depends on the materiality of the costs and the ease with which investors can substitute away from any given broker-dealer.

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(B) Participants

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Participants are expected to benefit from the requirements to report to the Central Repository. To the extent that the CAT enhances comparability of audit trail data – thereby enhancing order lifecycle comparability across different trading venues – Participants may better fulfill their obligations to “prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities” as set forth in Section 6 of the Exchange Act.

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Participants would also incur direct costs associated with creating, implementing and maintaining the CAT infrastructure. The full cost associated with the build and maintenance of the CAT would be shared among Participants and Industry Members, consistent with the CAT NMS Plan. Participants would also be subject to costs associated with updating and maintaining their own systems to comply with their obligations to report to the Central Repository.

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(1) Central Repository Build and Maintenance Costs

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The CAT NMS Plan provides that the costs arising from the build and maintenance of the CAT will be collected from all CAT Reporters, which includes Participants. As described in Article XI of the CAT NMS Plan and in Section C(b)(7)(iii)below, Participants will be required to pay their allocated portion of these costs on an annual basis.

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The CAT NMS Plan also contemplates that Participants may impose greater requirements on the Central Repository based on their use of information in the repository for regulatory purposes. These requirements may take the form of frequent and complex analyses of data which may likely require more resources from the Central Repository. It is critical that the Company recover its costs in a manner consistent with the principles articulated in the CAT NMS Plan, which include both the need to allocate costs in a manner consistent with the cost to operations and that the CAT NMS Plan not create significant disincentives to Participants in seeking to meet their regulatory obligations. As such, the CAT NMS Plan permits the Company to assess additional charges to Participants associated with their use of the Central Repository’s data and reporting facilities as it deems necessary.

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(2) Costs to Participants to Meet Reporting Requirements

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The Costs to Participants Study was distributed to the Participants to collect information about the potential costs of the CAT to the Participants. The Costs to Participants Study was designed to provide insight into the current total costs associated with regulatory reporting and surveillance programs discussed above, as well as expected implementation and maintenance costs associated with reporting to and surveillance through the Central Repository.

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The anticipated costs associated with the implementation of regulatory reporting to the Central Repository were estimated to be a total of $17,900,000 across all ten Participants. Included in this cost, Participants reported a total of $770,000 in legal and consulting costs, as well as total FTE costs of $10,300,000 for operational, technical/development and compliance-type functions.

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Maintenance costs associated with regulatory reporting to Central Repository were estimated to be a total of $14,700,000 across all ten Participants. Included in this estimate are legal, consulting, and other costs associated with maintenance, a total of $720,000, and $7,300,000 to FTEs for operational, technical/development, and compliance functions regarding the maintenance of regulatory reporting associated with CAT.

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The Participants were also asked to identify the costs associated with the implementation of surveillance programs within the Central Repository. The estimated total costs across all ten Participants were $23,200,000 including estimated legal, consulting, and other costs of $560,000. Also included in the total, Participants reported that they would allocate a total of $17,500,000 to FTEs to operational, technical/development, and compliance staff to be engaged in the creation of surveillance programs.

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The estimated total costs associated with the maintenance of surveillance programs were $87,700,000, including $1,000,000 for legal, consulting, and other costs. Of the total cost, the Participants estimated that they would allocate a total of $66,700,000 to FTEs to operational, technical/development and compliance staff.

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Retirement costs for current systems were estimated to be $310,000 across all Participants. However, Participants expect that by no longer needing to maintain these legacy systems due to adoption of the CAT, they will realize aggregate savings of $10,600,000, which will partially offset some of the costs expected to be borne by the Participants as described further below. To the extent that the Participants are able to retire legacy systems and replace them with more efficient and cost effective technologies, they may experience additional cost savings. The Costs to Participants Study does not attempt to quantify any such additional cost savings to broker-dealers.

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(C) Broker-Dealers

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The CAT is expected to provide a more resilient audit trail system that may benefit broker-dealers. For instance, as noted above, more effective oversight of market activity may increase investor confidence and help expand the investment opportunity set through increased listings. Broker-dealers may benefit from increased investor confidence, provided that it results in increased trading activity. In addition, broker-dealers may experience less burden, to the extent that, data provided to the Central Repository reduces the number of direct requests by regulators for their surveillance, examination and enforcement programs. For example, after the implementation of CAT, regulators seeking to identify activity for NMS Securities at the customer account level, would access that information from the Central Repository, rather than making a Blue Sheet request.

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More broadly, one benefit identified to broker-dealers of the CAT may arise from consolidating the collection and transmission of audit trail data into a uniform activity, regardless of where the quoting and trading occur. Such a consolidation may permit some broker-dealers to reduce the number of systems they operate to provide audit trail data to Participants and to retire legacy systems, at an appropriate time. Additionally, technological advances may make the operation of the new CAT Systems more efficient than those associated with the legacy systems. The Costs to CAT Reporters Study did not attempt to quantify any such cost savings to firms, an as such, the cost estimates provided here do not include consideration that such cost savings may be low.

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Broker-dealers would also incur costs associated with creating, implementing and maintaining the CAT infrastructure. These costs would arise from building and maintaining the CAT and updating and maintaining their own systems to comply with their reporting obligations.

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(1) CAT Build and Maintenance Costs

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Broker-dealers will also be required to contribute their portion of the direct costs associated with building and maintaining the CAT, as required by SEC Rule 613 and implemented by the CAT NMS Plan. Broker-dealers with CAT reporting obligations will be required to pay their allocated portion of these costs on an annual basis, pursuant to the Funding Model.

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The Funding Model acknowledges that the operating models of broker-dealers and Execution Venues are substantially different. Therefore, the Funding Model imposes different fee structures for broker-dealers and Executions Venues. ATSs that execute orders, which are operated by registered broker-dealers pursuant to Regulation ATS, are considered Execution Venues, for purposes of the CAT NMS Plan.

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(2) CAT Reporters Costs to Meeting Reporting Requirements

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Responses to the Costs to CAT Reporters Study provide estimates of the direct costs to broker-dealers associated with meeting requirements to report to the Central Repository. The Costs to CAT Reporters Study contained questions related to future costs related to both the retirement of existing systems and compliance with requirements of SEC Rule 613.

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Respondents were asked to evaluate the future costs under two separate approaches.204 For each approach, respondents were asked to estimate both for CAT implementation and maintenance: (1) the associated hardware and software costs; (2) the number of required FTEs; and (3) third-party provider costs.

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a. Implementation Phase of Approach 1

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Tables 7 and 8 describe the costs associated with the implementation of Approach 1. Based on the 167 study responses for the implementation of Approach 1, large firms provided an average (medium) hardware / software cost of $580,000 ($0) and small firms provided an average (median) cost estimates of $5,200 ($0).

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Large firms provided an average (median) FTE count of 11.00 (0.00). Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated as $4,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.17, with the median response provided by small respondents equal to 0.00. Participants estimate a dollar cost for the small respondent FTE requirements to be on average $470,000, with a median estimated cost of $0.

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Participants estimate large firms would incur average (median) third party / outsourcing costs of $72,000 ($0) and small firms would incur an estimated average (median) cost of $76,000 ($0).

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Total average (median) costs for Approach 1 Implementation are estimated to be $5,052,000 ($0) for large firms, and $551,200 ($0) for small firms.

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Tables 9 and 10 describe the costs associated with the implementation of Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided an average (median) hardware / software cost estimate of $750,000 ($0), and large non-OATS respondents providing average (median) estimated costs of $450,000 ($0).

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Large OATS reporters provided an average (median) FTE requirement of 14.92 (7.00), translating into estimated costs of $6,000,000 ($2,800,000), while large non-OATS respondents provided an average (median) FTE requirement of 8.05 (0.00), translating into an average (median) estimated cost of $3,200,000 ($0).

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Large OATS respondents estimated an average (median) third party / outsourcing cost of $150,000 ($0), while large non-OATS respondents provided an average (median) estimate of $9,500 ($0).

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Tables 11 and 12 describe the costs associated with the implementation of Approach 1 for small respondents with current OATS and non-OATS reporting obligations, small OATS respondents provided an average (median) hardware / software cost estimate of $21,000 ($1,000), with small non-OATS respondents providing an estimated average (median) cost of $100 ($0).

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Small OATS reporters provided an average (median) FTE requirement of 3.51 (2.00), translating into estimated an average (median) costs of $1,400,000 ($800,000), while small non-OATS respondents provided an average (median) FTE requirement of 0.38 (0.00), translating into an estimated average (median) cost of $150,000 ($0).

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Finally, small OATS respondents estimated an average (median) third party / outsourcing cost of $300,000 ($1,000), while small non-OATS respondents provided an average (median) estimate of $1,100 ($0).

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b. Maintenance Phase of Approach 1

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Tables 13 and 14 describe the costs associated with the maintenance of CAT reporting obligations for the full set of study responses under Approach 1. Based on the 167 study responses for the maintenance of Approach 1, large firms reported an average (median) hardware / software cost estimate of $210,000 ($0), and small firms reported an estimated cost of $1,600 ($0).

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Large firms provided an average FTE count requirement of 8.54, with the median response provided by large firms equaled to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $3,400,000, with a median FTE cost of $0. Small firms provided an average FTE count requirement of 1.12, with the median response provided by small respondents equal to 0.00. Participants estimated the average dollar cost for the small respondent FTE requirement l to be $450,000, and a median cost of $0.

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Large firms estimated that the average (median) third party / outsourcing cost is equal to $52,000 ($0) and small firms estimated average (median) costs to be equal to $24,000 ($0).

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Total average (median) costs for Approach 1 Maintenance are estimated to be $3,662,000 ($0) for large firms and $475,600 ($0) for small firms.

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Tables 15 and 16 show the costs associated with the maintenance of CAT reporting obligations for Approach 1 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $380,000 ($22,000), with large non-OATS respondents providing estimated average (median) costs of $80,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 10.03 (4.00), translating to estimated costs of $4,000,000 ($1,600,000), while large non-OATS respondents provided average (median) FTE requirements of 7.41 (0.00), translating to estimated costs of $3,000,000 ($0).

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Large OATS respondents estimated average (median) third party / outsourcing costs of $120,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

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Tables 17 and 18 describe the costs associated with the maintenance of CAT reporting obligations for Approach 1 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.52 (2.00), translating to estimated costs of $1,400,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $90,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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c. Implementation Phase of Approach 2

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Tables 19 and 20 show the costs associated with the implementation phase of Approach 2 for the full set of study responses. Based on the 167 study responses for the implementation phase of Approach 2, large firms provided average (median) hardware / software costs of $570,000 ($0), and small firms provided costs estimates of $5,000 ($0).

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Large firms provided average FTE count requirements of 10.15, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $4,100,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.08, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $440,000, and a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs are equal to $68,000 ($0) and small firms estimated average (median) costs to be equal to $16,000 ($0).

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Total average (median) costs for Approach 2 Implementation are estimated to be $4,738,000 ($0) for large firms, and $461,000 ($0) for small firms.

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Tables 21 and 22 show the costs associated with the implementation phase of Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $740,000 ($60,000), with large non-OATS respondents providing estimated average (median) costs of $450,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 14.81 (7.00), translating to estimated costs of $5,900,000 ($2,800,000), while large non-OATS respondents provided average (median) FTE requirements of 6.66 (0.00), translating to estimated costs of $2,700,000 ($0).

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Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $140,000 ($0), while large non-OATS respondents provided estimates of $10,000 ($0).

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Tables 23 and 24 show the costs associated with the implementation of Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $20,000 ($1,000), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.33 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.32 (0.00), translating to estimated costs of $130,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $60,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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d. Maintenance Phase of Approach 2

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Tables 25 and 26 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for the full set of study responses. Based on the 167 study responses for the maintenance phase of Approach 2, large firms provided average (median) hardware / software costs of $200,000 ($0) and small firms provided costs estimates of $1,500 ($0).

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Large firms provided average FTE count requirements of 7.27, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs can be estimated to be $2,900,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.06, with the median response provided by a small respondent equal to 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be $430,000, with a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs are equal to $48,000 ($0) and small firms estimated average (median) costs to be equal to $10,000 ($0).

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Total average (median) costs for Approach 2 Maintenance are estimated to be $3,148,000 ($0) for large firms, and $441,500 ($0) for small firms.

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Tables 27 and 28 provide the costs associated with the maintenance of CAT reporting obligations for Approach 2 for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $370,000 ($14,000), with large non-OATS respondents providing estimated average (median) costs of $79,000 ($0).

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Large OATS reporters provided average (median) FTE requirements of 9.79 (5.60), translating to estimated costs of $3,900,000 ($2,200,000), while large non-OATS respondents provided average (median) FTE requirements of 5.38 (0.00), translating to estimated costs of $2,200,000 ($0).

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Finally, large OATS respondents estimated average (maximum) third party / outsourcing costs of $110,000 ($0), while large non-OATS respondents provided estimates of $1,300 ($0).

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Tables 29 and 30 show the costs associated with the maintenance of CAT reporting obligations for Approach 2 for small respondents with current OATS and non-OATS reporting obligations. Small OATS respondents provided estimated average (median) hardware / software requirements of $6,000 ($500), with small non-OATS respondents providing estimated average (median) costs of $100 ($0).

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Small OATS reporters provided average (median) FTE requirements of 3.28 (2.00), translating to estimated costs of $1,300,000 ($800,000), while small non-OATS respondents provided average (median) FTE requirements of 0.31 (0.00), translating to estimated costs of $120,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $42,000 ($1,000), while small non-OATS respondents provided estimates of $1,100 ($0).

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e. Implementation and Maintenance Costs for Approach 1 vs. Approach 2

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Participants compared the estimated implementation and maintenance costs for Approach 1 and Approach 2 to determine if one solution would be more cost effective for the industry than the other. In general, respondents indicated that Approach 1 would lead to larger costs than Approach 2. Large firms estimated that it will cost approximately $5,052,000 to implement Approach 1, versus an estimated $4,738,000 for Approach 2, a cost difference of $314,000. From a maintenance perspective, large firms estimated that it would cost $3,662,000 for Approach 1 versus $3,148,000 for Approach 2, a cost difference of $514,000. Small firms also indicated that Approach 1 would be more expensive to implement and maintain than Approach 2. Small firms indicated that it would cost $551,200 to implement Approach 1 versus $475,600 for Approach 2, indicating a cost difference of $90,200. For the maintenance phases, small firms estimated it would cost approximately $475,600 for Approach 1 maintenance, versus $441,500 for Approach 2 maintenance, a cost difference of $34,100 between approaches. However, the cost estimates between these two approaches are not statistically significant and Participants conclude that there would likely be no incremental costs associated with either Approach.205

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f. Retirement of Systems Costs

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Participants recognize that in implementing the anticipated requirements in the CAT NMS Plan, broker-dealers would likely replace some components of their current systems. The costs associated with retiring current systems were considered as part of the impacts associated with the CAT NMS Plan.

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Tables 31 and 32 describe the cost associated with retirement of systems for the full set of study responses. Based on the 167 study responses for the retirement of systems large firms provided average (median) hardware / software costs of $120,000 ($0) and small firms provided cost estimates of $31,000 ($0).

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Large firms provided average FTE count requirements of 6.80, with the median response provided by a large firm equal to 0.00. Multiplying these counts by the rate employed by the Commission in SEC Rule 613 as described above, FTE costs are estimated to be $2,700,000, with a median FTE cost of $0. Small firms provided average FTE count requirements of 1.92, with the median response provided by a small respondent of 0.00. Participants estimate the dollar cost for the small respondent FTE requirements to be an average costs of $770,000, and a median cost of $0.

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Large firms estimated that average (median) third party / outsourcing costs to be $10,000 ($0) and small firms estimated average (median) costs to be $63,000 ($0).

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Total average (median) costs for the Retirement of Systems are estimated to be $2,830,000 ($0) for large firms and $864,000 ($0) for small firms.

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Tables 33 and 34 describe the costs associated with the retirement of systems for large respondents with current OATS and non-OATS reporting obligations. Large OATS respondents provided estimated average (median) hardware / software requirements of $270,000 ($0), with large non-OATS respondents providing estimated average (median) costs of $4,300 ($0).

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Large OATS reporters provided average (median) FTE requirements of 4.92 (3.10), translating to estimated costs of $2,000,000 ($1,200,000), while large non-OATS respondents provided average (median) FTE requirements of 8.21 (0.00), translating to estimated costs of $3,300,000 ($0).

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Finally, large OATS respondents estimated average (median) third party / outsourcing costs of $18,000 ($0), while large non-OATS respondents provided estimates of $4,800 ($0).

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Tables 35 and 36 show the costs associated with the retirement of systems for small respondents with current OATS and non-OATS reporting obligations for the full set of study respondents. Small OATS respondents provided estimated average (median) hardware / software requirements of $3,600 ($500), with small non-OATS respondents providing estimated average (median) costs of $40,000 ($0).

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Small OATS reporters provided average (median) FTE requirements of 4.60 (0.00), translating to estimated costs of $1,800,000 ($0), while small non-OATS respondents provided average (median) FTE requirements of 1.00 (0.00), translating to estimated costs of $400,000 ($0).

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Finally, small OATS respondents estimated average (median) third party / outsourcing costs of $240,000 ($1,500), while small non-OATS respondents provided estimates of $3,000 ($0).

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In comparing the two approaches and their costs to the current costs incurred by a broker-dealer for current regulatory reporting, respondents have indicated that they estimate both Approach 1 and Approach 2 to be less expensive than current regulatory reporting requirements. Overall, firms estimated that current costs would be $4,290,000 for large firms versus $1,210,000 for small firms, while maintenance costs of Approach 1 for large firms would cost $3,662,000 and $475,600 for small firms, indicating cost savings of $628,000 for large firms and cost savings of $734,400 for small firms. For maintenance costs related to Approach 2, large firms indicated costs of $3,148,000 with an expected savings of $1,142,000 while small firms estimated maintenance costs of $441,500 with expected savings of $768,500.

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Although there are differences in the current and anticipated maintenance costs discussed above, the Participants conclude that there would be no statistical difference in costs associated with the maintenance of the CAT, compared to maintenance costs for existing regulatory reporting requirements. Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference in costs to broker-dealers between Approach 1 and Approach 2 is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level separately for estimates of hardware / software costs, FTE costs, vendor costs, and total costs across large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

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g. Industry Feedback on Costs to CAT Reporters Study

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Participants’ understanding of broker-dealer costs has been enhanced through frequent dialogue with Industry Members. The DAG has largely provided written feedback on costs through the industry association members. In March 2013, SIFMA provided feedback on industry costs in its Consolidated Audit Trail White Paper.206 The association group stated that the industry is likely to face costs related to upgrading the regulatory reporting infrastructure. SIFMA highlighted that additional costs borne will be distributed across the front office, middle office, customer master data, compliance and risk and data management. Additionally, in February 2012, the FIF conducted a study to assess the costs associated with the implementation of OATS.207 In a summary of the study, FIF highlights that “future estimates of cost should consider the FIF cost model, most importantly the effort expended on business analysis and testing as part of the implementation effort.” One key view presented by the DAG was that retiring legacy systems will likely reduce costs to the industry, given their redundancies with the CAT. However, the FIF highlighted that existing timelines do not take into account costs associated with concurrent reporting for existing regulatory reporting and new regulatory requirements associated with the Central Repository.208 Additional detail around the plan to retire existing regulatory reports can be found in Appendix C, Section C.9.

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(D) Vendors

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The Costs to Vendors Study requested information regarding various third party service provider and vendor costs to comply with the requirements of SEC Rule 613.

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Based upon the responses to the Costs to Vendors Study, the expected dollar costs for implementation and maintenance of the CAT are largely the same for both approaches, and ranged widely between $0 and $20,000,000 for implementation and $50,000 and $6,000,000 for ongoing maintenance. One firm did indicate that Approach 1 would have substantially higher maintenance costs ($400,000 for Approach 1 versus $50,000 for Approach 2). For headcount and costs associated with implementation and maintenance of the CAT, all respondents indicated that Approach 1 would require more FTE resources (costs) to implement (ranging from 14 ($9,600,000) to 170 ($35,900,000) FTEs for Approach 1 and from 4 ($2,700,000) to 45 ($24,200,000) for Approach 2), while Approach 2 would require more FTE resources to maintain (ranging from 4.5 ($4,100,000) to 35 ($9,300,000) for Approach 1 and from 2 ($2,500,000) to 56 ($11,200,000) for Approach 2). As with current regulatory reporting costs, the firm with the largest number of clients reported the highest costs, but number of clients did not always correlate uniformly with higher expected costs for the other firms.

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Three of the four respondents to the vendor study indicated that they would incur costs to retire current regulatory reporting systems, with costs ranging from $500,000 to $5,000,000, with the firm with the highest expected retirement costs also having the highest current reporting costs. FTE requirements ranged from 1.5 ($250,000) to 23 ($7,200,000) FTEs.

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Under Approach 1, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, with the remaining two expecting higher costs. Under Approach 2, two respondents expected ongoing maintenance to cost less than the maintenance of current regulatory reporting requirements, one expected costs to be the same, and the final firm expected costs to be greater. All firms expected headcount associated with ongoing maintenance of the CAT to be less than under current reporting requirements.

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(E) Issuers

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Issuers also benefit from an effective regulatory regime supported by a reliable and complete audit trail. Specifically, issuers may benefit from enhanced investor confidence associated with better and more efficient oversight. The increase in investor confidence may draw more investors into the market, relative to other investment opportunities that do not provide the same protections. Increasing the pool of investors willing to invest in a primary offering may manifest itself in a lower cost of capital. Increased investor participation in secondary trading may also increase demand in the primary market, as the increased interest would be associated with greater efficiency in pricing and lower adverse selection costs. To the extent that the issuers do not have independent reporting obligations to the Central Repository (i.e., they are not otherwise CAT Reporters), they are not anticipated to incur direct costs associated with the CAT NMS Plan.

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(F) Indirect Costs

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The Participants recognize that in addition to direct costs, there may be indirect costs borne by parties as a result of the implementation of the CAT NMS Plan. As discussed further below, it is not possible for the Participants to quantify these costs, and as such, we present a qualitative discussion.

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The Participants have identified at least three distinct ways for indirect costs to arise as a result of the implementation of the CAT NMS Plan. First, all CAT Reporters are subject to direct fees to pay for the creation, implementation, and maintenance of the CAT along with other direct costs to meet CAT NMS Plan obligations. CAT Reporters may endeavor to shift these fees and other costs to their clients. Where CAT Reporters can do so successfully, the clients bear an indirect cost arising from the CAT NMS Plan. Second, to the extent that the Commission and the Participants amend their surveillance programs in the presence of the Central Repository, the broker-dealers may incur costs to adjust their internal compliance programs. And third, as described more fully in Appendix C, Analysis of the Impact on Competition, Efficiency and Capital Formation, broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Such a reduction in the provision of these services may impose an indirect cost on the public as well.

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The Participants considered the potential for CAT Reporters to shift fees and other costs associated with the CAT NMS Plan. Participants may charge their members to cover the CAT NMS Plan costs either explicitly or subsume those costs in other fees or assessments. Broker-dealers may charge their clients for their own costs, whether incurred directly or indirectly, either through explicit fees associated with CAT or through their existing fee structures. This analysis does not measure either the likelihood of costs being passed from the Participant to the broker-dealers or from the broker-dealers to their clients, or the potential associated dollar impacts. The extent to which these costs may be passed on to clients is related to alternative sources of revenue available to the CAT Reporters, the materiality of those costs, and the ease with which clients can substitute away from any given Participant or broker-dealer. Participants note, however, that Participants and broker-dealers may currently have incentives and opportunity to shift regulatory compliance costs to their customers and that nothing in the CAT NMS Plan alters those incentives or the likelihood of those costs being passed on.

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In addition, indirect costs to broker-dealers may arise as a result of the implementation of the CAT NMS Plan. First, broker-dealers may incur additional costs related to training and professional development, to equip the staff with the necessary knowledge necessary for compliance with the SEC Rule 613. Broker-dealers were specifically asked to consider these costs as part of their study response. Second, the enhanced and standardized data to be captured by the Central Repository is anticipated to increase the effectiveness of surveillance by regulators, which may impact broker-dealer compliance programs.

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(iv) Estimate of Aggregate Direct Costs and the Allocation of Costs across CAT Reporters

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(A) Estimate of Aggregate Costs

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In order to create the regulatory data infrastructure required by SEC Rule 613, this Plan proposes to build and maintain the CAT, along with resources necessary to generate regulatory reports and related analysis. CAT Reporters, including Participants and broker-dealers engaging in trading and quoting activities in Eligible Securities, will be jointly responsible for providing the capital to build and maintain the CAT. Costs eligible to be allocated jointly include any associated liabilities accrued during the planning and building phases of the project that are directly attributable to the CAT NMS Plan, for example, legal and consulting fees, and will be allocated according to the funding model described in Article XI of the CAT NMS Plan.

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In order to calculate to the implementation and annual maintenance costs of the CAT, the Participants considered the relevant cost factors for the following entities: Plan Processor, Participants, broker-dealers (large and small) and vendors. All implementation costs reflected below are in dollar costs for the year they are expected to be incurred, while all maintenance costs are estimated for the fifth year after the approval of the CAT NMS Plan, when all CAT Reporters are expected to be live.

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(1) Plan Processor

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Implementation Costs. For implementation costs associated with the Plan Processor, the Participants reviewed the build costs received from the Shortlisted Bidders and identified the high and low costs to use as a component of the overall industry cost. The lowest cost received was $30,000,000 and the highest estimate received was $91,600,000.

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Maintenance Costs. For maintenance costs associated with the Plan Processor, the Participants also reviewed the cost schedules received from the Shortlisted Bidders to build the range. To define the range of maintenance costs, the Participants reviewed the peak year maintenance costs from the Shortlisted Bidders. In addition to the costs received from the Shortlisted Bidders associated with the maintenance of operating and running the CAT, the Participants also included a yearly technical upgrade estimate to conservatively take into account changes in technology that may take place during the maintenance of the CAT. These additional costs begin at approximately 20% in year one, and slowly decrease to 5% during year five of operation. As such, the annual maintenance costs are estimated to range from $35,200,000 to $134,900,000.

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Retirement of Systems Costs. The Plan Processor is not expected to incur costs related to the retirement of systems.

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(2) Participants

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Upon review of the requirements associated with Approach 1 and Approach 2, the Participants identified that they do not favor one approach over the other.

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Implementation Costs. To estimate implementation costs for the Participants, the Participants used the aggregated results from the Costs to Participants Study. Based on the responses received from the Participants, the implementation of regulatory reporting is expected to cost $17,900,000 and the implementation of surveillance functions is estimated to cost $23,200,000.

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Maintenance Costs. To estimate the maintenance costs for the Participants, the Participants reviewed the results from the Costs to Participants Study for regulatory reporting and surveillance costs. The Participants estimated that annual aggregate regulatory reporting costs would be equal to $14,700,000 and that annual aggregate surveillance maintenance costs would cost $87,700,000.

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Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the Participants, the Participants reviewed the results from the Costs to Participants Study for retirement of systems costs. The Participants estimated that costs associated with retirement of systems would be equal to $310,000.

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(3) Broker-Dealers

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Implementation and maintenance costs related to the CAT for broker-dealers were extrapolated from the results of the Costs to CAT Reporters Study. As described above, the Participants believe there to be approximately 1,800 broker-dealers that would be CAT Reporters. Of the 167 respondents to the Costs to CAT Reporters Study, 49 were large firms, and 118 were small firms, indicating a large to small firm ratio in the overall population of 29% to 71%. Applying this ratio to the total population of 1,800 broker-dealers, results in 522 large firms and 1,278 small firms. In comparing the costs between the two approaches, the Participants have identified that Approach 1 is more expensive than the Approach 2, which causes Approach 1 to form the upper bound of the broker-dealer cost range, and Approach 2 to form the lower bound of the broker-dealer cost range.

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Implementation Costs. For Approach 1, large firm respondents estimated that implementation costs would be equal to $5,052,000 per firm, for a total estimated implementation cost of approximately $2.6 billion. Small firm respondents estimated that implementation costs for Approach 1 would be equal to $551,200 per firm, for a total estimated implementation cost of $740 million.209 For Approach 2, large firm respondents estimated that implementation costs would be equal to $4,738,000 per firm, for a total estimated implementation cost of approximately $2.5 billion, while small firms estimated implementation costs for Approach 2 to be equal to $461,000 per firm, for a total cost of $619 million.210 This results in a cost range of $2.5 billion to $2.6 billion for large firms, and a cost range of $619 million to $740 million for small firms for the implementation of the CAT.

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Maintenance Costs. For Approach 1, large firm respondents estimated that maintenance costs would be equal to $3,662,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.3 billion.211 Small firm respondents estimated that maintenance costs for Approach 1 would be equal to $475,600 per firm per year, for a total estimated annual maintenance cost of approximately $739 million.212 For Approach 2, large firm respondents estimated that maintenance costs would be equal to $3,148,000 per firm per year, for a total estimated annual maintenance cost of approximately $2.0 billion,213 while small firms estimated maintenance costs for Approach 2 to be equal to $441,500 per firm per year, for a total annual cost of approximately $686 million.214 This implies an annual cost range of approximately $2.0 billion to $2.3 billion for large firms, and an annual cost range of approximately $686 million to $739 million for small firms for maintenance of reporting to the Central Repository. These maintenance costs are discrete costs for the maintenance of CAT reporting, and are not intended to show incremental costs against current regulatory reporting requirements. Based on the Costs to CAT Reporters Study, Participants estimate these incremental costs to be negligible.

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Retirement of Systems Costs. To estimate the costs related to the retirement of systems for the broker dealers, the Participants reviewed the results from the Costs to CAT Reporters Study for retirement of systems costs. Large firm respondents estimated costs to be equal to $2,830,000, for a total retirement of systems cost equal to approximately $1.47 billion. Small firms estimated that costs related to the retirement of systems would cost $864,000, for a total retirement of systems cost of approximately $1.10 billion.

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(4) Vendors

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Implementation Costs. For implementation costs associated with Vendors, the Participants reviewed the aggregate build costs received from the Costs to Vendors Study and identified that Approach 1 would cost $118,200,000 to implement, while it would cost $51,600,000 to implement Approach 2.215

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Maintenance Costs. For maintenance costs associated with Vendors, the Participants also reviewed the cost schedules received from the Costs to Vendors Study. Vendors indicated an aggregate estimated annual cost of $38,600,000 for maintenance of Approach 1, and annual estimated maintenance costs of $48,700,000 for Approach 2.216

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Retirement of Systems Costs. Vendors indicated an aggregate cost of $21,300,000 for the retirement of existing regulatory reporting systems.

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(5) Total Aggregate Costs

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Based on the analysis of responses to the studies described above, and cost estimates provided by the Shortlisted Bidders, the Participants estimate the initial aggregate cost to the industry related to building and implementing the CAT would range from $3.2 billion to $3.6 billion. Estimated annual aggregate costs for the maintenance and enhancement of the CAT would range from $2.8 billion and $3.4 billion. Additionally, costs to retire existing systems would be approximately $2.6 billion.

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(B) Impacts of Not Receiving Requested Exemptions

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On January 30, 2015, the Participants submitted a letter to request that the Commission grant exemptions, pursuant to its authority under Section 36 of the Exchange Act, from the requirement to submit a national market system plan that meets certain reporting requirements specified in SEC Rule 613(c) and (d). Specifically, the Participants requested exemptive relief related to: (1) options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking executions to specific subaccount allocations on Allocation Reports; and (5) time stamp granularity. On September 2, 2015, the Participants supplemented their request with a supplemental request, clarifying its original requested exemption from the requirement in Rule 613(c)(7)(viii)(B) (including, in some instances, requesting an exemption from the requirement to provide an account number, account type and date account opened under Rule 613(c)(7)(viii)(B)).

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First, SEC Rule 613(c)(7) requires both options market makers and the options exchanges to record and report the details of options market maker quotes received by the options exchanges to the Central Repository. The Participants requested that the Commission provide the Participants with an exemption so that only options exchanges would record and report details for each options market maker quote and related Reportable Event to the Central Repository, while options market makers would be relieved of their obligation to record and report their quotes and related Reportable Events to the Central Repository. The Participants estimated that having both parties report options market maker quotes to the CAT would impose significant costs on the Plan Processor due to increased data storage and technical infrastructure, and on the options market makers due to a higher volume of reporting obligations. The Participants estimated that having both parties report options market maker quotes to the CAT would increase the size of data submitted to the CAT by approximately 18 billion records each day. Bidders estimated that requiring dual reporting of options market maker quotes would, over a five year period, lead to additional costs of between $2 million and $16 million for data storage and technical infrastructure for the Plan Processor. In addition, according to the results of a cost study conducted by three industry associations,217 the cost to options market makers to meet their quote reporting obligations ranges from $307 million to $382 million over a five year period.

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Second, Rule 613(c)(7) requires each CAT Reporter to record and report “Customer-ID(s) for each customer” when reporting order receipt or origination information to the Central Repository. The Commission noted that including a unique customer identifier could enhance the efficiency of surveillance and regulatory oversight. The Participants, however, favor the Customer Information Approach, that would require broker-dealers to provide detailed account and Customer information to the CAT, and have the Plan Processor correlate the Customer information across broker-dealers, assign a unique Customer identifier to each Customer and use that unique Customer identifier consistently across all CAT Data. The Participants believe that the Customer-ID approach imposes a significant cost burden on market participants and on the Plan Processor. According to cost estimates provided by the DAG,218 the cost for the top 250 CAT reporters to implement the Customer-ID as required in SEC Rule 613 would be at least $195 million. The Participants believe that this cost estimate is conservative, since it only represents the cost estimate for 11% of the total broker-dealers that are expected to be CAT Reporters.

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Third, SEC Rule 613(c)(7) requires that a CAT-Reporter-ID be reported to the Central Repository for each order and Reportable Event, so that regulators can determine which market participant took action with respect to an order at each Reportable Event. The Participants, however, have proposed to leverage existing business practices and identifiers (“Existing Identifier Approach”), rather than requiring new identifiers be established, as the former is deemed more efficient and cost-effective in implementing the CAT-Reporter-ID. The Participants believe that the CAT-Reporter-ID approach would impose a material cost burden on broker-dealers and Participants, as compared to the Existing Identifier Approach, since it would require major changes to broker-dealer systems. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to implement the CAT-Reporter-ID as required by SEC Rule 613 would be $78 million.

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Fourth, Rule 613(c)(7) requires each CAT Reporter to record and report the “the account number for any subaccounts to which the execution is allocated (in whole or part)” if an order is executed. The Participants acknowledge that this information is useful to regulators to fulfill their obligations to protect investors. However, the Participants estimate that meeting the obligations of the Rule would be unduly burdensome and costly to achieve given the existing allocation practices. As an alternative, the Participants proposed that allocations will be reported by CAT Reporters via a tool described as an Allocation Report. To create linkages from the order execution to the allocation process by means of an order identifier, the broker-dealers would be required to perform extensive re-engineering of their front, middle, and back office systems, and thus incur significant costs. According to cost estimates provided by the DAG, the cost for the 250 largest CAT Reporters to link allocations to executions would be $525 million.

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Finally, Rule 613(d) requires the recording and reporting of the time of certain Reportable Events to the Central Repository with time stamps at least to the millisecond. The Participants understand that time stamp granularity to the millisecond reflects current industry standards with respect to electronically-processed events in the order lifecycle. However, due to the lack of precision, the industry practice with respect to manual orders is to capture manual time stamps with granularity at the level of one second. The Participants believe that compliance with the time stamp granularity requirements of the Plan for Manual Order Events would result in added costs to the industry as there may be a need to upgrade databases, internal messaging applications/ protocols, data warehouses, and reporting applications to enable the reporting of such time stamps to the Central Repository. The Participants estimate that the total minimum cost to the industry to comply with a singular time stamp requirement for all CAT reporting would be approximately $10.5 million. This estimate is based on a current cost of $1,050 per manual timestamp clock which stamps to the second, with approximately 10,000 clocks requiring replacement across the industry. Upgrading this to millisecond granularity would likely add to the cost to the industry.

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(C) Allocation of Costs Across CAT Reporters

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Article XI of the CAT NMS Plan provides the process for determining the funding of the Company. In general, the Participants’ approach to funding of the Company is: (A) to operate the Company on a break-even basis, which means having fees imposed and collected that cover the Company’s costs and an appropriate reserve; and (B) to establish a fee structure that is equitable based on funding principles.219 Such equitable funding principles include: (1) to create transparent, predictable revenue streams aligned with anticipated costs; (2) to allocate costs among Participants and Industry Members taking into account the timeline for implementation of the CAT and the distinctions in the securities trading operations of Participants and Industry Members and their impact on the Company’s resources and operations; (3) to establish a tiered fee structure in which there is general comparability in the level of fees charged to CAT Reporters with the most CAT-related activity as measured by market share for Execution Venues, including ATSs, and by message traffic for non-ATS activities of Industry Members, where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members; (4) to provide ease of administrative functions; (5) to avoid disincentives such as burdens on competition and reduction in market quality; and (6) to build financial stability for the Company as a going concern.220

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Based on these principles, the Operating Committee will establish the Company’s funding, which is expected to arise primarily from fees charged to Participants and Industry Members. The Participants have sought input from the DAG as to the specific types of fees. Accordingly, the Participants propose to include the following fee types: (i) fixed fees payable by each Execution Venue that trades NMS Securities and OTC Equity Securities based on its market share (establishing two to five tiers of fixed fees); (ii) fixed fees payable by each Execution Venue that trades Listed Options (as defined in Rule 600(b)(35) of Regulation NMS) based on its market share (establishing two to five tiers of fixed fees); (iii) fixed fees payable by each Industry Member based on message traffic generated by such Industry Member (for the avoidance of doubt, the fixed fees payable by Industry Members pursuant to this paragraph shall, in addition to any other applicable message traffic, include message traffic generated by: (i) an ATS that does not execute orders that is sponsored by such Industry Member; (ii) routing orders to and from any ATS sponsored by such Industry Member); and (iii) ancillary fees (e.g., fees for late or inaccurate reporting, corrections, and access and use of the CAT for regulatory and oversight purposes).221

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The Operating Committee will use two different criteria to establish fees – market share222 for Execution Venues, including ATSs, and message traffic for Industry Members’ non-ATS activities – due to the fundamental differences between the two types of entities. While there are multiple factors that contribute to the cost of building, maintaining and using the CAT, Bidders stated during workshops and in response to specific questions posed by the Participants that processing and storage of incoming message traffic is one of the most significant cost drivers for the CAT. Thus, the Participants believe that basing fees on message traffic for non-Execution Venue Industry Members is consistent with an equitable allocation of the costs of the CAT. On the other hand, message traffic would not provide the same degree of differentiation between Participants that it does for Industry Members. Because the majority of message traffic at the Participants consists of quotations, and Participants usually disseminate quotations in all instruments they trade, regardless of execution volume, Execution Venues that are Participants generally disseminate similar amounts of message traffic. In contrast, execution volume more accurately delineates the different levels of trading activity of the Participants. For these reasons, the Participants believe that market share is the appropriate metric to use in establishing fees for Participants. Moreover, given the similarity between the activity of exchange Participants and ATSs, both of which meet the definition of an “exchange” as set forth in the Exchange Act, the Participants believe that ATSs should be treated in the same manner as the exchange Participants for the purposes of determining the level of fees associated with the CAT.

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Costs are allocated across the different types of CAT Reporters (broker-dealers, Execution Venues) on a tiered basis, in order to equitably allocate costs to those CAT Reporters that contribute more to the costs of creating, implementing and maintaining the CAT. The fees to be assessed at each tier are calculated so as to recoup a proportion of costs appropriate to the message traffic from firms in each tier. Therefore, larger broker-dealers, generating the majority of message traffic, will be in the higher tiers, and therefore be charged a higher fee. Smaller broker-dealers with low levels of message traffic will be in lower tiers and will be assessed a minimal fee for the CAT. The Participants estimate that up to 75% of broker-dealers will be in the lower tiers of the Funding Model.

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All fees under Article XI charged directly to Participants and indirectly to Industry Members will be reviewed by the Operating Committee at least annually.223 All proposed fees to be charged to Industry Members by Participants will be filed with the Commission pursuant to Section 19(b) of the Exchange Act.224 In addition, all disputes with respect to the fees the Company charges Participants will be resolved by the Operating Committee or a Subcommittee designated by the Operating Committee, subject to the right of Participants to seek redress from the Commission pursuant to SEC Rule 608 or in any other appropriate forum.225 The Participants will adopt rules requiring that disputes with respect to fees charged to Industry Members will be resolved by the Operating Committee or a Subcommittee, subject to the right of any Industry Member to seek redress from the SEC pursuant to SEC Rule 608 or in any other appropriate forum.226

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The CAT NMS Plan contemplates that the Plan Processor will be responsible for developing and executing administrative processes and procedures to effectuate the smooth functioning of the CAT, consistent with the principles articulated in Article XI. These processes and procedures would include, but are not limited to, establishing budget, notice, billing and collection cycles that provide transparency, predictability and ease of administrative functions to CAT reporters. Criteria and schedules for ancillary fees that might be collected pursuant to Article XI are also anticipated to be published by the Operating Committee.

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In articulating the funding principles of the CAT NMS Plan, Participants have established the need for the CAT NMS Plan to, among other things: (1) create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate, and administer the CAT and the other costs of the Company; and (2) provide for ease of billing and other administrative functions. The funding principles articulated in Article XI should also inform the policies and procedures adopted by the Operating Committee in executing the associated functions. To that end, to promote fairness and transparency with respect to fees, the Participants expect that the Operating Committee will adopt policies, procedures, and practices around budgeting, assignment of tiers, adjudicating disputes, billing, and collection of fees that provide appropriate transparency to all CAT Reporters. Participants expect that policies or procedures adopted to implement the administration of fee allocation and collection among CAT Reporters would be subject to comment by impacted parties before adoption.

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(v) Alternatives Considered

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(A) Technical Solution

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SEC Rule 613(a)(1)(xii) directs Participants to discuss reasonable alternative approaches to creating, implementing and maintaining the CAT. As part of the development of the CAT NMS Plan, the Participants considered a variety of alternatives with respect to technical and user support considerations. The technical considerations include: primary storage, data ingestion format, development process, quality assurance staffing and user support staffing. The analysis presented in Appendix C, D.12, below, describes alternative approaches considered for each technical consideration and the ultimate choice of the CAT NMS Plan based on factors that consider feasibility, cost and efficiency.

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In addition, the questions included in the Costs to CAT Reporters Study described above permitted the Participants to evaluate cost considerations to Industry Members associated with two different technical formats for reporting audit trail data to the Central Repository. One approach might permit broker-dealers to submit information data to the Central Repository using their choice among existing industry protocols, such as FIX. The second approach provided a scenario where CAT Reporters would submit relevant data to the Central Repository using a defined or specified format, such as an augmented version of OATS.

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(B) Funding Model

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As discussed above, Article XI of the CAT NMS Plan sets forth the provisions for establishing the funding of the Company and recovering the costs of operating the CAT. The Participants recognize that there are a number of different approaches to funding the CAT and have considered a variety of different funding and cost allocation models. Each model has its potential advantages and disadvantages. For example, a structure in which all CAT Reporters are charged a fixed fee regardless of reportable activity would provide CAT Reporters greater certainty regarding their fee obligations, but may place undue burden on small CAT Reporters. A variable fee structure focused on specific reportable information may make it easier for Industry Members to pass fees to their customers. However, such fees would be more complex and difficult to administer. Participants were particularly sensitive to the possibility that the fee structure might create distortions to the economic activities of CAT Reporters if not set appropriately.

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The Participants considered alternatives to cost allocation ranging from a strict pro-rata distribution, regardless of the type or size of the CAT Reporters, to a distribution based purely on CAT Reporter activity. Participants also considered a variety of ways to measure activity, including notional value of trading (as currently used for purposes of Section 31 fees), number of trades or quotations, and all message traffic sent. Further, Participants considered the comparability of audit trail activity across different Eligible Securities. The Participants discussed the potential approaches to funding, including the principles articulated in Article XI and an illustrative funding model, with the DAG multiple times, beginning on September 3, 2014.

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After extensive analysis and taking into consideration feedback from the DAG, the Participants determined that a tiered fixed fee structure would be fair and relatively uncomplicated. The Participants discussed several approaches to developing a tiered model, including defining fee tiers based on such factors as size of firm, message traffic or trading dollar volume. For example, a review of OATS data for a recent month shows the wide range in activity among broker-dealers, with a number of broker-dealers submitting fewer than 1,000 orders for the month and other broker-dealers submitting millions and even billions of orders in the same period. The Participants also considered a tiered model where CAT Reporters would be charged different variable fees based on tier assignment. However, the Participants believe a tiered fixed fee model is preferable to a variable model because a variable model would lack the transparency, predictability, and ease of calculation afforded by fixed fees. Such factors are crucial to estimating a reliable revenue stream for the Company and to permitting CAT Reporters to reasonably predict their obligations. Moreover, the Participants believe that the tiered approach would help ensure that fees are equitably allocated among similarly situated CAT Reporters and would further the goal of the Participants to lessen the impact on smaller firms. Irrespective of the approach taken with fees, the Participants believe that revenues generated should be aligned to the costs of building, implementing and maintaining the CAT, and if revenues collected are in excess of costs for any given year, such excess should be considered in setting fees for the following year.

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Finally, the Participants believe that it is important to establish a simple fee structure that is easy to understand and administer. The Participants are committed to establishing and billing fees so that Industry Members will have certainty and the ability to budget for them. In that regard, the CAT NMS Plan expressly provides that the Operating Committee shall not make any changes to any fees on more than a semi-annual basis unless, pursuant to a Supermajority Vote, the Operating Committee concludes that such change is necessary for the adequate funding of the Company.227

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8. An Analysis of the Impact on Competition, Efficiency, and Capital Formation (SEC Rule 613(a)(1)(viii))

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As required by SEC Rule 613(a)(1)(viii), this section provides an analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining the CAT NMS Plan. In recognition of the complexity of this analysis, the Participants have evaluated a variety of sources of information to assist in the analysis of the impact of the CAT NMS Plan on competition, efficiency and capital formation. Specifically, the Participants have evaluated the many comments related to competition, efficiency and capital formation received in response to the Commission’s proposal of SEC Rule 613 and during the CAT NMS Plan development process. In addition, the Participants considered the input of the DAG. Finally, the Participants used information derived from three cost studies described in the prior section on costs. Based on a review and analysis of these materials, the Participants believe that the CAT NMS Plan, as submitted, is justified given its estimated impacts on competition, efficiency and capital formation.

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(a) Impact on Competition

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Through an analysis of the data and information described above, the Participants have evaluated the potential impact of the CAT NMS Plan on competition, including the competitive impact on the market generally and the competitive impact on each type of Person playing a role in the market (e.g., Participants, broker-dealers, vendors, investors). Potential negative impacts on competition could arise if the CAT NMS Plan were to burden a group or class of CAT Reporters in a way that would harm the public’s ability to access their services, either through increasing costs or decreased provision of those services. These impacts may be direct, as in the provision of brokerage services to individual investors, or indirect, as in the aggregate costs of managing, trading and maintaining a securities holding. These impacts should be measured relative to the economic baseline, described above.

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The Participants have identified a series of potential impacts on competition that may arise as a result of the terms and conditions of the CAT NMS Plan. These potential impacts may be related to: (1) the technology ultimately used by the CAT and differences across CAT Reporters in their efforts necessary to meet the CAT NMS Plan’s requirements; (2) the method of cost allocation across CAT Reporters; and (3) changes in regulatory reporting requirements, and their attendant costs, particularly to smaller entities, who may previously have benefited from regulatory exemptions.

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In general, the Participants believe that the CAT NMS Plan will avoid disincentives such as placing an inappropriate burden on competition in the U.S. securities markets. The discussion below focuses on competition in the Participant and broker-dealer communities, where the Participants believe there is the greatest potential for impact on competition.

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(i) Participants

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The Participants already incur significant costs to maintain and surveil an audit trail of activity for which they are responsible. Each Participant bears these costs whether it expends internal resources to monitor relevant activity itself, or whether it contracts with others to perform these services on its behalf. The CAT NMS Plan, through the funding principles it sets forth in Section 11.2, seeks to distribute the regulatory costs associated with the development and maintenance of a meaningful and comprehensive audit trail in a principled manner. By calibrating the CAT NMS Plan’s funding according to these principles, the Participants sought to avoid placing undue burden on exchanges relative to their core characteristics, including market share and volume of message traffic. Thus, the Participants do not believe that any particular exchange in either the equities or options markets would be placed at a competitive disadvantage in a way that would materially impact the respective Execution Venue marketplaces for either type of security.

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In addition, because the CAT NMS Plan seeks to allocate costs in a manner consistent with the Participants’ activities, the Participants do not believe that it would discourage potential new entrants. For instance, an equity ATS – which would already incur costs under the CAT NMS Plan as a reporting broker-dealer – should not be discouraged from becoming a national securities exchanges because of the costs it would incur as a Participant based on its business model or pricing structure. As proposed here, the entity would be assessed exactly the same amount for a given level of activity whether it acted as an ATS or as an exchange. Accordingly, the Participants do not believe that adoption of the CAT NMS Plan would favor existing exchanges or types of exchanges vis-à-vis potential new competitors in a way that would degrade available Execution Venue services or pricing. For similar reasons, the Participants also do not believe that the costs of the CAT NMS Plan would distort the marketplace for existing or potential registered securities associations.

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(ii) Broker-Dealers

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Broker-dealer competition may be impacted if the direct and indirect costs associated with meeting the CAT NMS Plan’s requirements materially impact the provision of their services to the public. Further, competition may be harmed if a particular class or group of broker-dealers bears the costs disproportionately, and as a result, investors have more limited choices or increased costs for certain types of broker-dealer services.

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For larger broker-dealers, the Participants rely on the information obtained from the Costs to CAT Reporters Study and discussions with the industry to preliminarily conclude that the CAT NMS Plan will not likely have an adverse impact on competition. Under the CAT NMS Plan, broker-dealers would be assessed charges, as determined by the Operating Committee, for the build and maintenance of the CAT. They would also incur costs to build and maintain systems and processes necessary to submit and retain their own information to the Central Repository. The Participants’ efforts to align costs with market activity leads to an outcome where dollar costs are borne significantly more by larger entities.

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Additionally, large broker-dealers may view themselves as direct competitors to large Participants, in that they may provide similar execution services. The CAT NMS Plan seeks to mitigate competitive impacts by aligning the cost allocation in a manner that seeks comparability among the largest CAT Reporters regardless of their regulatory status.228

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According to the Costs to CAT Reporters Study, for large broker-dealers, the average decrease in maintenance costs associated with the CAT (i.e., the cost that CAT would impose on firms beyond the current economic baseline) would be $651,924, and the average decrease in maintenance costs for small firms would be $726,216 using Approach 1. For Approach 2, large broker-dealers would see a decrease in maintenance costs associated with the CAT of $1,170,548, and small firms would see a decrease in the same costs of $763,371. These averages could suggest that the decreased costs imposed by the CAT would represent a benefit to both large and small broker-dealers’ regulatory budgets. The Participants believe that the CAT NMS Plan would not materially disadvantage small broker-dealers versus large broker-dealers.

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For small broker-dealers, the Participants considered their contribution to market activity as an important determinant of the amount of the cost of the CAT that they should bear. While this allocation of costs may be significant for some small firms, and may even impact their business models materially, SEC Rule 613 requires these entities to report. The Participants have not identified a way to further minimize the costs to these firms within the context of the funding principles established as part of the CAT NMS Plan.

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The Participants were particularly sensitive during the development of the CAT NMS Plan to the potential burdens it could place on small broker-dealers. These broker-dealers may incur minimal costs under existing audit trail requirements because they are OATS-exempt or excluded broker-dealers or limited purpose broker-dealers. The Participants note that the CAT NMS Plan contemplates steps to diffuse the potential cost differential between large and small firms. For instance, small broker-dealers generally will have an additional year before they are required to start reporting data under the CAT NMS Plan to the Central Repository. This will permit these firms greater time to implement the changes to their own systems necessary to comply with the Plan. Furthermore, the Participants have sought exemptive relief concerning time stamps for recording the time of Manual Order Events.

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact competition. For instance, if the method of cost allocation created disincentives to quoting activity, certain broker-dealer’s business models might be affected more greatly than others. The Participants are unable to determine whether and how changing these incentives may impact competition. Participants intend to monitor changes to overall market activity and market quality and consider appropriate changes to the cost allocation model where merited.

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The Participants note that if the exemption requests that have been submitted to the Commission are not granted, the requirements of SEC Rule 613 may impose significantly greater costs that could potentially cause small broker-dealers to exit the marketplace, discourage new entrants to the small broker-dealer marketplace, or impact the broker-dealer landscape in other ways that may dampen competitive pressures.

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(b) Impact on Efficiency

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Through an analysis of the data and information described above, the Participants have evaluated the impact of the CAT NMS Plan on efficiency, including the impact on the time, resources and effort needed to perform various regulatory and other functions. In general, the Participants believe that the CAT NMS Plan should have a net positive effect on efficiency.

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Overall, the Participants believe that the CAT NMS Plan could improve market efficiency by reducing monitoring costs and increasing efficiency in the enforcement of Participant and Commission rules. Additionally, the Participants believe that the CAT will enable the Participants and the Commission to detect more quickly wrongdoing on a cross-market basis, which may deter some market participants from taking such actions. For example, FINRA’s equity cross-market surveillance patterns have already demonstrated the value of integrating data from multiple markets. FINRA has found that approximately 44 percent of the manipulation-based alerts it generated involved conduct on two or more equity markets and 43 percent of the alerts involved conduct by two or more market participants.229 A reduction in prohibited activity, as well as faster identification of such activity by regulators, would lead to a reduction in losses to investors and increased efficiency.

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The CAT could also create more focused efficiencies for broker-dealers and Participants by reducing the redundant and overlapping systems and requirements identified above. For all CAT Reporters, the standardization of various technology systems will provide, over time, improved process efficiencies, including efficiencies gained through the replacement of outdated processes and technology with cost saving and related staffing reductions. Standardization of systems will improve efficiency, for both Participants and broker-dealers, in the form of resource consolidation, sun-setting of systems, consolidated legacy systems and processes and consolidated data processing. In addition, more sophisticated monitoring may reduce the number of ad hoc information requests, thereby reducing the overall burden and increasing the operational efficiency of CAT Reporters.

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CAT Reporters may also experience various long term efficiencies from the increase in surveillance capabilities, such as greater efficiencies related to administrative functions provided by enhanced regulatory access, superior system speed and reduced system downtime. Moreover, the Commission and the Participants expect to have more fulsome access to unprocessed regulatory data and timely and accurate information on market activity, thus providing the opportunity for improved market surveillance and monitoring.

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Note, however, that uniform reporting of data to the Central Repository may require the development of data mapping and data dictionaries that will impose burdens in the short term. CAT Reporters also may incur additional time and direct costs to comply with new encryption mechanisms in connection with the transmission of PII data (although the quality of the process will improve).

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The Participants are cognizant that the method by which costs are allocated to broker-dealers may have implications for their business models that might ultimately impact efficiency. For instance, if the method of cost allocation created disincentives to the provision of liquidity, there may be an impact on the quality of the markets and an increase in the costs to investors to transact. As a result, the Participants set forth the funding principles that will guide the selection of the cost allocation model. The Participants have also sought out evidence available to best understand how cost allocation models may impact market participation, and more importantly, ultimately market outcomes.230

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The Participants intend to monitor changes to overall market activity and market quality and will consider appropriate changes to the cost allocation model where merited.

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(c) Impact on Capital Formation

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Through an analysis of the data and information described above, the Participants also have assessed the impact of the CAT NMS Plan on capital formation, including the impact on both investments and the formation of additional capital. In general, the Participants believe that the CAT NMS Plan will have no deleterious effect on capital formation.

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In general the Participants believe that the enhanced surveillance of the markets may instill greater investor confidence in the markets, which, in turn, may prompt greater participation in the markets. It is possible that greater investor participation in the markets could bolster capital formation by supporting the environment in which companies raise capital.

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Moreover, the Participants believe that the CAT NMS Plan would not discourage capital formation. As discussed in greater detail above, the Participants have analyzed the degree to which the CAT NMS Plan should cover Primary Market Transactions. Based on this analysis, the Participants believe that the CAT NMS Plan has been appropriately tailored so it does not create an undue burden on the primary issuances that companies may use to raise capital.

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In addition, the Participants do not believe that the costs of the CAT NMS Plan would come to bear on investors in a way that would materially limit their access to or participation in the capital markets.

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Finally, the Participants believe that, given the CAT NMS Plan’s provisions to secure the data collected and stored by the Central Repository, the CAT NMS Plan should not discourage participation by market participants who are worried about data security and data breaches. As described more fully in the CAT NMS Plan and Appendix C, The Security and Confidentiality of the Information Reported to the Central Repository, and Appendix D, Data Security, the Plan Processor will be responsible for ensuring the security and confidentiality of data during transmission and processing, as well as at rest, and for ensuring that the data is used only for permitted purposes. The Plan Processor will be required to provide physical security for facilities where data is transmitted or stored, and must provide for the security of electronic access to data by outside parties, including Participants and the Commission, CAT Reporters, or Data Submitters. The Plan Processor must include in these measures heightened security for populating, storing, and retrieving particularly sensitive data such as PII. Moreover, the Plan Processor must develop and maintain this security program with a dedicated staff including, among others, a Chief Information Security Officer dedicated to monitoring and addressing data security issues for the Plan Processor and Central Repository, subject to regular review by the Chief Compliance Officer. The Plan Processor also will be required to provide regular reports to the Operating Committee on a number of items, including any data security issues for the Plan Processor and Central Repository.

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(d) Impacts of the CAT NMS Plan Governance on Efficiency, Competition, and Capital Formation

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Participants considered the impacts of the CAT NMS Plan governance on efficiency, competition, and capital formation. Participants recognize that without effective governance, it will become harder for the CAT NMS Plan to achieve its intended outcome, namely, enhanced investor protection, in an efficient manner. Participants specifically considered two areas where ineffective governance might lead to economic distortions or inefficiencies: (i) the voting protocols defined in the CAT NMS Plan both for Participants in developing the CAT, and for the Operating Committee after the adoption of the CAT NMS Plan; and (ii) the role of industry advisors within the context of CAT NMS Plan governance.

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Participants understand that there may be detrimental impacts to adopting voting protocols that might impede the effective administration of the CAT System. For instance, too high a threshold for decision making may limit the ability of the body to adopt broadly agreed upon provisions. The extreme form of this would have been for the CAT NMS Plan to require unanimity on all matters. In such case, one dissenting opinion could effectively derail the entire decision-making apparatus. The inability to act in a timely way may create consequences for efficiency, competition, and capital. Conversely, if Participants set a voting threshold that is too low, it might have the impact of not giving sufficient opportunity to be heard or value to dissenting opinions and alternative approaches. As an example, if Participants were to set voting thresholds too low, it might be possible for a set of Participants to adopt provisions that might provide them a competitive advantage over other Participants. Either forms (a too high or too low threshold) could result in negative impacts to efficiency, competition, and capital formation. These issues apply in the context of efforts of the Participants to develop the CAT NMS Plan submitted here or in the context of the Operating Committee’s responsibilities after approval of the CAT NMS Plan.

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To address these concerns, Participants carefully considered which matters should require a Supermajority Vote and which matters should require a Majority Vote.231 The decision required Participants to balance the protection of rights of all parties with the interest of avoiding unnecessary deadlock in the decision making process. As a result, Participants have determined that use of a Supermajority Vote should be for instances considered by the Participants to have a direct and significant impact on the functioning, management, and financing of the CAT System. This formulation, relying on Majority Vote for routine decisions and Supermajority Vote for significant matters, is intended to meet the Commission’s direction for “efficient and fair operation of the NMS plan governing the consolidated audit trail.”232

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Participants also considered the role of industry representation as part of the governance structure. Participants recognize the importance of including industry representation in order to assure that all affected parties have a representative in discussing the building, implementation, and maintenance of the CAT System. Participants actively sought insight and information from the DAG and other industry representatives in developing the CAT NMS Plan. The CAT NMS Plan also contemplates continued industry representation through an Advisory Committee, intended to support the Operating Committee and to promote continuing efficiency in meeting the objective of the CAT.

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C. IMPLEMENTATION AND MILESTONES OF THE CAT

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9. A Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix))

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As required by SEC Rule 613(a)(1)(ix), this section sets forth a plan to eliminate rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of, among other things, whether the collection of such information remains appropriate; if still appropriate whether such information should continue to be separately collected or should instead be incorporated into the CAT; or if no longer appropriate, how the collection of such information could be efficiently terminated.

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Order Audit Trail System (“OATS”)

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The OATS Rules impose obligations on FINRA members to record in electronic form and report to FINRA, on a daily basis, certain information with respect to orders originated, received, transmitted, modified, canceled, or executed by members relating to OTC equity securities236 and NMS Securities.237 OATS captures this order information and integrates it with quote and transaction information to create a time-sequenced record of orders, quotes, and transactions. This information is then used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws. In general, the OATS Rules apply to any FINRA member that is a “Reporting Member,” which is defined in Rule 7410 as “a member that receives or originates an order and has an obligation to record and report information under Rules 7440 and 7450.”

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Although FINRA is committed to retiring OATS in as efficient and timely a manner as practicable, its ability to retire OATS is dependent on a number of events. Most importantly, before OATS can be retired, the Central Repository must contain CAT Data sufficient to ensure that FINRA can effectively conduct surveillance and investigations of its members for potential violations of FINRA rules and federal laws and regulations, which includes ensuring that the CAT Data is complete and accurate. Consequently, one of the first steps taken by the Participants to address the elimination of OATS was an analysis of gaps between the informational requirements of SEC Rule 613 and current OATS recording and reporting rules. In particular, SEC Rule 613(c)(5) and (6) require reporting of data only for each NMS Security that is (a) registered or listed for trading on a national securities exchange; (b) or admitted to unlisted trading privileges on such exchange; or (c) for which reports are required to be submitted to the national securities association. SEC Rule 613(i) requires the Participants to provide to the Commission within six months after the Effective Date a document outlining how the Participants could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS Securities (“OTC Equity Securities”) and debt securities (and Primary Market Transactions in such securities). Even though SEC Rule 613 does not require reporting of OTC Equity Securities, the Participants have agreed to expand the reporting requirements to include OTC Equity Securities to facilitate the elimination of OATS.238

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Next, the Participants performed a detailed analysis of the current OATS requirements and the specific reporting obligations under SEC Rule 613 and concluded that there are 42 data elements found in both OATS and SEC Rule 613; however, there are 33 data elements currently captured in OATS that are not specified in SEC Rule 613.239 The Participants believe it is appropriate to incorporate data elements into the Central Repository that are necessary to retire OATS and the OATS Rules. The Participants believe that these additional data elements will increase the likelihood that the Central Repository will include sufficient order information to ensure FINRA can continue to perform its surveillance with CAT Data rather than OATS data and can, thus, more quickly eliminate OATS and the OATS Rules.

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The purpose of OATS is to collect data to be used by FINRA staff to conduct surveillance and investigations of member firms for potential violations of FINRA rules and federal securities laws and regulations. SEC Rule 613 requires the Participants to include in the CAT NMS Plan a requirement that all Industry Members report information to the Central Repository within three years after the Effective Date. Consistent with this provision, under the terms of Sections 6.4 and 6.7 of the CAT NMS Plan, some Reporting Members will not be reporting information to the Central Repository until three years after the Effective Date. Because FINRA must continue to perform its surveillance obligations without interruption, OATS cannot be entirely eliminated until all FINRA members who currently report to OATS are reporting CAT Data to the Central Repository. However, FINRA will monitor its ability to integrate CAT Data with OATS data to determine whether it can continue to perform its surveillance obligations. If it is practicable to integrate the data in a way that ensures no interruption in FINRA’s surveillance capabilities, FINRA will consider exempting firms from the OATS Rules provided they report data to the Central Repository pursuant to the CAT NMS Plan and any implementing rules.

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FINRA’s ability to eliminate OATS reporting obligations is dependent upon the ability of the Plan Processor and FINRA to work together to integrate CAT Data with the data collected by OATS. FINRA is committed to working diligently with the Plan Processor to ensure this process occurs in a timely manner; however, it is anticipated that Reporting Members will have to report to both OATS and the Central Repository for some period of time until FINRA can verify that the data into the Central Repository is of sufficient quality for surveillance purposes and that all reporting requirements meet the established steady state Error Rates set forth in Section A.3(b). Once this is verified, FINRA’s goal is to minimize the dual-reporting requirement.

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Finally, the Participants note that, pursuant to Section 19 of the Exchange Act, the amendment or elimination of the OATS Rules can only be done with Commission approval. Approval of any such filings is dependent upon a number of factors, including public notice and comment and required findings by the Commission before it can approve any amendments; therefore, FINRA cannot speculate how long this process may ultimately take.

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10. Objective Milestones to Assess Progress (SEC Rule 613(a)(1)(x))

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As required by SEC Rule 613(a)(1)(x), this section sets forth a series of detailed objective milestones, with required completion dates, toward implementation of the consolidated audit trail.

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(a) Publication and Implementation of the Methods for Providing Information to the Customer-ID Database

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(b) Submission of Order and MM Quote Data to Central Repository

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(c) Linkage of Lifecycle of Order Events

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(d) Access to the Central Repository for Regulators

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(e) Integration of Other Data (“Other Data” includes, but is not limited to, SIP quote and trade data, OCC data, trade and quote information from Participants and reference data)

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D. PROCESS FOLLOWED TO DEVELOP THE NMS PLAN: These considerations require the CAT NMS Plan to discuss: (i) the views of the Participants’ Industry Members and other appropriate parties regarding the creation, implementation, and maintenance of the CAT; and (ii) the alternative approaches to creating, implementing, and maintaining the CAT considered and rejected by the Participants.

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11. Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi))

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(a) Process Used to Solicit Views:

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When the Participants first began creating a CAT pursuant to SEC Rule 613, the Participants developed the following guiding principles (the “Guiding Principles”):

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i. The CAT must meet the specific requirements of SEC Rule 613 and achieve the primary goal of creating a single, comprehensive audit trail to enhance regulators’ ability to surveil the U.S. markets in an effective and efficient way.

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ii. The reporting requirements and technology infrastructure developed must be adaptable to changing market structures and reflective of trading practices, as well as scalable to increasing market volumes.

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iii. The costs of developing, implementing, and operating the CAT should be minimized to the extent possible. To this end, existing reporting structures and technology interfaces will be utilized where practicable.

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iv. Industry input is a critical component in the creation of the CAT. The Participants will consider industry feedback before decisions are made with respect to reporting requirements and cost allocation models.

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The Participants explicitly recognized in the Guiding Principles that meaningful input by the industry was integral to the successful creation and implementation of the CAT, and as outlined below, the Participants have taken numerous steps throughout this process to ensure the industry and the public have a voice in the process.

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(i) General Industry Solicitation

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SEC Rule 613 was published in the Federal Register on August 1, 2012, and the following month, the Participants launched the CAT NMS Plan Website, which includes a dedicated email address for firms or the public to submit views on any aspect of the CAT. The CAT NMS Plan Website has been used as a means to communicate information to the industry and the public at large since that time. Also beginning in September 2012, the Participants hosted several events intended to solicit industry input regarding the CAT NMS Plan. A summary of the events is provided below:241

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• CAT Industry Call (September 19, 2012). The Participants provided an overview of SEC Rule 613, the steps the Participants were taking to develop a CAT NMS Plan as required by SEC Rule 613, and how the Participants planned to solicit industry comments and feedback on key implementation issues.

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• CAT Industry Events (October 2012). The Participants provided an overview of SEC Rule 613 and the steps the Participants were taking to develop an NMS Plan as required by SEC Rule 613. The events included an open Q & A and feedback session so that Industry Members could ask questions of the Participants and share feedback on key implementation issues. Two identical sessions were held on October 15, 2012 from 2:00 p.m. to 4:00 p.m. and on October 16, 2012 from 10:00 a.m. to 12:00 p.m. A total of 89 Industry Members attended the October 15 event in person, and a total of 162 Industry Members attended it by phone. A total of 130 Industry Members attended the October 16 event in person, and a total of 48 Industry Members attended it by phone.

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• CAT Industry Call and WebEx (November 29, 2012). The Participants provided an update on CAT NMS Plan development efforts including the process and timeline for issuing the RFP to solicit Bids to build and operate the CAT.

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• CAT Industry Events (February 27, 2014 and April 9, 2014). During these two events, the Participants provided an overview of the latest progress on the RFP process and the overall development of the NMS Plan. A total of 120 Industry Members attended the February event in person, and a total of 123 Industry Members attended it by phone. A total of 46 Industry Members attended the April event in person, and a total of 76 Industry Members attended it by phone.

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• CAT Cost Study Webinars (June 25, 2014 and July 9, 2014). The Participants hosted two Webinars to review and answer questions related to the Reporter Cost Study. There were approximately 100 to 120 Industry Members on each call.

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• CAT Industry Call and WebEx (December 10, 2014). The Participants provided an update on CAT NMS Plan development efforts, including filing of the CAT NMS Plan on September 30, 2014, the development of a funding model, and the PPR, which documents additional requirements for the CAT.

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For the above events, documentation was developed and presented to attendees, as well as posted publicly on the CAT NMS Plan Website.

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In addition to the above events, some Participants individually attended or participated in additional industry events, such as SIFMA conferences and FIF working groups, where they provided updates on the status of CAT NMS Plan development and discussed areas of expected CAT functionality.

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The Participants received general industry feedback from broker-dealers and software vendors.242 The Participants reviewed such feedback in detail, and addressed as appropriate while developing the RFP.

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The Participants also received industry feedback in response to solicitations by the Participants for industry viewpoints as follows:

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• Proposed RFP Concepts Document (published December 5, 2012, updated January 16, 2013). The Participants published via the CAT NMS Plan Website this document to solicit feedback on the feasibility and cost of implementing the CAT reporting requirements being considered by the Participants. Feedback was received from seven organizations, including software vendors, industry associations and broker-dealers, and the Participants discussed and addressed the feedback as appropriate in the final RFP document.

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• Representative Order Scenarios Solicitation for Feedback (February 1, 2013). The Participants solicited feedback via the CAT NMS Plan Website on potential CAT reporting requirements to facilitate the reporting of representative orders. Approximately 30 responses were received.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (April 22, 2013). The Participants solicited feedback via the CAT NMS Plan Website on four components of the CAT NMS Plan: (1) Primary Market Transactions; (2) Advisory Committee; (3) Time Stamp Requirement; and (4) Clock Synchronization. Approximately 80 Industry Members provided responses. FIF, SIFMA, and Thomson Reuters submitted detailed responses to the request for comments.

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• CAT Industry Solicitation for Feedback Concerning Selected Topics Related to NMS Plan (June 2013). The Participants solicited feedback via the CAT NMS Plan Website concerning Customer identifiers, Customer information, CAT-Reporter-IDs, CAT-Order-IDs, CAT intra-firm order linkages, CAT inter-firm order linkages, broker-dealer CAT order-to-exchange order linkages, data transmission, and error correction.

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• CAT Industry Feedback on Clock Drift and Time Stamp Issues (September 2013). The Participants solicited feedback via the DAG concerning the implementation impact associated with a 50 millisecond clock drift requirement for electronic orders and executions.

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• Cost Survey on CAT Reporting of Options Market Maker Quotes (November 2013). The Participants solicited feedback via the DAG concerning the implementation impact and costs associated with reporting of quotes by options market makers to the Central Repository.

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• Cost Estimates for CAT Exemptive Relief (December 2014). The Participants solicited feedback via the DAG regarding minimum additional costs to be expected by Industry Members in the absence of the requested Exemptive Relief.

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• Cost Estimate for Adding Primary Market Transactions in CAT (February 2015). The Participants solicited feedback via the DAG concerning the feasibility and costs of broker-dealers to report to the Central Repository information regarding primary market transactions in NMS securities.

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• Clock Offset Survey (February 2015). The Participants solicited further feedback via the DAG concerning current broker-dealer clock synchronization practices and expected costs associated with complying with a 50ms, 5ms, 1ms, and 100 microsecond clock drift requirement for electronic orders and executions.

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Feedback on these topics was received primarily through discussion during meetings of the DAG.

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(ii) The Development Advisory Group (DAG)

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In furtherance of Guiding Principle (iv) above, the Participants solicited members for the DAG in February 2013 to further facilitate input from the industry regarding various topics that are critical to the success of the CAT NMS Plan. Initially, the DAG consisted of 10 firms that represented large, medium, and small broker-dealers, the Options Clearing Corporation (OCC), a service bureau and three industry associations: the Security Traders Association (STA), SIFMA, and FIF.

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In March 2014, the Participants invited additional firms to join the DAG in an effort to ensure that it reflected a diversity of perspectives. At this time, the Participants increased the membership of the DAG to include 12 additional firms. As of January 2015, the DAG consisted of the Participants and Representatives from 24 firms and industry associations.

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The DAG has had 49 meetings since April 2013. Topics discussed with the DAG have included:

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• CAT Plan Feedback. The Participants shared draft versions of the CAT NMS Plan, including the PPR, as it was being developed with the DAG, who provided feedback to the Participants. The Participants reviewed and discussed this feedback with the DAG, and incorporated portions of it into the CAT NMS Plan.

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• Options Market Maker Quotes. The DAG discussed the impact of options market maker quotes on the industry. A cost analysis was conducted by the industry trade associations to analyze the impact of market maker quote reporting, as well as adding a “quote sent” time stamp to messages sent to exchanges by all options market makers The Participants included in the Exemptive Request Letters a request for exemptive relief related to option market maker quotes given that exchanges will be reporting this data to the CAT.

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• Customer-ID. The DAG discussed the requirements for capturing Customer-ID. The Participants proposed a Customer Information Approach in which broker-dealers assign a unique Firm Designated ID to each Customer and the Plan Processor creates and stores the Customer-ID. This concept was supported by the DAG and the Participants included in the Exemptive Request Letters a request for exemptive relief related to the Customer-ID to reduce the reporting on CAT Reporters.

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• Time Stamp, Clock Synchronization and Clock Drift. The DAG discussed time stamps in regards to potential exemptive relief on the time stamp requirements for allocations and Manual Order Events. In addition, industry clock synchronization processes were discussed as well as the feasibility of specific clock drift requirements (e.g., 50ms), with the DAG and the FIF conducting an industry survey to identify the costs and challenges associated with various levels of clock synchronization requirements.243 The Participants included in the Exemptive Request Letters a request for exemptive relief related to manual time stamps.

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• Exemptive Request Letters. In addition to the specific areas detailed above (Options Market Maker Quotes, Customer-ID, and Time Stamp, Clock Synchronization, and Clock Drift), the DAG provided input and feedback on draft versions of the Exemptive Request Letters prior to their filing with the SEC, including cost estimates to firms and the Industry as a whole should the exemptive requests not be granted. This feedback was discussed by the Participants and the DAG and incorporated into the Exemptive Request Letters. The DAG also provided input and feedback on the Exemptive Request Letters covering Linking Allocations to Executions and Account Effective Date submitted on April 3, 2015 and September 2, 2015 respectively.

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• Primary Markets. At the request of the Participants, the DAG discussed with the Participants the feasibility, costs, and benefits associated with reporting allocations of NMS Securities in Primary Market Transactions. The DAG further provided estimated costs associated with reporting allocations of NMS Securities in Primary Market Transactions at the top-account and sub-account levels, which was incorporated into the CAT NMS Plan.244

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• Order Handling Scenarios. The DAG discussed potential CAT reporting requirements for certain order handling scenarios and additional corresponding sub-scenarios (e.g., riskless principal order and sub-scenarios involving post-execution print-for-print matching, pre-execution one-to-one matching, pre-execution many-to-one matching, complex options and auctions) An Industry Member and Participant working group was established to discuss order handling scenarios in more detail.

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• Error Handling and Correction Process. The DAG discussed error handling and correction process. Industry Members of the DAG provided recommendations for making the CAT error correction processes more efficient. The Participants have reviewed and analyzed these recommended solutions for error correction processes and incorporated them in the requirements for the Plan Processor.

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• Elimination of Systems. The DAG discussed the gaps between CAT and both OATS and EBS. An OATS-EBS-CAT gap analysis was developed and published on the CAT NMS Plan Website to identify commonalities and redundancies between the systems and the functionality of the CAT. Additionally, gaps between LTID and the CAT were also developed. Additional examples of systems and rules being analyzed include, but are not limited to: CBOE Rule 8.9, PHLX Rule 1022, COATS, Equity Cleared Reports, LOPR, and FINRA Rule 4560.

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• Cost and Funding of the CAT. The DAG helped to develop the cost study that was distributed to Industry Members. Additionally, the Participants have discussed with the DAG the funding principles for the CAT and potential funding models.

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In addition, a subgroup of the DAG has met six times to discuss equity and option order handling scenarios, order types, how and whether the orders are currently reported and how linkages could be created for the orders within the CAT.

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(b) Summary of Views Expressed by Members and Other Parties and How Participants Took Those Views Into Account in Preparing the CAT NMS Plan

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The various perspectives of Industry Members and other appropriate parties informed the Participants’ consideration of operational and technical issues during the development of the CAT NMS Plan. In addition to the regular DAG meetings and special industry calls and events noted above, the Participants conducted multiple group working sessions to discuss the industry’s unique perspectives on CAT-related operational and technical issues. These sessions included discussions of options and equity order scenarios and the RFP specifications and requirements.

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Industry feedback was provided to Participants through gap analyses, cost studies, comment letters and active discussion in DAG meetings and industry outreach events. Specific topics on which the industry provided input include:

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Overall Timeline. Industry Members expressed a concern that the original timeline for implementation of the CAT is significantly shorter than the timeline for other large scale requirements such as Large Trader Reporting. The industry requested that, in developing the overall timeline for development and implementation of the CAT NMS Plan, the Participants account for additional industry comment/input on specifications in the official timeline and discussed risk mitigation strategies for implementation of the Central Repository.

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Request for proposal. The Participants provided relevant excerpts of the RFP to DAG members for review and input. These sections were discussed by the Participants, and appropriate feedback was incorporated prior to publishing the RFP.

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Options Market Maker Quotes. Industry Members expressed the view that requiring market makers to provide quote information to the CAT will be duplicative of information already being submitted to the CAT by the exchanges. Participants worked closely with DAG members to develop an alternative approach that will meet the goals of SEC Rule 613, and which is detailed in the Exemptive Request Letter that the Participants submitted to the Commission related to manual time stamps.

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Customer-ID. Extensive DAG discussions reviewed the Customer-ID requirements in SEC Rule 613. The industry expressed significant concern that the complexities of adding a unique CAT customer identifier to order reporting would introduce significant costs and effort related to the system modifications and business process changes broker-dealers would face in order to implement this requirement of SEC Rule 613. Working with Industry Members, the Participants proposed a Customer Information Approach in which broker-dealers would assign a unique Firm Designated ID to each Customer which the Plan Processor would retain. Additional feedback was provided by the DAG for the use of the Legal Entity Identifier (“LEI”) as a valid unique customer identifier as an alternative to Tax Identification Numbers to identify non-natural person accounts. This Customer Information Approach is included in the Exemptive Request Letters that the Participants submitted to the Commission.

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Error Correction. DAG members discussed the criticality of CAT Data quality to market surveillance and reconstruction, as well as the need for a robust process for the timely identification and correction of errors. Industry Members provided feedback on error correction objectives and processes, including the importance of those data errors not causing linkage breaks. This feedback was incorporated into the RFP and relevant portions of the PPR.

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Industry Members also suggested that CAT Reporters be provided access to their submitted data. Participants discussed the data security and cost considerations of this request and determined that it was not a cost-effective requirement for the CAT.

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Governance of the CAT. Industry Members provided detailed recommendation for the integration of Industry Members into the governance of the CAT, including an expansion of the proposed Advisory Committee to include industry associations such as FIF and SIFMA. Industry Members also recommended a three-year term with one-third turnover per year is recommended to provide improved continuity given the complexity of CAT processing.

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The Participants have discussed CAT governance considerations with the DAG at several meetings. The Participants incorporated industry feedback into the CAT NMS Plan to the extent possible in light of the regulatory responsibilities placed solely upon the Participants under the provisions of SEC Rule 613. The proposed structure and composition of the Advisory Committee in Article 4.12 was discussed with the DAG in advance of the submission of this Plan.

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Role of Operating Committee. The Operating Committee, consisting of one voting member representing each Participant, is structured to ensure fair and equal representation of the Participants in furtherance of SEC Rule 613(b)(1). The overarching role of the Operating Committee is to manage the Company and the CAT System similar to the manner in which a board of directors manages the business and affairs of a corporation. The primary and more specific role of the Operating Committee is to make all policy decisions on behalf of the Company in furtherance of the functions and objectives of the Company under the Exchange Act, any rules thereunder, including SEC Rule 613, and the CAT NMS Plan. In connection with its role, the Operating Committee has the right, power and authority to exercise all of the powers of the Company, to make all decisions, and to authorize or otherwise approve all actions by the Company, except as otherwise provided by applicable law or as otherwise provided in the CAT NMS Plan (Section 4.1 of the CAT NMS Plan). The Operating Committee also monitors, supervises and oversees the actions of the Plan Processor, the Chief Compliance Officer and the Chief Information Security Officer, all of whom are involved with the CAT System on a more detailed and day-to-day basis.

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The decisions made by the Operating Committee include matters that are typically considered ordinary course for a governing body like a board of directors (e.g., approval of compensation of the Chief Compliance Officer (Section 6.2(a)(iv) the CAT NMS Plan) and approval to hold an executive session of the Operating Committee (Section 4.3(a)(v) of the CAT NMS Plan)), in addition to matters that are specific to the functioning, management and financing of the CAT System (e.g., changes to Technical Specifications (Sections 4.3(b)(vi)-(vii) of the CAT NMS Plan) and significant changes to the CAT System (Section 4.3(b)(v) of the CAT NMS Plan)).

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The CAT NMS Plan sets forth a structure for decisions that the Operating Committee may make after approval of the CAT NMS Plan by the SEC. These decisions relate to events that may occur in the future as a result of the normal operation of any business (e.g., additional capital contributions (Section 3.8 of the CAT NMS Plan), approval of a loan to the Company (Section 3.9 of the CAT NMS Plan)) or that may occur due to the operation of the CAT System (e.g., the amount of the Participation Fee to be paid by a prospective Participant (Section 3.3(a) of the CAT NMS Plan)). These decisions cannot be made at the time of approval of the CAT NMS Plan because the Operating Committee will need to make its determination based on the facts and circumstances as they exist in the future. For example, in determining the appropriate Participation Fee, the Operating Committee will apply the factors identified in Section 3.3 of the CAT NMS Plan (e.g., costs of the Company and previous fees paid by other new Participants) to the facts existing at the time the prospective Participant is under consideration. Another example is the establishment of funding for the Company and fees for Participants and Industry Members. Section 11.2 of the CAT NMS Plan sets forth factors and principles that the Operating Committee will use in determining the funding of the Company. The Operating Committee then has the ability to review the annual budget and operations and costs of the CAT System to determine the appropriate funding and fees at the relevant future time. This approach, which sets forth standards at the time the CAT NMS Plan is approved that will be applied to future facts and circumstances, provides the Operating Committee with guiding principles to aid its decision-making in the future.

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The Participants also recognize that certain decisions that are fundamental and significant to the operation of the Company and the CAT System must require the prior approval of the SEC, such as the use of new factors in determining a Participation Fee (Section 3.3(b)(v) of the CAT NMS Plan). In addition, any decision that requires an amendment to the CAT NMS Plan, such as termination of a Participant (Section 3.7(b) of the CAT NMS Plan), requires prior approval of the SEC (Section 12.3 of the CAT NMS Plan).

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The Operating Committee has the authority to delegate administrative functions related to the management of the business and affairs of the Company to one or more Subcommittees and other Persons; however, the CAT NMS Plan expressly states that the Operating Committee may not delegate its policy-making functions (except to the extent policy-making determinations are already delegated as set forth in the CAT NMS Plan, which determinations will have been approved by the SEC) (Section 4.1 of the CAT NMS Plan). For example, the CAT NMS Plan provides for the formation of a Compliance Subcommittee to aid the Chief Compliance Officer in performing compliance functions, including (1) the maintenance of confidentiality of information submitted to the CAT; (2) the timeliness, accuracy and completeness of information; and (3) the manner and extent to which each Participant is meeting its compliance obligations under SEC Rule 613 and the CAT NMS Plan (Section 4.12(b) of the CAT NMS Plan). The Operating Committee also has delegated authority to the Plan Processor with respect to the normal day-to-day operating function of the Central Repository (Section 6.1 of the CAT NMS Plan). Nevertheless, decisions made by the Plan Processor that are more significant in nature remain subject to approval by the Operating Committee, such as decisions related to the implementation of policies and procedures (Section 6.1(c) of the CAT NMS Plan), appointment of the Chief Compliance Officer, Chief Information Officer, and Independent Auditor (Section 6.1(b) of the CAT NMS Plan), Material System Changes or any system changes for regulatory compliance (Sections 6.1(i) and 6.1(j) of the CAT NMS Plan). In addition, the Operating Committee will conduct a formal review of the Plan Processor’s performance under the CAT NMS Plan on an annual basis (Section 6.1(n) of the CAT NMS Plan). As to Subcommittees that the Operating Committee may form in the future, the Participants have determined that the Operating Committee will establish a Selection Subcommittee to select a successor Plan Processor when the time arises (Section 6.1(t) of the CAT NMS Plan). In the future, the Operating Committee will take a similar approach when delegating authority by providing Subcommittees or other Persons with discretion with respect to administrative functions and retaining authority to approve decisions related to policy and other significant matters of the Company and the CAT System.

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The role of the Operating Committee, including the delegation of its authority to Subcommittees and other limited Persons, as provided in the CAT NMS Plan is similar to that of other national market system plans, including the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC. It also is based on rules and regulations under the Exchange Act, and general principles with respect to the governance of a limited liability company. All decisions made by the Operating Committee will be governed by the guiding principles of the CAT NMS Plan and SEC Rule 613.

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Voting Criteria of the Operating Committee: This section describes the voting criteria for decisions made by the Operating Committee, which consists of a representative for each Participant, and by any Subcommittee of the Operating Committee in the management and supervision of the business of the Company and the CAT System.

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A Majority Vote (an affirmative vote of at least a majority of all members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is the default standard for decisions that are typically considered ordinary course matters for a governing body like a board of directors or board of managers or that address the general governance and function of the Operating Committee and its Subcommittees. All actions of the Company requiring a vote by the Operating Committee or any Subcommittee requires authorization by a Majority Vote except for matters specified in certain sections of the CAT NMS Plan described below, which matters require either a Supermajority Vote or a unanimous vote. As a general matter, the approach adopted by the Operating Committee is consistent with the voting criteria of the NASDAQ Unlisted Trading Privileges Plan (the “NASDAQ UTP Plan”), the Limited Liability Company Agreement of the Options Price Reporting Authority, LLC, the Consolidated Quotation Plan and the Consolidated Tape Association Plan.

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A Supermajority Vote (an affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee authorized to vote on a particular matter) is required to authorize decisions on matters that are outside ordinary course of business and are considered by the Participants to have a direct and significant impact on the functioning, management and financing of the CAT System. This approach was informed by similar plans (e.g., the NASDAQ UTP Plan, which requires a unanimous vote in many similar circumstances); however, the CAT NMS Plan has the lower requirement of a Supermajority Vote because overuse of the unanimity requirement makes management and oversight difficult. This approach takes into account concerns expressed by the Participants regarding management of the CAT NMS Plan, an is consistent with suggestions in the Adopting Release for the Participants to take into account t need for efficient and fair operation of the CAT NMS Plan and to consider the appropriateness of unanimity requirement and the possibility of a governance requirement other than unanimity, or even supermajority approval, for all but the most important decisions.

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The Participants believe that certain decisions that may directly impact the functioning and performance of the CAT System should be subject to the heightened standard of a Supermajority Vote, such as: selection and removal of the Plan Processor and key officers; approval of the initial Technical Specifications; approval of Material Amendments to the Technical Specifications proposed by the Plan Processor; and direct amendments to the Technical Specifications by the Operating Committee. In addition, the Participants believe the instances in which the Company enters into or modifies a Material Contract, incurs debt, makes distributions or tax elections or changes fee schedules should be limited, given that the Company is intended to operate on a break-even basis. Accordingly, those matters should also require the heightened standard of a Supermajority Vote.

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A unanimous vote of all Participants is required in only three circumstances. First, a decision to obligate Participants to make a loan or capital contribution to the Company requires a unanimous vote (Section 3.8(a) of the CAT NMS Plan). Requiring Participants to provide additional financing to the Company is an event that imposes an additional and direct financial burden on each Participant, thus it is important that each Participant’s approval is obtained. Second, a decision by the Participants to dissolve the Company requires unanimity (Section 10.1 of the CAT NMS Plan). The dissolution of the Company is an extraordinary event that would have a direct impact on each Participant’s ability to meet its compliance requirements so it is critical that each Participant consents to this decision. Third, a unanimous vote is required if Participants decide to take an action by written consent in lieu of a meeting (Section 4.10 of the CAT NMS Plan). In that case, because Participants will not have the opportunity to discuss and exchange ideas on the matter under consideration, all Participants must sign the written consent. This approach is similar to the unanimity requirement under the Delaware General Corporation Law for decisions made by written consent of the directors of a corporation in lieu of a meeting.

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Voting on Behalf of Affiliated Participants: Each Participant has one vote on the Operating Committee to permit equal representation among all the Participants. Initially, the Operating Committee will have 19 Participants. Of the 19 Participants, there are five Participants that are part of the Affiliated Participants Group and five Participants without any Affiliated Participants. Because of the relationship between the respective Affiliated Participants and given the large number of Participants on the Operating Committee, the Participants believe an efficient and effective way of structuring the Operating Committee in order to have an orderly and well-functioning committee is to permit but not require one individual to serve as a voting member for multiple Affiliated Participants. This approach does not change the standard rule that each Participant has one vote. This approach provides Affiliated Participants with the flexibility to choose whether to have one individual represent one or more of the Affiliated Participants or to have each of them represented by a separate individual. Affiliated Participants may likely vote on a matter similarly, and allowing them to choose the same individual as a voting member would be a convenient and practical way of having the Affiliated Participants’ votes cast. Because there is no requirement that the representative of multiple Affiliated Participants cast the same vote for all represented Participants, there is no practical difference between this approach and an approach that mandates a separate representative for each Participant. In addition, the Participants considered whether this approach would result in less participation because of a reduced number of individuals on the Operating Committee. If each group of Affiliated Participants were to choose one individual to serve as a voting member, there would be still be 10 individuals on the Operating Committee, which the Participants do not believe would cause less active representation or participation or would otherwise lead to unwanted concentration on the Operating Committee.

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Affiliated Participant Groups and Participants without Affiliations:

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1. New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC

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2. The NASDAQ Stock Market LLC; NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX LLC

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3. BATS Exchange, Inc.; BATS Y-Exchange, Inc.; EDGX Exchange, Inc.; EDGA Exchange, Inc.

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4. Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated

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5. International Securities Exchange, LLC; ISE Gemini, LLC

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6. National Stock Exchange, Inc.

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7. Chicago Stock Exchange, Inc.

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8. BOX Options Exchange LLC

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9. Miami International Securities Exchange LLC

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10. Financial Industry Regulatory Authority, Inc.

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Conflicts of Interest Definition: The Participants arrived at the definition of Conflicts of Interest set forth in Article I of the CAT NMS Plan based on a review of existing rules and standards of securities exchanges, other plans, including the Selection Plan as to qualifications of a Voting Senior Officer of a Bidding Participant, and general corporate and governance principles.

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Transparency in the Bidding and Selection Process: DAG members requested input into the bidding and selection process for the Plan Processor, citing the extensive impact of CAT requirements on the industry as well as proposed cost for compliance. Specifically, Industry Members requested that non-proprietary aspects of the responses to the RFP should be available to the public to inform the discussion regarding the costs and benefits of various CAT features and the technological feasibility of different solutions. Participants, working with counsel, determined that such information could be appropriately shared with DAG members pursuant to the provisions of a non-disclosure agreement (“NDA”) that was consistent with the terms of the NDA executed between the Participants and the Bidders. After extensive discussion, DAG members declined to sign such an NDA. The Participants continued to share non-bid specific information and to solicit the views and perspective of DAG members as it developed a Plan approach and related solutions.

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Time Stamp Granularity and Clock Synchronization Requirement: Industry Members recommended a millisecond time stamp for electronic order and execution events and a time stamp in seconds for manual order handling. Industry Members suggested a grace period of two years after the CAT requirements are finalized to allow broker-dealers sufficient time to meet the millisecond time stamp granularity. In addition, Industry Members recommended maintaining the current OATS rule of a one second clock drift tolerance for electronic order and execution events, citing a significant burden to Industry Members to comply with a change to the current one-second clock drift.245 Participants conducted active discussions with Industry Members on this topic, and included in the Exemptive Request Letter a request for exemptive relief related to time stamp granularity for Manual Order Events.

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Equitable Cost and Funding: Industry Members expressed the view that any funding mechanism developed by the Participants should provide for equitable funding among all market participants, including the Participants. The Participants recognized the importance of this viewpoint and have incorporated it within the guiding principles that were discussed with the Industry.

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Order ID/Linkages: The DAG formed an order scenarios working group to discuss approaches to satisfy the order linkage requirements of SEC Rule 613. On the topic of allocations, Industry Members provided feedback that the order and execution processes are handled via front office systems, while allocation processes are conducted in the back office. Industry Members expressed the view that creating linkages between these systems, which currently operate independently, would require extensive reengineering of middle and back office processes not just within a broker-dealer but across broker-dealers, imposing significant additional costs on the industry as a whole. Given the widespread use of average price processing accounts, clearing firms, prime brokers and self-clearing firm cannot always determine which specific order results in a given allocation or allocations. Industry Members worked closely with Participants on a proposed alternative approach which the Participants submitted to the Commission in the Exemptive Request Letters.

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Elimination of Systems and Rules: The elimination of duplicative and redundant systems and rules is a critical aspect of the CAT development process. Industry DAG members including SIFMA and FIF provided broad based and comprehensive insight on the list of existing regulatory systems and Participant rules that they deem to be duplicative, including, among others, OATS, the EBS reporting system, and Large Trader reporting. In addition, FIF provided a gap analysis of CAT requirements against Large Trader transactional reporting obligations.

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The Participants discussed feedback from the industry in a variety of forums: (i) during DAG meetings; (ii) in relevant Subcommittee meetings, depending on the topic; and (iii) at two multi-day offsite meetings where Representatives of each Participant gathered in a series of in-person workshops to discuss the requirements of the Plan Processor, both technical and operational. This was in addition to numerous video-conference meetings when Participants discussed and developed the RFP document incorporating, where appropriate, feedback from the industry.

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12. Discuss Reasonable Alternative Approaches that the Participants Considered to Create, Implement, and Maintain the CAT (SEC Rule 613(a)(1)(xii))

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The Participants, working as a consortium, selected the approach reflected in the Plan through a detailed analysis of alternatives, relying on both internal and external knowledge and expertise to collect and evaluate information related to the CAT. For some of the requirements of SEC Rule 613, the Participants’ analysis indicated that the required approach would be unduly burdensome or complex. In these cases, the Participants have requested exemption from these requirements in the Exemptive Request Letter, which details the analysis performed and alternatives considered for these specific requirements.

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The Participants leveraged their own extensive experience with regulatory, technical and securities issues in formulating, drafting and filing the CAT NMS Plan. Specifically, the nineteen Participants formed various Subcommittees to focus on specific critical issues during the development of the CAT NMS Plan. The Subcommittees included:

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• a Governance Committee, which developed recommendations for decision-making protocols and voting criteria critical to the development of the CAT NMS Plan, in addition to developing formal governance and operating structures for the CAT NMS Plan;

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• a Technical Committee, which developed the technical scope requirements of the CAT, the CAT RFP documents, and the PPR;

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• an Industry Outreach Committee, which provided recommendations on effective methods for soliciting industry input, in addition to facilitating industry involvement in CAT-related public events246 and development of the CAT NMS Plan and the Exemptive Request Letters;

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• a Press Committee as a Subcommittee of the Industry Outreach Committee, which coordinated interactions with the press;

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• a Cost and Funding Committee, which drafted a framework for determining the costs of the CAT, and provided recommendations on revenue/funding of the CAT for both initial development costs and ongoing costs; and

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• an Other Products Committee, which is designed to assist the SEC, as necessary, when the SEC is determining whether and how other products should be added to the CAT.247

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Representatives from all Subcommittees met to discuss the overall progress of the CAT initiative in the Operating Committee.

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To support the Participants’ internal expertise, the Participants also engaged outside experts to assist in formulating the CAT NMS Plan. Specifically, the Participants engaged the consulting firm Deloitte & Touche LLP as a project manager, and engaged the law firm Wilmer Cutler Pickering Hale and Dorr LLP to serve as legal counsel in drafting the CAT NMS Plan, both of which have extensive experience with issues raised by the CAT. Additionally, the Participants engaged the services of the public relations firm Peppercomm to assist with public relations and press engagement in formulating the CAT NMS Plan.

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Furthermore, as discussed in more detail above in Appendix C, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan, the Participants engaged in meaningful dialogue with Industry Members with respect to the development of the CAT through the DAG and other industry outreach events.

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Using this internal and external expertise, the Participants developed a process to identify, evaluate and resolve issues so as to finalize the CAT NMS Plan. As discussed above in Appendix C, the Participants have, among other things, developed the Selection Plan to describe the process for selecting the Plan Processor, created and published an RFP, evaluated Bids, and chosen a shortlist of Bids. Contemporaneously, the Participants have drafted the Plan set forth herein to reflect the recommendations that have resulted from the approach and analysis described above.

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For certain technical considerations for the development and maintenance of the CAT that do not materially impact cost, required functionality or data security, the Participants did not mandate specific approaches, but rather chose to consider solutions proposed by the Bidders.

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(a) Request for Proposal

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The Participants considered multiple alternatives for the best approach to gathering the information necessary to determine how to create, implement and maintain the CAT, including issuance of a Request for Information (“RFI”) and Request for Proposal (“RFP”). After due consideration, with a view to meeting the demanding deadline set forth in SEC Rule 613, the Participants decided to use their expertise to craft an RFP seeking proposals to implement the main requirements to successfully build and operate the CAT. This approach was designed to solicit imaginative and competitive proposals from the private sector as well as to provide an adequate amount of insight into the costs associated with creating, implementing, and maintaining the CAT.

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To design the RFP process, the Participants consulted with their technology subject matter resources to determine technical implications and requirements of the CAT and to develop the RFP. Based on these requirements, the Participants developed the Proposed RFP Concepts Document,248 which identified the high level requirements for which potential Bidders would be expected to design a solution, ahead of publishing the full RFP on February 26, 2013. The Participants received 31 intents to bid, and then hosted a Bidder conference on March 8, 2013 to discuss the requirements and provide additional context to the industry and potential Bidders. Two additional conference calls to discuss additional questions on the RFP were held on April 25, 2013 and May 2, 2013. The Participants also established an e-mail box through which questions on the RFP were received.

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Ten competitive proposals were submitted on March 21, 2014. Each of the ten proposals was carefully reviewed by the Participants, including in-person meetings with each of the ten Bidders. Following this review, the Bids were reduced to six proposals in accordance with the Selection Plan approved by the Commission in February 2014. In accordance with the Selection Plan Amendment approved by the Commission on June 23, 2015, the Participants asked the Bidders on July 14, 2015 to revise their bids to account for the updated requirements included in the CAT NMS Plan as filed on February 27, 2015, as well as to address specific additional questions and considerations. As described more fully throughout this Appendix C, the proposals offer a variety of solutions for creating, implementing and maintaining the CAT.

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As stated above, the Participants received proposals from ten Bidders that were deemed qualified, including many from large and well-respected information technology firms. The open ended nature of the questions contained in the RFP allowed Bidders to provide thoughtful and creative responses with regards to all aspects of the implementation and the operation of the CAT. The RFP process also resulted in the submission of multiple competitively-priced Bids. The six Shortlisted Bids remaining under consideration by the Participants, inclusive of the initial system build and the first five years of maintenance costs, have ranges between $165 million and $556 million, and encompass a number of innovative approaches to meeting the requirements of SEC Rule 613, such as use of non-traditional database architectures and cloud-based infrastructure solutions.

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The Participants conducted the RFP process and the review of Bids pursuant to the Selection Plan approved by the Commission, which was designed to mitigate the conflicts of interest associated with Participants that are participating in developing the CAT while also seeking to become the Plan Processor and to ensure a level playing field for all potential Bidders to be considered on a fair and equal basis.

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(b) Organizational Structure

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The Participants considered various organizational structures of the Bidders to assess whether a particular structure would be a material factor in the ability of a Bidder to effectively operate as the Plan Processor. Of the Bids submitted, three general organizational structures for the Plan Processor emerged: (1) consortiums or partnerships (i.e., the Plan Processor would consist of more than one unaffiliated entity that would operate the CAT); (2) single firms (i.e., one entity would be the Plan Processor and that entity would operate the CAT as part of its other ongoing business operations); and (3) dedicated legal entities (i.e., CAT operations would be conducted in a separate legal entity that would perform no other business activities). Each type of organizational structure has strengths and limitations, but the Participants did not find that a particular organizational structure should be a material factor in selecting a Bidder. Accordingly the Participants have not mandated a specific organizational structure for the Plan Processor.

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(c) Primary Storage

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The Bidders proposed two methods of primary data storage: traditionally-hosted storage architecture, and infrastructure-as-a-service. Traditionally-hosted storage architecture is a model in which an organization would purchase and maintain proprietary servers and other hardware to store CAT Data. Infrastructure-as-a-service is a provisioning model in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components to a third party who charges for the service on a usage basis.

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Each data storage method has a number of considerations that the Participants will take into account when evaluating each Bidder’s proposed solution. Such considerations include the maturity, cost, complexity, and reliability of the data storage method as used in each Bidder’s proposal. The Participants are not mandating a specific method for primary data storage provided that the data storage solution can meet the security, reliability, and accessibility requirements for the CAT, including storage of PII data, separately.

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(d) Customer and Account Data

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All Bidders proposed solutions consistent with the Customer Information Approach in which broker-dealers would report a unique Firm Designated ID for each Customer to the Plan Processor and the Plan Processor would create and store the CAT Customer-ID without passing this information back to the broker-dealer. The use of existing unique identifiers (such as internal firm customer identifiers) could minimize potentially large overhead in the CAT System that otherwise would be required to create and transmit back to CAT Reporters a CAT System-generated unique identifiers. Allowing multiple identifiers also will be more beneficial to CAT Reporters. This approach would still require mapping of identifiers to connect all trading associated with a single Customer across multiple accounts, but it would also ease the burden on CAT Reporters because each CAT Reporter would report information using existing identifiers it currently uses in its internal systems. Moreover, because the CAT System would not be sending a CAT System-generated Customer-ID back to the CAT Reporters, CAT Reporters would not need to process CAT Customer-IDs assigned by the Plan Processor. This approach would reduce the burden on the CAT Reporters because they would not need to build an additional process to receive a Customer-ID and append that identifier to each order origination, receipt or cancellation. This approach may also help alleviate storage and processing costs and potentially reduce the security risk of transmission of the Customer-ID to the CAT Reporter.

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The Participants support the use of the Customer Information Approach and included the approach in the Exemptive Request Letter so that the Central Repository could utilize this approach to link Customer and Customer Account Information. The Participants believe this approach would be the most efficient approach for both the Plan Processor and CAT Reporters.

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(e) Personally Identifying Information (PII)

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All Bidders proposed encrypting all PII, both at rest and in motion. This approach allows for secure storage of PII, even if servers should be compromised or data should be leaked. However, encryption can be highly complex to implement effectively (e.g., the poor choice of password salting or an insecure storage of private keys can compromise security, even without knowledge of the system administrator).

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All Bidders also proposed imposing a Role Based Access Control249 to PII. These controls would allow for varying levels of access depending on user needs, and would allow compartmentalizing access based on “need to know.” However, multiple layers of access can add further complexity to the implementation and use of a system.

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Some Bidders also proposed implementing multi-factor authentication250. This greatly enhances security and can prevent a leak of passwords or keys from completely compromising security. However, it increases system overhead, and increases the difficulty of accessing data.

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The Participants are requiring multi-factor authentication and Role Based Access Control for access to PII, separation of PII from other CAT Data, restricted access to PII (only those with a “need to know” will have access), and an auditable record of all access to PII data contained in the Central Repository. The Participants believe potential increased costs to the Plan Processor and delays that this could cause to accessing PII are balanced by the need to protect PII.

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(f) Data Ingestion Format

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Bidders proposed several approaches for the ingestion format for CAT Data: uniform defined format, use of existing messaging protocols or a hybrid approach whereby data can be submitted in a uniform defined format or using existing message protocols. There are benefits to the industry under any of the three formats. A large portion of the industry currently reports to OATS in a uniform defined format. These firms have invested time and resources to develop a process for reporting to OATS. The uniform formats recommended by the Bidders would leverage the OATS format and enhance it to meet the requirements of SEC Rule 613. This uniform format, therefore, may reduce the burden on certain CAT Reporters and simplify the process for those CAT Reporters to implement the CAT. However, some firms use message protocols, like FIX, as a standard point of reference with Industry Members that is typically used across the order lifecycle and within a firm’s order management processes. Leveraging existing messaging protocols could result in quicker implementation times and simplify data aggregation for Participants, CAT Reporters, and the Plan Processor, though it is worth noting that message formats may need to be updated to support CAT Data requirements.

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The Participants are not mandating the data ingestion format for the CAT. The Participants believe that the nature of the data ingestion is key to the architecture of the CAT. A cost study of members of the Participants did not reveal a strong cost preference for using an existing file format for reporting vs. creating a new format.251 However, FIF did indicate there was an industry preference among its members for using the FIX protocol.252

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(g) Process to Develop the CAT

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Bidders proposed several processes for development of the CAT: the agile or iterative development model, the waterfall model, and hybrid models that incorporate aspects of both the waterfall and agile methodologies. An agile methodology is an iterative model in which development is staggered and provides for continuous evolution of requirements and solutions. A waterfall model is a sequential process of software development with dedicated phases for Conception, Initiation, Analysis, Design, Construction, Testing, Production/ Implementation and Maintenance. The agile or iterative model is flexible to changes and facilitates early delivery of usable software that can be used for testing and feedback, helping to facilitate software that meets users’ needs. However, at the beginning of an agile or iterative development process, it can be difficult to accurately estimate the effort and time required for completion. The waterfall model would provide an up-front estimate of time and effort and would facilitate longer-term planning and coordination among multiple vendors or project streams. However, the waterfall model could be less flexible to changes, particularly changes that occur between design and delivery (and thereby potentially producing software that meets specifications but not user needs).

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The Participants are not mandating a development process. The Participants believe that either agile or iterative development or waterfall method or even a combination of both methods could be utilized to manage the development of CAT.

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(h) Industry Testing

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Bidders also proposed a range of approaches to industry testing, including dedicated environments, re-use of existing environments, scheduled testing events, and ongoing testing.

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Dedicated industry test environments could provide the possibility of continuous testing by participants, rather than allow for testing only on scheduled dates. Use of dedicated industry test environments also would not impact other ongoing operations (such as disaster recovery sites). However, developing and maintaining dedicated test environments would entail additional complexity and expense. Such expenses may be highest in hosted architecture systems where dedicated hardware would be needed, but potentially rarely used.

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The re-use of existing environments, such as disaster recovery environment, would provide simplicity and lower administrative costs. However, it could impact other ongoing operations, such as disaster recovery.

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Scheduled testing events (which might be held, for example, on weekends only, or on specific dates throughout the year) could provide for more realistic testing by involving multiple market participants. This approach also would not require the test environment to be available at all times. However, scheduled events would not allow users to test on the CAT System until a dedicated time window is open.

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Ongoing testing would allow users to test the CAT System as often as needed. However, this approach would require the test environment to be available at all times. It also may lead to lower levels of test participation at any given time, which may lead to less realistic testing.

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The Participants are requiring that the CAT provide a dedicated test environment that is functionally equivalent to the production environment and available on a 24x6 basis. The Participants believe that an ongoing testing model will be more helpful to the industry because it will provide an environment in which to test any internal system changes or updates that may occur in the course of their business that may affect reporting to the CAT. Additionally, this environment will provide a resource through which the CAT Reporters can continually test any CAT System mandated or rule associated changes to identify and reduce data errors prior to the changes being implemented in the production environment.

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(i) Quality Assurance (QA)

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The Participants considered a number of QA approaches and methodologies, informed by the Bidder’s proposals as well as discussions with the Participants’ own subject matter resources. Some of the approaches considered included “continuous integration,” where developer working copies are merged into the master and tested several times a day, test automation, and various industry standards such as ISO 20000/ITIL. The Participants are not mandating a single approach to QA beyond the requirements detailed in the RFP, for which each Bidder provided a detailed approach.

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One key component of the QA approaches proposed by the Bidders was the staffing levels associated with QA. Initial QA proposals from Bidders included staffing ranges from between 2 and 90 FTEs, although some Bidders indicated that their QA function was directly incorporated into their development function. Some Bidders proposed allocating QA resources after the third month. A larger number of QA resources may facilitate structured, in-depth testing and validation of the CAT System. However, a larger set of QA resources could lead to higher fixed costs and administrative overhead.

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The Participants are not mandating the size for QA staffing; however, the Participants will consider each Bidder’s QA staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its QA staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe the QA staffing numbers varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

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(j) User Support and Help Desk

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The RFP required that the CAT Help Desk be available on a 24x7 basis, and that it be able to manage 2,500 calls per month. To comply with these requirements, Bidders proposed user support staffing ranges from five to 36 FTEs. They also proposed dedicated support teams and support teams shared with other groups.

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A larger number of FTE user support staff could provide a higher level and quality of support. However, a higher number of staff would impose additional overhead and administrative costs. Additionally, as the support organization grows, it may become less closely integrated with the development team, which could decrease support effectiveness.

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A dedicated CAT support team would facilitate deep knowledge of the CAT System and industry practices. However, it would create additional overhead and costs. Additionally, management of support teams may not be the managing firm’s primary business, which could lead to inefficiencies. A support staff shared with non-CAT teams could provide for increased efficiency, if the team has greater experience in support more broadly. However, support resources may not have the depth of knowledge that dedicated support teams could be expected to develop.

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The Participants are not requiring specific FTEs for user support staffing; however, the Participants will consider each Bidder’s user support staffing proposals in the context of the overall Bid, and the selected Bidder must ensure that its staffing is sufficient to perform the activities required by the CAT NMS Plan. The Participants believe that the number of FTEs varied in the Bids because they are largely dependent on both the staffing philosophy of the Bidder as well as the organizational structure for the proposed Central Repository.

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Some Bidders proposed a US-based help desk, while others proposed basing it offshore. A U.S.-based help desk could facilitate a higher level of service, and could provide a greater level of security (given the sensitive nature of the CAT). However, a U.S.-based help desk may have greater labor costs. An offshore help desk would potentially have lower labor costs, but could provide (actual or perceived) lower level of service, and could raise security concerns (particularly where the help desk resources are employed by a third-party).

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The Participants are not requiring a specific location for the help desk. The Participants believe that as long as the Bidder’s solution meets the service and security requirements of the CAT, it is not necessary to prescribe the location.

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(k) CAT User Management

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Bidders proposed several approaches to user management253: help desk creation of user accounts, user (e.g., broker-dealer) creation of accounts, and multi-role. Help desk creation of accounts would allow for greater oversight and validation of user creation. However, it would increase administrative costs, particularly in the early stages of the CAT (as an FTE must setup each user). User creation of accounts would require lower staffing levels but would provide less oversight and validation of user creation.

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A multi-role approach would allow for a blended approach in which the Plan Processor could, for example, set up an administrator at each broker-dealer, and then allow the broker-dealer to set up additional accounts as needed. This approach could allow users with different levels of access to be provisioned differently, with those requiring greater oversight being provisioned manually. However, it would add complexity to the user creation system, and would provide less oversight and validation than would a fully manual system.

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For CAT Reporters entering information into the CAT, the Participants are requiring that each user be validated by the Plan Processor to set-up access to the system. However, for staff at regulators that will be accessing the information for regulatory purposes only, the Plan Processor can establish a set-up administrator who has the ability to provide access to other users within its organization. However, such administrators cannot set up access for PII information. Staff at regulators who need access to PII information must go through an authentication process directly with the Plan Processor. The Participants believe that this approach balances the demand on the staff at the Plan Processor with the need to ensure proper oversight and validation for users of the CAT.

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(l) Required Reportable Order Events

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The Participants considered multiple order event types for inclusion in the Plan. Of the order event types considered, the results order event type and the CAT feedback order event were not required. The Participants determined that a results order event type would not provide additional value over a “daisy chain” linkage method. A CAT feedback order event can be generated by the Plan Processor, thereby removing the reporting burden from reporting firms. Therefore the Participants are not requiring CAT Reporters to provide data for these two event types to the CAT. The required reportable order events are listed in Section 6.3(d).

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(m) Data Retention Requirements

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SEC Rule 613(e)(8) requires data to be available and searchable for a period of not less than five years. Broker-dealers are currently required to retain data for six years under the Exchange Act Rule 17a-4(a).

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The Participants support the use of a six year retention timeframe as it complies with Exchange Act Rule 17a-4(a). The Participants are requiring data for six years to be kept online in an easily accessible format to enable regulators to have access to six years of audit trail materials for purposes of its regulation.

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The Participants understand that requiring this sixth year of data storage may increase the cost to run the CAT; however, they believe the incremental cost would be outweighed by the needs of regulators to have access to the information. An analysis of the six Shortlisted Bidder proposals indicated that the average expected year-on-year annual cost increase during years four and five (i.e., once all reporters were reporting to the Central Repository) was approximately 4%. Extending this increase to another year would result in incremental annual costs to the Plan Processor ranging from approximately $1.15 million to $4.44 million depending upon the Bidder. Based on the assumption that the cumulative annual cost increase from year five to year six will also be 4% (including all the components provided by the Bidders in their respective cost schedules254), the maximum cost increase for data retention for an additional year would be 4%.

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(n) Data Feed Connectivity

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Bidders proposed either real-time SIP connectivity or end-of-day batch SIP connectivity. Real-time SIP connectivity would provide for more rapid access to SIP Data, but may require additional processing support to deal with out-of-sequence or missing records. End-of-day batch SIP connectivity provides the possibility of simpler implementation, but data from SIPs would not be available in the CAT until after overnight processing. Because CAT Reporters are only required to report order information on a next-day basis, the Participants are not requiring that the Plan Processor have real-time SIP connectivity.

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(o) Disaster Recovery

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Participants discussed two commonly accepted structures for disaster recovery: hot-hot255 and hot-warm256. While hot-hot allows for immediate cutover, the Participants agreed that real-time synchronization was not required, but rather that data must be kept synchronized to satisfy disaster recovery timing requirements (e.g., 48 hour cutover). A hot-warm structure meets the requirements of SEC Rule 613, and costs for hot-hot were considered to be higher than hot-warm. Therefore, the Participants are requiring a hot-warm disaster recovery structure, provided it meets the requirements set forth in Appendix D, BCP / DR Process.

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(p) Synchronization of Business Clocks

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The Participants considered multiple levels of precision for the clock synchronization standard set forth in the plan, ranging from 1 second (s) to 100 microseconds (μs). The Participants determined based on their expertise and feedback from industry that an initial clock synchronization of 50 milliseconds (ms) would be the most practical and effective choice and represents the current industry standard. Pursuant to SEC Rule 613(d), the initial standard of 50ms will be subject to annual analysis as to whether or not a more stringent clock synchronization tolerance could be implemented consistent with changes in industry standards.

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In order to identify the industry standard the Participants and Industry Members reviewed their own internal technology around Network Time Protocol (“NTP”) and Precision Time Protocol (“PTP”),257 potentially used in conjunction with Global Positioning System (“GPS”).258 In reviewing internal infrastructure, the Participants and Industry Members noted that the majority of firms had indicated that they leveraged at least NTP clock synchronization technology. In addition, the FIF conducted a clock synchronization survey259 (“FIF Clock Offset Survey”) of 28 firms to identify costs and challenges associated with clock synchronization tolerances of 50ms, 5ms, 1ms, and 100μs. The FIF Clock Offset Survey indicated that 93% of responding firms leverage NTP technology, while fewer than half of responding firms use SNTP, PTP, or GPS. In reviewing the standards for NTP technology, the Participants determined that this technology can accommodate a 50ms tolerance. In addition, the FIF Clock Offset Survey demonstrated that 60% of responding firms currently synchronize their clocks with an offset of 50ms or greater, with approximately 20% of responding firms currently using an offset of 50ms. Only 18% of responding firms used a clock offset of 30ms or less. In light of these reviews and the survey data, the Participants concluded that a clock offset of 50ms represents an aggressive, but achievable, industry standard.

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In addition to determining current industry clock offset standards used in the industry, the FIF Clock Offset Survey indicated that the costs to survey respondents were as follows:260

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As indicated in the above table, annual maintenance costs of survey respondents for a 50ms standard would be on average 31% higher than current costs, and would escalate to 102%, 123%, and 242% increases over current maintenance costs as clock synchronization standards move to 5ms, 1ms, and 100μs respectively, indicating that maintenance costs rapidly escalate as clock synchronization standards increase beyond 50ms. Survey respondents also indicated that increasing clock synchronization requirements would require escalating technology changes, including significant hardware changes (such as installation of dedicated GPS or other hardware clocks and network architecture redesign), migration to new time synchronization standards, and widespread upgrades of operating systems and databases currently in use. For example, to achieve a 5ms clock offset would require firms to install GPS clocks in all locations and migrate from NTP to PTP. The Participants believe, based on the FIF Clock Offset Survey, that fewer than half of firms currently leverage GPS technology or PTP for clock synchronization.

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As noted in Article VI, Section 6.8, the Participants, working with the Processor’s Chief Compliance Officer, shall annually evaluate and make recommendations as to whether industry standards have evolved such that changes to the clock synchronization standards should be changed. It is the belief of the Participants that, while setting an initial clock synchronization of 5ms lower than 50ms may be achievable, it does not represent current industry standard and there may be challenges with small broker-dealers’ potentially substantial costs. However, once both large and small broker-dealers begin reporting data to the Central Repository, and as increased time synchronization standards become more mature, the Participants will assess the ability to tighten the clock synchronization standards to reflect changes in industry standards in accordance with SEC Rule 613.

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(q) Reportable Securities

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SEC Rule 613(c)(6) requires NMS Securities to be reported the Central Repository and SEC Rule 613(i) requires the Participants to detail a plan outlining how non-NMS Securities, debt securities, and Primary Market Transactions in equity securities that are not NMS Securities can be reported to the Central Repository in the future. The Participants considered whether to require including OTC Equity Securities, non NMS Securities, in a future phase of the CAT NMS Plan, as contemplated by the Commission in SEC Rule 613, or accelerating their inclusion into the first phase of the Plan. As part of this consideration, Participants weighed heavily the feedback from the DAG and other market participants of the considerations associated with the two alternatives, and made the determination to include OTC Equities in the requirements under the CAT NMS Plan.

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pubdate: January 10, 2018 effdate: N/A -

APPENDIX D

- Topic: CAT NMS Plan, Appendix C - Compliance User: National Securities Exchanges/National Securities Associations - Keywords: - CAT NMS Plan Processor Requirement, - Central Repository Requirement, - Technical Environments, - Data Retention Requirements, - Connectivity and Data Transfer, - -

CAT NMS Plan Processor Requirements

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Appendix D, CAT NMS Plan Processor Requirements, outlines minimum functional and technical requirements established by the Participants of the CAT NMS Plan for the Plan Processor. Given the technical nature of many of these requirements, it is anticipated, as technology evolves, that some may change over time. The Participants recognize that effective oversight of, and a collaborative working relationship with, the Plan Processor will be critical to ensure the CAT achieves its intended purpose, namely enhanced investor protection, in an efficient and cost-effective manner. The Participants also recognize that maintaining the efficiency and cost-effectiveness of the CAT requires flexibility to respond to technological innovations and market changes. For example, these minimum functional and technical requirements allow the Plan Processor flexibility to make certain changes to the Technical Specifications, while limiting others to the Operating Committee, and anticipate agreement between the Operating Committee and the Plan Processor on SLAs relating to, among other things, development, change management, and implementation processes and timelines. Maintaining such flexibility to adapt in these and other areas relating to the development and operation of the CAT is a foundational principle of this Appendix D.

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1. Central Repository Requirements

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1.1 Technical Architecture Requirements

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The Central Repository must be designed and sized to ingest, process, and store large volumes of data. The technical infrastructure needs to be scalable, adaptable to new requirements and operable within a rigorous processing and control environment. As a result, the technical infrastructure will require an environment with significant throughput capabilities, advanced data management services and robust processing architecture.

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The technical architecture must be scalable and able to readily expand its capacity to process significant increases in data volumes beyond the baseline capacity. The baseline capacity requirements are defined in this document. Once the CAT NMS Plan is approved, the Operating Committee will define the baseline metrics on an ongoing basis. CAT capacity planning must include SIP, OPRA and exchange capacity and growth forecasts. The initial baseline capacity requirements will be based on twice (2X) the historical peaks for the most recent six years, and the Plan Processor must be prepared to handle peaks in volume that could exceed this baseline for short periods. The SLA(s) will outline details of the technical performance and scalability requirements, and will be specifically targeted to the selected Bidder’s solution.

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The Central Repository must have the capacity and capability to:

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• Ingest and process throughput to meet baseline capacity requirements as well as scalability to meet peak capacity requirements, including staging, loading, speed of processing, and linking of data;

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• Accommodate data storage and query compute, such as:

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o Scalable for growth data storage and expansion capability, including but not limited to, resizing of database(s), data redistribution across nodes, and resizing of network bandwidth;

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o Robust processes to seamlessly add capacity without affecting the online operation and performance of the CAT System; and

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o Quantitative methods for measuring, monitoring, and reporting of excess capacity of the solution;

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• Satisfy minimum processing standards as described in the CAT RFP and that will be further defined in the SLA(s);

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• Adapt to support future technology developments and new requirements (including considerations for anticipated/potential changes to applicable rules and market behavior);

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• Handle an extensible architecture that is capable of supporting asset classes beyond the initial scope of NMS Securities and OTC Equity Securities;

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• Comply with the clock synchronization standards as set forth in Article VI, Section 6.8; and

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• Handle an extensible data model and messaging protocols that are able to support future requirements such as, but not limited to:

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o Expansion of trading hours, including capability and support for 24-hour markets;

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o Sessions for securities;261 and

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o New asset classes, such as debt securities or derivative instruments.

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1.2 Technical Environments

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The architecture must include environments for production, development, quality assurance testing, disaster recovery, industry-wide coordinated testing, and individual on-going CAT Reporter testing. The building and introduction of environments available to CAT Reporters may be phased in to align with the following agreed upon implementation milestones:

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• Development environment – the development environment must be created to build, develop, and maintain enhancements and new requirements. This environment must be separate from those listed below.

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• Quality assurance environment – a quality assurance (QA) environment must be created to allow simulation and testing of all applications, interfaces, and data integration points contained in the CAT System.

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o The QA environment shall be able to simulate end-to-end production functionality and perform with the same operational characteristics, including processing speed, as the production environment.

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o The QA environment shall support varied types of changes, such as, but not limited to, the following:

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‧ Application patches;

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‧ Bug fixes;

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‧ Operating system upgrades;

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‧ Introduction of new hardware or software components;

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‧ New functionality;

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‧ Network changes;

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‧ Regression testing of existing functionality;

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‧ Stress or load testing (simulation of production-level usage); and

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‧ Recovery and failover.

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o A comprehensive test plan for each build and subsequent releases must be documented.

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• Production environment – fully operational environment that supports receipt, ingestion, processing and storage of CAT Data. Backup/disaster recovery components must be included as part of the production environment.

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• Industry test environment –

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o The Plan Processor must provide an environment supporting industry testing (test environment) that is functionally equivalent to the production environment, including:

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‧ End-to-end functionality (e.g., data validation, processing, linkage, error identification, correction and reporting mechanism) from ingestion to output, sized to meet the standards of the production SLA;

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‧ Performance metrics that mirror the production environment; and

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‧ Management with the same information security policies applicable to the production environment.

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o The industry test environment must also contain functionality to support industry testing, including:

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‧ Minimum availability of 24x6;

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‧ Replica of production data when needed for testing;

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‧ Data storage sized to meet varying needs, dependent upon scope and test scenarios; and

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‧ Support of two versions of code (current and pending).

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o The industry test environment must support the following types of industry testing:

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‧ Technical upgrades made by the Plan Processor;

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‧ CAT code releases that impact CAT Reporters;

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‧ Changes to industry data feeds (e.g., SIP, OPRA, etc.);

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‧ Industry-wide disaster recovery testing;

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‧ Individual CAT Reporter and Data Submitter testing of their upgrades against CAT interfaces and functionality; and

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‧ Multiple, simultaneous CAT Reporter testing.

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o The industry test environment must be a discrete environment separate from the production environment.

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o The Plan Processor must provide the linkage processing of data submitted during coordinated, scheduled, industry-wide testing. Results of the linkage processes must be communicated back to Participants as well as to the Operating Committee.

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o Data from industry testing must be saved for three months. Operational metrics associated with industry testing (including but not limited to testing results, firms who participated, and amount of data reported and linked) must be stored for the same duration as the CAT production data.

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o The Plan Processor must provide support for industry testing, including testing procedures, coordination of industry testing, publish notifications, and provide help desk support during industry testing.

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o The Participants and the SEC must have access to industry test data.

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1.3 Capacity Requirements

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System capacity must have the following characteristics.262

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The Central Repository must be:

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• Designed such that additional capacity can be quickly and seamlessly integrated while maintaining system access and availability requirements;

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• Able to efficiently and effectively handle data ingestion on days with peak and above-peak data submission volumes; and

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• Required to maintain and store data for a 6-year sliding window of data. System access and availability requirements must be maintained during the maintenance of the sliding window. It is expected that the Central Repository will grow to more than 29 petabytes of raw, uncompressed data.

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The Plan Processor must:

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• Define a capacity planning process to be approved by the Operating Committee, with such process incorporating industry utility capacity metrics; and

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• Develop a robust process to add capacity, including both the ability to scale the environment to meet the expected annual increases as well as to rapidly expand the environment should unexpected peaks in data volumes breach the defined capacity baseline. Capacity forecasts from systems, including OPRA, UTP, and CTA, must also be included for capacity planning purposes. This capacity planning process must be approved by the Operating Committee.

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1.3.1 Monitoring Capacity Utilization and Performance Optimization

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In order to manage the data volume, operational capacity planning must be conducted on a periodic basis. The Plan Processor must submit capacity-planning metrics to the Operating Committee for review to ensure that all parties are aware of the system processing capabilities and changes to assumptions. Changes to assumptions could lead to positive or negative adjustments in the costs charged to CAT Reporters. Reports that capture daily disk space, processing time, amount of data received and linkage completion times must be provided by the Plan Processor to the Operating Committee.

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1.4 Data Retention Requirements

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The Plan Processor must develop a formal record retention policy and program for the CAT, to be approved by the Operating Committee, which will, at a minimum:

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• Contain requirements associated with data retention, maintenance, destruction, and holds;

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• Comply with applicable SEC record-keeping requirements;

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• Have a record hold program where specific CAT Data can be archived offline for as long as necessary;

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• Store and retain both raw data submitted by CAT Reporters and processed data; and

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• Make data directly available and searchable electronically without manual intervention for at least six years.

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2. Data Management

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The Plan Processor must develop data management policies and procedures to govern and manage CAT Data, reference data, and metadata contained in and used by the Central Repository.

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The CAT must capture, store, and maintain current and historical reference data information. This master / reference database will include data elements such as, but not limited to, SRO-assigned market participant identifiers, product type, trading unit size, trade / quote minimum price variation, corporate actions, symbology changes, and changes in listings market center. The Plan Processor must support bi-temporal milestones (e.g., Effective Date and as-of-date) of the reference data.

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CAT Reporters will submit data to the Central Repository with the listing exchange symbology format. The Central Repository must use the listing exchange symbology format for output of the linked data. Instrument validation must be included in the processing of data submitted by CAT Reporters.

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The Central Repository must be able to link instrument data across any time period so that data can be properly displayed and linked regardless of changes to issue symbols or market class. The Plan Processor is required to create and maintain a symbol history and mapping table, as well as to provide a tool that will display a complete issue symbol history that will be accessible to CAT Reporters, Participants and the SEC. In addition, the Plan Processor will be required to create a start-of-day (“SOD”) and end-of-day (“EOD”) CAT reportable list of securities for use by CAT Reporters. This list must be available online and in a machine readable (e.g., .csv) format by 6 a.m. on each Trading Day.

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Queries, reports, and searches for data that span dates where there are changes to reference data must automatically include data within the requested date range. For example, if a query is run for a symbol that had three issue symbol changes during the time window of the query parameters, the result set must automatically include data for all three symbols that were in use during the time window of the query.

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The Plan Processor must also develop an end-to-end process and framework for technical, business and operational metadata.

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2.1 Data Types and Sources

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The Plan Processor will be responsible for developing detailed data and interface specifications for data to be submitted by CAT Reporters. These specifications will be contained in the Technical Specifications, the initial version of which will be presented to the Operating Committee for approval. The Technical Specifications must be designed to capture all of the data elements required by SEC Rule 613, as well as other information the Participants determine necessary to facilitate elimination of reporting systems that the CAT may cause to be redundant, such as EBS and OATS. In the future, new data sources such as public news may be added to the specifications.

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CAT Reporters and Data Submitters will transmit data in an electronic data format(s) that will be defined by the Plan Processor. The Technical Specifications must include details for connectivity and electronic submission, transmission, retransmission and processing. It is possible that more than one format will be defined to support the various senders throughout the industry.

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The Participants anticipate that some broker-dealers will not directly report to the CAT but will rely on other organizations to report on their behalf. However, the CAT will need to have the flexibility to adapt on a timely basis to changes in the number of entities that report CAT Data.

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2.2 Data Feed Management

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The Plan Processor must monitor and manage incoming and outgoing data feeds for, at a minimum, the following:

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• Data files from each CAT Reporter and Data Submitter;

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• Files that cover multiple trade dates (e.g., to account for clearing and changes);

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• Full and partial file submissions that contain corrections from previously rejected files;

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• Full and partial file submissions based on CAT Reporter; and

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• Receipt and processing of market data feeds (SIP, OPRA, OCC).

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The Plan Processor must also develop a process for detecting, managing, and mitigating duplicate file submissions. It must create and store operational logs of transmissions, success, and failure reasons in order to create reports for CAT Reporters, Participants, and the SEC. Outgoing data feeds must be logged and corresponding metadata elements must be monitored and captured.

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2.2.1 Managing connectivity for data feeds (e.g., SIPs, broker-dealers and regulators)

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The Plan Processor will be required to ensure that it provides all CAT Reporters with the ability to transmit CAT Data to the Central Repository as required to meet the reporting requirements. The Plan Processer is required to have a robust managed file transfer (“MFT”) tool, including full monitoring, permissioning, auditing, security, high availability,263 file integrity checks, identification of data transmission failures / errors, transmission performance metrics, multiple transmission protocols, Latency / network bottlenecks or delays, key management, etc. CAT Reporters must also have the ability to conduct manual data entry via a GUI interface or the uploading of a file, subject to a maximum record capacity, which will be defined by the Plan Processor in consultation with the Operating Committee.

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3. Reporting and Linkage Requirements

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All CAT Data reported to the Central Repository must be processed and assembled to create the complete lifecycle of each Reportable Event. Reportable Events must contain data elements sufficient to ensure the same regulatory coverage currently provided by existing regulatory reporting systems that have been identified as candidates for retirement.

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Additionally, the Central Repository must be able to:

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• Assign a unique CAT-Reporter-ID to all reports submitted to the system based on sub-identifiers, (e.g., MPIDs, ETPID, trading mnemonic) currently used by CAT Reporters in their order handling and trading processes.

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• Handle duplicate sub-identifiers used by members of different Participants to be properly associated with each Participant.

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• Generate and associate one or more Customer-IDs with all Reportable Events representing new orders received from a Customer(s) of a CAT Reporter. The Customer-ID(s) will be generated from a Firm Designated ID provided by the CAT Reporter for each such event, which will be included on all new order events.

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• Accept time stamps on order events handled electronically to the finest level of granularity captured by CAT Reporters. Additionally, the CAT must be able to expand the time stamp field to accept time stamps to an even finer granularity as trading systems expand to capture time stamps in ever finer granularity. The Plan Processor must normalize all processed date/time CAT Data into a standard time zone/format.

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In addition, the data required from CAT Reporters will include all events and data elements required by the Plan Processor in the Technical Specifications to build the:

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• Life cycle of an order for defined events within a CAT Reporter;

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• Life cycle of an order for defined events intra-CAT Reporter; and

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• State of all orders across all CAT Reporters at any point in time.

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The Plan Processor must use the “daisy chain approach” to link and create the order lifecycle. In the daisy chain approach, a series of unique order identifiers, assigned to all order events handled by CAT Reporters are linked together by the Central Repository and assigned a single CAT-generated CAT-Order-ID that is associated with each individual order event and used to create the complete lifecycle of an order.

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By using the daisy chain approach the Plan Processor must be able to link all related order events from all CAT Reporters involved in the lifecycle of an order. At a minimum, the Central Repository must be able to create the lifecycle between:

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• All order events handled within an individual CAT Reporter, including orders routed to internal desks or departments with different functions (e.g., an internal ATS);

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• Customer orders to “representative” orders created in firm accounts for the purpose of facilitating a customer order (e.g., linking a customer order handled on a riskless principal basis to the street-side proprietary order);

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• Orders routed between broker-dealers;

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• Orders routed from broker-dealers to exchanges;

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• Orders sent from an exchange to its routing broker-dealer;

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• Executed orders and trade reports;

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• Various legs of option/equity complex orders; and

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• Order events for all equity and option order handling scenarios that are currently or may potentially be used by CAT Reporters, including:

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o Agency route to another broker-dealer or exchange;

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o Riskless principal route to another broker-dealer or exchange capturing within the lifecycle both the customer leg and street side principal leg;

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o Orders routed from one exchange through a routing broker-dealer to a second exchange;

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o Orders worked through an average price account capturing both the individual street side execution(s) and the average price fill to the Customer;

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o Orders aggregated with other orders for further routing and execution capturing both the street side executions for the aggregated order and the fills to each customer order;

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o Complex orders involving one or more options legs and an equity leg, with a linkage between the option and equity legs;

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o Complex orders containing more legs than an exchange’s order management system can accept, causing the original order to be broken into multiple orders;

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o Orders negotiated over the telephone or via a negotiation system;

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o Orders routed on an agency basis to a foreign exchange;

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o Execution of customer order via allocation of shares from a pre-existing principal order;

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o Market maker quotes; and

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o Complex orders involving two or more options legs.

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Additionally, the Central Repository must be able to:

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• Link each order lifecycle back to the originating Customer;

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• Integrate and appropriately link reports representing repairs of original submissions that are rejected by the CAT due to a failure to meet a particular data validation;

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• Integrate into the CAT and appropriately link reports representing records that are corrected by a CAT Reporter for the purposes of correcting data errors not identified in the data validation process;

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• Assign a single CAT-Order-ID to all events contained within the lifecycle of an order so that regulators can readily identify all events contained therein; and

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• Process and link Manual Order Events with the remainder of the associated order lifecycle.

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3.1 Timelines for Reporting

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CAT Data for the previous Trading Day must be reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day following the day the Industry Member receives such data; however, the Plan Processor must accept data prior to that deadline, including intra-day submissions.

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3.2 Other Items

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The Plan Processor must anticipate and manage order data processing over holidays, early market closures and both anticipated and unanticipated market closures. The Plan Processor must allow and enable entities that are not CAT Reporters (e.g., service bureaus) to report on behalf of CAT Reporters only upon being permissioned by the CAT Reporter, and must develop appropriate tools to facilitate this process.

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3.3 Required Data Attributes for Order Records Submitted by CAT Reporters

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At a minimum, the Plan Processor must be able to receive the data elements as detailed in the CAT NMS Plan.

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4. Data Security

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4.1 Overview

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SEC Rule 613 requires that the Plan Processor ensure the security and confidentiality of all information reported to and maintained by the CAT in accordance with the policies, procedures and standards in the CAT NMS Plan.

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The Plan Processor must have appropriate solutions and controls in place to ensure data confidentiality and security during all communication between CAT Reporters and Data Submitters and the Plan Processor, data extraction, manipulation and transformation, loading to and from the Central Repository and data maintenance by the CAT System. The Plan Processor must address security controls for data retrieval and query reports by Participant and the SEC. The solution must provide appropriate tools, logging, auditing and access controls for all components of the CAT System, such as but not limited to access to the Central Repository, access for CAT Reporters, access to rejected data, processing status and CAT Reporter performance and comparison statistics.

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The Plan Processor must provide to the Operating Committee a comprehensive security plan that covers all components of the CAT System, including physical assets and personnel, and the training of all persons who have access to the Central Repository consistent with Article VI, Section 6.1(m). The security plan must be updated annually. The security plan must include an overview of the Plan Processor’s network security controls, processes and procedures pertaining to the CAT Systems. Details of the security plan must document how the Plan Processor will protect, monitor and patch the environment; assess it for vulnerabilities as part of a managed process, as well as the process for response to security incidents and reporting of such incidents. The security plan must address physical security controls for corporate, data center, and leased facilities where Central Repository data is transmitted or stored. The Plan Processor must have documented “hardening baselines” for systems that will store, process, or transmit CAT Data or PII data.

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4.1.1 Connectivity and Data Transfer

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The CAT System(s) must have encrypted internet connectivity. CAT Reporters must connect to the CAT infrastructure using secure methods such as private lines or (for smaller broker-dealers) Virtual Private Network connections over public lines. Remote access to the Central Repository must be limited to authorized Plan Processor staff and must use secure multi-factor authentication that meets or exceeds the Federal Financial Institutions Examination Council (“FFIEC”) security guidelines surrounding authentication best practices.264

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The CAT databases must be deployed within the network infrastructure so that they are not directly accessible from external end-user networks. If public cloud infrastructures are used, virtual private networking and firewalls/access control lists or equivalent controls such as private network segments or private tenant segmentation must be used to isolate CAT Data from unauthenticated public access.

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4.1.2 Data Encryption

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All CAT Data must be encrypted at rest and in flight using industry standard best practices (e.g., SSL/TLS) including archival data storage methods such as tape backup. Symmetric key encryption must use a minimum key size of 128 bits or greater (e.g., AES-128), larger keys are preferable. Asymmetric key encryption (e.g., PGP) for exchanging data between Data Submitters and the Central Repository is desirable.

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Storage of unencrypted PII data is not permissible. PII encryption methodology must include a secure documented key management strategy such as the use of HSM(s). The Plan Processor must describe how PII encryption is performed and the key management strategy (e.g., AES-256, 3DES).

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If public cloud managed services are used that would inherently have access to the data (e.g., BigQuery, S3, Redshift), then the key management surrounding the encryption of that data must be documented (particularly whether the cloud provider manages the keys, or if the Plan Processor maintains that control). Auditing and real-time monitoring of the service for when cloud provider personnel are able to access/decrypt CAT Data must be documented, as well as a response plan to address instances where unauthorized access to CAT Data is detected. Key management/rotation/revocation strategies and key chain of custody must also be documented in detail.

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4.1.3 Data Storage and Environment

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Data centers housing CAT Systems (whether public or private) must, at a minimum, be AICPA SOC 2 certified by a qualified third-party auditor that is not an affiliate of any of the Participants or the CAT Processor. The frequency of the audit must be at least once per year.

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CAT compute infrastructure may not be commingled with other non-regulatory systems (or tenets, in the case of public cloud infrastructure). Systems hosting the CAT processing for any applications must be segmented from other systems as far as is feasible on a network level (firewalls, security groups, ACL’s, VLAN’s, authentication proxies/bastion hosts and similar). In the case of systems using inherently shared infrastructure/storage (e.g., public cloud storage services), an encryption/key management/access control strategy that effectively renders the data private must be documented.

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The Plan Processor must include penetration testing and an application security code audit by a reputable (and named) third party prior to launch as well as periodically as defined in the SLA(s). Reports of the audit will be provided to the Operating Committee as well as remediation plan for identified issues. The penetration test reviews of the Central Repository’s network, firewalls, and development, testing and production systems should help the CAT evaluate the system’s security and resiliency in the face of attempted and successful systems intrusions.

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4.1.4 Data Access

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The Plan Processor must provide an overview of how access to PII and other CAT Data by Plan Processor employees and administrators is restricted. This overview must include items such as, but not limited to, how the Plan Processor will manage access to the systems, internal segmentation, multi-factor authentication, separation of duties, entitlement management, background checks, etc.

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The Plan Processor must develop and maintain policies and procedures reasonably designed to prevent, detect, and mitigate the impact of unauthorized access or usage of data in the Central Repository. Such policies and procedures must be approved by the Operating Committee, and should include, at a minimum:

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• Information barriers governing access to and usage of data in the Central Repository;

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• Monitoring processes to detect unauthorized access to or usage of data in the Central Repository; and

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• Escalation procedures in the event that unauthorized access to or usage of data is detected.

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A Role Based Access Control (“RBAC”) model must be used to permission user with access to different areas of the CAT System. The CAT System must support an arbitrary number of roles with access to different types of CAT Data, down to the attribute level. The administration and management of roles must be documented. Periodic reports detailing the current list of authorized users and the date of their most recent access must be provided to Participants, the SEC and the Operating Committee. The reports of the Participants and the SEC will include only their respective list of users. The Participants must provide a response to the report confirming that the list of users is accurate. The required frequency of this report will be defined by the Operating Committee. The Plan Processor must log every instance of access to Central Repository data by users.

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Passwords stored in the CAT System must be stored according to industry best practices. Reasonable password complexity rules should be documented and enforced, such as, but not limited to, mandatory periodic password changes and prohibitions on the reuse of the recently used passwords.

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Password recovery mechanisms must provide a secure channel for password reset, such as emailing a one-time, time-limited login token to a pre-determined email address associated with that user. Password recovery mechanisms that allow in-place changes or email the actual forgotten password are not permitted.

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Any login to the system that is able to access PII data must follow non-PII password rules and must be further secured via multi-factor authentication (“MFA”). The implementation of MFA must be documented by the Plan Processor. MFA authentication capability for all logins is required to be implemented by the Plan Processor.

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4.1.5 Breach Management

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The Plan Processor must develop policies and procedures governing its responses to systems or data breaches. Such policies and procedures will include a formal cyber incident response plan, and documentation of all information relevant to breaches.

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The cyber incident response plan will provide guidance and direction during security incidents. The plan will be subject to approval by the Operating Committee. The plan may include items such as:

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• Guidance on crisis communications;

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• Security and forensic procedures;

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• Customer notifications;

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• “Playbook” or quick reference guides that allow responders quick access to key information;

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• Insurance against security breaches;

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• Retention of legal counsel with data privacy and protection expertise; and

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• Retention of a Public Relations firm to manage media coverage.

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Documentation of information relevant to breaches should include:

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• A chronological timeline of events from the breach throughout the duration of the investigation;

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• Relevant information related to the breach (e.g., date discovered, who made the discovery, and details of the breach);

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• Response efforts, involvement of third parties, summary of meetings/conference calls, and communication; and

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• The impact of the breach, including an assessment of data accessed during the breach and impact on CAT Reporters.

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4.1.6 PII Data Requirements

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PII data must not be included in the result set(s) from online or direct query tools, reports or bulk data extraction. Instead, results will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. By default, users entitled to query CAT Data are not authorized for PII access. The process by which someone becomes entitled for PII access, and how they then go about accessing PII data, must be documented by the Plan Processor. The chief regulatory officer, or other such designated officer or employee at each Participant must, at least annually, review and certify that people with PII access have the appropriate level of access for their role.

-

Using the RBAC model described above, access to PII data shall be configured at the PII attribute level, following the “least privileged” practice of limiting access as much as possible.

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PII data must be stored separately from other CAT Data. It cannot be stored with the transactional CAT Data, and it must not be accessible from public internet connectivity. A full audit trail of PII access (who accessed what data, and when) must be maintained. The Chief Compliance Officer and the Chief Information Security Officer shall have access to daily PII reports that list all users who are entitled for PII access, as well as the audit trail of all PII access that has occurred for the day being reported on.

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4.2 Industry Standards

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The following industry standards—which is not intended to be an exclusive list—must be followed as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee (in the event of a conflict between standards, the more stringent standard shall apply, subject to the approval of the Operating Committee):

-

• National Institute of Standards and Technology:

-

o 800-23 – Guidelines to Federal Organizations on Security Assurance and Acquisition / Use of Test/Evaluated Products

-

o 800-53 – Security and Privacy Controls for Federal Information Systems and Organizations

-

o 800-115 – Technical Guide to Information Security Testing and Assessment

-

o 800-118 – Guide to Enterprise Password Management

-

o 800-133 – Recommendation for Cryptographic Key Generation

-

o 800-137 – Information Security Continuous Monitoring for Federal Information Systems and Organizations

-

o To the extent not specified above, all other provisions of the NIST Cyber Security Framework

-

• Federal Financial Institutions Examination Council:

-

o Authentication Best Practices

-

• International Organization for Standardization:

-

o ISO/IEC 27001 – Information Security Management

-

The Company shall endeavor to join the FS-ISAC and comparable bodies as the Operating Committee may determine. The FS-ISAC provides real time security updates, industry best practices, threat conference calls, xml data feeds and a member contact directory. The FS-ISAC provides the Company with the ability to work with the entire financial industry to collaborate for the purposes of staying up to date with the latest information security activities.

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5. BCP / DR Process

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5.1 Overview

-

The Plan Processor must develop and implement disaster recovery (“DR”) and business continuity plans (“BCP”) that are tailored to the specific requirements of the CAT environment, and which must be approved and regularly reviewed by the Operating Committee. The BCP must address the protection of data, service for the data submissions, processing, data access, support functions and operations. In the context of this document, BCP generally refers to how the business activities will continue in the event of a widespread disruption and the DR requirements refer to how the CAT infrastructure will be designed to support a full data center outage. In addition, the Plan Processor must have SLAs in place to govern redundancy (i.e., no single point of failure) of critical aspects of the CAT System (e.g., electrical feeds, network connectivity, redundant processors, storage units, etc.) and must have an architecture to support and meet the SLA requirements. Any SLAs between the Plan Processor and third parties must be approved by the Operating Committee.

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5.2 Industry Standards

-

The following National Institute of Standards and Technology standards, at a minimum, must be followed in association with Disaster Recovery, in each case as such standards and requirements may be replaced by successor publications, or modified, amended, or supplemented and as approved by the Operating Committee:

-

• 800-34 – Contingency Planning for Federal Information Systems; and

-

• Specifically, the following sections as minimum requirements for designing and implementing BCP and DR plans:

-

o Chapter 3: Information System Contingency Planning Process, which identifies seven steps to use when developing contingency plans;

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o Chapter 4: Information System Contingency Plan Development, which outlines the key elements of a contingency plan;

-

o Chapter 5: Technical Contingency Planning Considerations (using the specific sections applicable to the Plan Processor’s systems) which provides considerations specific to different types of technology; and

-

o Other sections and the appendices should be taken into consideration as warranted.

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In addition, the Plan Processor will need to develop a process to manage and report all breaches.

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5.3 Business Continuity Planning

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The Plan Processor will design a BCP that supports a continuation of the business activities required of the CAT in the event of a widespread disruption.

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With respect to the team supporting CAT business operations, a secondary site must be selected that is capable of housing the critical staff necessary for CAT business operations. The site must be fully equipped to allow for immediate use. The selection of the site must take into account diversity in utility and telecommunications infrastructure as well as the ability for CAT staff to access the site in the event of transit shutdowns, closure of major roadways and other significant disruptions that may affect staff. Planning should consider operational disruption involving significant unavailability of staff.

-

A bi-annual test of CAT operations where CAT staff operates the facility from the secondary site is required. This will ensure that phone systems, operational tools and other help desk functions all work as expected and the Plan Processor still functions as usual even in the event of a disruption.

-

CAT operations staff must maintain, and annually test, remote access capabilities to ensure smooth operations during a site un-availability event. Certain critical staff may be required to report directly to the secondary office site. However, an effective telecommuting solution must be in place for all critical CAT operations staff. Furthermore, any telecommuting strategy must require a remote desktop style solution where CAT operations and data consoles remain at the primary data center and must further ensure that CAT Data may not be downloaded to equipment that is not CAT-owned and compliant with CAT security requirements.

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The BCP must identify critical third party dependencies. The Plan Processor will coordinate with critical suppliers regarding their arrangements and involve these parties in tests on an annual basis. Critical third party firms may be required to provide evidence of their BCP capabilities and testing.

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The Plan Processor must conduct third party risk assessments at regular intervals to verify that security controls implemented are in accordance with NIST SP 800-53. These risk assessments must include assessment scheduling, questionnaire completion and reporting. The Plan Processor should provide assessment reports to the Operating Committee.

-

The Plan Processor will develop and annually test a detailed crisis management plan to be invoked following certain agreed disruptive circumstances.

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The processing sites for business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”265

-

The Plan Processor will conduct an annual Business Continuity Audit using an Independent Auditor approved by the Operating Committee. The Independent Auditor will document all findings in a detailed report provided to the Operating Committee.

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5.4 Disaster Recovery Requirements

-

The Plan Processor will implement a DR capability that will ensure no loss of data and will support the data availability requirements and anticipated volumes of the CAT.

-

A secondary processing site must be capable of recovery and restoration of services at the secondary site within a minimum of 48 hours, but with the goal of achieving next day recovery after a disaster event. The selection of the secondary site must consider sites with geographic diversity that do not rely on the same utility, telecom and other critical infrastructure services. The processing sites for disaster recovery and business continuity must adhere to the “Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.”

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The secondary site must have the same level of availability / capacity / throughput and security (physical and logical) as the primary site. The requirement implies and expects that fully redundant connectivity between the primary and secondary processing sites be established and fully available. Further, given this recovery window, this connectivity must be used to replicate repositories between the primary and secondary sites. Finally, CAT Reporter and Data Submitter submissions must be replicated to the secondary site for possible replay if recent replications are incomplete. Replication must occur as deliveries complete to ensure that a widespread communications failure will have minimal impact to the state of the secondary site.

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On an annual basis, the Plan Processor must execute an industry DR test, which must include Plan Participants and a critical mass of non-Plan Participant CAT Reporters and Data Submitters. The tests must be structured such that all CAT Reporters and other Data Submitters can upload to the DR site and the data be ingested by the CAT Data loaders. All DR tests are required to realistically reflect the worst-case scenario.

-

Failover processes must be transparent to CAT Reporters, as well as failback. In the event of a site failover, CAT Reporters must be able to deliver their daily files without changing configuration. This avoids requiring all CAT Reporters to update configurations, which is an error-prone effort.

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After a DR event, the primary processing site must be made available as quickly as possible. For short duration DR events, the primary site must be returned to primary within 48 hours after the DR event. Longer duration outages will have differing SLAs. The DR plan must include designs that allow the re-introduction of the primary site or the introduction of a new primary site as the event dictates and an indication of the time required for this re-introduction.

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6. Data Availability

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6.1 Data Processing

-

CAT order events must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. The processing timelines start on the day the order event is received by the Central Repository for processing. Most events must be reported to the CAT by 8:00 a.m. Eastern Time the Trading Day after the order event occurred (referred to as transaction date). The processing timeframes below are presented in this context. All events submitted after T+1 (either reported late or submitted later because not all of the information was available) must be processed within these timeframes based on the date they were received.

-

The Participants require the following timeframes (Figure A) for the identification, communication and correction of errors from the time an order event is received by the processor:

-

• Noon Eastern Time T+1 (transaction date + one day) – Initial data validation, lifecycle linkages and communication of errors to CAT Reporters;

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• 8:00 a.m. Eastern Time T+3 (transaction date + three days) – Resubmission of corrected data; and

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• 8:00 a.m. Eastern Time T+5 (transaction date + five days) – Corrected data available to Participant regulatory staff and the SEC.

-

Late submissions or re-submissions (after 8:00 a.m.) may be considered to be processed that day if it falls within a given time period after the cutoff. This threshold will be determined by the Plan Processor and approved by the Operating Committee. In the event that a significant portion of the data has not been received as monitored by the Plan Processor, the Plan Processor may decide to halt processing pending submission of that data.

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Figure A: CAT Central Repository Data Processing Timelines

- -

6.2 Data Availability Requirements

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Prior to 12:00 p.m. Eastern Time on T+1, raw unprocessed data that has been ingested by the Plan Processor must be available to Participants’ regulatory staff and the SEC.

-

Between 12:00 p.m. Eastern Time on T+1 and T+5, access to all iterations of processed data must be available to Participants’ regulatory staff and the SEC.

-

The Plan Processor must provide reports and notifications to Participant regulatory staff and the SEC regularly during the five-day process, indicating the completeness of the data and errors. Notice of major errors or missing data must be reported as early in the process as possible. If any data remains un-linked after T+5, it must be available and included with all linked data with an indication that the data was not linked.

-

If corrections are received after T+5, Participants’ regulatory staff and the SEC must be notified and informed as to how re-processing will be completed. The Operating Committee will be involved with decisions on how to re-process the data; however, this does not relieve the Plan Processor of notifying the Participants’ regulatory staff and the SEC.

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Figure B: Customer and Account Information (Including PII)

- -

CAT PII data must be processed within established timeframes to ensure data can be made available to Participants’ regulatory staff and the SEC in a timely manner. Industry Members submitting new or modified Customer information must provide it to the Central Repository no later than 8:00 a.m. Eastern Time on T+1. The Central Repository must validate the data and generate error reports no later than 5:00 p.m. Eastern Time on T+1. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be resubmitted no later than 5:00 p.m. Eastern Time on T+3. The Central Repository must process the resubmitted data no later than 5:00 p.m. Eastern Time on T+4. Corrected data must be available to regulators no later than 8:00 a.m. Eastern Time on T+5.

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Customer information that includes PII data must be available to regulators immediately upon receipt of initial data and corrected data, pursuant to security policies for retrieving PII.

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7. Receipt of Data from Reporters

-

7.1 Receipt of Data Transmission

-

Following receipt of data files submitted by the CAT Reporter or Data Submitter, the Plan Processor must send an acknowledgement of data received to the CAT Reporter and Data Submitter, if applicable. Such acknowledgment will enable CAT Reporters to create an audit trail of their submissions and allow for tracing of data breakdowns when data is not received. At a minimum, the receipt acknowledgement will include:

-

• SRO-Assigned Market Participant Identifier;

-

• Date of Receipt;

-

• Time of Receipt;

-

• File Identifier; and

-

• Value signifying the acknowledgement of receipt, but not processing, of the file.

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7.2 Data Validation

-

The Plan Processor will implement data validations at the file and individual record level for data received by the Plan Processor including customer data. If a record does not pass basic validations, such as syntax rejections, then it must be rejected and sent back to the CAT Reporter as soon as possible, so it can repair and resubmit.266 The required data validations may be amended based on input from the Operating Committee and the Advisory Committee. All identified exceptions will be reported back to the CAT Reporter submitting the data and/or the CAT Reporter on whose behalf the data was submitted.

-

The data validations must include the following categories and must be explained in the Technical Specifications document:

-

• File Validations – Confirmation of file transmission and receipt are in the correct formats. This includes validation of header and trailers on the submitted report, confirmation of a valid SRO-Assigned Market Participant Identifier, and verification of the number of records in the file.

-

• Validation of CAT Data – Syntax and context checks, including:

-

o Format checks:

-

‧ Check that the data is entered in the specified format

-

o Data Type checks:

-

‧ Check that the data type of each attribute is as per specification

-

o Consistency checks:

-

‧ Check that all attributes for a record of a specified type are consistent

-

o Range/logic checks:

-

‧ Range check – Validate that each attribute for every record has a value within specified limits

-

‧ Logic check – Validate that the values provided against each attribute are associated with the event type they represent

-

o Data validity checks:

-

‧ Validate that each attribute for every record has an acceptable value

-

o Completeness checks:

-

‧ Verify that each mandatory attribute for every record is not null

-

o Timeliness checks:

-

‧ Verify that records were submitted within the submission timelines

-

• Linkage Validation267 – Process by which related CAT Reportable Events are in a linked daisy chain method

-

CAT Reporters must have the ability to correct, replace or delete records that have passed initial validations within the CAT.

-

After the Central Repository has processed the data, the Plan Processor must provide daily statistics, including at a minimum, the following information:

-

• SRO-Assigned Market Participant Identifier;

-

• Date of Submission;

-

• Number of files received;

-

• Number of files accepted;

-

• Number of files rejected;

-

• Number of total order events received;

-

• Number of order events accepted;

-

• Number of order events rejected;

-

• Number of each type of report received;

-

• Number of each type of report accepted;

-

• Number of each type of report rejected;

-

• Number of customer records received;

-

• Number of total customer records accepted;

-

• Number of total customer records rejected;

-

• Number of unknown accounts;

-

• Number of late submissions;

-

• Order-IDs rejected;

-

• Reason(s) for rejection;

-

• Number of records attempted to be matched;

-

• Number of records matched; and

-

• Percentage of records matched.

-

Individual records contained in files that do not pass the file validation process must not be included for further processing. Once a file passes the initial validation, individual records contained therein may then be processed for further validation. Individual records that do not pass the data validation processes will not be included in the final audit trail but must be retained. Additionally, records not passing the validations will not be included for matching processes.

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7.3 Exception Management

-

The Plan Processor must capture rejected records for each CAT Reporter and make them available to the CAT Reporter. The “rejects” file must be accessible via an electronic file format and the rejections and daily statistics must be available via a web interface. The Plan Processor must provide functionality for CAT Reporters to amend any exceptions.

-

The Plan Processor must support bulk error correction. Rejected records can be resubmitted as a new file with appropriate indicators to identify the rejection record, which is being repaired. The Plan Processor will then reprocess repaired records.

-

A GUI must be available for CAT Reporters to make updates to individual records or attributes and must include, at a minimum, the:

-

• Count of each type of rejection;

-

• Reason for each rejection;

-

• Ability to download the rejections;

-

• Firm assigned order ID of each rejection;

-

• Details of each rejection;

-

• Type of report rejected; and

-

• Repair status.

-

The Plan Processor must support bulk replacement of records, and reprocess such replaced records. The Plan Processor must provide CAT Reporters with documentation that detail the process how to amend and upload records that fail the validations that are outlined as part of Section 7.4. The Plan Processor must maintain a detailed audit trail capturing corrections to and replacements of records.

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The Plan Processor will provide CAT Reporters with their error reports as they become available, and daily statistics will be provided after data has been uploaded and validated by the Plan Processor. The Plan Processor must support a continuous validation and feedback model so that CAT Reporters can identify and correct rejections on an ongoing basis. The rejected reports will include descriptive details, or codes related to descriptive details, as to why each data record was rejected by the Plan Processor.

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On a monthly basis, the Plan Processor must produce and publish reports detailing performance and comparison statistics for CAT Reporters,268 similar to the Report Cards published for OATS presently. This will enable CAT Reporters to assess their performance in relation to their industry peers and help them assess the risk related to their reporting of transmitted data.

-

Breaks in intermittent lifecycle linkages must not cause the entire lifecycle to break nor cause a reject to the CAT Reporter that correctly reported.

-

7.4 Error Corrections

-

Error corrections must be able to be submitted and processed at any time, including timeframes after the standard repair window. Additionally, in order to make corrections, CAT Reporters must have access to the Central Repository over weekends.

-

CAT Reporters must be able to submit error corrections for data errors identified by CAT Reporters that passed format validations.

-

Additionally, the Plan Processor must:

-

• Provide feedback as to the reason(s) for errors;

-

• Prevent a linkage break between reports from resulting in additional events being rejected;

-

• Allow broken linkages to be repaired without having to submit or resubmit additional reports;

-

• Allow error corrections to be submitted both via online and bulk uploads or via file submission;

-

• Support auto-correction of identified errors and notify reporters of any auto-corrections;

-

• Support group repairs (i.e., the wrong issue symbol affecting multiple reports).

-

7.5 Data Ingestion

-

Data submitted to the Central Repository, including rejections and corrections, must be stored in repositories designed to hold information based on the classification of the CAT Reporter (i.e., whether the CAT Reporter is a Participant, a broker-dealer, or a third party Data Submitter). After ingestion by the Central Repository, the Raw Data must be transformed into a format appropriate for data querying and regulatory output.

-

8. Functionality of the CAT System

-

8.1 Regulator Access

-

The Plan Processor must provide Participants’ regulatory staff and the SEC with access to all CAT Data for regulatory purposes only. Participants’ regulatory staff and the SEC will access CAT Data to perform functions, including economic analyses, market structure analyses, market surveillance, investigations, and examinations.

-

The CAT must be able to support, at a minimum, 3,000 regulatory users within the system. It is estimated that approximately 20% of all users will use the system on a daily or weekly basis while approximately 10% of all users will require advanced regulator-user access, as described below. Furthermore, it is estimated that there may be approximately 600 concurrent users accessing the CAT at any given point in time. These users must be able to access and use the system without an unacceptable decline in system performance.269

-

As stated in Appendix D, Data Security, the Plan Processor must be able to support an arbitrary number of user roles. Defined roles must include, at a minimum:

-

• Basic regulator users – Individuals with approved access who plan to use the Central Repository to run basic queries (e.g., pulling all trades in a single stock by a specific party).

-

• Advanced regulator users – Individuals with approved access who plan to use the Central Repository to construct and run their own complex queries.

-

Regulators will have access to processed CAT Data through two different methods, an online-targeted query tool and user-defined direct queries and bulk extracts.

-

8.1.1 Online Targeted Query Tool

-

The online targeted query tool will provide authorized users with the ability to retrieve processed and/or validated (unlinked) data via an online query screen that includes the ability to choose from a variety of pre-defined selection criteria. Targeted queries must include date(s) and/or time range(s), as well as one or more of a variety of fields, including the following:

-

• Instrument(s);

-

• Related instruments (e.g., single stock and all options with for the stock);

-

• Data type (executions, orders, cancelations, quotes, etc.);

-

• Product type (equity, option, etc.);

-

• Processed data, unlinked data or both;

-

• Listing market;

-

• Exchange;

-

• CAT-Reporter-ID(s) – CAT assigned and Participant assigned;

-

• Customer-ID(s) – CAT assigned and CAT Reporter assigned;

-

• CAT-Order-ID(s) – CAT assigned and CAT Reporter assigned;

-

• ISO flag;

-

• Put/call;

-

• Strike price (include ability to select range);

-

• Size;

-

• Price;

-

• Side;

-

• Short-sale identifier;

-

• Time-in-force (IOC, GTC, etc.);

-

• Orders, quotes, BBOs or trades above or below a certain size;

-

• Orders, quotes, BBOs or trades within a range of prices;

-

• Canceled orders and/or trades;

-

• CAT Reporters exceeding specified volume or percentage of volume thresholds in a single instrument or market-wide during a specified period of time;

-

• CAT Reporter correction rate over time;

-

• Audit trail of order linkages;

-

• Corporate action events;

-

• Instrument history; and

-

• Others to be defined.

-

The tool must provide a record count of the result set, the date and time the query request is submitted, and the date and time the result set is provided to the users. In addition, the tool must indicate in the search results whether the retrieved data was linked or unlinked (e.g., using a flag). In addition, the online targeted query tool must not display any PII data. Instead, it will display existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements. The Plan Processor must define the maximum number of records that can be viewed in the online tool as well as the maximum number of records that can be downloaded. Users must have the ability to download the results to .csv, .txt, and other formats, as applicable. These files will also need to be available in a compressed format (e.g., .zip, .gz). Result sets that exceed the maximum viewable or download limits must return to users a message informing them of the size of the result set and the option to choose to have the result set returned via an alternate method.

-

The Plan Processor must define a maximum number of records that the online targeted query tool is able to process. The minimum number of records that the online targeted query tool is able to process is 5,000 (if viewed within the online query tool) or 10,000 (if viewed via a downloadable file).

-

Once query results are available for download, users are to be given the total file size of the result set and an option to download the results in a single or multiple file(s). Users that select the multiple file option will be required to define the maximum file size of the downloadable files. The application will then provide users with the ability to download the files. This functionality is provided to address limitations of end-user network environment that may occur when downloading large files.

-

The tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission, as well as the delivery of results. The Plan Processor will use this logged information to provide monthly reports to each Participant and the SEC of its respective metrics on query performance and data usage of the online query tool. The Operating Committee must receive all monthly reports in order to review items, including user usage and system processing performance.

-

8.1.2 Online Targeted Query Tool Performance Requirements

-

For targeted search criteria, the minimum acceptable response times will be increments of less than one minute. For the complex queries that either scan large volumes of data (e.g., multiple trade dates) or return large result sets (>1M records), the response time must generally be available within 24 hours of the submission of the request. Regardless of the complexity of the criteria used within the online query tool, any query request for data within one business date of a 12-month period must return results within 3 hours.

-

Performance requirements listed below apply to data:

-

• Online targeted query tool searches that include equities and options trade data only in the search criteria must meet minimum requirements, including:

-

o Returning results within 1 minute for all trades and related lifecycle events for a specific Customer or CAT Reporter with the ability to filter by security and time range for a specified time window up to and including an entire day;

-

o Returning results within 30 minutes for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 1 month);

-

o Returning results within 6 hours for all trades and related lifecycle events for a specific Customer or CAT Reporter in a specified date range (maximum 12-month duration from the most recent 24 months); and

-

o Returning results for the full 6 years of data for all trades and lifecycle events across daily, weekly, and multi-year periods.

-

• Online targeted query tool searches that include equities and options order and National Best Bid and National Best Offer data in search criteria must meet minimum requirements, including:

-

o Returning results within 5 minutes for all orders and their complete lifecycles for a single security from a specific Participant across all markets (note: a Participant could have multiple participant identifiers) in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders, cancelations, and the National Best Bid and National Best Offer (or the protected best bid and offer) at the time the order is created for a single security in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all equity and options orders, cancelations, and executions from a specific market participant in a single underlying instrument in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders, quotes, routes, cancelations and trades (complete life-cycle) for related instruments (e.g., single stock and all options series for the same stock) in a specified time window not to exceed 10 minutes for a single date;

-

o Returning results within 5 minutes for all orders and quotes entered during a specific time period by a list of specific CAT Reporters, with the ability to drill down to show the complete life-cycle must return results in a specified time window not to exceed 10 minutes for a single date; and

-

o Returning results within 5 minutes for all orders and quotes entered during a specific time period for a specified list of instruments must return results in a specified time window not to exceed 10 minutes for a single date.

-

The online targeted query tool architecture must include an automated application-level resource management component. This feature must manage query requests to balance the workload to ensure the response times for targeted and complex queries meet the defined response times. The resource management function will categorize and prioritize query requests based on the input parameters, complexity of the query, and the volume of data to be parsed in the query. Additionally, the source of the query may also be used to prioritize the processing. The Plan Processor must provide details on the prioritization plan of the defined solution for online query requests.

-

The online targeted query tool must support parallel processing of queries. At a minimum, the online targeted query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.1.3 Online Targeted Query Tool Access and Administration

-

Access to CAT Data is limited to authorized regulatory users from the Participants and the SEC. Authorized regulators from the Participants and the SEC may access all CAT Data, with the exception of PII data. A subset of the authorized regulators from the Participants and the SEC will have permission to access and view PII data. The Plan Processor must work with the Participants and SEC to implement an administrative and authorization process to provide regulator access. The Plan Processor must have procedures and a process in place to verify the list of active users on a regular basis.

-

A two-factor authentication is required for access to CAT Data. PII data must not be available via the online targeted query tool or the user-defined direct query interface.

-

8.2 User-Defined Direct Queries and Bulk Extraction of Data

-

The Central Repository must provide for direct queries, bulk extraction, and download of data for all regulatory users. Both the user-defined direct queries and bulk extracts will be used by regulators to deliver large sets of data that can then be used in internal surveillance or market analysis applications. The data extracts must use common industry formats.

-

Direct queries must not return or display PII data. Instead, they will return existing non-PII unique identifiers (e.g., Customer-ID or Firm Designated ID). The PII corresponding to these identifiers can be gathered using the PII workflow described in Appendix D, Data Security, PII Data Requirements.

-

Participants and regulators must have the ability to create, save, and schedule dynamic queries that will run directly against processed and/or unlinked CAT Data. The examples below demonstrate robust usage of the CAT Data to perform a variety of complex query, surveillance, and market analysis use cases. User-defined direct queries will be used to perform tasks such as market reconstruction, behavioral analysis, and cross-market surveillance.

-

The method(s) for providing this capability is dependent upon the architecture of the CAT and will be defined by the final solution. The CAT cannot be web-based due to the volumes of data that could be extracted.

-

The Participants are agnostic as to how user-defined direct queries or bulk extracts are implemented as long as the solution provides an open API that allows regulators to use analytic tools (e.g., R, SAS, Python, Tableau) and can use ODBC/JDBC drivers to access the CAT Data. Queries invoked through the open API must be auditable. The CAT System must contain the same level of control, monitoring, logging and reporting as the online targeted query tool. The Plan Processor may define a limited set of basic required fields (e.g., date and at least one other field such as symbol, CAT-Reporter ID, or CAT-Customer-ID) that regulators must use in direct dynamic queries.

-

The Plan Processor must provide procedures and training to regulators that will use the direct query feature. The Plan Processor may choose to require that user-defined direct query users participate in mandatory training sessions.

-

The bulk extract feature will replace the current Intermarket Surveillance Group (ISG) ECAT and COATS compliance data files that are currently processed and provided to Participants for use in surveillance applications. These files are used extensively across all Participants in a variety of surveillance applications and are a critical data input to many surveillance algorithms. With the initial implementation of the CAT, opportunities exist to improve the content and depth of information available in these data files. The Plan Processor will need to work with ISG to define new layouts that will include additional data elements that will be available in the CAT Data.

-

The Plan Processor is responsible for providing data models and data dictionaries for all processed and unlinked CAT Data.

-

8.2.1 User-Defined Direct Query Performance Requirements

-

The user-defined direct query tool is a controlled component of the production environment made available to allow the Participants’ regulatory staff and the SEC to conduct queries. The user-defined direct query tool must:

-

• Provide industry standard programmatic interface(s) that allows Participants’ regulatory staff and the SEC with the ability to create, save, and run a query;

-

• Provide query results that are extractable / downloadable and can be used to refine subsequent queries;

-

• Support complex, multistage queries;

-

• Run at a minimum 3,000 queries on a daily basis. Of these, it is anticipated that roughly 60% would be simple queries (e.g., pulling of all trades in a given symbol traded during a certain time period) and 40% would be complex (e.g., looking for quotes or orders more than 5% away from the National Best Bid and National Best Offer);

-

• Process and run approximately 1,800 queries concurrently;

-

• Support SQL 92 as well as recursive queries with common table expressions (recursive CTEs), bulk load utility, interface for dimension management, windowing functions, JBDC and ODBC, or provide another API with equal or greater query capabilities, so long as ODBC and JDBC are supported. Support for stored procedures and user-defined functions are optional;

-

• Include data presentation tools / query tools that support query results that produce data sets ranging from less than 1 gigabyte to at least 10 terabytes or more of uncompressed data;

-

• Provide query owners with the ability to schedule queries;

-

• Provide query owners with the ability to cancel a query during execution or prior to the scheduled running of a query;

-

• Provide Participants with a means to view all saved queries owned by the Participants as well as the scheduling of query executions (for queries that have been scheduled);

-

• Provide an automated delivery method of scheduled query results to the appropriate Participant. Delivery methods must comply with all information security guidelines (encryption, etc.);

-

• Provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability;

-

• Include workload balancer to allow prioritization and processing of queries and delivery of results; and

-

• Support parallel processing of queries. At a minimum, the user-defined direct query tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.2.2 Bulk Extract Performance Requirements

-

For bulk extracts of an entire day of data, the minimum acceptable transfer time of equity and options data is four hours. This requirement assumes that there are no limitations within the regulator’s own network environment that will prevent the Plan Processor from meeting this requirement.

-

A consideration was made to require an online Report Center that would include pre-canned reports that could be delivered to regulators or pulled upon request. The reports would be predefined based on requirements developed by Participants and the SEC. Due to the added complexity and the lack of quantifiable use cases, the Participants determined that this was something that may be useful in the future but not at the initial implementation and launch of the CAT. This will be reassessed when broker-dealers begin submitting data to the CAT.

-

It is envisioned that non-Participant CAT Reporters will be unable to access their data submissions through bulk data exports with the initial implementation of CAT. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports.

-

Extraction of data must be consistently in line with all permissioning rights granted by the Plan Processor. Data returned must be encrypted, password protected and sent via secure methods of transmission. In addition, PII data must be masked unless users have permission to view the data that has been requested.

-

The Plan Processor must have an automated mechanism in place to monitor user-defined direct query usage. This monitoring must include automated alerts to notify the Plan Processor of potential issues with bottlenecks or excessively long queues for queries or data extractions. The Plan Processor must provide details as to how the monitoring will be accomplished and the metrics that will be used to trigger alerts.

-

The user-defined direct query and bulk extraction tool must log submitted queries and parameters used in the query, the user ID of the submitter, the date and time of the submission and the date and time of the delivery of results. The Plan Processor will use this logged information to provide monthly reports to the Operating Committee, Participants and the SEC of their respective usage of the online query tool.

-

The bulk extract tool must support parallel processing of queries. At a minimum, the bulk extract tool must be able to process up to 300 simultaneous query requests with no performance degradation.

-

8.3 Identifying Latency and Communicating Latency Warnings to CAT Reporters

-

The Plan Processor will measure and monitor Latency within the CAT network. Thresholds for acceptable levels of Latency will be identified and presented to the Operating Committee for approval. The Plan Processor will also define policies and procedures for handling and the communication of data feed delays to CAT Reporters, the SEC, and Participants’ regulatory staff that occur in the CAT. Any delays will be posted for public consumption, so that CAT Reporters may choose to adjust the submission of their data appropriately, and the Plan Processor will provide approximate timelines for when system processing will be restored to normal operations.

-

8.4 Technical Operations

-

The Plan Processor will develop policies, procedures, and tools to monitor and manage the performance of the Central Repository, to be approved by the Operating Committee. Such policies, procedures, and tools will include, at a minimum:

-

• Monitoring and management of system availability and performance, to include both Online Targeted Query Tool and User-Defined Direct Queries;

-

• Monitoring and management of query tool usage (e.g., to identify long-running or “stuck” queries); and

-

• Segregation of query queues by regulator or Participant (i.e., one regulator or Participant’s queries should not prevent another regulator or Participant’s queries from running).

-

8.5 System SLAs

-

Service Level Agreements for system and operational performance will be established for areas, including the following:

-

• Linkage and order event processing performance;

-

• Query performance and response times;

-

• System availability;

-

• User support/help desk performance;

-

• Application, network, and data security performance; and

-

• Development, change management, and implementation processes and timelines.

-

The actual terms of the SLAs will be negotiated between the Plan Participants and the eventual Plan Processor.

-

9. CAT Customer and Customer Account Information

-

9.1 Customer and Customer Account Information Storage

-

The CAT must capture and store Customer and Customer Account Information in a secure database physically separated from the transactional database. The Plan Processor will maintain information of sufficient detail to uniquely and consistently identify each Customer across all CAT Reporters, and associated accounts from each CAT Reporter. The following attributes, at a minimum, must be captured:

-

• Social security number (SSN) or Individual Taxpayer Identification Number (ITIN);

-

• Date of birth;

-

• Current name;

-

• Current address;

-

• Previous name; and

-

• Previous address.

-

For legal entities, the CAT must capture the following attributes:

-

• Legal Entity Identifier (LEI) (if available);

-

• Tax identifier;

-

• Full legal name; and

-

• Address.

-

The Plan Processor must maintain valid Customer and Customer Account Information for each trading day and provide a method for Participants’ regulatory staff and the SEC to easily obtain historical changes to that information (e.g., name changes, address changes, etc.).

-

The Plan Processor will design and implement a robust data validation process for submitted Firm Designated ID, Customer Account Information and Customer Identifying Information, and must continue to process orders while investigating Customer information mismatches. Validations should:

-

• Confirm the number of digits on a SSN,

-

• Confirm date of birth, and

-

• Accommodate the situation where a single SSN is used by more than one individual.

-

The Plan Processor will use the Customer information submitted by all broker-dealer CAT Reporters to assign a unique Customer-ID for each Customer. The Customer-ID must be consistent across all broker-dealers that have an account associated with that Customer. This unique CAT-Customer-ID will not be returned to CAT Reporters and will only be used internally by the CAT.

-

Broker-Dealers will initially submit full account lists for all active accounts to the Plan Processor and subsequently submit updates and changes on a daily basis. In addition, the Plan Processor must have a process to periodically receive full account lists to ensure the completeness and accuracy of the account database. The Central Repository must support account structures that have multiple account owners and associated Customer information (joint accounts, managed accounts, etc.), and must be able to link accounts that move from one CAT Reporter to another (e.g., due to mergers and acquisitions, divestitures, etc.).

-

9.2 Required Data Attributes for Customer Information Data Submitted by Industry Members

-

At a minimum, the following Customer information data attributes must be accepted by the Central Repository:

-

• Account Owner Name;

-

• Account Owner Mailing Address;

-

• Account Tax Identifier (SSN, TIN, ITIN);

-

• Market Identifiers (Larger Trader ID, LEI);

-

• Type of Account;

-

• Firm Identifier Number;

-

o The number that the CAT Reporter will supply on all orders generated for the Account;

-

• Prime Broker ID;

-

• Bank Depository ID; and

-

• Clearing Broker.

-

9.3 Customer-ID Tracking

-

The Plan Processor will assign a CAT-Customer-ID for each unique Customer. The Plan Processor will determine a unique Customer using information such as SSN and DOB for natural persons or entity identifiers for Customers that are not natural persons and will resolve discrepancies. Once a CAT-Customer-ID is assigned, it will be added to each linked (or unlinked) order record for that Customer.

-

Participants and the SEC must be able to use the unique CAT-Customer-ID to track orders from any Customer or group of Customers, regardless of what brokerage account was used to enter the order.

-

9.4 Error Resolution for Customer Data

-

The Plan Processor must design and implement procedures and mechanisms to handle both minor and material inconsistencies in Customer information. The Central Repository needs to be able to accommodate minor data discrepancies such as variations in road name abbreviations in searches. Material inconsistencies such as two different people with the same SSN must be communicated to the submitting CAT Reporters and resolved within the established error correction timeframe as detailed in Section 8.

-

The Central Repository must have an audit trail showing the resolution of all errors. The audit trail must, at a minimum, include the:

-

• CAT Reporter submitting the data;

-

• Initial submission date and time;

-

• Data in question or the ID of the record in question;

-

• Reason identified as the source of the issue, such as:

-

o duplicate SSN, significantly different Name;

-

o duplicate SSN, different DOB;

-

o discrepancies in LTID; or

-

o others as determined by the Plan Processor;

-

• Date and time the issue was transmitted to the CAT Reporter, included each time the issue was re-transmitted, if more than once;

-

• Corrected submission date and time, including each corrected submission if more than one, or the record ID(s) of the corrected data or a flag indicating that the issue was resolved and corrected data was not required; and

-

• Corrected data, the record ID, or a link to the corrected data.

-

10. User Support

-

10.1 CAT Reporter Support

-

The Plan Processor will provide technical, operational and business support to CAT Reporters for all aspects of reporting. Such support will include, at a minimum:

-

• Self-help through a web portal;

-

• Direct support through email and phone;

-

• Support contact information available through the internet; and

-

• Direct interface with Industry Members and Data Submitters via industry events and calls, industry group meetings and informational and training sessions.

-

The Plan Processor must develop tools to allow each CAT Reporter to:

-

• Monitor its submissions;

-

• View submitted transactions in a non-bulk format (i.e., non-downloadable) to facilitate error corrections;

-

• Identify and correct errors;

-

• Manage Customer and Customer Account Information;

-

• Monitor its compliance with CAT reporting requirements; and

-

• Monitor system status.

-

The Plan Processor will develop and maintain communication protocols (including email messaging) and a secure website to keep CAT Reporters informed as to their current reporting status, as well as issues with the CAT that may impact CAT Reporters’ ability to submit or correct data. The website will use user authentication to prevent users for seeing information about firms other than their own, and will contain:

-

• Daily reporting statistics for each CAT Reporter,270 including items such as:

-

o SRO-Assigned Market Participant Identifier;

-

o Date of submission;

-

o Number of files received;

-

o Number of files accepted;

-

o Number of files rejected;

-

o Number of total order events received;

-

o Number of order events accepted;

-

o Number of order events rejected;

-

o Number of each type of report received;

-

o Number of each type of report accepted;

-

o Number of each type of report rejected;

-

o Number of total customer records accepted;

-

o Number of total customer records rejected;

-

o Order-IDs rejected;

-

o Reason for rejection;

-

o Number of records attempted to be matched;

-

o Number of records matched;

-

o Percentage of records matched;

-

o Number of customer records received;

-

o Number of unknown accounts;

-

o Latest view of statistics inclusive of re-submissions to get a trade-date view of exceptions and correction statistics available for CAT Reporters to know when everything for a given trade date has been completed; and

-

o Most recent CAT Reporter Compliance Report Card, as defined in section 12.4;

-

• CAT System status, system notifications, system maintenance, and system outages; and

-

• A mechanism for submitting event data and correcting and resubmitting rejections or inaccurate data.

-

The Plan Processor will develop and maintain a public website containing comprehensive CAT reporting information, including:

-

• Technical Specifications;

-

• Reporting guidance (e.g., FAQs);

-

• Pending rule changes affecting CAT reporting;

-

• CAT contact information;

-

• Availability of test systems;

-

• Testing plans;

-

• Proposed changes to the CAT; and

-

• Fee schedule.

-

The Plan Processor will develop and maintain a mechanism for assigning CAT Reporter-IDs. A mechanism will also be developed and maintained to change CAT Reporter-IDs should this be necessary (e.g., due to a merger), with the expectations that such changes should be infrequent. Changes to CAT-Reporter-IDs must be reviewed and approved by the Plan Processor.

-

Initially, non-Participant CAT Reporters will not have access to their data submissions through bulk data exports with the initial implementation of the Central Repository. Only Participants and the SEC will have access to full lifecycle corrected bulk data exports. Non-Participant CAT Reporters will be able to view their submissions online in a read-only, non-exportable format to facilitate error identification and correction. Data Submitters will be able to export bulk file rejections for repair and error correction purposes.

-

The Plan Processor will define methods by which it will consult with and inform CAT Reporters and industry groups on updates and changes to user support.

-

The Plan Processor will define pre- and post-production support programs to minimize the Error Rate and help CAT Reporters to meet their compliance thresholds. Such pre-production support program shall include, but are not limited to, the following activities:

-

• Educational programs – Includes the following:

-

o Publication and industry-wide communication (including FAQs) of the Technical Specifications, including:

-

‧ Appropriate definitions / expected usages for each value in field format

-

‧ All available attribute values for each field

-

o Establishment of a dedicated help desk for Reporters to contact;

-

o Industry participation in order linkage methodologies;

-

‧ Include information on new order / trade types;

-

o Hosting of industry educational calls; and

-

o Hosting of industry-wide training.

-

• Registration – Requires all firms to:

-

o Register and be certified as CAT Reporters;

-

o Attend industry-wide training;

-

o Establish internal controls to capture potential misreporting scenarios; and

-

o Work with the Plan Processor to understand scenario-based reporting and expected outputs.

-

• Communications Plan – A strong communications plan of the timeline to reporting go-live shall:

-

o Include communication on how Error Rates and Compliance Thresholds are calculated; and

-

o Describe how errors will be communicated back to CAT Reporters.

-

• Industry-wide testing – Industry-wide test results must be available for all CAT Reporters.

-

o As mentioned in Appendix C, Objective Milestones to Assess Progress, appropriate time must be provided between Technical Specification publication and production go-live.

-

o Ample testing time must be provided.

-

o Appropriate scenario-based testing, including all three validation processes, shall be established.

-

o A separate test environment for CAT Reporters that mirrors the production environment shall be provided.

-

Post-production support program activities shall include, but are not limited to the following:

-

• Issuing a monthly Report Card on reporting statistics, with information on how reporters stand against similar entities;

-

• Publishing daily reporting statistics;

-

• Maintaining Technical Specifications with defined intervals for new releases/updates;

-

• Posting FAQs and other informational notices to be updated as necessary;

-

• Hosting of industry educational calls;

-

• Hosting of industry-wide training;

-

• Emailing outliers, meaning firms significantly reporting outside of industry standards;

-

• Conducting annual assessments of dedicated help desk to determine appropriate staffing levels;

-

• Using the test environment prior to releasing new code to production; and

-

• Imposing CAT Reporter requirements:

-

o Attendance/participation of industry testing sessions;

-

o Attendance in industry educational calls; and

-

o Attendance in industry-wide training.

-

10.2 CAT User Support

-

The Plan Processor will develop a program to provide technical, operational and business support to CAT users, including Participants’ regulatory staff and the SEC. The CAT help desk will provide technical expertise to assist regulators with questions and/or functionality about the content and structure of the CAT query capability.

-

The Plan Processor will develop tools, including an interface, to allow users to monitor the status of their queries and/or reports. Such website will show all in-progress queries/reports, as well as the current status and estimated completion time of each query/report.

-

The Plan Processor will develop communication protocols to notify regulators of CAT System status, outages and other issues that would affect Participants’ regulatory staff and the SEC’s ability to access, extract, and use CAT Data. At a minimum, Participants’ regulatory staff and the SEC must each have access to a secure website where they can monitor CAT System status, receive and track system notifications, and submit and monitor data requests.

-

The Plan Processor will develop and maintain documentation and other materials as necessary to train regulators in the use of the Central Repository, including documentation on how to build and run reporting queries.

-

10.3 CAT Help Desk

-

The Plan Processor will implement and maintain a help desk to support broker-dealers, third party CAT Reporters, and Participant CAT Reporters (the “CAT Help Desk”). The CAT Help Desk will address business questions and issues, as well as technical and operational questions and issues. The CAT Help Desk will also assist Participants’ regulatory staff and the SEC with questions and issues regarding obtaining and using CAT Data for regulatory purposes.

-

The CAT Help Desk must go live within a mutually agreed upon reasonable timeframe after the Plan Processor is selected, and must be available on a 24x7 basis, support both email and phone communication, and be staffed to handle at minimum 2,500 calls per month. Additionally, the CAT Help Desk must be prepared to support an increased call volume at least for the first few years. The Plan Processor must create and maintain a robust electronic tracking system for the CAT Help Desk that must include call logs, incident tracking, issue resolution escalation.

-

CAT Help Desk support functions must include:

-

• Setting up new CAT Reporters, including the assignment of CAT-Reporter-IDs and support prior to submitting data to CAT;

-

• Managing CAT Reporter authentication and entitlements;

-

• Managing CAT Reporter and third party Data Submitters testing and certification;

-

• Managing Participants and SEC authentication and entitlements;

-

• Supporting CAT Reporters with data submissions and data corrections, including submission of Customer and Customer Account Information;

-

• Coordinating and supporting system testing for CAT Reporters;

-

• Responding to questions from CAT Reporters about all aspects of CAT reporting, including reporting requirements, technical data transmission questions, potential changes to SEC Rule 613 that may affect the CAT, software/hardware updates and upgrades, entitlements, reporting relationships, and questions about the secure and public websites;

-

• Responding to questions from Participants’ regulatory staff and the SEC about obtaining and using CAT Data for regulatory purposes, including the building and running of queries; and

-

• Responding to administrative issues from CAT Reporters, such as billing.

-

10.4 CAT Reporter Compliance

-

The Plan Processor must include a comprehensive compliance program to monitor CAT Reporters’ adherence to SEC Rule 613. The Chief Compliance Officer will oversee this compliance program, and will have responsibility for reporting on compliance by CAT Reporters to the Participants. The compliance program covers all CAT Reporters, including broker-dealers and Participants.

-

As a fundamental component of this program, the Plan Processor will identify on a daily basis all CAT Reporters exceeding the maximum allowable Error Rate established by the Participants. The Error Rate will initially be set by the CAT NMS Plan, and will be reviewed and adjusted on an ongoing basis by the Operating Committee. Error Rates will be based on timeliness, correctness, and linkages.

-

The Plan Processor will, on an ongoing basis, analyze reporting statistics and Error Rates and recommend to Participants proposed changes to the maximum allowable Error Rates established by the Participants. All CAT Reporters exceeding this threshold will be notified that they have exceeded the maximum allowable Error Rate and will be informed of the specific reporting requirements that they did not fully meet (e.g., timeliness or rejections).

-

The Plan Processor will develop and publish CAT Reporter compliance report cards on a periodic basis to assist CAT Reporters in monitoring overall compliance with CAT reporting requirements. The Plan Processor will also recommend criteria and processes by which CAT Reporters will be fined for inaccurate, incomplete, or late submissions. The compliance report cards will include the following information:

-

• Number of inaccurate transactions submitted;

-

• Number of incomplete transactions submitted; and

-

• Number of transactions submitted later than reporting deadlines.

-

The CAT Reporter compliance program will include reviews to identify CAT Reporters that may have failed to submit order events to the CAT, as well as to ensure CAT Reporters correct all identified errors even if such errors do not exceed the maximum allowable Compliance Threshold.

-

The Plan Processor will, on a monthly basis, produce and provide reports containing performance and comparison statistics as needed to each Participant on its members’ CAT reporting compliance thresholds so that Participants can monitor their members’ compliance with CAT reporting requirements and initiate disciplinary action when appropriate. The Plan Processor will also produce and provide, upon request from the Participants and the SEC, reports containing performance and comparison statistics as needed on each CAT Reporter’s compliance thresholds so that the Participants or the SEC may take appropriate action if a Participant fails to comply with its CAT reporting obligations.

-

The Plan Processor will produce and make available on a monthly basis reports for all CAT Reporters, benchmarking their performance and comparison statistics against similar peers. The reports will be anonymized such that it will not be possible to determine the members of the peer group to which the CAT Reporter was compared.

-

The Plan Processor will produce and make available to regulators on a monthly basis a report detailing Error Rates, transaction volumes, and other metrics as needed to allow regulators to oversee the quality and integrity of CAT Reporter reporting to the Central Repository.

-

11. Upgrade Process and Development of New Functionality

-

11.1 CAT Functional Changes

-

The Plan Processor must propose a process governing the determination to develop new functionality, which process must be reviewed and approved by the Operating Committee. The process must, at a minimum:

-

• Contain a mechanism by which changes can be suggested to the Operating Committee by Advisory Committee members, the Participants, or the SEC;

-

• Contain a defined process for developing impact assessments, including implementation timelines, for proposed changes; and

-

• Contain a mechanism by which functional changes which the Plan Processor wishes to undertake can be reviewed and approved by the Operating Committee.

-

The Plan Processor shall not unreasonably withhold, condition, or delay implementation of any changes or modifications reasonably requested by the Operating Committee.

-

11.2 CAT Infrastructure Changes

-

The Plan Processor must implement a process to govern changes to CAT. This process must contain provisions for:

-

• Business-as-usual changes (e.g., replacing failed hardware, adding capacity to deal with expected increases in transaction volumes) that would require the Plan Processor to provide the Operating Committee with a summary report (e.g., infrastructure changes, acquired costs, etc.); and

-

• Isolated infrastructure changes (e.g., moving components of the system from a self-hosted to an Infrastructure-as-a-Service provider) that would require the Plan Processor to provide a request to the Operating Committee for review and approval before commencing any actions.

-

11.3 Testing of New Changes

-

The Plan Processor must implement a process governing user testing of changes to CAT functionality and infrastructure, which process must be reviewed and approved by the Operating Committee. The process must:

-

• Define the process by which changes are to be tested by CAT Reporters;

-

• Define the criteria by which changes will be approved prior to their deployment into the production environment(s); and

-

• Define the environment(s) to be used for user testing.

-
-
fn -

1 This Error Rate includes errors by CAT Reporters and linkage validation errors. In addition, errors attributable to the Plan Processor will be memorialized and reported to the Operating Committee.

-
-
fn -

2 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 Fed. Reg. 45722, 45789 (Aug. 1, 2012) (“Adopting Release”).

-
-
fn -

3 See Adopting Release at 45790. Section B below includes discussions of reasonable alternatives to approaching the creation, implementation, and maintenance of the CAT that the Participants considered. See SEC Rule 613(a)(1)(xii).

-
-
fn -

4 See Adopting Release at 45793.

-
-
fn -

5 The initial RFP was amended in March 2014. See Consolidated Audit Trail National Market System Plan Request for Proposal (last updated Mar. 3, 2014), available at http://catnmsplan.com/web/groups/catnms/documents/catnms/p213400.zip (the “RFP”).

-
-
fn -

6 The SEC has approved two amendments to the Selection Plan. See Securities Exchange Act Rel. No. 75192 (June 17, 2015), 80 Fed. Reg. 36028 (June 23, 2015); and Securities Exchange Act Rel. No.75980 (Sept. 24, 2015), 80 Fed. Reg. 58796 (Sept. 30, 2015).

-
-
fn -

7 See Selection Plan, 78 Fed. Reg. 69910, Ex. A §§ I(Q) (defining “Qualified Bid”), VI(A) (providing the process for determining whether Bids are determined to be “Qualified Bids”).

-
-
fn -

8 See Selection Plan § 6; see also id. Article V.

-
-
fn -

9 See SEC Rules 613(a)(1)(xi) and 613(b)(7).

-
-
fn -

10 See original Exemptive Request Letter, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602383.pdf.

-
-
fn -

11 See Participants’ Proposed RFP Concepts Document (last updated Jan. 16, 2013) (the “Proposed RFP Concepts Document”). The Proposed RFP Concepts Document was posted on the Consolidated Audit Trail NMS Plan website, http:// catnmsplan.com (the “CAT NMS Plan Website”).

-
-
fn -

12 See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Sept. 2, 2015), available at the CAT NMS Plan Website. Separately, on April 3, 2015, the Participants filed with the Commission examples demonstrating how the proposed request for exemptive relief related to allocations would operate; this filing did not substantively update or amend the Exemptive Request Letter. See Letter from the Participants to Brent J. Fields, Secretary, SEC re: Supplement to Request for Exemptive Relief from Certain Provisions of SEC Rule 613 of Regulation NMS under the Securities Exchange Act of 1934 (Apr. 3, 2015), available at the CAT NMS Plan Website.

-
-
fn -

13 See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 Fed. Reg. 72252, 72275 n. 246 (Dec. 5, 2014) (adopting Reg SCI and citing the Adopting Release at 45774).

-
-
fn -

14 See Adopting Release at 45748 n.278 (noting that “the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf”). The Participants note that CAT Reporters using third party service providers to submit information on their behalf would still be responsible for all the data submitted on their behalf. The term “CAT Reporters” is generally used to refer to those parties that are required by SEC Rule 613 and the CAT NMS Plan to submit data to the CAT (i.e., national securities exchanges, national securities associations, and members thereof). The term “Data Submitters” includes those third-parties that may submit data to the CAT on behalf of CAT Reporters as well as outside parties that are not required to submit data to the CAT but from which the CAT may receive data (e.g., SIPs). Thus, all CAT Reporters are Data Submitters, but not all Data Submitters are CAT Reporters.

-
-
fn -

15 As noted, the Participants submitted the Exemptive Request Letters to facilitate compliance with the goals and purposes of the rule while minimizing the impact on existing market practices and reducing burdens on both Participants and broker-dealers.

-
-
fn -

16 See SIFMA Industry Recommendations for the Creation of the Consolidated Audit Trail (CAT) at 70 (Mar. 28, 2013) (“SIFMA Recommendations”), available at http://www.sifma.org/workarea/downloadasset.aspx?id=8589942773. Section 1.1 of the CAT NMS Plan includes OTC Equity Securities as “Eligible Securities.” As discussed in Appendix C, Plan to Eliminate Existing Rules and Systems (SEC Rule 613(a)(1)(ix)), inclusion of OTC Equity Securities in the initial phase of the CAT should facilitate the retirement of FINRA’s Order Audit Trail System (“OATS”) and reduce costs to the industry.

-
-
fn -

17 SEC Rule 613(e)(7).

-
-
fn -

18 See SEC Rule 613(c)(7).

-
-
fn -

19 RFP Question 49.

-
-
fn -

20 RFP Questions 59-60.

-
-
fn -

21 RFP Question 62.

-
-
fn -

22 RFP Question 63.

-
-
fn -

23 SEC Rule 613 and Sections 6.3 and 6.4 of the CAT NMS Plan permit certain other information to be reported by 8:00 a.m. Eastern Time on the Trading Day following the day the CAT Reporter receives the information. See SEC Rule 613(c)(4), (c)(7)(vi)-(viii).

-
-
fn -

24 SIFMA’s recommendations to the Participants regarding the CAT indicates support for the ability of Data Submitters to submit data in batch or near-real-time reporting. See SIFMA Recommendations, at 55.

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25 As noted above, the term “customer” means “(i) [t]he account holder(s) of the account at a broker-dealer originating an order, and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different than the account holder(s).” SEC Rule 613(j)(3).

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26 SEC Rule 613(c)(7)(i)(A).

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27 SEC Rule 613(c)(7)(iv)(F).

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28 SEC Rule 613(c)(8).

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29 SEC Rule 613(j)(5).

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30 SEC Rule 613(j)(4).

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31 Where a validated LEI is available for a Customer or entity, it may obviate the need to report other identifier information (e.g., Customer name, address).

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32 The Participants anticipate that Customer information that is initially reported to the CAT could be limited to only customer accounts that have, or are expected to have, CAT-reportable activity. For example, accounts that are considered open, but have not traded Eligible Securities in a given timeframe may not need to be pre-established in the CAT, but rather could be reported as part of daily updates after they have CAT-reportable activity.

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33 Because reporting to the CAT is on an end-of-day basis, intra-day changes to information could be captured as part of the daily updates to the information. See SEC Rule 613(c)(3). To ensure the completeness and accuracy of Customer information and associations, in addition to daily updates, broker-dealers would be required to submit periodic full refreshes of Customer information to the CAT. The scope of the “full” Customer information refresh would need to be further defined, with the assistance of the Plan Processor, to determine the extent to which inactive or otherwise terminated accounts would need to be reported.

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34 SIFMA Recommendations at 30-31; Financial Industry Forum (FIF) Consolidated Audit Trail (CAT) Working Group Response to Proposed RFP Concepts Document at 12 (Jan. 18, 2013), available at http://catnmsplan.com/industryFeedback/P197808 (“FIF Response”).

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35 “Active accounts” are defined as accounts that have had activity within the last six months.

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36 RFP Question 1.

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37 FIF Response at 35.

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38 Id.

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39 SIFMA Recommendations at 62.

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40 Data retention requirements by the Central Repository are discussed more fully in Appendix D, Functionality of the CAT System.

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41 RFP § 2.3 at 19.

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42 SEC Rule 613: Consolidated Audit Trail (CAT), Questions for Industry Consideration, available at http://catnmsplan.com/QuestionsforIndustryConsideration.

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43 RFP Question 1.

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44 RFP Question 49.

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45 RFP Questions 59-60.

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46 RFP Question 62.

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47 RFP Question 63.

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48 RFP Question 43.

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49 RFP Question 50.

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50 The industry supports receiving information on reporting errors as soon as possible to enable CAT Reporters to address errors in a timely manner. See FIF Response at 36.

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51 See Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)), for additional details on cost studies.

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52 See Section 6.1(c) of the CAT NMS Plan.

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53 See SEC Rule 613(j)(1).

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54 See SIFMA Recommendations at 13, 39-42; FIF Response at 19.

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55 See RFP Questions 11 and 12.

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56 A detailed example of the application of the daisy chain approach to an order routed to an exchange on an agency basis can be found in the Proposed RFP Concepts Document at 26.

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57 This subcommittee included 21 Industry Members and 16 Participants. It met 11 times over the course of 13 months to discuss order handling and CAT reporting requirements. Examples of order handling scenarios that must be addressed include, in addition to the agency scenario referenced above: orders handled on a riskless principal basis, orders routed out of a national securities exchange through a broker-dealer router to another national securities exchange, orders executed on an average price basis and orders aggregated for further routing and execution. Detailed examples of these types of scenarios can be found in the Proposed RFP Concepts Document at 27-30.

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58 These scenarios, and how the daisy chain approach could be applied, can be found in the Representative Order Proposal (Feb. 2013), available at http://catnmsplan.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=P197815.

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59 Although the Plan Processor must account for multiple simultaneous queries, the Central Repository must also support the ability to schedule when jobs are run.

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60 Initially, only the SEC and Participants will have access to data stored in the Central Repository.

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61 The RFP required support for a minimum of 3,000 users. The actual number of users may be higher based upon regulator and Participant usage of the system.

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62 SEC Rule 613(a)(1)(ii).

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63 Adopting Release at 45790.

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64 FIF Response at 35.

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65 FIF Response at 35.

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66 SIFMA Recommendations at 62.

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67 One example of why the Participants believe a five day repair window is too long is that regulators may need access to the data as quickly as possible in order to conduct market reconstruction.

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68 SEC Rule 613(a)(1)(ii).

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69 Adopting Release at 45790.

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70 RFP Question 81.

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71 RFP Question 82.

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72 RFP Question 83.

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73 RFP Question 84.

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74 RFP Question 85.

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75 RFP Question 86.

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76 RFP Question 87.

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77 The SEC defined “off-line” analysis as “any analysis performed by a regulator based on data that is extracted from the [CAT] database, but that uses the regulator’s own analytical tools, software, and hardware.” Adopting Release at 45798 n.853.

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78 Id.

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79 Id.

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80 Id.

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81 Id.

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82 Id.

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83 Id.

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84 As documented in Appendix D, each CAT Reporter will be issued a public key pair (“PKI”) that it can use to submit data, and access confirmation that their data has been received.

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85 Adopting Release at 45799. See also RFP § 2.8.2.

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86 Adopting Release at 45799.

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87 Adopting Release at 45790-91, 45799.

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88 RFP Section 2.2.4.

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89 RFP Question 14.

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90 RFP Question 15.

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91 RFP Question 16.

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92 RFP Question 17.

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93 RFP Question 18.

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94 SEC Rule 613(e)(4)(ii) and (iii).

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95 SEC Rule 613(e)(4)(iii).

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96 FIF Consolidated Audit Trail Working Group Processor Proposed Optimal Solution Recommendations at 6 (Sep. 15, 2014), available at http://www.sec.gov/comments/4-668/4668-16.pdf (the “FIF Optimal Solution Recommendations”).

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97 FIF Response at 36.

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98 SEC Rule 613(e)(6)(i) defines “Error Rate” to mean “[t]he percentage of reportable events collected by the central repository for which the data reported does not fully and accurately reflect the order event that occurred in the market.” All CAT Reporters, including the Participants, will be included in the Error Rate. CAT Reporters will be required to meet separate compliance thresholds, which will be a CAT Reporter-specific rate that may be used as the basis for further review or investigation into CAT Reporter performance (the “Compliance Thresholds”). Compliance Thresholds will compare a CAT Reporter’s error rate to the aggregate Error Rate over a period of time to be defined by the Operating Committee. See infra note 109 and accompanying text (discussing Compliance Thresholds). A CAT Reporter’s performance with respect to the Compliance Threshold will not signify, as a matter of law, that such CAT Reporter has violated SEC Rule 613 or the rules of any Participant concerning the CAT.

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99 As indicated by FINRA in its comment to the Adopting Release, OATS compliance rates have steadily improved as reporters have become more familiar with the system. When OATS was first adopted compliance rates were 76%, but current compliance rates are 99%. See Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission (Aug. 9, 2010).

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100 Adopting Release at 45790-91.

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101 As required by SEC Rule 613(e)(6)(ii), the Error Rate will be calculated on a daily basis as the number of erroneous records divided by the total number of records received on any given day and will be inclusive of validation of CAT Data and linkage validations. Error Rates are calculated for reporting groups as a whole, not for individual firms. Individual firms within a reporting group may have higher or lower Error Rates, though they would still be subject to any penalties or fines for excessive Error Rates to be defined by the Operating Committee. Additionally, this Error Rate will be considered for the purpose of reporting metrics to the SEC and the Operating Committee and individual firms will need to maintain Compliance Thresholds as described below.

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102 The Participants expect that error rates after reprocessing of error corrections will be de minimis.

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103 See FINRA, OATS Phase III, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/PhaseIII/.

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104 See FINRA, OATS Reporting Requirements to OTC Equity Securities, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/OTCEquitySecurities/.

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105 See FINRA, OATS Expansion to all NMS Stocks, https://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/.

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106 The initial rejection rates for OATS were 23% and a late reporting rate of 2.79%.

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107 Error rate reporting will be bifurcated by reporter group (e.g., Large Broker/Dealers) rather than product type to minimize the complexity of Error Rate calculations

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108 As used in this table, “years” refer to years after effectiveness of the NMS Plan.

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109 Compliance Thresholds will be set by the Operating Committee. Compliance Thresholds for CAT Reporters will be calculated at intervals to be set by the Operating Committee. All CAT Reporters, including the Participants, will be subject to Compliance Thresholds. Compliance Thresholds will include, among other items, compliance with clock synchronization requirements.

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110 Events occurring within a single system that uses the same clock to time stamp those events should be able to be accurately sequenced based on the time stamp. For unrelated events, e.g., multiple unrelated orders from different broker-dealers, there would be no way to definitively sequence order events within the allowable clock drift as defined in Article 6.8.

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111 See Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Participant Representatives of the CAT (June 12, 2013), available at http://catnmsplan.com/industryFeedback/P284394 (“FIF Letter”).

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112 FIF Letter at 11.

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113 Letter from T.R. Lazo, Managing Director, SIFMA, and Thomas Price, Managing Director, SIFMA (June 11, 2013), available at http://catnmsplan.com/industryFeedback/P284395 (“SIFMA Letter”); FIF Letter at 10.

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114 FIF Letter at 10.

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115 FIF Letter at 10; SIFMA Comments on Selected Topics at 11.

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116 FIF Letter at 10.

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117 FIF Letter at 10.

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118 FIF Letter at 10; SIFMA Letter at 11.

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119 Adopting Release at 45790 n.782.

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120 See Appendix C, Time and Method by which CAT Data will be Available to Regulators.

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121 Id.

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122 Id.

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123 Some trade data (e.g., trade data feeds disseminated by the SIPs) is public and therefore of little concern from a security standpoint. However, because this data may be linked to confidential order data or other non-public information, the Participants are requiring the Plan Processor to store this public data in the same manner as the non-public order and trade information submitted to the Central Repository by Data Submitters.

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124 RFP Question 65.

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125 RFP Question 66.

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126 RFP Question 67.

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127 RFP Question 68.

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128 RFP Question 69.

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129 RFP Question 70.

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130 RFP Question 71.

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131 RFP Question 72.

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132 RFP Question 75.

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133RFP Question 76.

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-
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134RFP Question 77.

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-
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135RFP Question 78.

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-
fn -

136RFP Question 79.

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-
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137RFP Question 80.

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-
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138RFP Question 5.

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-
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139RFP Question 6.

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140 RFP Question 73. The Bidders were asked to include information pertaining to strategy, tools and techniques, and operational and management practices that will be used.

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141 RFP Question 74.

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142 SEC Rule 613(e)(4). This section of Appendix C provides an outline of the policies and procedures to be implemented. When adopting this requirement, the Commission recognized “the utility of allowing the [Participants] flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.” Adopting Release at 45782. Additional detail is provided in Appendix D, Data Security.

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143 See Section 6.2(a)(v) of the CAT NMS Plan for a more detailed list of the activities to be performed by the Chief Compliance Officer.

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144 See SEC Rule 613(e)(5).

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145 As described in Appendix C, Reporting Data to the CAT, general queries can be carried out using the Customer-ID without the need to know specific, personally-identifiable information (i.e., who the individual Person associated with the Customer-ID is). The Customer-ID will be associated with the relevant accounts of that Person; thus, the use of Customer-ID for querying will not reduce surveillance.

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146 See, e.g., Google Cloud Platform, https://cloud.google.com/developers/articles/auto-scaling-on-the-google-cloud-platform/.

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147 All observations and costs as provided in this section include secondary offerings.

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148 SEC Rule 613(a)(1)(vi).

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149 Questions for Public Comment re the CAT NMS Plan (Apr. 22, 2013), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p246652.pdf (“April Request for Comment”).

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150 Adopting Release at 45792 n.792.

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151 See generally, Securities Act Release No. 8565, 70 Fed. Reg. 19672 (Apr. 13, 2005) (Commission guidance regarding prohibited conduct in connection with IPO allocations) (“IPO Allocation Release”).

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152 Id.

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153 See FIF Letter at 4.

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154 See FIF Letter; SIFMA Letter; Thomson Reuters (May 21, 2013) (“Thomson Reuters Letter”), available at http://catnmsplan.com/industryFeedback/; see also Thomson Reuters Letter, http://catnmsplan.com/industryFeedback/P284396 (systems used for primary market allocations differ from those used for secondary market transactions).

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155 FIF Letter at 4; SIFMA Letter at 3

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156 FIF Letter at 4. The Participants also understand that top account allocation systems do not generally have execution reporting capacity, since reporting of primary market transactions is not currently required under OATS and other transaction reporting systems. SIFMA Letter at 2.

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157 See DAG Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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158 FIF Letter at 4.

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159 For example, commenters noted that “firms generally use the same clearance and settlement systems for clearing and settling final allocations in primary market transactions as they do for clearing and settling secondary market trades.” SIFMA Letter at 4.

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160 Adopting Release at 45792-93.

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161 Id.

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-
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162 Id.

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-
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163 See supra note 157.

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164 Based upon an assumption of 12 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 12 person-months of analysis * 3 * 21.741 person-days per month * $1,200 daily FTE rate = $939,211 * 250 = $234.8 million.

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165 Based upon an assumption of 3 person-months of business analysis, an implementation timeline of 3x the business analysis timeline, 21.741 person-days per month, a $1,200 daily FTE rate, and a multiplier of 250 to reflect the costs of the 250 largest reporting firms. 3 person-months of analysis * 3 * 21.741 person-days per months * $1,200 daily FTE rate = $234,802 * 250 = $58.7 million.

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166 See, e.g., Memorandum to File Re: Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (outlining foundational elements of regulatory economic analysis).

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167 A unique study link was distributed to 4,406 broker-dealers. For 381 of the broker-dealers, the distribution email either was undeliverable or the broker-dealer responded that the study did not apply to them.

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168 See SEC Rule 613 – Consolidated Audit Trail (CAT) Cost Study Overview and Assumptions, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p535485.pdf.

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169 See Past Events and Announcements, SROs Launch Study to Analyze Implementation Cost of the Consolidated Audit Trail (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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170 See SEC Rule 613: Consolidated Audit Trail (CAT), SRO Hosted Consolidated Audit Trail Cost Study Webinar (July 9, 2014), available at http://catnmsplan.com/PastEvents/P551992.

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171 Materially incomplete responses were those that provided responses for less than half of the cost-related questions.

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172 Responses were outliers if their values were two times greater than the next highest value.

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173 Section 5.2(b) of the CAT NMS Plan describes how the Participants selected the Shortlisted Bidders.

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174 More specifically, Participants anticipate that technology costs and technological solutions may evolve over the bidding process and may affect the Bids. For instance, one Bidder recently provided an update to the Participants, noting “We expect continued cost reductions as Moore’s Law is applied to cloud pricing and to have this bring down total cost to the industry on an ongoing basis.” As another example, evolving technologies for data security may either increase or decrease estimated costs.

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175 Due to the complexity of the cost estimation effort, all figures provided in this analysis section have been rounded to a reasonable degree of accuracy and should be considered approximate.

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-
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176 The discount factor represents an estimate of the average yield on AAA-rated corporate debt for the month period August 28, 2014 to September 27, 2014. Costs anticipated to be accrued after the first year (years 2 through 5) are discounted back to the first year to permit Participants to compare the anticipated costs associated with different Bids on a constant dollar basis.

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177 Bidders indicated that user support costs primarily consisted of FTE costs.

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178 Adopting Release at 45723.

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179 See FINRA Rule 7410 et seq.

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-
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180 Adopting Release at 45722.

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181 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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182 See FINRA Rule 7470.

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183 See FINRA Rule 7410(o).

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184 See FINRA Rule 7410(j).

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185 See, e.g., SEC Rules 17a-3, 17a-4; FINRA Rules 4511-13.

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186 These costs are not mutually exclusive, and respondents may have included a combination of costs across all categories.

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187 Firms were requested to self-select as “small” if they would qualify under Exchange Act Rule 0-10(c) as a broker or dealer that:

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(1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and

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(2) is not affiliated with any Person (other than a natural Person) that is not a small business or small organization as defined in this section.

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188 Participants recognize that 116 respondents stated that they do not currently report to OATS and this number is greater than the Participants’ estimate of the total number of broker-dealers with reporting obligations to SROs other than FINRA. Participants assume that some broker-dealers who are FINRA members and currently exempt or excluded from OATS reporting requirements identified themselves as having no OATS reporting requirement. Given that these study responses provided data that could not otherwise be presumed to be incomplete or inaccurate, the Participants have chosen to include these responses in the analysis.

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189 The distinction between cost estimates for OATS and non-OATS reporters is being made so that Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that might arise from current reporting practices.

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190 The distinction between cost estimates for OATS and non-OATS reporters is made so that Plan Participants may assess potential differences in estimated costs across the two identified scenarios in order to capture potential differences in costs that may arise from current reporting practices.

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191 Some respondents provided no response to a specific question, i.e., left that response blank, while providing responses to the other questions in the study. The tables provided throughout this section provide a count of such blank responses for each question.

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192 Participants assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release. Participants do note, however, that as part of the Costs to CAT Reporters Study, respondents were solicited to provide a cost for FTEs. Based on responses, the estimated annual cost per FTE would be $210,000 for large firms and $167,000 for small firms. Applying these estimates instead of the Commission’s assumed annual cost would lead to dollar costs for FTEs on the order of half as large as reported here.

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193 One anonymous small firm in the sample reported a total current regulatory reporting cost of $14 million. The Participants are not in a position to verify this number or determine whether it is due to an erroneous response (e.g., the respondent may not have recognized that the study collected responses to the cost questions in $1,000 increments). Therefore, Participants believe median numbers might better represent the typical costs across large and small firms instead of reported averages.

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194 See FINRA, OATS Frequently Asked Questions at D8 (last updated July 6, 1998), available at http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085541.

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195 See Hibah Yousuf, Only Half of All Americans Invested in Stocks, CNN Money (May 9, 2014), http://money.cnn.com/2013/05/09/investing/american-stock-ownership/ (includes Gallup Poll results).

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196 See, e.g., Andy Nybo, The Retail Options Renaissance, TABB Forum (Jan. 27, 2014), http://tabbforum.com/opinions/the-retail-options-reneissance.

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197 Cumming et al., Global Market Surveillance, 10(2) Am. Law & Econ. Rev. at 454-506 (July 24, 2008).

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198 See, e.g., La Porta, et al., Legal Determinants of External Finance, 52(3) J. Finance 1131-1150 (1997).

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199 Cumming et al., Exchange Trading Rules, Surveillance and Insider Trading (working paper, Oct. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2101826.

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200 Where better surveillance identifies behaviors and practices that are manipulative and harmful to the investing public more quickly and more accurately, the Commission and Participants may be able to adopt rules to stop these practices more quickly and in a more tailored fashion.

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201 Cumming et al., Exchange Trading Rules and Stock Market Liquidity, 99(3) J. Financial Economics 651-71 (Mar. 2011).

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202 Christensen et al., Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement (Dec. 31, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1745105.

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203 Pursuant to Section 31 of the Exchange Act, Participants are required to pay transaction fees and assessments to the Commission that are designed to recover the costs related to the government’s supervision and regulation of the securities markets and securities professionals. Participants, in turn, may collect their Section 31 fees and assessments from their broker-dealer members. 15 U.S.C. § 78ee.

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204 The two approaches are described in detail in Appendix C, Analysis of Expected Benefits and Estimated Costs for Creating, Implementing, and Maintaining the Consolidated Audit Trail (SEC Rule 613(a)(1)(vii)).

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205 Participants arrive at this conclusion on the basis of a standard t-test of the hypothesis that the difference between Approach 1 and Approach 2 costs is different from zero. The t-test is unable to reject the null hypothesis (i.e., that the difference in costs between the two approaches is not distinguishable from zero) at the 0.05% level. The t-test rejects the null hypothesis for estimates of hardware / software costs, FTE costs, vendor costs, and total costs. The t-test also rejects any significant difference in estimated costs under the two approaches separately for large OATS reporters, small OATS reporters, large non-OATS reporters, and small non-OATS reporters.

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206 See SIFMA Recommendations.

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207 See SEC Memorandum to File No. S7-11-10, Re: Staff Meeting with the Financial Information Forum (Feb. 29, 2012), available at http://www.sec.gov/comments/s7-11-10/s71110-112.pdf.

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208 See FIF, Comment Letter Re: Consolidated Audit Trail National Market System Plan Submission (Nov. 19, 2014), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601972.pdf.

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209 Small firm total estimated implementation costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for one year, from the beginning of CAT reporting in year 1 through the expected incurring of build costs by small firms in the year prior to the start of their reporting (i.e., year 2). Because large firms report a year earlier than small firms and would incur most implementation costs in year 1, a similar rate has not been applied to their implementation costs.

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210 Id.

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211 Large and small firm total estimated maintenance costs are estimated in year 5 to account for a steady state of reporting, and include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of CAT reporting in year 1 through year 5.

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212 Id.

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213 Id.

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214 Id.

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215 Vendor cost estimates assume an annual cost per FTE of $401,440, consistent with the rate applied by the Commission in the Adopting Release.

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216 The total estimated vendor maintenance costs include a compound annual growth rate of 5% to account for increases in labor and operational costs over time. The rate was applied for four years, from the beginning of broker-dealer CAT reporting in year one through year five.

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217 Cost Survey Report on CAT Reporting of Options Quotes by Market Makers, conducted by the Financial Information Forum, Securities Industry and Financial Markets Association and Securities Traders Association (Nov. 5, 2013); available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p601771.pdf.

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218 Cost estimates provided by the DAG on topics where the Participants have requested exemptive relief can be found at: http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602494.pdf

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219 See Section 11.2 of the CAT NMS Plan.

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220 See id.

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221 See Section 11.3 (a)-(c) of the CAT NMS Plan.

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222 Market share for Execution Venues is defined as the total trade volume executed on an individual Execution Venue as a percentage of total trades executed across all Venues.

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223 See Section 11.3(d) of the CAT NMS Plan.

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224 See Section 11.1(b) of the CAT NMS Plan.

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225 See Section 4.1 and Section 11.5 of the CAT NMS Plan.

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226 See id.

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227 See Section 11.3(d) of the CAT NMS Plan.

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228 There is empirical evidence that firms’ order routing decisions respond to changes in trading fees. Such evidence finds that an increase in the level of an exchange’s net fee is associated with a decrease in trading volume and market share relative to other exchanges. This evidence suggests that there is sufficient competition among Execution Venues such that where the Participant’s costs for the CAT are material it may be difficult for Execution Venues to fully pass those costs to broker-dealers. This argument holds as long as broker-dealers are not able to pass such costs on to their customers. See Cardella et al., Make and Take Fees in the U.S. Equity Market (working paper, Apr. 29, 2013), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2149302.

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229 Remarks of Robert Ketchum, Chairman and Chief Executive Officer, FINRA (Sept. 17. 2014), available at http://www.finra.org/Newsroom/Speeches/Ketchum/P600785.

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230 See, e.g., IIROC’s analysis of its market regulation fee model, available at http://www.iiroc.ca/Documents/2011/5f95e549-10d1-473e-93cf-3250e026a476_en.pdf and http://www.iiroc.ca/Documents/2012/bf393b26-7bdf-49ff-a1fc-3904d1de3983_en.pdf.

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231 Further discussion of the Participants’ consideration of the use of the Majority Vote and Supermajority Vote is contained in Appendix C, 11, Process by Which Participants Solicited Views of Members and Other Appropriate Parties Regarding Creation, Implementation, and Maintenance of CAT; Summary of Views; and How Sponsors Took Views Into Account in Preparing NMS Plan (SEC Rule 613(a)(1)(xi)).

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232 Adopting Release at 45787.

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233 The systems and rules identified for retirement (in full or in part) include: FINRA’s OATS Rules (7400 Series), the rules of other Participants that incorporate FINRA’s OATS requirements (e.g. NASDAQ Rule 7000A Series, BX Rule 6950 Series, PHLX Rule 3400 Series, NYSE Rule 7400 Series, NYSE Arca Equities Rule 7400 Series, and NYSE MKT Rule 7400 Series), COATS and associated rules, NYSE Rule 410(b), PHLX Rule 1022, CBOE Rule 8.9, EBS and associated rules, C2 Rule 8.7, and CHX BrokerPlex reporting (Rule 5).

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234 See SEC Rule 613 – Consolidated Audit Trail (CAT) Preliminary EBS-CAT Gap Analysis, available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p450537.pdf.

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235 See FIF CAT WG: Preliminary Large Trader Rule (Rule 13h-1) – CAT (Rule 613) Gap Analysis (Feb. 11, 2014), available at https://fif.com/fif-working-groups/consolidated-audit-trail/member-resources/current-documents?download=1221:february-11-2014-fif-cat-wg-preliminary-large-trader-rule-rule-13h-1-cat-rule-613-gap-analysis&start=35.

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236 See FINRA Rule 7410(l).

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237 Other SROs have rules requiring their members to report information pursuant to the OATS Rules. See, e.g., NYSE Rule 7400 Series; NASDAQ Rule 7400 Series.

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238 This expansion of the CAT reporting requirements to OTC Equity Securities was generally supported by members of the broker-dealer industry and was discussed with the DAG on July 24, 2013.

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239 SEC Rule 613(c)(7) lists the minimum order information that must be reported to the CAT and specifies the information that must be included in the CAT NMS Plan. The Commission noted in the Adopting Release that “the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of [SEC Rule 613].” Adopting Release at 45750.

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240 Small broker-dealers are defined SEC Rule 0-10(c).

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241 These events are also described on the CAT NMS Plan Website at www.catnmsplan.com. See SEC Rule 613: Consolidated Audit Trail (CAT), Past Events and Announcements (last updated Dec. 10, 2014), available at http://catnmsplan.com/PastEvents/.

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242 See generally Industry Feedback on the Consolidated Audit Trail (last updated Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/.

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243 See FIF, Clock Offset Survey Preliminary Report (last updated Feb. 17, 2015), available at http://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p602479.pdf (the “FIF Clock Offset Survey Preliminary Report”).

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244 See DAG, Cost Estimate for Adding Primary Market Transactions into CAT (Feb. 17, 2015), available at http://catnmsplan.com/industryFeedback/P602480.

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245 See FIF Clock Offset Survey Preliminary Report.

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246 A summary of industry outreach events is included in Appendix C, General Industry Solicitation.

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247 When adopting the CAT, the Commission directed the Commission staff “to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail.” Adopting Release at 45744-5 n.241.

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248 See supra note 11.

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249 Role Based Access Control (RBAC) is a mechanism for authentication in which users are assigned to one or many roles, and each role is assigned a defined set of permissions. Additional details are provided in Appendix D, Data Security.

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250 Multifactor authentication is a mechanism that requires the user to provide more than one factor (e.g., biometrics/ personal information in addition to a password) in order to be validated by the system.

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251 See Appendix C, Analysis of the CAT NMS Plan, for additional details on cost studies.

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252 See FIF Response.

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253 User management is a business function that grants, controls, and maintains user access to a system.

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254 RFP at 57.

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255 In a hot-hot disaster recovery design, both the production site as well as the backup site are live, and the backup can be brought online immediately.

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256 In a hot-warm disaster recovery design, the backup site is fully equipped with the necessary hardware. In the event of a disaster, the software and data would need to be loaded into the backup site for it to become operational.

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257 NTP and PTP are protocols used to synchronize clocks across a computer network.

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258 GPS is a radio navigation system that can be used to capture a precise determination of time.

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259 FIF Clock Offset Survey Preliminary Report.

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260 The Participants consider the estimates provided to be conservative as a majority of the study respondents fell into the category of large broker-dealers.

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261 Equity markets currently have morning, primary, and evening sessions. It is possible that over time sessions may cross into the next calendar day.

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262 References to data sizing refer to raw, uncompressed data and do not account for benefits of compression, overhead of data storage or indices. Data sizing estimates do not include meta-data and are based on delimited, fixed length data sets. The Plan Processor is responsible for calculating its platform capacity capabilities based on its proposed solution. Three years after the finalization of the CAT NMS Plan, when all CAT Reporters submit their data to the Central Repository, the Central Repository must be sized to receive process and load more than 58 billion records per day.

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263 To be defined in the SLAs to be agreed to between the Participants and the Plan Processor, as detailed in Appendix D, Functionality of the CAT System.

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264 Federal Financial Institutions Examination Council, Supplement to Authentication in an Internet Banking Environment (June 22, 2011), available at http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20(FFIEC%20Formated).pdf.

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265 See Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System (Apr. 8, 2003), available at http://www.sec.gov/news/studies/34-47638.htm.

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266 If needed – data validation may be a process with an initial validation phase for data errors and a subsequent validation phase later in processing where more time is needed to assess the context of the record in relation to data that may be submitted to the CAT later in the submission window. The Plan Processor must have an additional “matching” process for the purposes of linking together order data passed between CAT Reporters.

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267 A linkage validation error should only populate for the CAT Reporter that the Plan Processor determines to have broken the link.

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268 See Appendix C, Error Communication, Correction, and Processing.

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269 Specific performance requirements will be included in the SLA.

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270 Each CAT Reporter or Data Submitter must only be able to view its own data and data it submits on behalf of others.

+

In selecting the Plan Processor, the Selection Committee has been guided by the need to satisfy the requirements of Rule 613 and the CAT NMS Plan. In addition, the Selection Committee also has been guided by Guiding Principles that the Participants adopted for the CAT development process. The Participants developed the following Guiding Principles:

+

• The CAT must meet the specific requirements of Rule 613 and achieve the primary goal of creating a single, comprehensive audit trail to enhance regulators' ability to surveil the U.S. markets in an effective and efficient way.

+

• The reporting requirements and technology infrastructure developed must be adaptable to changing market structures and reflective of trading practices, as well as scalable to increasing market volumes.

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• The costs of developing, implementing, and operating the CAT should be minimized to the extent possible. To this end, existing reporting structures and technology interfaces will be utilized where practicable.

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• Industry input is a critical component in the creation of the CAT. The Participants will consider industry feedback before decisions are made with respect to reporting requirements and cost allocation models.

+

With these requirements and principles as guides, each Participant serving on the Selection Committee voted on the Bidders in each round of voting based on its own view of how each Bid satisfied these various provisions. Accordingly, the Selection Committee has determined that Thesys Technologies, LLC was the most appropriate Bidder to become the Plan Processor.

+

* * * * *

+

Thank you for your attention to this matter. Please contact any of the undersigned if you have any questions or comments.

+

Respectfully submitted,

+

[Executed signature pages are located at the end of this submission.]

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cc: The Hon. Mary Jo White, Chair

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The Hon. Kara M. Stein, Commissioner

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The Hon. Michael S. Piwowar, Commissioner

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Ms. Heather Seidel, Acting Director, Division of Trading and Markets

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Mr. Gary L. Goldsholle, Deputy Director, Division of Trading and Markets

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Mr. David S. Shillman, Associate Director, Division of Trading and Markets

+

Mr. David Hsu, Assistant Director, Division of Trading and Markets

+

IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

+ + + + + + + + +

IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

+

P A R T I C I P A N T S:

+ + + + +

TN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as ofthe day and year first above written.

+

PARTICIPANTS:

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fn +

1 17 C.F.R. § 242.608(a)(6). Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

+
+
fn +

2 The RFP process is described in Appendix C of the CAT NMS Plan, as well as on the CAT NMS Plan website (www.catnmsplan.com).

+
+
fn +

3 Appendix C, CAT NMS Plan.

+
+
fn +

4 The RFP is set forth in Appendix A of the CAT NMS Plan. The RFP was published in full in the notice of the CAT NMS Plan. See Securities Exchange Act Rel. No. 77724 (Apr. 17, 2016), 81 Fed. Reg. 30614 (May 17, 2016).

\ No newline at end of file diff --git a/spider/files/data000023.html b/spider/files/data000023.html deleted file mode 100644 index c9f43d2..0000000 --- a/spider/files/data000023.html +++ /dev/null @@ -1,317 +0,0 @@ - - jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: Consolidated Audit Trail (CAT) Update - source: NYSE Trader Update - source_type: Notice - language: English -
pubdate: February 1, 2019 effdate: N/A -

Subject: Consolidated Audit Trail (CAT) Update

- Topic: Trader Update, Consolidated Audit Trail (CAT) Update - Compliance User: 9c3d20f0-eb09-4a1d-bdef-a2f9b7200102 - Keywords: - CAT NMS plan, - LLC, - Rule 613, - FINRA Rule 6800, - -

Date: February 1, 2019

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Audience: NYSE, NYSE American, NYSE Arca, NYSE National, and Chicago Stock Exchange Traders

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CAT NMS, LLC confirms that it is working to transition the Consolidated Audit Trail (“CAT”) project to a new Plan Processor. In transitioning the project to a new Plan Processor, the Participants are evaluating the impact the transition will have on current Industry Member implementation plans. While certain dates may change, there are no material changes planned for the Industry Member Technical Specifications. The Participants will continue to work with industry participants to finalize the Industry Member Reporting Specification. As an initial matter, the Participants anticipate the initial test period for data ingestion will move from August 2019 to late 2019 and plan to announce a more detailed implementation schedule shortly. The Participants plan to host an industry webcast in the very near future to provide more information and answer questions.

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Background

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Rule 613 of the Securities Exchange Act of 1934 requires national securities exchanges and national securities associations to submit a national market system plan to the Commission to create, implement, and maintain the CAT that would allow regulators to more efficiently and accurately track all activity in U.S. equity and options markets. Pursuant to Rule 613, the Participants filed with the Commission the CAT NMS Plan, which was approved by the Commission on November 15, 2016.

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Under Rule 613(g)(2), each member of a national securities exchange or national securities association is required to comply with all the provisions of the CAT NMS Plan. Relatedly, as mandated under Rule 613, the CAT NMS Plan requires each Participant to adopt rules requiring its members to comply with Rule 613 and the CAT NMS Plan, and to agree to enforce compliance by its members in that regard. Accordingly, each Participant has adopted rules requiring its members to comply with Rule 613 and the CAT NMS Plan. See, e.g., FINRA Rule 6800 Series.

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The SROs jointly own and operate CAT NMS, LLC, which was formed by the SROs to arrange for and oversee the creation, implementation, and maintenance of the CAT as required under Rule 613. Further, the CAT is a facility of each SRO. Accordingly, when Industry Member reporting commences, Industry Members will submit data to an SRO facility.

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- \ No newline at end of file diff --git a/spider/files/data000025.html b/spider/files/data000025.html deleted file mode 100644 index a2155c7..0000000 --- a/spider/files/data000025.html +++ /dev/null @@ -1,1169 +0,0 @@ - - jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: Order Approving Joint Industry Plan (Release 34-71596) - document_type: Orders - source: US/SEC/Orders/Order Approving Joint Industry Plan - source_type: Order Approving Joint Industry Plan - language: English - citation: Release 34-71596 -
pubdate: February 21, 2014 effdate: N/A -

Order Approving Joint Industry Plan (Release 34-71596)

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan, - CAT NMS plan, - -

SECURITIES AND EXCHANGE COMMISSION

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(Release No. 34-71596; File No. 4-668)

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February 21, 2014

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Joint Industry Plan; BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc. and Topaz Exchange, LLC; Order Approving Proposed National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail

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pubdate: February 22, 2014 effdate: N/A -

I. Introduction

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Introduction - Compliance User: Self-Regulatory Organization - Keywords: - SRO, - Securities Exchange Act - Section 11A, - CAT NMS plan, - -

On September 3, 2013, BATS Exchange, Inc., BATS-Y Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, NYSE Arca, Inc., and Topaz Exchange, LLC (collectively, “SROs” or “Participants”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”),1 and Rule 608 thereunder,2 a proposed National Market System (“NMS”) Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail (“Plan”).3 The Participants requested that the Commission approve the Plan.4 The Plan was published for comment in the Federal Register on November 21, 2013.5 The Commission received six comment letters from five commenters in response to the proposal.6 On January 31, 2014, the Participants to the Plan responded to the comment letters.7 This order approves the Plan.

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pubdate: February 23, 2014 effdate: N/A -

II. Background

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Background - Compliance User: Self-Regulatory Organization - Keywords: - CAT NMS plan, - Sec Rule 613, - -

On July 11, 2012, the Commission adopted Rule 613 under the Act to require the SROs to jointly submit an NMS plan (“CAT NMS Plan”) to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail (“CAT”), with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.8 Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail. In instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the CAT NMS Plan in a way that best achieves the objectives of the Rule. Specifically, Rule 613 incorporates a series of twelve “considerations” that the Participants must address in the CAT NMS Plan, including:

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• the specific details and features of the CAT NMS Plan;

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• the Participants’ analysis of the CAT NMS Plan’s costs and impact on competition, efficiency, and capital formation;

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• the process in developing the CAT NMS Plan;

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• information about the implementation of the CAT NMS Plan; and

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• milestones for the creation of the consolidated audit trail.9

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As part of the discussion of these “considerations,” the Participants must include cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.10 In addition, Rule 613 requires that the Participants: (1) provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the CAT NMS Plan submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the CAT NMS Plan submitted; and (3) provide their own analysis of the submitted CAT NMS Plan’s potential impact on competition, efficiency, and capital formation.11 These detailed requirements are intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the CAT NMS Plan ultimately submitted by the Participants.12

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In light of the numerous specific requirements of Rule 613, the Participants concluded that publication of a request for proposal (“RFP”) was necessary to ensure that potential alternative solutions to creating the consolidated audit trail can be presented and considered by the Participants and that a detailed and meaningful cost/benefit analysis can be performed, both of which are required considerations to be addressed in the CAT NMS Plan.13 The Participants published the RFP on February 26, 2013, and requested that any potential bidders notify the Participants of their intent to bid by March 5, 2013. Thirty-one firms submitted an intent to bid in response to the publication of the RFP; four of the firms were Participants or Affiliates of Participants.14

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pubdate: February 24, 2014 effdate: N/A -

III. Description of the Proposal

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal - Compliance User: Self-Regulatory Organization - Keywords: - CAT NMS plan, - Plan Processor, - -

The Participants filed the Plan to govern how the SROs will proceed with formulating and submitting the CAT NMS Plan—and, as part of that process, how to review, evaluate, and narrow down the bids submitted in response to the RFP (“Bids”)15—and ultimately choosing the plan processor that will build, operate, and maintain the consolidated audit trail (“Plan Processor”).16

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pubdate: February 25, 2014 effdate: N/A -

A. Governance

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Governance - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan - Section III, - CAT NMS plan, - Sec Rule 613, - Operating Committee, - Voting Rights, - Voting Requirements, - Participants, - -

Section III of the Plan establishes the overall governance structure the Participants have chosen.17 Specifically, the Participants propose establishing an Operating Committee responsible for formulating, drafting, and filing with the Commission the CAT NMS Plan and for ensuring the Participants’ joint obligations under Rule 613 are met in a timely and efficient manner. As set forth in Section III(B) of the Plan, each Participant will select one individual and one substitute to serve on the Operating Committee; however, other representatives of each Participant are permitted to attend Operating Committee meetings. Section III of the Plan also establishes the procedures for the Operating Committee, including provisions regarding meetings, Participants’ voting rights, and voting requirements.

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pubdate: February 26, 2014 effdate: N/A -

B. Conflicts of Interest

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Conflicts of Interests - Compliance User: Self-Regulatory Organization - Keywords: - CAT NMS plan, - Bidders, - Plan Processor, - -

The Participants recognize their important regulatory obligations with respect to the development of the CAT NMS Plan, and ultimately the creation and operation of the consolidated audit trail.18 However, they also recognize that Participants or Affiliates of Participants may also be Bidders seeking to serve as the Plan Processor or may be a subcontractor to Bidders seeking to serve as the Plan Processor.19 Accordingly, the Participants have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions, which are described below, designed to balance these competing factors. The Participants believe that the Plan achieves this balance by allowing all Participants to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.20

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pubdate: February 27, 2014 effdate: N/A -

C. Plan Processor Selection Process

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process - Compliance User: Self-Regulatory Organization - Keywords: - Bidder Shortlist, - Plan Processor, - -
pubdate: February 28, 2014 effdate: N/A -

1. Bidder Shortlist Determination

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process, Bidder Shortlist Determination - Compliance User: Self-Regulatory Organization - Keywords: - Selection Plan - Section V and VI, - Plan Processor, - Voting Senior Officer, - Bidding Participant, - SRO, - Selection Committee, - Qualified Bid, - Participant, - Shortlisted Bid, - CAT NMS plan, - -

Sections V and VI of the Plan21 set forth the process for the Participants’ evaluation, and narrowing down, of the Bids, and choosing the Plan Processor.22 Pursuant to these Sections, the evaluation of Bids and selection of the Plan Processor will be performed by a Selection Committee composed of one senior officer from each Participant (“Voting Senior Officer”).23 The SROs noted that, because of the potential conflicts of interest noted above, the Plan includes multiple requirements to increase the independence of the Voting Senior Officer who participates on the Selection Committee on behalf of a Bidding Participant.24 The criteria set forth in Section V(D) of the Plan include requirements concerning the Voting Senior Officer’s job responsibilities, decision-making authority, and reporting, and require that the Bidding Participant establishes functional separation between its Plan responsibilities and its business/commercial (including market operations) functions. In addition, the criteria prohibit any disclosure of information regarding the Bid to the Voting Senior Officer and prohibit the Voting Senior Officer from disclosing any non-public information gained in his or her role as such. According to the SROs, these criteria are intended to insulate the Voting Senior Officer from any inside knowledge regarding the Bid (while also preventing any information about the evaluation process from being shared with staff preparing the Bidding Participant’s Bid) and to reduce any potential personal motivation that may exist that could improperly influence a Voting Senior Officer’s decisions.25

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Any action requiring a vote by the Selection Committee under the Plan can only be taken in a meeting in which all Participants entitled to vote are present.26 All votes taken by the Selection Committee are confidential and non-public, and a Participant’s individual votes will not be disclosed to other Participants or to the public.27 For this reason, the Plan provides that votes of the Selection Committee will be tabulated by an independent third party approved by the Operating Committee.28 Moreover, the Participants do not anticipate that aggregate votes or anonymized voting distribution numbers will be provided to the Participants following votes by the Selection Committee.29

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The Plan divides the processes for review and evaluation of Bids, and selection of the Plan Processor, into four separate stages. After Bids are submitted,30 Section VI(A) of the Plan provides that the Selection Committee will review them to determine which are Qualified Bids (i.e., Bids that contain sufficient information to allow the Voting Senior Officers to meaningfully assess and evaluate them).31 At this initial stage, if two-thirds or more of the Participants determine that a Bid does not meet the threshold for a Qualified Bid, the Bid will be eliminated from further consideration. The Participants believe this initial step will ensure that only those Bids meeting a minimum level of detail and sufficiency will move forward in the process, and insufficient Bids can be eliminated.32

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Following the elimination of Bids that are not Qualified Bids, each Qualified Bidder will be provided the opportunity to present its Bid to the Selection Committee.33 After the Qualified Bidders have made their presentations, the Selection Committee will establish a subset of Bids that will move on in the process (“Shortlisted Bids”).34 The Plan provides that, if there are six or fewer Qualified Bids submitted, all of those Bids will be selected as Shortlisted Bids.35 If there are more than six but fewer than eleven Qualified Bids, the Selection Committee will choose five Shortlisted Bids, and, if there are eleven or more Qualified Bids, the Selection Committee will choose 50% of the Qualified Bids as Shortlisted Bids.36

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When voting to select the Shortlisted Bids from among the Qualified Bids, each Voting Senior Officer must rank his or her selections, and the points assigned to the rankings increase in single-point increments.37 Thus, for example, if five Shortlisted Bids are to be chosen, each Participant will vote for its top five choices in rank order, with the first choice being given five points, the second choice four points, the third choice three points, the fourth choice two points, and the fifth choice one point. The Plan also provides that at least two Non-SRO Bids must be included as Shortlisted Bids, provided there are two Non-SRO Bids that are Qualified Bids.38 According to the SROs, this provision further reduces the impact of potential conflicts of interest in choosing Shortlisted Bids.39 If, following the vote, no Non-SRO Bids have been selected as Shortlisted Bids, the Plan requires that the two Non-SRO Bids receiving the highest cumulative votes be added as Shortlisted Bids.40 If, in this scenario, a single Non-SRO Bid was a Qualified Bid, that Non-SRO Bid would be added as a Shortlisted Bid.41 The Participants believe selecting Shortlisted Bids is appropriate both to ensure that Bidders submit a complete and thorough Bid initially and so that Qualified Bidders will know whether they have a realistic opportunity to be selected as the Plan Processor after the CAT NMS Plan is approved.42

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pubdate: March 01, 2014 effdate: N/A -

2. Bid Revision and Selection of Plan Processor

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Plan Processor Selection Process, Bid Revision and Selection of Plan Processor - Compliance User: Self-Regulatory Organization - Keywords: - CAT NMS plan, - Shortlisted Bid, - Advisory Committe, - Sec Rule 613, - Bidding Participant, - Vote, - Rule 608, - -

Following the selection of Shortlisted Bids, the Participants will identify the optimal proposed solution(s) for the consolidated audit trail for inclusion in the CAT NMS Plan for submission to the Commission.43 As a part of this process, and the overall review and evaluation of Shortlisted Bids, the Selection Committee may consult with the advisory committee required and established by Rule 613 (“Advisory Committee”). If the Commission approves the CAT NMS Plan, the Selection Committee will determine, by majority vote, which Shortlisted Bidders will have the opportunity to revise their Bids in light of the provisions in the final, approved CAT NMS Plan.44 In making a decision whether to permit a Shortlisted Bidder to revise its Bid, the Selection Committee will consider the provisions in the CAT NMS Plan as well as the content of the Shortlisted Bidder’s initial Bid. According to the SROs, to reduce potential conflicts of interest, the Plan also provides that, if a Bid submitted by or including a Bidding Participant or an Affiliate of a Bidding Participant is a Shortlisted Bidder, that Bidding Participant must recuse itself from all votes regarding whether a Shortlisted Bidder will be permitted to revise its Bid.45

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Section VI(E) provides that, after the permitted Shortlisted Bidders submit any revisions, the Selection Committee will select the Plan Processor from the Shortlisted Bids in two rounds of voting where, subject to the recusal provision described below, each Participant has one vote. In the first round, each Participant will select a first and second choice, with the first choice receiving two points and the second choice receiving one point. The two Shortlisted Bids receiving the highest cumulative scores in the first round will advance to the second round.46 In the event of a tie resulting in more than two Shortlisted Bids advancing to the second round, the tie will be broken by assigning one point per vote to the tied Shortlisted Bids, and the one with the most votes will advance. If this procedure fails to break the tie, a revote will be taken on the tied Shortlisted Bids with each vote receiving one point. If the tie persists, the Participants will identify areas for discussion, and revotes will be taken until the tie is broken.47

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Once two Shortlisted Bids have been chosen, the Participants will vote for a single Shortlisted Bid from the final two to determine the Plan Processor.48 If one or both of the final Bids is submitted by or includes a Bidding Participant or an Affiliate of a Bidding Participant, the Bidding Participant must recuse itself from the final vote.49 In the event of a tie, a revote will be taken. If the tie persists, the Participants will identify areas for discussion and, following these discussions, revotes will be taken until the tie is broken.50 As set forth in Section VII of the Plan, following the selection of the Plan Processor, the Participants will file with the Commission a statement identifying the Plan Processor and including the information required by Rule 608.

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pubdate: March 02, 2014 effdate: N/A -

D. Implementation

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Description of the Proposal, Implementation - Compliance User: Self-Regulatory Organization - Keywords: - Approval of Plan, - CAT NMS plan, - Bids, - Selection Plan - Section VI, - -

The terms of the Plan will be operative immediately upon approval of the Plan by the Commission. The Participants have announced that Bids must be submitted four weeks after the Commission’s approval of the Plan.51 The Participants will begin reviewing and evaluating the Bids pursuant to Section VI of the Plan upon receipt of the Bids, and anticipate that it will take seven months to evaluate the Bids and submit the CAT NMS Plan to the Commission pursuant to Sections VI(A) and (B) of the Plan.52 As noted above, upon approval of the CAT NMS Plan, the Plan will automatically terminate. The review of revised Shortlisted Bids and the selection of the Plan Processor will be undertaken as set forth in Sections VI(D) and (E) of the Plan as those sections are incorporated into the CAT NMS Plan.

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pubdate: March 03, 2014 effdate: N/A -

IV. Comment Letters and Response Letter

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter - Compliance User: Self-Regulatory Organization - Keywords: - Comment Letter, - CAT NMS plan, - SRO, - -

The Commission received six comment letters from five commenters on the proposed Plan.53 Three of the commenters generally supported the Plan.54 All of the commenters had concerns with, and/or questions regarding, specific details on the terms of the Plan, collectively identifying three main issues – (1) industry participation in the evaluation of Bidders, the selection of the Plan Processor, and the drafting of the CAT NMS Plan; (2) transparency in SRO decision-making; and (3) conflicts of interest – and offering suggestions as to how those concerns and/or questions could be addressed.55 The Participants responded to the comments regarding the proposal.56

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pubdate: March 04, 2014 effdate: N/A -

A. Industry Participation

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Industry Participation - Compliance User: Self-Regulatory Organization - Keywords: - Selection Process, - SRO, - Advisory Committee, - Operating Committee, - CAT NMS plan, - Shortlisted Bidder, - CAT Development Advisory Group, - -

As proposed in the Plan, only the SROs will participate in the selection process, and they may consult with the Advisory Committee when reviewing and evaluating the Shortlisted Bids.57 Three commenters believe that industry participation in the selection process is important, and they suggest varying solutions to ensure that such participation is required by the Plan.58

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One commenter states that the process should include the integrated involvement and meaningful participation of representatives of the broker-dealer community.59 Specifically, the commenter states that there should be public representation on the Operating Committee, and that non-SRO, industry members should be involved in the evaluation of Bidders and the selection of the Plan Processor.60 The commenter believes that “[t]he unique expertise and insight of the broker-dealer community complements that of the SROs and would bring the perspective of the entities that will be providing the ‘lion’s share’ of the reported data to the CAT.”61 This commenter additionally recommends that the Participants amend the Plan to establish the Advisory Committee as part of this Plan, as opposed to waiting for the submission of the CAT NMS Plan, with safeguards and procedural protections to assure that the SROs fully consider the views of the committee.62 Another commenter states that it supports consultation with the Advisory Committee as part of the selection process so long as safeguards are put in place to ensure the confidentiality of the Bidders’ information is protected.63 A third commenter believes that the Advisory Committee’s scope of participation is extremely limited and should be expanded and it recommends that the SROs should be required to consult the Advisory Committee when reviewing the Shortlisted Bids to select the Plan Processor.64

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In response to these comments, the SROs indicate how the Operating Committee has provided, and will continue to provide, for industry participation in the development of the CAT NMS Plan.65 In response to the comment that Advisory Committee consultation should be mandatory as part of the review of Shortlisted Bidders, the SROs noted that they will consult proactively with the industry for input on key aspects of the Bids, so long as the selection process is not impaired, especially with regard to maintaining Bidder confidential information.66 The SROs also note that they created the CAT Development Advisory Group (“DAG”) and that the DAG has been, and will continue to be, a valuable source of input for the development of the CAT NMS Plan.67 The SROs state that they will continue to engage the industry on key topics pertaining to aspects of the Bids that directly affect the industry.68 The SROs further state that, after Bids are received in response to the RFP, they are committed to providing the DAG with anonymized information taken from Bids that will provide the DAG members with enough specificity to allow them to understand the comparative advantages and disadvantages of the options being considered by the SROs, so that they can contribute in a meaningful way to the SROs’ analysis of such information.69 The SROs further note that they intend to work with the DAG to identify the particular sections of the RFP that will benefit from industry input during the evaluation of Bids.70 The SROs also explain that they understand that broad industry input during the development of the CAT NMS Plan is critical to selecting optimal proposed solutions, and that they will continue to hold discussions with the DAG at the greatest level of detail possible without compromising a fair selection process and confidential Bid information.71

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pubdate: March 05, 2014 effdate: N/A -

B. Transparency

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Transparency - Compliance User: Self-Regulatory Organization - Keywords: - Bidder, - SRO, - CAT NMS plan, - CAT Reporter, - Plan Processor, - DAG, - NDA, - RFP Responses, - Shorlisted Bids, - Qualified Bids, - Sec Rule 613, - -

Several commenters stress the importance of transparency in the Bidder selection process and the standards the SROs will employ for review of Bids.72 One commenter states that the Commission should not approve the Plan unless it is amended to provide public disclosure of the selection process.73 The commenter recommends that the SROs publish the Bidders and the contents of the Bids, explaining that the Bids should be available to the public to inform the discussion regarding the costs and benefits, and technological feasibility of different solutions.74 The commenter believes that these responses to the RFP and the SROs’ rationale for eliminating them from consideration as the Plan Processor will be important for the industry to consider in commenting on the CAT NMS Plan.75

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Another commenter recommends that the SROs share information contained in the Bids, specifically relating to the functions and interfaces of the entities (i.e., broker-dealers and SROs) that are required to report to the CAT (“CAT Reporters”), so that the industry can provide feedback to the SROs for assessment of Bidder responses.76 The commenter believes that broad input from the DAG during the CAT NMS Plan development process is critical to ensure that the SROs consider issues from the CAT Reporter perspective.77 The commenter maintains that this information would represent an external description of the Plan Processor and should not require any disclosure of internal implementations or proprietary information from the Bidders.78 Further, the commenter argues that this level of information will be public information once the CAT NMS Plan is published as Rule 613 requires that the CAT NMS Plan be sufficiently detailed to describe the alternatives to the solution selected by the SROs.79 The commenter also argues that because Bids cannot be revised prior to the submission of the CAT NMS Plan pursuant to the proposed Plan, information leakage should not be a concern.80

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The commenter also opines that if the SROs deem it necessary to require DAG members to sign NDAs in order to share confidential portions of Bidders’ responses, any such NDAs should be targeted and finite in nature, specifically noting that DAG discussions on CAT Reporter functionality should not be subject to an NDA.81 The commenter states that only confidential portions of Bids should be covered by NDAs, and that to the greatest extent possible, information relating to Bidders’ responses should be publicly available to facilitate critical outreach from the DAG.82

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In response to these comments, the SROs state that they do not intend to publish the content of the Bids in order to manage a fair process and to address Bidders’ concerns regarding the confidentiality of proprietary and other sensitive information during the selection process.83 The SROs represent that this is standard industry practice.84 The SROs further indicate that, as required by Rule 613, the CAT NMS Plan submitted will discuss appropriate and anonymized elements of the Bids that were not selected, including the relative advantages and disadvantages of each solution, an assessment of the costs and benefits, and the basis upon which the SROs selected the optimal proposed solutions in the CAT NMS Plan.85 The SROs also note that the CAT NMS Plan will be subject to notice and comment.86 However, the SROs state that they will seek industry feedback on proposed approaches and key themes of the RFP responses.87

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The SROs also state that, prior to any consultation with the Advisory Committee or the DAG about information contained in a Bid, the SROs will require the execution of an NDA.88 In response to the comment regarding the scope of NDAs, the SROs state that NDAs will be appropriately drafted to protect confidential information while allowing for meaningful discussion between the SROs and members of the Advisory Committee or the DAG.89

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Three commenters recommend that the selection criteria used to evaluate the Bids be publicly available.90 Specifically, one commenter states that, if the evaluation criteria are thorough and known to all parties (i.e., SROs, Bidders, the industry and the Commission), the process will be more transparent and fair.91 This commenter suggests that the evaluation process and criteria used in the final two rounds of voting be published prior to each round of voting, or at a minimum reviewed with the industry via the DAG.92 Another commenter requests clarification regarding the criteria that Voting Senior Officers will employ when reviewing and ranking Bids, both when selecting the Shortlisted Bids from the Qualified Bids and when selecting the Plan Processor from the Shortlisted Bids.93 A third commenter suggests that the SROs should publish information about the results of each round of voting (e.g., the total votes received by each Bidder or a ranking of the Bidders by voting result).94

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In response to these comments, the SROs agree to publish more detailed descriptions of the evaluation criteria listed in the RFP, which will be used by each SRO as a guideline when evaluating Bids.95 The SROs note that the evaluation criteria can be broadly grouped into the following five areas: (1) technical architecture, (2) operations – technical (processing capability), (3) operations – non-technical, (4) company information, and (5) contract and terms. The SROs further provide lists of criteria within each of the five areas in the Response Letter.96 The SROs explain that each SRO’s assessment will be informed by the defined criteria noted above but that an individual SRO may determine that other factors are important in making its independent evaluation of a Bid.97 The SROs do not intend to publish voting results.98 The SROs state that this approach is considered standard industry practice and there is no articulated benefit to making this information publicly available. The SROs state that they are concerned that the public disclosure of such information may incorrectly and inaccurately suggest the relative strength of a particular Bid without any meaningful context.99

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One commenter recommends that the minutes of the SRO Operating Committee meetings be made public, in order to further increase transparency and serve as a communications vehicle for informing the industry of the CAT governance actions and decisions.100 In response to this comment, the SROs indicate that the Operating Committee meeting minutes will not be made public either prior to or after approval of the CAT NMS Plan.101 The SROs state that, in managing a fair process and maintaining Bidder confidentiality as provided for in the NDA executed with the Bidders, the SROs will not publish Operating Committee minutes during the Bid evaluation and selection process.102 The SROs believe that this approach encourages effective and critical review of the Bids as well as open and frank discussions in light of all material considerations, including timing and complexity.103 The SROs explain that the decisions made by the Operating Committee regarding aspects of the Bids will be reflected in the CAT NMS Plan, which will be open to public comment, and will include an analysis of both the optimal proposed solutions and those solutions not selected, thus providing the public with the opportunity to consider the SROs’ decisions.104 The SROs further state that, once the CAT NMS Plan has been approved and the Advisory Committee has been established, members of that committee will have the right to attend CAT management committee meetings, except for executive sessions, and, as such, will have access to the minutes from such meetings, as well as the right to receive information concerning the operation of the central repository and to provide their views to the SROs.105

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Finally, one commenter requests clarification on whether the optimal proposed solutions for the CAT NMS Plan will be the product of an individual Bid or a composite of select portions of multiple Bids.106 If it will be the latter, the commenter questions how the SROs will determine the costs and benefits of such solutions.107 In response to this comment, the SROs clarify that the optimal proposed solutions could include approaches from different Bids in order to identify a solution that best meets the requirements of Rule 613.108 The SROs recognize that there may be inherent challenges in combining elements of separate solutions, but they want to ensure the flexibility in the evaluation process to identify a holistic solution that is better suited to meet the requirements of Rule 613, while not being limited to the components of any individual Bid.109 The SROs intend to consult with the DAG and the industry as part of the review of anonymized solutions from the Bids, including, but not limited to, requesting input on the technical and operational specifications of the proposed solutions, and the associated cost-benefit analysis.110

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pubdate: March 06, 2014 effdate: N/A -

C. Conflicts of Interest

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Conflicts of Interests - Compliance User: Self-Regulatory Organization - Keywords: - Bidder, - SRO, - CAT NMS plan, - Shorlisted Bids, - -

Two commenters express concerns that the provisions in the Plan that are intended to address conflicts of interest are insufficient.111 One commenter questions the genuineness of the separation through firewalls within the SROs intended to segregate individuals participating in the selection process from those participating in the bidding process.112 The commenter also expresses concern that it is challenging to enforce and monitor such restrictions.113 The commenter further recommends that the Plan either limit the Bidders to non-SROs or only to SROs.114 Another commenter recommends that the Plan require Bidding Participants to be recused from both rounds of voting on Shortlisted Bids, not just the second round of voting to select the Plan Processor.115

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In response to these comments, the SROs note the important regulatory obligations that exist for each of them with respect to the creation and operation of the CAT, and that it is essential that each one contribute to the development of the CAT NMS Plan and the selection of the Plan Processor.116 However, the SROs recognize that SROs or Affiliates of SROs may also be Bidders seeking to serve as the Plan Processor or may be included as part of a Bid.117 The SROs represent that they have sought to mitigate these potential conflicts of interest by including in the Plan multiple provisions designed to balance these competing factors, and have established information barriers, which they believe are sufficient to maintain functional separation between employees representing a specific SRO as part of the consortium planning the CAT and employees developing Bids.118 The SROs state that the implementation of information barriers is considered a standard industry practice for mitigating the risks of conflicts of interests.119 The SROs continue to believe that the Plan achieves this balance by allowing all SROs to participate meaningfully in the process of creating the CAT NMS Plan and choosing the Plan Processor, while imposing strict requirements to ensure that the participation is independent and that the process is fair and transparent.120

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Distinct from the concern regarding potential conflicts of interest arising from an SRO that is also a Bidder, one commenter suggests that the Plan or NDA should be amended to require, even for SROs that are not Bidders or Affiliates of Bidders, the functional separation of employees representing an SRO for purposes of the selection process and its business or commercial functions to safeguard against misuse of Bidders’ confidential information.121

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The SROs state that, although the Bidding Participants are required to maintain the functional separation suggested by the commenter, it will not be practical for all other SROs to isolate their employees that participate in the Bid evaluation and selection process, as varying skillsets will be required to fully evaluate the Bids, and many SROs are faced with resource constraints that would make them unable to wall off certain personnel without either decreasing the expertise available to evaluate Bids or having inadequate resources to manage their business/commercial functions.122 While the SROs state that it is not practical to isolate non-Bidding SRO employees participating in the Bid evaluation and selection process from other SRO employees, they represent that, to protect Bidders’ confidential information, all SROs will adhere to the section of the NDA executed with Bidders that restricts the distribution and use of Bid information by SROs, their affiliates, agents, advisors, and contractors by obligating such parties:

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(i) to hold the Disclosing Party’s Confidential Information in strict confidence and to protect such Confidential Information from disclosure to others (including, without limitation, all precautions the Receiving Party employs with respect to its own Confidential Information), (ii) no [sic] to divulge any such Confidential Information … other than to its Representatives for the purpose of assisting the Receiving Party with respect to the CAT NMS Selection Process, and (ii) [sic] not to make use whatsoever at any time of Confidential Information except to evaluate and discuss the CAT NMS Selection Process … the Receiving Party shall ensure that its Representatives comply with this Agreement as if they were parties to this Agreement.123

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pubdate: March 07, 2014 effdate: N/A -

D. Other Issues

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues - Compliance User: Self-Regulatory Organization - Keywords: - Revision of Bids, - Timing, - Quorum Standard, - -
pubdate: March 08, 2014 effdate: N/A -

1. Revision of Bids

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Revision of Bids - Compliance User: Self-Regulatory Organization - Keywords: - CAT NMS plan, - Shortlisted Bidders, - Qualified Bidder, - SRO, - -

The proposed Plan provides that, following approval of the CAT NMS Plan, upon a majority vote of the Selection Committee, Shortlisted Bidders will be permitted to revise their Bids provided that revisions are necessary or appropriate in light of the Shortlisted Bidder’s initial Bid and the provisions in the approved CAT NMS Plan. One commenter recommends that the Selection Committee instead should only allow revised Bids: (1) after the first round of voting on the Shortlisted Bidders, at which time the list of Bidders would be narrowed to two; and (2) only for the purposes of confirming that the final two Bidders have proposals that meet the requirements of the approved CAT NMS Plan.124 The commenter also believes that, if revisions would require material changes to the Bid of either of the two remaining Bidders, both Bidders should be permitted to revise their Bids.125 This commenter is concerned that allowing Bidders to revise their Bids too early in the selection process could materially impact the depth and breadth of information that Bidders are willing to provide in their initial Bids.126 Under the Plan as proposed, the commenter believes that Bidders will not have a strong incentive to put forth their best ideas, processes, systems, and methods in response to the initial RFP, and will include only enough information to meet the Qualified Bidder threshold.127 Contrary to this position, another commenter believes that all Bidders should be permitted to revise their Bids, based on the provisions contained in the approved CAT NMS Plan, and recommends removing the requirement that the Selection Committee grant permission to revise Bids.128

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In response to these comments, the SROs state that they recognize the value of allowing the Shortlisted Bidders to revise their Bids and expect that including this component in the Plan will result in better quality and more comprehensive Bids from all Bidders.129 Further, the SROs note that preserving their discretion to limit revision of Bids is important, particularly in the instance where there are six or fewer Bidders, all of whom would automatically become Shortlisted Bidders.130 The SROs believe that without SRO discretion to determine which Bidders can revise their Bids, Bidders may not provide detailed information in their initial Bids, but will await the final structure of the CAT NMS Plan to provide full information in their revised Bids.131 Therefore, the SROs believe they need discretion to not allow a Shortlisted Bidder to revise its Bid if the initial Bid did not clearly communicate a cogent, workable plan and evidence the ability to execute the plan.132 Accordingly, the SROs will assess whether revisions are necessary or appropriate in light of the content of the Shortlisted Bidder’s initial Bid and the provisions of the approved CAT NMS Plan.133 More specifically, the SROs anticipate permitting revision of Bids where the initial Bid clearly communicated a feasible CAT

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approach and showed a substantial likelihood that the Bidder could implement the approach contained in the approved CAT NMS Plan.134 The SROs believe this is consistent with standard industry practices when managing an RFP process.135

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pubdate: March 09, 2014 effdate: N/A -

2. Timing

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Timing - Compliance User: Self-Regulatory Organization - Keywords: - Bidding Participant, - CAT NMS plan, - SRO, - Shortlisted Bidder, - -

Two commenters express concerns with timing related to the selection process.136 One commenter takes issue with the due date for Bids in response to the RFP being four weeks after approval of this Plan.137 Specifically, the commenter believes that Bidding Participants are likely to have information about the final selection process and associated timeline for approval before it is made publicly available, and that Bidders must have adequate time to modify their Bids to reengage subcontractors and product/service providers, as well as to update prices for technology components.138 Accordingly, the commenter recommends that the due date for Bids in response to the RFP be 12 weeks after approval of the Plan.139 Another commenter does not believe that two months after effectiveness of the CAT NMS Plan is sufficient time for the SROs to select a Plan Processor from among the Shortlisted Bidders, particularly if there are significant changes from the proposed and approved CAT NMS Plan.140 The commenter recommends a four- to six-month period to allow the Shortlisted Bidders time to revise their Bids to reflect the approved CAT NMS Plan, and to allow the SROs time to consider the Bids and seek industry and technical expertise to aid their evaluation process.141

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In response to the comment regarding the due date for Bids, the SROs indicate that the anticipated deadline four weeks after the approval of the Plan is based on the current requirement to submit the CAT NMS Plan by September 30, 2014.142 However, the SROs note that, if the approved Plan has a material impact on the Bidders’ ability to respond to the RFP, then the due date may be extended.143 In response to the comment regarding the timeframe to select the Plan Processor, the SROs note that that requirement is mandated by Rule 613(a)(3)(i) and that they hope to meet the deadline.144 Going forward, the SROs indicate that they will continue to evaluate whether, and how much, additional time they may be required to seek from the Commission for the selection of the Plan Processor.145

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pubdate: March 10, 2014 effdate: N/A -

3. Quorum Standard

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Quorum Standarad - Compliance User: Self-Regulatory Organization - Keywords: - Selection Committee, - Voting Senior Officers, - SRO, - Plan Processor, - -

One commenter is concerned that the quorum standard for the Selection Committee is too difficult and could lead to delays.146 Specifically, the commenter notes that each SRO’s Voting Senior Officer is a very unique employee and is concerned that such individuals may not always be available for meetings of the Selection Committee.147 The commenter further believes that, because all Voting Senior Officers are required to be present in order to have a quorum of the Selection Committee, delays in the evaluation and voting procedures could occur.148 Consequently, the commenter recommends that an alternate member, with less stringent qualifications, be considered as a voting substitute for the Voting Senior Officer, but any actions taken by the voting substitute would continue to be the direct responsibility of the Voting Senior Officer.149

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In response to this comment, the SROs state that they will ensure that all Voting Senior Officers will be in attendance for all voting processes as part of the Plan Processor selection, either in person or telephonically, as permitted under operation of the CAT beyond the selection of the Plan Processor.150 The SROs further indicate that the Plan does not affect the operation of the CAT beyond the selection of the Plan Processor, and, as such, the SROs will include additional personnel with voting rights as part of the broader governance of the CAT.151

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pubdate: March 11, 2014 effdate: N/A -

4. Information Sharing

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan, Comment Letters and Response Letter, Other Issues, Information Sharing - Compliance User: Self-Regulatory Organization - Keywords: - Bidder, - DAG, - CAT NMS Plan Website, - NDA, - SRO, - CAT NMS plan, - -

Another commenter expresses a concern related to information sharing with Bidders.152 Specifically, the commenter believes that some Bidders may be affiliated or associated with members of the DAG and, therefore, may have access to information relating to DAG discussions that other Bidders do not.153 The commenter further believes that all Bidders should have uniform information relating to DAG discussions and recommends that a formal process be developed under which the SROs disseminate information to all Bidders relating to DAG discussions that are relevant to the Bidding process.154 Another commenter similarly stated that the Bidders and all other interested parties should have access to DAG discussions.155 The commenter recommended that all DAG meeting materials and minutes could be posted on the CAT NMS Plan Website to achieve this goal.156

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In response to the concern that some Bidders will have access to the DAG discussions while others will not, the SROs state that, prior to consultation on any aspect of information included in a Bid, the SROs intend to require the execution of NDAs by members of the Advisory Committee or the DAG, thus facilitating communication and mitigating the confidentiality risks of proprietary Bidder information.157 Additionally, the SROs indicate that it will be a requirement that no member of the Advisory Committee or the DAG will have affiliations with Bidding entities, unless such members have functional separation between their representatives on the DAG and their representatives involved with entities preparing or participating in a Bid similar to those restrictions imposed on Bidding SROs under Section V(D) of the Plan.158

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In response to comments recommending the dissemination of DAG materials, the SROs state that they are committed to holding an open dialogue with industry members during the development of the CAT NMS Plan and will host additional industry outreach events to communicate, among other updates, decisions and ongoing discussion topics from DAG meetings.159 The SROs state that they will post to the CAT NMS Plan Website those materials from DAG discussions that are deemed to be non-confidential information regarding the CAT NMS Plan development and Bidder evaluation process, such as gap analyses regarding the sunsetting of existing regulatory systems.160 However, the SROs state that not all DAG materials will be posted to the website in order to safeguard confidential information and maintain a fair process.161

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pubdate: March 12, 2014 effdate: N/A -

V. Discussion and Commission Findings

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan - Compliance User: Self-Regulatory Organization - Keywords: - Exchange Act - Section 11(A), - Rule 608, - SRO, - CAT NMS plan, - Comment Letters, - Response Letters, - RFP, - DAG, - Operating Committee, - -

After carefully considering the proposed Plan, the issues raised by the comment letters, and the Response Letter, including the commitments contained therein, the Commission has determined to approve the Plan pursuant to Section 11A(a)(3)(B) of the Act162 and Rule 608,163 in that it is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system.164 Rule 613 mandates that the SROs develop the CAT NMS Plan, and the SROs have voluntarily filed this Plan for the purpose of facilitating that development. The Commission believes the Plan is reasonably designed to govern the process by which the SROs will formulate and submit the CAT NMS Plan, including the review, evaluation, and narrowing down of Bids in response to the RFP, and ultimately choosing the Plan Processor that will build, operate, and maintain the consolidated audit trail. The Commission believes that the Plan should thereby help promote the goals of investor protection, and fair and orderly markets, by describing the process of developing the CAT NMS Plan, selecting a Plan Processor, and ultimately creating the consolidated audit trail, which will substantially enhance the ability of the SROs and the Commission to oversee today’s securities markets and fulfill their responsibilities under the federal securities laws.

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The Commission notes that, in response to the comments regarding industry participation in the selection process,165 the SROs state that the DAG is a valuable source of input for the development of the CAT NMS Plan, and commit to provide the DAG with anonymized information taken from Bids with enough specificity to allow the DAG to understand the comparative advantages and disadvantages of the options being considered so that the DAG can contribute in a meaningful way to the SROs’ analysis of Bid information.166 The SROs also commit to continue to work with the DAG to identify the particular sections of the RFP that will benefit from industry input, and to solicit the views of the DAG and the industry for the required cost-benefit analysis, while adhering to their responsibility to maintain the confidentiality of the Bid submissions.167 The Commission believes that such an ongoing and open dialogue between the SROs and the DAG during the selection process is appropriate, and will facilitate the drafting of a detailed and thoughtful CAT NMS Plan, as contemplated by Rule 613. The Commission encourages the SROs to consult with and utilize the DAG to inform their decision making processes.

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With respect to the comments on the transparency of the selection process,168 the SROs reiterate their commitment to provide transparency to the industry during the selection process and thereafter, and agree to provide more detailed descriptions of their evaluation criteria in the RFP.169 The SROs, however, recognize the need to balance full transparency with Bidder concerns about the confidentiality of proprietary information, in addition to more general concerns about inhibiting an open dialogue during the decision-making process. In light of these concerns, the SROs decline to publish the contents of the Bids, the Operating Committee minutes, or the SRO voting results.170 The Commission believes in the importance of a transparent process with respect to the development of the CAT NMS Plan and to the selection of a Plan Processor, but at the same time recognizes the legitimate concerns of Bidders regarding the confidentiality of proprietary and other sensitive information, and the desire by the SROs to encourage Bidders to provide sufficiently detailed Bids to facilitate the development of a robust CAT NMS Plan. The Commission believes that the SROs have appropriately balanced these competing goals as described above.

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To address concerns regarding potential conflicts of interest in the selection process,171 the SROs included in the Plan multiple provisions that are intended to balance the need for SROs to participate in the process given the important regulatory obligations that exist for each of them with respect to the creation and operation of the CAT, with the potential for conflicts of interest that can arise when an SRO is a Bidding Participant.172 The Commission believes that the SROs have included reasonable steps to address the concerns about conflicts of interest.

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With regard to the issue of when and under what circumstances Bidders should be permitted to revise their Bids, one commenter encourages the SROs to liberalize the proposed Plan’s approach to allowing revisions while another commenter suggests that the SROs increase restrictions on the ability of Bidders to revise their Bids.173 In their Response Letter, the SROs state that they will not modify their proposal to permit each Shortlisted Bidder the opportunity to revise its Bid only if a majority of the Selection Committee believes that revisions by the particular Bidder are “necessary or appropriate.” As noted above, the SROs believe that without SRO discretion to determine which Bidders can revise their Bids, Bidders may not provide detailed information in their initial Bids, but will await the final structure of the CAT NMS Plan to provide full information in their revised Bids.174 The Commission believes that the SROs’ approach is reasonably designed to help assure that the SROs receive sufficiently detailed information to develop the CAT NMS Plan.

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With respect to the comments raised by a commenter relating to the due date for Bids175 (four weeks after Commission approval of the Selection NMS Plan), the Commission notes that the SROs explain that the timeframe is based on the current requirement to submit the CAT NMS Plan by September 30, 2014, and note that, if the approved Plan has a material impact on the Bidders’ ability to respond to the RFP, then the SROs may extend this date.176 Regarding the comments made by another commenter relating to the two-month period for the selection of the Plan Processor,177 the Commission notes that this is a deadline imposed by Rule 613(a)(3)(i)178 and that the SROs state that they hope to meet this deadline but will continue to evaluate whether, and, if so, how much, additional time may be required, and will seek additional time from the Commission for the selection of the Plan Processor if needed.179

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With respect to the comment regarding the quorum requirement for Selection Committee meetings,180 the Commission notes that the SROs state that they will ensure that all Voting Senior Officers will be in attendance for all voting processes as part of the Plan Processor selection, either in person or telephonically.181 With respect to the concerns regarding information sharing,182 the Commission notes that, in addition to requiring NDAs, the SROs have indicated that no member of the Advisory Committee or the DAG will be permitted to have affiliations with Bidding entities, unless such members have functional separation between their representatives on the DAG and their representatives involved with entities preparing or participating in a Bid.183

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The Commission finds that the Plan is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system and that it is reasonably designed to achieve its objective of facilitating the development of the CAT NMS Plan and the selection of the Plan Processor. Accordingly, the Commission expects that the Participants will implement the Plan as described, and complete the evaluation of the Bids and submission of the CAT NMS Plan as required by Rule 613.184

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pubdate: March 13, 2014 effdate: N/A -

VI. Conclusion

- Topic: SEC Release, Release No. 34-71596, Joint Industry Plan; Order Approving Proposed National Market System Plan - Compliance User: Self-Regulatory Organization - Keywords: - Exchange Act - Section 11(A), - File No. 4-668, - Effectivity of Plan, - -

IT IS THEREFORE ORDERED, pursuant to Sections 11A of the Act,185 and the rules thereunder, that the Plan (File No. 4-668) is approved and declared effective, and the Participants are authorized to act jointly to implement the Plan as a means of facilitating a national market system.

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By the Commission.

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Kevin M. O’Neill

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Deputy Secretary

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1 15 U.S.C. 78k-1.

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2 17 CFR 242.608.

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3 See letter to Elizabeth M. Murphy, Secretary, Commission, from the SROs dated August 23, 2013 (“Submission Letter”).

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4 Id. at 1.

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5 See Securities Exchange Act Release No. 70892 (November 15, 2013), 78 FR 69910 (“Notice”).

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6 See letters to Elizabeth M. Murphy, Secretary, Commission, from Marcia E. Asquith, Senior Vice President and Corporate Secretary, Financial Industry Regulatory Authority, Inc. (“FINRA”), dated December 20, 2013 (“FINRA Letter”); from Anonymous (“Anonymous 1”), dated December 23, 2013 (“Anonymous 1 Letter”); from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (“SIFMA”), dated December 23, 2013 (“SIFMA Letter”); from Manisha Kimmel, Executive Director, Financial Information Forum (“FIF”), dated December 23, 2013 (“FIF Letter”); Anonymous (“Anonymous 2”), dated December 23, 2013 (“Anonymous 2 Letter”) from Manisha Kimmel, Executive Director, FIF, dated January 24, 2014 (“FIF Letter II”).

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FINRA notes that it has two roles with respect to the development of the consolidated audit trail: (1) a role as a Participant in developing the CAT NMS Plan (as defined below) (“SRO Side”) and (2) a role as an entity that has submitted an intent to submit a Bid (as defined below) in response to the RFP (as defined below) (“Bid Side”). FINRA notes that it has implemented a communications firewall between the SRO Side and the Bid Side, including policies and procedures designed to prevent the members of the SRO Side and the Bid Side from communicating with one another about non-public matters involving the consolidated audit trail. The FINRA Letter was submitted by the Bid Side. See FINRA Letter at 1.

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Copies of all comments received on the proposed Plan are available on the Commission’s website, located at http://www.sec.gov/comments/4-668/4-668.shtml. Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. ET.

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7 See letter to Elizabeth M. Murphy, Secretary, Commission, from the Participants, dated January 31, 2014 (“Response Letter”).

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8 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2013) (“Adopting Release”).

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9 See Rule 613(a)(1)(i)-(xii).

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10 See Rule 613(a)(1)(vii); Rule 613(a)(1)(xii).

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11 See Rule 613(a)(1)(viii).

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12 See Adopting Release, supra note 8, at 45725.

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13 See Submission Letter, supra note 3, at 3.

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14 Since that time, 13 firms—including two Participants and one Affiliate of a Participant—have formally notified the Participants that they will not submit bids as primary bidders. A list of firms that submitted an intent to bid is located on the Participants’ website at www.catnmsplan.com (“CAT NMS Plan Website”). According to the Plan, “[a]n ‘Affiliate’ of an entity means any entity controlling, controlled by, or under common control with such entity.” See Section I(A) of the Plan.

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15 See Section I(C) of the Plan.

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16 See Submission Letter, supra note 3, at 4.

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17 Section I sets forth the definitions used throughout the Plan, and Section II lists the Participants and establishes the requirements for admission of new, or withdrawal of existing, Participants. Each currently approved national securities exchange and national securities association subject to Rule 613(a)(1) is a Participant in the Plan. Section II(B) of the Plan provides that any entity approved by the Commission as a national securities exchange or national securities association under the Act after the effectiveness of the Plan shall become a Participant by satisfying each of the following requirements: (1) effecting an amendment to the Plan by executing a copy of the Plan as then in effect (with the only change being the addition of the new Participant’s name in Section II of the Plan) and submitting such amendment to the Commission for approval; and (2) providing each then-current Participant with a copy of such executed Plan.

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18 See Notice, supra note 5, at 69911.

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19 Id.

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20 Id.

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21 Section IV of the Plan governs amendments to the Plan. In general, except with respect to the addition of new Participants, any change to the Plan requires a written amendment that sets forth the change, is executed by over two-thirds of the Participants, and is approved by the Commission pursuant to Rule 608 of the Act or otherwise becomes effective under Rule 608.

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22 Initial steps in the evaluation and selection process will be performed pursuant to the Plan; the final two rounds of evaluation and voting, as well as the final selection of the Plan Processor, will be performed pursuant to the CAT NMS Plan. The sections of the CAT NMS Plan governing these final two voting rounds are set forth in Sections VI(D) and (E) of the Plan and will be incorporated into the CAT NMS Plan. The Participants believe it is essential that the entire process be laid out in the Plan so that the Commission can consider and approve the entire evaluation and selection process, even though the final two voting rounds, including the selection of the Plan Processor, will not be conducted until after the approval of the CAT NMS Plan. See Submission Letter, supra note 3, at 4.

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23 In the case of Affiliated Participants, one individual may be (but is not required to be) the Voting Senior Officer for more than one or all of the Affiliated Participants.

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24 The Plan defines a “Bidding Participant” broadly to include any Participant that: (1) submits a Bid; (2) is an Affiliate of an entity that submits a Bid; or (3) is included, or is an Affiliate of an entity that is included, as a Material Subcontractor as part of a Bid. See Section I(E) of the Plan. A “Material Subcontractor” is “any entity that is known to the Participant to be included as part of a Bid as a vendor, subcontractor, service provider, or in any other similar capacity and, excluding products or services offered by the Participant to one or more Bidders on terms subject to a fee filing approved by the SEC, (1) is anticipated to derive 5% or more of its annual revenue in any given year from services provided in such capacity; or (2) accounts for 5% or more of the total estimated annual cost of the Bid for any given year.” See Section I(J) of the Plan. The Plan provides that “[a]n entity will not be considered a ‘Material Subcontractor’ solely due to the entity providing services associated with any of the entity’s regulatory functions as a self-regulatory organization registered with the SEC.” See id.

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25 See Notice, supra note 5, at 69912. As described below, even with the independence criteria in place, the Plan also requires recusal by the Voting Senior Officer from certain votes.

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26 See Section V(C)(1) of the Plan.

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27 See Section V(B)(4) of the Plan.

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28 Id.

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29 See Notice, supra note 5, at 69912.

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30 The Participants anticipate that Bids must be submitted four weeks after the Commission approves the Plan. See id.

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31 The Plan defines a Qualified Bid as “a Bid that is deemed by the Selection Committee to include sufficient information regarding the Bidder’s ability to provide the necessary capabilities to create, implement, and maintain a consolidated audit trail so that such Bid can be effectively evaluated by the Selection Committee.” See Section I(Q) of the Plan. The Plan provides that, “[w]hen evaluating whether a Bid is a Qualified Bid, each member of the Selection Committee shall consider whether the Bid adequately addresses the evaluation factors set forth in the RFP, and apply such weighting and priority to the factors as such member of the Selection Committee deems appropriate in his or her professional judgment.” See id.

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32 See Notice, supra note 5, at 69912.

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33 See Section VI(B)(1) of the Plan.

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34 See Section VI(B)(2) of the Plan.

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35 See id.

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36 See Sections VI(B)(3)-(4) of the Plan. The Plan provides that, if there is an odd number of Qualified Bids, the number of Shortlisted Bids to be chosen will be rounded up to the next whole number (e.g., if there are thirteen Qualified Bids, seven Shortlisted Bids will be selected). See Section VI(B)(4) of the Plan. In the event of a tie to select the Shortlisted Bids, all such tied Qualified Bids will be Shortlisted Bids. See Section VI(B)(3)(c) of the Plan.

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37 See Section VI(B)(3) of the Plan.

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38 Id. The Plan defines a “Non-SRO Bid” as “a Bid that does not include a Bidding Participant.” See Section I(L) of the Plan.

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39 See Notice, supra note 5, at 69912-13

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40 See Section VI(B)(3)(d) of the Plan.

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41 Id.

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42 See Notice, supra note 5, at 69912.

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43 See Submission Letter, supra note 3, at 7; Section VI(D) of the Plan.

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44 See Section IV(D)(1) of the Plan.

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45 See Notice, supra note 5, at 69913. See Section V(B)(2) of the Plan.

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46 See Section VI(E)(3) of the Plan. Each round of voting throughout the Plan is independent of other rounds.

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47 Id.

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48 See Section VI(E)(4)(b) of the Plan.

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49 See Section V(B)(2) of the Plan.

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50 See Section VI(E)(4)(c) of the Plan.

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51 See Notice, supra note 5, at 69913.

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52 Id.

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53 See supra note 6.

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54 See FINRA Letter at 1; SIFMA Letter at 1; FIF Letter at 1.

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55 See FINRA Letter at 1-2; Anonymous 1 Letter at 1; SIFMA Letter at 1; FIF Letter at 1-2; Anonymous 2 Letter at 1; FIF Letter II at 2-3.

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56 See Response Letter, supra, note 7.

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57 See Sections II and VI(D)(2) of the Plan.

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58 See SIFMA Letter; FINRA Letter; and FIF Letter.

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59 See SIFMA Letter at 1.

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60 Id. at 2-4.

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61 Id. at 3.

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62 Id. at 4-5. In particular, the commenter suggests that the Plan should require the SROs: (1) to document and provide the Advisory Committee with a written statement, explaining the reasons for any SRO rejection of a written recommendation submitted by the committee; and (2) to prepare agendas for meetings and provide documents to be discussed at the meetings in advance to give committee members sufficient time to analyze information and formulate views. Id.

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63 See FINRA Letter at 4. The commenter requests clarification on whether members of the Advisory Committee would be required to sign a non-disclosure agreement (“NDA”) if they are given access to confidential information as part of any consultation with the Selection Committee. Id. at 3-4.

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64 See FIF Letter at 4.

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65 See Response Letter, supra note 7, at 2-4.

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66 Id. The SROs, however, note that the creation of the Advisory Committee that is required by Rule 613(b)(7) (“Rule 613 Advisory Committee”) is not germane to the Plan. The SROs state that the requirement in Rule 613(b)(7) is that the CAT NMS Plan establish an Advisory Committee to advise the SROs on the implementation, operation and administration of the consolidated audit trail. The SROs then state that the Rule 613 Advisory Committee will be established in the CAT NMS Plan, and that the CAT NMS Plan will provide specifics as to the role of the Rule 613 Advisory Committee in the process of reviewing and evaluating Bids. Id. at 2.

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67 Id. at 2-4. The SROs also note their previous engagement with industry through posting industry questions on the CAT NMS Plan Website and conducting open meetings. Id. at n.5.

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68 Id. at 2.

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69 Id. at 3. The SROs note that this information sharing will occur only after executed NDAs are in place with the appropriate industry members. Id. at n. 7.

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70 Id. at 3.

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71 Id.

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72 See FINRA Letter at 1-2; SIFMA Letter at 1-3; FIF Letter at 2-3; FIF Letter II at 2.

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73 See SIFMA Letter at 3.

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74 Id. at 2.

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75 Id.

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76 See FIF Letter at 2-3; and FIF Letter II at 2-3.

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77 See FIF Letter II at 3.

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78 See FIF Letter at 3.

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79 See FIF Letter II at 2-3.

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80 Id. at 2.

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81 See FIF Letter II at 3.

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82 Id.

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83 See Response Letter, supra note 7, at 9.

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84 Id.

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85 Id.

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86 Id.

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87 Id. at 8.

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88 Id.

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89 Id.

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90 See FINRA Letter at 2; SIFMA Letter at 3; FIF Letter at 2.

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91 See FIF Letter at 2.

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92 Id.

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93 See FINRA Letter at 2.

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94 See SIFMA Letter at 3.

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95 See Response Letter, supra note 7, at 4.

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96 Id. at 4-5.

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97 Id. at 5.

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98 Id. at 9.

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99 Id.

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100 See FIF Letter at 2.

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101 See Response Letter, supra note 7, at 10.

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102 Id.

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103 Id.

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104 Id.

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105 Id. The SROs state, however, that consistent with standard industry practices, the SROs will not share the minutes with the industry as a whole. Id.

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106 See FIF Letter at 2.

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107 Id.

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108 See Response Letter, supra note 7, at 8.

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109 Id.

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110 Id. at 4.

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111 See Anonymous 1 Letter at 1; Anonymous 2 Letter at 1.

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112 See Anonymous 1 Letter at 1.

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113 Id.

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114 Id.

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115 See Anonymous 2 Letter at 1. The commenter has submitted an intent to bid on the RFP. Id.

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116 See Response Letter, supra note 7, at 7.

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117 Id.

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118 Id.

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119 Id.

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120 Id.

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121 See FINRA Letter at 4.

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122 Id.

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123 See Response Letter, supra note 7, at 10-11.

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124 See FINRA Letter at 2-3.

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125 Id at 3.

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126 Id at 3.

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127 Id.

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128 See FIF Letter at 4.

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129 See Response Letter, supra note 7, at 6.

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130 Id.

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131 Id.

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132 Id.

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133 Id.

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134 Id.

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135 Id.

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136 See Anonymous 2 Letter at 1; FIF Letter at 5.

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137 See Anonymous 2 Letter at 1.

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138 Id.

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139 Id.

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140 See FIF Letter at 5.

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141 Id.

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142 See Response Letter, supra note 7, at 11-12.

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143 Id. at 12. Any such changes to the due date will be communicated to Bidders as soon as such a decision is made. Id.

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144 Id. at 11.

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145 Id.

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146 See FIF Letter at 2.

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147 Id.

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148 Id.

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149 Id.

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150 See Response Letter, supra note 7, at 7.

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151 Id. at 7-8.

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152 See FINRA Letter at 4.

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153 Id.

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154 Id at 4-5.

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155 See FIF Letter II at 2.

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156 Id.

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157 See Response Letter, supra note 7, at 8.

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158 Id. at 9.

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159 Id. at 9.

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160 Id.

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161 Id.

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162 15 U.S.C. 78k-1(a)(3)(B).

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163 17 CFR 242.608. In approving this Plan, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

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164 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k-1(a).

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165 See SIFMA Letter at 1-5; FINRA Letter at 4; and FIF Letter at 4.

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166 See Response Letter, supra note 7, at 2-4.

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167 Id.

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168 See FINRA Letter at 1-2; SIFMA Letter at 1-3; FIF Letter at 2-3.

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169 See Response Letter, supra note 7, at 4-5.

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170 Id. at 9-10. The Commission further notes that keeping voting information non-public can help address conflicts of interest by limiting the ability of outsiders to observe and reward certain voting behavior.

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171 See Anonymous 1 Letter at 1; Anonymous 2 Letter at 1.

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172 See Response Letter, supra note 7, at 7.

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173 See FIF Letter at 4; FINRA Letter at 2-3.

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174 See Response Letter, supra note 7, at 6.

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175 See Anonymous 2 Letter at 1.

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176 See Response Letter, supra note 7, at 11-12.

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177 See FIF Letter at 5.

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178 See Response Letter, supra note 7, at 11.

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179 Id.

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180 See FIF Letter at 2.

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181 See Response Letter, supra note 7, at 7.

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182 See FINRA Letter at 4-5.

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183 See Response Letter, supra note 7, at 9.

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184 Rule 613(a)(1) required the SROs to file the CAT NMS Plan 270 days from the date of publication of the Adopting Release in the Federal Register. See 17 CFR 242.613(a)(1). The Adopting Released was published on August 1, 2012, thus establishing April 28, 2013 as the initial deadline for the submission of the CAT NMS Plan. See Adopting Release, supra note 8. Since April 28, 2013, was a Sunday, in accordance with Rule 160(a) of the Commission’s Rules of Practice, the deadline for filing the CAT NMS plan was Monday, April 29, 2013. On March 7, 2013, the Commission granted a request from the SROs for a temporary exemption from this deadline until December 6, 2013. See Securities Exchange Act Release No. 69060, 78 FR 15771 (March 12, 2013); and letter to Elizabeth M. Murphy, Secretary, Commission, from Robert L.D. Colby, Executive Vice President and Chief Legal Officer, FINRA, dated February 7, 2013. On December 6, 2013, the Commission granted a second request from the SROs for a temporary exemption from the new deadline until September 30, 2014. See Securities Exchange Act Release No. 71018, 78 FR 75669 (December 12, 2013); and letter to Elizabeth M. Murphy, Secretary, Commission, from Robert L.D. Colby, Executive Vice President and Chief Legal Officer, FINRA, dated November 7, 2013.

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185 15 U.S.C. 78k-1.

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pubdate: 2006-06-01T00:00:00 effdate: 2006-06-01T00:00:00 -

RECORD RETENTION AND LITIGATION HOLDS FOR FINANCIAL INSTITUTIONS

- Topic: Banking Financial Services Review, Record Retention - Compliance User: N/A - Keywords: - Record Retention, - Hold Order, - -

Lending and Financial Institutions Are Subject to a Variety of Federal and State Laws Governing Record Retention in Almost All Their Activities, from Credit Transactions to Insider Loans. Retention Policies Must Include Provisions for "Holds" When Litigation, Audits, or Government Investigations Are Pending or Reasonably Foreseeable.

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By Bruce A. Radke and John B. Thornton*

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This article discusses the standards for record retention and provides an overview of the federal laws relating to record retention for the financial services industry. However, given the significant number of such laws, the list cannot be exhaustive in an article of this length. Also, state statutes and regulations necessarily vary from state to state. This article focuses on federal law but also provides certain examples of state law from one state, Illinois. In addition, this article addresses when a financial institution must institute a litigation hold to preserve documents that may be potentially relevant in pending or reasonably foreseeable litigation, audits or government investigations.

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LEGAL STANDARDS FOR RECORD RETENTION POLICIES

- Topic: Banking Financial Services Review, Record Retention, Legal Standards - Compliance User: N/A - Keywords: - Legal Standards, - Retention Policies, - Statutes of Limitations, - -

A record retention policy formalizes a company’s procedures for maintaining and disposing of records received in the ordinary course of business. There are several important considerations in crafting a record retention policy. First, the policy must be tailored to the legitimate business needs of the financial institution to retain certain records. It is important to remember that statutes and regulations provide only minimum legal record retention requirements. Other considerations, including administrative, operational and fiscal requirements, may necessitate extending retention beyond the minimum statutory and regulatory requirements. In general, records should not be retained for periods beyond their usefulness to the financial institution or beyond the legal requirements for their retention.

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IN THIS ISSUE

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• Record Retention and Litigation Holds for Financial Institutions

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Second, a retention policy must take into account the particular litigation environment faced by the financial institution. A financial institution involved in litigation may rely on a retention policy to demonstrate that a record was legitimately disposed of in accordance with the retention policy. In general, records may be destroyed when done pursuant to a records retention policy that is reasonable and consistently applied.

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Courts have declined to sanction parties for disposing of records in accordance with record retention policies.1 The U.S. Supreme Court in Arthur Andersen LLP v. United States,2 acknowledged the important role that record retention policies play in corporate operations and noted that:

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‘Document retention policies,’ which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.

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(Internal citations omitted.) Id. Citing the Arthur Andersen decision, the Seventh Circuit recently has held that “[t]here is nothing wrong with a policy of destroying documents after the point is reached at which there is no good business reason to retain them.”3

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In its seminal decision in Lewy v. Remington Arms Co., Inc.,4 the Eighth Circuit articulated the standards for record retention policies. The court emphasized that the retention periods must be reasonable considering (1) the facts and circumstances surrounding the relevant records (a three-year retention period may be sufficient for standard company correspondence, but insufficient for records relating to consumer complaints); (2) the frequency and magnitude of similar types of lawsuits such that the company should have known not to dispose of the potentially relevant records; and (3) whether the policy was instituted in bad faith to dispose of potentially harmful records that otherwise would be subject to discovery in litigation.5

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In addition, a record retention policy should take into account relevant statutes of limitations. For example, if a state regulation requires that an employment agreement be maintained for three years following an employee’s departure, but that state has a five-year statute of limitations period for breach of contract actions, then the employee agreement should be kept for at least five years because the agreement may be relevant in future litigation with the employee. Moreover, if a financial institution has branches in more than one state, it may choose the longest statute of limitation that may apply to all branches to have a consistent retention policy. A record retention policy that is consistent for all branches is easier to implement and less likely to lead to instances of erroneous and inconsistent record disposition.

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The failure to preserve records when under a duty to do so can result in significant regulatory sanctions and fines. For example, a financial institution recently was fined $2.1 million by the SEC for failing to preserve e-mail and other electronic records. Improper record destruction also can lead to severe sanctions in litigation, as illustrated by the Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. Inc. case.6 There, a $1.4 billion judgment was entered against a financial institution after it had been sanctioned for failing to preserve and produce certain electronic records.

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RECORD RETENTION PERIODS FOR FINANCIAL INSTITUTIONS

- Topic: Banking Financial Services Review, Record Retention, Retention Period - Compliance User: N/A - Keywords: - Record Retention, - -

Both federal and state statutes and regulations contain record retention requirements. Where requirements overlap, the financial institution must use the longer of the two record retention periods. In some instances, there may be federal record retention regulations in an area where a particular state has no corresponding regulation.

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Lending Statutes and Regulations

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation - Compliance User: N/A - Keywords: - Lending Statutes and Regulation, - -
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Regulation B (Equal Credit Opportunity Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Regulation B - Compliance User: N/A - Keywords: - Application, - Business Credit, - Record Keeping, - Retention Period, - -

The Equal Credit Opportunity Act (the “ECOA”)7 prohibits financial institutions from discriminating on the basis of age, sex, race, color, religion, marital status, or natural origin with respect to any aspect of a credit transaction.

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12 C.F.R. § 202.12(b) provides that a financial institution must retain, in original form or a copy thereof, for a period of 25 months after the institution notifies an applicant of the action taken on an application:

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(i) Any application that it receives, any information required to be obtained concerning characteristics of the applicant to monitor compliance with [the ECOA] ... and any other written or recorded information used in evaluating the application and not returned to the applicant at the applicant’s request;

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(ii) A copy of the following documents if furnished to the applicant in written form (or, if furnished orally, any notation or memorandum made by the creditor):

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(A) The notification of action taken; and

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(B) The statement of specific reasons for adverse action; and

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(iii) Any written statement submitted by the applicant alleging a violation of [the ECOA] or [implementing] regulations.8

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The financial institution must also retain, for a similar time, the following records documenting action taken with respect to existing credit accounts:

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(i) Any written or recorded information concerning the adverse action; and

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(ii) Any written statement submitted by the applicant alleging a violation of [the ECOA] or [implementing] regulations.9

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Records related to an extension of business credit are subject to shorter retention periods. Section 202.12(b)(5) provides:

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With regard to a business with gross revenues in excess of $1,000,000 in its preceding fiscal year, or an extension of trade credit, credit incident to a factoring agreement or other similar types of business credit, the creditor shall retain records for at least 60 days after notifying the applicant of the action taken. If within that time period the applicant requests in writing the reasons for adverse action or that records be retained, the creditor shall retain records for 12 months.10

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The financial institution must retain the information beyond 25 months (12 months for business credit) if it has actual notice that it is under investigation, if it is subject to an enforcement proceeding for an alleged violation of the ECOA, or if the financial institution has been served with notice of a civil action. In such cases, the records are to be retained until final disposition of the matter unless otherwise ordered by the court or agency.11

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Regulation C (Home Mortgage Disclosure Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Regulation C - Compliance User: N/A - Keywords: - Real Estate Lending, - Record Keeping, - Retention Period, - -

The Home Mortgage Disclosure Act (“HMDA”)12 is intended to provide the public with information and disclosures concerning real estate lending practices. Institutions are required to compile and report real estate loan data by census tract regarding applications for, and origi-nations of, home purchase and home improvement loans.13

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Institutions located within metropolitan statistical areas are required to maintain a HMDA loan/application register (HMDA-LAR). The HMDA-LAR is to be submitted to the institution’s regulatory agency annually. The HMDA-LAR consists of data concerning:

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• the race or national origin and gender of the loan applicants;

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• the type and amount of the loans;

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• origination and purchases of home-purchase and home-improvement loans;

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• loan denials;

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• withdrawn applications;

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• applications that were approved but not accepted; and

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• incomplete applications.14

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The institution must retain each HMDA-LAR for a period of three years.15 The disclosure statement prepared by the Federal Financial Institutions Examination Counsel must be available to the public for a period of five years.16

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Bank Secrecy Act

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Bank Secrecy Act - Compliance User: N/A - Keywords: - Bank Transactions, - Financial Institutions, - Record Keeping, - Retention Period, - -

Under the Bank Secrecy Act (“BSA”),17 a financial institution must maintain records of the issuance or sale of monetary instruments (bank check or draft, cashier’s check, money order or traveler’s check) involving currency in amounts of $3,000 to $10,000.18 Such records are to be kept for five years.19

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Additionally, the financial institution must maintain a record of each extension of credit in an amount in excess of $10,000 that is not secured by real property for a period of five years.20 The record must contain the name and address of the person to whom the extension of credit is made, and the amount, nature or purpose, and date of the credit.21 For a period of five years, the financial institution must maintain a record of any transaction resulting in the transfer of currency or other monetary instruments, funds, checks, investment securities, or credit, of more than $10,000 to or from any person, account, or place outside the United States.22

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Financial institutions are required to collect certain information in connection with all wire transfers in excess of $3,000.23 Such information is to be retained for five years.24 The information to be collected and retained depends upon: (1) the type of financial institution; (2) the role in the wire transfer (originator, intermediary or beneficiary); (3) the amount of the wire transfer; and (4) the relationship of the parties to the transaction with the financial institution.25

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Records of each customer’s taxpayer identification number for each certificate of deposit sold or redeemed, or each deposit or share account opened must also be maintained by banks.26 Banks are also required to keep a number of specific documents relating to deposit accounts and currency transfers.27 Such records are to be kept for five years.28

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Regulation Z (Truth in Lending Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Regulation Z - Compliance User: N/A - Keywords: - Credit Application, - Credit Solicitation, - Record Keeping, - Retention Period, - -

The Truth in Lending Act (“TILA”)29 addresses a broad range of credit transactions. It imposes a variety of disclosure requirements intended to ensure that consumers are adequately informed concerning the terms of a credit transaction. The disclosures are also designed to facilitate comparison of the terms of different credit offers.

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The TILA requires financial institutions to retain records evidencing compliance with the disclosure provision of the act and involves the materials that must be provided to the consumer at the time of the credit application or solicitation. Consumers obtaining charge card accounts must receive disclosures identifying the annual percentage rate, various fees, minimum finance charges; and any grace period provided.30

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Financial institutions must also provide the consumer with a periodic statement that includes the previous balance of the account, identification of transactions, the amount of the finance charge, and the billing dispute address.31 Certain types of credit plans secured by the consumer’s home require the lender to disclose the following: that the consumer’s home could be lost in the event of default, payment terms, and an itemization of fees.32 The lending institution must provide disclosures concerning variable interest-rate adjustment at least once each year during which an interest-rate adjustment is implemented without an accompanying payment change, and at least 25, but no more than 120, calendar days before payment at a new level is due.33

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12 C.F.R. § 225.25 provides that creditors shall retain evidence of compliance with the TILA for two years after disclosures are required to be made or acts are required to be taken.34 However, the relevant administrative agencies may require creditors to keep records for a longer period if necessary to carry out their enforcement responsibilities.35

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Real Estate Settlement Procedures Act

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Real Estate Settlement Procedures Act - Compliance User: N/A - Keywords: - Credit Transactions, - Uniform Settlement Statement, - Applicant's Acknowledgments, - Record Keeping, - Retention Period, - -

The Real Estate Settlement Procedures Act (“RESPA”)36 requires that institutions provide consumers with specific information concerning credit transactions involving federally related mortgage loans. RESPA requires that a number of disclosures be provided to the consumer prior to settlement.

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A Uniform Settlement Statement (HUD-1 or HUD-1A) sets forth settlement charges in connection with either the purchase or the refinancing (or other subordinate lien transaction) of family residential property. 24 C.F.R. § 3500.10(e) provides:

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The lender shall retain each completed HUD-1 or HUD-1A and related documents for five years after settlement, unless the lender disposes of its interest in the mortgage and does not service the mortgage. In that case, the lender shall provide its copy of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as a part of the transfer of the loan file. Such owner or servicer shall retain the HUD-1 or HUD-1A for the remainder of the five-year period.37

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Records relating to RESPA’s prohibition against kickbacks and unearned fees must be kept for five years from the date of execution.38 Likewise, records required under 24 C.F.R. § 3500.15 involving “affiliated business arrangements”39 are to be retained for five years from the date of execution.40 Financial institutions servicing loans covered by RESPA must keep records reflecting the handling of each borrower’s escrow account for a period of at least five years after the institution has last serviced the escrow account.41

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The Servicing Disclosure Statement and Applicant Acknowledgment informs the consumer:

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• whether the servicing of the loan will be assigned, sold, or transferred to any other person at any time while the loan is outstanding; and

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• of the percentages of mortgage servicing loans originated by the institution in each calendar year for which servicing has been assigned, sold, or transferred for that calendar year.42

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Under 24 C.F.R. § 3500.21(c)(3), the signed Applicant Acknowledgments must be retained for a period of five years after the date of settlement as part of the loan file for every settled loan. There is no requirement for retention of Applicant Acknowledgments if the loan is not settled.43

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In addition, institutions are required to provide consumers with a good-faith estimate of the amount of or range of charges for the specific settlement services that the consumer is likely to incur in connection with the mortgage loan.44 The regulations do not specifically require institutions to retain a copy of the good-faith estimate that must be provided to the consumer under RESPA. However, the reference to “related documents” made in 24 C.F.R. 3500.10(e) could include these estimates. Institutions should consider retaining these documents, in addition to the HUD-1 and HUD-IA, to avoid challenges.

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Regulation M (Consumer Leasing Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Regulation M - Compliance User: N/A - Keywords: - Lease, - Record Keeping, - Retention Period, - -

The Consumer Leasing Act (“CLA”)45 requires that lessees of personal property be supplied with information that will enable the lessees to compare the terms of different leases. 12 C.F.R. § 213.8 provides that a lessor shall retain evidence of compliance with the requirements imposed by the CLA for a period of not less than two years after the date disclosures are required or an action is required to be taken.46

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Regulation BB (Community Reinvestment Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Regulation BB - Compliance User: N/A - Keywords: - Community Loan, - Retention Period, - -

The Community Reinvestment Act (“CRA”)47 is designed to evaluate a financial institution’s efforts to service the lending needs in its delineated community by using the institution’s loan data to identify the entities and areas to which the institution has or has not extended credit. Documents required to be maintained by the CRA (the financial institution’s CRA disclosure statement and CRA file)48 are amended on a regular basis, and generally only the most recent version must be retained. However, under 12 C.F.R. § 228.43, institutions must retain written public comments and the HMDA disclosure statement for each of the past two years in their CRA file.49

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National Credit Union Administration

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, National Credit Union Administration - Compliance User: N/A - Keywords: - Federal Credit Unions, - Retention Period, - -

The National Credit Union Administration governs the lending practices of federal credit unions, which are specifically prohibited from relying upon real estate appraisals that are based upon consideration of discriminatory factors. The retention period for records required under this regulation are essentially the same as those provided for under Regulation B: 25 months, measured from the time the applicant has received notice from the federal credit union of the action taken on the real estate loan application.50

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Flood Disaster Protection Act

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Flood Disaster Protection Act - Compliance User: N/A - Keywords: - Loan, - Retention Period, - Record Keeping, - -

Under the Flood Disaster Protection Act,51 Standard Flood Hazard Determination Forms, in either hard copy or electronic form, are to be retained for the period of time that the bank owns the loan.52 A written notice shall be provided to the borrower when a savings association makes, increases, extends, or renews a loan secured by a building or a mobile home located, or to be located, in a special flood hazard area. The savings association shall retain a record of the receipt of the notices by the borrower for the period of time the savings association owns the loan.53

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38 I.A.C. § 1075.430 Maintenance of Records (Illinois)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Lending Statutes and Regulation, Maintenance of Records - Compliance User: N/A - Keywords: - Loan Application, - Savings Banks, - Retention Period, - Record Keeping, - -

Illinois savings banks are to retain all loan applications and supporting documentation for the life of the loan, whether or not the loan is secured by real estate. Illinois banks are to retain rejected loan applications for 36 months following such rejection. Illinois savings banks must maintain all loan registers permanently.54

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Retention of Records for Deposit Accounts and Bank Administration

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Retention of Records for Deposit Accounts and Bank Administration - Compliance User: N/A - Keywords: - Record Retention, - -
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Regulation DD (Truth in Savings Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Regulation DD - Compliance User: N/A - Keywords: - Disclosure of Interests, - Consumer Savings Accounts, - -

The regulations governing record retention under the Truth in Savings Act (“TISA”)55 are set forth in 12 C.F.R. Part 230. The TISA provides comprehensive guidelines governing consumer savings accounts, including requirements concerning the calculation and disclosure of interest payments made to depositors.

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Depository institutions must retain evidence of compliance with TISA for a minimum of two years after the date disclosures are required to be made or action is required to be taken.56 The retention period may be extended in the event that enforcement proceedings are initiated against the institution.57

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Regulation CC (Availability of Funds and Collection of Checks)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Regulation CC - Compliance User: N/A - Keywords: - Checking Transactions, - Investigation, - -

Regulation CC governs the time frames in which financial institutions may process checking transactions and provide consumers with access to their funds on deposit.58 Financial institutions must retain records evidencing compliance with Regulation CC for a minimum of two years.59 If a bank has actual notice that it is being investigated, is subject to an enforcement proceeding, or has been served with notice of an action filed, the bank must retain the records pertaining to the action or proceeding pending final disposition of the matter.60

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Regulation E (Electronic Funds Transfer Act)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Regulation E - Compliance User: N/A - Keywords: - Electronic Funds Transfer, - Disclosure of Terms, - Compliance Records, - -

Regulation E establishes the rights, liabilities, and responsibilities of parties to electronic funds transfer (EFT) systems such as automated teller machine transactions, telephone bill payment services, point-of-sale terminal transfers, and preauthorized transfers from consumer accounts (i.e., direct deposit).61 In general, lending institutions are required to provide consumers with disclosures that identify the terms and conditions of the EFT services and specific transactions.

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Records that are evidence of compliance with Regulation E are to be kept for two years from the date the disclosures are to be made. The retention period can be extended with actual notice of an investigation or enforcement proceeding concerning an alleged violation. In that case, records are to be maintained until final disposition of the matter.62

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Regulation O (Loans to Bank Executive Officers, Directors, and Principal Shareholders)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Regulation O - Compliance User: N/A - Keywords: - Insider's Credit, - Record Keeping, - -

Regulation O imposes limitations upon a bank’s ability to extend credit to identified insiders.63 The regulation applies to any extension of credit by any federally insured bank to any executive officer, director, or principal shareholder of the bank, of its parent company or of any other subsidiary of its parent company. Regulation O requires that annual surveys and records of all loans to bank insiders be retained for three years.64

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Regulation S, Subpart B (Funds Transfers and Transmittals of Funds)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Regulation S - Compliance User: N/A - Keywords: - Domestic Funds Transfers, - International Funds Transfers, - Record Keeping, - -

Subpart B to Regulation S requires financial institutions to maintain records of domestic and international funds transfers if it is determined that such records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.65 Separate but similar regulations apply to funds transfers by banks and transmittals of funds by non-bank financial institutions.66 12 C.F.R. § 219.24 provides that all records that are required to be retained by this regulation shall be retained for five years.67

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38 I.A.C. § 1075 Maintenance of Corporate Books and Records (Illinois)

- Topic: Banking Financial Services Review, Record Retention, Retention Period, Deposit Accounts and Bank Administration, Maintenance of Records - Compliance User: N/A - Keywords: - Corporate Books, - Corporate Records, - Record Keeping, - -

The Illinois Administrative Code provides record retention periods with regard to the access of the state banking commissioner to bank subsidiaries’ and holding companies’ books and records,68 annual audits of corporate books and records by an independent licensed public accountant,69 and general maintenance of corporate books and records.70 For all three types of records, the retention period is seven years.

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LITIGATION HOLDS

- Topic: Banking Financial Services Review, Record Retention, Litigation Holds - Compliance User: N/A - Keywords: - Preservation Order, - Hold Order, - Retention Period, - Effective Litigation Hold, - -

Developing and implementing a retention policy that maintains records for the minimum retention periods required by law is a first, but not the last, step. A well-designed record retention policy should also take into account the possibility of litigation. When a financial institution is involved in litigation or reasonably expects that litigation may occur, it must put a “litigation hold” on all documents that are relevant to that litigation. A litigation hold, also known as a “preservation order” or “hold order,” is a process used by financial institutions and other companies to advise their employees of pending or anticipated litigation and of their obligation to preserve relevant records and to suspend their normal records-destruction policies as they relate to potentially relevant records.

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Several recent court decisions demonstrate the severe sanctions companies face for destroying documents during litigation and underscore the need to implement and comply with litigation holds. For example, in Zubulake v. UBS Warburg, LLC,71 the court ruled that a party must take affirmative steps to preserve documents, including: (1) issuing a litigation hold at the outset of the litigation or whenever litigation is reasonably anticipated such that all sources of discoverable information are identified and retained; (2) communicating the litigation hold directly to all key employees; (3) repeating the litigation hold instructions; (4) monitoring compliance with the litigation hold; and (5) instructing all employees to produce potentially relevant documents in their files.72

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Developing, implementing and managing an effective litigation hold as part of a company’s overall record retention policy is therefore essential. An effective record retention policy minimizes the records retained to the minimum required to meet a financial institution’s legal requirements and operational needs. As a result, financial institutions significantly reduce the inconvenience and expense involved in responding to discovery requests in litigation. A record retention policy that includes a litigation hold component also is an invaluable tool to demonstrate a financial institution’s good faith and reasonable efforts to comply with its discovery obligations.

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Proactive coordination and planning among corporate counsel, outside counsel and IT/IS personnel are necessary to design and implement a litigation hold that is ready to respond effectively when needed. An effective litigation hold should include:

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• An enterprise-wide record retention policy that includes a litigation hold component to allow for the immediate suspension of the disposition of hardcopy and electronic records, including e-mail, that may be potentially relevant in pending or reasonably anticipated litigation;

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• The identity of employees to be notified of the litigation hold, a standard notice and an acknowledgement procedure for affected employees;

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• Specific steps and assignments for preserving back-up tapes, archiving e-mails, and, if necessary, notifying third-party vendors;

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• A method for monitoring compliance with any litigation hold in effect;

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• Periodic follow-ups with company employees to reiterate the litigation hold instructions, and procedures for notifying new employees of the litigation hold; and

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• A procedure for rescinding the litigation hold, notifying necessary third-party vendors, and restoring the record retention schedule for disposition of records.

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CONCLUSION

- Topic: Banking Financial Services Review, Record Retention, Conclusion - Compliance User: N/A - Keywords: - Retention Policy, - Compliance, - Failure to comply, - -

Retention of records demonstrating compliance with federal and state regulations coupled with adequate litigation hold procedures are essential for lending and financial institutions. The failure to implement a legally compliant record retention policy and litigation hold procedures may expose financial institutions to significant risk. ■

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* BRUCE A. RADKE and JOHN B. THORNTON are with Vedder, Price, Kaufman & Kammholz, P.C. in Chicago. Mr. Radke is a member of Vedder Price’s litigation practice and regularly counsels clients, including financial institutions, on enterprise-wide record management programs, litigation hold procedures and electronic communications policies. Mr. Thornton, an associate and member of the firm’s litigation practice, counsels clients on a variety of record retention and disposition issues.

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1. See, e.g., Morris v. Union Pac R.R., 373 F.3d 896 (8th Cir. 2004) (district court erred in giving adverse inference instruction where defendant erased audiotape in accordance with its standard 90-day retention policy); Stevenson v. Union Pac. R.R., 354 F.3d 739, 747 (8th Cir. 2004) (“Where a routine document retention policy has been followed ... there must be some indication of an intent to destroy the evidence for the purpose of obstructing or suppressing the truth in order to impose the sanction of an adverse inference instruction.”); United States v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th Cir. 2002) (affirming trial court’s finding of no spoliation of evidence where the defendants destroyed records in the normal course of business pursuant to an established retention policy); Park v. City of Chicago, 297 F.3d 606, 614-16 (7th Cir. 2002) (affirming district court’s refusal to issue adverse inference jury instruction where the records were disposed of in good faith pursuant to a routine records expungement policy, despite the plaintiffs’ contention that the destruction of certain records violated an EEOC record retention regulation that required the records to be retained for at least one year); Hynix Semiconductor, Inc. v. Rambus Inc., No. C-00-20905 RMW (N.D. Cal. Jan. 4, 2006) (adoption of record retention policy was a “permissible business decision” and policy was not implemented in advance of reasonably foreseeable litigation for the purpose of destroying relevant information).

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2. Arthur Andersen LLP v. United States, —- U.S. ——, at ——, 125 S.Ct. 2129, 2135, 161 L.Ed.2d 1008, 2005 WL 1262915, at *5 (May 31, 2005).

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3. Fidelity Nat. Title Ins. Co. of New York v. Intercounty Nat. Title Ins. Co., 412 F.3d 747, 750 (7th Cir. 2005).

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4. 836 F.2d 1104, 1112 (8th Cir. 1988).

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5. Id.; See also Stevenso., 354 F.3d at 746; Brown v. Sandals Resorts Int’l, 284 F.3d 949, 955 (8th Cir. 2002) (approving pattern jury instructions that adopted the Lewy standards); United States v. Taber Extrusions L.P., No. 4:00C V00 255, 2001 WL 1941318 (E.D. Ark., Dec. 27, 2001) (citing the Lewy standards in denying a motion for sanctions where the documents were disposed of in accordance with a records retention policy).

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6. 2005 WL 679071 (Fla. Cir. Ct. March 1, 2005) and 2005 WL 674885 (Fla. Cir. Ct. March 23, 2005).

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-
fn -

7. 15 USC § 1691, et seq.

-
-
fn -

8. 12 C.F.R. § 202.12(b)(1).

-
-
fn -

9. 12 C.F.R. § 202.12(b)(2).

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-
fn -

10. 12 C.F.R. § 202.12(b)(5).

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-
fn -

11. 12 C.F.R. § 202.12(b)(5).

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-
fn -

12. 12 U.S.C. § 2801, et seq.

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-
fn -

13. 12 C.F.R. §§ 203.4 and 203.5.

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-
fn -

14. Id.

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-
fn -

15. 12 C.F.R. § 203.5(d).

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-
fn -

16. Id.

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-
fn -

17. 31 U.S.C. § 5311, et seq.

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-
fn -

18. 31 C.F.R. § 103.29.

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-
fn -

19. 31 C.F.R. §§ 103.29(c) and 103.38.

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-
fn -

20. 31 C.F.R. §§ 103.33(a) and 103.38.

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-
fn -

21. 31 C.F.R. §§ 103.33(a).

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-
fn -

22. 31 C.F.R. §§ 103.33(b) and 103.38.

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-
fn -

23. 31 C.F.R. §§ 103.33(e), (f), and (g).

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-
fn -

24. 31 C.F.R. §§ 103.38.

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-
fn -

25. 31 C.F.R. §§ 103.33(e), (f), and (g).

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-
fn -

26. 31 C.F.R. § 103.34(a).

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-
fn -

27. 31 C.F.R. § 103.34(b).

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-
fn -

28. 31 C.F.R. § 103.38.

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-
fn -

29. 15 U.S.C. § 1601, et seq.

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-
fn -

30. 12 C.F.R. § 226.5a.

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-
fn -

31. 12 C.F.R. § 226.7.

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-
fn -

32. 12 C.F.R. § 226.5b.

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-
fn -

33. 12 C.F.R. § 226.20(c).

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-
fn -

34. 12 C.F.R. § 226.25(a).

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-
fn -

35. 12 C.F.R. § 226.25(a).

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-
fn -

36. 12 U.S.C. § 2600, et seq.

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-
fn -

37. 24 C.F.R. § 3500.10(e).

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-
fn -

38. 24 C.F.R. § 3500.14(h).

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-
fn -

39. An “affiliated business arrangement” is defined as “the relationship among business entities where one entity has effective control over the other by virtue of a partnership or other agreement or is under common control with the other by a third entity or where an entity is a corporation related to another corporation as parent to subsidiary by an identity of stock ownership.” 24 C.F.R. § 3500.15(c)(2).

-
-
fn -

40. 24 C.F.R. § 3500.15(d).

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-
fn -

41. 24 C.F.R. § 3500.17(l).

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-
fn -

42. 24 C.F.R. § 3500.21.

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-
fn -

43. 24 C.F.R. § 3500.21(c)(3).

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-
fn -

44. 24 C.F.R. § 3500.7.

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-
fn -

45. 15 U.S.C. § 1667, et seq.

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-
fn -

46. 12 C.F.R. § 213.8.

-
-
fn -

47. 12 U.S.C. § 2901, et seq.

-
-
fn -

48. 12 C.F.R. §§ 563e. 42 and 563e.43.

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-
fn -

49. 12 C.F.R. § 228.43(b).

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-
fn -

50. 12 C.F.R. § 701.31(c)(5).

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-
fn -

51. 42 U.S.C. § 4001, et seq.

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-
fn -

52. 12 C.F.R. § 572.6(b).

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-
fn -

53. 12 C.F.R. § 572.9(d).

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-
fn -

54. Ill. Admin. Code tit. 38 § 1075.430.

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-
fn -

55. 12 U.S.C. § 4301, et seq.

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-
fn -

56. 12 C.F.R. § 230.9(c).

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-
fn -

57. Id.

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-
fn -

58. 12 C.F.R. § 229.

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-
fn -

59. 12 C.F.R. § 229.21(g).

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-
fn -

60. Id.

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-
fn -

61. 12 C.F.R. § 205.

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-
fn -

62. 12 C.F.R. § 205.13(b).

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fn -

63. 12 C.F.R. § 215.

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-
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64. 12 C.F.R. §§ 215.8 and 215.22(d).

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-
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65. 12 C.F.R. § 219.23.

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-
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66. 31 C.F.R. § 103.33.

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-
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67. 12 C.F.R. § 219.24.

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-
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68. Ill. Admin. Code tit. 38 § 1075.1285.

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-
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69. Ill. Admin. Code tit. 38 § 1075.1290.

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-
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70. Ill. Admin. Code tit. 38 § 1075.1295.

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-
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71. 229 F.R.D. 422 (S.D.N.Y. 2004).

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-
fn -

72. Id., at 439 See also United States v. Philip Morris USA Inc., 2004 U.S. Dist. LEXIS 13580 (D.D.C., July 21, 2004) (sanctioning defendant $2.75 million for violating a court order to preserve potentially relevant documents where defendant routinely destroyed e-mails and other electronic records while the action was pending); Broccoli v. Echostar Communications, Corp., 229 F.R.D. 506, 510-13 (D. Mary. 2005) (sanctioning employer for spoliation of evidence due to its failure to suspend its normal, automatic e-mail and data deletion policy despite being placed on notice of potential litigation).

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pubdate: November 30, 2017 effdate: N/A -

FINANCIAL INFORMATION FORUM

- Topic: SEC Comment Letter, FIF, Consolidated Audit Trail - Compliance User: 24448b92-78bb-48a5-8335-8e24f7e09a26 - Keywords: - FIF, - SEC, - CAT NMS plan, - -

5 Hanover Square

-

New York, New York 10004

-

212-422-8568

-

Via Electronic Delivery

-

Brett Redfearn, Director, Division of Trading and Markets

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Securities and Exchange Commission

-

100 F Street, NE,

-

Washington, DC 20549‐1090

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Michael Simon, CAT NMS Plan Chair on behalf of CAT NMS Plan Operating Committee

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30 Rockefeller Plaza

-

New York, N.Y. 10112

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November 30, 2017

-

Re: Revised Plan for Consolidated Audit Trail Industry Member Reporting

-

Dear Mr. Redfearn and Mr. Simon,

-

The Financial Information Forum (“FIF”)1 respectfully requests guidance from the Securities and Exchange Commission (“SEC”) and the CAT NMS Plan Operating Committee on updates which need to be made to the plan and milestones for Industry Member reporting to the Consolidated Audit Trail (“CAT”).

-

The CAT NMS Plan2 specified that Large Industry Member reporting of order data was required to begin on November 15, 2018, 24 months after effective date. The Plan also specified that the Plan Processor was required to publish Technical Specifications for Industry Member submission of order data no later than 1 year (November 15, 2017) before Industry Members were required to begin reporting data to the Central Repository3. The milestone for publishing the Technical Specifications for Industry Member submission of order data has not been met, meaning that commencement of Large Industry Member Reporting cannot begin as specified in the CAT NMS Plan because implementation cannot be achieved in less than one year.4

-

FIF reviewed the Draft CAT Reporting Technical Specifications for Industry Members5, and provided extensive comments6 to Thesys CAT and the Operating Committee on the issues and problems identified. No feedback has been provided, nor has FIF been able to schedule any dialog sessions with Thesys CAT or the Operating Committee to resolve the identified problems, including the need for interpretive guidance from the regulators. The draft specification also encapsulated a broader scope of reporting requirements than specified in Rule 613, thus introducing further challenges to implementation. In FIF’s opinion, it will take considerable time and effort to transform this Draft specification into a complete Final Specification that could be used by the industry for its CAT implementation.

-

As a result of the current state, Industry Members risk losing momentum in their own implementation efforts to complete CAT reporting. Industry Members are juggling their own analysis and development efforts for CAT and other projects. This uncertainty in the CAT Industry Member reporting timeframe introduces challenges to staffing, budgeting and technology project portfolio planning – all important activities at end of year. We ask that the SEC and the Operating Committee provide a revised plan and milestones for Industry Member CAT reporting to eliminate this project uncertainty.

-

Furthermore, FIF believes this is an opportune time to improve the implementation of CAT in addition to achieving the goals of SEC Rule 613 and the CAT NMS Plan. FIF stands ready to assist in crafting a viable plan and schedule that would include key elements previously identified in FIF comment letters7, such as: iterative reviews of complete specifications, definition of an implementation schedule following publication of Final Technical Specifications, extended testing period including a coordinated industry-wide test, achievement of quality exit criteria prior to launch, phasing of functionality, pilot period during duplicative reporting (OATS and CAT) to facility OATS retirement. We are ready to enter a dialog to resolve the identified problems with the Draft specification and suggest alternative approaches to the current plan that could yield more simple and straightforward design and interfaces, while still achieving the Rule 613 regulatory objectives.

-

FIF recognizes that the focus of the SEC and Operating Committee today may not be on Industry Member reporting. Having said that, our members seek immediate guidance on target dates for when the plans and milestones for Industry Member reporting will be addressed. FIF offers our assistance to the SEC and Operating Committee as we all work together to advance this important regulatory reporting infrastructure to completion.

-

Sincerely,

- -

William H. Hebert, Managing Director

-

Financial Information Forum

-

cc: The Honorable Jay Clayton, Chair, SEC

-

The Honorable Kara Stein, Commissioner, SEC

-

The Honorable Michael Piwowar, Commissioner, SEC

-

Mr. Gary Goldsholle, Deputy Director, Division of Trading and Markets, SEC

-

Mr. David S. Shillman, Associate Director, Division of Trading and Markets, SEC

-

Self-Regulatory Organizations; BATS Exchange, Inc., BATS Y-Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Miami International Securities Exchange, LLC, NASDAQ OMX BX, Inc., The Investors Exchange, NASDAQ OMX PHLX, LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE Arca, Inc., NYSE MKT LLC.

-
fn -

1 FIF (www.fif.com) was formed in 1996 to provide a centralized source of information on the implementation issues that impact the securities industry across the order lifecycle. Our participants include trading and back office service bureaus, broker-dealers, market data vendors and exchanges. Through topic-oriented working groups, FIF participants focus on critical issues and productive solutions to technology developments, regulatory initiatives, and other industry changes.

-
-
fn -

2 SEC Release No. 34-79318; File No. 4-698 Joint Industry Plan; Order Approving the National Market System Plan Governing the Consolidated Audit Trail, Exhibit A (CAT NMS Plan), November 15, 2016.

-
-
fn -

3 CAT NMS Plan, Appendix C, C.10.b, Submission of Order and MM Quote Data to Central Repository (SEC Rule 613(a)(1)(x))

-
-
fn -

4 FIF has commented that the 12 month implementation period defined in the CAT NMS Plan is insufficient to build and test the CAT complex interfaces and produce the low error rates as required in the Plan; See letter from Mary Lou VonKaenel, Managing Director, FIF to Brent Fields, Re: SEC Release No. 34-77724, July 18, 2016.

-
-
fn -

5 Draft CAT Reporting Technical Specifications for Industry Members, Draft V0.1, September 1, 2017.

-
-
fn -

6 Letter from William Hebert Managing Director, FIF to Mr. Ed Watson, et.al., Re: DRAFT CAT Reporting Technical Specifications for Industry Members DRAFT V0.1, dated September 1, 2017, September 25, 2017 and October 16, 2017.

-
-
fn -

7 See, e.g. letters from Mary Lou VonKaenel’s Managing Director, FIF to Brent Fields, Re: SEC Release No. 34-77724; File No. 4-698; Consolidated Audit Trail National Market System Plan; July 18, 2016; William Hebert Managing Director, FIF to SROs, Milestone for Participants’ rule change filings to eliminate/modify duplicative rules, April 12, 2017; William Hebert Managing Director, FIF to Brett Redfearn, Re: File No. SR-FINRA-2017-013 Response to Comments, November 2, 2017.

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-
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pubdate: July 28, 2010 effdate: N/A -

SEC Comment Letters (SEC Release 34-62174)

- Topic: SEC Comment Letter, File Number S-­‐7-­11-‐10, Consolidated Audit Trail, Release No. 34-‐62174 - Compliance User: Securities and Exchange Commission/Self-Regulatory Organization - Keywords: - FIX Protocol, - Consolidated Audit Trail System, - -

28 July 2010

-

Securities and Exchange Commission

-

100 F Street, NE

-

Washington, DC 20549-1090

-

File Number S-7-11-10, Consolidated Audit Trail, Release No. 34-62174

-

Re: Recommendation to Use FIX Protocol in Consolidated Audit Trail System

-

Dear Sir or Madam:

-

I work as a consultant to the electronic trading industry with my company Aditat. Previous to this, I was President of Orc Software North America and President of Cameron Systems. I was co-chair of the FIX Protocol Americas Committee and member of the Global Steering Committee 2005-2007.

-

My submission is limited to only the data protocol used and is a recommendation that the SEC mandates that the FIX data protocol be used for the proposed Consolidated Audit Trail System.

-

The Financial Information Exchange (FIX) protocol is an industry driven protocol for electronic trading. It is now the global industry standard and has been a great success within the securities industry in the last 15 years. FIX is used in equities, foreign exchange, fixed income, commodities, and derivative markets. FIX is used by the buy side, sell side and exchanges. It is a global standard, being the dominant protocol in all major European and most major Asian markets. Its usage is governed by the industry run non-profit FIX Protocol Ltd (http://www.fixprotocol.org). A list of buy and sell side members, plus exchanges, is available at http://www.fixprotocol.org/members/. Please note that though this list is large it is not exhaustive, as firms do not need to be a member to use the protocol.

-

Nearly all pre-trade, trade, and some post-trade messages that are sent between the buy side, sell side and exchanges are sent using the FIX protocol. FIX is used for indications of interest, quotes, orders, basket/list orders, cancel/replace orders, executions and allocations. Many brokers also use the FIX protocol for routing messages within their organization. The FIX protocol already captures most of the information that the Consolidated Audit Trail System hopes to capture, including timestamp, side, quantity, type of order, client order ID, account, order handling instructions, desk received, and stock locate for short sales. If any extra data needs to be captured for the Consolidated Audit Trail System this can be easily done by adding new fields to the protocol, which the FIX Protocol organization often does.

-

The advantages of using the FIX Protocol for the Consolidated Audit Trail System are:

-

a. Lower Costs to the Industry – Buy side, sell side and exchanges already communicate and store messages using the FIX protocol. Costs to develop systems to store and communicate trading information to the SEC or SROs would be lower using FIX as the data already exists in a suitable format today.

-

b. Less Error and Easier Auditing – As records are currently kept using the FIX protocol, if any other protocol is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data.

-

c. Real Time – All FIX messages are generated in real time for trading. The SEC could more easily attain a real time reporting system by using FIX.

-

d. Ability to Co-ordinate Across Derivative Markets and Globally – Market events such as the May 6 flash crash require looking at not just historical equity data but also data from equity derivative markets and international markets. As the FIX protocol is dominant in other asset classes and derivative markets including equity index futures, equity futures, equity options, and global markets, regulators can more easily gain a broader view.

-

e. Ability to Use Established Knowledge and Vendor Base – All buy side and sell side firms and exchanges today have experience working with the FIX protocol. There are thousands of business analysts, developers and consultants with in depth experience. There are hundreds of suppliers with products that communicate, monitor and manage the FIX protocol. These products range from free open source to robust vendor solutions. Using the FIX protocol will allow the SEC, SROs and firms to use this established experience and vendor base.

-

Currently some of the scope of the Consolidated Audit Trail System is captured in FINRA’s Order Audit Trail System (OATS) and the NYSE’s Order Tracking System (OTS). It is worthwhile to use many of the processes around data requested and the data transmission between brokers and the SRO from these systems. However the advantage of moving to FIX protocol instead of using one of the custom data protocols that these systems use is that the data is first in FIX and therefore requires no translation ensuring accuracy. FIX is in real time, while these custom data protocols are used for end of day reporting. Using a custom data protocol means that the data will not be as easily compared with data from derivatives and international markets that use FIX. And using a custom protocol will forever silo understanding of the data in the protocol within the limited number of people who focus on regulatory and compliance issues at securities firms. The entire global securities industry uses FIX, while only the regulatory and compliance departments at US equity brokers understand the OATS or OTS data format.

-

FIX is currently used to support regulations from FINRA, CFTC, SEC and internationally from the Investment Industry Regulatory Organization of Canada

-

(IIROC) and the Australian Securities and Investment Commission (ASIC). An overview of this regulatory support is at: http://www.fixprotocol.org/regulations/.

-

For clarity, the FIX protocol has two parts. The application layer governs the data format (what the data looks like) and is what this recommendation is focused on. The session layer governs the transport of the messages (how the messages are sent between firms). While the session layer could be used for sending the messages from firms to the SRO, there may be other ways of sending the messages that are just as suitable.

-

Thank you for consideration of this submission.

-

Sincerely,

-

Martin Koopman

-

martink@aditat.com

-

+1 917 3885775

-

137 West 78th Street

-

New York, NY 10024

-
- \ No newline at end of file diff --git a/spider/files/data000029.html b/spider/files/data000029.html deleted file mode 100644 index 4182ee6..0000000 --- a/spider/files/data000029.html +++ /dev/null @@ -1,391 +0,0 @@ - - jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: SEC Exemptive Relief (SEC Release 34-69060) - document_type: Reliefs - source: US/SEC/Reliefs/Exemptive Relief - source_type: Exemptive Relief - language: English - citation: SEC Exemptive Relief (SEC Release 34-69060) -
pubdate: March 07, 2013 effdate: N/A -

SEC Exemptive Relief (SEC Release 34-69060)

- Topic: SEC Release, Release No. 34-69060), Exemptive Relief - Compliance User: Self-Regulatory Organization - Keywords: - Sec Rule 613, - FINRA, - SRO, - NMS Plan, - Exemptive Order, - Request Letter, - Exchange Act - Section 36, - -

SECURITIES AND EXCHANGE COMMISSION

-

(Release No. 34-69060)

-

Order Granting a Temporary Exemption Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 from the Filing Deadline Specified in Rule 613(a)(1) of the Exchange Act

-

March 7, 2013

-

Rule 613(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)1 requires the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the seventeen registered national securities exchanges (collectively, the “SROs”) to “jointly file on or before 270 days from the date of publication of the Adopting Release [for Rule 613 of the Exchange Act2] in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by [the rule].” The Adopting Release for Rule 613 was published in the Federal Register on August 1, 2012,3 thus requiring the national market system plan (the “NMS plan”) to be filed on or before April 28, 2013.4 On February 8, 2013, the Commission received a request from the SROs, pursuant to Rule 0-12 under the Exchange Act,5 that the Securities and Exchange Commission (“Commission”) grant a temporary exemption under Section 36 of the Exchange Act,6 from the deadline specified in Rule 613(a)(1) of the Exchange Act7 for submitting the NMS plan to the Commission.8

-

In the Request Letter, the SROs noted that Rule 613 requires that they include in the NMS plan “cost estimates for the proposed solution, and a discussion of the costs and benefits of alternative solutions considered but not proposed.”9 They also noted that Rule 613 requires that the NMS plan include a discussion of “[t]he process by which the [SROs] solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the [SROs] took such views into account in preparing the [NMS plan].”10

-

In order to satisfy these requirements, the SROs believe that conducting a request for proposal (“RFP”) process is necessary prior to filing an NMS plan. The SROs believe that such a process will ensure that potential alternative solutions for creating the consolidated audit trail can be presented to the SROs for their consideration, and will provide the SROs with information necessary to prepare a detailed cost/benefit analysis as required by Rule 613. To ensure that the RFP process is effective, the SROs believe the concepts that will be contained in the RFP should be subject to public comment before the document is finalized and formally published. The SROs believe that public comment will ensure that the RFP addresses areas of concerns to the industry and the SROs, and will also provide potential bidders with information on the RFP prior to its formal publication. To this end, the SROs published an RFP concept document on December 5, 2012, and requested public feedback by January 18, 2013.11

-

The SROs stated in their Request Letter that they do not believe that the 270-day time period provided for in Rule 613(a)(1) provides sufficient time for the development of the RFP, formulation and submission of bids, and review and evaluation of such bids. The SROs also stated that they believe additional time beyond the 270 days provided for in Rule 613(a)(1) is necessary in order to provide sufficient time for effective consultation with and input from the industry and the public on the proposed solution chosen by the SROs for the creation of the consolidated audit trail at the conclusion of the RFP process and the NMS plan itself. The SROs believe that such a comment process is necessary in order to gather information needed to perform an effective cost/benefit analysis, including the estimated costs to broker-dealers and other market participants of building the consolidated audit trail in accord with the proposed solution, as well as to meaningfully assess and respond to the comments and draft the final NMS plan for submission to the Commission.

-

In the Request Letter, the SROs provided the following estimated timeline, which is based on their current expectation for conducting the RFP process and drafting the NMS plan:

-

• December 5, 2012: The SROs published an RFP concept document for comment

-

• January 18, 2013: Deadline to submit comments on the RFP concept document made publicly available (i.e., a 45-day comment period)

-

• February 2013: The SROs will publish the final RFP for bids

-

• March 2013: The SROs will solicit public comment on certain portions of the draft NMS plan that are not dependent on the RFP process and can benefit from public comment

-

• April 2013: Deadline for submitting bids in response to the RFP

-

• July 2013: The SROs will select a proposed solution after reviewing and evaluating the RFP bids

-

• August 2013: The SROs will solicit public comment on other specific portions of the proposed NMS plan that the SROs believe can benefit from public comment and that incorporate the RFP process and the proposed solution, including soliciting estimates on industry costs

-

• October 2013: Comments must be submitted on the proposed solution (i.e., a 60-day comment period)

-

• December 6, 2013: The SROs file the proposed NMS plan with the Commission

-

For the reasons set forth above, the SROs stated that a temporary exemption from the filing deadline until December 6, 2013 is “necessary to allow the SROs to conduct the thoughtful and comprehensive analysis this important regulatory initiative deserves.”12 The SROs also stated their belief that “the timeline outlined above will lead to a significantly better and more informed process and, as a result, the proposed solution will be the result of a more meaningful and careful analysis.”13

-

Section 36 of the Exchange Act14 authorizes the Commission, by rule, regulation, or order, to exempt, either conditionally or unconditionally, any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of the Exchange Act or any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.

-

After considering the SROs’ proposed process for developing the NMS plan, the Commission finds that it is appropriate in the public interest, and is consistent with the protection of investors, to grant the SROs a temporary exemption from the deadline for filing the NMS plan contained in Rule 613(a)(1)15 until December 6, 2013. The Commission understands that the creation of a consolidated audit trail is a significant undertaking and that a proposed NMS plan must include detailed information and discussion about many things, including the methods for reporting the required data; a detailed estimate of the costs to plan sponsors and to members of the plan sponsors of creating, implementing, and maintaining the consolidated audit trail (including issues relating to funding of the consolidated audit trail); an analysis of the impact on competition, efficiency and capital formation of creating, implementing and maintaining the NMS plan; and a discussion of any reasonable alternative approaches that the plan sponsors considered including a description of any such alternative approach, the relative advantages and disadvantages of each such alternative, including an assessment of the alternative’s costs and benefits, and the basis upon which the plan sponsors selected the approach in the NMS Plan submitted.16

-

Additionally, given that the planned RFP process as described in the Request Letter is expected to include multiple solicitations for public comment, the Commission believes that it is appropriate in the public interest and consistent with the protection of investors to provide the SROs with additional time. This additional time to complete the RFP process should allow the SROs to engage in a more thoughtful and comprehensive process for the development of an NMS plan. In this regard, the Commission notes that the additional time to solicit comment from the industry and the public at certain key points in the development of the NMS plan could identify issues that can be resolved earlier in the development of the consolidated audit trail and prior to filing the NMS plan with the Commission. In granting the SROs’ request, the Commission expects the SROs to work diligently to adhere to the milestones specified by the SROs in the Request Letter. The Commission also expects the SROs to utilize the additional time to prepare a detailed and complete NMS plan for the Commission and the public to consider.

-

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 36 of the Exchange Act,17 that the SROs are temporarily exempted from the deadline for submitting the NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository contained in Rule 613(a)(1) until December 6, 2013.

-

By the Commission.

-

Elizabeth M. Murphy

-

Secretary

-
fn -

1 17 CFR 242.613(a)(1).

-
-
fn -

2 17 CFR 242.613.

-
-
fn -

3 Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Adopting Release”).

-
-
fn -

4 April 28, 2013, is a Sunday. Therefore, in accordance with Rule 160(a) of the Commission Rules of Practice, the deadline for filing the NMS plan is Monday, April 29, 2013. The SROs, however, had established an earlier deadline for the filing of the NMS plan of Friday, April 26, 2013.

-
-
fn -

5 17 CFR 240.0-12.

-
-
fn -

6 15 U.S.C. 78mm(a)(1).

-
-
fn -

7 17 CFR 242.613(a)(1).

-
-
fn -

8 See Letter from Robert L.D. Colby, Chief Legal Officer, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated February 7, 2013 (the “Request Letter”).

-
-
fn -

9 See Request Letter (quoting Adopting Release, supra 3, at 45725).

-
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fn -

10 See Request Letter (quoting 17 CFR 242.613(a)(1)(xi)).

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11 See Request Letter.

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12 See Request Letter.

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13 Id.

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14 15 U.S.C. 78mm.

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15 As noted above, the current deadline for submitting the NMS plan is April 29, 2013. This deadline is calculated pursuant to Rule 613(a)(1) which requires the NMS plan to be filed 270 days from the date of publication of the Adopting Release in the Federal Register. See note 4, supra.

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16 See Rule 613(a)(1).

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17 15 U.S.C. 78mm.

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- \ No newline at end of file diff --git a/spider/files/data000030.html b/spider/files/data000030.html deleted file mode 100644 index e21c940..0000000 --- a/spider/files/data000030.html +++ /dev/null @@ -1,4468 +0,0 @@ - - jurisdiction: US - regulatory_authority: Securities and Exchange Commission - content_type: compilation - document_title: 34-67457 Consolidated Audit Trail - document_type: Releases - source: Securities and Exchange Commission/Releases/Final Rule Release - source_type: Final Rule Release - language: English - citation: SEC Release No. 34-67457 -
pubdate: N/A effdate: N/A -

34-67457 Consolidated Audit Trail

- Topic: SEC Final Rule, Release No. 34-67457 - Compliance User: Broker-dealers - Keywords: - Consolidated Audit trail, - -

AGENCY: Securities and Exchange Commission

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ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission ("Commission") is adopting Rule 613 under the Securities Exchange Act of 1934 ("Exchange Act" or "Act") to require national securities exchanges and national securities associations ("self-regulatory organizations" or "SROs") to submit a national market system ("NMS") plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

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EFFECTIVE DATE: October 1, 2012

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FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202) 551-5665; Jennifer Colihan, Special Counsel, at (202) 551-5642; Carl Tugberk, Special Counsel, at (202) 551-6049; or Leigh Duffy, Special Counsel, at (202) 551-5928, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

SUPPLEMENTARY INFORMATION:

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information - Compliance User: Broker-dealers - Keywords: - Consolidated Audit trail, - -
pubdate: July 18, 2012 effdate: October 01, 2012 -

I. Executive Summary

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Executive Summary - Compliance User: Broker-dealers - Keywords: - Trading, - broker-dealers, - SRO, - audit trail, - NMS Plan, - -

In today's high-speed electronic markets, trading is widely dispersed across a variety of market centers, including exchanges, alternative trading systems ("ATSs"), such as dark pools and electronic communication networks ("ECNs"), and over-the-counter broker-dealers acting as market makers or block positioners. In their capacity as SROs, the Financial Industry Regulatory Authority ("FINRA") and some of the exchanges currently maintain their own separate audit trail systems for certain segments of this trading activity, which vary in scope, required data elements and format. In performing their market oversight responsibilities, SRO and Commission staffs today must rely heavily on data from these various SRO audit trails.

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As discussed more fully in part II.A below, there are shortcomings in the completeness, accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these shortcomings are a result of the disparate nature of the systems, which make it impractical, for example, to follow orders through their entire lifecycle as they may be routed, aggregated, rerouted, and disaggregated across multiple markets. The lack of key information in the audit trails that would be useful for regulatory oversight, such as the identity of the customers who originate orders, or even the fact that two sets of orders may have been originated by the same customer, is another shortcoming.

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Though SRO and Commission staff also have access to sources of market activity data other than SRO audit trails, these systems each suffer their own drawbacks. For example, data obtained from the electronic blue sheet ("EBS")1 system and equity cleared reports2 comprise only trade executions, and not orders or quotes. In addition, like data from existing audit trails, data from these sources lacks key elements important to regulators, such as the time of execution, and, in the case of equity cleared reports, the identity of the customer. Furthermore, recent experience with implementing incremental improvements to the EBS system has illustrated some of the overall limitations of the current technologies and mechanisms used by the industry to collect, record, and make available market activity data for regulatory purposes.3

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The Commission therefore believes that the regulatory data infrastructure on which the SROs and the Commission currently must rely generally is outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system. In performing their oversight responsibilities, regulators today must attempt to cobble together disparate data from a variety of existing information systems lacking in completeness, accuracy, accessibility, and/or timeliness – a model that neither supports the efficient aggregation of data from multiple trading venues nor yields the type of complete and accurate market activity data needed for robust market oversight.

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To address this problem and improve the ability of the SROs and the Commission to oversee the securities markets, on May 26, 2010, the Commission proposed Rule 613,4 with the goal of creating a comprehensive consolidated audit trail5 that allows regulators to efficiently and accurately track all activity in NMS securities throughout the U.S. markets. As proposed – and summarized in part II.B below – Rule 613 required SROs to jointly submit an NMS plan6 that would govern the creation, implementation, and maintenance of a consolidated audit trail, including a central repository to receive and store consolidated audit trail data. In the proposed Rule, the Commission specified many requirements that the NMS plan, and by extension the consolidated audit trail, must meet, ranging from details of the data elements to be collected, to the timing of data transmissions, to specific standards for data formatting.

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Among its various requirements, the proposed Rule mandated that the NMS plan developed by the SROs must in turn require each SRO and its members to capture and report specified trade, quote, and order activity in all NMS securities7 to the central repository in real time, across all markets, from order inception through routing, cancellation, modification, and execution. The proposed Rule also mandated that the NMS plan require the creation of unique order identifiers to facilitate the ability of regulators to view cross-market activity, as well as unique customer identifiers to enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order or the person exercising investment discretion for the account originating the order, if different from the beneficial owner.

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The Commission received 64 comment letters from 56 commenters in response to the proposed consolidated audit trail representing a wide range of viewpoints, as summarized in part II.C below.8 The commenters included national securities exchanges, a national securities association, technology providers, academics, broker-dealers, organizations representing industry participants, individual investors, and members of Congress.9 Of the comment letters received, 13 expressed support for the proposal;10 36 expressed support, but suggested modifications to certain provisions of the proposal;11 five solely suggested modifications to the proposal;12 two opposed the proposal;13 and seven neither supported nor opposed the substance of the proposal.14 Concerns raised in these comment letters included: (1) the appropriateness of real-time reporting of required data to the central repository;15 (2) the scope of the required data elements, including the use of unique order identifiers and unique customer identifiers;16 and (3) the burden and costs associated with the proposal.17 In addition, a number of commenters offered alternative approaches and made suggestions regarding the creation, implementation, and maintenance of the consolidated audit trail.18

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In consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to the proposed requirements for the NMS plan submitted to the Commission for its consideration. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means SROs may use to meet certain requirements. Some of the more significant changes are as follows:

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• Replacing Real-Time Reporting with a Requirement to Report Data by 8: 00 AM of the Next Trading Day. The adopted Rule no longer requires that the NMS plan provide for the reporting of order event data19 to the central repository in real time; rather, it provides that the NMS plan must require the reporting of order event data to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the SRO or the member.20 The NMS plan may accommodate voluntary submissions of order event data prior to 8: 00 a.m. on the following trading day, but it may not mandate a reporting deadline prior to 8: 00 a.m.

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• Providing More Flexibility to Determine the Format of Data Reported to the Central Repository. The proposed Rule mandated that the NMS plan require the SROs and their members to collect and provide to the central repository the required order and event information in a uniform electronic format. The adopted Rule instead allows the SROs to determine the details of how market participants would transmit data to the central repository (which might include multiple electronic formats, rather than a uniform electronic format), subject to a more general requirement that data must be transmitted in a manner that ultimately allows the central repository to make this data available to regulators in a uniform electronic format.21

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• Eliminating the Requirement to Report Orders with a Unique Order Identifier. The proposed Rule mandated that each order reported to the central repository be tagged with a unique identifier that is the same throughout the order's entire lifecycle. In the adopted Rule, this requirement is replaced with a more general requirement that once all order events are transmitted to the central repository, the repository must be able to efficiently and accurately link together all lifecycle events for the same order, and make available to regulators this linked order data.22

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• Extending the Compliance Period for Small Broker-Dealers. Under the adopted Rule, the NMS plan may provide that small broker-dealers be allowed up to three years, rather than two years as proposed, from the effectiveness of the NMS plan to provide the required data to the consolidated audit trail. 23

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In addition to the above modifications, the Commission has also added a number of new requirements to the adopted Rule in response to general concerns expressed by commenters regarding the process for the development and implementation of the NMS plan. Some of the more significant of these additions are as follows:

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• Considering and Explaining Choices and Available Alternatives. The adopted Rule requires that the NMS plan describe and discuss any reasonable alternative approaches to the creation of the consolidated audit trail that were considered by the SROs and why the approach set forth by the NMS plan was selected.24

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• Planning for Future System Efficiencies. The adopted Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof) that are rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also discuss the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).25

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• Considering Input. The adopted Rule requires the NMS plan to address the process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, provide a summary of the views of such members and other parties, and describe how the plan sponsors took such views into account in preparing the NMS plan.26 In addition, the adopted Rule also requires the NMS plan to provide for the establishment of an Advisory Committee whose function will be to advise the plan sponsors on the implementation, operation, and administration of the central repository.27

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• Periodic Reviews of the Consolidated Audit Trail. To help assure the Commission that as financial markets evolve and new technologies emerge, the consolidated audit trail remains a useful regulatory tool, the adopted Rule mandates that the NMS plan must require the central repository's Chief Compliance Officer to regularly review the operations of the consolidated audit trail, and, in light of market and technological developments, make appropriate recommendations for enhancements to the consolidated audit trail.28

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The Commission has also added certain requirements to the adopted Rule in response to specific concerns expressed by commenters with respect to the use of consolidated audit trail data. Some of the more significant of these additions are as follows:

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• Enhancing Security and Privacy Requirements. Commenters have expressed concerns regarding the risk of failing to maintain appropriate controls over the privacy and security of consolidated audit trail data. Accordingly, the adopted Rule requires the NMS plan to include additional policies and procedures that are designed to ensure the rigorous protection of confidential information collected by the central repository.29

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• Addressing and Limiting Errors. Commenters have also expressed concerns about the potential for errors in the consolidated audit trail; the adopted Rule requires the SROs to provide in their NMS plan detailed information regarding anticipated error rates as well as the plan's proposed error correction process.30

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The Commission generally believes that the collective effect of the modifications and additions described above will be to significantly expand the set of solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and to provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the alternatives that would have been available under the requirements of the proposed Rule. The Commission further believes that these changes address or mitigate the principal concerns raised by commenters – including concerns regarding the extent and cost of the systems changes required by the SROs and their members – while continuing to enable the SROs and the Commission to achieve significant benefits from the consolidated audit trail.31 Each of the modifications and additions noted above is described and explained in detail in part III below.

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Given these changes and the wide array of commenters' views on how to best create, implement, and maintain a consolidated audit trail, the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration.32 Indeed, some commenters recognized that a consolidated audit trail could be created, implemented, and maintained in a number of ways, and thus recommended that the Commission replace the specific systems requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal request-for-proposal ("RFP") process.33

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In light of the expanded solution set that should be available under the changes described above and commenter views on the NMS plan development process, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on competition, efficiency, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., the requirement to solicit input from members of the SROs and other appropriate parties); and (4) information about the implementation plan and milestones for the creation of the consolidated audit trail.

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These requirements are intended to ensure that the Commission and the public have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of how well the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. To help elicit the most appropriate information and analysis from the SROs in response to these requirements, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." These use cases and accompanying questions should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule, as well as aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail.34

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Because the Commission believes the adopted Rule permits a wider array of solutions to be considered by the SROs than the proposed Rule did and because the Commission and the public will be able to avail themselves of much more information and analysis in connection with the NMS plan submission, the Commission is also making significant modifications to the process by which it will consider the costs and benefits of the creation, implementation, and maintenance of a consolidated audit trail, as well as the potential impacts on efficiency, competition, and capital formation. In particular, the methodology that the Commission used in the Proposing Release to estimate the costs of creating, implementing, and maintaining a consolidated audit trail may be no longer suitable. As discussed in the Proposing Release, the approximately $4 billion cost estimate for the creation and implementation of a consolidated audit trail was primarily based on averages for the development from scratch of new, very large-scale market systems.35 However, the Commission's rationale for this approach was predicated on some of the specific technical requirements of the proposed Rule, especially those related to the real-time collection and standard formatting of all data. As such, the approach assumed that the consolidated audit trail would not be able to build on existing trade, order, and audit trail systems. As noted above, these assumptions may no longer be valid since several of the specific technical requirements underlying the Proposing Release's approach have been substantially modified. The Commission believes these changes would now permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards.36

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In light of these changes, the Commission believes that the economic consequences of the consolidated audit trail now will become apparent only over the course of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. In particular, the Commission believes that the costs and benefits of creating a consolidated audit trail, and the consideration of specific costs as related to specific benefits, is more appropriately analyzed once the SROs narrow the expanded array of choices they have under the adopted Rule and develop a detailed NMS plan. The Commission therefore is focusing its economic analysis in this Release on the actions the SROs are required to take upon approval of the adopted Rule – specifically the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research, that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.37 A robust economic analysis of the next step – the actual creation and implementation of a consolidated audit trail itself – requires information on the plan's detailed features (and their associated cost estimates) that will not be known until the SROs submit their NMS plan to the Commission for its consideration. Accordingly, the Commission is deferring this analysis until such time as it may approve any NMS plan – that is, after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

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To that end, the adopted Rule requires that the SROs: (1) provide an estimate of the costs associated with creating, implementing, and maintaining the consolidated audit trail under the terms of the NMS plan submitted to the Commission for its consideration; (2) discuss the costs, benefits, and rationale for the choices made in developing the NMS plan submitted; and (3) provide their own analysis of the submitted NMS plan's potential impact on competition, efficiency and capital formation. The Commission believes that these estimates and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can develop estimates of the costs for the creation, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs.

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The Commission notes that this approach is suited for the multi-step nature of the particular process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail. Further, because the Commission is deferring its final analysis of the consolidated audit trail until after a detailed NMS plan has been submitted to the Commission for its consideration and the public has had an opportunity to comment, the adopted Rule has been modified to include a mandate that in determining whether to approve the NMS plan and whether the NMS plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation of creating, implementing, and maintaining the NMS plan.38 The Commission also will consider the costs and benefits of the creation, implementation, and maintenance of the consolidated audit trail pursuant to the details proposed in the NMS plan submitted to the Commission for its consideration.

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As a result of the new requirements for SROs to provide additional information about costs and a number of other aspects of the NMS plan they submit, the Commission is extending the timeframe for the submission of the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the adopting release for Rule 613 ("Adopting Release") in the Federal Register. The Commission also is altering the timeframe within which SROs must submit proposed rule changes to require their members to comply with the requirements of the Rule and the NMS plan approved by the Commission39 and the deadline for submitting the document required by Rule 613(i) regarding the possible expansion of the scope of the NMS plan.40

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pubdate: July 18, 2012 effdate: October 01, 2012 -

II. Introduction

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction - Compliance User: Broker-dealers - Keywords: - Objectives, - Limitations, - Reporting, - -
pubdate: July 18, 2012 effdate: October 01, 2012 -

A. Need for, and Objectives of, a Consolidated Audit Trail

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives - Compliance User: Broker-dealers - Keywords: - audit trail, - Rule 613, - NMS Plan, - -

The Commission believes that the Rule adopted today is an appropriate step in the creation of a consolidated audit trail which, when implemented, should substantially enhance the ability of the SROs and the Commission to oversee today's securities markets and fulfill their responsibilities under the federal securities laws. Rule 613 requires the submission of an NMS plan to create, implement, and maintain the first comprehensive audit trail for the U.S. securities markets, which will allow for the prompt and accurate recording of material information about all orders in NMS securities, including the identity of customers, as these orders are generated and then routed throughout the U.S. markets until execution, cancellation, or modification. This information will be consolidated and made readily available to regulators in a uniform electronic format.

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This section reviews the current status and limitations of existing, discrete audit trails and discusses how a consolidated audit trail could address those limitations and improve the ability of the SROs and the Commission to perform their regulatory functions. To perform this review, the Commission is, in part, drawing upon its own experiences in using existing audit trails to carry out its regulatory duties.41 The Commission also is relying on information provided to the Commission from other regulators who use existing audit trail systems, broker-dealers and organizations representing industry participants, and those with expertise in data management and technology solutions that may be applicable to the adopted requirements.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Use and Limitations of Current Sources of Trading Data
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Use and Limitations - Compliance User: Broker-dealers - Keywords: - SRO, - TRade, - EBS System, - Equity Cleared Reports, - SRO Audit Trails, - -

It has become increasingly challenging for SROs and the Commission to oversee the U.S. securities markets across the multitude of trading venues, given the huge volume of orders and trades that are generated, routed, transformed, and then re-routed across dozens of venues every day. Among the challenges is the fact that there is no single, comprehensive audit trail available to regulators.42 At present, the SROs and the Commission must use a variety of data sources, including EBS,43 equity cleared reports,44 and SRO audit trail data to help fulfill their regulatory obligations. As a result, among other issues, regulatory authorities face many challenges in obtaining, reconciling, and making effective use of even the limited order and execution data that is available, thereby hindering the conduct of market surveillance, investigation and enforcement activities, and market reconstructions and analyses.45

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The ultimate effectiveness of core SRO and Commission regulatory efforts depends on the following four qualities of trade and order (collectively "market") data:

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• Accuracy. Is the data about a particular order or trade correct?

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• Completeness. Does the data represent all market activity of interest, or just a subset? Is the data sufficiently detailed to provide the required information?

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• Accessibility. How is the data stored? How practical is it to assemble, aggregate, reconcile, and process the data? Can all appropriate regulators acquire the data they need?

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• Timeliness. When is the data available to regulators? How long will it take to process before it can be used for regulatory analyses?

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SROs generally use market data in the form of audit trails to identify potential misconduct in the markets they oversee, including attempts to manipulate market quotations, inflate trading or order volume artificially, or profit from non-public information. When these surveillance efforts identify suspicious trading activity, SROs have a responsibility to open investigations in which they assemble and review additional market data to assess the nature and scope of the potential misconduct. When an SRO detects persistent problems in the market it oversees, it may write new rules for its members to address the problems. To inform these rulemaking efforts, SROs frequently gather and analyze significant amounts of market data. The effectiveness of such efforts is largely determined by the qualities of the data available.46

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The qualities of such market data are also primary determinants of the Commission's ability to fulfill its statutory mission. The Commission uses market data in most of its investigations of potential securities law violations. In many of these investigations, market data analysis frames the issues for investigation and is a primary means of identifying relationships between individuals and entities whose activities may threaten the integrity of the securities markets or create substantial and unnecessary investor losses. The Commission also uses audit trails and other sources of market data to: (1) inform its priorities for examinations of broker-dealers, investment advisers and SROs; (2) supplement the data and information it collects during those examinations; and (3) determine the nature and scope of any potential misconduct the examinations identify. The Commission also relies heavily on market data to identify patterns of trading and order activity that pose risks to the securities markets and to inform regulatory initiatives, as well as to perform market reconstructions. In addition, the Commission relies on market data to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. As is the case for the SROs, the effectiveness of such efforts by the Commission is largely determined by the qualities of the data available.47

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As described in the following sections, each of the present sources of market data available to regulators suffers from deficiencies limiting its effective use.

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a. The EBS System

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The EBS system is currently the only available source of data that allows regulators to obtain the identity of customers of broker-dealers who have executed trades. The SROs and the Commission have depended on this system for decades to request trading records from broker-dealers. The EBS system, supplemented by the requirements of Rule 17a-25 under the Exchange Act,48 is generally used by SRO and Commission staff to assist in the investigation of possible securities law violations, typically involving insider trading and market manipulations.49 In its electronic format, the EBS system provides certain detailed execution information, upon request by SRO or Commission staff, for specific securities during specified timeframes. However, EBS data, which is currently sourced from the so-called back-office records of clearing brokers, are limited to executed trades and do not contain information on orders or quotes (and thus no information on routes, modifications, and cancellations). Also, in frequent cases where brokers utilize average-price accounts to execute and aggregate multiple trades for one or more customers, the details of each individual trade execution are typically lost when reported through the EBS system because it is only the average aggregate price and volume of a series of executed trades that are transmitted to the clearing systems for processing.50

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Furthermore, the EBS data currently includes only the dates, but not the times, of each trade execution (regardless of whether or not the trade represents an average-price series of executions).51 Since there could be many broker-dealers trading a given security on a given day of interest, to reconstruct trading on the market for one security on one day could involve many, perhaps hundreds, of EBS requests. Consequently, EBS data, alone, are not generally useful for price or short sale manipulations analysis, order flow analysis, depth-of-book analysis, or any large-scale market reconstructions in which the timing of events is required to build a useful picture of the market.52

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In addition, though the EBS system provides the names associated with each account in which a trade has been placed, these names are based on the separate records of each broker-dealer providing data to the EBS system, and the same party may be identified by a different name across multiple broker-dealers. Experience of staff at the Commission has shown53 that it is difficult to perform cross-broker customer analysis of trading since the same customer may be known by different names depending on the account and broker-dealer through which it traded.

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The EBS system also typically requires SRO and Commission staff needing EBS data to request the information from each broker-dealer, and complete responses from each broker-dealer may take days or weeks depending upon the scope of the request. As a result of these various limitations, the EBS system is generally only used by regulators in narrowly-focused enforcement investigations that generally involve trading in particular securities on particular dates or with specific broker-dealers.

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b. Equity Cleared Reports

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In addition to the EBS system and Rule 17a-25, the SROs and the Commission also rely upon the NSCC54 equity cleared report for initial regulatory inquiries.55 This report is generated on a daily basis by the SROs, is provided to the NSCC, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.56 This information is also provided to the Commission upon request. Since the information made available on the report is limited to the date, the clearing firm, and the number of transactions cleared by each clearing firm, its use for regulatory purposes is quite limited -- equity cleared reports basically serve as a starting point for certain types of investigations, providing a tool the Commission can use to narrow down the clearing firms to contact concerning transactions in a certain security.

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c. SRO Audit Trails

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In addition to EBS data and equity cleared reports, the SROs and the Commission rely on data collected through individual SRO audit trails. Most SROs maintain their own specific audit trails applicable to their members. For example, the National Association of Securities Dealers ("NASD")57 established its Order Audit Trail System ("OATS")58 in 1996, which required NASD (n/k/a FINRA) members to report certain trade and order data on Nasdaq-listed equity securities. OATS was later expanded to include OTC equity securities. Similarly, the NYSE implemented its Order Tracking System ("OTS")59 in 1999 under which its members were required to report certain trade and order data on NYSE-listed securities. Beginning in 2000, several of the current options exchanges implemented the Consolidated Options Audit Trail System ("COATS").60 In addition, many of the exchanges have created their own audit trails to assist in surveillance activities.

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Recently, FINRA expanded its OATS requirements from covering only Nasdaq-listed and OTC equity securities to covering all NMS stocks.61 To avoid duplicative reporting requirements, the NYSE, NYSE Amex LLC (n/k/a "NYSE MKT LLC") ("NYSE Amex"), and NYSE ARCA, Inc. ("NYSE Arca") subsequently replaced their OTS audit trail requirements for members who are also members of either FINRA or Nasdaq (and therefore subject to OATS requirements) with rules that allow these members to satisfy their reporting obligations by meeting the new OATS requirements.62

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Although these developments with respect to the scope of FINRA's OATS rules reduce the number of audit trails with disparate requirements, they still do not result in a comprehensive audit trail that provides regulators with accurate, complete, accessible, and timely data on the overall markets for which regulators have oversight responsibilities. In particular, data collected by FINRA pursuant to FINRA's Rule 7400 series ("OATS data") does not provide a complete picture of the market because though OATS collects data from FINRA members with respect to orders and trades involving NMS stocks, OATS does not include trade or order activity that occurs on exchanges, or at broker-dealers that are not FINRA or Nasdaq members. Nor does OATS include exchange quotes, principal orders submitted by FINRA members registered as market makers, or options data.63 In performing its own regulatory oversight of the markets, FINRA has chosen to create an internal process in which it augments the data it collects via OATS with trade execution data from other exchanges with which it has a regulatory services agreement. This process provides FINRA with a wider view of the markets than that provided by OATS alone, but linking data in this fashion does not yield fully accurate results.64 For these reasons, the Commission believes that the augmented OATS data currently falls short of providing an efficient source of data for analyzing cross-market activities, or tracking an order through its entire cycle from generation through routing to execution, modification or cancellation.

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OATS data also suffers from a lack of timeliness, partly as a result of the problems with the accuracy of the data as collected, and partly because of its lack of completeness. When FINRA receives an end-of-day OATS file from a member, it takes an hour for FINRA to acknowledge receipt of the report and approximately another 24 hours to determine if there is a syntax error65 in the report.66 During this time, FINRA performs over 152 validation checks on each order event reported to OATS. Thus, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.67 Each of these checks can result in OATS data submissions being rejected and generating an error message.68 As a result of these validation checks, almost 425,000 reports per day, on average, are rejected and must be corrected.69 In addition to the 24 hours needed to identify errors within a report, it takes another two business days to determine whether a file that is syntactically correct nevertheless contains errors in content related to internally-inconsistent information about processing, linking, and routing orders. Once a member is advised of such errors, the member has up to five business days to re-submit a corrected file. However, error corrections are limited to only those that are required to remedy internal inconsistencies within a given member's submission. Cross-firm inconsistencies in which, for example, one member reports routing an order to a second member, but the second member does not report receiving or processing such an order, are identified as unmatched or unlinkable data records, but neither firm corrects these types of reporting errors. The net result yields an historical data record of market activity that contains a small but permanent number of incorrect or irreconcilable trade and order events.70

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Given the time it takes to process each OATS file, and the nature of the process in which errors are detected, reported back to members, and then corrected, inter-firm surveillance by FINRA typically does not begin until 5 business days after receipt of OATS data. In addition, the final product of the FINRA process is available to FINRA, but is not stored in a market-wide database or a central repository that is readily accessible to other regulators. This is because SROs do not typically have access to the internal systems of another SRO, though they may share some sources of underlying data.71

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Because the Commission does not have direct access to OATS data and other SRO audit trails and because each SRO only has direct access to its own audit trails, requests must be made to the Intermarket Surveillance Group ("ISG")72 or SROs to conduct an analysis on order data. It can take days or weeks, depending on the scope of the information requested, to receive responses to requests. Once the responses to its requests for information are received, the Commission, or any SRO undertaking the same task, must commit a significant amount of time and resources to process and cross-link the data from the various formats used by different SROs before it can be analyzed and used for regulatory purposes. Whether or not this process is successful depends on the accuracy, completeness, and format of the data received, as well as how readily data from different SROs can be reliably linked. For example, staff at the Commission working on the analysis of the May 6, 2010 "Flash-Crash" found it was not possible to use the data from existing audit trails to accurately or comprehensively reconstruct exchange and ATS equity limit order books for NMS securities as required to fully analyze the events of that day.73

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A further difficulty in using existing audit trails to conduct cross-market surveillance is the lack of consistency in both format and content among the various audit trails. Not all SROs collect data using the OATS format. In addition, each options exchange maintains its own COATS audit trail in a different format and includes different supplemental data items in its audit trail. These differences make it difficult and labor intensive for regulators to view options trading activity across multiple markets, and the lack of any combined equity and options audit trail is a significant impediment to regulators performing cross-product investigations and analyses.

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An additional shortcoming of existing SRO audit trails is the lack of customer identifiers. In general, existing SRO audit trails only identify the broker-dealer handling the order and not the account holder or the person exercising investment discretion for the account holder, if different. This limitation makes the process of identifying the customers involved in unusual trading patterns or market events very difficult. Even determining whether or not an unusual trading pattern exists is challenging if the data does not identify trades by a single customer at multiple broker-dealers. Requests therefore must be made to one or more broker-dealers to obtain information about the customer or customers behind an order. Multiple requests may be necessary before the information is obtained. EBS data may have to be requested as a supplement. A further challenge arises in any type of customer-based cross-market analysis because there is no standard convention for how customers are identified at different broker-dealers – the same party directing trades across multiple venues, or through different broker-dealers, can be known by many different names.

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Not having customer information at the early stage of surveillance can also impair the accuracy, and thus efficacy, of certain surveillances. The patterns that emerge when trade and order activity is aggregated across all customers of a broker-dealer often exhibit characteristics that can be quite different from the (initially) unobservable patterns of trade and order activity of each individual customer at that broker-dealer. This could result in what are known as "false positive signals," in which market activities that initially are flagged as being potentially manipulative by a surveillance system are later found not to be potentially manipulative once more detailed customer data from the broker-dealer is requested and analyzed. In contrast, potentially manipulative activities may be missed by a surveillance system that cannot identify the customers behind each order or trade if those activities are otherwise obscured by non-manipulative activities of other customers of the same broker-dealer such that the aggregate patterns of trading do not appear potentially manipulative.

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Given the various limitations described above, the Commission does not believe that existing audit trails, with their current features, provide regulators with an efficient or adequate method of monitoring and surveilling the market for NMS securities. The Commission notes, for example, that FINRA summarizes the current cross-market systems as follows: "The current systems in place to achieve effective cross-market surveillance, such as the ISG, are incomplete. For example, the ISG audit trail data has numerous shortcomings, including: (1) it does not capture quote/orders away from a market's inside market (i.e., those quotes/orders below the best bid or above the best offer); (2) it currently identifies participants of a trade only to the clearing broker, not down to the executing broker level; (3) data submitted by participants is not validated; (4) certain data fields are not mandatory; and (5) there are no service level agreements to ensure that participants submit timely and accurate information."74

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pubdate: July 18, 2012 effdate: October 01, 2012 -
2. Regulatory Improvements with a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Regulatory Improvements with CAT - Compliance User: Broker-dealers - Keywords: - NMS Plan, - Quality of Audit Trail, - Surveillance, - Investigation, - Customer-ID, - Risk-Based Examination, - Market Manipulation, - Tips, - Complaints, - Cross-Market, - Broad-Based Market Events, - Market Analysis, - Reporting Requirements, - -

The NMS plan required by the Rule, if approved by the Commission, will improve the quality of audit trail data by, among other things: (1) identifying with a unique "Customer-ID" the account holder(s) with respect to an account at a registered broker-dealer and, if different, any person authorized to give the broker-dealer trading instructions for such account; (2) identifying the time of each key event in the life of an order according to synchronized business clocks; (3) requiring the reporting of comprehensive order lifecycle data; and (4) including all NMS securities in one audit trail. As discussed below, the Commission believes that these improvements should have the potential to result in the following: (1) improved market surveillance and investigations; (2) improved analysis and reconstruction of broad-based market events; and (3) improved market analysis. In addition, a consolidated audit trail has the potential to result in a reduction in disparate reporting requirements and data requests.

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a. Improved Market Surveillance and Investigations

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A consolidated audit trail will expand the data available for regulators to perform surveillance and investigations for illegal activities such as insider trading, wash sales, or manipulative practices. In particular, a consolidated audit trail will help surveillance and investigations by facilitating risk-based examinations, allowing more accurate and faster surveillance for manipulation, improving the process for evaluating tips, complaints, and referrals ("TCRs"), and promoting innovation in cross-market and principal order surveillance.

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i. Risk-Based Examinations

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A consolidated audit trail will facilitate risk-based examinations. Risk-based examinations require access to accurate and timely data so that the scope of the examination can be properly set to cover the areas of identified risks. Regulators currently may request audit trail data directly from the broker-dealer, work with the broker-dealer to understand the format and definitions in the data, validate that information with a third party, and analyze the data to determine whether the initial assumptions concerning risk were valid. This effort requires significant resources from both the regulator and the broker-dealer, all of which may be wasted if the resulting analysis shows that the assumptions of risk justifying the examination of a particular subject were not founded. Thus, this resource-intensive process does not necessarily reveal the subjects most worthy of examination, and does not permit an effective pre-examination review of a subject's trading practices.

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In contrast, a consolidated audit trail would permit regulators, for example, to identify risks and appropriate subjects for examinations relating to certain types of trading by creating and comparing metrics based on the complete (and possibly cross-market) activities of a broker-dealer or customer. Signals based on such metrics could, for example, identify outlier patterns in the ratio of order activity to execution, which may be an indication of potentially manipulative practices. Currently, this method is impractical because, as described above, it requires the consolidation of many audit trails that store data in non-uniform formats, participant information in SRO audit trails often does not consistently identify the executing broker-dealer, and there is no uniform method of identifying customers.

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In sum, consolidated audit trail data that meets the minimum requirements for the NMS plan specified in the Rule would allow regulators to create a process that focuses much more of their resources on those firms for which specific activities over specific time periods warrant follow up. The subsequent examinations would thus be more precise, resulting in more efficient use of regulatory resources, potentially reducing the need for multiple document requests, and ultimately reducing the sometimes significant compliance burden on a broker-dealer or other subject.

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ii. Market Manipulation

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In addition to helping regulators focus their resources and better identify areas in which potentially manipulative trading activity may be occurring, a consolidated audit trail will greatly aid the analysis of the potential manipulation itself. The current methodology to analyze order and trade data requires a tremendous amount of time and resources to construct an accurate picture of when trades are actually executed. Typically, this includes: (1) broker-dealers and other registrants responding to multiple requests from the Commission and SROs; (2) SROs devoting regulatory resources to obtaining, analyzing, and reporting data requested by the Commission; and (3) Commission staff reconciling inconsistent order data provided by different SROs with respect to different markets.

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In addition, while SRO audit trail data identifies the dates and times of trades by a particular broker-dealer, SRO audit trail data does not reveal the identities of the customers initiating the trades executed by the broker-dealers. Accordingly, to identify customers placing trades through a broker-dealer, regulatory staff must obtain EBS data and integrate such data with SRO audit trail data. This is a cumbersome process because there is no automated process to link the two data sources. To determine the exact execution time for trades by a particular customer, regulatory staff must obtain a third set of data from the broker-dealer's trading and order handling system. These processes can take many months. In some cases, the laborious process of assembling the data delays other critical investigative or analytical steps. In other cases, investigators or analysts forego the process of determining when trades occurred, limiting their analysis to more accessible information. As a result, SRO and Commission staffs may fail to ascertain the full scope of misconduct under investigation or the causes of unusual market events at issue.

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Even more critically, the absence of reliable information about who initiated which orders makes detection of schemes that involve repeat instances of activity through accounts at multiple broker-dealers difficult. Schemes of this sort may be among the most harmful and difficult to police, but without a customer identifier that consistently and uniquely identifies responsibility for orders across all broker-dealers, no amount of technical sophistication and securities market insight can produce a data query or analysis to detect them.75

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With the data provided by the consolidated audit trail, regulatory staff would be able to conduct such analyses in a much shorter period of time. In addition, the process of analysis with a consolidated audit trail would be inherently more reliable than the manual reconstruction process currently available, reducing the risk of inaccuracies. Furthermore, the ability to process and meaningfully analyze audit trail data more quickly would allow regulatory staff to employ proactive methods of identifying potentially manipulative activities. The Commission therefore believes a consolidated audit trail would make the overall process of identifying and analyzing potentially manipulative trading practices much more focused, accurate, and efficient.76

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The timely availability of data to regulators also impacts the efficacy of detecting (and possibly mitigating the effects of) some types of market manipulation. For example, some pernicious trading schemes are designed to generate large "quick-hit" profits in which participants attempt to transfer the proceeds from the activity to accounts outside of the reach of domestic law enforcement as soon as the offending transactions have settled in the brokerage account (typically three days after execution). If the SROs detect such schemes and promptly report them to the Commission, the Commission potentially could seek asset freezes that limit the transfer of funds until charges against the account holder are resolved. The Commission believes that a consolidated audit trail in which uniform data about market activities are efficiently collected and processed soon after such activities occur, and in which data are available to regulators in a timely manner, would more frequently and effectively allow regulators to use this approach.

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iii. Tips and Complaints

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A consolidated audit trail also would significantly improve the processes used by the SROs and the Commission for evaluating tips and complaints about trading activity.77 It is not uncommon for market participants or those with experience in market data to sometimes note atypical trading or quoting patterns in publicly-available market data. A consolidated audit trail would allow regulatory staff to quickly determine whether a particular instance of an atypical activity (regardless of how it was originally identified), such as an abnormally high level of quote traffic, is worthy of further investigation.

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Today, such an analysis of TCRs is difficult and cumbersome. Even a preliminary review requires analysis by each exchange or ATS to identify the activity in question and to determine its scope. Regulators then must consolidate the analyses from each such market center to determine the identities of those responsible for the atypical activity in question. To the extent that the activity originates from several market participants, regulators must conduct additional analysis on each of those participants, and possibly other participants, to discover information that could identify the customer(s) originating the orders that created the atypical activity. Without a unique customer identifier included in the order and trade data, this may not be possible. The consolidated audit trail would significantly improve the multi-stage process, enabling regulatory staff to make efficient queries on orders and more quickly determine whether the TCR can be "closed" or if further analysis and investigation are warranted.

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iv. Cross-Market and Principal Order Surveillance

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Investigations of cross-market activity may be more efficient with a consolidated audit trail as such an audit trail may provide regulators with data not currently consolidated across markets and/or data not currently available to regulators such as broker-dealer principal orders, including market maker quotes. For example, in an attempt to manipulate the market, a broker-dealer could use numerous principal sell orders across multiple venues to give the misleading appearance of broad sell-side pressure, and then send a buy principal order at a favorable price to take advantage of the market momentum created by the misleading sell orders. This type of activity would be difficult to readily identify with current audit trails, but it could be the target of a routine surveillance of a consolidated audit trail. The Commission notes, for example, the statement of FINRA and NYSE Euronext that, "[p]articularly since the implementation of Regulation NMS in 2007, there has been a significant increase in market linkages, the result of which is that trading activity on one market can have a profound effect on other markets. This, in turn, has led to the realization that market manipulation, by its very nature, is facilitated cross-market where, for example, trading on one market is used to affect a security's price while trading on another market is used to take advantage of that price change."78

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In addition, the consolidation of order data with direct access for all relevant regulators may create opportunities for regulators to develop entirely new methods of surveillance, and to keep existing forms of surveillance up to date as new market practices and new market technologies continue to rapidly evolve. In fact, as described more fully below, SROs are required by the Rule to incorporate the expanded audit trail data into their surveillance systems.79

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b. Improved Analysis and Reconstruction of Broad-Based Market Events

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A consolidated audit trail will significantly improve the ability of regulators to reconstruct broad-based market events so that they and the public may be informed by an accurate and timely accounting of what happened, and possibly why. The sooner a reconstruction can be completed, the sooner regulators can begin reviewing an event to determine what, if any, regulatory responses might be required to address the event in an effective manner.

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For example, on the afternoon of May 6, 2010, the U.S. equity and equity futures markets experienced a sudden breakdown of orderly trading, when broad-based indices, such as the Dow Jones Industrial Average Index and the S&P 500 Index, fell about 5% in just five minutes, only to rebound soon after (the "Flash Crash"). Many individual equities suffered even worse declines, with prices in over 300 stocks and exchange-traded funds falling more than 60%. In many of these cases, trades were executed at a penny or less in stocks that were trading at prices of $30 or more only moments earlier before prices recovered to their pre-Flash Crash levels.80

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The Commission immediately formed an interdisciplinary team from across the Commission to analyze the events of May 6, 2010, identify possible causes, inform the public of what happened, and aid in formation of regulatory responses. The CFTC took similar steps. Within a few weeks, staff at the Commission and the CFTC released a joint preliminary report that described the event and, in general terms, the market conditions prior to and during the rapid decline.81 However, at that time the staffs were unable to definitively identify the specific conditions or circumstances that could have caused, contributed to, or exacerbated the event. Though the SROs and the Commission quickly implemented a single-stock circuit breaker pilot program as an initial response, a more complete regulatory response required a full and robust analysis of additional data.

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From the start of the investigation, many market participants had suggested that the sudden withdrawal of liquidity in the equity markets may have resulted in the rapid decline of prices as orders to immediately sell (many from retail investors) found no interest on the buy side (from market professionals).82 To fully understand how such conditions could occur, Commission economists needed to analyze the order books for thousands of equities. Commission staff requested order book data from several exchanges that sell such data or could readily put such data together, but this data did not represent the whole market. Commission staff attempted to use order data from OATS and several SRO audit trails to reconstruct order books for thousands of equities traded on exchanges that do not maintain or could not provide order book data. Although it was possible to link the data from different sources to show trading activity for a particular stock over a specific period of time, the accuracy, completeness, and content of the combined data sets were not sufficient to allow for an accurate reconstruction of the order books. This hindered staff in determining what happened to liquidity before, during, and after the Flash Crash. Two major problems were the inability to identify and eliminate duplicate orders from the data and the inability to accurately sequence events across the multiple data sources.

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As described in the final joint report issued by the staffs of the CFTC and the Commission on September 30, 2010, Commission staff were only able to create a comprehensive view of the order books by acquiring, processing, and aggregating four distinct data sets that each contained a subset of order book information from each of the four exchanges that could provide such information: Nasdaq ModelView, NYSE Openbook Ultra, NYSE ARCABook, and BATS Exchange.83 Given the enormous volume of data that needed to be processed (more than 5.3 billion records), even small changes to the integration and aggregation process took significant computer time to test and implement.

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By early July 2010, staff at the CFTC had completed a very detailed analysis of the full order book of the S&P 500 E-Mini futures contract and were able to show how liquidity in that contract had been eroding for most of the day. The CFTC's detailed second-by-second analysis of trading during the Flash Crash itself revealed how buy-side depth in the S&P 500 E-Mini futures virtually evaporated as broad market indices rapidly fell 5%.84 However, until a similar analysis could be completed in the equity markets, neither regulators nor the public would know whether an evaporation of liquidity was also present in the equity markets, and whether the timing of such an event preceded or followed the liquidity event in the futures market. Ultimately, it took Commission staff nearly five months to complete an accurate representation of the order books of the equity markets for May 6, 2010. Even then, the reconstruction was not fully complete and only contained an estimated 90% of trade and order activity for that day.85 However, it was sufficiently comprehensive to allow staff to perform a robust analysis of the equity markets revealing how "the decline in full-depth buy-side liquidity for the E-Mini precede[d] that of the SPY and [the stocks composing] the S&P 500," and how "drops in [stock] prices [became] increasingly more severe with ever-larger drops in liquidity."86

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Had there been a consolidated audit trail in place on May 6, 2010, regulators would likely have been able to much more quickly and efficiently perform these types of detailed analyses. This in turn could have dramatically shortened the time during which regulators, as well as the public, remained uncertain about what actually happened during the Flash Crash.

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c. Improved Market Analysis

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In addition to the surveillance and reconstruction benefits described above, a consolidated audit trail would also significantly improve the ability of regulators to monitor overall market structure, so that both the Commission and the SROs can be better informed in their rulemakings. In January 2010 the Commission published a concept release on equity market structure that discusses how the markets have rapidly evolved from trading by floor-based specialists to trading by high-speed computers. The concept release poses a number of questions about the role and impact of high-frequency trading strategies and the movement of trading volume from the public national securities exchanges to dark pools.87

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Over the past two years there has been considerable discussion about these topics by regulators, market participants, the media, and the general public. Nevertheless, numerous open questions remain because of a lack of consolidated market data, making certain types of market-wide analysis impractical. For example, existing research on high frequency trading cannot precisely identify high frequency traders. As a result, studies of high frequency trading have been limited in their ability to thoroughly examine such strategies and their impact on the market, leaving many open questions. Having more precise data on who is trading (and from which general patterns of order submission could be inferred) would help regulators better understand the impact of high frequency trading on markets. Similar analyses also could be performed for other aspects of general market structure, such as those discussed in the concept release related to dark pools and internalization. In addition, having access to a consolidated audit trail will provide the Commission and SROs with better data to conduct retrospective analyses of rules and pilots. Informed analysis of these topics requires consolidating audit trails so that quotes and trades across multiple exchanges can be linked (either by customer type or by specific customer) with order flow and trades from the many dozens of over-the-counter venues.

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d. Potential Reduction in Disparate Reporting Requirements and Data Requests

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The Commission believes that a consolidated audit trail will reduce the burdens on SROs and broker-dealers associated with producing regulatory data. In particular, the consolidated audit trail may reduce burdens from ad hoc data requests.

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The Commission believes that the creation of a consolidated audit trail may reduce the number and types of ad hoc requests made by regulators to market participants for data concerning their trading activities. In particular, regulators could use direct access to data in the consolidated audit trail for investigations or analyzing trends or broad market activities instead of requesting data from market participants. In addition, regulators could use this direct access to analyze the activities of a single trader across multiple markets, which today requires requests for data from multiple market participants. Regulators would therefore likely make fewer ad hoc requests. The Commission, however, does not believe that all ad hoc requests for data from market participants will be replaced by obtaining data from the consolidated audit trail. A detailed investigation of a particular firm may require types of data from that firm that are not stored in the consolidated audit trail, or that relate to periods prior to the implementation of the consolidated audit trail. In addition, in cases in which there are discrepancies, or even suspected discrepancies, between a firm's actual trading activities and what is stored in the consolidated audit trail's central repository, regulators are likely to request data directly from market participants for verification and investigative purposes.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
3. Large Trader Reporting System Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Objectives, Large Trader Reporting System Rule - Compliance User: Broker-dealers - Keywords: - Rule 3h-1, - NMS Plan, - -

The Commission believes that a consolidated audit trail will be able to build upon various aspects of the large trader reporting system that was recently adopted by the Commission.88 Rule 13h-1, which establishes the large trader reporting system, requires large traders to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. Upon receipt of Form 13H, the Commission issues a unique identification number to the large trader, which the large trader then will be required to provide to those broker-dealers through which the large trader trades. Registered broker-dealers will be required to maintain specified transaction records for each large trader and to report that information to the Commission upon request. The Large Trader Rule requirements are designed to enable the Commission to promptly and efficiently identify significant market participants and collect data on their trading activity so that Commission staff can reconstruct market events, conduct investigations and bring enforcement actions as appropriate.

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Several commenters noted that portions of the requirements of Rule 13h-1 overlapped with certain provisions of proposed Rule 613 and requested that the Commission harmonize the rules.89 One commenter stated that the Commission should consider implementing only those portions of Rule 13h-1 that would not be affected by, or be redundant to, the implementation of the consolidated audit trail proposal.90 Another commenter suggested that the Commission mandate compliance only with those aspects of Rule 13h-1 that would operate as part of the consolidated audit trail – the large trader identifier in particular – so they could be leveraged in the creation of the consolidated audit trail.91 Yet another commenter believed that, upon implementation of the consolidated audit trail, it would not be necessary for large traders to identify themselves to their broker-dealers pursuant to Rule 13h-1, because the consolidated audit trail already would require broker-dealers to include a customer identifier for every order.92 The commenter explained that, if customer information is collected as part of the consolidated audit trail, the Commission and SROs could run queries to identify customers with significant trading volume.93

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The Commission believes that both Rules are necessary to enhance regulatory oversight of the markets and its members. Key aspects of Rule 13h-1 define the types of entities that are large traders, and who must register with the Commission and file and keep current certain background information on Form 13H. These aspects of Rule 13h-1 are not addressed by Rule 613 and would not be superseded by it. Rather, the information collected by the registration of large traders would further complement the data collected for a consolidated audit trail. To this end, Rule 613 requires that large trader identifiers also be reported to the central repository as part of any large trader's customer account information94

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The Commission does note, however, that other aspects of Rule 13h-1 may be superseded by Rule 613. Specifically, the trade reporting requirements of Rule 13h-1 are built upon the existing EBS system. To the extent that, as described in Section II.A.2.iv.d., data reported to the central repository under Rule 613 obviates the need for the EBS system, the Commission expects that the separate reporting requirements of Rule 13h-1 related to the EBS system would be eliminated.95

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pubdate: July 18, 2012 effdate: October 01, 2012 -

B. Summary of Proposed Rule 613

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of Proposed Rule 613 - Compliance User: Broker-dealers - Keywords: - NMS Plan, - FINRA, - Rule 613, - Data Collection, - SRO, - -

Proposed Rule 613 would have required that the SROs propose an NMS plan that included provisions regarding: (1) the operation and administration of the NMS plan; (2) the creation, operation and oversight of a central repository; (3) the data required to be provided by SROs and their members96 to the central repository; (4) clock synchronization; (5) compliance by national securities exchanges, FINRA, and their members with Rule 613 and the NMS plan; and (6) a plan for the possible expansion of the NMS plan to products other than NMS securities. Specifically, proposed Rule 613 would have required the SROs to jointly file an NMS plan with the Commission to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.97 The NMS plan would have been required to provide for an accurate, time-sequenced record of an order's life, from receipt or origination, through cancellation or execution. In particular, the proposed Rule would have required the NMS plan to require that the SROs and their respective members collect and provide to the central repository data for each "reportable event," defined to include the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order, with respect to any NMS security. This data would have been required to be collected and provided to the central repository in a uniform electronic format on a real-time basis.

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Under the proposed Rule, the data collected upon the receipt or origination of an order would have included: a unique order identifier; a unique customer identifier;98 a unique identifier for the broker-dealer receiving or originating the order; the date and time of receipt or origination of the order; and the "material terms of the order."99 For orders that are modified or cancelled, the data collected in real time would have included: the date and time the modification or cancellation was received or originated; the price and remaining size of the order; changes in the material terms of the order (if the order is modified); and the identity of the person giving the modification or cancellation.

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For orders that are routed, data collected in real time would have included: the unique order identifier, the date and time the order was routed; the unique identifier of the broker-dealer or national securities exchange routing the order; the unique identifier of the broker-dealer or national securities exchange receiving the order; if routed internally at a broker-dealer, the identity and nature of the department and desk to which the order was routed; and the material terms of the order.

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For orders received that were routed, data collected in real time would have included all the information for orders that are routed, except the identity and nature of the department and desk to which the order was routed, if routed internally at a broker-dealer; however, the date and time the order was routed would be replaced by the date and time the order was received.

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For the execution of an order, data collected in real time would have included: the unique order identifier; the date and time of execution; the execution size and price; the unique identifier of the SRO or broker-dealer executing the order; the capacity of the broker-dealer executing the order (i.e., principal, agency, riskless principal); and whether the execution was reported pursuant to an effective transaction reporting plan or the OPRA Plan.100

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Because certain information may not be readily available at the time of the reportable event, the proposed Rule would have required the NMS plan to require each SRO and its members to collect and provide to the central repository certain information, in a uniform electronic format, promptly after receipt of such information, but in no instance later than midnight of the day that the reportable event occurred or when the SRO or its member receives such information. Under the proposed Rule, this data would have included: the account number for any subaccounts to which the execution is allocated (in whole or part); the unique identifier of the clearing broker or prime broker, if applicable; the unique order identifier of any contra-side order; special settlement terms, if applicable; short sale borrow information and identifier; the amount of a commission, if any, paid by the customer, and the unique identifier of the broker-dealer(s) to whom the commission is paid; and, if the execution is cancelled, a cancelled trade indicator.

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The proposed Rule would have required that the SROs jointly file an NMS plan with the Commission within 90 days after approval of the Rule. In addition, the SROs would have been required to select a plan processor within two months of the effectiveness of the NMS plan, as well as provide the Commission a document outlining how the SROs would propose to expand the audit trail to include non-NMS securities and additional transactions. The proposed Rule also would have required the SROs to file proposed rule changes to require their members to comply with the requirements of the proposed Rule and the NMS plan within 120 days of the effectiveness of the NMS plan. The SROs would have been required to begin reporting data to the central repository within one year after the effectiveness of the NMS plan, and their members would have been required to begin reporting data to the central repository within two years after the effectiveness of the NMS plan.

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As proposed, the NMS plan would have been required to include specific plan provisions, detailing: the plan governance structure, the processes of admission and withdrawal of plan sponsors, the percentage of votes required to effectuate amendments to the plan, the allocation of central repository costs among the plan sponsors, and the appointment of a Chief Compliance Officer ("CCO") of the central repository. The proposed Rule would have required all plan sponsors to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the information contained in the consolidated audit trail. This information would be available to the Commission and the SROs for regulatory and oversight purposes only. The proposed Rule also would have required the NMS plan to require information be collected in a convenient and usable standard electronic data format, directly available and searchable electronically without any manual intervention for a period of not less than five years. This information would have been required to be available immediately, or, if immediate availability was not reasonably and practically achieved, any search query would have to begin operating on the data not later than one hour after the search query was made. Additionally, the proposed Rule would have required the NMS plan to include policies and procedures, including standards, to be utilized by the plan processor to ensure the security and confidentiality of all information submitted to the central repository, and all SROs and their employees, as well as all employees of the central repository, would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data. The proposed Rule also would have required SROs and their members to synchronize their business clocks that are used for the purposes of recording the date and time of any event that must be reported under the proposed Rule consistent with industry standards. Further, the proposed Rule would have required the central repository to collect and retain, on a current and continuing basis, and in a format compatible with the other information collected pursuant to the proposed Rule, the national best bid and national best offer ("NBBO") information for each NMS security. Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act,101 and last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act also would have been required to be collected and retained.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

C. Summary of General Comments on the Proposed Rule

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule - Compliance User: Broker-dealers - Keywords: - Comments, - -

The Commission requested comments on all aspects of the proposed Rule, including the potential costs and benefits.102 In particular, the Commission encouraged commenters to identify, discuss, analyze, and supply relevant data regarding any such costs or benefits.103 In response, commenters provided views and opinions regarding the regulatory usefulness of a consolidated audit trail; the overall costs of the proposed Rule, focusing on those requirements that commenters believed would be the most costly or burdensome to implement;104 the process for creating and implementing a consolidated audit trail; and alternatives to the proposed Rule's approach to creating, implementing, and maintaining a consolidated audit trail. These comments are discussed below.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Industry Support for a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT - Compliance User: Broker-dealers - Keywords: - Opinions, - FINRA, - NYSE, - NASDAQ, - Commenters, - SIFMA, - -

Commenters provided a wide range of opinions, and shared their concerns, regarding specific aspects of the proposed Rule.105 However, many of the commenters and their representatives who are involved with regulating and operating securities markets – as well as many of the commenters who otherwise populate data for, or make use of, existing audit trail systems (such as broker-dealers) – expressed support for the creation of a single consolidated audit trail.

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FINRA and NYSE Euronext, filed a joint letter, "vigorously support[ing] the establishment of a consolidated audit trail," and stating, among other things, that "the evolution of the U.S. equity markets and the technological advancements that have recently taken place have created an environment where a consolidated audit trail is now essential to ensuring the proper surveillance of the securities markets and maintaining the confidence of investors in those markets."106

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The NASDAQ OMX Group, Inc. similarly states that "[m]arket developments and fragmentation of market centers with varying market structures and levels of transparency have created inefficiencies and potential gaps in cross-market regulation," and that "[c]omplete transparency is the only way to ensure fair and orderly markets."107

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Other commenters also stated their general support for the creation of a consolidated audit trail. According to Direct Edge Holdings, LLC ("Direct Edge"), "[t]he proposed consolidated audit trail ('CAT') system would significantly enhance the capabilities of regulators to police trading across asset classes; replace existing audit trails and consolidate trading and execution data for the asset classes under the Commission's jurisdiction . . . enable regulators to create a more complete timeline of an order's lifecycle; and facilitate large-scale market reconstructions . . . ."108

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Although CBOE expressed some concerns in its comment letter about the "breadth, expense, and timetable of the Proposal"109 (concerns that were shared by other commenters),110 it "recognizes there are potential benefits to be obtained from CAT, and agrees that a central repository with uniform data submitted by all markets could enhance SRO and SEC oversight of the markets."111 CBOE further stated that, "[i]n particular, a CAT that contains a customer identifier on an order by order basis would enhance significantly the audit trails of the markets."112

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BATS Exchange, Inc. ("BATS") expressed general support for the Commission's proposal, stating, "[o]ver the last several years, liquidity has dispersed across multiple interconnected venues, such that no one market center can claim a majority share of equity securities transactions. However, regulatory tools have not evolved to keep pace with these changes, and the limited existing processes and data available to analyze inter-market trading are inadequate. As a consequence, regulators rely on inefficient processes to reconstruct intermarket trading activity, including ad hoc requests to members for trading data when a potential problem is identified."113

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Liquidnet, Inc. ("Liquidnet"), an ATS, generally stated that, "[i]n the long run, a properly-designed system that provides for centralized reporting of data should be more cost-efficient than the current patchwork system for collecting audit trail data."114 Liquidnet outlined seven specific benefits of a consolidated audit trail, ranging from "[reducing] the time that regulatory personnel must expend to request and collect data from market participants on a case-by-case basis," to "[reducing] the cost of reconstructing, analyzing, and reporting on significant market events such as those that occurred on May 6, 2010." 115

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The Securities Industry and Financial Markets Association ("SIFMA"), an industry group that represents, among other entities, hundreds of securities firms that could be impacted by the creation of a consolidated audit trail, "believes that a centralized and comprehensive audit trail would enable the SEC and securities self-regulatory organizations ('SROs') to perform their monitoring, enforcement, and regulatory activities more effectively."116 SIFMA further states that, "[i]n the current era of electronic trading, regulators need efficient access to order and execution data from both broker-dealers and exchanges. Indeed, a consolidated audit trail is a much-needed improvement over today's fragmented audit trail platforms."117 As did a number of other commenters,118 SIFMA also expressed concerns about, and suggested alternatives to, some specific aspects of the proposed Rule, which will be further discussed below.

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Finally, the Commission notes that members of the Financial Information Forum, whose participants include "trading and back office service bureaus, broker-dealers, market data vendors and exchanges," agree that "an enhanced audit trail system could increase the effectiveness of cross-market surveillance through better data availability and integration."119

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When the perspectives of these commenters are combined with the Commission's own experiences (as described above in Section II.A.1.c.), a common theme emerges: there is substantial room for improvement in the collection of and access to trading data beyond what is available today from existing audit trails and other sources. The Commission agrees with many of the commenters that one of the main benefits of a consolidated audit trail will be to improve the efficiency and adequacy of a regulatory process of collecting and accessing audit trail data that directly affects and impacts a significant number, and wide variety, of market participants.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
2. Commenters' Views on the Overall Costs of the Proposed Rule and the Resulting Framework of the Adopted Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Industry Support for a CAT - Compliance User: Broker-dealers - Keywords: - Cost, - Comments, - -

With respect to general costs for the proposal, commenters expressed differing views. As discussed below, some commenters thought that the Commission overestimated the burdens of creating, implementing, and maintaining a consolidated audit trail, while others argued that the Commission had underestimated such burdens.

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Nasdaq was among those commenters that stated that the Commission had overestimated the burdens. Specifically, Nasdaq stated that "innovative technology exists to meet many of the Commission's goals at significantly lower costs than estimated in the Proposing Release," and that SROs should be able to weigh the costs and benefits of various designs.120 Other commenters also expressed similar opinions stating that a consolidated audit trail accomplishing the Commission's goals could be implemented for less than the preliminary estimates.121 Two firms with experience in processing and analyzing market data, FTEN and Thomson Reuters, each noted that current technology could convert data from disparate systems into a uniform format, resulting in a less costly implementation of the consolidated audit trail.122 FTEN stated that "currently available commercial systems are capable of immediately accomplishing CAT goals of real-time cross-market transparency, accountability and control with no implementation risk and for far less than the estimated multi-billion dollar price tag."123 It further suggested that "[t]he SEC should leverage already deployed and commercially available solutions that are in production use today by major market participants . . . ." and an "iterative approach [that] would leverage existing systems to capture order and execution data in real-time from liquidity destinations (exchanges, ECNs, ATSs and dark pools) and 'map' the data back to original trade submissions by market participants without requiring integration with, or changes to, market participants systems or to liquidity destination systems and without modifying existing order flow."124 Similarly, another commenter recommended a technology solution that could handle the required data in milliseconds and that "significantly reduces disk space required, which can potentially save millions of dollars when dealing with multiple terabytes of data."125 One commenter suggested an entirely different approach through the use of an "adaptive graph indexing-based architecture" as the basis for the consolidated audit trail platform, instead of using a central repository, and explained that this technology would keep trading data within each SRO.126

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On the other hand, numerous commenters expressed general concerns about the costs of implementing a consolidated audit trail relative to the benefits to be gained. For example, one commenter stated that "there can be no doubt whether market regulators need a consolidated audit trail;" however, the commenter questioned whether a system as costly as the consolidated audit trail was necessary to detect violations such as frontrunning, spoofing, and layering, which are violations the Commission has rarely pursued in the recent past.127

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As discussed above, many commenters expressed general support for the creation of a consolidated audit trail, but believed that, as proposed, the implementation would be too costly and that the Rule should be modified.128 Concern about the proposed real-time requirements for reporting data to the central repository was a common theme expressed by these commenters,129 including those who maintained that a requirement to provide data on a real-time basis would be too burdensome due to the extensive systems changes that would be needed to comply with such a requirement.130 Some of these commenters argued that a real-time reporting requirement would require many industry participants to build entirely new systems or undertake significant technological upgrades.131 SIFMA, in particular, estimated that the cost per broker-dealer to implement real-time reporting could be millions of dollars and that the cost of capturing options quotes in real time alone could exceed the Commission's $2.1 billion estimate for the annualized cost of the audit trail.132 SIFMA further argued that broker-dealers would incur costs associated not only with establishing and maintaining the infrastructure to support real-time reporting, but also due to regulatory risk if they are not able to achieve 100 percent compliance with the proposed Rule.133 While SIFMA opposed a real-time reporting requirement, and encouraged the Commission to adopt a next day or later reporting requirement,134 SIFMA also stated that "if the SEC determines to require reporting of certain data elements in real-time or near real-time, we believe such data should be limited to reporting of 'key business events.'"135 SIFMA further stated that, "if the definition of real-time allowed for reporting within minutes (e.g. 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications . . . ."136 SIFMA described how a reporting system using "drop copies"137 could be "achievable in the relative near term," although it noted that its proposed process would not, among other things, include a unique Customer ID or a unique order identifier.138

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Commenters also expressed general concerns regarding the costs of other aspects of the Proposed Rule. For example, Global Electronic Trading Company ("GETCO"), a market maker in equities and equity options, urged the Commission to consider whether quotation information already disseminated by SROs could be reported instead of requiring the SROs and their members to report all quotation information to reduce costs for the industry.139 Another commenter, Wells Fargo Advisors, argued that the inclusion of a unique customer identifier would add "tremendous incremental cost to the [consolidated audit trail]."140

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Many commenters provided suggestions and views on how the costs of creating and implementing a consolidated audit trail might be lowered. For example, financial technology firm, Correlix, Inc. ("Correlix"), stated that relying on existing infrastructure, where possible, could bring down the cost and amount of time it would take to implement the consolidated audit trail.141 Correlix further stated that existing technology already is able to provide "a complete end-to-end history of message and order data from the market participant to the execution venue's matching engine and back to the originator," and that allows clients to run customized queries and reports on the data.142

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A variety of commenters, including SROs and broker-dealers, also believed it would be more cost efficient to use the existing OATS infrastructure specifically as a basis for a consolidated audit trail, rather than to purchase or create an entirely new system.143 Commenters further argued that existing audit trails could be expanded economically and quickly.144

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In contrast, other commenters expressed the view that costs could be reduced not by using existing audit trail infrastructures, but rather by using new, innovative technology to create the consolidated audit trail.145 Noetic Partners, a financial technology firm, explained that technologies are currently available to build a system that would capture "full-depth" data with "compression and near-line storage" in a system that would enable fast retrieval and analysis of data, and opined that, based on existing technology, a consolidated audit trail could be implemented for substantially less than the Commission's preliminary estimates.146 This commenter stated that, based on available technology, a fully functional consolidated audit trail could be implemented in months, rather than years, at an initial cost of less than $100 million.147

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An aggregate analysis of the many specific opinions described above suggests that commenters' views regarding the costs of creating, implementing, and maintaining a consolidated audit trail fall into one of two general categories. One set of commenters expressed the view that many, if not all, of the requirements of the proposed Rule could be met in a cost-effective fashion if current audit trail systems were replaced with new technologies and systems. However, another set of commenters expressed the view that a number of the requirements of the proposed Rule would be very costly to implement, and, instead, suggested that the most cost-effective method of creating a consolidated audit trail would be to relax some of the proposed requirements and build upon the infrastructure of existing audit trail systems.

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Therefore, as discussed above and in detail below,148 in response to these comments, and specific comments discussed throughout this Release,149 the Commission is adopting Rule 613 with substantive changes to some of the specific collection, reporting, and data requirements of the Rule.150 The Commission believes that these changes significantly expand the solutions that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the Rule compared with the requirements of the proposed Rule. For example, the Rule no longer requires real-time reporting151 or only one unique order identifier;152 thus, the Rule would accommodate an NMS plan based on the types of solutions proposed by SIFMA and FINRA. However, to guide the SROs in their development of the NMS plan, the Rule includes several specific considerations153 that the Commission intends to use to evaluate the submitted NMS plan and consider its costs and benefits.

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The changes from the Proposing Release provide the SROs with the flexibility to submit an NMS plan that provides creative solutions that harness innovative technology or that build on existing audit trail systems.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
3. Comments on the Process for Creating a Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on the Process for Creating a CAT - Compliance User: Broker-dealers - Keywords: - NMS Plan, - FIF, - STA, - Comments, - SROs, - -

The Commission received comments regarding the process through which a consolidated audit trail should be created. As proposed, the Rule required that the SROs submit an NMS plan setting forth the details for the creation, implementation, and maintenance of a consolidated audit trail within 90 days of approval of the Rule. A few commenters suggested that more time be allotted for the planning and design of the NMS plan.154 FIF and the Security Traders Association ("STA") recommended extensive, "up-front business analysis,"155 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."156 These commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.157

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In this regard, several commenters suggested that the Commission undergo a RFP or request for information ("RFI") process to create and implement a consolidated audit trail.158 Specifically, FIF urged the Commission to perform a RFP process "to determine the best technical solution for developing a consolidated audit trail."159 FIF suggested that the Commission "should outline a set of goals and guiding principles they are striving to achieve as part of the adopted CAT filing and leave the determination of data elements and other technical requirements to [an] industry working group."160 Similarly, Direct Edge suggested that Commission staff should form and engage in a working group to develop an RFP for publication by the Commission.161 DirectEdge explained that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.162 Further, commenters, including Broadridge Financial Solutions, Inc., a technology provider,163 also requested more specific information about the audit trail system to better assess the Commission's initial cost estimates and to determine the best approach to the consolidated audit trail.164

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To gather the necessary information, commenters argued that the timeframe for submitting an NMS plan should be extended. FIF and STA opined that the time needed to perform the analysis to produce a "detailed blueprint for CAT"165 would be closer to six months,166 rather than the proposed 90 days.167 As a basis for their suggestions, FIF provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.168 FIF noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.169

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In response to these comments, the Rule requires the SROs to provide more information and analysis to the Commission as part of their NMS plan submission than would have been required under the proposed Rule. As discussed in more detail below, these requirements have been incorporated into the Rule as "considerations" that the SROs must address, and they generally mandate that the NMS plan submitted to the Commission for its consideration discuss certain important features and details of the NMS plan, such as how data will be transmitted to the central repository, as well as an analysis of NMS plan costs and impact on efficiency, competition, and capital formation, the process followed by the SROs in developing the NMS plan, and information about the implementation plan and milestones for the creation of the consolidated audit trail.170 These requirements are intended to ensure that the NMS plan is the result of a thorough and well-developed plan for creating, implementing, and maintaining the consolidated audit trail, and the Proposing Release highlighted the importance of these types of considerations. In Section III.C. below, the Commission also provides details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases" to help the SROs prepare a sufficiently detailed NMS plan that addresses the requirements of the adopted Rule.171

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Because of the additional information and analysis required to be included in the NMS plan, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan. Rule 613(a)(1) provides that "[e]ach national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section." The Commission will publish the NMS plan submitted in accordance with Rule 608 of Regulation NMS under the Exchange Act172 for public comment and will approve the NMS plan if the Commission determines it is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act. 173 The Commission also will consider whether the NMS plan submitted for its consideration would achieve the objectives of the Rule.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
4. Comments on Alternatives to the Proposed Consolidated Audit Trail
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Introduction, Summary of General Comments on the Proposed Rule, Comments on Alternatives to the Proposed Consolidated Audit - Compliance User: Broker-dealers - Keywords: - Recommendation, - Alternatives, - FINRA, - OATS, - -

Several commenters, many of whom generally supported the concept of a consolidated audit trail, recommended alternatives for how a consolidated audit trail should be created, implemented, and maintained. In particular, the Commission received comments suggesting various ways that the OATS system could be modified to serve as the central repository for the consolidated audit trail. FINRA submitted a blueprint for a modified version of OATS that listed certain changes to address the Commission's proposed requirements for the creation, implementation, and maintenance of the consolidated audit trail.174 The proposed modifications included, for example, the addition of data elements capturing whether an order was solicited, customer account type, a large trader identifier,175 and a unique identifier for branch office and registered representative to the data reported to OATS;176 using OATS to capture order and quote data from all national securities exchanges and eventually OPRA; the inclusion of options, fixed income securities, security-based swaps, principal orders and orders originating in firm-controlled accounts for purposes of working a customer order in OATS; the use of CRD numbers to identify broker-dealers; an exchange data processing gateway for OATS to validate submissions from exchanges; full access to regulators of queryable consolidated audit trail data through the FINRA web portal;177 and OATS' acceptance of limited drop-copy report information from broker-dealers on a 15-minute reporting basis.178 However, FINRA's blueprint provided that the large trader identifier should be used initially to identify market participants, as the complexities of tracking retail accounts, the infrequent amount of trading by retail investors, and the large number of such investors make requiring a unique customer identifier difficult.179

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Another commenter from the academic field believed that a modified version of OATS (including fields incorporating ultimate customer account information, a reduction in the time stamp standard to milliseconds or even microseconds, and standardized clock synchronization requirements), coupled with a requirement that exchanges must report to OATS, would allow OATS to fulfill the needs of the consolidated audit trail in a less costly manner than originally proposed.180 This commenter stated that the Commission's needs could be met by "a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."181

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Several commenters, including SROs and broker-dealers, generally believed that it would be more cost and time efficient to use a form of OATS as a basis for the consolidated audit trail than to purchase or create a new system.182 For example, FINRA/NYSE Euronext stated that modifying existing systems would reduce both the time and cost to develop a consolidated audit trail, explaining that "the programming changes needed to comply with an entirely new system are substantially greater than expanding existing protocols,"183 while BATS suggested that significant cost savings may be realized by building a consolidated audit trail that "leverages elements of OATS."184 FINRA/NYSE Euronext also argued that existing audit trails could be expanded "economically and quickly,"185 noting that use of such systems, such as FINRA's OATS, could make the central repository unnecessary.186 Similarly, FINRA believed that using OATS as a foundation of the consolidated audit trail would make the consolidated audit trail easier to implement,187 as opposed to building a new system, which could take years to establish and would likely result in "negative unintended consequences" during development.188 FIF suggested leveraging FINRA's Trade Reporting and Compliance Engine as a basis for the coverage of debt securities.189

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Two SROs, BOX and CBOE, recommended the joint use of both OATS and COATS.190 BOX suggested an expansion of OATS and COATS to include customer information,191 and CBOE stated that it believed that certain aspects of OATS and COATS could be combined, with the addition of customer and routing broker information, and new formats.192 The Commission also received an alternative proposal from a commenter that was not based on OATS, but on a combination of automatically-generated drop-copies and the Financial Information eXchange ("FIX") protocol.193 SIFMA urged reporting on a T+1 basis as it believed real-time reporting would require significant changes to existing order management and trading systems.194 If T+1 reporting were not adopted, however, SIFMA's proposal suggested that certain data be provided to the central repository in near real time, such as data pertaining to "key business events" such as order receipt and origination, order transmittal, execution, modification, and cancellation. SIFMA's proposal listed the specific data elements to be reported for each event, but, to achieve quick implementation, did not include unique customer or order identifiers, or an identifier for algorithmic orders.195

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The Commission has considered the comments on alternative proposals, including those based on OATS, and has made significant modifications to the proposed Rule in light of such comments. Each of these modifications is discussed in detail in Section III. below. But the Commission notes more generally that, as adopted, Rule 613 does not prescribe a specific audit trail collection system or a particular method of data collection to be used for the central repository. In addition, the Commission believes that certain modifications to Rule 613, such as allowing data to be reported by 8: 00 a.m. Eastern Time the following trading day, rather than in real time as proposed, provide the SROs with a wider range of options for how they choose to meet the requirements of the adopted Rule compared with the requirements of the proposed Rule. This wider range of options could more easily accommodate an OATS-based approach or other approaches for the creation of a consolidated audit trail, as suggested by commenters, consistent with the requirements of Rule 613.

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The Commission notes, however, that OATS, in its current form, has certain limitations and does not include certain attributes that the Commission deems crucial to an effective and complete consolidated audit trail.196 Some of the limitations of OATS that would need to be addressed to meet the requirements of Rule 613 include:

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• At present, only FINRA members are required to report trade and order activity through OATS. The resulting exclusion of some exchange-based and other types of non-member activity could lead to significant gaps in the data as an order is generated, routed, rerouted, and finally executed, canceled, or modified;

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• OATS does not currently require the collection of market-making quotes submitted by registered market makers (in those stocks for which they are registered), resulting in further, significant gaps in the data;

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• OATS is a part of a process by which FINRA collects data from its members for its own regulatory use. OATS is not a central repository and therefore does not presently provide other regulators with ready access to a central database containing processed, reconciled, and linked orders, routes, and executions ready for query, analysis, or download; and

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• OATS does not presently collect options data, and does not afford regulators an opportunity to perform cross-product surveillance and monitoring;

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• OATS does not collect information on the identities of the customers of broker-dealers from whom an order is received. As discussed above in Section I., the Commission believes that the integrated inclusion of such data elements into a single consolidated audit trail provides many important regulatory benefits.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

III. Discussion

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion - Compliance User: Broker-dealers - Keywords: - Rule 613, - -

A discussion of each of the key provisions of Rule 613, as adopted, is set forth below.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

A. NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan - Compliance User: Broker-dealers - Keywords: - Description, - Implementation, - -
pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Description of the Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan, Description - Compliance User: Broker-dealers - Keywords: - Implementation, - NMS Plan, - Comments, - -

a. Implementation of the Consolidated Audit Trail through an NMS Plan

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As proposed, the consolidated audit trail would have been created, implemented, and maintained through an NMS plan approved by the Commission. As proposed, Rule 613(a)(1) would have required each national securities exchange and national securities association to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository.197 The Commission would then have been required to publish the NMS plan for public comment pursuant to Rule 608 of Regulation NMS under the Exchange Act,198 and, following the period of public comment, would consider whether or not to approve the NMS plan. In the Proposing Release, the Commission stated its expectation that the exchanges and FINRA would "cooperate with each other and take joint action as necessary to develop, file, and ultimately implement a single NMS plan to fulfill this requirement."199

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The Commission requested comment on this approach. Specifically, the Commission requested comment on whether requiring the exchanges and FINRA to jointly file an NMS plan that would contain the requirements for a consolidated audit trail was the most effective and efficient way to achieve the objectives of Rule 613, or whether the Commission should require the exchanges and FINRA to standardize or otherwise enhance their existing rules. The Commission further requested comment on which approach would be most efficient in improving the ability to monitor cross-market trading, or to undertake market analysis or reconstructions, and why.

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Two commenters discussed how the consolidated audit trail should be created and implemented through an NMS plan.200 One noted that the Rule should provide the SROs with sufficient flexibility to develop an NMS plan that meets the overarching goals of the Commission.201 The second suggested that the Rule should "include only the elements needed for a [consolidated audit trail], and then leave it up to the SROs, [securities information processors] and involved vendors to develop the specifications for the data elements to be specified in the NMS plan, which would ultimately be subject to public comment and SEC approval."202

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Other commenters objected in principle to the use of an NMS plan to create and implement the consolidated audit trail.203 One commenter stated that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient," given the need "to respond and adapt quickly to new ways of trading and handling orders," and believed it would be difficult to jointly make necessary technology changes under an NMS plan because, based on the commenter's experience of collecting data for an existing audit trail, "technology changes and changes to technical specifications must be made regularly and promptly with respect to firm-specific reporting requirements, interpretations, and codes to keep up with complex and evolving trading and routing strategies."204 Another commenter argued that an NMS plan is "unnecessary … given all of the governance issues with NMS plans" because "[t]he Commission can get most of what it needs with a few tweaks to the existing trade reports and by extending OATS to cover all NMS stocks and executions at exchanges."205

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For the reasons discussed below, the Commission continues to believe that an NMS plan filed pursuant to Rule 608 of Regulation NMS206 is the most effective mechanism to implement the consolidated audit trail, and is adopting Rule 613 with a number of modifications and clarifications to address the concerns of commenters.207

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The Commission believes that the creation, implementation, and maintenance of the consolidated audit trail through an NMS plan will ensure that the SROs' expertise as the "front line" regulators of securities markets is drawn upon to develop the details of the consolidated audit trail, and to make appropriate adjustments as warranted to respond to changes in the securities markets and technology going forward. As such, under the Commission's approach, Rule 613 outlines a broad framework for the creation, implementation, and maintenance of the consolidated audit trail, including the minimum elements the Commission believes are necessary for an effective consolidated audit trail. Additionally, Rules 613(a)(1) and (a)(4), which require that each SRO jointly file and be a sponsor of the NMS plan, is being adopted as proposed. The Commission continues to believe that requiring all SROs to jointly file the NMS plan to establish the consolidated audit trail, as opposed to the flexibility provided by current Rule 608 of Regulation NMS under the Exchange Act,208 which permits any two or more SROs to submit an NMS plan, is appropriate because such a requirement is expected to result in an NMS plan that is the product of negotiation and compromise among all of the SROs; in this regard, the NMS plan submitted to the Commission also may be more readily implemented as the NMS plan should take into consideration the capabilities of every SRO.

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In response to the commenter that advocated granting additional flexibility to the SROs in developing the requirements of the NMS plan,209 the Commission has made significant modifications to the Rule in several respects to increase the options available to SROs in developing the requirements of the NMS plan.210 Furthermore, in instances where Rule 613 sets forth minimum requirements for the consolidated audit trail, the Rule provides flexibility to the SROs to draft the requirements of the NMS plan in a way that best achieves the objectives of the Rule. For example, Rule 613 requires the NMS plan submitted to the Commission for its consideration to require material terms of an order, such as order type, to be collected by the central repository.211 However, the Rule does not enumerate specific order types or prescribe the format or nature of how this information would be represented. This would be left to the SROs developing the NMS plan and allows flexibility for the future, when new order types may be introduced and added, if appropriate.

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Similarly, in response to the commenter stating that implementing the consolidated audit trail through an NMS plan would be "difficult and inefficient" given the need to respond and adapt quickly to new ways of trading and handling orders,212 the Commission notes that, while the NMS plan submitted to the Commission for its consideration must contain the minimum necessary elements for the consolidated audit trail, and any amendments to an effective NMS plan initiated by plan sponsors will require approval by Commission order, the SROs should have flexibility to accommodate a variety of technological and other market developments without amending the NMS plan (e.g., through the issuance and updating of technical specifications that are reasonably and fairly implied by the NMS plan). Underscoring this need to ensure the consolidated audit trail is regularly updated to remain compatible with best market practices, the Commission, as discussed in Section III.C.2.a.i., also has added general requirements to Rule 613 with regards to SROs monitoring and planning for the technological evolution of the consolidated audit trail. Further, as noted in Section III.B.3 below, the NMS plan must include a governance structure for the central repository that is designed to ensure efficient decision-making.

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The Commission has also considered the comment that recommended that the Commission should leave it to the SROs, securities information processors ("SIPs") and vendors to develop the specifications for the data elements in the NMS plan.213 The Commission agrees in principle with the commenter, and believes that market participants other than SROs also could have valuable insights regarding the design of the specifications for the data elements, the central repository, and other aspects of the Rule. To address this concern, the adopted Rule requires the SROs to explain in the NMS plan the process by which they solicited views of their members regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members, and how the plan sponsors took such views into account in preparing the NMS plan.214 In addition, the Rule requires the NMS plan submitted to the Commission for its consideration to provide for the creation of an Advisory Committee to afford SRO members, and other interested parties as permitted by the NMS plan,215 the opportunity to have input on the creation, implementation, and maintenance of the consolidated audit trail.216 The Commission also notes that nothing in the Rule precludes the SROs, as plan sponsors, from consulting with others, including the SIPs and vendors, as they craft the NMS plan. Finally, pursuant to Rule 608(b)(1), the NMS plan will be published for public comment.217 Thus, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted to the Commission, which the Commission will review and consider.

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In response to the commenter that believed that the objectives of the consolidated audit trail could be achieved "with a 'few tweaks' to the existing trade reports and by extending OATS,"218 the Commission notes, as described above, that existing trade reports and the current OATS process combined do not meet many of the requirements the Commission believes are essential for a consolidated audit trail. The Commission therefore believes that an NMS plan, as noted above, provides an effective mechanism for the SROs to create, implement, and maintain a consolidated audit trail meeting such requirements. However, it also notes that the adopted Rule does not preclude the infrastructure, nomenclature, format, or any other aspects of an existing order audit trail system, such as OATS, from being used for the consolidated audit trail, provided the NMS plan proposing to establish such an audit trail otherwise meets the requirements of Rule 613. The Commission stresses that existing order audit trails lack critical information such as the identity of the customer, data on principal orders or quotes, and a way to link orders across markets – information that the Commission believes is essential to the consolidated audit trail.219

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pubdate: July 18, 2012 effdate: October 01, 2012 -

B. Elements of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan - Compliance User: Broker-dealers - Keywords: - SRO, - NMS Plan, - Implementation, - Submission, - Minimum Requirements, - -

As discussed above, the adopted Rule requires the SROs to submit an NMS plan to create, implement, and maintain a consolidated audit trail.220 As adopted, the Rule permits the SROs to consider a wider array of solutions, in creating, implementing, and maintaining a consolidated audit trail. The Rule, however, also sets forth certain minimum requirements of the consolidated audit trail that must be included in the NMS plan submitted by the SROs to the Commission for its consideration. The Commission believes that it is important to set forth certain minimum requirements to ensure that the consolidated audit trail will be designed in a way that provides regulators with the accurate, complete, accessible, and timely market activity data they need for robust market oversight. The minimum audit trail requirements that must be included in the NMS plan submitted by the SROs are discussed below.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Recording and Reporting
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Recording and Reporting - Compliance User: Broker-dealers - Keywords: - Products, - Covered Transactions, - Orders, - Quotations, - Persons Required to Report, - Central Repository, - Reportable Events, - Data Elements, - Material Terms, - Order Type, - Special Handling Instructions, - National Securities Exchange, - National Securities Association, - Broker-Dealer Identifiers, - Customer Identifier, - -

a. Products and Transactions Covered

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As proposed, Rule 613 would have applied to secondary market transactions in all NMS securities, which includes NMS stocks and listed options.221 In the Proposing Release, the Commission also addressed the possibility of expanding the scope of the consolidated audit trail over time. Specifically, proposed Rule 613(i) would have required the NMS plan to include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how such exchanges and associations would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. The document also would have been required to identify which market participants would be required to provide the additional data and to include an implementation timeline and a cost estimate for including such data in the consolidated audit trail.222 The Commission requested comment on whether expanding the consolidated audit trail to include the products and transactions specified above was an appropriate approach to the eventual expansion of the consolidated audit trail, and, if so, an appropriate and realistic timetable for doing so.

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Several commenters expressed opinions on the scope of the products and transactions proposed to be covered by the Rule and how their inclusion in the consolidated audit trail should be phased in under the Rule.223 One commenter urged the Commission to consider including additional asset classes in the scope of the products covered by the Rule, and specifically questioned the value of the consolidated audit trail without the inclusion of information on futures and other derivatives.224

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The Commission also received comment on the proposed Rule's approach for considering a possible future expansion of the products and transactions covered by the consolidated audit trail. One commenter believed that its technology would allow development of a platform that would support multiple asset classes and expansion of the consolidated audit trail for use by other regulators.225 Other commenters expressed general support for expanding the scope of products covered.226 One specifically suggested expanding the scope of the Rule, for example, to include the "creation of instruments that underlie the securities that make up [mortgage-backed securities] and [asset-backed securities]."227 Another suggested expanding the consolidated audit trail to all securities submitted to an exchange or clearing agency.228 Yet another commenter, however, argued against allowing the exchanges, through the NMS plan, to have primary responsibility for specifying the data requirements of non-exchange-traded asset classes, stating that exchanges lacked experience with these instruments.229

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The Commission has considered the comments discussed above and is adopting the Rule as proposed with respect to the scope of the securities that must be covered at this time, but, as described below, acknowledges the importance of a mechanism for considering other types of products in the future. Specifically, the adopted Rule requires that consolidated audit trail data be collected for all NMS securities.230 However, the Commission also is adopting the requirement that the NMS plan require the SROs to jointly submit a document outlining a possible plan for expansion of the consolidated audit trail, as proposed, but with three modifications from the proposed Rule.

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Rule 613(i) requires that the SROs jointly provide the Commission a document outlining how the SROs could incorporate the following additional products into the consolidated audit trail: equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities ("expansion document"). The adopted Rule also requires the expansion document to include details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline and a cost estimate. The first modification from the proposed Rule is a technical change clarifying that Rule 613(i) is requiring the SROs to provide the Commission with a document that outlines how an expansion of the consolidated audit trail could be accomplished in the future and is not, at this time, requiring that the SROs commit to expanding the consolidated audit trail beyond secondary market transactions in NMS securities.231 However, the Commission notes that Rule 613(i) retains the requirement that SROs include an implementation timeline and a cost estimate; in this regard, the Commission expects that the SROs will address fully in the expansion document how any such expansion of the consolidated audit trail could be implemented in practice, and that such document would include sufficient detail for the Commission to ascertain how the SROs could proceed with such expansion. The Commission would expect to make the expansion document publicly available on its website and to solicit a wide range of comment on it to further inform and facilitate the expansion of the consolidated audit trail if appropriate, taking into account the relevant considerations contemplated by Rule 613(a)(1). In addition, the expansion document could inform the detailed plans that are to be prepared at least every two years by the CCO of the NMS plan.232

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In addition, after considering the comments received relating to the potential expansion of the consolidated audit trail and how such an expansion might occur,233 the Commission is making the second modification to the proposed Rule to extend the deadline for submitting the expansion document from two months to six months from the date of effectiveness of the NMS plan approved by the Commission. The Commission believes that the additional four months will provide the time necessary after the approval of the NMS plan by the Commission for the SROs to consider how they might expand the consolidated audit trail to capture orders and trading in these additional securities and thus will aid the Commission in receiving an outline or plan from the exchanges and associations that has had the benefit of additional time for analysis and planning. Finally, given the extension of the deadline for submitting the expansion document and the importance of information regarding primary market information in NMS stocks relative to other types of transactions as discussed in Section III.B.1.a. below, the Commission is removing the requirement that the expansion document discuss all primary market transactions in NMS stocks and is, instead, as discussed later, requiring that a discussion of the feasibility, benefits, and costs of incorporating into the consolidated audit trail information about allocations in primary market transactions in NMS securities be addressed with the NMS plan submission.234 However, the expansion document must still include a discussion of primary market transactions in equity securities that are not NMS securities.

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The Commission agrees in principle with the commenters that advocated a phased approach to implementation.235 The Commission, however, has determined not to modify the proposed scope of the Rule, which applies to orders in NMS securities. The Commission also adopts substantially its proposed implementation timeframes that apply if and when the NMS plan is approved,236 except that the NMS plan may provide up to one additional year before small broker-dealers will be required to provide information to the central repository.237

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The Commission continues to believe that the Rule's requirement to include secondary market transactions in all NMS securities (i.e., both listed equities and options) is a reasonable first step in the implementation of the consolidated audit trail. In addition, the Commission believes that applying the Rule solely to NMS securities should allow for a less burdensome implementation of the consolidated audit trail as compared to applying the Rule to a broader set of securities,238 in large part because market participants already have experience with audit trails for transactions in these securities. And, as discussed in detail above,239 there are many significant benefits of a consolidated audit trail that includes NMS securities (even if it is only limited to NMS securities).

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With regards to a phased approach to implementation, the Commission notes that the data recording and reporting requirements would apply initially, as proposed, to the SROs but not to their members. This will allow members additional time to, among other things, implement the systems and other changes necessary to provide the required information to the central repository, including capturing customer and order information that they may not have previously been required to collect. Should the SROs determine that additional implementation phases might be appropriate (e.g., applying the Rule first to equities and then to listed options), the Commission notes that the Rule does not preclude the SROs from proposing such phases, so long as the outer time parameters specified in the Rule, which the Commission is adopting as proposed, are met.240

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The Commission agrees with commenters that the inclusion of additional products (even at a later date) could further enhance the ability of the SROs and the Commission to conduct effective market oversight for financial products currently trading in the marketplace.241 The Commission also believes that it could be beneficial for the consolidated audit trail to be expanded over a reasonable period of time to include information on primary market transactions in equity and debt securities, as this data could be used to quickly assess potential violations of various rules under the Exchange Act such as, for example, Regulation M and Rule 10b-5.242 For example, the primary market transaction data would allow regulators to more quickly identify whether any participant in an offering sold short prior to the offering in violation of Regulation M. The primary market transaction data would allow for identification of the cost basis for purchases by intermediaries and make it easier to assess whether subsequent mark-ups to investors in primary offerings are fair and reasonable and, if not, whether there has been a violation of the antifraud provisions of the federal securities laws, including Rule 10b-5.

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The Commission considered the comment letter that agreed that "policing the market requires a comprehensive approach" but asserted the exchanges should not be primarily responsible for specifying requirements relating to asset-backed securities and other debt instruments, including swap instruments that are not exchange-traded.243 In response, the Commission notes the Rule requires the SROs to submit a document outlining a plan for the possible expansion of the NMS plan to non-NMS securities – namely debt securities and equity securities that are not NMS securities.244 The Commission also notes that FINRA, the SRO responsible for oversight of trading in the over-the-counter market, would participate in the preparation of such expansion document, and expects that FINRA would provide substantial input as to how the consolidated audit trail might be expanded to include non-NMS securities. Because the consolidated audit trail will be jointly owned and operated by the SROs pursuant to the NMS plan, however, the Commission believes that the involvement of all of the SROs in any potential expansion process is appropriate.

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The Commission also notes that any expansion of the consolidated audit trail to include transactions in non-NMS securities would be effected through public notice and comment, and take into account the relevant considerations contemplated by Rule 613(a)(1). Furthermore, adopted Rule 613(b)(7), discussed in more detail later in this Release,245 requires the NMS plan to include an Advisory Committee, which includes members of the plan sponsors and other interested parties as set by the NMS plan,246 that would be available to provide consultation on matters concerning the central repository, including the securities subject to the Rule. Therefore, the Commission believes that the participation of FINRA, the public, and the Advisory Committee should assist the SROs in devising a document outlining the expansion of the consolidated audit trail to other securities.

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The Commission continues to believe that the expansion document required by Rule 613(i) will provide valuable information to the Commission and help inform the Commission about the likely efficacy of expanding the scope of the consolidated audit trail to include information on equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities. In addition, the expansion document will aid the Commission in assessing the feasibility and impact of the plan sponsors' proposed approach.

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The Commission acknowledges that plan sponsors will incur costs to prepare the expansion document. For example, plan sponsors will be required to address, among other things, details for each order and reportable event for which data may be submitted; which market participants may be required to provide the data; an implementation timeline; and a cost estimate. Thus, the plan sponsors must, among other things, undertake an analysis of technological and computer system acquisitions and upgrades that would be required to incorporate such an expansion. The Commission, however, believes that it would be beneficial to receive a document outlining how the plan sponsors could incorporate into the consolidated audit trail securities in addition to NMS securities, such as over-the-counter equity and debt securities, as soon as practicable. This is because such an expansion document will aid the Commission in assessing both the feasibility of expanding the audit trail to these additional securities, possibly including, as commenters urged, instruments that underlie mortgage-backed securities and asset-backed securities, and the resulting potential benefits to the securities markets as a whole if the consolidated audit trail is expanded in the manner described in the document submitted by the plan sponsors pursuant to Rule 613(i).

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b. Orders and Quotations

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As proposed, Rule 613 would have required that information be provided to the central repository for every order in an NMS security originated or received by a member of an exchange or FINRA. Proposed Rule 613(j)(4) would have defined "order" to mean: (1) any order received by a member of a national securities exchange or national securities association from any person; (2) any order originated by a member of a national securities exchange or national securities association; or (3) any bid or offer.247 In sum, the Commission proposed that the Rule cover all orders (whether for a customer or for a member's own account), as well as quotations in NMS stocks and listed options.248

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The Commission requested comment about the scope of its proposed definition of "order," including whether principal orders249 should be included in the scope of the consolidated audit trail and whether there are any differences between orders and quotations that should be taken into account with respect to the information that would be required to be provided to the central repository. The Commission also requested comment on whether non-firm quotations should be included in the consolidated audit trail and marked to show that they are not firm.250

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Commenters generally supported the inclusion of principal orders in the definition of "order,"251 but some expressed concern about including market maker quotations in the consolidated audit trail.252 In particular, these commenters thought that the volume of quotes proposed to be collected was so large that it would require market participants to increase the capacity of their systems that would transmit data to the central repository, and thus recommended that market maker quotations be exempted from the Rule's reporting requirements.253 One of these commenters specifically suggested that the Rule use the same approach as is currently used for the COATS – which contains order, quote (but only the top of market quote) and transaction data for all market participants.254

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The Commission also received two comments regarding the inclusion of non-firm orders and quotes in the consolidated audit trail. One commenter, consistent with the proposed Rule, stated that only firm orders and quotes should be included.255 Another commenter, however, believed that the proposed Rule did not go far enough, and stated that the Rule should require that information relating to indications of interest or similar communications be reported to, among other things, assist the SROs and the Commission in detecting "spoofing,"256 where a market participant enters and quickly cancels limit orders or quotations with the intent of having those non-bona fide orders or quotations change the NBBO or create a misperception of the available market liquidity to induce others to change their trading decisions.

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In addition to the comments regarding inclusion of principal and non-firm orders and quotes in the consolidated audit trail, some commenters suggested ways to narrow the definition of "order." One commenter would exempt "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit," from the mandatory reporting requirements.257 Another commenter – an options exchange - recommended that the Commission only require consolidated NBBO data to be reported with respect to options quotations, noting that there are millions of quotes per day on its exchange and that certain options, including out-of-the-money options, are subject to a high volume of quotation updates but generate limited trading activity.258

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The Commission considered the comments regarding the scope of the quotes and orders that should be included in the Rule's definition of "order," and acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.259 The Commission also acknowledges that requiring the recording and reporting of all quotes and orders may entail more costs, such as additional development time and storage capacity, than if the Commission did not require the recording and reporting of market maker quotes or out-of-the-money options. Nevertheless, because the Commission continues to believe that many of the benefits of a consolidated audit trail can only be achieved if all orders and quotations are included, the Commission is adopting the definition of "order" in Rule 613(j)(4) (renumbered as Rule 613(j)(8)), as proposed, to include orders received by a member of an exchange or FINRA from any person, any order originated by a member of an exchange or FINRA, and any bid or offer, including principal orders.260

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The Commission believes it is important for the consolidated audit trail to capture information for all principal orders and market maker quotations because principal orders and market maker quotations represent a significant amount of order and transaction activity in the U.S. markets. Effective surveillance of their trading is critical to detecting a variety of types of potential misconduct such as manipulation and trading ahead. By providing regulators comprehensive information about principal orders and market maker quotations throughout the U.S. markets – information that is not available to regulators today using existing audit trails – the consolidated audit trail would allow regulators to efficiently surveil for manipulative and other illegal activity by market making and other proprietary trading firms. In addition, any comprehensive market reconstruction or other market analysis would need to take into account principal orders and market maker quotations – which, as noted above, constitute a large percentage of the orders and trades in today's markets – to provide a complete and accurate picture of market activity.

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Furthermore, the Commission believes that including principal orders and market maker quotations in the consolidated audit trail would permit SROs to more efficiently monitor the market for violations of SRO rules. Such monitoring requires determination of the exact sequence of the receipt and execution of customer orders in relation to the origination and execution of principal orders or market maker quotations. For example, SROs would be able to use the consolidated audit trail data to more efficiently detect instances when a broker-dealer receives a customer order and then sends a principal order or quote update to an exchange ahead of the customer order, potentially violating the trading ahead prohibitions in SRO rules.261

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In addition, information on principal orders or market maker quotations could be useful in investigating illegal "spoofing." The availability to regulators of comprehensive information about principal orders and market maker quotations would allow them to more efficiently and effectively identify the source of the orders or quotations and, thus, better determine whether the quoted price was manipulated or simply a response to market forces.

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A further example where information on principal orders and market maker quotations would enhance regulatory efforts is in reviewing "layering" or other manipulative activity. Layering is a form of market manipulation where orders are placed close to the best buy or sell price with no intention to trade in an effort to falsely overstate the liquidity in a security. Layering attempts to manipulate the shape of the limit order book to move the price of a security or influence the trading decisions of others. Layering is often effected with principal orders, so inclusion of principal orders in the consolidated audit trail would aid regulators in the detection of this manipulative practice.262

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The Commission considered the comment that recommended excluding certain quotations, such as those generated for out-of-the-money options, from the definition of "orders" required to be reported to the central repository.263 The Commission, however, believes that such quotations must be included in the consolidated audit trail. Although there may be a high volume of quotations in out-of-the-money options with limited resulting trading activity, the Commission believes that having a record of those quotations is necessary to allow regulators to surveil high-speed quoting strategies for manipulative or other illegal behavior and to assess the impact of market making and other high-frequency quoting behaviors on the quality of the markets. Including these quotations is necessary for example, because the Commission may investigate allegations of a broker-dealer engaging in the practice of flooding the market with out-of-the-money option quotations for the purpose of manipulating the price of the option or related security, or to overload exchange execution systems. Based on the foregoing, to ascertain whether any illegal activity might be occurring through the misuse of quoting, the consolidated audit trail must require all bids and offers to be collected and reported to the central repository.

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The Commission also considered the comment that asserted that "non-trading transfers of securities within a legal entity, such as internal journals of securities within a desk or aggregation unit" should be exempt from the reporting requirements of the Rule.264 In response to this comment, the Commission notes that Rule 613 does not require the reporting of such transfers because they are not "orders," as defined under Rule 613(j)(8). However, Rule 613 does require the NMS plan to require the reporting of the internal routing of orders at broker-dealers.265

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The Commission also considered the comment that recommended including indications of interest in the definition of "order."266 The Commission, however, is not including indications of interest in the definition of "order" for purposes of the consolidated audit trail because the Commission believes that the utility of the information such data would provide to regulators would not justify the costs of reporting the information. Indications of interest are different than orders because they are not firm offers to trade, but are essentially invitations to negotiate. As such, the Commission believes that indications of interest are less likely to be used as a vehicle for illegal activity, such as manipulation or layering, because they would be less likely to induce a response from other market participants.

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c. Persons Required to Report Information to the Central Repository

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Under proposed Rule 613(c)(5), each national securities exchange and its members would have been required to collect and provide to the central repository certain data for each NMS security registered or listed on a national securities exchange, or admitted to unlisted trading privileges on such exchange; and, under proposed Rule 613(c)(6), each national securities association and its members would have been required to collect and provide to the central repository certain data for each NMS security for which transaction reports would be required to be submitted to a national securities association. Proposed Rule 613(c)(7) would have required each national securities exchange, national securities association, and any member of such exchange or association to collect and provide to the central repository certain details, delineated in such Rule, for each order and each reportable event. The Commission requested comment on whether requiring SROs and their members to report the required order information to the central repository was appropriate.

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Several commenters broadly objected to the requirement that all broker-dealers report consolidated audit trail information to the central repository and/or proposed alternatives to such a requirement.267 One commenter suggested that introducing brokers should be permitted to rely on their clearing firms for reporting to the central repository, arguing that requiring separate reporting by introducing brokers and clearing firms "will only dilute the economic benefits realized by Introducing Brokers through such clearing arrangements and may result in increased costs to customers."268 This commenter also stated that it does not believe there is appreciable benefit to the Commission, FINRA or the markets in general in mandating reporting by introducing brokers.269

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Similarly, another commenter urged the Commission to exclude broker-dealers from the consolidated audit trail reporting requirements if they route their orders exclusively to another reporting firm that is solely responsible for further routing decisions, on the basis that this would essentially result in duplicative reporting.270 In addition, this commenter recommended the Commission exempt small broker-dealers from the reporting requirements if compliance would be unduly burdensome.271 Another commenter, a small broker-dealer that manually handles orders, specifically suggested that the Commission adopt a provision similar to FINRA Rule 7470, which provides FINRA staff the authority to grant exemptions to broker-dealers that solely handle orders manually from OATS recording and data transmission requirements.272

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Three commenters argued that broker-dealers should not be required to report quotation information to the central repository that is available from other market participants.273 Specifically, one commenter argued that broker-dealers should not be required to report information to the central repository that has already been reported to an SRO (e.g., market maker quotes) because the SRO would also be reporting the information to the central repository.274 Another commenter stated that it "believes that, rather than requiring quote reporting by broker-dealers, only the exchanges and FINRA (through its Alternative Display Facility and proposed Quotation Consolidation Facility) should be required to report quotations," and added that "[t]he exchanges and FINRA are in a position to provide quotation information at a lower cost and with more accuracy."275 Similarly, a third commenter urged the Commission to consider "whether surveillance systems could rely on quotation information disseminated by the SROs," instead of requiring all quotation data to be sent separately to the repository.276

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The Commission considered the comments objecting to the requirement that broker-dealers report all consolidated audit trail information to the central repository. However, for the reasons discussed below, the Commission is adopting the requirements as proposed with regard to the obligation of members to report required data to the central repository.277 Specifically, the Commission is adopting Rules 613(c)(5) and (6) as proposed. Rule 613(c)(5) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by [Rule 613(c)(7)] for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange," and Rule 613(c)(6) provides that "[t]he national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association."

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In essence, the Commission believes these provisions are appropriate because they require each party – whether a broker-dealer, exchange or ATS – that takes an action with respect to an order, and thus has the best information with respect to that action, to record and report278 that information to the central repository.279 For example, the broker-dealer originating an order – whether received from a customer or generated as a principal order – is in the best position to record the terms of that order, including the time of origination, as well as the unique customer and order identifiers. If the originating broker-dealer is required to record the time each order in a rapid series of principal orders is generated, for example, regulators will be able to more accurately reconstruct the sequence of those orders for purposes of conducting market surveillances for manipulative or other illegal activity, or for performing market reconstructions. In addition, requiring the originating broker-dealer to record the time an order was received from a customer could then help regulators more accurately determine whether the broker-dealer quickly traded ahead of the customer order. On the other hand, if the recording and reporting requirements initially applied only to the executing or routing broker-dealer, or the exchange in the case of market maker quoting, regulators would not know the precise time the order or quote was originated, and would not be able to implement or perform as efficiently effective surveillances, such as those discussed above. In addition, the lack of precise order origination time could interfere with the ability of regulators to perform accurate market reconstructions or analyses, particularly with respect to high frequency trading strategies. Thus, the Commission believes that every broker-dealer (and exchange) that touches an order must record the required data with respect to actions it takes on the order, contemporaneously with the reportable event, to ensure that all relevant information, including the time the event occurred, is accurately captured and reported to the consolidated audit trail.280

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While a broker-dealer will be required to record any actions it takes with respect to an order because such recordation would capture information, particularly the time stamp, which is needed by regulators for the reasons discussed above, the Commission notes that nothing in the Rule precludes the NMS plan submitted to the Commission for its consideration from allowing an introducing broker or other broker-dealer to use a third party, such as a clearing broker-dealer, to report the data recorded by the introducing broker or other broker-dealer to the central repository.

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The Commission acknowledges that SROs and their members will incur costs to record and report the audit trail data required by Rules 613(c)(5), 613(c)(6) and 613(c)(7).281 The Commission also acknowledges that, in some instances, the information required to be recorded and reported by some market participants, for example, market makers, may indeed be available from other market participants (in the case of market makers, the exchanges) and that there might be additional costs for all market participants to record and report information. However, for the reasons noted above, the Commission believes that requiring every market participant that touches an order to record and report the required audit trail data to the central repository, and thus requiring these market participants to incur these costs is appropriate. The Commission believes that such costs will depend on the exact details of how information is to be recorded and reported to the central repository, including whether third-parties, such as clearing-brokers or exchanges, facilitate the transmission of such data. But because these costs depend on details that are not being prescribed by the Commission, Rule 613 requires that the SROs must, in their proposal of the specific mechanisms by which data will be reported to the central repository, include cost estimates of their solution, as well as a discussion of the costs and benefits of the various alternatives considered but not chosen.282 More so, as discussed above in Section I, once the Commission receives the submitted NMS plan, it will be able to use such plan-specific details and costs estimates, as well as public comment on the NMS plan, in determining whether to approve the NMS plan.

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The Commission also considered the comment that small broker-dealers should be granted an exemption from the Rule,283 and, as discussed in Section III.D., is adopting Rule 613(a)(3)(vi), which provides that the NMS plan shall require each SRO to require small broker-dealers to provide audit trail data to the central repository within three years after effectiveness of the NMS plan, as opposed to within two years as proposed.284 The Commission believes that completely exempting small broker-dealers from reporting requirements would be contradictory to the goal of Rule 613, which is to create a comprehensive audit trail. In effect, an exemption to small broker-dealers from the requirements of the Rule would eliminate the collection of audit trail information from a segment of the broker-dealer community and would thus result in an audit trail that does not capture all orders by all participants in the securities markets for NMS securities. The Commission notes that illegal activity, such as insider trading and market manipulation, can be conducted through accounts at small broker-dealers just as readily as it can be conducted through accounts at large broker-dealers. In addition, granting an exemption to certain broker-dealers might create incentives for prospective wrongdoers to utilize such firms to evade effective regulatory oversight through the consolidated audit trail. The Commission recognizes, however, that small broker-dealers, particularly those that operate manual systems, might be particularly impacted because of their more modest financial resources and may need additional time to upgrade to an electronic method of reporting audit trail data to the central repository, and thus believes that allowing the NMS plan to permit such broker-dealers up to an extra year to begin reporting data to the central repository if the plan sponsors believe such an accommodation is reasonable, is appropriate. The Commission believes up to an additional year could allow small broker-dealers extra time to explore the most cost-effective and most efficient method to comply with the Rule. The Commission acknowledges that permitting small broker-dealers up to three years to begin reporting the required audit trail data to the central repository will delay the ability of regulatory authorities to obtain full information about all orders from all participants, which in turn will result in delaying the full regulatory benefit of the consolidated audit trail. However, the Commission believes that such an accommodation to small broker-dealers is reasonable, given the fact that small broker-dealers may face greater financial constraints in complying with Rule 613 as compared to larger broker-dealers. 285 The Commission also notes that many small broker-dealers are introducing broker-dealers and may be able to use their clearing broker-dealers to report the data to the central repository, thereby potentially reducing some of their costs.

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d. Reportable Events and Consolidated Audit Trail Data Elements

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As proposed, Rule 613 would have required SROs and their respective members to provide certain information regarding each order and each "reportable event" to the central repository. A reportable event would have been defined in proposed Rule 613(j)(5) to include, but not be limited to, the receipt, origination, modification, cancellation, routing, and execution (in whole or in part) of an order.

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For the reportable event of receipt and origination of an order, proposed Rule 613(c)(7)(i) would have required the reporting of the following data elements: (1) information of sufficient detail to identify the customer; (2) a unique customer identifier for each customer; (3) customer account information; (4) a unique identifier that would attach to an order at the time of receipt or origination by the member; (5) a unique identifier for the broker-dealer receiving or originating an order; (6) the unique identifier of the branch office and registered representative receiving or originating the order; (7) the date and time (to the millisecond) of order receipt or origination; and (8) the material terms of the order.

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For the reportable event of routing of an order, proposed Rule 613(c)(7)(ii) would have required the reporting of the following information by the member or SRO that is doing the routing, each time an order is routed: (1) the unique order identifier; (2) the date on which an order was routed; (3) the exact time (in milliseconds) the order was routed; (4) the unique identifier of the broker-dealer or national securities exchange that routes the order; (5) the unique identifier of the broker-dealer or national securities exchange that receives the order; (6) the identity and nature of the department or desk to which an order is routed if a broker-dealer routes the order internally; and (7) the material terms of the order.

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Rule 613(c)(7)(iii), as proposed, also would have required the collection and reporting by the SRO or member receiving a routed order of the following information: (1) the unique order identifier; (2) the date on which the order is received; (3) the time at which the order is received (in milliseconds); (4) the unique identifier of the broker-dealer or national securities exchange receiving the order; (5) the unique identifier of the broker-dealer or national securities exchange routing the order; and (6) the material terms of the order.

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For the reportable events of modification or cancellation of an order, proposed Rule 613(c)(7)(iv) would have required the following data be collected and reported: (1) the date and time (in milliseconds) that an order modification or cancellation was originated or received; (2) the price and remaining size of the order, if modified; (3) the identity of the person responsible for the modification or cancellation instruction; and (4) other modifications to the material terms of the order.

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For full or partial executions of an order, proposed Rule 613(c)(7)(v) would have required the following information to be collected and reported to the central repository: (1) the unique order identifier; (2) the execution date; (3) the time of execution (in milliseconds); (4) the capacity of the entity executing the order (whether principal, agency, or riskless principal); (5) the execution price; (6) the size of the execution; (7) the unique identifier of the national securities exchange or broker-dealer executing the order; and (8) whether the execution was reported pursuant to an effective transaction reporting plan or pursuant to the OPRA Plan.

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The Commission received comments on the information proposed to be recorded and reported to the central repository for each reportable event (i.e., the consolidated audit trail data elements) but did not receive comments on the proposed definition of reportable event in proposed Rule 613(j)(5) (i.e., the events that trigger consolidated audit trail reporting requirements). However, the Commission is making clarifying changes to proposed Rule 613(j)(5) (renumbered as Rule 613(j)(9)) to define a "reportable event" as including the original receipt of a customer's order by a broker-dealer; the origination of an order by a broker-dealer (i.e., a principal order); and the receipt of a routed order. Thus, Rule 613(j)(9), as adopted, provides that "[t]he term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order." The Commission believes these changes from the proposal are appropriate because they conform Rule 613(j)(9) to the provisions of Rule 613(c)(7). Specifically, Rule 613(c)(7) is structured around each "reportable event;" therefore, audit trail data is listed according to the data that must be reported upon "original receipt or origination" of an order (Rule 613(c)(7)(i)); "routing" of an order (Rule 613(c)(7)(ii)); "receipt of an order that has been routed" (Rule 613(c)(7)(iii)); "modification or cancellation" of an order (Rule 613(c)(7)(iv)); and "execution" of an order (Rule 613(c)(7)(v) and (vi)).

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As noted above, the Commission received comments on the information proposed to be recorded and reported to the central repository with each reportable event (i.e., the consolidated audit trail data elements) and, in response, is adopting the Rule with certain modifications from the proposed Rule with respect to certain of the consolidated audit trail data elements. In so adopting the Rule, the Commission acknowledges that costs will be incurred by SROs and their members to record and report this information to the central repository and by the central repository to receive, consolidate, store and make accessible such information.286 However, the Commission believes that the costs to SRO members for reporting this information, and the costs to the central repository for collecting and storing this information, will significantly depend on the exact details of how this information will be gathered and transmitted by the various types of market participants covered by Rule 613. The Commission is therefore requiring the SROs to include as part of the NMS plan submitted to the Commission for its consideration pursuant to the Rule, details of how each of the different data elements would be recorded, reported, collected, and stored, as well as cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed. The Commission also notes that the SROs are not prohibited from proposing additional data elements not specified in Rule 613 if the SROs believe such data elements would further, or more efficiently, facilitate the requirements of the Rule.

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Once the SROs have submitted an NMS plan with these details, the Commission will be able to use this information to determine whether to approve the NMS plan. The Commission at this time is only directing the SROs to develop and submit a detailed NMS plan that includes each of the data elements. The Commission is not making a final determination of the nature and scope of the data elements to be included in the consolidated audit trail – as discussed above, these determinations will be made after the SROs submit the NMS plan, and the Commission and public have had an opportunity to consider the proposed data elements.

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Rather, at this time the Commission is only making a more limited determination. The benefits the Commission and the public will receive from being able to consider the detailed costs and benefits of the specific set of data elements submitted to the Commission for its consideration pursuant to the Rule justify the costs of preparing the NMS plan with such data elements included.

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A discussion of these consolidated audit trail data elements follows.

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i. Material Terms of the Order

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As proposed, Rule 613 would have required broker-dealers to report the material terms of the order upon origination or receipt of an order and upon routing, modification, and cancellation of an order.287 Proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) defined material terms of the order to include, but not be limited to, the following information: (1) the NMS security symbol; (2) the type of security; (3) price (if applicable); (4) size (displayed and non-displayed); (5) side (buy/sell); (6) order type; (7) if a sell order, whether the order is long, short, or short exempt;288 (8) if a short sale, the locate identifier; (9) open/close indicator; (10) time in force (if applicable); (11) whether the order is solicited or unsolicited; (12) whether the account has a prior position in the security; (13) if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and (14) any special handling instructions.

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The Commission requested comment on whether there are any items of information that are required to be recorded and reported by existing audit trail rules, or to be provided to the SROs or the Commission upon request, that were not proposed but should have been included in the Rule. One commenter suggested that two data elements be added to aid regulators in detecting the original source of orders that violate laws or are involved in market manipulations.289 Specifically, this commenter recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order.290 Another commenter questioned the need for information regarding whether an account has a prior position in a security.291 The commenter expressed skepticism about the value of knowing, in real time, whether the customer has a prior position in the security, since the length of time the position has been held would not be captured. This commenter also questioned how the Commission's requirement that the prior position in a security be reported would work in the situation where a client has multiple accounts but it is the first time the client has opened a position in one of the accounts.292 Another commenter provided specific information on the exact data elements that it could incorporate into the consolidated audit trail if it were chosen as the central processor under Rule 613.293

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The Commission considered the views of the commenter that questioned the value of knowing whether a customer has a prior position in a security. The Commission also considered the commenter's concern about potential reporting complications for clients with multiple accounts, as well as general comments urging the Commission to reduce the burdens of the Rule, and is adopting proposed Rule 613(j)(3) (renumbered as Rule 613(j)(7)) with modifications to delete certain data elements.

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After considering the commenters' views, and re-evaluating the necessity of requiring certain specific data elements, the Commission has determined not to require the locate identifier (if a short sale); whether the order is solicited or unsolicited; and whether the account has a prior position in the security. The Commission believes the consolidated audit trail can still achieve significant benefits without requiring the routine recording and reporting of these specific data elements to the central repository.294 While this information may be useful for certain investigations and market analyses, the Commission believes that this additional data could be readily obtained from a follow-up request to a broker-dealer if the other data required by proposed Rule 613(j)(3), particularly relating to the customer behind the order, is included in the consolidated audit trail. Thus, the Commission believes that it is unnecessary to require this additional data to be reported as a standard part of the consolidated audit trail. In effect, the Commission believes that the benefits of having these specific audit trail data elements are minimal. As such, the Commission does not believe the benefits to the Commission and the public to consider the detailed costs and benefits of such data elements justify the costs to SROs for including them in their NMS plan submission.

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In response to the commenter who recommended that the proposed Rule should capture the identity of the individual who originated the order (in addition to identifying the firm) and the system he or she used to originate the order,295 the Commission notes that Rule 613 defines "customer" as: "(i) the account holder(s) of the account at a registered broker-dealer originating the order; and (ii) any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)."296 The Rule does not require the identification of the individual registered representative who placed the order.297 Further, the Commission does not believe that "the system he or she used to originate the order" is of significant enough regulatory value to require that information to be recorded and reported under Rule 613 at this time.

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(A) Order Type

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As proposed, the Rule would have required that members report the order type as an element of the material terms of an order. In the Proposing Release, the Commission explained that the proposed Rule does not specify the exact order types (e.g., market, limit, stop, pegged, stop limit) that could be reported under the Rule in recognition that order types may differ across markets and an order type with the same title may have a different meaning at different exchanges.298 The Commission also noted that markets are frequently creating new order types and eliminating existing order types. Thus, the Commission preliminarily believed that it would not be practical to include a list of order types in the proposed Rule as part of the required information to be reported to the central repository.

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The Commission received one comment in response to its request for comment on its proposed approach to handling order types. This commenter believed that the Commission did not think that order types were needed for the consolidated audit trail, and argued that this information is "essential for any attempts to use the order data to reconstruct the state of the limit order book at any point in time."299 The Commission agrees that information about an order's type is important and notes that the Rule, as proposed, did require order types to be reported.300 Thus, the Commission is adopting the Rule, as proposed, to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for SROs and members to report the order type as an element of the material terms of an order. The Rule, however, does not provide an exhaustive list of order types, as the Commission continues to believe that it is not feasible to do so in its Rule, for the reasons stated in the Proposing Release.301 Rather, the Commission believes the plan sponsors should be responsible for determining how to describe and categorize specific order types in the NMS plan or in the NMS plan's technical specifications, as there is more flexibility to amend such documents and the SROs would have the most familiarity with the variations among the order types on their markets. The Commission notes that specific order types may differ across markets, and even an order type with the same title may have a different meaning at different exchanges. Further, SROs regularly develop new order types to respond to changes in market structures and trading strategies, and any list of order types will likely need to be updated over time.

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(B) Special Handling Instructions

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The proposed Rule also would have required that that any special handling instructions be reported as part of the material terms of an order.302 The Commission specifically requested comment in the Proposing Release on whether the Rule should require, as part of the disclosure of special handling instructions, the disclosure of an individual algorithm that may be used by a member or customer to originate or execute an order, and, if so, how such an algorithm should be identified. The Commission received one comment noting the importance of requiring the special handling instructions to be included in the consolidated audit trail.303 This commenter believed that special handling instructions were important for reconstructing the limit order book.304 Regarding algorithms, commenters generally were not in favor of unique identifiers for algorithms.305 One commenter urged against requiring customer information at the level of "individual strategy, trading desk, or particular algorithm . . . ."306 Another commenter stated that the proposed rule should not require that unique customer identifiers be affixed to computer algorithms.307 This commenter pointed out that algorithms change daily, which would result in uncertainty about whether new identifiers are needed. Further, the commenter argued that firms would need to develop safeguards to ensure proprietary algorithms and trading strategies are not appropriated by competitors. This commenter suggested that, instead of requiring a unique customer identifier, the Commission could require that a "flag" be appended to orders generated by an algorithm.

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The Commission agrees with the commenter that supported the proposed requirement that special handling instructions be reported308 and is adopting this requirement as proposed.309 The Commission believes that such information will be useful to regulators in attempting to recreate an SRO's limit order book for market reconstructions. When performing market reconstructions, it is important for regulators not only to have information regarding what orders were on the book, but the conditions or special instructions attached to those orders. Such information can be of key importance in determining the amount of accessible liquidity at any price point and whether or not certain orders were entitled to be executed at various price levels.

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Additionally, the Commission considered the comments received regarding whether an individual algorithm should be reported and identified as part of an order's special handling instructions, and has determined not to adopt that requirement in recognition that algorithms change frequently and therefore it may be difficult to determine when and if new algorithm identifiers are necessary. The Commission also considered one commenter's concern regarding the proprietary nature of algorithms and the risk of competitors appropriating algorithms if they were required to be identified in the consolidated audit trail. However, the Commission notes that, because the disclosure of whether an order is a result of an algorithm that makes trading decisions based on a programmed investment strategy might be useful for the Commission and the SROs to sort or filter trade data to re-construct market events or to better evaluate potentially manipulative behavior or intent, the SROs may want to consider whether it would be feasible to include a "flag" or other indicator that would reveal whether an order was the result of an algorithmic trading calculation. Such a flag would not identify the actual algorithm used, but could instead indicate whether the order was the result of an algorithmic trade. Appending such a "flag" or indicator may aid regulatory authorities in their efforts to make preliminary assessments about market activity and better allow the SROs and the Commission to monitor the usage of algorithms over time. The Commission acknowledges that by not requiring that algorithms be recorded and reported to the central repository, the consolidated audit trail may not contain an audit trail data element that might prove useful to regulatory authorities. The Commission, however, believes that, should regulatory authorities need such information, regulators can submit a request for this information and obtain the information about whether the order was the result of an algorithm readily from the broker-dealer that handled the order.

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ii. Unique National Securities Exchange, National Securities Association and Broker-Dealer Identifiers

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The Commission proposed to require each member originating or receiving an order from a customer, and each national securities exchange, national securities association, and member that subsequently handles the order to report its own unique identifier to the central repository. Proposed Rule 613(c)(7)(i)(E) (renumbered as 613(c)(7)(i)(C)) would have provided that any member of an SRO, that originally receives from a customer or originates a principal order, shall collect and electronically report "the unique identifier of the broker-dealer receiving or originating the order." Similarly, proposed Rule 613(c)(7)(ii)(D) provided that the SRO or any member of such SRO that routes an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(ii)(E) provided that the SRO or any member of such SRO routing an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(D) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange receiving the order." Proposed Rule 613(c)(7)(iii)(E) provided that the SRO or any member of such SRO that receives an order shall collect and electronically report "the unique identifier of the broker-dealer or national securities exchange routing the order." Proposed Rule 613(c)(7)(iv)(E) required, for a modification or a cancellation of an order, the identity of the person giving such instruction. Proposed Rule 613(c)(7)(v)(F) provided that the SRO or any member of such SRO that executes an order in whole or part report "the unique identifier of the broker-dealer or national securities exchange executing the order." Further, the Commission proposed to require a member receiving an order from a customer to report, if applicable, "the unique identifier of the branch office and the registered representative receiving or originating the order."310

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Commenters generally supported the proposed use of unique identifiers for exchanges and broker-dealers.311 One commenter explained that cross-market surveillance efforts are unduly complicated if a single market participant has a different identifier for each market, and stated that the current market participant identifier ("MPID") system needed to be updated.312 This commenter, however, questioned whether it was necessary for branch office and registered representative information to be included in the consolidated audit trail, stating that the information would increase the amount of data reported to the consolidated audit trail, but would be useful only in certain circumstances.313 In another letter, the same commenter proposed to use Central Registration Depository ("CRD") numbers to uniquely identify broker-dealers.314 Under this system, the commenter suggested that SROs would be required to link the CRD numbers to unique MPIDs to create a cross-referenced database, so that data could be searched and retrieved at the firm level (by CRD number) or by the unique market center identifiers used by firms for each transaction on a specific market center.315 For activity not occurring on a national securities exchange, the commenter proposed continued reporting with MPIDs currently used for OATS reporting.316 Another commenter supported the use of MPIDs as unique identifiers for broker-dealers, suggesting that the MPIDs of the firms originating each order should be added to the trade report, but stated that only FINRA and the Commission should be allowed to access this information.317

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After considering commenters' views requesting additional flexibility with respect to the unique identifiers requirement for national securities exchanges, national securities associations, and members, the Commission has determined to adopt the Rule to require plan sponsors to include in the NMS plan submitted to the Commission for its consideration a requirement for such unique identifiers, substantially as proposed. The Commission, however, has made two technical changes to the Rule text from the proposal to: (1) add a defined term, "CAT-Reporter-ID," in adopted Rule 613(j)(2) to refer to these unique identifiers, and (2) expressly permit that a "code" be used that uniquely and consistently identifies the national securities exchange, national securities association, or member. Specifically, adopted Rule 613(j)(2) provides that "[t]he term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository."

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In response to the commenters that stated that firms' current MPIDs or CRD numbers may work as a viable unique broker-dealer identifier, the Commission believes it is appropriate to leave the decision of whether to specify an existing identifier, such as a firm's MPID or CRD number, or some other identifier such as one created under the unique legal entity identifier (LEI) standard under development by the International Standards Organization ("ISO") (ISO 17442),318 as the unique broker-dealer identifier, to the plan sponsors to assess and propose in the NMS plan. Therefore, while the adopted Rule continues to require the NMS plan to require these unique identifiers, the Rule does not specify which identifier to use, nor does the Rule specify the process for assigning unique broker-dealer identifiers.319 In this regard, the Commission expects the plan sponsors to establish a process, to be described in the NMS plan, by which every national securities exchange, and every member of a national securities exchange or national securities association, can obtain a CAT-Reporter-ID.

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The Commission also is adopting, substantially as proposed, rules requiring the NMS plan submitted to the Commission for its consideration to require each SRO and its members to report the unique identifier of the broker-dealer or SRO for each reportable event in the life of an order to the central repository, except to make two technical changes: to include the new defined term, "CAT-Reporter-ID" and to require the CAT-Reporter-ID or Customer-ID, if applicable, of the person giving a cancellation or modification instruction.320 Specifically, Rule 613(c)(7)(i)(C), as adopted, provides that any member of an SRO that originally receives from a customer or originates a principal order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer receiving or originating the order." Rule 613(c)(7)(ii)(D) provides that any national securities exchange or any member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(ii)(E) provides that any national securities exchange or member of an SRO that routes an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed." Rule 613(c)(7)(iii)(D) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order." Rule 613(c)(7)(iii)(E) provides that the SRO or any member of an SRO that receives a routed order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order." Rule 613(c)(7)(iv)(F) provides that the SRO or any member of an SRO that receives an instruction to modify or cancel an order shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction." Rule 613(c)(7)(v)(F) provides that the national securities exchange or any member of an SRO that executes an order in whole or part shall record and report "[t]he CAT-Reporter-ID of the broker-dealer or national securities exchange executing the order." Rule 613(c)(7)(vi)(B) provides that, if an order is executed in whole or part, a member of an SRO shall record and report "[t]he CAT-Reporter-ID of the clearing broker or prime broker, if applicable."

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The Commission notes that CAT-Reporter-IDs will be reported to the central repository for each reportable event that the member or SRO is reporting to the central repository. The requirement to report CAT-Reporter-IDs in this manner will help ensure that regulators can determine which market participant took action with respect to an order at each reportable event. The Commission does not believe that the CAT-Reporter-ID of each member or market that touches an order needs to be tagged to and travel with an order for the life of the order, as long as the CAT-Reporter-ID of the member or exchange taking the action is reported to the central repository, and an order identifier(s) is reported at every reportable event of the order. The Commission believes the details of how these data are reported to the central repository, and the specific methodologies used by the central repository to assemble time-sequenced records of the full life-cycle of an order, is best left to the expertise of the SROs as they develop the NMS plan to be submitted to the Commission for its consideration. Instead, as adopted, Rule 613 requires that data in the central repository be made available to regulators in a linked fashion so that each order can be tracked from origination through modification, cancellation, or execution, and that the parties routing or receiving routes, or otherwise performing such actions, are identified for every reportable event.

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After considering the comment opposing the requirement to report to the central repository the unique identifier of the branch office and registered representative receiving or originating an order,321 the Commission has reconsidered the requirement in proposed Rule 613(c)(7)(i)(F) and is not adopting this requirement.322 While this audit trail data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that this information need not be required by Rule 613 because it is not critical information to help identify the customer responsible for trading a security, nor to capturing the entire life of an order as it moves from origination to execution or cancellation. In addition, the Commission believes that a requirement that a unique identifier of the branch office and registered representative receiving or originating the order be reported may not provide enough information in an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that this information be required in the audit trail created by Rule 613. Further, should regulators determine that the identity of the branch office and registered representative receiving or originating the order is needed to follow-up on a specific issue, they may request the information directly from the broker-dealer as broker-dealers are required to make and keep records identifying the registered representative that receives an order pursuant to Exchange Act Rules 17a-3(a)(6)(i)323 and 7a-4(b)(1).324 As such, the Commission does not believe the benefits of including this information in the consolidated audit trail justify the costs to SROs for requiring them to devise a methodology to identify the branch offices and registered representatives receiving or originating an order, and a mechanism for reporting this type of data to the central repository.

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iii. Unique Customer Identifier

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(A) Proposed Rule

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As proposed, Rule 613 would have required every SRO and broker-dealer to report a unique customer identifier to the central repository for any order originated by or received from such customer.325 Specifically, proposed Rule 613(c)(7)(i)(B) (renumbered as Rule 613(c)(7)(i)(A)) would have required that a national securities exchange, national securities association or any member of such exchange or association that originally receives or originates an order to collect and electronically report "a unique customer identifier for each customer." In the Proposing Release, the Commission noted that the unique customer identifier should remain constant for each customer, and have the same format, across all broker-dealers.326

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The Commission requested comment on possible ways to develop and implement unique customer identifiers. For example, the Commission solicited input about who should be responsible for generating the identifier; whether a unique customer identifier, together with the other information with respect to the customer that would be required to be provided under the proposed Rule, would be sufficient to identify individual customers; and whether there were any concerns about how the customer information would be protected. The Commission specifically requested comment on what steps should be taken to ensure that appropriate safeguards are implemented with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository.

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(B) Comments on Proposed Rule 613(c)(7)(i)(B)

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The Commission received comments that supported the general notion that identifying customers in an audit trail would be beneficial for regulatory purposes.327 One commenter stated that a customer identifier on an order-by-order basis would "enhance significantly the audit trails of the markets."328 Similarly, another commenter agreed that identifying the customer would be useful to regulators for purposes of market surveillance and enforcement.329 Another commenter noted that it "fully supports more granularity in an order audit trail, such as obtaining high-level customer identity information (e.g., large trader identification), so that patterns of trading across multiple market centers can be quickly and readily identified, and [the commenter] agrees that the timeframe needed to identify customers should be greatly reduced; however, [the commenter] question[s] the utility of receiving the identity of both the beneficial owner and the person exercising the investment discretion, if different, for each and every order reported to the consolidated audit trail."330

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However, other commenters disagreed with the need for a unique customer identifier and the proposed Rule's requirements for reporting a unique customer identifier with every order. These commenters generally focused on the complexity and cost of the systems changes required to implement the unique customer identifier requirement for every customer;331 the complexity in the process for assigning unique customer identifiers;332 the alternative ways that a customer could be identified without requiring a unique customer identifier as proposed;333 and the concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.334

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One commenter discussed the complexity and cost of the systems changes required to implement the unique customer identifier requirement, as set forth in the Rule.335 This commenter, who did not believe the Commission should require a unique customer identifier for every customer, noted the "complexity of the technology development work involved" in adding this identifier to the audit trail.336 The commenter added that the work required to update internal architecture to report customer identifiers would be "substantial" because broker-dealer systems and processes may access and maintain customer (and proprietary) identification information in different ways and at different levels of specificity, and that sales and trading systems would need to be modified to report the unique customer identifiers with every order. This commenter also noted the "significant costs" generally associated with requiring a unique customer identifier.337

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A few commenters also submitted their views on the complexity of the process for assigning unique customer identifiers.338 One commenter noted that the process for assigning unique customer identifiers that the Commission discussed in the Proposing Release (i.e., generating unique customer identifiers based on the input by a broker-dealer of a customer's social security number or tax identification number) would not create an administrative burden on individuals and non-broker-dealer entities.339 Another commenter, however, noted difficulties associated with implementing a centralized process for assigning, storing and utilizing standardized customer identifiers340 and another commenter characterized the "implementation of a centralized customer identification system" as a "monumental task."341 Another commenter believed that to satisfy the Rule's requirements, the industry would need to implement a completely new market-wide system to satisfy the unique customer identifier requirement, noting that this might not be feasible on the proposed timeline.342 Another commenter characterized the collection of a unique customer identifier as a "significant project unto itself."343 One commenter observed that given the large number of retail investors (some with multiple accounts), the complexities associated with tracking retail investors' accounts, and the relatively small and infrequent amount of trading by typical retail investors, the Rule should not require unique customer identifiers for every customer.344 Another commenter urged the Commission to specify whether the process required that a unique customer identifier be submitted at the time an order is originated or received and the procedure to be followed if an identifier is not available.345

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A few commenters suggested alternative ways to identify a customer, rather than through a unique customer identifier.346 One commenter suggested that customers could be identified by amending the current trade report.347 Another commenter believed that "sophisticated analysis could identify trading activity that might be coordinated, without using an account identifier, and that regulators could then perform further analysis to determine who traded by using [EBS] and other methods already available to the staff."348 Another commenter noted that a possible method for identifying customers could be by linking customer information in EBS to trading information in OATS.349 Another commenter noted that "[i]t makes economical sense to use the current OATS and COATS audit trails and to expand those audit trails to include additional customer information, thereby providing a more complete audit trail for regulatory oversight for post trade analysis rather than building another audit trail system."350

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Commenters also discussed the need for both a large trader identification number under Rule 13h-1 under the Exchange Act, the Commission's Rule implementing the large trader reporting system,351 and a unique customer identifier under Rule 613.352 One commenter stated that the Commission could alleviate some of the burdens of the proposed Rule, and increase the effectiveness of an identification system, if it required only large trader identification numbers to be reported instead of requiring a unique customer identifier for every customer.353 This commenter believed that the Commission and the SROs are unlikely to be interested in routine transactions by small investors and would much more likely need accurate information about the orders of large traders because they are most likely to engage in transactions large enough to impact prices.354 Another commenter noted that an alternative would be to only identify entities that have sponsored or direct access to market centers via a relationship with a sponsoring market participant and to identify customers whose trading activity would be required to be disclosed pursuant to Rule 13h-1.355

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Certain commenters discussed concerns about how the privacy of customers might be compromised if every customer was assigned a unique customer identifier.356 One commenter, noting the Commission's discussion in the Proposing Release that the unique customer identifiers could be based on a customer's social security number or taxpayer identification number, believed that the Commission's approach raises "serious privacy concerns."357 Another commenter noted that "there is a legitimate privacy concern with having the unique customer identifier available to the marketplace, and creating a means to protect that privacy would add tremendous incremental cost to the [consolidated audit trail]."358 One commenter questioned how long and at what level customer information would be encrypted,359 and another noted that "[t]he proposal needs to clarify who will have access to customer data and how confidentiality will be ensured."360

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(C) Adopted Rule

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(1) Need for a Unique Customer Identifier

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The Commission recognizes that the implementation of the unique customer identifier requirement may be complex and costly, and the reporting of a unique customer identifier will require SROs and their members to modify their systems to comply with the Rule's requirements. The Commission, however, believes that unique customer identifiers are vital to the effectiveness of the consolidated audit trail. The inclusion of unique customer identifiers should greatly facilitate the identification of the orders and actions attributable to particular customers and thus substantially enhance the efficiency and effectiveness of the regulatory oversight provided by the SROs and the Commission. Without the inclusion of unique customer identifiers, many of the benefits of a consolidated audit trail as described above in Section II.2. would not be achievable.

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For example, unique customer identifiers will make regulatory inquiries and investigations more efficient by eliminating delays resulting from the current need to send information requests to individual market participants in search of this key information, as well as reducing the burden on regulators and market participants of such requests.361 The identity of the customer is often necessary to tie together potential manipulative activities that occur across markets and through multiple accounts at various broker-dealers. Existing audit trails, however, do not identify the customer originating the order and thus do not allow SRO and Commission regulatory staff to quickly and reliably track a person's trading activity wherever it occurs in the U.S. securities markets. A unique customer identifier connected to each order will allow the SROs and the Commission to more quickly identify the customer that originated each order and therefore potentially more quickly and efficiently stop manipulative behavior through the submission of orders. In certain cases this might limit the losses of parties injured by malfeasance who currently may suffer losses during the weeks or months that it can currently take for regulators to obtain customer information through written requests for information.

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Further, unique customer identifiers will aid regulators in reconstructing broad-based market events. Specifically, having unique customer identifiers will aid regulators in determining how certain market participants behaved in response to market conditions and may even reveal the identity of the market participant(s) who caused or exacerbated a broad-based market event. More so, unique customer identifiers would enable regulators to disaggregate the market activity of different participants in ways that could help address many important questions related to equity and equity options market structure, ranging from more detailed analyses of the potential impacts of high frequency trading, to studies of market liquidity, to trend analyses of the trading costs and general efficiency by which investors use our public markets to acquire or dispose of their securities holdings.

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The Commission has considered commenters' concerns about the complexity of the process for creating and assigning unique customer identifiers and understands and acknowledges that the process of creating and assigning unique customer identifiers may not be simple and may result in additional costs to SROs and their members.362 The Commission also considered the commenters' views that there may be alternative ways to identify the customer responsible for orders, and that, in the view of some commenters, every individual customer need not be identified for purposes of an audit trail. As noted above, the Commission believes that the identification of each customer responsible for every order is critical to the effectiveness of a consolidated audit trail and does not agree that the commenters' alternative means of identifying a customer would be as effective as the method proposed by Rule 613. For example, the Commission considered the comment that customers could be identified by amending the trade report, but this approach would fail to identify customers associated with orders that are not executed.363 Additionally, account numbers are assigned by broker-dealers for their own customers only, and account numbers vary between broker-dealers. Thus, the identity of a customer from a specific account number would not be apparent to regulators without the time-consuming requests for information Rule 613 specifically is seeking to avoid. The use of unique customer identifiers would permit regulators to readily trace market activity by the same customer back to that unique customer identifier even if such market activity were affected across multiple accounts and broker-dealers.

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The Commission also considered the recommendations of some commenters that the consolidated audit trail should use the large trader identifier instead of a unique customer identifier.364 The Commission, however, does not believe that the commenters' approach will address the regulatory need to obtain information on and to identify the holders of accounts for all order activity in the market for NMS securities because the use of the large trader identifier alone would identify only those traders that self-report as "large traders" pursuant to Rule 13h-1 and are assigned a large trader unique identifier. Thus, under the commenters' suggested approach, only a very small portion of customers – the very largest traders in the market – would be assigned a unique identifier for purposes of the consolidated audit trail. Smaller traders, however, also can be perpetrators of illegal activity, or otherwise impact the market. Accordingly, the Commission believes that information on all customers is necessary to achieve the goal of Rule 613.

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Despite the wide and disparate array of views from commenters on the costs, complexities, and most efficient methodologies to generate and collect unique customer identifiers, the Commission believes that the potential benefits of including this information in the consolidated audit trail justify the costs to the SROs in requiring that they develop and include a detailed framework for unique customer identification as part of the NMS plan to be submitted for consideration by the Commission and the public. Therefore, the Commission is adopting the Rule substantially as proposed to provide that the NMS plan must require every member to report a unique customer identifier to the central repository upon origination or receipt of an order as required by Rule 613(c)(7)(i)(A). The Commission, however, is changing the term "unique customer identifier," as used in the proposed Rule, to the term "Customer-ID." Adopted Rule 613(j)(5) defines the term "Customer-ID" to mean, "with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository."365

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Given the complexity and the various existing options for identifying a customer, the Commission believes that the plan sponsors, by engaging in a detailed process that combines their own expertise with that of other market participants, are in the best position to devise a methodology for, and estimate the costs of, including customer identifiers in the consolidated audit trail. Once the NMS plan was submitted, the Commission and the public would then be able to consider the details and costs of such a framework.

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The Commission notes that the Rule does not specify the process for assigning the unique customer identifiers, or the format for such identifiers; rather, the Rule contemplates that the plan sponsors have the flexibility to determine the precise way to assign or "code" these identifiers. In this regard, the Commission expects the plan sponsors to establish a process by which every broker-dealer can, in a cost-effective manner, obtain a unique customer identifier, or Customer-ID, for each of their customer(s).366 The Commission also expects the plan sponsors to establish a process by which unique customer identifiers are reported to the central repository, and how this information is linked to the name and address of customers as stored in the central repository. The Commission further notes that Rule 613 does not specify that unique customer identifiers must be attached to every reportable event as orders are routed from one market or broker-dealer to another, or that these identifiers are reported at the same time and fashion as other customer-identifying information. Rather, the Commission is relying on the SROs, and other market participants,367 to develop a proposal that maximizes efficiency and security, and that data in the central repository be made available to regulators in a linked fashion so that each order, and all subsequent reportable events, can be readily traced back to one or more customers through their unique identifiers.

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In response to the commenter that questioned what should happen if a unique customer identifier was not available,368 the Commission notes that the Rule does not set out a process for addressing a situation where a unique customer identifier is not available to a broker-dealer and/or customer. Instead, the Commission believes that the plan sponsors are in the best position to address this situation as they develop the overall process for assigning unique customer identifiers. In response to the comment that requested the Commission specify whether a unique customer identifier is required to be reported at the time an order is originated or received,369 the Commission notes that Rule 613(c)(7)(i)(A) requires that the NMS plan require that this information be recorded contemporaneously with the reportable event, but permits the reporting of the identifier by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded.370 In addition, in response to the commenter that believed that the consolidated audit trail should identify market participants with direct or sponsored access to markets,371 the Commission notes that under the Rule, to assure the Commission and the SROs of an accurate and complete audit trail for every action that every market participant takes with respect to an order, the sponsored party will be assigned a Customer-ID and the sponsoring broker-dealer will be assigned a CAT-Reporter ID under Rule 613.

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The Commission also considered the privacy and security concerns that commenters raised with respect to the use of Customer-IDs.372 In response to these comments, the Commission is revising proposed Rule 613, as discussed in more detail in Section III.B.2.e. below, to include additional mechanisms to safeguard the privacy and confidentiality of the audit trail data, including the Customer-ID, in large part to address the privacy concerns raised by commenters.373 In response to the commenter that questioned when and at what level customer information would be encrypted,374 the Commission notes that, while Rule 613 does not explicitly require that this information be encrypted, the Rule contains several safeguards to ensure the privacy and confidentiality of the audit trail data. Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, reported to the central repository, will be ensured.375 Based on these provisions, the Commission believes that plan sponsors would need to make sure customer information is protected, and the plan sponsors could require such data to be encrypted.

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Additionally, the Commission believes that privacy concerns also could be mitigated if the plan sponsors determine, as permitted by Rule 613, that the unique customer identifiers not travel with the order, and instead be reported to the central repository only upon the receipt or origination of an order. Therefore, if the plan sponsors make this decision, the SROs and their members will not be able to use the unique customer identifier to track the identity of a customer(s) or a customer's order flow.376 While the unique customer identifier will be linked to information that is sufficient to identify a customer (e.g., the name and address of the customer) and customer account information377 at the central repository, this information will be accessible only by regulators for regulatory purposes.378 The Commission also notes that the plan sponsors could determine not to require that a customer's social security number or tax identification number be used as a customer's unique identifier to the extent they believe that there are privacy and confidentiality concerns.

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(2) Definition of "Customer"

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As proposed, Rule 613(j)(1) (renumbered as Rule 613(j)(3)) defined "customer" as "[t]he beneficial owner(s) of the account originating the order; and [t]he person exercising investment discretion for the account originating the order, if different from the beneficial owner(s)." The Commission received two comments regarding the inclusion of beneficial owners in the definition of customer. One commenter questioned the use of a unique customer identifier for both a beneficial owner of an account and the person exercising investment discretion, if different, and noted that if a trade comes into question, the person exercising investment discretion, not the beneficial owner, likely will be the "first person of interest in any type of review or investigation of such trading activity."379 Another commenter requested further clarity regarding the definition of "customer" for purposes of Rule 613, and suggested that the Commission should define "beneficial owner" to be sure this term is applied correctly.380 This commenter specifically stated that "[t]he SEC should also provide a definition for the terms 'beneficial owner' and 'customer' to eliminate any doubts as to whom these labels apply. For example, is the 'customer' the entity directing the trade or the beneficial owner of the account?" and added that, "for registered investment advisers, the unique customer identifier should be associated with the investment adviser rather than the underlying beneficial owner. Frequently, investment advisers aggregate orders for multiple beneficial owners in 'bulk' orders that are routed together and allocated on an average-priced basis to ensure best execution."381 In response to commenters' concerns about the use of the term "beneficial owner," the Commission is revising Rule 613(j)(1), as proposed (renumbered as Rule 613(j)(3)), to state that "[t]he term 'customer' shall mean: (i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." The Commission believes that the revised Rule will provide it with the customer information required to achieve the objectives of the consolidated audit trail.382

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In adopting this revised definition, the Commission is clarifying its intent that, with respect to the "account holder" reference under Rule 613(j)(3), the NMS plan submitted to the Commission for its consideration must require broker-dealers to capture information on only the individuals or entities that currently are required to be recorded in the books and records of the broker-dealer pursuant to Rule 17a-3(a)(9) under the Exchange Act.383 Because this provision does not require broker-dealers to obtain information about their account holders beyond what they are required to obtain today, the Commission believes the modification to the proposed Rule is appropriate because it will reduce the proposed Rule's burden on broker-dealers in recording and reporting information about a "customer," as that term will be defined under Rule 613(j)(3). The Commission notes that, under the Rule, as adopted, for joint accounts – where two individuals are required to provide information under Rule 17a-3 of the Exchange Act for one account – information for both persons listed on the joint account would be recorded and reported under Rule 613.384

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The Commission also believes that it is important to capture the person that has authority to give trading instructions to a broker-dealer for an account, if different from the account holder, because such person likely will be of interest in a review or investigation of activity in such account. Thus, the Commission is modifying the proposed Rule to clarify its intent that under Rule 613 the NMS plan also must capture, in the definition of customer, "[a]ny person from whom the broker-dealer is authorized to accept trading instructions, if different from the account holder(s)."385 Knowing the identity of the person who is authorized to give the broker-dealer trading instructions for an account, whether the account holder or an adviser or other third party, is a vital component in the investigative process. Further, when investigating violations of the federal securities laws, it is important to promptly identify all potentially relevant parties who may have made trading or investment decisions, which could include both the person authorized to give the broker-dealer trading instructions for such account and the account holder.386

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Pursuant to the revised definition of "customer" under adopted Rule 613, for example, if an order is entered to buy or sell securities for the account of an investment company or other pooled investment vehicle (a "fund"), the Rule will capture, in the definition of customer, the fund itself or, if the account at the broker-dealer is held only in the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions, the Rule will capture the investment adviser.387 If the account at the broker-dealer is held in the name of the fund itself, the Rule will capture both the name of the fund (pursuant to Rule 613(j)(3)(i)), as well as the name of the fund's investment adviser from whom the broker-dealer is authorized to accept trading instructions (pursuant to Rule 613(j)(3)(ii)). In addition, if an adviser enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would capture both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)). If an adviser instead enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule would capture the adviser (pursuant to Rule 613(j)(3)(i)) but would only capture any client accounts to which the adviser allocates executed trades (pursuant to Rule 613(c)(7)(vi)) if those client accounts were held separately at the same broker-dealer as well.

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Furthermore, in cases where multiple individuals in the same trading firm transact through a single account maintained at a broker-dealer in the name of that trading firm, the Rule will require the NMS plan to require recording and reporting of the Customer-ID of the trading firm associated with that account, and not the Customer-IDs of the individual traders who had placed the orders.388 The Commission understands that in some cases broker-dealers may have knowledge of the individual traders transacting within the same firm-wide account, and may even provide reports to the firm holding the account that summarizes trade activity according to individual trader. Because such information is not captured by the Rule, but may be useful in informing regulators about the potential manipulative activities, the SROs may wish to consider how such information might be incorporated into the consolidated audit trail in the future.

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The Commission is also modifying a related provision of the Rule, Rule 613(c)(7)(i)(A), to reflect that more than one Customer-ID must be provided upon original receipt or origination of an order if the account holder and the person authorized to give the broker-dealer trading instructions for such account are different or if more than one person is an account holder for the account (such as, for example, joint account holders). Specifically, Rule 613(c)(7)(i)(A) provides that "Customer-ID(s)" (i.e., multiple Customer-IDs) must be provided for each customer, if that is applicable. In addition, the Commission notes that every "customer," as defined by Rule 613(j)(3) will be assigned a Customer-ID; thus, two Customer-IDs maybe associated with one order under the Rule.

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iv. Unique Order Identifier

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As proposed, the Rule would have required the NMS plan to require each member of an exchange or FINRA to attach, to each order received or originated by the member, a unique order identifier that would be reported to the central repository and that would remain with that order throughout its life, including routing, modification, execution, or cancellation. Specifically, proposed Rule 613(c)(7)(i)(D) (renumbered as Rule 613(c)(7)(i)(B)) would have provided that the national market system plan shall require each national securities exchange, national securities association, and any member of such exchange or association to collect and electronically provide to a central repository details for each order and each reportable event, including, but not limited to, "a unique identifier that will attach to the order at the time the order is received or originated by the member and remain with the order through the process of routing, modification, cancellation, and execution (in whole or in part)." In the Proposing Release, the Commission stated that the use of such an identifier would allow the SROs and the Commission to efficiently link all events in the life of an order and help create a complete audit trail across all markets and broker-dealers that handle the order.389 Proposed Rules 613(c)(7)(ii)(A), 613(c)(7)(iii)(A), and 613(c)(7)(v)(A) would have required the reporting of a unique order identifier to the central repository for the reportable events of routing and execution. The Commission did not propose to mandate the format of such an identifier or how the identifier would be generated.

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The Commission requested comment on whether a unique order identifier that would remain with the order for its life would be necessary or useful for an effective consolidated audit trail. The Commission also specifically requested comment on, among other things, the feasibility and merits of its proposed approach for attaching a unique order identifier to an order, as well as on how multiple "child" orders that may result if the original "parent" order is subsequently broken up, or an aggregation of multiple original orders into a single order, should be addressed.

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Several commenters expressed opinions on the proposed unique order identifier requirement, with some noting that the Commission's proposal imposed "significant" burdens or challenges on market participants, and others offering alternatives to the Commission's approach to identifying orders.390 For example, some commenters suggested that the Rule permit the approach used for OATS reporting, in which the broker-dealer initiating or receiving an order would generate its own order identifier, but pass on a separate routing identifier to the entity to which it routes the order, which would generate its own order identifier, but retain and report that routing identifier as well, so that information about the order can be linked together as it is passed from venue to venue.391 One of these commenters also believed that the OATS approach would avoid certain complexities that could occur with a unique order identifier, such as when the original order is broken up into multiple "child" orders.392 In a subsequent comment letter, the commenter stated that it could require two new order event types that would allow customer orders handled on a riskless principal or agency basis to be linked to the related representative orders.393 Another of the commenters suggested that "the adopted CAT filing should require that an order be tracked through its lifecycle and [the Commission should] leave the technical details to [a] requirements analysis."394

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Another commenter was concerned that, if the originating firm's or customer's name was used as part of the unique order identifier, this could create "potential privacy information risks as every new destination (both internally across information barriers within a firm and externally across broker-dealers) would see where an order originated."395 Similarly, a third commenter supported the OATS approach of linking a series of separate order identifiers in part because it believed that, if a unique identifier were to pass from firm-to-firm, there was a risk that information about the origin of an order might be inferred.396 Yet another commenter recommended that the Commission standardize how the order identifier should be structured to ensure consistent reporting between firms, instead of leaving this decision to the plan sponsors.397

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The Commission has considered the comments received regarding the requirement that the NMS plan mandate a unique order identifier, and is adopting Rule 613 with significant modifications398 that provide more flexibility for the SROs, as the plan sponsors, to determine whether the NMS plan will require a single unique order identifier or a "series of order identifiers." Specifically, the Rule, as adopted, requires that every order have a "CAT-Order-ID," defined as "a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of the order."399

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The Commission has modified the Rule from the proposal so that the SROs can draw upon their own expertise, as well as those of other market participants, in developing the most accurate and efficient methodology for tracking an order through its life. Thus, the SROs may submit an NMS plan in which they require a single unique order ID to travel with each originating order; the SROs may submit an NMS plan in which, as suggested by a number of commenters, a series of order IDs, each generated by different market participants, is reported to the central repository in a manner that allows for the accurate linking of reportable events; or the SROs may submit an NMS plan based on any other methodology that meets the requirements of the Rule.

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The Commission expects that the details of the methodology proposed by the SROs in the NMS plan will, in part, be based on how the generation and reporting of order identifiers would interact with other technical details involving order tracking in the consolidated audit trail, such as the potential for multiple orders to be aggregated, routed, and disaggregated. However, though the Commission is not prescribing a particular methodology, the Rule does require that SROs take into account a number of considerations, such as accuracy and cost, in designing their methodology.400

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The Commission notes that, with this modification, a wider array of possible solutions is now available to the SROs as they develop the NMS plan to be submitted to the Commission for its consideration, including those that may better accommodate the infrastructure of existing audit trails and thereby potentially, and possibly significantly, reduce implementation burdens. As indicated above, several commenters suggested that the Rule accommodate the linked order identifier approach, currently used by OATS.401 However, the Commission also notes that, though the adopted Rule could accommodate such an approach, there historically have been limitations on the accuracy and reliability of linking orders in OATS.402 It will therefore be very important for the NMS plan to demonstrate how the approach it has selected will ensure that information about all reporting events pertaining to an order will be efficiently and accurately linked together in a manner that allows regulators efficient access to a complete order audit trail.403 As discussed below, the reliability, accuracy, and confidentiality of the data reported to and maintained by the central repository, as well as the method by which the data in the central repository can be accessed by regulators, are considerations for the Commission in evaluating the NMS plan.404

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The Commission emphasizes that, under the adopted Rule, regardless of the specific method chosen by the SROs, all orders reported to the central repository must be made available to regulators in a uniform electronic format and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information for all reportable events for that order.405 The Commission believes the consolidated audit trail will still achieve significant benefits with this modification.

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The Commission recognizes the complexities of order routing in today's markets, including, as noted by a commenter,406 the frequent splitting of larger orders into numerous "child" orders or the bundling of smaller orders into one larger order. The Commission believes, however, that since, in today's complex markets, orders are currently and routinely aggregated and disaggregated, practical solutions to record such orders can be developed by the plan sponsors to ensure they are accurately and efficiently tracked through a variety of aggregation and disaggregation events.

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With regard to the concern expressed by a commenter that the use of an order identifier(s), as required by Rule 613, could provide the ability to deduce the origin of an order, thereby revealing confidential trading strategies or raising privacy concerns,407 the Commission notes that this commenter assumed that a unique order identifier "would very likely require members to include the originating firm's or customer's name as part of the identifier."408 The Commission believes, however, that the SROs will be able to devise a way to assign order identifiers – through random number sequences or otherwise – that would protect the identity of broker-dealers and their customers from disclosure to persons other than authorized regulatory personnel. The Commission also notes that, as discussed in Section III.B.2.e. infra, the adopted Rule requires the NMS plan submitted to the Commission for its consideration to incorporate a variety of policies and procedures to ensure the security and confidentiality of all information reported to the central repository.

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Furthermore, because the Rule requires the SROs to discuss the details of each aspect of the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider how well the methodology the SROs developed to link reportable events for the same order meets the considerations of accuracy and reliability, as well as those of security and confidentiality. The Commission will then be able to use this information in determining whether to approve the NMS plan submitted.

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v. Time Stamp

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The proposed Rule would have required SROs and their members to report the date and time, to the millisecond, that an order was originated or received, routed out, and received upon being routed, modified, cancelled, and executed.409 Specifically, proposed Rules 613(c)(7)(i)(H) (renumbered as 613(c)(7)(i)(E)), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B) (renumbered as 613(c)(7)(iv)(C)), and 613(c)(7)(v)(C) provided that the "time of order receipt or origination (in milliseconds)" would be recorded for every order originated or received, routed, modified, cancelled or executed, by a broker-dealer or SRO.

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Several commenters expressed opinions on the time stamp requirement. One commenter believed a millisecond standard was not precise enough, explaining that many exchanges currently execute orders in less than a millisecond.410 This commenter explained that, to detect the manipulative or fraudulent behavior of high frequency traders, it is necessary that time stamps be accurate to a level more detailed than the speed at which trades are executed; otherwise, it would not be possible to determine the time sequence in which trades occurred. The commenter suggested that reports from execution venues (e.g., exchanges, ATSs, dark pools, and large internalizers) should be required to be accurate to 0.01 milliseconds.411 This commenter also suggested that a more liberal time stamp standard of one second might be more appropriate for low-volume broker-dealers.412 Another commenter, however, expressed concern about the proposed millisecond time stamp requirement, explaining that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second."413 Another commenter believed that, because computers have a certain rate of error when keeping time ("time drift"), it is difficult to sequence orders based on millisecond time stamps.414 As a result, according to this commenter, there is "no real value in requiring data to this level of specificity [based on milliseconds], especially if the goal of time stamping is to sequence the lifecycle of a single order as it moves from origination to execution."415

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The Commission has considered the comments regarding the precision of the proposed time stamp requirement for the consolidated audit trail and is adopting the millisecond time stamp requirement with modifications from the proposal.416 As adopted, the Rule provides that the NMS plan submitted shall require the time stamps as set forth in Rule 613(d)(3).417 Rule 613(d)(3) provides that the NMS plan must require each SRO and its members to "[u]tilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in any national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond." Rule 613(d)(3) also provides that, "[t]o the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, such plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced." Rule 613(d)(3) further provides that "[t]he national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments."

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The Commission notes that SIPs currently support millisecond time stamps418 and other entities in the securities industry currently conduct business in millisecond increments or finer.419 The Commission believes that, given the speed with which the industry currently handles orders and executes trades, it is important that the consolidated audit trail utilize a time stamp that will enable regulators to better determine the order in which reportable events occur. The entry time of orders can be critical to enforcement cases. For example, the timing between order origination and order entry is important in investigating possible market abuse violations, such as trading ahead of a customer order. In general, determining whether a series of orders rapidly entered by a particular market participant is manipulative or otherwise violates SRO rules or federal securities laws, otherwise being able to reconstruct market activity, or performing other detailed analyses, requires the audit trail to sequence each order accurately. The Commission believes that, for many types of common market activities that operate at the level of milliseconds or less, time stamps in increments greater than a millisecond would not allow this sequencing with any reasonable degree of reliability.

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In response to the comment that a millisecond standard is not sufficiently precise, as many exchanges currently execute orders in less than a millisecond,420 adopted Rule 613(d)(3) provides that the NMS plan must require that, to the extent that the order handling and execution systems of any SRO or broker-dealer utilize time stamps in increments finer than the minimum required by the NMS plan time stamps, such SRO or member must use time stamps in such finer increments when reporting data to the central repository, so that reportable events reported to the central repository by any SRO or member can be accurately sequenced. The Commission believes this approach will improve the accuracy of records with respect to the sequencing of events that occur very rapidly, especially with respect to those market participants that have elected to use time stamps in increments finer than a millisecond.

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The Commission recognizes, as a commenter noted,421 that computers have a certain rate of deviation when keeping time. The requirement that clocks be synchronized within a level of granularity to be specified in the NMS plan422 is designed to ensure that time drift does not exceed a defined level of deviation. However, the Commission believes that time stamps reported with a millisecond or finer granularity would still provide significant benefits even, contrary to one commenter's assertion,423 if the time drift between systems is larger than a millisecond. This is because such time stamps would still allow an accurate sequencing of reportable events as may commonly occur within in a single system, tied to a single clock, at levels of a millisecond or finer (e.g., high-frequency trading algorithms). Any drift of such a system's clock relative to the clocks of other systems may of course hinder the time-sequencing of cross-system events, but it would not preclude the ability of regulators from performing a detailed, accurate time-sequenced analysis of all the orders, cancellations, modifications, and executions performed by the specific system of interest.424 In this regard, the Rule is analogous to the current requirements for OATS reporting: FINRA requires clocks to be synchronized to the second, and requires time stamps to be reported to FINRA in seconds, unless those time stamps are captured by the FINRA member in milliseconds, in which case they must reported to FINRA in milliseconds (notwithstanding the clock sync remaining at a second).425

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The Commission acknowledges that changes (with their associated costs) might be required to internal broker-dealer systems to comply with a millisecond time stamp requirement. However, given the benefits outlined above, and the apparent widespread use of millisecond time stamps in the industry today,426 the Commission believes the cost of requiring the SROs to develop a plan that provides for millisecond time stamps, and to discuss the costs and benefits of the specific solution chosen, is justified.

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The Commission also acknowledges that broker-dealers who presently report time stamps to OATS in millisecond increments, but whose systems direct and capture their order activity in finer time increments, could incur costs associated with these time stamps being reported to the central repository with the same granularity at which they are recorded by the broker-dealers.427 The Commission recognizes that there may be alternatives to reporting events in finer than millisecond increments that enable the central repository to use a different method for accurately time-sequencing sub-millisecond events originating from within a system or systems on a single clock. Therefore, in developing the NMS plan to be submitted to the Commission for its consideration, if the SROs identify one or more such alternatives, the Commission believes that they should address such alternatives in the NMS plan,428 how such alternatives (i.e., an alternative to reporting in finer than millisecond increments) would ensure that reportable events may be accurately time-sequenced at the sub-millisecond level, and the costs associated with such alternatives both on their own terms and relative to a requirement to report events in the same sub-millisecond time stamp as used by a broker-dealer for directing and capturing orders.429

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The Commission also notes that, because millisecond time stamps may become inadequate to investigate trading as technology evolves and trading speeds increase, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require the plan sponsors to annually evaluate whether industry standards have evolved such that a finer increment time stamp is appropriate. As this approach is tied to the then-current industry standard used to assess whether to shorten the future time stamp increment, the Commission also believes that this approach helps assure that the time stamps in the consolidated audit trail will be in line with technological developments. Should the industry standard move to a finer time standard, the plan sponsors could modify the minimum standard required by the NMS plan by submitting an amendment to the NMS plan under Rule 608 of Regulation NMS. Such an amendment would need to be considered and would be subject to approval by the Commission, as well as subject to public notice and comment.430

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vi. Additional Routing Data Elements

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Proposed Rules 613(c)(7)(ii) and (iii) would have required that certain additional information be collected and reported specifically to allow regulators to track the life of an order through the routing process. The Commission requested comment as to whether information regarding the routing of orders would be necessary or useful for an effective consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to routing.

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One commenter noted that the proposed Rule would capture the routing of an order internally within a broker-dealer, but not the routing of an order internally within an exchange from one execution system to another.431 This commenter also noted that, as proposed, the Rule would not require an SRO or member to report information indicating that an order was "flashed" or otherwise displayed in a "step-up" mechanism.432 The commenter believed that this information would be important for the consolidated audit trail to capture.433

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The Commission believes that it is important to capture the routing of an order internally within a broker-dealer to, for example, evaluate best execution practices.434 Capturing the time at which a broker-dealer received a customer's order and the time that such order was executed can help determine if the broker-dealer delayed acting on its customer's order. The time at which an order was routed can affect the evaluation of whether the broker-dealer fulfilled its best execution obligations, and, thus, the Commission believes that this internal broker-dealer routing information should be captured by Rule 613. The Commission, however, does not believe that data regarding order processing (i.e., management of an order) within exchange systems is as useful as data regarding internal routing within a broker-dealer435 because, for example, unlike broker-dealers, exchanges do not have best execution obligations. Further, any issues with an SRO's internal processing would occur at a single venue – the SRO – and, thus, there could be direct follow-up with the SRO. Additionally, the Commission notes that the consolidated audit trail will not collect information indicating whether orders were flashed or displayed in a "step-up" mechanism as it concerns an exchange's internal processing and dissemination to its members of an order in the instance when the exchange cannot execute the order because the exchange does not have any available trading interest at the NBBO (depending on the side of the order).436 Orders that are flashed or displayed through a "step-up" mechanism are not executable because they are displayed only to members of an exchange as an indication of a broker-dealer's interest. The Commission believes it is appropriate not to require the reporting of these flashed or "stepped-up" orders to the central repository because, as noted above, the Commission believes that the tracing of processes within an exchange is not as material to regulators as the routing of orders between markets. Further, as stated, SROs do not have the same legal obligations with regard to handling customer orders as broker-dealers; therefore, the Commission does not believe it is necessary, at this time, to require the consolidated audit trail to track an SRO's internal processing of orders.

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The Commission has considered the comments related to the data that is required to be recorded and reported when an order is routed and is adopting Rules 613(c)(7)(ii) and (iii) substantially as proposed.437 The Commission notes that the Rule requires that the NMS plan require the broker-dealer routing an order and the broker-dealer receiving a routed order – both actions that are defined as "reportable events" under Rule 613 – record and report the CAT-Reporter-ID of the broker-dealer routing the order and the CAT-Reporter-ID of the broker-dealer receiving the routed order. The Commission believes the requirement to report this information on both the routing and receiving end of a route is not duplicative but, rather, is useful. Specifically, information regarding when a broker-dealer received a routed order could prove useful in an investigation of allegations of best execution violations to see if, for example, there were delays in executing an order that could have been executed earlier. In addition, if a market participant is required to report when it receives an order, regulators could solely rely on information gathered directly from that market participant when examining or investigating the market participant. For example, if a regulator needs to investigate a delay between the time a market participant received an order and the time the market participant acted on the order, under Rule 613, as adopted, the regulator could use information recorded and reported by the market participant itself, rather than rely on information about the receipt and action taken on the order that would be provided by a third party. Information from a third party may be less accurate in general and may not accurately reflect events to the extent there are latencies in order transmission. In addition, the Commission relies on data such as that which would be recorded under Rule 613(c)(7)(ii) and (iii) to improve its understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. For these reasons, the Commission believes that it is important to have both the routing broker-dealer and the receiving broker-dealer report their CAT-Reporter-IDs to the central repository, and that such information could aid regulatory authorities when analyzing the trades of market participants.438

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To reflect terms that have been modified elsewhere in the Rule as adopted, the terms "unique order identifier" and "unique identifier" in Rule 613(c)(7)(ii) and (iii) have been replaced with the terms "CAT-Order-ID" and "CAT-Reporter-ID." In addition, Rule 613(c)(7)(ii) and (iii) now reflect the new time stamp requirement contained in Rule 613(d)(3). Specifically, Rules 613(c)(7)(ii)(C) and 613(c)(7)(iii)(C) provide that the time at which an order is routed or received must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed. The Commission believes these conforming changes are appropriate to reflect the revised terms in the adopted Rule.

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vii. Additional Modification, Cancellation, or Execution Data Elements

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In addition to the data elements discussed above, proposed Rules 613(c)(7)(iv) and (v) would have required that certain information be collected and provided specifically to allow regulators to track the life of an order through modification, cancellation, or execution. The Commission requested comment as to whether information required under the Rule as proposed would be sufficient to create a complete and accurate consolidated audit trail, and asked if any information, in addition to the data elements proposed, should be included in the consolidated audit trail relating to modifications, cancellations, or executions.

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In response, one commenter noted that broker-dealer order management systems may differ in their treatment of order modifications and cancellations, as some, for example, may capture or report only modified data elements, and not necessarily all of the elements of a modified order.439 The commenter recommended that the consolidated audit trail accommodate such differences, and further suggested requiring only the submission of the order identifier for a cancelled order, not the order's other data elements.440 Another commenter believed that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."441

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After consideration of the comments regarding the specific audit trail data required for orders that are modified, cancelled, or executed, the Commission is adopting Rules 613(c)(7)(iv) and (v) substantially as proposed, with a modification to require that the NMS plan include a requirement that the CAT-Order-ID for such orders also be recorded and reported to the central repository. This modification is designed to ensure that an order identifier be reported for orders that have been modified or cancelled. The Commission believes that the order identifier is a critical piece of information that will efficiently link an order across markets. Adopted Rules 613(c)(7)(iv) and (v) will also require that the NMS plan submitted to the Commission for its consideration require the recording and reporting of the CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction to reflect the new terminology of the adopted Rule. In addition, Rules 613(c)(7)(iv) and (v) reflect the new time stamp requirement contained in Rule 613(d)(3), as adopted. Specifically, Rules 613(c)(7)(iv)(C) and 613(c)(7)(v)(C) provide that the time at which an order is modified, cancelled, or executed must be recorded and reported pursuant to Rule 613(d)(3), rather than simply in milliseconds as proposed.

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The Commission believes it is necessary to require the NMS plan to require the information under Rule 613(c)(7)(iv) and (v) for each order and reportable event because it will assist the Commission and SROs in identifying all changes made to an order (including an execution) and those market participants responsible for the changes (or execution). The Commission believes this information, in combination with the proposed information pertaining to order receipt or origination, will provide regulators with a comprehensive view of all material stages and participants in the life of an order. Among other things, this order information should help regulators investigate suspicious trading activity in a more efficient manner than is currently possible. Regulators will have access to information identifying the customer behind the order and will also see how a customer's order is handled across markets. This data also will improve regulators' understanding of how markets operate and evolve, including with respect to the development of new trading practices, the reconstruction of atypical or novel market events, and the implications of new markets or market rules. In addition, the Commission believes that most of the data proposed to be recorded and reported by the Rule for order modification, cancellation, and execution is data that most broker-dealers already generate in the course of handling an order pursuant to the existing audit trail requirements of several SROs.442

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The Commission notes that regulatory staff at an SRO or the Commission could use execution information required under Rule 613(c)(7)(v), which will be consolidated with the other audit trail information required under Rule 613 to, for example, detect patterns of reported and unreported transactions effected by a broker-dealer in a particular security by comparing the data reported to the central repository regarding an execution with information reported pursuant to a transaction reporting plan or the OPRA Plan. Depending on the results of that analysis, regulators may undertake further inquiry into the nature of trading by that broker-dealer to determine whether the public received accurate and timely information regarding executions, and whether the broker-dealer complied with the trade reporting obligations contained in SRO rules. Patterns of reported and unreported transactions by a particular broker-dealer could also be indicia of market abuse, including the failure to obtain the best execution for customer orders, or possible market manipulation. Thus, the ability to compare the consolidated order execution data, including customer information, with the trades reported to the consolidated tape would be an important component of an effective market surveillance program that is not possible today because regulators currently do not have access to comprehensive cross-market audit trail data, and the process of identifying customers is very labor intensive, time-consuming, and error prone.

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In response to the commenter that recommended that the consolidated audit trail accommodate differences in the treatment of modifications by broker-dealer order management systems (i.e., those that report only the modified data elements, not the entire order), and suggested that only an order identifier be reported for a cancellation, not the cancelled order's other data elements,443 the Commission notes that Rule 613 does not require all of the data elements of a modified order to be reported to the central repository. The Rule only requires the NMS plan to require the reporting of the CAT-Order-ID; the date and time the modification is received or originated; the CAT-Reporter ID of the broker-dealer or the Customer-ID of the person giving the modification instruction; if modified, the price and remaining size of the order; and any other changes to the material terms of the order. The adopted Rule also requires the NMS plan to require the date and time a cancellation is received or originated and the CAT-Reporter-ID of the broker-dealer, or Customer-ID of the person, giving the cancellation instruction to be reported to the central repository. The Commission believes this will ensure that regulators can determine the market participant or person responsible for the cancellation of an order,444 and the date and time of the cancellation.

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In response to the commenter that suggested that the Rule should require that the execution data be linked with the public trade report using a common identifier,445 the Commission notes that Rule 613(c)(7)(v)(G) requires the NMS plan submitted to the Commission for its consideration to require that, for an order that has been executed, the SRO or member that executes the order must report to the central repository whether the execution was reported pursuant to an effective transaction reporting plan or OPRA, as applicable. The Commission has considered the commenter's further suggestion that a common identifier link the audit trail execution reports for the buy and sell orders to the public trade report and is not mandating such a requirement under Rule 613; the Commission believes that Rule 613 and its requirements provide a sufficient initial framework for collecting audit trail data that will enhance the ability of regulators to surveil the market for NMS securities.446 Accordingly, the Commission is adopting Rule 613(c)(7)(v)(G), as proposed, which requires that the plan sponsors include in the NMS plan submitted to the Commission for its consideration a requirement that the broker-dealer report to the central repository whether a trade was reported pursuant to an effective transaction reporting plan or OPRA.

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e. Rule 613(c)(3): Information to Be Recorded Contemporaneously with the Reportable Event and Reported to the Central Repository by 8:00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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i. Proposed Rule 613(c)(3)

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As proposed, Rule 613(c)(3) would have required the NMS plan to require each SRO and member to collect and provide to the central repository, on a "real time" basis, key data for each order and each reportable event, including the origination or receipt of an order, as well as the routing, cancellation, modification, or execution of the order.447 Specifically, the proposed Rule would have provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraphs (c)(7)(i) through (v) of this section on a real time basis."448 In the Proposing Release, the Commission noted that "real time" meant "immediately and with no built in delay from when the reportable event occurs."449

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ii. Comments on Proposed Rule 613(c)(3)

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The Commission received a variety of comments about the achievability of the real-time requirement; the accuracy of audit trail data that would be collected and provided in real time; the necessity, merits and usefulness of real-time audit trail data; the costs of real-time reporting; and the proposed Rule's requirement that all audit trail data be collected and reported in real time. These comments are discussed below.

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Several commenters believed that reporting data on a real-time basis was achievable.450 Of these comments, one commenter stated that its current systems could be used to support real-time reporting, and that real-time reporting may be easier to achieve than intraday or end-of-day batch processing.451 Similarly, another commenter, endorsing the use of FIX Protocol, stated that FIX Protocol is already widely used throughout the financial industry, and that "[a]ll FIX messages are generated in real time for trading."452

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A significant number of commenters, however, expressed concern about the proposed requirement that the audit trail data be collected and provided to the central repository in real time.453 Some of these commenters focused on the effect a real-time reporting requirement would have on their systems, and the systems changes that might be needed to achieve real-time reporting. Specifically, commenters argued that a real-time collection and provision requirement would require many industry participants to build entirely new systems or to undertake significant technological upgrades to comply with a real-time reporting requirement.454 Other commenters stated that real-time reporting would strain their order handling systems and result in latencies and delays in the processing of customer orders.455 Additionally, one commenter questioned the ability of a real-time consolidated audit trail system to handle periods of immense volume, like the volume on May 6, 2010.456

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Other commenters who expressed concern about the real-time reporting requirement questioned the accuracy of data that would be reported in real time.457 One commenter, for example, noted that there would not be an opportunity for data validation if consolidated audit trail data were required to be reported in real time.458 Another commenter stated that the real-time processing required by real-time reporting would create data integrity issues and, thus, lead to poorer data quality as compared to an approach with a more liberal timeframe, such as next day, or "T+1," reporting.459 FINRA similarly commented that the data integrity issues that arise when audit trail data is provided on a T+1 basis would be exacerbated by a real-time system.460 FINRA stated that it performs over 40 billion data validations of order events submitted through OATS every day, and requires its members to repair rejected OATS data.461

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A number of commenters discussed whether a real-time reporting requirement is necessary. One commenter stressed that the real-time availability of data would facilitate the identification of cross-market events and their origins.462 This commenter explained that a platform developed using FTEN and SMARTS technology would include real-time risk management and surveillance capabilities.463 However, most commenters did not believe that real-time data typically would be useful to the Commission and SROs.464 One commenter explained that using audit trail data before having an opportunity to validate it "may result in a severely distorted picture of trading and interfere with effective oversight."465 Another commenter stated that "real-time order information is inherently incomplete and could even be inaccurate and therefore misleading to the users of the data."466 Some commenters were of the view that the Commission had significantly overvalued the regulatory benefit of real-time data.467 One of these commenters noted that, "[b]ased on its experience in conducting surveillance, [it] does not believe that it is essential that all of the information proposed to be captured in the CAT be received real time or near-real-time."468 A commenter suggested that, to the extent any information had to be submitted in real time, it should be limited to data related to certain key events, such as order receipt and origination, order transmittal, execution, modification, and cancellation.469 Other commenters generally questioned the value of real-time audit trail data, arguing that regulators would still need to rely on traditional investigative techniques, such as taking testimony, to establish securities law violations.470 Another commenter believed that "[m]any potential uses for the data, including enforcement inquiries probing market behavior, may require either multiple days' worth of data, or data from other markets that is not available on a real-time basis," limiting the ability to use such real-time data provided by the consolidated audit trail.471

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Some commenters questioned whether the substantial costs that would be associated with providing the data on a real-time basis would outweigh the benefits.472 One commenter believed that "the SEC has significantly overestimated the incremental utility of real-time data over data received on a T+1 basis" and that "the costs associated with the breadth of real-time reporting proposed by the Commission would be significant and far outweigh the minimal regulatory benefit gained by such a reporting system."473

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Some commenters who questioned the value of the real-time reporting requirement also suggested that the Commission consider a different timeframe for the reporting of audit trail information. Several commenters, for example, suggested a later timeframe for reporting audit trail data to the central repository. One commenter, an exchange, stated that "[o]ur strong preference would be for submission of information to the central repository through a batch process after the close of the trading day involved."474 Another commenter suggested a compromise whereby broker-dealers would be subject to next day (or later) reporting requirements, while the SROs could leverage their existing real-time monitoring tools and provide real-time trading information for use in the consolidated audit trail.475 Several commenters recommended that the Commission permit end-of-day reporting.476 One commenter noted that end-of-day reporting would alleviate some of the practical challenges firms would face with a requirement to identify beneficial owners on a real-time basis.477 Another commenter suggested that a reporting deadline of 10-15 minutes would be substantially more workable than a "real-time" reporting requirement.478 Finally, one commenter suggested that broker-dealers and SROs should retain audit trail information, and submit it only upon regulatory request, so that the central repository would only collect data needed for investigations or surveillance purposes.479

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One commenter, who did not specifically advocate either real time or reporting on an end-of-day basis, supported a requirement that all trades be reported in a standardized format that will be accessible to the SEC at the end of each trading day.480

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Some commenters suggested alternative means of collecting audit trail information, assuming such audit trail data would not be on a real-time basis and would not be through the reporting regime set forth by Rule 613. For example, one commenter suggested the Commission consider "a consolidation" of [OATS] and [COATS], audit trails that are produced on a T+1 basis; and a review of the prospect of extracting specific real-time data from surveillance reports currently used by SROs to perform post trade analysis, such as the Large Option Position Report . . . and large trader reports, to obtain real-time risk information that may impact a particular NMS issue or the market in general."481 This commenter believed that a requirement of real-time reporting should be considered only after other available sources of data have been carefully reviewed, and only to the extent that such a requirement is both necessary and economically feasible.482 Another commenter, however, urged the Commission not to "lower its expectations for the CAT and accept a more limited audit trail based exclusively on existing systems."483 One commenter suggested that the Commission consider a "hybrid" approach that would enhance elements of the quotation and transaction information reported in real time, while collecting and reporting more specific order information on a T+1 basis or later.484

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Two commenters commented on the meaning of "real time."485 One commenter noted that "[our members] request clarification on the definition of real-time data submission as it relates to each data element required by CAT. The granularity/definition of real-time for each element will have a major impact on SROs, their members and CAT system development from both a data quality and database design perspective . . . ."486 The other commenter noted that the "[t]he term 'real time' is used throughout the document, but never defined. (There are several distinct meanings in the computer industry.)"487

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The Commission also received comments specifically relating to the cost of reporting the audit trail information in real time under the Rule as proposed. One commenter believed it would cost $1.25 million in initial costs to comply with the Rule as proposed.488 The commenter divided its $1.25 million estimate into development costs of $750,000 and hardware costs of $500,000 (including hardware, circuits, etc.).489 In addition, this commenter believed the development timeframe would be 9-12 months "once final architecture is drafted," and would require approximately 6,000 hours of development work.490 Notably, this commenter said that "[t]he assumptions that drove this analysis were that any real time reporting of order events would leverage the capabilities contained within the [OATS] reporting today and that the revised real time system would retire the legacy systems of Bluesheets, OATS, OTS and TRACE."491 With respect to ongoing costs to provide information, this commenter also stated that it believed the Commission had underestimated the ongoing costs of the proposal.492 However, another commenter, who opined that the goals of the consolidated audit trail could be achieved for significantly lower costs than the Commission originally estimated, stated that, if the Rule permitted market participants to modify existing systems for collecting and reporting audit trail information, the consolidated audit trail objectives could "be achieved and perhaps even surpassed."493

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iii. Adopted Rule 613(c)(3)

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As described in detail below, the Commission is adopting Rule 613 with two significant modifications to the proposed requirement that the NMS plan submitted to the Commission for its consideration require the collection and provision of key audit trail data to the central repository on a "real time" basis. First, the Rule, as adopted, no longer requires the real-time reporting of consolidated audit trail data but, instead, provides that order event audit trail data must be reported "by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."494 Second, the adopted Rule clarifies that this data is to be recorded "contemporaneously with the reportable event," instead of in "real time."495

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(A) Reporting of Audit Trail Data by 8: 00 a.m. Eastern Time on the Trading Day Following the Day Such Information Has Been Recorded

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The Commission has considered the commenters' concerns regarding a "real-time" reporting requirement for audit trail data, including its achievability and cost effectiveness; the accuracy of audit trail data recorded and reported in real time; and the necessity, merits, and usefulness of real-time audit trail data.496

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On the one hand, the Commission recognizes that there may be very considerable costs imposed on the industry if audit trail data was required to be reported to the central repository in real time – indeed, the Commission, in the Proposing Release, estimated the costs of creating a real-time consolidated audit trail by assuming that such a requirement would necessitate the wholesale creation of new industry-wide systems. On the other hand, the Commission also received a variety of comments suggesting that real-time reporting could be achieved in a cost-effective manner.497 And yet other commenters suggested a hybrid approach. For example, SIFMA commented that, although it believed real-time reporting as originally proposed by the Commission would be too costly, intra-day reporting of a subset of audit data delayed 10-15 minutes would be possible. SIFMA further described how such reporting might be accomplished through the use of "drop-copy" data.498

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With respect to concerns about the accuracy of consolidated audit trail data if real-time reporting were required, the Commission recognizes that the real-time reporting of data could result in accuracy issues to the extent SROs and broker-dealers would need to re-enter the required audit trail data into a separately prepared regulatory report containing the required audit trail data for submission to the central repository, as is the case today with OATS reports.499 The Commission notes, however, that the use of certain existing technologies, such as "drop copies" described by SIFMA, could provide reliable and accurate audit trail data to the central repository because such "drop copies" would reflect the information captured by an SRO or member's order management and execution systems to enter, route, modify, and execute or cancel orders.

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The Commission believes that, whether or not real-time reporting of data is required, the creation, implementation, and maintenance of a consolidated audit trail will likely be a complex and significant undertaking for the industry. It therefore recognizes the practical advantages of a more incremental, or more gradual, approach to such an undertaking. After considering the many comments received on the use of real-time data by regulators, the Commission has recognized that, although there might be some additional benefits to receiving data and monitoring the markets intra-day (such as for certain enforcement investigations and the facilitation of real-time cross-market surveillance), the majority of the regulatory benefits gained from the creation of an industry-wide consolidated audit trail, as described in the Proposing Release, do not require real-time reporting. Indeed, the extent of the potential uses of a consolidated audit trail discussed in Section II.A.2., supra, which do not rely on a real-time reporting requirement, illustrate the value of a consolidated audit trail even if data is not reported in real-time. Instead, the Rule, as adopted, provides that the NMS plan must require that order event data be reported "by 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member."500

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The Commission notes that, while the Rule provides that the NMS plan must impose a reporting deadline of 8: 00 a.m. Eastern Time of the trading day following the day such information has been recorded by the national securities exchange, national securities association or member, the Rule also provides that the NMS plan may accommodate SROs and members that voluntarily satisfy their reporting obligations earlier.501

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The Commission acknowledges that, by replacing the requirement that the SROs develop a plan for real-time reporting with a requirement for reporting by 8: 00 a.m. the next trading day, the Commission has precluded the possibility that, as some commenters suggested, a mandatory real-time reporting NMS plan might be developed by the SROs for consideration by the Commission and the public.502 However, given the overall scope and complexity of creating a consolidated audit trail, the Commission has determined that it would be more beneficial to have the SROs and their members focus on those key aspects of a consolidated audit trail that the Commission believes would be the most useful for improving regulatory oversight and monitoring (including, but not limited to, the use of unique customer identifiers, the ability to accurately link an order across its lifecycle, the inclusion of market making quotes, and the addition of options data), rather than focus on how to develop an NMS plan for real-time reporting that may not yield benefits that are equally as useful.503 The Commission also believes that, as a consequence of this modification, the Rule, as adopted with the 8: 00 a.m. reporting deadline, will more readily accommodate a consolidated audit trail that could build upon existing audit trail infrastructures. Meeting the requirement of the Rule may no longer necessitate the creation of completely new infrastructures. In particular, the Commission notes that the OATS technical specifications require OATS data to be reported by 8: 00 a.m. the following calendar day.504 Thus, the Rule, as adopted, would permit the SROs to submit an NMS plan to the Commission for its consideration with reporting timeframes comparable to OATS' requirement, with which all FINRA members are presently capable of complying.505 As a result, broker-dealers might need to make fewer systems changes to comply with the Rule than they would have had to make if real-time reporting were required, though, as discussed in Section II.C.4., supra, OATS in its present form would still need to be modified to meet certain of the other requirements of this Rule.506 Nevertheless, as suggested by many commenters, fewer systems changes to comply with the Rule should lead to lower costs incurred by broker-dealers.507

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An additional consequence of the Commission's decision not to require real-time reporting is that, since meeting the requirements of the Rule may no longer necessitate the wholesale creation of new systems, the Commission's proposed cost estimates, which were based on this assumption, may no longer be applicable. As discussed in Section II.C.2., supra, the Commission believes that given the many different ways in which the SROs may develop an NMS plan that meets an 8: 00 a.m. reporting requirement, the costs of such reporting will be highly dependent on the details of the specific plan proposed. The Rule, as adopted, therefore directs the SROs to provide these details, along with associated costs, in the NMS plan submitted to the Commission for the Commission and the public to consider. The Commission will be able to consider this information when determining whether to approve the NMS plan submitted.

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(B) Recording of Audit Trail Data Contemporaneously with the Reportable Event

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As noted above, the Rule as proposed would have required SROs and their members to "collect" audit trail data "on a real time basis." In response to commenters who commented on the meaning of "real time," the Commission is adopting this provision with modifications from the proposed Rule. Specifically, Rule 613(c)(3), as adopted, requires that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event."

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The Commission believes that the term "contemporaneously" better reflects its intent, as noted in the Proposing Release, that information should be collected immediately and with no built-in delay from when the reportable event occurs. While, in response to commenters, the Commission is no longer requiring the real-time reporting of information, the Commission believes it is important for SROs and broker-dealers to "record" the events contemporaneously. The Commission expects that compliance with this requirement will not be difficult for SROs and broker-dealers with automated systems, which will contain much, if not all, of the data to be reported to the central repository as a result of processing and saving a record of any actions taken by the SRO or broker-dealer. On the other hand, broker-dealers that do not use automated systems will have to ensure that reportable events are manually recorded as they are occurring. In addition, the adopted Rule uses the term "record" in Rule 613(c)(3), instead of the proposed term "collect," because the Commission believes that term more accurately reflects its intent that a contemporaneous record be made when an order event occurs.

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f. More Flexible Format for Reporting Consolidated Audit Trail Data to the Central Repository

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In the Proposing Release, the Commission expressed its preliminary view that data would need to be collected and provided by SROs and their members to the central repository in a uniform electronic format to assure regulators that they will have ready access to comparable cross-market data.508 Specifically, Rule 613(c)(2), as proposed, provided that "[t]he national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to collect and provide to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format."

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However, the Commission received comments suggesting that audit trail data does not necessarily need to be provided by SROs and their members to the central repository in a uniform electronic format, and that such data instead could be converted automatically into a uniform format by the central repository or a third party using existing technology, which could result in lower cost for the securities industry than originally estimated.509 Specifically, two commenters indicated that technology exists today to convert or "normalize" data that may be produced from disparate systems into a uniform format and that, as a result, implementation of the consolidated audit trail could be simpler and less costly than originally contemplated by the Commission.510 One of these commenters stated that a number of risk management services and surveillance systems currently receive automatically-generated copies, or "drop copies," of order and execution messages, in real time, from a variety of broker-dealers and exchanges, and convert that information into a common standard format.511 Two other commenters suggested that firms that currently use FIX should be allowed to continue utilizing FIX,512 stating that FIX's prevalence in the financial industry would make it cheaper and easier to use FIX as the protocol of the consolidated audit trail.513 Another commenter stated it could collect information directly from exchanges and other sources of information to minimize reporting obligations, and could leverage its own technology to get information directly from exchanges.514

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In response to these comments, the Commission has modified this aspect of the proposed Rule. Specifically, adopted Rule 613(c)(2) allows the NMS plan to provide that SROs and their members can report data either "in a uniform electronic format" or "in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage."515 In light of the comments that data from multiple sources could be converted into a uniform format,516 this modification provides SROs with the flexibility, in devising the NMS plan, to better accommodate a range of proposals, including those based on leveraging technology in a cost-effective manner by permitting data to be converted to a uniform electronic format at the broker-dealer level or at the central repository. The Commission does not believe this change will reduce the accuracy or accessibility of the audit trail data provided to regulators (since the Rule still requires data to ultimately be provided to regulators in a uniform electronic format).

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Further, by providing the SROs the ability to use a number of approaches to normalization, broker-dealers and SROs may not need to make substantial changes to their order management and execution systems to comply with Rule 613; instead, the central repository or the broker-dealers could convert such data into a uniform electronic format, and the Rule now provides the plan sponsors with the flexibility to use this approach in the NMS plan submitted to the Commission for its consideration. The Commission believes that, to the extent it avoids requiring broker-dealers and SROs to make substantial changes to their order management and execution systems to comply with Rule 613 regarding a uniform electronic format, this type of approach could be a more efficient and cost-effective method for collecting the specified audit trail data required by the Rule.517 The Commission expects that the NMS plan submitted for its consideration will specify how any normalization approach that might be included in the plan will lead to accurate and reliable data.518

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g. Timeframe for Reporting Other Data Elements to the Central Repository

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i. Proposed Rule 613(c)(4)

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While most order and execution information would have been required to be reported to the central repository on a real-time basis under the proposed Rule, the Commission also recognized that not all information required to be reported to the consolidated audit trail would be available to the SROs and their members in real time.519 In general, the audit trail data required under this timeframe reflected information not typically available until later in the order handling and execution process. This information that would have been provided on an extended timeframe included: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique order identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) the cancelled trade indicator (if applicable) (collectively, "supplemental audit trail data").520 Proposed Rule 613(c)(4) would have permitted the supplemental audit trail data to be reported to the central repository promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information.

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The Commission solicited comments on proposed Rule 613(c)(4) and its requirement that certain audit trail information not available in real time be reported promptly after the national securities exchange, national securities association, or member received the information, but in no instance later than midnight of the day that the reportable event occurs or the SRO or member receives such information. One commenter believed that the timeframe for reporting the specific consolidated audit trail data listed above should be lengthened to T+1 or later.521 This commenter was concerned that requiring broker-dealers to report certain data elements by midnight could disrupt the trading of certain products.

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ii. Adopted Rule 613(c)(4)

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After considering the commenter's views on proposed Rule 613(c)(4), the Commission is adopting the Rule with three modifications from the proposed Rule. First, to parallel the 8: 00 a.m. deadline by which order event data must be reported to the central repository under adopted Rule 613(c)(3), adopted Rule 613(c)(4) requires that the NMS plan provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the member receives the audit trail data, and provides that the plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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Second, the adopted Rule no longer requires the reporting of (1) special settlement terms, (2) the amount of commission, if any, paid by the customer, and the unique identifier of the broker-dealer to whom the commission is paid, and (3) the short sale borrow information and identifier. Third, adopted Rule 613(c)(4) requires that the NMS plan provide for the reporting of certain customer identification and customer account information by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such data, instead of in "real time," as proposed.522 These modifications are discussed in more detail below.

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(A) Reporting Timeframe

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In response to the comments regarding the timing for reporting of consolidated audit trail data elements,523 the Commission is adopting Rule 613(c)(4) with modifications to the timeframe for reporting supplemental audit trail data. Specifically, the Rule no longer requires that supplemental audit trail data be reported "promptly" after the broker-dealer receives the information but no later than midnight of the day that the reportable event occurred; rather, adopted Rule 613(c)(4) requires the NMS plan to provide that supplemental audit trail data be reported by 8: 00 a.m. Eastern Time on the trading day following the day the broker-dealer receives such information. Although the NMS plan may permit broker-dealers to report such information prior to that time, it may not require such earlier reporting. The Commission believes it is appropriate that there be an extended timeframe for reporting this data because this information (e.g., allocation to subaccounts) might not be available until later in the order handling and execution process and, on balance, the Commission does not believe it is necessary that it be reported to the central repository "promptly". Instead, the modification to Rule 613(c)(4), as proposed, now requires that the NMS plan provide that the supplemental audit trail data be reported by 8: 00 a.m. Eastern Time following the day the member receives the information, which parallels the adopted Rule 613(c)(3) timeframe for reporting event data. The Commission believes this more flexible standard should reduce implementation burdens and simplify the requirements of adopted Rule 613, without materially reducing the utility of the consolidated audit trail.

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The Commission notes that it has made a clarifying change to Rule 613(c)(4), as proposed, to specify that the obligation to report the supplemental audit trail data to the central repository only falls on a broker-dealer, and not on a national securities exchange or national securities association.524 The Commission believes that this change is appropriate because only broker-dealers receive the types of audit trail data described in Rule 613(c)(vi) through (viii).525

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(B) Elimination of Certain Data Elements

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As previously noted, proposed Rule 613(c)(4) would have required that the following information be reported to the central repository: (1) the account number for any subaccounts to which the execution is allocated (in whole or part); (2) the unique identifier of the clearing broker or prime broker (if applicable); (3) the unique identifier of any contra-side order(s); (4) special settlement terms (if applicable); (5) the short sale borrow information and identifier; (6) the amount of a commission, if any, paid by the customer and the unique identifier of the broker-dealer(s) to whom the commission is paid; and (7) cancelled trade indicator (if applicable).526

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After considering general comments suggesting that the Commission reduce the proposed reporting obligations under Rule 613, the Commission is not requiring the following data elements to be reported to the central repository: (1) special settlement terms; (2) the amount of commission, if any, paid by the customer; (3) the unique identifier of the broker-dealer to whom the commission is paid; and (4) the short sale borrow information and identifier.527 While this data may be useful in the context of certain investigations or market analyses, upon further consideration, the Commission believes that these data elements should not be required by Rule 613 because the Commission does not typically find that these particular audit trail data elements provide enough information relevant to an initial assessment of whether illegal or manipulative activity is occurring in the marketplace to warrant that they be required as a standard part of the audit trail created by Rule 613. If the Commission or the SROs find that such information would be useful to their regulatory responsibilities, they may request the information directly from the broker-dealer with the obligation to record this information, although requests related to short sale borrow information may pose unique challenges. In effect, the Commission believes that the benefit of having these specific audit trail data elements in the consolidated audit trail at this time is unlikely to justify the recording and reporting burden on broker-dealers of providing these elements, particularly in light of the other information required to be reported under Rule 613 and the regulators' ability to obtain this information through a follow-up request. The Commission notes that, if the SROs believe that having such data elements as part of the consolidated audit trail could be useful to their regulatory responsibilities, the SROs could determine to require SROs and their members to record and report such data as part of the NMS plan.

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With respect to the account number for any subaccounts to which the execution is allocated (in whole or in part) – an audit trail data element that will be required by Rule 613(c)(4), as adopted – the Commission notes that obtaining allocation information is important because part of the goal of Rule 613 is to obtain audit trail information for the life of an order, which would include how an order was ultimately allocated (i.e., to which specific customer and account). The Commission notes, however, that the Rule requires the NMS plan to require a broker-dealer to report only the account number of any subaccounts to which an execution is allocated that is contained in its own books and records for accounts and subaccounts it holds; there is no obligation for the broker-dealer to obtain any additional information about accounts or subaccounts from other broker-dealers or non-broker-dealers who submitted the original order. The Commission further notes that broker-dealers will remain subject to existing regulatory requirements, including recordkeeping and suitability requirements (e.g., "know your customer" rules). Including the account number of any subaccounts to which an execution is allocated in the consolidated audit trail will allow regulators to understand how an allocation of the securities was made among customers of a broker-dealer to, for example, determine if the broker-dealer was favoring a particular customer, to better understand the economic interests of the customer, or as it relates to possible enforcement actions. Similarly, having information regarding the identity of the clearing broker or prime broker for the transaction, the identity of any contra-side order(s), and a cancelled trade indicator by 8: 00 a.m. Eastern Time on the trading day following the day that the member receives such information will aid the Commission and the SROs in knowing all of the parties that touched an order (including the clearing broker, prime broker, and contra-side party to the order), and whether the order was cancelled. The Commission believes that all of this information will facilitate regulatory improvements as discussed above in Section II.A.2.

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(C) Movement of Certain Data Elements from Event Data to Supplemental Audit Trail Data

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As proposed, Rule 613 would have required that, in addition to the Customer-ID, customer account information and other specified information sufficient to identify a customer be reported in real time.528 The Commission requested comment about the feasibility of this requirement. Several commenters expressed concern over the proposed requirement that customer information be reported in real time upon origination or receipt of an order.529 One commenter believed that leakage of customer information could "negatively impact investor willingness to trade in the U.S. markets,"530 and, instead, urged regulators to rely on EBS to provide customer information.531 Another commenter did not think it was feasible to provide customer information in real time.532 Another commenter suggested that the Commission "pare down its list of data points to focus on what would appear on a trade ticket and certain client demographic information."533 This commenter explained that its suggested approach "makes sense because for most brokers pulling trade ticket information from frontend systems will be straightforward, and client demographics should be easily pulled and populated onto a system for easy retrieval."534 Another commenter was of the view that only customer information regarding the person exercising investment discretion for the account originating the order, such as an investment adviser, should be required to be reported.535 This commenter explained that if a trade is not executed an investment advisor would not typically provide information about the owners of the underlying accounts to the broker-dealer and thus this commenter suggested that it would be more practical to disclose underlying account information in relation to executed trades.536 Another commenter suggested that there be a "requirements analysis" that considers the availability of order and trade data, and noted that allocation data is not available at the time of order entry.537

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In recognition of commenters' concerns that this information may not be available in real time538 and to reduce the reporting burdens on broker-dealers, the Commission is moving data elements, including the customer's name, address, and account information, and large trader identifier (if applicable) (collectively defined as "customer attributes") from the order event data category to the supplemental audit trail data category.539 As a result, the Commission is adopting the Rule to provide that the NMS plan require that customer attributes540 including the customer's name, address,541 and customer account information be reported under Rule 613542 no later than 8: 00 a.m. Eastern Time on the trading day following the day that the member receives the information.543 The Commission expects that the Customer-ID will be able to be linked to the customer attributes in the consolidated audit trail.

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The Commission believes that, to realize many of the objectives of a consolidated audit trail, the specific attributes of a customer must be recorded and, when needed, made available to regulators. Without these customer attributes, the data recorded is effectively anonymized, which would prevent regulators from using the enhanced consolidated audit trail data to take any enforcement action against specific individuals. The Commission believes customer attributes544 are necessary because regulatory authorities need to accurately and efficiently identify the customer to effectively surveil and analyze the markets, and enforce the securities laws. For example, as noted in the Proposing Release,545 a trader may trade through multiple accounts at multiple broker-dealers. Being able to identify the account holder aids in the identification and investigation of suspicious trading activity. Accordingly, the unique customer identifier that is required to be reported to the central repository for original receipt, origination, modification, or cancellation of an order,546 and that links together all reportable events by the same customer, must ultimately link back to information regulators could use to identify the party. With this information, regulators could more quickly initiate investigations, and more promptly take appropriate enforcement action. While this information could be requested from broker-dealers by the Commission and the SROs on a case-by-case basis, the Commission believes that achieving these benefits requires having such information maintained in a uniform format that is readily accessible to the Commission and the SROs.

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Furthermore, in response to the commenters concerns with respect to the confidentiality of this sensitive information,547 and as discussed in more detail below, the adopted Rule includes requirements for enhanced safeguards with respect to the privacy and confidentiality of consolidated audit trail data, including customer information.548

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In response to the commenter who suggested only information appearing on the trade ticket and certain client demographic information549 be collected, the Commission notes that it may be feasible for the NMS plan to allow customer identifying and account information to be reported by a broker-dealer to the central repository only when the customer opens or closes an account (or at the time the consolidated audit trail is first implemented for pre-existing accounts) -- this information may not need to be re-reported with every order.550 Under this approach, the specified customer attributes may be stored in the central repository and automatically linked to an order whenever an order with the applicable Customer-ID is reported. As the Commission noted in the Proposing Release,551 broker-dealers today, as part of their books and records requirements, must take reasonable and appropriate steps to ensure the accuracy of the customer information with respect to orders received.552 Following adoption of the Rule, and the creation and implementation of the consolidated audit trail, broker-dealers will continue to be subject to this requirement as they report customer information to the central repository. The Commission believes that allowing the specified customer attributes to be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that a broker-dealer first receives this information appropriately balances the regulatory need with the practical burdens of supplying it in real time as originally proposed.

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In response to the commenter who stated that an investment adviser would not typically provide information about the owners of the underlying accounts to the broker-dealer if the trade is not executed,553 the Commission notes that, in the case of an adviser that enters an order to buy or sell securities using its own account held at the broker-dealer originating the order, the Rule, as adopted, would only require the NMS plan to require the capture of information about the owners of the underlying client accounts for which the order was placed if there is an executed trade, and if the executed trade is allocated (pursuant to Rule 613(c)(7)(vi)) to the accounts of the adviser's clients at the same broker-dealer.554 However, the Commission notes that, in the case of an adviser that enters an order on behalf of clients that each maintain separate accounts at the broker-dealer originating the order, using those accounts, the Rule would require the NMS plan to require the capture of both the adviser – as the person providing trading instructions to the broker-dealer (pursuant to Rule 613(j)(3)(ii)) – and the clients, who are the account holders at the broker-dealer (pursuant to Rule 613(j)(3)(i)), even if the order did not result in execution.

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Finally, in the Proposing Release,555 the Commission specifically requested comment on whether there are laws or other regulations in other jurisdictions that would limit or prohibit members from obtaining the proposed customer information for non-U.S. customers. The Commission also requested comment on how members currently obtain such information. If broker-dealers did encounter special difficulties in obtaining customer information from other jurisdictions, the Commission requested comment on how the proposed consolidated audit trail requirements should be modified to address such difficulties.

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The Commission received one comment on this issue.556 The commenter expressed concern that, if broker-dealers were forced to refuse orders from non-U.S. customers because the laws of another jurisdiction prohibited disclosure of certain customer information, U.S. broker-dealers would be penalized and trading activity may shift offshore.557 The commenter recommended that the Commission adopt a limited exemption that would allow broker-dealers to accept orders from non-U.S. broker-dealers without providing customer information, in recognition of the fact that these broker-dealers are subject to regulation in their home countries.558

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In the Rule, as adopted, "customer" is defined as "(i) [t]he account holder(s) of the account at a registered broker-dealer originating the order; and (ii) [a]ny person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s)." Under this definition, the non-U.S. broker-dealer referred to above is the "customer" of the U.S. broker-dealer for purposes of the rule. The U.S. broker-dealer would be required to record customer information for transactions in NMS securities only with respect to its foreign broker-dealer customer. There is no requirement to record information about the customers of such foreign broker-dealer. Because the Rule as adopted does not require a non-U.S. broker-dealer placing orders in NMS securities through a U.S. broker-dealer to provide information about its customers to the consolidated audit trail, the Commission believes that the requested limited exemption is unnecessary.

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Although the Commission is aware that the privacy laws of some, but not all, foreign jurisdictions may hinder a foreign broker-dealer's ability to disclose personal identifying and account information of their customers absent customer authorization, the Rule as adopted does not require the foreign broker-dealer to disclose this information about its customers.559 Accordingly, a non-U.S. customer desiring to trade in the U.S. markets would be permitted to do so through a foreign broker-dealer without having to disclose its personal data to the consolidated audit trail. Because the Rule as adopted does not require a foreign broker-dealer to disclose personal identifying and account information of its customers to the consolidated audit trail, the Commission does not believe that trading in NMS securities will shift offshore as a result of the customer identification requirements.

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h. Clock Synchronization

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As proposed, Rules 613(d)(1) and (2) required that the NMS plan filed with the Commission include a requirement that each SRO and its members synchronize their business clocks that they use for the purposes of recording the date and time of any event that must be reported to the time maintained by the National Institute of Standards and Technology ("NIST"), consistent with industry standards.560 The SROs and their members also would have been required to annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes to industry standards.561 This clock synchronization would have been required to occur within four months after effectiveness of the NMS plan.562

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A few commenters expressed concerns with the Commission's proposed approach to clock synchronization, and a few commenters provided comments specifically relating to the Commission's estimated costs relating to clock synchronization.563 One commenter preferred a synchronization standard measured in seconds and believed that synchronizing at the millisecond level would require specialized software configurations and expensive hardware.564 This commenter also was of the view that there could be material problems with systems latency if processors were required to re-synchronize clocks every few seconds to address "time drift" issues – further deviations from the time maintained by the NIST that may occur after a clock is synchronized.565 Another commenter suggested that a clock synchronization standard shorter than the three second standard currently required by FINRA for OATS compliance might be impossible to achieve across market participants.566 A third commenter was concerned that implementing clock synchronization could require firms to make modifications to a variety of related applications.567 One commenter noted that synchronizing clocks to milliseconds would require costly specialized software and hardware.568

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On the other hand, one commenter – a provider of data capture and time stamping technology – noted that "[t]he advent of relatively low cost GPS receivers that derive absolute timing information accurate to better than 0.1 micro-seconds has significantly eased the problem of clock synchronization across multiple global locations," that "[s]uch technology costs a few thousands of dollars per installation," and that "[i]t is already in use by exchanges and high frequency traders."569 Another commenter expressed support generally for the Commission's proposed approach to clock synchronization.570

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After considering the comments received on this issue, the Commission is adopting Rule 613(d)(1) as proposed. As this provision requires that the NMS plan require clock synchronization consistent with industry standards, the Commission expects the NMS plan that is submitted to specify the time increment within which clock synchronization must be maintained, and the reasons the plan sponsors believe this represents the industry standard. The Commission notes that FINRA currently requires its members to synchronize their business clocks used for OATS reporting to within one second of the time maintained by NIST.571 The Commission believes that the current industry standard for conducting securities business is more rigorous than one second. For example, as one commenter noted, technology used today by exchanges and high frequency trading firms synchronizes clocks to increments well within the millisecond level.572 The Commission recognizes, as another commenter noted, that some firms may need to upgrade their technology to meet the industry standard,573 and that there will be attendant costs for such upgrading.574

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The Commission continues to believe that it is appropriate to require members of the securities industry to synchronize their clocks to the time maintained by NIST. Effective clock synchronization is essential to maintaining an accurately time-sequenced consolidated audit trail, particularly one where time stamps will be in millisecond increments or less. Because the consolidated audit trail will capture trading activity occurring across markets, if the business clocks used by SROs and their members for the purposes of recording the date and time for reportable events are not properly and consistently synchronized, the consolidated audit trail data will not be accurately time-sequenced. It is critical for the consolidated audit trail to allow regulators the capability to accurately determine the order in which all reportable events occur.575

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The Rule as proposed required that both the SROs and their members annually evaluate the clock synchronization standard to determine whether it should be changed to require finer increments, consistent with any changes in the industry standard.576 The Commission believes that the obligation to evaluate the clock synchronization standard annually should be borne by the SROs as the plan sponsors, not SRO members. The Commission believes that it is appropriate for the SROs, as regulators of the securities markets and users of the consolidated audit trail data, to have the obligation to evaluate whether a change in the clock synchronization standard is warranted.577 Therefore, the adopted Rule provides that the NMS plan shall require SROs to evaluate annually the clock synchronization standard set forth in the NMS plan.578

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The Commission recognizes, as a commenter noted,579 that time drift is an issue that must be addressed by the plan sponsors, to prevent a deterioration of the accuracy of the data in the consolidated audit trail. Therefore, the Commission expects the NMS plan to address the maximum amount of time drift that would be allowed before clocks must be re-synchronized, and why this is consistent with the industry standard.

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As with many other aspects of the Rule, the costs of this requirement are highly dependent on the details of the solution proposed by the SROs because the Commission is leaving it up the SROs to determine the maximum allowable time drift. As such, the SROs must discuss in their submitted plan the clock-synchronization standard they proposed, what alternatives were considered, and the rationale behind their choice. Once the NMS plan is received, the Commission, as well as the public, will be able to consider the extent to which the proposed synchronization standard supports the ability of regulators to fully achieve the benefits afforded by the creation of a cross-market consolidated audit trail.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
2. Central Repository
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Central Repository - Compliance User: Broker-dealers - Keywords: - NMS Plan, - Receipt, - Consolidation, - Retention of Data, - Audit Trail Data, - NBBO Information, - Transaction Reports, - Last Sale Reports, - Retention, - Timeliness, - Accuracy, - Integrity, - Completeness, - Consolidated Data, - Access, - Confidentiality, - -

a. Central Repository as a Facility of the SROs

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As proposed, Rule 613(e) required that the NMS plan provide for the creation and maintenance of a central repository,580 which would have been a "facility" of each exchange and FINRA.581 The central repository would have been jointly owned and operated by the exchanges and FINRA, and the NMS plan would have been required to provide, without limitation, the Commission and SROs with access to, and use of, the data reported to and consolidated by the central repository for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.582 Each of the exchanges and FINRA would have been a sponsor of the plan583 and, as such, would have been jointly responsible for selecting a plan processor to operate the central repository.584

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The Commission requested comment on the need for a central repository to receive and retain the consolidated audit trail information, whether there would be alternatives to creating a central repository for the receipt of order audit trail information, and whether it would be practical or appropriate to require the SROs to jointly own and operate the central repository.

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A few commenters discussed the proposed ownership structure of the central repository.585 One commenter argued that the central repository should be owned and operated by the Commission, or a non-SRO formed specifically to operate the central repository, and expressed concern that the central repository could be used by SROs as a source of revenue through the imposition of penalties.586 Another commenter recommended that the Commission own the repository and not outsource it to a third party, explaining that, in systemically important events, it may be necessary to have immediate and direct access to the data, without an intermediary.587 Yet another commenter noted that the decision to use OATS or another system as the basis for the consolidated audit trail system should be separate from the choice of the party that will be responsible for building and operating the central repository.588

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The Commission received a couple of comments specifically regarding the costs of the creation and maintenance of the central repository. FINRA, in one of its comment letters, submitted a "blueprint" for a version of a consolidated audit trail based on enhancements to OATS – though without certain key elements proposed to be required by the adopted Rule – and estimated initial costs for developing the repository to be between $100 million and $125 million, with ongoing annual costs to be between $30 million and $40 million.589 Another commenter suggested the use of cloud computing for the central repository which it believed would cost less than $10 million per year.590

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The Commission has considered the comments and is adopting as proposed the requirement in Rule 613(e)(1) that the NMS plan provide for the creation of a central repository. The Commission believes that having a central repository is important to ensuring access to consolidated data for the Commission and SROs, and for ensuring consistency, quality, and security in the audit trail data.

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As adopted, Rule 613(e)(1) does not dictate a particular audit trail collection system to be used as the central repository for the consolidated audit trail, but, instead, delineates the required core features of such a system.

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The Commission considered the commenter's recommendation that it should own the central repository591 but determined that such ownership is not necessary as long as the central repository has the core features articulated in the Rule, the Commission and SROs have full access to the audit trail data for regulatory purposes, and the central repository is a facility of each SRO subject to Commission oversight.592 The Commission notes that, because the central repository will be jointly owned by, and a facility of, each SRO, it will be subject to Commission oversight. The Commission will have unfettered access to the data in the central repository without being its owner.

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The Commission also considered the comment that the central repository should be owned by a non-SRO specifically formed to operate the central repository.593 The Commission, however, believes that it will have more regulatory authority over the central repository as a facility of each SRO than it would have if the central repository were owned or operated by a non-SRO. First, the Commission has the statutory obligation to oversee the SROs, including facilities thereof, and to ensure that SROs enforce compliance by their members with the respective SRO's rules, and the federal securities laws, rules, and regulations.594 Second, a facility of an SRO is subject to the rule filing requirements of Section 19(b) of the Exchange Act.595

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In response to the commenter who expressed concern that the plan sponsors would use the central repository to generate revenue through penalties,596 the Commission notes that any penalty provisions must be provided in the NMS plan submitted to the Commission for its consideration, or in a future amendment to the NMS plan, if the NMS plan is approved. The Commission will review the NMS plan submitted for its consideration, which also will be subject to public notice and comment, to assure itself that the NMS plan is designed to be applied fairly and otherwise in a manner consistent with the Exchange Act. The Commission expects that the NMS plan's penalty provisions would provide sufficient detail regarding the circumstances in which any penalties would apply, and any restrictions on how payments of such penalties may be used, to permit the Commission to determine that such penalty provisions are fair and consistent with the Exchange Act. As the central repository will be a facility of the plan sponsors, the rules governing it must be consistent with the Exchange Act.597 In addition, future amendments to the penalty provisions would either be reviewed as an amendment to the NMS plan, under Rule 608 of Regulation NMS, or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.598 Additionally, the Commission has the authority to review any action taken or failure to act by any person under an effective NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS.599 Lastly, any penalty provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure they are implemented fairly in a manner consistent with the Exchange Act.600

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In response to the comments regarding the costs of the creation and maintenance of a central repository, the Commission notes that the costs would be highly dependent on the decisions the SROs make with respect to each of the areas in which the Commission has provided flexibility to the SROs in crafting the NMS plan to be submitted to the Commission for its consideration. For example, cost estimates could vary depending on whether the NMS plan requires unique order identifiers or permits "a series of order identifiers." Such cost estimates also could vary because the Rule does not specify details regarding, among other things, the security and confidentiality procedures of the central repository, the system for assigning customer identifiers, the format(s) of data reported to the central repository, the methods by which regulators will access data in the central repository, whether an annual independent evaluation will be required, how reportable events related to the same order will be linked, or how errors will be processed. Such information will be known only after the filing of the NMS plan and, thus, the Commission believes it is appropriate to defer consideration of such costs until the NMS plan is submitted for its consideration. Once it is submitted, the Commission will be able to use this information in determining whether to approve the NMS plan.

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The Commission notes that other provisions of the Rule that are applicable to the central repository, discussed below, have been modified from the proposal, including provisions relating to the format in which the data may be reported,601 and to the security and confidentiality of the consolidated audit trail data.602

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b. Receipt, Consolidation, and Retention of Data

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1. Audit Trail Data

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In addition to providing for the creation and maintenance of the central repository, Rule 613(e), as proposed, also would have required the central repository to receive, consolidate, and retain all data reported by the SROs and their members pursuant to the Rule and the NMS plan.603

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The Commission is adopting, substantially as proposed, the provisions in Rule 613(e) regarding the responsibility of the central repository to receive, consolidate, and retain the audit trail data, but with a few modifications to reflect changes the Commission made to other sections of Rule 613.604

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The first change to Rule 613(e)(1) is a conforming change to the modification in adopted Rule 613(c)(2) that permits the NMS plan to provide that audit trail data be reported to the central repository either in a uniform electronic format, or in a manner that would allow the central repository or a third party to convert the data to a uniform electronic format for consolidation and storage.605 Given the need for cross-market comparability and ready access,606 the adopted Rule requires that, to the extent the NMS plan does not require that data be reported to the central repository in a uniform electronic format, the central repository must convert the data to a uniform electronic format for consolidation and storage.607 The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to have the central repository normalize audit trail data reported, the Rule requires the central repository to consolidate and store the data in a uniform electronic format.

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The second change to Rule 613(e)(1) reflects the Commission's view that, while it is appropriate to provide the plan sponsors with the flexibility to determine how an order will be identified, audit trail data must be stored in the central repository in a manner that will allow order information to be retrieved in a timely and accurate fashion. Accordingly, adopted Rule 613(e)(1) requires that the audit trail data consolidated in the central repository be stored "in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval . . . for all reportable order events for that order." The Commission notes that, regardless of whether the NMS plan submitted to the Commission for its consideration elects to use a series of order identifiers or a unique order identifier, the Rule requires the central repository to be able to link together all reporting events pertaining to an order.

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In looking ahead to considering the overall cost of creating, implementing, and maintaining a consolidated audit trail in connection with the NMS plan, the Commission recognizes that, in addition to the costs to SRO members who would be required to record and report data to the central repository, there also will be costs associated with creating and maintaining a central repository. These costs may include: (1) the purchase and maintenance of servers and systems to receive, consolidate, and retain audit trail data, and to allow access to and searches on the data; (2) the development of policies and procedures relating to the timeliness, accuracy, completeness, security, and confidentiality of the data collected; (3) the development and maintenance of a comprehensive information security program for the central repository; and (4) dedicated staff, including a CCO.

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2. NBBO Information, Transaction Reports, and Last Sale Reports

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In addition to receiving, consolidating, and retaining audit trail data reported pursuant to Rule 613(c), Rule 613(e)(5), as proposed, would have required the central repository to collect and retain, on a current and continuing basis and in a format compatible with the information collected pursuant to Rule 613(c)(7),608 the NBBO information for each NMS security,609 as well as transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, Rule 601 of Regulation NMS under the Exchange Act.610 In addition, last sale reports reported pursuant to the OPRA Plan filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS under the Exchange Act would have been required to be collected and retained.611

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One commenter expressed its belief that, "[a]s in the case of the current OATS system, execution data provided to the consolidated audit trail should identify where the trade was publicly reported and have a common identifier that links the audit trail execution reports for the buy and sell orders to the public trade report."612 The Commission believes that the proposed requirement for the central repository to collect and retain NBBO information, as well as transaction reports and last sale reports,613 would facilitate the ability of SRO and Commission staff to search across order, NBBO, and transaction databases. Moreover, inclusion of NBBO information would permit regulators to compare order execution information to the NBBO information readily as all of the information will be available in a compatible format in the same database. This information also would be available to the Commission to assist in its oversight efforts.

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Additionally, requiring the central repository to collect and retain the NBBO and transaction information in a format compatible with the order execution information would aid in monitoring for regulatory compliance (e.g., Rule 201 of Regulation SHO). Also, this information would be useful in conducting market analyses (e.g., how order entry affects NBBO prices and depth). The Commission believes that the requirement that the central repository collect transaction reports reported pursuant to the CTA, UTP, and OPRA plans614 would allow regulators to more efficiently evaluate certain trading activity. For example, a pattern of unreported trades may cause the staff of an SRO to make further inquiry into the nature of the trading to determine whether the public is receiving accurate and timely information regarding executions and that market participants are continuing to comply with the trade reporting obligations under SRO rules. Similarly, a pattern of unreported transactions could be indicia of market abuse, including failure to obtain best execution for customer orders or possible market manipulation. The Commission believes that having the quotation and transaction information currently collected with respect to NMS securities in the same data repository – and in a compatible format – as part of the consolidated audit trail would enhance regulatory efficiency when analyzing the data.

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After considering the comment on this provision,615 the Commission is adopting proposed Rule 613(e)(5)(ii) and (e)(5)(iii) (renumbered as Rule 613(e)(7)(ii) and (e)(7)(iii)), as proposed, and the requirement of proposed Rule 613(e)(5)(i) (renumbered as Rule 613(e)(7)(i)) for the NMS plan to require the central repository to collect and retain NBBO information for each NMS security substantially as proposed, but is clarifying that the NBBO information must include size and quote condition.616 NBBO size information is integral to determining whether best execution and order handling requirements were satisfied for a particular order because these requirements depend on the relationship between the size of the order and the displayed size at the NBBO. NBBO quote condition information is integral to determining whether or not quotes are immediately accessible. For example, quote condition information that identifies whether the quote reflecting the NBBO was automated, and therefore subject to trade-through protection, or manual617 may be an important consideration in determining whether the duty of best execution was satisfied. The NBBO price, size, and quote condition is used by regulators to evaluate members for compliance with regulatory requirements, such as the duty of best execution or Rule 611 of Regulation NMS.618 The Commission acknowledges that there will be costs to the central repository to purchase and to retain NBBO information, transaction reports, and last sale reports. However, the Commission believes that the benefits associated with having such information included in the central repository justify the costs to the SROs of requiring that they include this in the NMS plan submitted to the Commission for its review.

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3. Retention of Information

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As proposed, Rule 613(e)(6) would have provided that the NMS plan require the central repository to retain the information collected pursuant to Rule 613(c)(7) and (e)(5) in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. The information would have been required to be available immediately, or, if immediate availability could not reasonably and practically be achieved, a search query would have been required to begin operating on the data not later than one hour after the search query is made.619

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One commenter suggested that the Commission modify the time standard for the availability of older data to a next day (or later) standard, as the need for regulators to have immediate access to the data diminishes over time. The commenter stated that a requirement that the data be made available the next day, or after another longer period of time, would be less burdensome on the consolidated audit trail system and less costly, while still meeting the needs of regulators.620 Another commenter believed that there could be difficulties in querying and analysis because the proposal did not specify how the data would be stored in the central repository.621

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In response to the commenters' concerns, the Commission is modifying the proposed Rule. Specifically, Rule 613(e)(8) (renumbered from proposed Rule 613(e)(6)) provides that "[t]he national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to [Rules 613(c)(7) and (e)(7)] in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years." The adopted Rule does not require, as was proposed, that the consolidated audit trail data be available immediately, or if immediate availability cannot reasonably and practically be achieved, any search query must begin operating on the data not later than one hour after the search query is made.622

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The Commission believes that it is unnecessary for the Rule to require a timeframe within which consolidated audit trail data must be available or a timeframe for when a search must begin after the query is made because, as discussed below,623 the Rule, as adopted, includes a provision that requires the NMS plan to specifically address the "time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."624 The Commission will consider the response to this provision contained in the NMS plan submitted by the plan sponsors to the Commission, regarding the time and method by which the data in the central repository can be accessed and used by regulators as part of their regulatory and oversight responsibilities – which would encompass queries – as it evaluates the NMS plan. The Commission believes this provision provides flexibility to the SROs to devise an access requirement that meets the needs of regulators in a cost-effective and timely manner, 625 rather than establishing a strict deadline for all data to be accessible from the central repository.

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c. Timeliness, Accuracy, Integrity, and Completeness of the Consolidated Data

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As proposed, Rule 613(e)(4)(ii) would have required the NMS plan to include policies and procedures, including standards, for the plan processor to ensure the timeliness, accuracy, and completeness of the data provided to the central repository. In addition, proposed Rule 613(e)(4)(iii) would have required that the NMS plan include policies and procedures, including standards for the plan processor to reject data provided to the central repository that does not meet these validation parameters, and for SROs and members to re-transmit corrected data. Finally, proposed Rule 613(e)(4)(iv) would have required that the NMS plan include policies and procedures, including standards, to ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository.

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The Commission requested comment on these proposed requirements.626 The Commission asked if this approach was practical to ensure the integrity of the data, and whether there were alternative methods that would achieve the same purpose that would be preferable. The Commission also requested comment on how much latency would result from a validation procedure.

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The Commission received comments focusing concern on the potential for errors in the consolidated audit trail and the negative effects of errors in the consolidated audit trail.627 One commenter stated that the "key principles [that] best ensure that the regulatory goals of the consolidated audit trail are met in a cost efficient manner" include a system that "avoids data quality issues through data validation safeguards and a structure that reads data as close to the point of origin as possible to avoid data translation errors when data is processed through intermediary applications."628 Another commenter stated that "the CAT facility would also need a mechanism to identify and correct data that was inaccurate."629 Another commenter noted that, "if any other protocol [other than FIX] is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data."630

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As a point of reference, summary data about OATS provided by FINRA to Commission staff indicates that approximately 0.25% of the intra-firm data reported daily by members contains errors. 631 Additionally, according to FINRA, when errors relating to the linkage of order reports are detected, members have no obligation to correct the errors.632 As a result, approximately 1-2% of each day's recorded events remain unmatched (i.e., multi-firm events, such as order routing, that cannot be reconciled).633 This deficiency in the OATS process diminishes the completeness and overall usefulness of the audit trail OATS creates.

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In a comment letter, FINRA discussed the challenge of obtaining accurate audit trail information if the data was required in real time, and it noted the actions it undertakes to ensure the accuracy and completeness of its audit trail data and minimize errors.634 FINRA stated that, "to ensure the integrity of OATS data submitted, FINRA performs over 152 separate OATS data validations on each order event, each of which can result in OATS data submissions being rejected and generating an error message.635 As a result, FINRA performs over 40 billion separate checks each day to ensure OATS data conforms to all applicable specifications.636 Members are then required by rule to repair and resubmit such data that did not meet OATS specifications.637 Although members' OATS compliance rates are very high on average, almost 425,000 reports per day, on average, are rejected and must be corrected.638 Accordingly, to use audit trail data before such validations have been performed may result in a severely distorted picture of trading and interfere with effective oversight."639

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With respect to mechanisms to ensure compliance by SROs with the requirements of the plan, one commenter stated that "Commission rules should focus on the reasonable design of systems, processes and procedures to fulfill their objectives and patterns and practice of noncompliance rather than looking to any failure as a rule violation. This is particularly important in the context of data errors or similar matters."640

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Finally, another commenter believed that "major market participants" should retain "detailed information of all network packets and trade data at both the ingress and egress of their infrastructure."641 This commenter believed that this information would not need to be forwarded to "any audit authority" but explained that such information could be used by regulators in the event a "denial of service" attack were to occur at a network level to slow market activities or hinder the flow of market information. This commenter further explained that having this information would "greatly improve confidence in the integrity of data and act as a further deterrence for fraudulent activity."642

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After consideration of the comments received, the Commission is adopting Rule 613(e)(4)(ii) substantially as proposed. Thus, the NMS plan must have policies and procedures, including standards, to ensure the timeliness, accuracy, and completeness of the data received. The Commission believes that audit trail data that is timely, accurate, and complete is critical to the usefulness and effectiveness of Rule 613. However, the Commission is adding the term "integrity" to the list of items that the policies and procedures adopted by the plan sponsors, as set forth in Rule 613(e)(4)(ii), must address.643 The addition of "integrity" is designed to help emphasize that data should not be subject to benign or malicious alteration, so that such data would be consistent and reliable at each point of transmission throughout its lifecycle (i.e., transmission from the SRO or member to the central repository, data extraction, transformation and loading at the central repository, data maintenance and management at the central repository, and data access by regulators). The Commission believes that the integrity of the audit trail data is critical to the usefulness and effectiveness of the consolidated audit trail.

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The Commission also is adopting Rule 613(e)(4)(iv), renumbered as Rule 613(e)(4)(iii), as proposed, which provides that the NMS plan submitted shall include policies and procedures, including standards, to be used by the plan processor to ensure the accuracy of the consolidation by the plan processor of the data reported to the central repository. The Commission believes that policies and procedures, including standards, to be used to ensure accuracy of the consolidated data are important and necessary because the benefits of ensuring that data is accurately reported to the central repository would be lost if the consolidation process is not as equally robust. The regulatory benefits of a consolidated audit trail are therefore based, in part, on the timeliness, accuracy, completeness, and integrity of the data ultimately available to regulators from the central repository.

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As described above in Sections III.B.1.f. and III.B.1.d.iv., the adopted Rule provides the SROs with more flexibility than the proposed Rule in developing (a) the format(s) of data to be reported to the central repository, and (b) the methods by which order identifiers will be used to link reportable events. Accordingly, the Commission expects the policies and procedures included in the NMS plan submitted to the Commission for its consideration to apply to both the transmission of audit trail data from SROs and their members to the central repository, and the consolidation and retention of that data, and other information collected pursuant to the Rule, by the central repository, including, but not limited to, any normalization or conversion of the data to a uniform electronic format, and procedures for how reportable events are accurately linked. The Commission believes that it is critical to the usefulness of the consolidated audit trail that the SROs and their members report data in a manner that is accurate and complete, and that the central repository takes any and all appropriate measures to consolidate and retain that data in the same manner. To the extent the data is not accurate or complete, the ability of SRO and Commission staff to utilize the data to accomplish the goal of the consolidated audit trail will be compromised.644

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In light of the comments the Commission received that noted the concern about the potential for errors in the consolidated audit trail, as well as the impact such errors may have on the consolidated audit trail,645 the Commission is revising Rule 613(e)(4)(iii) as proposed (renumbered as Rule 613(e)(6)(i)). Specifically, Rule 613(e)(6)(i) requires the NMS plan submitted to the Commission for its consideration to "[s]pecify a maximum error rate to be tolerated by the central repository for any data reported pursuant to Rule 613(c)(3) and (c)(4); describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce the maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof."646 Rule 613(e)(6)(ii) states that the NMS plan shall "[r]equire the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan." Rule 613(e)(6)(iii) and (iv) provide that the NMS plan shall "[s]pecify a process for identifying and correcting errors in the data reported to the central repository pursuant to [Rule 613(c)(3) and (c)(4)], including the process for notifying the national securities exchanges, national securities associations, and members who reported erroneous data to the central repository about such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and . . . [s]pecify the time by which data that has been corrected will be made available to regulators."647

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As noted above, the Commission believes the availability of accurate consolidated data is a critical component of a useful and effective audit trail. Ideally, there would be no errors in the recording or reporting of any audit trail data element, and every data element of every reportable event would be accurately recorded by the SROs and their members, and then accurately reported to the central repository under Rule 613, resulting in a consolidated audit trail that reflects all actions relating to every order in the market for securities. However, because the Commission understands that, to some extent, errors in reporting audit trail data to the central repository will occur, the Commission believes it is appropriate to adopt a provision in Rule 613 that requires the NMS plan to set forth the maximum error rate to be tolerated by the central repository in the reporting of audit trail data, as well as to specify a process for identifying and correcting such errors.648

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The Commission notes that the Rule leaves to the plan sponsors the ability to determine the acceptable maximum error rate, although the Rule does require that the NMS plan must explain the basis for selecting such rate. The Rule also requires the NMS plan submitted to the Commission for its consideration to set forth how the plan sponsors will seek to reduce such maximum error rate over time, thereby increasing the accuracy of audit trail data. Further, the Rule requires the NMS plan to have in place a means to ensure compliance with the maximum error rate so that SROs and their members are incentivized to comply with the maximum error rate, and to set forth a plan for promptly remedying the causes for any noncompliance.

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Since the Rule leaves many of the specific details regarding error rates and error-correction processes for the plan sponsors to determine, and because the accuracy and completeness of data ultimately received by regulators is of such significance to the effective use of a consolidated audit trail, the Commission, as well as the public, would likely consider such details very important in their overall evaluation of the submitted plan. Furthermore, given that the approval of any plan by the Commission would, in part, be based on expectations of maximum error rates, the Commission believes it is equally important for objective measures to be reported that track how well the plan is meeting such expectations. Thus, to ensure the accuracy of the audit trail data generally meets these expectations, Rule 613(e)(6)(ii) also requires that the error rate identified in the NMS plan be measured each business day and that remedial action be taken if, on any given day, the error rate exceeds the maximum error rate set forth in the NMS plan.649

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The Commission also believes it is appropriate to require the SROs to formulate a process for identifying and dealing with errors, and to require that the SROs or the members reporting erroneous data be notified that an error in reporting has occurred.650 In addition, the Commission believes it is appropriate to require the SROs to develop a process to help ensure that errors are promptly corrected by the reporting SRO or member. The Commission understands that requirements similar to these are currently implemented by FINRA as part of their OATS process, though cross-firm errors, such as those leading to irreconcilable or unmatched routes, are not generally corrected under the OATS process.651 The Commission further believes that disciplining SROs and members that repeatedly report erroneous audit trail data, as required by Rule 613(e)(6)(iii), is appropriate given the need to maintain an accurate consolidated audit trail for regulatory purposes. Finally, given that the NMS plan submitted to the Commission for its consideration is required to specify a process for correcting errors, the Commission also believes it is appropriate to require, pursuant to Rule 613(e)(6)(iv), that the NMS plan submitted to the Commission for its consideration specify the time by which data that has been corrected will be made available to regulators. In reviewing the NMS plan submitted for its consideration, the Commission will therefore be able to consider the time that uncorrected but consolidated data (which was reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information was recorded) would be available for use by regulators, the expected error rate of this data, and the time at which a corrected version of this data would be made available to regulators. These three parameters will help inform regulators as to the potential effectiveness of starting different types of surveillance and monitoring activities at different times.652

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The Commission acknowledges there would be costs to the central repository associated with developing policies and procedures related to the timeliness, accuracy, integrity, and completeness of data, including, but not limited to, processes for identifying and correcting errors in the audit trail data received, and measuring the error rate on a daily basis. However, the size of these costs depends significantly on the specific details of the NMS plan submitted to the Commission for its consideration. Once the SROs submit the NMS plan to the Commission for its consideration specifying the details, parameters, and estimated costs of such processes, as well as the maximum error rate expected under such processes, the Commission and the public will be able to consider this information when determining whether to approve the NMS plan.

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d. Access to the Central Repository and Consolidated Audit Trail Data for Regulatory and Oversight Purposes

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As proposed, each national securities exchange and national securities association, as well as the Commission, would have had access to the central repository for the purposes of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.653 This access would have included all systems of the central repository, and the data reported to and consolidated by the central repository.654 In addition, the Commission proposed to require that the NMS plan include a provision requiring the creation and maintenance by the central repository of a method of access to the consolidated data.655 This method of access would have been required to be designed to include search and reporting functions to optimize the use of the consolidated data. The Commission requested comment on whether it should allow the consolidated audit trail data to be made available to third parties, such as for academic research.

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One commenter supported limiting access to the consolidated audit trail data to the Commission and SROs for regulatory purposes, but suggested it would also be appropriate to share the data with the CFTC.656 Other commenters supported the idea of providing "anonymized" data for academic use, as long as appropriate controls were established to assure regulators and market participants that confidential trading information could not be revealed.657 Specifically, one commenter endorsed the use of the data "with appropriate safeguards" by academic researchers, explaining that it will "promote understanding of the markets," and "lead to better policy decisions and thus more fair and orderly markets."658 Similarly, another commenter also supported the use of the data by certain third parties and stated that "[a]ccess to real-world data can help research immensely."659

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The Commission also received a comment that argued for extending access to the consolidated audit trail data to certain individuals who have a fiduciary responsibility to shareholders of a company. This commenter explained that such access would allow them to audit all trading activity in the equity or other derivative securities of that company.660

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The Commission recognizes there may be certain benefits to the types of expanded access to data in the central repository that has been suggested by various commenters, but, for the reasons discussed below, it is adopting the provisions in Rule 613 regarding access by regulatory authorities at the SROs and the Commission to the systems operated by the central repository, and to the data received, consolidated, and retained by the central repository, substantively as proposed in Rule 613(e)(3), but with one clarification regarding the requirement for access by regulators.661 Specifically, Rule 613(e)(3), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports." As proposed, Rule 613(e)(3) would have provided that the central repository must have a "reporting function." The Commission believes that this language is ambiguous and may have implied that the central repository was required to do more than respond to search queries. Accordingly, the Commission is replacing the requirement in proposed Rule 613(e)(3) that the central repository provide "search and reporting functions" with the requirement that there be "the ability to run searches and generate reports." The change in language from that contained in the Rule, as proposed, is not intended to change the substance of the requirement.

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In response to the commenter who suggested sharing data with the CFTC, the Commission notes that it has shared information with the CFTC in the past and that it intends to continue sharing information when the situation so warrants. The Commission notes that, among other arrangements, it currently has information-sharing agreements with other regulators. The Commission also agrees with commenters that there may be benefits to allowing academics or other third parties to have access to data collected by the central repository. Academic and other third-party analyses are helpful to the Commission in performing its own evaluation of the economic costs and benefits of regulatory policy. The Commission also notes that one commenter believes that the ability of companies to detect manipulative trading activity in their securities could be enhanced if certain individuals, who have a fiduciary responsibility to shareholders, were given access to limited consolidated audit trail data. However, because the creation and implementation of the consolidated audit trail is in the formative stage, and in light of commenters' concerns about the privacy and security of the information, the Commission believes it is premature to require that the NMS plan require the provision of data to third parties.

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Though the Commission is not specifying a particular process, or any details, regarding the mechanism(s) by which regulators will access data in the central repository, the Rule requires the SROs to provide such details and cost estimates in its NMS plan submitted to the Commission for its consideration.662 Further, as discussed below in Section III.C.2.c., the Commission is providing the SROs with detailed regulator use cases for how regulators would likely make use of the data in the central repository. These regulator use cases are designed to help the SROs respond with sufficient details in the NMS plan submitted to the Commission for its consideration so that, along with associated cost estimates also required to be provided by the SROs, the Commission and the public will be able to fully consider the NMS plan submitted.

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e. Confidentiality of Consolidated Data

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Rule 613(e)(4)(i), as proposed, would have required that the NMS plan include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository. The plan sponsors and employees of the plan sponsors and central repository would have been required to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.663 As proposed, Rule 613 also would have required the NMS plan to include mechanisms to ensure compliance by the plan sponsors and their members with the requirements of the plan.664

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In the Proposing Release, the Commission solicited comments regarding what steps should be taken to ensure appropriate safeguards with respect to the submission of customer information, as well as the receipt, consolidation, and maintenance of such information in the central repository. The Commission requested comment on the issue of appropriate safeguards to be put in place by the SROs and the central repository to help ensure confidentiality. The Commission also asked whether the proposed Rule should: (1) require that SROs put in place specific information barriers or other protections to help ensure that data is used only for regulatory purposes; (2) provide for an audit trail of the SROs' personnel access to, and use of, information in the central repository to help monitor for compliance with appropriate usage of the data; and (3) include a requirement that the NMS plan include policies and procedures to be used by the plan processor to ensure the security and confidentiality of information reported to, and maintained by, the central repository be expanded to include the content of any searches or queries performed by the SROs or the Commission on the data.665

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Several commenters expressed concern about how to best ensure the confidentiality of the data collected.666 One commenter generally argued that safeguards for the audit trail data had not been sufficiently addressed in the Proposing Release.667 Another commenter recommended that the operator of the central repository and the SROs be required to implement security policies, processes, and practices consistent with industry best practices for the protection of sensitive information and that such policies, processes, and practices be audited on an annual basis by a third-party expert.668 Similarly, one commenter suggested that vendors also should implement best practices with regard to security, reliability, and integrity of data.669 Another commenter stated that SROs should be subject to the same privacy and data protection standards as those to which broker-dealers are subject, and that SRO members should not be held responsible, and be indemnified by the SROs, for any breaches of customer or firm information.670

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One commenter offered several specific recommendations for enhancing the security of audit trail information.671 This commenter suggested that the Commission should expressly state who would have access to the data, when they could access it, and how they could use it, and further recommended that all data sent to the central repository be encrypted, and that certain fields be "masked" or be subject to delayed end-of-day reporting.672 In addition, this commenter suggested that the Commission and each SRO should adopt a robust information security program, and that the Commission should explain how it intends to treat requests for audit trail data.673

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Another commenter suggested that the Rule more explicitly enunciate permissible and impermissible uses of the consolidated audit trail and suggested including a requirement regarding the SROs' personnel access to and use of audit trail data, as well as a commitment by the Commission to review each SRO with respect to the adequacy of information barriers.674 Similarly, a commenter suggested that access to audit trail data be limited to employees of regulators whose function is to monitor and surveil that market.675 This commenter supported the restriction that consolidated audit trail data only be used for regulatory purposes.676

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One commenter asked how and at what level customer data would be encrypted.677 This commenter listed specific aspects of data encryption that would need to be addressed, and noted that potential burdens could be associated with encryption.678 Finally, one commenter recommended that the Commission express its intention to withhold audit trail data from the public pursuant to Freedom of Information Act ("FOIA")679 exemptions.680

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The Commission considered the concerns expressed by commenters about the sensitivity of much of the information that will be consolidated by the central repository, and believes that maintaining the confidentiality of customer and other information reported to the central repository is essential. Without adequate protections, market participants would risk the exposure of highly-confidential information about their trading strategies and positions.

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The Commission notes that that it currently has controls and systems for its own use and handing of audit trail information. Nevertheless, given the sensitivity of certain information that will be produced by the consolidated audit trail – as well as the fact that such information should be more readily available and provided in a more usable format than existing audit trail information – the Commission intends to review the controls and systems that it currently has in place for the use and handling of audit trail information. The Commission further intends to evaluate whether any additional controls and systems may be required to adequately protect the sensitive information provided to it under the consolidated audit trail.681

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In addition, adopted Rule 613(e)(4)(i) requires that the NMS plan include policies and procedures that are designed to ensure implementation of the privacy protections that are necessary to assure regulators and market participants that the NMS plan provides for rigorous protection of confidential information reported to the central repository. Specifically, adopted Rule 613(e)(4)(i)(A) requires that "[a]ll plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in [Rule 613(e)(4)(i)(A)] shall be construed to prevent a plan sponsor from using the data that it submits to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation." Further, in response to a comment,682 adopted Rule 613(e)(4)(i)(B) adds the requirement to the Rule, as proposed, that the plan sponsors adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository, and (2) permit only persons designated by plan sponsors to have access to the data in the central repository.683 In addition, the Commission is modifying the Rule, as proposed, to require that the plan processor must: (1) develop and maintain a comprehensive information security program, with dedicated staff, that is subject to regular reviews by the central repository's CCO, (2) require the central repository to have a mechanism to confirm the identity of all persons permitted to access the data, and (3) maintain a record of all instances where such persons access the data.684

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The Commission believes these provisions should create a framework for the SROs to establish a thorough and exacting process for helping ensure the continued effectiveness of the confidentiality safeguards. Further, the Commission believes these additional provisions are appropriate because they clarify the types of confidentiality safeguards that the NMS plan submitted to the Commission for its consideration must have to preserve the confidentiality of the information that is received, consolidated, and retained by the central repository. The provision requiring information barriers is designed to, for example, protect and prevent audit trail data, which are to be used only for regulatory purposes, from being communicated to any personnel at an SRO that are engaged in non-regulatory or business activities. Additionally, the Rule's requirement that policies and procedures submitted as part of the NMS plan provide that: (i) only persons designated by the plan sponsors have access to the central repository data, (ii) the plan processor have a mechanism to confirm the identity of all persons permitted access to the data, and (iii) the plan processor maintain a record of all instances where such persons access the data. These provisions are designed to assure regulators and market participants that only designated persons are allowed access to the consolidated audit trail data, and that the central repository will have a method to track such access. With respect to the commenter that suggested the Commission more explicitly enunciate permissible and impermissible uses of the consolidated audit trail,685 the Commission notes that any security and confidentiality provisions included in the NMS plan approved by the Commission will be subject to the Commission's inspection and examination program of SROs to ensure that they are implemented fairly in a manner consistent with the Exchange Act.686

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The Commission believes that an outline or overview description of the policies and procedures that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan submitted to the Commission to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed.

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The Commission considered the comment that asked when and at what level customer information would be encrypted.687 The Commission notes that, while Rule 613 does not require that this information be encrypted, the Rule contains several safeguards, discussed in this section, to ensure the privacy and confidentiality of the audit trail data. Based on these provisions,688 the Commission believes that plan sponsors would need to make sure customer information is protected, which could be accomplished by data encryption, if they so choose. Additionally, the Commission notes that the unique customer identifier is only reported once to the central repository – by the broker-dealer that is either originating the order or is the original recipient of the order. Because the unique customer identifier does not travel with the order as it is routed to other market participants, only the originating broker-dealer should be able to determine the identity of the customer of the order. The Commission considered the comment that recommended that the Commission express its intention to withhold audit trail data from the public pursuant to FOIA.689 The adopted Rule places no affirmative obligations on the Commission to provide information to any third parties. Further, the Commission believes there are bases under FOIA to withhold customer information, including 5 U.S.C. 552(b)(4) (trade secrets, commercial or financial information), 5 U.S.C. 552(b)(6) (personal information affecting an individual's privacy), and 5 U.S.C. 552(b)(8) (records related to examinations of financial institutions). The Commission intends to assert all appropriate exemptions in response to a FOIA request for information related to the consolidated audit trail's customer information.

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The Rule, as adopted, also states that the NMS plan must require the SROs to adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository, described above, with respect to information security.690 The Commission believes this provision is appropriate because it provides an incentive to SROs to comply with the central repository's information security program. The Commission encourages SROs to include in their comprehensive information security program developed and maintained by the plan processor provisions for notifying any customer or other market participant whose information may have been compromised by a security breach, so that appropriate remedial steps may be taken.

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Additionally, given the importance of the security of data consolidated in the central repository, and in response to the commenter who recommended an annual third-party audit of the security of the central repository,691 the Commission has added Rule 613(e)(5) to require the NMS plan submitted to the Commission for its consideration to address whether there will be an annual, independent evaluation of the security of the central repository and (1) if so, provide a description of the scope of such planned evaluation, and (2) if not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead. As with most information technology systems, the central repository's system will include measures to assure regulators and market participants of the security of the system. An independent evaluation of the security of the central repository could aid the central repository in identifying and correcting potential areas of weakness or risk. While the Commission is leaving it to the plan sponsors to determine whether the NMS plan will require an annual audit, given the confidential nature of information that will be stored at the central repository, the Commission believes that the NMS plan submitted to the Commission for its consideration must, at a minimum, address whether such an audit is appropriate.

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The Commission also notes that, as discussed below,692 it is adding a specific provision that requires the NMS plan submitted to the Commission for its consideration to discuss the security and confidentiality of the information reported to the central repository.693 With this information, the Commission, as well as the public, will be able review in detail how the NMS plan proposes to ensure the security and confidentiality of such information in deciding whether to approve the NMS plan.

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The Commission believes that, collectively, these provisions are appropriate because of the confidential and commercially valuable information that the central repository will contain. The Commission believes that the purpose and efficacy of the consolidated audit trail would be compromised if the Commission, the SROs and their members could not rely on the confidentiality and security of the information stored in the central repository. The Commission acknowledges there would be costs associated with a comprehensive information security program, including, but not limited to, compensating a CCO and a dedicated staff, and establishing policies and procedures, as well as for an annual, independent evaluation of the central repository's security (if such an evaluation is required by the NMS plan submitted to the Commission for its consideration) or alternative measures (if such an evaluation is not). Once the SROs have submitted the NMS plan to the Commission that, as required, contains details about the security and confidentiality of the audit trail data, the Commission and the public will be able to consider this information when evaluating the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
3. Other Required Provisions of the NMS Plan
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Elements of the NMS Plan, Other Required Provisions of the NMS Plan - Compliance User: Broker-dealers - Keywords: - Exchanges, - Associations, - Penalties, - Members, - Operation, - Administration, - NMS Plan, - -

a. Compliance with the NMS plan

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1. Exchanges and Associations

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As proposed, Rule 613(h) would have provided that each plan sponsor shall comply with the provisions of an NMS plan submitted pursuant to the proposed Rule and approved by the Commission.694 In addition, the proposed Rule would have provided that any failure by a plan sponsor to comply with the provisions of the NMS plan could be considered a violation of the proposed Rule.695 The proposed Rule also would have required that the NMS plan include a mechanism to ensure compliance by the sponsors with the requirements of the plan.696

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One commenter expressed concern that there would be competitive implications if the NMS plan were to include provisions that would permit SROs to assess penalties against one another for non-compliance.697 This commenter recommended, instead, that the NMS plan include a "fee recoupment" provision so the plan administrator could recoup costs incurred as a result of an error by a particular SRO.698 The commenter maintained that a "fee recoupment" provision, coupled with the risk of Commission disciplinary action for a "pattern or practice" of non-compliance, would be a sufficient penalty.699

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After considering the comment received on the issue of compliance with the NMS plan by exchanges and associations,700 the Commission is adopting Rule 613(h) substantially as proposed, with a modification to Rule 613(h)(3) to specify that a mechanism to ensure compliance by the sponsors of the NMS plan with the requirements of the plan "may include penalties where appropriate" and a technical modification to proposed Rule 613(h)(1) and (2).701 The Commission believes that specifying that the mechanism to ensure compliance by the sponsors of the NMS plan may include a penalty provision where appropriate provides the plan sponsors with an appropriate tool – including potential disciplinary action – to help ensure compliance by SROs with the terms and provisions of the NMS plan.702 The Commission notes that a penalty provision could provide an incentive for each SRO to comply with all the provisions of the NMS plan because each SRO will seek to avoid incurring any penalty under the Rule. The incentive to avoid a penalty could also reduce the risk of non-compliance with the Rule. The Commission notes, however, that the adopted Rule does not mandate that the NMS plan's enforcement mechanism include penalties, as there might be other mechanisms to enforce or encourage compliance with the Rule, and the Commission believes that the SROs, in the first instance, should design such mechanisms in their role as plan sponsors. However, the Commission expects that if the SROs design compliance mechanisms that do not incorporate penalties, they would explain in the NMS plan how such mechanisms are expected to help ensure compliance by SROs with the terms and provisions of the NMS plan.703

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With respect to the comment concerning the potential competitive implications of allowing the plan sponsors to impose penalties against each other for non-compliance, the Commission notes that it will carefully review the NMS plan submitted for its consideration, including any proposed mechanisms to help ensure compliance with the NMS plan and the adopted Rule, to help ensure that penalty provisions, if any, are designed to be applied fairly and in a manner consistent with the Exchange Act.704 As the central repository will be a facility705 of the SROs, the rules governing it must be consistent with the Exchange Act. In addition, any future amendment to the penalty provisions applicable to the SROs would either be reviewed as an amendment to the NMS plan (effected through public notice and comment and taking into account the relevant considerations contemplated by Rule 613(a)(1)) or, because the central repository is a facility of the SROs, as a proposed rule change of the central repository under Section 19 of the Exchange Act.

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The Commission notes that the Commission's examination authority under Section 17 of the Exchange Act706 extends to the central repository because it is a facility of the SROs and, thus, the Commission will have the opportunity to inspect the central repository and its books and records for compliance with any penalty provisions set out in the NMS plan. Additionally, the Commission has the authority to review any actions taken under the NMS plan, pursuant to Rule 608(d)(1) of Regulation NMS,707 for burdens on competition, among other matters.708

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In response to the comment suggesting a "fee recoupment" provision in the NMS plan, the Commission notes that Rule 613(b)(4), as adopted, provides that "[t]he national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan." In this regard, to the extent a "fee recoupment" is a method for recouping costs incurred by the central repository as a result of an error in reporting to the consolidated audit trail, as stated by a commenter,709 the Commission notes that, pursuant to Rule 613(b)(4), the plan sponsors may, if they deem it appropriate, include a fee recoupment provision in the NMS plan submitted to the Commission for its consideration.710

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2. Members

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Proposed Rule 613(g) would have included provisions to subject members of each SRO to the requirements of Rule 613. Specifically, as proposed, the Rule would have required each SRO to file with the Commission, pursuant to Section 19(b)(2) of the Exchange Act711 and Rule 19b-4 thereunder,712 a proposed rule change to require its members to comply with the requirements of the proposed Rule and the NMS plan.713 Further, the proposed Rule directly would have required each member to (1) collect and submit to the central repository the information required by the Rule, and (2) comply with the clock synchronization requirements of the proposed Rule.714 The proposed Rule also would have required that the NMS plan include a provision that each SRO, by subscribing to and submitting the plan to the Commission, agrees to enforce compliance by its members with the provisions of the plan.715 Finally, the proposed Rule would have required the NMS plan to include a mechanism to ensure compliance with the requirements of the plan by the members of each SRO that is a sponsor of the NMS plan submitted pursuant to this Rule and approved by the Commission.716

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One commenter expressed the view that "enforcement of [the consolidated audit trail] . . . should be accomplished through a policies and procedures rule framework – similar to that of Regulation NMS. To enforce the rule from a strict liability perspective would simply be the wrong approach and would result in thousands of technical (non-material) violations, which is clearly not the intent of the rule."717

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After considering the comment regarding Rule 613's provisions on compliance with the Rule by members of the SROs, the Commission is adopting Rule 613(g) substantially as proposed, with technical modifications to proposed Rule 613(g). These technical modifications simplify the language of Rule 613(g). Adopted Rule 613(g) does not include the phrase that applied the requirements therein to each member of an SRO "that is a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the deleted language.

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In addition, the Commission modified Rule 613(g)(2) as proposed to provide that, "[e]ach member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members." This change requires members to comply with all applicable provisions of the NMS plan as approved by the Commission instead of with the specific provisions contained in the Rule relating to recording and reporting data and clock synchronization since the requirements contained in the NMS plan may differ or be more specific than the requirements stated in the Rule.

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To be in compliance with the NMS plan, members must record and report all data elements required by the NMS plan within the time specified in the plan. To this end, the plan sponsors must develop a way to ensure that each member that takes action with respect to an order (e.g., originates, receives, routes, modifies, cancels or executes an order) records and reports all required elements associated with a reportable event, as the plan sponsors must also develop a mechanism to address any lapses in compliance with the NMS plan with a goal of ensuring the central repository is receiving a complete record of the life of an order.

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The Commission does not agree with the commenter that believed that enforcement of the consolidated audit trail will necessarily "result in thousands of technical (non-material) violations, which is clearly not the intent of the rule." 718 The Commission notes that the adopted Rule does not address the means of achieving compliance with the requirements of the consolidated audit trail. Rather, adopted Rule 613(g) simply provides that the SROs must submit proposed rule changes to require their members to comply with the requirements of an NMS plan approved by the Commission.

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The Commission acknowledges there would be costs to the SROs for filing with the Commission proposed rule changes to require their members to comply with Rule 613 and the NMS plan approved pursuant thereto. The Commission, however, believes that the Rule should include these rule filing requirements for the reasons discussed above.

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b. Operation and Administration of the NMS Plan

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Proposed Rule 613(b) sets forth requirements concerning the operation and administration of the NMS plan. As proposed, Rule 613(b)(1) would have required that the NMS plan include a governance structure to ensure fair representation of the plan sponsors and provisions governing the administration of the central repository, including the selection of a plan processor. Rule 613(b)(2), as proposed, also would have required the plan sponsors to include in the NMS plan a provision addressing the requirements for the admission of new sponsors to the plan and the withdrawal of sponsors from the plan. In addition, proposed Rule 613(b)(3) would have required the NMS plan to include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, and proposed Rule 613(b)(4) would have required that the plan sponsors develop a process for allocating among themselves the costs associated with creating and maintaining the central repository, including a provision addressing the manner in which such costs would be allocated to sponsors who join the plan after it has been approved.

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Finally, proposed Rule 613(b)(5) would have required the NMS plan to require the appointment of a CCO to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations to the plan sponsors for enhancement to the nature of the information collected and the manner in which it is processed. In the Proposing Release, the Commission stated that it expected the CCO would establish the procedures necessary to ensure that the operations of the central repository keep pace with technical developments and to make any necessary upgrades or changes to the central repository to maintain its efficacy.719

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The Commission received comments addressing the proposed requirements for operation and administration of the NMS plan.720 One commenter suggested that the NMS plan should contain a voting mechanism that requires less than unanimity, and with an effective tie breaking mechanism.721 This commenter also recommended that the governance structure "limit the ability of individual SROs to make modifications on a unilateral basis that could escalate costs by forcing the operator and firms to absorb costs that do not advance the interests of investors."722

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Two commenters expressed views on the selection and role of the plan processor.723 One suggested that the SROs should select the processor through a "request for proposal."724 Another commenter generally believed that the allocation of plan processor costs warranted more consideration.725 This commenter expressed concern with regard to the SROs owning the plan processor, noting in particular that unanimous consent would be required for all board actions.726 This commenter stated that the plan processor alone should handle rulemaking and compliance, subject to oversight by an "industry group."727 Another commenter stated that, "[r]egarding the governance of the national market system plan [contemplated] by the proposal, we wish to reiterate that the SEC should provide the broker-dealer industry with an official 'seat at the table' alongside the SROs, so that [the broker-dealers] can review and comment on system requirements as they are being developed and vote on plan amendments going forward."728

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After considering these comments, for the reasons discussed below, the Commission is adopting Rule 613(b) as proposed, but with the addition of two new requirements. Specifically, in addition to the provisions included in the proposed rule,729 Rule 613(b), as adopted, provides that the national market system plan submitted shall include: "a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail . . ., [and] an Advisory Committee . . . includ[ing] representatives of the member firms of the plan sponsors."730

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The requirement that the NMS plan require the appointment of a CCO to regularly review the operation of the central repository and make any appropriate recommendations for enhancements731 is one method to facilitate the consolidated audit trail's ability to evolve over time in terms of technology, functionality, and accuracy. Adopted Rule 613(b)(6) supplements this requirement by now requiring that the NMS plan "include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum: (i) [a]n evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with [Rule 613(e)(6)]), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with [Rule 613 (e)(4)]), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics; (ii) [a] detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the NMS plan to include new instruments, and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer; (iii) [a]n estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and (iv) [a]n estimated implementation timeline for any such potential improvements, if applicable."732 The Commission believes these provisions will help plan sponsors understand and evaluate any deficiencies in the operation of the consolidated audit trail and to propose potential enhancements to the NMS plan, as appropriate, taking cost effectiveness into consideration. These provisions also will allow the Commission to assess any such potential improvements, accounting for the considerations contemplated by Rule 613(a)(1), the specific requirements of the approved NMS plan, and any changes or additions to these requirements that the Advisory Committee, the SROs, or the Commission may wish to consider in the future. The Commission believes that such enhancements, if any, to the consolidated audit trail could improve the ability of the SROs and the Commission to conduct effective market oversight by keeping up with continually-changing technologies and markets, by, for example, allowing the SROs and the Commission to conduct their market oversight more quickly, accurately, and/or comprehensively, as well as possibly at lower costs. Similarly, the Commission believes that adding granularity and details regarding the scope and nature of Customer-IDs, adding new instruments, or including new trading or order activities could allow regulators to have a more complete picture of the markets and market participants, which could also lead to more effective market oversight. The Commission believes that performing this assessment no later than every two years is reasonable given the rapid speed at which the markets and related technologies are evolving. The Commission also believes that the written assessment, required by Rule 613(b)(6), will help inform the Commission about the likely feasibility, costs, and impact of, and the plan sponsors' approach to, the consolidated audit trail evolving over time. The Commission would expect to make the document publicly available on its website.

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In response to the comment requesting that the broker-dealer industry receive a "seat at the table" regarding governance of the NMS plan,733 the adopted Rule requires that the NMS plan submitted to the Commission for its consideration include a provision requiring the creation of an Advisory Committee, composed at least in part by representatives of the members of the plan sponsors, "to advise the plan sponsors on the implementation, operation and administration of the central repository."734 Further, the adopted Rule requires that the NMS plan submitted to the Commission for its consideration require that "[m]embers of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors."735 Pursuant to the Rule, the NMS plan also shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsor.736 The Rule further provides that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.737 The Commission believes that, given the scope of the Rule, both in terms of the market participants that may be affected by the Rule and the breadth of the audit trail information that will be collected, it is important that the plan sponsors solicit input from their members because this could help inform the plan sponsors of any expected or unexpected operational or technical issues that may arise in the implementation of the Rule and/or the operation of the central repository, and help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the burdens on SRO members. The Commission believes that the Advisory Committee could provide members of the SROs with a forum for informing the plan sponsors of any potential implementation or operational issues faced by them in connection with the consolidated audit trail. Plan sponsors also will be able to draw on the knowledge and experience of these members to help assure the Commission and market participants that any requirements imposed on SRO members will be accomplished in a manner that takes into account the costs to SRO members. The Commission also believes that an Advisory Committee could help foster industry consensus on how to approach and resolve possible issues that may be disputed, and approaches that may conflict, regarding operation of the consolidated audit trail. In this regard, the Commission encourages the plan sponsors to, in the NMS plan, provide for an Advisory Committee whose composition includes SRO members from a cross-section of the industry, including representatives of small-, medium- and large-sized broker-dealers.

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The Commission believes the requirement for the NMS plan to create the Advisory Committee, as well as the requirement in Rule 613(a)(1)(xi), discussed below, that requires the NMS plan to require a discussion of the process by which the plan sponsors solicited the views of their members on the creation, implementation, and maintenance of the consolidated audit trail, a summary of those views, and how the plan sponsors took those views into account when preparing the NMS plan, are responsive to commenters' views that more input by industry representatives, such as members of the SROs who are subject to the requirements of Rule 613, would be advantageous to the creation, implementation, and maintenance of the consolidated audit trail.738

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In addition, because the members of the Advisory Committee will have the right to attend all meetings of the plan sponsors (with the exception of executive sessions), to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors, the governance process of the central repository will be more transparent to all market participants that will be affected by Rule 613. Further, the Commission believes the inclusion of SRO members on the Advisory Committee will increase the efficacy of the central repository. These market participants will have first-hand experience with the operation of the central repository, as they are required to report data to the facility, allowing them to provide informed input on any problems currently facing the central repository of which they are aware, and on any future actions that the central repository might or should take to address such problems. Finally, the Commission believes that an Advisory Committee structure that also permits the plan sponsors to meet in executive session without members of the Advisory Committee appropriately balances the need to provide a mechanism for industry input into the operation of the central repository, against the regulatory imperative that the operations and decisions regarding the consolidated audit trail be made by SROs who have a statutory obligation to regulate the securities markets, rather than by members of the SROs, who have no corresponding statutory obligation to oversee the securities markets.

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The Commission also considered the comment that provided other suggestions on the governance of the NMS plan and believes that the commenter's concerns regarding a unanimity requirement in the NMS plan have merit.739 Accordingly, the Commission urges the SROs to take into account the need for efficient and fair operation of the NMS plan governing the consolidated audit trail, and consider the appropriateness of a unanimity requirement and the possibility of a governance requirement other than unanimity, or even super-majority approval, for all but the most important decisions. The Commission believes that an alternate approach may be appropriate to avoid a situation where a significant majority of plan sponsors – or even all but one plan sponsor – supports an initiative but, due to a unanimous voting requirement, action cannot be undertaken.740 Therefore, the Commission believes the SROs should consider alternative governance structures that would ensure that decisions made by the SROs are both achieved and implemented efficiently, in the interest of advancing the Commission's mission. The Commission notes that the NMS plan submitted to the Commission for its consideration will be published for public comment, and industry participants will have an opportunity at that time to submit comments on the governance structures proposed by the plan sponsors. Further, the Commission believes, as discussed above, that unanimity need not be the standard for decision-making with regard to matters relating to the operation of the consolidated audit trail. Thus, the plan sponsors have flexibility under the Rule to determine the governance structures that will facilitate the effective and efficient oversight of the plan processor.

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In response to the comments regarding the selection and role of the plan processor,741 the Commission believes that the SROs, as the plan sponsors of the NMS plan governing the operation of the consolidated audit trail, should retain the authority to select and oversee the plan processor. The Commission believes that the SROs are in the best position to understand how the plan processor should operate and to address the need for changes when necessary. The SROs also have the flexibility under the Rule to consult the Advisory Committee, for example, to assist the SROs in their selection process and in their determination of whether modifications are necessary to address innovations in the industry if they believe that such participation is needed.

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The Commission acknowledges that, in addition to the many costs and burdens associated with the creation, implementation, and maintenance of a consolidated audit trail, with regards to the specific requirements discussed in this section, there would be costs to the SROs for appointing a CCO to the central repository, providing the Commission with the written assessment of the operation of the consolidated audit trail, and creating an Advisory Committee.742 For the reasons discussed above, the Commission believes these requirements are important to the efficient operation and practical evolution of the consolidated audit trail, and are responsive to many commenters' concerns about governance structure, cost allocations, and the inclusion of SRO members as part of the planning process. The Commission is therefore requiring the SROs to include these requirements in the NMS plan submitted to the Commission for its consideration. After the SROs submit the NMS plan, the Commission and the public will have more detailed information in evaluating the NMS plan.

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c. Surveillance

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As proposed, Rule 613(f) would have required each SRO subject to the Rule to develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated audit trail data. The Rule, as proposed, also would have required each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan.743

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Commenters generally expressed support for the proposal's requirement that SROs implement surveillance systems that make use of the consolidated information.744 One commenter stated that the enhanced surveillance that could be achieved with the audit trail would likely attract additional trading volume to the U.S. markets and that the consolidated audit trail would benefit the SROs by permitting them to conduct surveillance themselves, thus "reducing their risks and their costs."745 Another commenter noted that the proposed consolidated audit trail would be a "critical first step toward consolidated market surveillance," and would lower costs for markets and their participants through economies of scale.746 A third commenter opined that a centralized database such as the consolidated audit trail is necessary to bring together data from exchanges, ECNs, and dark pools to properly regulate trading.747 However, one commenter maintained that a "Commission-mandated market regulator" would be costly for the securities industry and create the potential for a lack of surveillance innovation.748 A commenter recommended that the Commission monitor the surveillance systems and provide guidance to the SROs in establishing their surveillances.749 Finally, one commenter suggested that outsourcing surveillance to regulators could result in lower costs for markets, and recommended several specific security and analytical features for such a surveillance system.750

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After considering the comments, for the reasons discussed below, the Commission is adopting Rule 613(f) as proposed. Specifically, the Rule requires that each SRO develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.751 The Commission believes that it is appropriate to require SROs to enhance their surveillance programs to make full use of the increased functionalities and the timeliness of the consolidated audit trail. Additionally, because trading and potentially manipulative activities could take place across multiple markets, the Commission supports efforts to coordinate surveillance among the SROs, such as through a plan approved pursuant to Rule 17d-2 under the Exchange Act,752 or through regulatory services agreements between SROs. In this regard, as commenters have noted, SROs could "outsource" surveillance efforts to another SRO, if there are efficiencies to be gained. With respect to the comment regarding the benefits to be gained by creating a "single market regulator," the Commission believes that mandating such an entity or structure goes beyond the scope of the Rule.753

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The Commission notes that it intends to review its own surveillance activities in light of the consolidated audit trail and intends to take steps to enhance its surveillance capabilities to take advantage of consolidated audit trail data. The Commission anticipates that such steps will be informed by – and may in turn help inform – the surveillance enhancement measures required to be taken by the SROs under adopted Rule 613(f).

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The Commission also is adopting Rule 613(a)(3)(iv) as proposed, which requires the NMS plan to require each SRO to implement its new or enhanced surveillance system within fourteen months after the effectiveness of the NMS plan. Since Rule 613(a)(3)(iii) will require the NMS plan to require SROs to begin reporting to the central repository within one year after effectiveness of the NMS plan, the Commission believes the two additional months provided by this timeframe is reasonable and sufficient to allow SROs to update their surveillance systems and allow for testing of new surveillances.

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The Commission acknowledges there would be costs to the SROs for developing and implementing surveillance systems, or enhancing existing surveillance systems, reasonably designed to make use of the consolidated audit trail. However, the Commission believes it may be possible for SROs to retire some of their existing, and perhaps less-efficient, audit trail and surveillance systems once the consolidated audit trail is operational. As discussed in Section III.C.a.iv. below, the adopted Rule requires the SROs to consider and discuss the potential for costs savings if other SRO systems, and their associated surveillances, were migrated to the consolidated audit trail.754 Once such information is submitted in the NMS plan submitted to the Commission for its consideration, the Commission and the public will be able to consider the information in evaluating the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

C. NMS Plan Process

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process - Compliance User: Broker-dealers - Keywords: - Comments, - Adopted Rule, - Cost, - -

As proposed, Rule 613(a)(1) would have required each SRO to jointly file on or before 90 days from approval of the Rule an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and a central repository. Section III.A. above discusses the use of an NMS plan to create, implement, and maintain a consolidated audit trail. This Section focuses on the process the SROs must follow when submitting to the Commission the NMS plan that satisfies the requirements discussed in Section III.B. above and the process the Commission will undergo when evaluating whether to approve the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Comments on the NMS Plan Process
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Comments on the NMS Plan Process - Compliance User: Broker-dealers - Keywords: - Comments, - NMS Plan, - Analysis, - -

The Commission received several comments regarding how best to develop an NMS plan that will govern the creation and implementation of a consolidated audit trail, as well as the time needed to do so. Several commenters suggested that the Commission undergo a RFP or RFI process to create a consolidated audit trail.755 Specifically, one commenter suggested that the Commission outline a set of goals it intends to achieve through creation of a consolidated audit trail and allow an industry working group to determine the data elements that must be reported and other technical requirements.756 Another commenter opined that an RFP process would facilitate the identification of the costs and benefits of the audit trail, as well as the consideration of a wider range of technological solutions.757 Further, some commenters requested more specific information about the audit trail system to determine the best approach for implementing the consolidated audit trail.758

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Some of these commenters stressed that more time should be allotted for the planning and design of the NMS plan due to the comprehensive business analysis that would be needed in the initial stages of the consolidated audit trail.759 Commenters recommended extensive, "up-front business analysis,"760 explaining that if conducted "during the CAT plan development process, [they] are confident that issues would emerge earlier in the process, leading to more efficient and cost-effective solutions."761 The commenters believed that the business analysis would require many discussions involving the Commission, the SROs and teams comprising members of the securities industry.762 The commenters also suggested that the business analysis could include an RFI "to engage potential solution providers early in the process,"763 and stated that the time needed to perform the analysis to produce a "detailed blueprint for CAT"764 would be closer to six months,765 rather than the proposed 90 days.766 As a basis for their suggestions, one of the commenters provided a breakdown of the time and the types of work needed for FINRA's expansion of OATS to all NMS securities.767 This commenter noted that over one-third of the time required for the project was spent on conducting business analysis, and that one-third of the time was spent on project development.768

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In addition, some commenters noted that a consolidated audit trail could be implemented in a number of ways, and thus recommended that the Commission replace the specific system requirements of the proposed Rule with more general "end-user" requirements, perform an analysis of how existing audit trail systems do and do not meet the needs of regulators, and perhaps even engage in a formal RFP process.769

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pubdate: July 18, 2012 effdate: October 01, 2012 -
2. Adopted Rule
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Adopted Rule - Compliance User: Broker-dealers - Keywords: - Rule 613(a)(1), - SRO, - NMS Plan, - Considerations, - Features and Details, - Analysis, - Process, - Implementation, - Commission Review, - Cases, - Analyses related to Investigation, - Analyses related to Monitoring, - Order Tracking, - Time Sequence, - Database Security, - Database Access, - Submission, - Extension of Time, - -

After considering the comments regarding the NMS plan process, the Commission is adopting proposed Rule 613(a)(1) with modifications. First, the Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. These requirements have been incorporated into the adopted Rule as "considerations" that the SROs must address, and generally mandate that the NMS plan discuss: (1) the specific features and details of the NMS plan (e.g., how data will be transmitted to the central repository, and when linked data will be available to regulators); (2) the SROs' analysis of NMS plan costs and impact on efficiency, competition, and capital formation; (3) the process followed by the SROs in developing the NMS plan (e.g., solicitation of input from members of the SROs); and (4) the information about the implementation and milestones of the consolidated audit trail. Second, the Commission is furnishing further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases." Third, the Commission is extending the amount of time allowed for the SROs to submit the NMS plan from 90 days from the date of approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register. A discussion of these modifications and the "use cases" follows.

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a. NMS Plan Considerations

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As noted above,770 the Commission believes that the collective effect of the modifications and additions described above will be to significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining the consolidated audit trail and provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule. Further, given these changes to the Rule discussed above and the wide array of commenter's views on how to best implement a consolidated audit trail,771 the Commission expects that the SROs will seriously consider various options as they develop the NMS plan to be submitted to the Commission for its consideration. The costs and benefits of the consolidated audit trail are highly dependent on the specific solutions proposed by SROs.

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Accordingly, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule772) until such time as it may approve the NMS plan submitted to the Commission for its consideration. In light of the expanded set of solutions that should be available as a result of the changes described above and to facilitate a more robust economic analysis, the adopted Rule now requires the SROs to provide much more information and analysis to the Commission as part of their NMS plan submission. The Commission is therefore requiring the SROs to discuss, as part of their NMS plan "considerations" that detail how the SROs propose to implement the requirements of the plan, cost estimates for the proposed solution, and a discussion of the costs and benefits of alternate solutions considered but not proposed.

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This additional information and analysis are intended to ensure that the Commission and the SROs have sufficiently detailed information to carefully consider all aspects of the NMS plan ultimately submitted by the SROs, facilitating an analysis of the extent to which the NMS plan would allow regulators to effectively and efficiently carry out their responsibilities. The NMS plan submitted by the SROs will be published for public comment and reviewed by the Commission for consistency with the Exchange Act and the rules thereunder. As a result, all interested persons, including market participants, regulatory authorities, and the general public, will have an opportunity to provide meaningful comments on the details and costs of the NMS plan submitted, which the Commission will review and consider.

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i. Features and Details of the NMS Plan

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The first six considerations the Rule requires the SROs to address in the NMS plan relate to the features and details of the NMS plan. These six considerations require the NMS plan to specify and explain the choices made by the SROs to meet the requirements specified in the Rule for the consolidated audit trail. The Commission intends to use the discussion of these considerations to evaluate the NMS plan submitted for its consideration and how well it meets the objectives described in Section II.B.2.

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Rule 613(a)(1)(i)

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Rule 613(a)(1)(i) requires the NMS plan submitted to discuss "[t]he method(s) by which data is reported to the central repository, including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load and retain such data. . . ." The Rule also requires the NMS plan to discuss the basis for selecting such method(s).

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The Commission believes that requiring that the NMS plan discuss the method(s) by which data is reported to the central repository is important because the method for reporting data and the source of the data are significant to the effectiveness of the consolidated audit trail and could affect, and potentially enhance, the reliability and the accuracy of the data that is reported to the central repository.773 Discussing such method(s), as well as the basis for selecting such method(s), should help assure the Commission that the plan sponsors have considered the various alternatives and selected the method(s) that best achieves the objectives of the consolidated audit trail in a cost-effective manner.774 In addition, Rule 613(a)(1)(i) requires that the NMS plan describe how the central repository will receive, extract, transform, load and retain data because the Commission believes that this information is integral to a comprehensive understanding of the operation of the central repository proposed in the NMS plan.

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Rule 613(a)(1)(ii)

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Rule 613(a)(1)(ii) requires the NMS plan to address "[t]he time and method by which the data in the central repository will be made available to regulators, in accordance with [Rule 613(e)(1)] to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities."

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The time and method by which data will be made available to regulators are fundamental to the utility of the consolidated audit trail because the purpose of the consolidated audit trail is to assist regulators in fulfilling their responsibilities to oversee the securities markets and market participants.775 The NMS plan submitted should discuss these issues in detail, guided, in particular, by the issues and questions raised in the "Regulator Use Cases" described in Section III.C.2.b., below.

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The importance of this consideration was discussed in the Proposing Release.776 The Commission emphasized the necessity of the data being in a uniform electronic format so that regulators would be able, among other things, to effectively and efficiently detect and investigate illegal trading across markets, without having to spend valuable time and resources reconciling audit trail formatting differences in the data.777 In addition, the Proposing Release noted that requiring the order and trade data to be collected in one location in a single format would allow regulators ready access to the data for use in market reconstructions, market analyses, surveillance and investigations,778 as regulators could then retrieve the information that they need much faster than the current process of requesting data from multiple parties without having to reconcile disparate audit trail information. Also, in the Proposing Release, the Commission noted the importance of SRO regulatory staff having direct access to consolidated audit trail data.779 The Commission continues to believe that it is vital that regulators have ready access to the consolidated audit trail data in the central repository so that this information can be effectively and efficiently used in fulfilling their regulatory responsibilities.

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Rule 613(a)(1)(iii)

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Rule 613(a)(1)(iii) requires the NMS plan to address "[t]he reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators."

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The Commission believes the reliability and accuracy of the data is a critical aspect of the consolidated audit trail, because the usefulness of the data to regulators would be significantly impaired if it is unreliable or inaccurate. If the reliability and accuracy of reported data is not maintained by the central repository during the period it is required to be retained and throughout the various uses to which it may be put by regulators, then its value to regulators will be substantially diminished.

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Accordingly, the NMS plan submitted should discuss in detail, among other things, how the consolidated audit trail envisioned by the sponsors would be designed, tested and monitored to ensure the reliability and accuracy of the data collected and maintained by the central repository (e.g., during transmission from the SRO or member to receipt by the central repository,780 data extraction, transformation and loading at the central repository,781 data maintenance and management at the central repository,782 and data access by regulators783).

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The Commission notes that, when proposing Rule 613, it highlighted the importance of this consideration by emphasizing that the reliability and accuracy of the data are critical to the integrity and effectiveness of the consolidated audit trail.784 Indeed, Rule 613(e)(4)(ii), like the proposed Rule, specifically requires the plan sponsors to establish policies and procedures for the plan processor to ensure the timeliness, accuracy and completeness of the audit trail data reported to the central repository.

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Rule 613(a)(1)(iv)

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Rule 613(a)(1)(iv) requires the NMS plan to discuss "[t]he security and confidentiality of the information reported to the central repository."

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The Commission is including this consideration because it believes that keeping the data secure and confidential is crucial to the efficacy of the consolidated audit trail and the confidence of market participants. Exposure of highly-confidential information about the trading strategies and positions of market participants through a security breach, for example, could impact the confidence of the public in the central repository and in trading on the U.S. markets. The Commission understood the importance of security and confidentiality provisions when it proposed Rule 613(e)(4) to require the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information reported to, and maintained by, the central repository.785 Numerous commenters also noted the importance of maintaining the security and the confidentiality of the data collected pursuant to the proposed Rule.786

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Rule 613(a)(1)(v)

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Rule 613(a)(1)(v) requires the NMS plan to address "[t]he flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments."

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The Commission believes that the flexibility and scalability of the systems used by the central repository are important to the effectiveness of the consolidated audit trail, and, accordingly, the Commission believes the NMS plan under Rule 613 should address potential "built-in" obsolescence that may arise as a result of the SROs' choice of systems or technology. For this reason, the NMS plan should address how, taking into consideration the costs and benefits, including the potential impact on competition, efficiency, and capital formation, the consolidated audit trail systems might be designed to accommodate: (1) potential growth in the trading volume or message traffic relating to NMS securities; (2) possible expansion to include other non-NMS securities;787(3) additional data fields that the SROs or the Commission might determine to require in the future (such as new order characteristics); and (4) potential technological developments that might allow the consolidated audit trail to be operated in a more timely, reliable, and cost-effective manner.

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As noted in the Commission's Concept Release on equity market structure,788 the market for trading securities has changed dramatically in recent years and, as technology advances, trading systems and trading strategies also change. The Commission believes that it is important for the consolidated audit trail to keep pace with market developments. It must be designed in a way that allows it to do so efficiently and in a cost-effective manner to assure regulators of its continued usefulness. Thus, the Commission has identified the flexibility and scalability of the systems used by the central repository to collect, consolidate and store audit trail data as a consideration that must be discussed in the NMS plan submitted to the Commission for its consideration. To sufficiently address this consideration, the Commission expects the NMS plan to describe in detail how the consolidated audit trail envisioned by the sponsors would be designed to accommodate additional message traffic for orders in NMS securities, how readily capacity could be expanded, and the existence of any capacity limits. The Commission also would expect the NMS plan to discuss in detail the extent to which the proposed consolidated audit trail could accommodate potential additional data elements, order characteristics, and other types of securities such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, how quickly this could be done, and whether any limits exist on the ability of the proposed system to accommodate these types of changes. Additionally, the Commission would expect the NMS plan to further discuss whether and how the consolidated audit trail could be upgraded to keep pace with improvements in technology, such as improvements to the speed of systems processing.

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The Commission believes these descriptions are important because, otherwise, what initially appears to be an effective and cost-effective NMS plan could become significantly less so over time as markets evolve and if, for example, order volumes increase, new order types are developed, and additional data elements or other types of securities, such as non-NMS securities, debt securities, primary market transactions in equity securities that are non-NMS securities, and primary market transactions in debt securities, are potentially incorporated into the consolidated audit trail.

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The Commission notes that issues relating to the potential flexibility and scalability of the consolidated audit trail were raised in the Proposing Release. For example, the Commission stated that, while the proposal was limited to NMS securities, the Commission ultimately intended the consolidated audit trail to cover secondary market transactions in other securities and information on primary market transactions.789 In fact, as discussed above, the Commission specifically proposed that the NMS plan contain provisions relating to the possible expansion of the consolidated audit trail to products other than NMS securities.790 In addition, in the Proposing Release, the Commission specifically noted its concerns with the lack of scalability of the existing EBS system and the fact that the volume of transaction data subject to reporting under the EBS system can be significantly greater than the system was intended to accommodate in a typical request for data.791

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Rule 613(a)(1)(vi)

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Rule 613(a)(1)(vi) requires the NMS plan to address "[t]he feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner: (A) [t]he identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction; (B) [t]he number of such securities each such market participant is allocated; and (C) [t]he identity of the broker-dealer making each such allocation."

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In the Proposing Release, the Commission stated that "it would be beneficial to provide for the possible expansion of the consolidated audit trail to include information on primary market transactions in NMS stocks" and required in proposed Rule 613 that the plan sponsors address such expansion in a document provided to the Commission within two months after effectiveness of the NMS plan.792 The Commission continues to believe, for the reasons set forth below, that a potential expansion of the consolidated audit trail to cover primary market transactions would be beneficial. Specifically, the Commission believes that the SROs should address – at the time of the submission of the NMS plan to the Commission, rather than as part of a later expansion plan – the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail.

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As with the data sources discussed in Section II.A, the sources of information currently available to the Commission regarding allocations of NMS securities in primary market transactions are each limited in their ability to provide accurate, complete, accessible, and timely information.793 For example, while the Commission and FINRA can request information about allocations from the books and records of broker-dealers, such requests are unduly cumbersome for both regulators and market participants, potentially involving multiple time-consuming individual requests.794 Other sources of information about allocations of NMS securities in primary market transactions – including public sources795 – are also limited in certain respects.796

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In light of these limitations, data about the allocations of NMS securities in primary market transactions could also improve market analysis by the Commission and the SROs, which could in turn help better inform rulemaking and other policy decisions. Specifically, such data might aid the Commission and the SROs in better understanding the role of such allocations in the capital formation process. Combining this data with the secondary market data to be collected by the consolidated audit trail could allow regulators to calculate investor positions and when and how the investors receiving allocations sell their securities. Such data could also facilitate a better understanding of how securities are allocated in a primary market transaction, how allocations differ across broker-dealers and investors, and what types of investors are allocated securities. This analysis is virtually infeasible on a market-wide basis today because the data collection process using current sources of information is so cumbersome.

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In addition, if the consolidated audit trail included data regarding the allocations of NMS securities in primary market transactions, SROs could be better able to monitor for compliance with their rules related to such transactions.797 The data also could more broadly assist SROs in their examinations and investigations related to allocations in initial public offerings ("IPOs") and other primary market transactions by providing a richer data set for evaluating possible compliance issues. For example, the SROs could use IPO allocation information, combined with the secondary market transaction information in a consolidated audit trail, to run surveillance on whether sales in the IPO auction were marked accurately (i.e., "long" or "short") and in compliance with applicable requirements.798 Allocation data could also allow SROs to conduct surveillance for "red flags" they might develop regarding potential suitability issues related to customer allocations, as well as potentially improper allocations to customers (such as kickbacks).

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The Commission could also enhance its own examination and investigation processes if data regarding the allocations of NMS securities in primary market transactions were included in the consolidated audit trail. Without access to a single centralized database of allocations, Commission staff must rely on more limited data sources that generally enable only either broad-based sweeps or one-off investigations based on particularized suspicion of wrongdoing. Because the relevant data would be readily available for analysis, including information about allocations as part of the consolidated audit trail could facilitate the Commission's identification of particular risks and exam candidates. Other examinations undertaken by the Commission staff address whether employees of a regulated entity are in compliance with the rules applicable to their transactions related to primary market transactions. Having allocation information available before such an examination commences could allow staff to enhance their pre-examination research, better focus on the sources of potential violations, and ultimately foster more effective and efficient examinations.

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In investigations related to primary market transactions, the Commission staff generally must obtain data from underwriters post-transaction, which can take considerable time owing to the limitations on current sources of data noted above.799 Including data about the allocations of NMS securities in primary market transactions in the consolidated audit trail could enable investigations to proceed more efficiently and to more quickly assess whether alleged violations of various rules under the Exchange Act, such as Regulation M and Rule 10b-5, warrant investigation.800 In addition, the Commission believes that information about allocations could help the SROs and Commission investigate allegations of improper allocations, such as allocations subject to "spinning"801 or "laddering."802 Currently, these types of investigations would require requesting data from underwriters, and in some cases, other parties (such as investment advisors) involved in the primary market transaction.

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Given these potential benefits, the Commission believes that it is important – consistent with its view in the Proposing Release – for the SROs to address the feasibility, benefits, and costs of recording and reporting information about allocations of NMS securities in primary market transactions as part of the consolidated audit trail. However, unlike other potential additions to the consolidated audit trail – e.g., the inclusion of debt securities – that will be contemplated later in expansion plans, allocations of NMS securities in primary market transactions are uniquely tied to the central element of the NMS plan – the reporting of data regarding trading in NMS securities. For example, allocations in primary market transactions may have a significant impact on trading and other activity in the secondary market, and behavior in the primary market may influence behavior in the secondary market through initial pricing and other mechanisms. More broadly, IPOs and other primary market transactions continue to be a source of particular interest for market participants and observers because of, among other things, their role in the capital formation process. In light of these considerations, the Commission believes it is appropriate to require the SROs to address allocations of NMS securities in primary market transactions at the time that the NMS plan is submitted under adopted Rule 613(a)(1), rather than as part of an expansion plan under adopted Rule 613(i).

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At the same time, the Commission recognizes that firms may use systems and methods to handle information regarding allocations of NMS securities in primary market transactions that differ from those used to handle information regarding secondary market transactions in such securities. Such differences may affect the extent to which information regarding allocations may be readily incorporated into the consolidated audit trail described by the NMS plan mandated by Rule 613. For example, the unique features of allocations of NMS securities in primary market transactions may require different reporting timeframes, different information security controls, or additional data elements that would not be required for other information being reported to the central repository and that are not contemplated by Rule 613. Because of these potential differences, the Commission believes it is appropriate to require the SROs to address the feasibility, costs, and benefits of their members reporting information regarding allocations of NMS securities in primary market transactions, rather than require the NMS plan to require such reporting at the outset.

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The Commission acknowledges that plan sponsors nevertheless will incur costs to address the feasibility, benefits, and costs of incorporating information about allocations of NMS securities in primary market transactions into the consolidated audit trail. Among other things, the plan sponsors will need to undertake an analysis of technological and computer system acquisitions and upgrades that would be required to include information about such allocations. However, given the potential benefits described above of including such information in the consolidated audit trail, the Commission believes these costs are justified.

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ii. Analysis of the NMS Plan

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As noted above, in consideration of the views expressed, suggestions for alternatives, and other information provided by those commenting on the proposed Rule, the Commission is adopting Rule 613 with significant modifications to a number of the proposed requirements. In certain instances these modifications alter the data and collection requirements of the proposed Rule. In other instances, the adopted Rule has been altered to be less prescriptive, and hence less limiting, in the means the SROs may use to meet certain requirements. These modifications significantly expand the solution set that could be considered by the SROs for creating, implementing, and maintaining a consolidated audit trail and thus provide the SROs with increased flexibility in how they choose to meet the requirements of the adopted Rule, relative to the solution set that would have been available under the requirements of the proposed Rule.

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Because these modifications permit a wider array of solutions to be considered by the SROs, including solutions that could capitalize on existing systems and standards,803 the assumptions underlying the Commission's cost estimate in the Proposing Release that new, large-scale market systems would need to be developed from scratch may no longer be valid.804 Thus, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself (in contrast to the costs of the actions the SROs are required to take upon approval of the adopted Rule)805 until such time as it may approve any NMS plan submitted to the Commission for its consideration – that is, after the NMS plan, together with its detailed information, including cost estimates for the creation, implementation, and maintenance of the consolidated audit trail, and analysis, has been submitted by the SROs to the Commission and there has been an opportunity for public comment. The Commission believes that the information and analyses will help inform public comment regarding the NMS plan and will help inform the Commission as it evaluates whether to approve the NMS plan. In this way, the Commission can be better informed about the costs for the development, implementation, and maintenance of the consolidated audit trail that benefit from cost data and information provided by the SROs in conjunction with – and guided by – their development of an NMS plan that complies with the requirements of the adopted Rule. In addition, as noted above,806 the Rule includes a mandate that in determining whether to approve the plan and whether the plan is in the public interest, the Commission must consider the impact of the NMS plan on efficiency, competition, and capital formation.

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Rule 613(a)(1)(vii)

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Rule 613(a)(1)(vii) requires the NMS plan to include "[t]he detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify: (A) [a]n estimate of the costs to the plan sponsors for creating and maintaining the central repository; (B) [a]n estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; (C) [a]n estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and (D) [h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."807

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Commenters opined on the costs of funding the consolidated audit trail in general.808 One commenter stated that the Commission should give "important consideration to alternative means to help fund the creation of what is essentially a public utility in [the consolidated audit trail]," suggesting the Commission "should itself pay user fees to help build and run the [consolidated audit trail]," or that the government should underwrite low-cost loans for market participants aimed to pay the costs of the consolidated audit trail.809 Another commenter suggested that the cost of creating and maintaining the central repository should be shared among all market participants, including broker-dealers, ATSs, and exchanges.810 Another commenter stated that, if the Commission requires the SROs to fund the creation of the consolidated audit trail (i.e., the central repository), SROs may be forced to raise transaction fees, which would "resurrect the distortions caused by high transaction fees, potentially increase the use of flash orders, if allowed, and discourage trading activity."811

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The Commission also received comments regarding the allocation of the costs of the consolidated audit trail.812 One commenter emphasized that the NMS plan must provide for an equitable allocation of costs, including the sharing of expansion costs by the parties that benefit from any new products added to the consolidated audit trail.813 One commenter suggested that the Commission should require trading venues to allocate system costs for the consolidated audit trail "at least partially based on message traffic . . . ."814 Similarly, another commenter, opining that exchanges currently bear a disproportionate amount of the costs for market surveillance and noting that exchanges would also be forced to shoulder the costs of the consolidated audit trail, suggested that other venues, such as ATSs and internal broker-dealer platforms, should bear a proportionate share of the costs of creating, implementing, and maintaining the consolidated audit trail.815 This commenter also suggested that the Commission fund the audit trail using fees assessed on high frequency traders who cancel a "disproportionately high" percentage of their orders,816 arguing that this "would have the added benefit of deterring a practice that, at best, adds little value in the price discovery process and, at worst, is potentially manipulative or even fraudulent."817

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The Commission believes that the issues surrounding how the consolidated audit trail should be funded, and how costs in creating, implementing, and maintaining the consolidated audit trail should be allocated, are important, and the Rule requires information about those issues to be provided by the SROs in the NMS plan submitted to the Commission for its consideration. In response to comments and in recognition that an initiative of the size and scope of the consolidated audit trail necessarily will require substantial expenditures by the SROs and their members, the Commission is requiring, pursuant to Rule 613(a)(1)(vii), the SROs to include in the NMS plan, a discussion of costs and how such costs will be allocated. As discussed above, the Commission believes that the SROs will incur costs to create and maintain the central repository.818 Also, as discussed above, SROs and their members may need to make systems changes or to purchase new systems to record and report the data required by the NMS plan to the central repository.819 SROs and their members will incur upfront costs, as well as ongoing costs to record and report such information. Because, as noted above, these costs can only be analyzed once the SROs narrow the array of choices they have and develop a detailed NMS plan,820 the Commission believes that the most robust approach for estimating these costs is for the SROs to provide such cost estimates in conjunction with, and guided by, their development of the NMS plan. The Commission believes that a fulsome discussion in the NMS plan of the estimated costs to SROs and their members will aid commenters in providing useful comments that will further the Commission's understanding of the cost implications of the consolidated audit trail. In addition, a fulsome discussion will aid the Commission in its evaluation of whether to approve the NMS plan and in conducting its own analysis of the costs and benefits of the NMS plan.

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There also would be costs associated with establishing and operating the central repository that will be jointly owned by the plan sponsors. The Commission believes it is important to understand how the plan sponsors plan to allocate such costs among themselves to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan amongst the SROs. In addition, although the plan sponsors likely would initially incur the costs to establish and fund the central repository directly, they may seek to recover some or all of these costs from their members. If the plan sponsors seek to recover costs from their members, the Commission believes that it is important to understand the plan sponsors' plans to allocate costs between themselves and their members, to help inform the Commission's decision regarding the possible economic or competitive impact of the NMS plan.

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Rule 613(a)(1)(viii)

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Rule 613(a)(1)(viii) requires the NMS plan to include "[a]n analysis of the impact on competition, efficiency, and capital formation of creating, implementing, and maintaining the national market system plan."

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Rule 608(a)(4)(ii)(C) under Regulation NMS already requires every NMS plan submitted to the Commission to be accompanied by an analysis of the impact on competition of implementation of the plan.821 This requirement is designed to help inform the Commission's evaluation of whether the NMS plan will impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Rule re-states the application of the Rule 608(a)(4)(ii)(C) requirement to provide an analysis of the NMS plan's impact on competition and imposes a requirement that the NMS plan also include an analysis of the impact on efficiency and capital formation.822

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These requirements are designed to help inform the Commission's understanding of whether the NMS plan may promote efficiency and capital formation. As an initial matter, the SROs will be providing an analysis of the economic consequences of the NMS plan they develop and propose. As noted above, because the specific requirements of the NMS plan will not be known until the NMS plan is submitted, and the SROs will be providing that analysis, the Commission will consider the impact of the proposed consolidated audit trail on efficiency, competition, and capital formation in deciding whether to approve the NMS plan. The Commission, however, will consider such analysis in determining whether to approve the NMS plan and whether the plan is in the public interest under Rule 608(b)(2). 823

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iii. Process Followed to Develop the NMS Plan

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The following two considerations require the NMS plan to address how the SROs solicited the input of their members and other appropriate parties in their design of the NMS plan, and to detail the alternative consolidated audit trail designs considered and rejected by the SROs. These considerations will inform the Commission's evaluation of the NMS plan submitted for its consideration.

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Rule 613(a)(1)(xi)

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Rule 613(a)(1)(xi) requires the NMS plan to discuss "[t]he process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan."

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The Commission believes that the SROs' consideration of the views of their members is important because, given the scope of the Rule, it will affect many market participants and will require them to report a broad range of audit trail information. Ensuring that market participants with varied perspectives have a role in developing the NMS plan submitted to the Commission for its consideration could help inform the plan sponsors of operational or technical issues that may arise in the implementation of the NMS plan, and help assure the Commission and market participants that the requirements imposed on members are done so in an efficient and cost-effective manner.824 Similarly, the Commission believes it is important that the SROs consider the views of other parties – such as back office service providers, market operations specialists, and technology and data firms – as may be appropriate in light of the Rule's goal of creating, implementing, and maintaining a complex system that may entail changes to multiple other systems and functionalities involved across the lifecycle of an order. Such parties could offer operational and technical expertise to the SROs, including, among other things, by identifying issues that may arise in the interface between legacy and new systems. In addition, the inclusion of such parties in the deliberative process could also result in the introduction of additional alternative approaches.

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The Commission also believes that it is appropriate to require the SROs to set out in the NMS plan a summary of the views expressed by such members and other parties and how the SROs took those views into account in developing the NMS plan. This requirement is designed to inform the Commission about the extent to which the SROs considered the views of their members and other appropriate parties as they undertook the complex task of developing the NMS plan for a consolidated audit trail, to facilitate a cost estimate by the SROs that takes into account the costs members will incur in creating, implementing, and maintaining the consolidated audit trail, as well as to encourage the consideration of reasonable alternative approaches contemplated by Rule 613(a)(1)(xii) in the plan formulation process.

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The Commission received several comments advocating inclusion of the broker-dealer community and other appropriate parties in the planning of the consolidated audit trail.825 One commenter, with respect to NMS plan governance, urged the inclusion of "an official 'seat at the table' alongside the SROs" for members of the broker-dealer industry.826 Another commenter recommended that the Commission seek greater SRO and broker-dealer involvement in the front-end planning before adopting a final rule to make all parties aware of potential design tradeoffs, and establish appropriate timelines for implementation and compliance.827 A further commenter advocated allowing working groups to engage in dialogue with the Commission, broker-dealers and the SROs to effectively conduct the business analysis needed to build the consolidated audit trail.828 Additionally, one commenter suggested that the Commission staff should form and engage working groups comprised of representatives from the "affected constituents," specifically brokers and "key technology vendors,"829 and that such working groups could work with the Commission to develop a request for proposal."830 Similarly, another commenter urged the Commission to require an industry working group of SROs and a representative group of broker-dealers to address the "complexities involved in developing such a system."831 One commenter suggested encouraging the participation of issuers and other market participants in the creation of the consolidated audit trail,832 and another commenter advocated the inclusion of "broad industry participation from the SEC, FINRA, exchange, broker dealer and vendor communities."833

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The Commission considered the comments recommending wider industry involvement in the creation of the consolidated audit trail and believes that, since the consolidated audit trail will be a regulatory tool used by the SROs and the Commission, it is appropriate for the SROs, when developing the NMS plan, to request input from the securities industry as well as technological advice. The Commission believes that this input should be sought during the preparation of the NMS plan submitted to the Commission for its consideration,834 during the comment process,835 and subsequent to the approval of an NMS plan.836

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Rule 613(a)(1)(xii)

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Rule 613(a)(1)(xii) requires the NMS plan to discuss "[a]ny reasonable alternative approaches to creating a consolidated audit trail that the plan sponsors considered in developing the national market system plan, including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan."837 The Commission believes this consideration is appropriate because it reflects the view, supported by commenters, that there are alternative approaches to creating, implementing, and maintaining the consolidated audit trail. The Commission believes that requiring the SROs to discuss alternatives considered helps ensure that the plan sponsors have appropriately weighed the merits of the various approaches that might be considered to create, implement, and maintain the consolidated audit trail, by requiring the NMS plan to describe the alternatives that the plan sponsors considered before making any significant decision with respect to the consolidated audit trail, and the relative advantages and disadvantages, including costs and benefits, of such alternatives. The Commission also believes that requiring transparency with respect to alternative approaches and the decision-making process of the SROs will facilitate public comment on the NMS plan and the wisdom of the approach selected by the plan sponsors. Similarly, such transparency should provide the Commission with useful insights into the rationale for the approach chosen by the plan sponsors as it considers whether to approve the NMS plan submitted to the Commission. The Commission also notes that this consideration complements Rule 613(a)(1)(vii), discussed above, which requires that the NMS plan discuss the detailed estimated costs to the plan sponsors for creating, implementing, and maintaining the consolidated audit trail, because this consideration requires the NMS plan to provide the costs of the alternatives that were not adopted by the plan sponsors in the NMS plan submitted to the Commission.

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iv. Implementation and Milestones of the Consolidated Audit Trail

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The following two considerations are designed to elicit additional information from the plan sponsors about the implementation and milestones of the consolidated audit trail. These will inform the Commission's evaluation of the NMS plan submitted to the Commission for its consideration, particularly in the degree to which the consolidated audit trail can replace existing data sources and in how effectively the proposed plan will meet the objectives discussed in Section II.B.2.

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Rule 613(a)(1)(ix)

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Rule 613(a)(1)(ix) requires the NMS plan to discuss "[a] plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of: (A) [w]hether collection of such information remains appropriate; (B) [i]f still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and (C) [i]f no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of the phasing-in of the consolidated audit trail and phasing-out of such existing rules and systems (or components thereof)."838

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As noted in the Proposing Release and above, many exchanges and FINRA each have their own disparate audit trail rules.839 Thus, a member of the various exchanges and FINRA could be subject to the audit trail rules of, and be required to submit different information to, more than one exchange and FINRA. In addition, several commenters discussed the potential reduction in costs for the creation, implementation, and maintenance of a consolidated audit trail if existing SRO audit trail requirements were eliminated. In particular, one commenter stated that, "over the long-term, the costs of developing a carefully designed and appropriately scaled consolidated audit trail could be offset in part by eliminating the individual SRO reporting requirements imposed under existing audit trail systems."840 This commenter also urged the SROs and the Commission "to rely to the fullest extent possible on the consolidated audit trail data for market reconstructions, investigations, and analysis, rather than requesting data from broker-dealers. This would be more efficient for both firms and regulators and would help maximize the utility of the consolidated audit trail."841

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Another commenter similarly stated that "a consolidated trail and consolidated market surveillance should achieve economies of scale that ultimately lower costs for both the markets themselves and the market participants."842 This commenter further reasoned that, "[r]ather than each SRO separately maintaining its own surveillance staff and surveillance programs that are searching for the same behavior, and thus creating redundancies, certain technology and staff resources can be consolidated into a single enterprise with costs equitably allocated across all SROs."843 However, the commenter also pointed out that "[s]uch consolidation, of course, would not preclude individual SROs from conducting surveillance for unique attributes and rules of its marketplace, ensuring that specialized market expertise continues to inform surveillance and oversight of trading on that market."844

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Many other commenters shared similar opinions with regards to the efficiency effects that a consolidated audit trail would have on market participants and their requirements to provide data to regulators. One commenter, for example, listed as one of seven benefits of a consolidated audit trail that "it would reduce the time and resources required by market participants to respond to case-by-case requests from regulators."845 Another commenter stated that it "agrees with the Commission that the implementation of the proposed consolidated audit trail would likely render unnecessary existing audit trails and data obtained through the equity blue sheets system."846 Similarly, another commenter also "agree[d] with the Commission that in calculating the total cost to the industry of the audit trail it is important to consider offsetting savings from the retirement of redundant data feeds such as OATS, OTS, COATS, ISG Equity Audit Trail, and EBS. In addition, the industry may be able to avoid the cost of compliance with the Commission's proposed Large Trader Reporting System if the consolidated audit trail contains sufficient information to meet those requirements."847

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The Commission recognizes that the creation of a consolidated audit trail could result in efficiency gains for market participants with respect to their regulatory data reporting requirements and for regulators with respect to their surveillance activities. The Commission also recognizes that the consolidated audit trail could render existing rules and systems that contain the same requirements as the consolidated audit trail redundant. While the Commission is not at this time requiring that existing rules and systems be eliminated, the Rule requires that the NMS plan provide a plan to eliminate existing rules and systems (or components thereof), including identification of such rules and systems (or components thereof). Further, to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, such plan must also include an analysis of (1) whether the collection of such information remains appropriate, (2) if still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail, and (3) if no longer appropriate, how the collection of such information could be efficiently terminated. Finally, such plan must also provide the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof).

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The Commission believes that the implementation of a plan to eliminate duplicative existing rules, systems, and/or components of such rules and systems, will result in increased efficiency to market participants who need to comply with the disparate reporting requirements for orders and with repeated requests for data by regulators who cannot obtain the data they need from existing sources of information.

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Rule 613(a)(1)(x)

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Rule 613(a)(1)(x) requires the NMS plan to include "[o]bjective milestones to assess progress toward the implementation of the national market system plan."

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The creation of a consolidated audit trail is crucial to the effective oversight of the U.S. securities markets, but at the same time is an initiative of substantial scope and complexity. Accordingly, to ensure that the consolidated audit trail is established in a timely and logical manner, and that the SROs can be held accountable for maintaining a workable implementation schedule, the NMS plan submitted is required to set forth a series of detailed objective milestones, with projected completion dates, toward implementation of the consolidated audit trail. In addition to being useful for the Commission in its evaluation of the NMS plan, the milestones will be used by the Commission in its supervision of the implementation of the consolidated audit trail. Such milestones could include, but are not limited to: publication and implementation of the methods for obtaining a CAT-Reporter-ID and the Customer-ID database, testing of the collection of order and execution data from a representative subset of broker-dealers, initial access to the central repository for regulators, demonstration of linking the full lifecycle of events for select test orders, cancels, modifications, and executions, and integration of trade and quote data as currently reported by trading venues into the central repository.

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v. Commission Review

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The Commission believes these considerations represent fundamental characteristics of a meaningful plan to establish an effective and efficient consolidated audit trail. The Commission will assess the NMS plan's discussion of the considerations described as part of its evaluation of the NMS plan.848 The Commission notes that, if the NMS plan submitted does not comply with the requirements of the Rule, or if the Commission determines changes are necessary or appropriate, the Commission may amend the NMS plan pursuant to Rule 608(b)(2 of Regulation NMS with such changes or subject to such conditions as the Commission may deem necessary or appropriate, taking into account the considerations contemplated in Rule 613(a)(1).849 In addition, should the NMS plan and the consolidated audit trail not keep pace with market or technological developments, such that its efficiency or effectiveness becomes impaired,850 the Commission itself may, pursuant to Rule 608(b), propose an amendment to the NMS plan.851

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b. Regulator Use Cases

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In light of the comments recommending that the Commission undertake an RFP process and provide more "business requirements"852 the Commission believes that it is useful to provide further details about how it envisions regulators would use, access, and analyze consolidated audit trail data through a number of "use cases," as might typically be found in an RFP. These "use cases" and accompanying questions set forth below are derived directly from the considerations described in adopted Rule 613(a)(1), which, as discussed in Section III.C.2.a., originated from key principles of the consolidated audit trail that had been highlighted by the Commission in the Proposing Release. Specifically, these "use cases" describe the various ways in which, and purposes for which, regulators would likely use, access, and analyze consolidated audit trail data. By describing how regulators would use the consolidated audit trail data, the "use cases" and the related questions are meant to elicit a level of detail about the considerations that should help the SROs prepare an NMS plan that better addresses the requirements of the adopted Rule. They should also aid the Commission and the public in gauging how well the NMS plan will address the need for a consolidated audit trail. In particular, the "use cases" will assist in gauging how well the NMS plan will specifically address the needs outlined in this Rule, by describing the features, functions, costs, benefits, and implementation times of the plan.

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The Commission notes that it is not including these "use cases" and accompanying questions to endorse a particular technology or approach to the consolidated audit trail; rather, these "use cases" and accompanying questions are designed to aid the SROs' understanding of the types of useful specific information that the NMS plan could contain that would assist the Commission in its evaluation of the NMS plan. The Commission also notes that its description of "use cases" includes a non-exclusive list of factors that SROs could consider when developing the NMS plan. The SROs also may include in the NMS plan submitted to the Commission for its consideration any other information regarding how data would be stored or accessed that the SROs believe the Commission or the public may find useful in evaluating the NMS plan submitted.

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1. Analyses Related to Investigations and Examinations

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The Commission expects that the consolidated audit trail will provide regulators the ability to more efficiently conduct targeted investigations and examinations. These generally require being able to conduct several types of queries on large amounts of data and extract targeted segments of such data. These targeted segments are likely to be much smaller than the bulk extractions discussed in Section III.C.2.b.2., below.

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Off-Line Analysis. Regulators are likely to frequently require the extraction of relatively small amounts of select data from the consolidated audit trail database at the central repository for their own "off-line" analyses.853 For example, a regulator may need to extract data on all orders in a particular stock, by a particular customer, on a particular day, or based on any other combination of fixed search criteria.854 Though the total data extracted may be small, the number of records that need to be searched to find such data may be enormous.

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i. What technical or procedural mechanisms will regulators be required to use to request data extractions? Does the NMS plan provide for a front-end user interface to perform search and extractions? If not, what types of tools or technologies would regulators need to implement to send search and extract requests to the database? Would regulators be permitted to write and submit their own queries (e.g., Structure Query Language or "SQL") to the database directly? Would the central repository write and submit queries on behalf of a regulator at the regulator's request?

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ii. What response times should regulators expect from search and extract requests? Would a search for all trades in a given security by a given customer over a specified period of time return a response with all requested data in one minute? One hour? Overnight? How would this response time scale with the amount of data requested? With the amount of data being searched?

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iii. How would the database effectively process simultaneous requests by multiple users at one or more regulators? Will each request be queued serially? Can they be processed in parallel? What is the effect of simultaneous requests on response times? Would there be limits to the number of search queries that can be performed at the same time? Would there be limitations on the size of the extractions from such queries?

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iv. A wide range of users at regulators may need to search and extract data for analysis. How are users to be administered? If the NMS plan contemplates a front-end user interface, what validation and security mechanisms will ensure that only permitted users will have access to such data? If the plan contemplates direct access through a means other than a front-end user interface, what security and validation mechanisms would regulators need to deploy to interact with the database?

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Dynamic Search and Extraction. At times, regulators may need to identify and extract small amounts of data from the database based on dynamic search criteria that might require the database to perform calculations on stored data to meet the specified criteria. A few examples of dynamic criteria are: searching for trades with trade sizes above a certain threshold, searching for trades in securities with execution prices that change more than a certain percentage in a given period of time, and searching for orders that are canceled within a certain period of time.

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i. Does the NMS plan contemplate allowing for dynamic search criteria to operate directly on the database? If so, how would the dynamic search criteria be specified and run? What, if any, limitations would there be on the types of search criteria that can be requested? What are the implications for response times? If the plan contemplates a front-end user interface, will dynamic search criteria be included? If the plan allows for dynamic search criteria through a means other than a front-end user interface, what types of tools or technologies would regulators need to implement to request dynamic searches? Have the plan sponsors considered whether such tools or technologies and the personnel to use them are currently available to the regulators?

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ii. If the NMS plan does not contemplate dynamic search criteria, please explain how regulators would be able to use the consolidated audit trail data to perform such searches. Would data need to be downloaded in bulk by the regulators to accomplish these types of searches off-line (see below for related questions)?

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2. Analyses Related to Monitoring, Surveillance, and Reconstruction

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In addition to targeted analysis of select data from the consolidated audit trail database, regulators will also require the analysis of data in bulk form. For example, the Commission is likely to use consolidated audit trail data to calculate detailed statistics on order flow, order sizes, market depth and rates of cancellation, to monitor trends and inform SRO and Commission rulemaking. To satisfy the surveillance requirements of Rule 613(f), regulators may want the ability to feed consolidated audit trail data into analytical "alert" programs designed to screen for potential illegal activities such as insider trading or spoofing. Surveillances might also benefit if regulators are able to link consolidated audit trail data with databases on certain types of material news events or market participants. This would allow regulators to isolate and aggregate data on trading in advance of those news events or by those participants. If preliminary analyses showed problems, the regulators could then request significant amounts of data for a more thorough and detailed follow-up analysis. In the event of a large scale market event like the May 6, 2010 "flash crash," regulators are likely to use consolidated audit trail data to reconstruct market events on the day of the event, including but not limited to reconstructing entire order books and trading sequences.

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i. What, if any, SRO surveillance data could be replaced by the consolidated audit trail while still improving SROs' ability to surveil?

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ii. How will the NMS plan allow regulators to address these types of large-scale, on-going data analyses?

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iii. In addition to providing regulators with the ability to search and extract data, will the NMS plan provide regulators with access to any plan-hosted applications or interfaces (i.e., those that operate on plan-based systems and resources) that would enable users to perform data analyses on, or create reports or graphs from, data stored in the database (such application or interfaces collectively known as "hosted analytical tools")? If so, how would regulators use and access such tools? What are the limitations of such tools? Would the tools allow regulators to perform the analyses discussed in the examples presented above?

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iv. If the NMS plan does not provide regulators with hosted analytical tools, how would regulators be expected to use their own resources, software, and hardware to perform such analyses? Would the plan provide regulators with an application programming interface ("API") that allows regulators to develop their own tools that interact directly with the consolidated audit trail database? If so, what will the form of such API be? Are there limitations to the number of systems that could connect to the database? How will the plan negotiate priorities for connectivity, searches and queries done via the API? Will there be limitations to the types of queries that could be performed through the API? What types of in-house technologies and systems would be required for regulators to connect to the consolidated audit trail in this fashion?

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v. If the NMS plan does not provide regulators with analytical tools and services and does not provide an API for regulators to connect their own analytics systems to the database, what mechanism would the plan provide to regulators for accessing bulk data in a way that allows for large-scale analyses? Would the plan allow for end-of-day downloads of an entire day's activity so that regulators could load this information into their own systems for such analysis? If so, how is access to such a download to be controlled and implemented? How long would it take to transmit an entire day's worth of consolidated audit trail data to each of the regulators that requires such access? 10 minutes? One hour? Multiple hours? Longer than overnight? Do these time estimates reflect that multiple regulators are likely to simultaneously download consolidated audit trail data each night? What types of technologies or systems would be required for regulators to download this data? What are the expected sizes of such a data download? What type of systems would each regulator need to deploy to store and analyze this data? Have the plan sponsors considered whether such systems and the personnel to operate them are currently available to the regulators?

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vi. Does the plan contemplate data streaming as a method of transmitting bulk data to each regulator? If so, what is the form and mechanism of such data streaming? Would the streaming occur intraday as data is reported to, and processed by, the database, or would the streaming occur after all (or a majority of, or such other criteria) data was reported to, and processed by the database (e.g. overnight streaming)? How would intraday streaming impact the accuracy or completeness of the data received by regulators? Would data be transmitted through different methods or with varying delays by different SROs?

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vii. If the plan does not contemplate any bulk data analyses or means of transmitting data to regulators on a bulk overnight basis or in an intraday or overnight streaming fashion, describe what alternative mechanisms, if any, could be used to enable regulators to perform the types of analyses described at the beginning of the section (b), as well as the various examples described throughout this document of how regulators would make use of consolidated audit trail data.

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3. Order Tracking and Time Sequencing

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As discussed in detail throughout this Release, one of the key requirements of the consolidated audit trail is to provide regulators with a complete record of all of the events that stem from a particular order, from routing to modification, cancellation, or execution. In addition, these events must be stored by the central repository in a linked manner – using either a unique order identifier or a series of unique order identifiers, as discussed in Section III.B.1.d.iv. – so that regulators can quickly and accurately extract a time-sequenced history of each event related to an order.

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i. What methods will the plan use to create the linkages for order events as described above? How will regulators access and search on data in a linked fashion?

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ii. What is the technical form of the order identifier(s) that broker-dealers will be required to send to the consolidated audit trail database so that these linkages can be created? To what extent will broker-dealers be able to generate such identifier(s) using their current systems? To what extent will broker-dealers need to collect or track new data, or modify their systems, to generate such identifier(s)?

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iii. Will the transmission of economic data (such as a price) be sent separately, or via a different technical mechanism, from noneconomic data (such as the identity of a customer)?

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iv. What other changes, if any, will be required of systems typically in use by broker-dealers to provide such data? To what extent can existing broker-dealer systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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v. What changes, if any, will be required of the systems currently in use by regulators to receive such data? To what extent can existing regulatory systems be employed? What modifications will be necessary? What are the costs and technological ramifications of such changes?

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vi. If data reformatting is required, how much must be done by each broker-dealer using its own systems and resources prior to sending data to the central repository, versus being done on the receiving end by the central repository using plan-based systems and resources?

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vii. If multiple methods for collecting and aggregating are contemplated by the NMS plan, what are the pros and cons of each method?

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viii. How will the plan ensure orders and subsequent events are properly time-sequenced? At what level of granularity will time stamps be stored for each event? Milliseconds? Microseconds? Picoseconds? Describe any differences in the accuracy at which events originating in the same broker-dealer system can be sequenced versus events across different systems at the same broker-dealer, or systems at different broker-dealers. What type of synchronization of clocks will be employed to minimize inter-system timing inaccuracies?

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ix. If time stamps are not stored at a sufficient level of granularity to properly sequence events, what other data or mechanisms will the NMS plan provide to meet the requirement that regulators be able to time-sequence events?

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x. Even if time stamps are sufficiently granular to meet the time-sequencing requirements of today, how would the plan contemplate increasing that granularity as the speed of trading increases?

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4. Database Security, Contingency Planning, and Prospects for Growth

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The data stored in the consolidated audit trail database will contain confidential detailed records of trade and order flow by customer.

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i. How will the plan ensure the security of the database in a way that provides for flexible access by permitted users at multiple regulators (i.e., the Commission and the SROs), but denies access to all other non-permitted users?

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ii. What are the plan's policies and procedures with regards to security? Will the plan make use of any specific national or international security standards? If so, which ones? Will the plan make use of third-party reviews of its security procedures?

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iii. What types of contingency and backup plans will be employed by the plan to safeguard against the loss of data due to technical failures? Will the plan make use of live failover mechanisms so that data being sent to the database is not inadvertently lost in the event of a failure? Will contingency plans provide regulators with uninterrupted access to the database? If not, what are the expectations for recovery times under different failure scenarios?

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iv. As order and trade volumes increase, how does the plan contemplate handling the need for increased capacity and throughput? Would the plan be able to accommodate a doubling in daily volume without materially altering the basic technologies and architecture? A ten-time increase? A 100-times increase?

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5. Database Access

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As part of an investigation or examination, regulators may need to analyze historical trades and orders in the database maintained by the central repository (though not trade and order events occurring prior to the implementation of the consolidated audit trail).

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i. How much historical data will be stored "on-line" in the database and be available for immediate search and extraction?

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ii. How will data be archived if it is no longer stored on-line? How will regulators access and search data that has been archived?

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iii. Will third parties have access to historical data? How will this access differ from the regulatory access?

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c. Extension of time for submission of NMS plan

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Proposed Rule 613 required the SROs to jointly file the NMS plan within 90 days from approval of Rule 613. The Commission received a comment letter specifically suggesting that a six-month period, rather than the 90-day period originally proposed, would be more appropriate for the submission of the NMS plan to ensure that the NMS plan is drafted with an informed understanding of how order and trade processing works so that the consolidated audit trail systems are capable of achieving the Commission's objectives.855 To this end the commenter recommended that the Rule mandate the formation of cross‐market participant working groups; outline the objectives of consolidated audit trail rather than identify technical requirements; and allow six months for the cross‐participant working groups to perform a requirements analysis as part of the development of the NMS plan.856

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In response to this commenter and other commenters that suggested that the Commission rely on an industry working group to create the consolidated audit trail857 and to provide sufficient time for the SROs to draft the additional provisions required by the Rule858 and to prepare responses to the considerations and the use cases for inclusion in the NMS plan,859 the Commission is extending the timeframe for the submission of the NMS plan from 90 days from approval of Rule 613 to 270 days from the date of publication of the Adopting Release in the Federal Register.860

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pubdate: July 18, 2012 effdate: October 01, 2012 -
3. NMS Plan Costs
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, NMS Plan Costs - Compliance User: Broker-dealers - Keywords: - Cost Estimate, - Preliminary, - Revised, - Programmer Analyst, - Business Analyst, - Attorney, - Compliance Manager, - -

a. NMS Plan Cost Estimates

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This section sets forth the Commission's estimates of the costs to prepare and file the NMS plan. As noted above, as part of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, together with its detailed information and analysis, has been submitted by the SROs to the Commission for its consideration and there has been an opportunity for public comment.861 The Commission believes that an economic analysis of the consolidated audit trail is more appropriately performed once the SROs narrow the expanded array of choices they have and developed a detailed NMS plan.862 At that time, the Commission will have available to it detailed information provided by the SROs, and any additional information provided by commenters once the NMS plan is published for comment. The cost estimates set forth below, therefore, only reflect the Commission's estimates as to the costs to the SROs for developing an NMS plan to be submitted to the Commission. These cost estimates do not reflect the much more significant initial and ongoing costs that would be incurred if such NMS plan were approved by the Commission and the implementation of the consolidated audit trail begins.

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The Commission notes that the requirement to develop and submit the NMS plan also is a collection of information within the meaning of the Paperwork Reduction Act of 1995 ("PRA").863 Section IV. below describes in detail the burdens associated with the requirement that the SROs develop and submit an NMS plan.

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i. Preliminary Cost Estimates from Proposing Release

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In the Proposing Release, the Commission estimated that each SRO, on average, would incur an aggregate one-time cost of approximately $234,000864 to prepare and file the NMS plan, for an estimated aggregate cost of about $3.5 million.865

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In making these estimates, the Commission assumed that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be comparable to the cost to create other existing NMS plans.866 Underlying the Commission's estimates were estimates of the amount of time the Commission believed would likely be spent by Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers. The Commission did not receive any comments on these specific cost estimates.

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ii. Revised Cost Estimates

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As noted above, the Commission based its original estimates of the cost to prepare and file the NMS plan on the costs incurred with existing NMS plans. The adopted Rule, however, has been modified from the proposed Rule in several significant ways that differentiate the costs to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to: (1) provide additional information and analysis while addressing the considerations that are set forth in Rule 613(a)(1);867 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,868 security and confidentiality,869 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;870 (3) address error rates;871 and (4) provide for the creation of an Advisory Committee.872

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(A) Revised Initial Costs to Create and File the NMS Plan

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In light of these modifications to the proposed Rule, the Commission no longer believes that the cost of developing and filing the NMS plan pursuant to the proposed Rule would be sufficiently comparable to the cost to create other existing NMS plans to use those costs as a basis for developing a cost estimate for the NMS plan required by Rule 613. Instead, as discussed in more detail below, the Commission is increasing its estimated costs for the development and filing of the NMS plan due to the increases in the hours that likely would be spent to create the NMS plan by the SROs.873 The Commission also is adjusting its preliminary cost estimate for the creation and filing of an NMS plan to reflect updated 2011 wage figures, as well as the registration of two additional SROs, since the preliminary estimates were developed.874 Specifically, the Commission now estimates that the aggregate one-time cost for creating and filing an NMS plan would be approximately $718,000 per SRO,875 or approximately $12.2 million in the aggregate,876 compared to an initial estimate of $234,000 per SRO, or approximately $3.5 million in the aggregate, to prepare and file an NMS plan.877

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The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;878 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that the Commission underestimated the time the SROs would spend on business analyses to be performed in designing the NMS plan based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.879 In response, as discussed below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney, and Compliance Manager hours.

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The Commission notes that the average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

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(i) Programmer Analyst

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The Commission is increasing its Programmer Analyst hour estimates from 220 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.i., the Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase substantially its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

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(ii) Business Analyst

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The Commission is increasing its Business Analyst hour estimates from 360 hours to 880 hours per SRO. As discussed in more detail below in Section IV.D.2.a.ii., the Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases," and overall, an amount of time that is comparable to the time that would likely be spent by Programmer Analysts because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, but have separate responsibilities as well.

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(iii) Attorney

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The Commission is increasing its estimates for the hours an Attorney would likely spend to prepare and file an NMS plan from 400 hours to 700 hours per SRO. As discussed in more detail in Section IV.D.2.a.iii. below, the Commission anticipates that an Attorney would spend substantially more time than previously estimated to draft the NMS plan.

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(iv) Compliance Manager

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The Commission is increasing its Compliance Manager hour estimate from 100 hours to 300 hours per SRO. As discussed in more detail below in Section IV.D.2.a.iv., the Commission anticipates that a Compliance Manager would spend substantially more time than previously estimated to draft the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
4. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, NMS Plan Process, Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation - Compliance User: Broker-dealers - Keywords: - Effective Analysis, - Competition, - Promotion, - NMS Plan, - -

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition. Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.

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The Commission has focused its economic analysis in this Release on the requirement that the SROs develop an NMS plan, rather than on the actual creation, implementation, and maintenance of a consolidated audit trail itself, and is deferring its economic analysis of the actual creation, implementation, and maintenance of a consolidated audit trail itself until such time as it may approve the NMS plan submitted to the Commission for its consideration. The Commission's consideration of the Rule's impact on efficiency, competition, and capital formation is consistent with this approach. Because the Rule focuses only on the process and the requirement of the development of an NMS plan, the Commission believes that the adopted Rule will have minimal, if any, impact on efficiency, competition, and capital formation.

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The Commission regards the adopted Rule as only a step in the multi-step process of developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail and the Commission recognizes that the creation, implementation, and maintenance of a consolidated audit trail itself could potentially have effects on efficiency, competition, and capital formation. Therefore, Rule 613(a)(5) specifically provides that the Commission will consider the impact of the NMS plan submitted to the Commission for its consideration on efficiency, competition, and capital formation in determining whether to approve the plan or any amendment thereto. A complete consideration of the impact of the NMS plan, or any amendment thereto, on efficiency, competition, and capital formation, however, requires information that will not be known until the SROs submit their NMS plan or any amendment thereto. Accordingly, the Commission is deferring this analysis until such time as it may approve the NMS plan, or any amendment thereto, submitted by the SROs. To facilitate the consideration of such possible impacts, the Rule requires SROs to provide their own analysis of the plan's potential impact on efficiency, competition, and capital formation.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

D. Implementation of Rule 613 after Approval of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Discussion, Implementation of Rule 613 after Approval of the NMS Plan - Compliance User: Broker-dealers - Keywords: - Rule 613, - Implementation, - -

Proposed Rule 613(a)(3) sets forth a timetable for the implementation of the consolidated audit trail once the Commission has approved an NMS plan. The Commission proposed that the data collection and submission requirements would have applied first to the national securities exchanges and FINRA, and then to their individual members.880 Specifically, proposed Rule 613(a)(3)(iii) would have required the plan sponsors to provide to the central repository the data to be required by the Rule within one year after effectiveness of the NMS plan. Members of the exchanges and FINRA would have been required to begin providing to the central repository the data required by the proposed Rule two years after the effectiveness of the NMS plan.881 This phased approach was intended to allow members additional time to implement the systems changes necessary to begin providing the information to the central repository, including developing procedures to capture any new information required, such as the unique customer and order identifiers.

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Additionally, proposed Rule 613(g)(1) would have required each SRO to file a proposed rule change with the Commission on or before 120 days from approval of Rule 613 to require its members to comply with Rule 613. Further, proposed Rule 613(i) would have required the plan sponsors to jointly provide to the Commission, within two months after effectiveness of the NMS plan, a document outlining how the plan sponsors would propose to incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in NMS stocks, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that would be required to be provided, which market participants would be required to provide the data, an implementation timeline, and a cost estimate.

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Although one commenter agreed that the consolidated audit trail could be implemented according to the timeline originally proposed,882 and another urged the Commission to expedite implementation of Rule 613,883 several commenters stated that more time would be necessary to develop and implement the NMS plan.884 Many commenters suggested extended timelines for various aspects of the consolidated audit trail.885 Two commenters, however, argued that the timetable for implementation should be shortened,886 and one of the commenters suggested that the Commission use existing infrastructure, naming OATS as an example, as the basis of the audit trail to save implementation time.887 Another commenter requested that the Commission move the deadline for submission of the joint document from the SROs outlining a proposal of how an expansion could occur from two months, as proposed, to one year after approval of the NMS plan, to allow time to choose a technology provider and build the infrastructure of the system, stating that "[i]t would be far better to develop the design for the initial products and leverage this knowledge to later phases."888

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The Commission also received two comment letters recommending that the Rule contain an exemption to accommodate the business model of small broker-dealers.889

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After considering the comments regarding the proposed timeline for implementation of the Rule, the Commission is adopting Rule 613 with changes to the proposed Rule. First, the Commission is adopting a deadline of 60 days from effectiveness of the NMS plan (rather than 120 days from approval of the Rule, as originally proposed) by when each SRO must file with the Commission proposed rule changes to require its members to comply with the requirements of the Rule and the adopted NMS plan,890 so that SROs can sequence their efforts by acting first on developing the NMS plan to be submitted to the Commission for its consideration, and then on proposed rules requiring compliance by their members. Second, in response to the commenter that advocated extending the deadline for the plan sponsors for submission of the joint document outlining how an expansion could occur from two months, as proposed, to one year after effectiveness of the approved NMS plan, the Commission is modifying the proposed Rule so that the document will be due to the Commission within six months (rather than two months as proposed) after the approval of the NMS plan. The Commission believes that this additional four months will provide the time necessary after the submission of the NMS plan to the Commission for the SROs to plan how to expand the consolidated audit trail to capture orders and trading in these additional securities.891

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The Commission has considered the comment letters that requested an exemption from the proposed Rule for small broker-dealers,892 but, as discussed above,893 does not believe that it is appropriate to completely exempt smaller broker-dealers from the requirements of the consolidated audit trail. While the Commission does not believe that it is appropriate to completely exempt smaller broker-dealers from the Rule, the Commission, in response to commenters' concerns regarding the potential difficulties for small broker-dealers, is modifying the time by when the NMS plan may require small broker-dealers to comply with Rule 613. The Commission is permitting the SROs in the NMS plan to allow small broker-dealers up to three years after effectiveness, rather than two years as proposed, to begin reporting data to the central repository in recognition that some of these firms may still be handling orders manually and thus will need additional time to upgrade to an electronic method.894 Additionally, because many of these broker-dealers may have limited resources, the Commission encourages plan sponsors to propose in the NMS plan a requirement that small broker-dealers report data to the central repository within three years after effectiveness of the NMS plan, as the Commission believes that providing small broker-dealers a longer implementation time should assist such broker-dealers in identifying the most cost-effective and the most efficient manner in which to procure third-party software or make any systems modifications or other changes to comply with Rule 613.

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Rule 613(a)(3)(vi) uses the definition of "small broker-dealer" contained in Exchange Act Rule 0-10: "Small entities under the Securities Exchange Act for purposes of the Regulatory Flexibility Act."895 Rule 0-10(c) defines a "small broker-dealer" as a broker or dealer that: (1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 240.17a5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in this section.896 The Commission believes that applying this definition is appropriate because it is an existing regulatory standard that is an indication of small entities for which regulators should be sensitive when imposing regulatory burdens.

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The Commission notes that not all of the timeframes for implementation are being revised.897 As discussed in Section III.B.1.f., above, the Commission has learned through the comment process that technology exists today to "normalize" information collected for the consolidated audit trail into a uniform electronic format, which will allow the required data to be captured and reported to the central repository more readily than the Commission originally anticipated. Accordingly, the Commission believes the remaining proposed implementation timeframes are reasonable and is adopting them as proposed.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

IV. Paperwork Reduction Act

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act - Compliance User: Broker-dealers - Keywords: - Information, - NMS Plan, - -

Certain provisions of the Rule contain "collection of information requirements" within the meaning of the PRA. The Commission published notice requesting comment on the collection of information requirements in the Proposing Release and submitted the proposed collection to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The control number for Rule 613 is OMB Control No. 3235-0671 and the title of the new collection of information is "Creation of a Consolidated Audit Trail Pursuant to Section 11A of the Securities Exchange Act of 1934 and Rules thereunder."

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This Release includes the Commission's estimates of the costs to create and file the NMS plan.898 As noted above, the Commission is deferring its economic analysis of the consolidated audit trail (other than with respect to the NMS plan) until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.899 Similarly, the Commission is discussing below its estimates of the burden hours associated with the development and filing of the NMS plan but is deferring its discussion of the much more significant burden hours associated with the other paperwork requirements of the consolidated audit trail. The Commission also is deferring its discussion of the ongoing burden hours associated with the NMS plan because such ongoing burdens would only be incurred if the Commission approves the NMS plan. Instead, the Commission will defer these discussions until after the NMS plan, including the detailed information and analysis, has been submitted by the SROs and there has been an opportunity for public comment.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

A. Summary of Collection of Information under Rule 613

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Summary of Collection of Information under Rule 613 - Compliance User: Broker-dealers - Keywords: - Filing of NMS Plan, - SRO, - Paperwork, - -

Rule 613 requires the SROs to develop and file an NMS plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository for the collection of information for NMS securities.900 The NMS plan must require each SRO and its respective members to provide certain data to the central repository in compliance with Rule 613.901 The NMS plan also must include a discussion of specified considerations,902 and certain provisions related to administration and operation of the plan903 and the operation of the central repository.904 Further, the NMS plan is required to include certain provisions related to compliance by the SROs and their members with the requirements of the Rule and the NMS plan.905

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The Commission believes that requiring an NMS plan imposes a paperwork burden on the SROs associated with preparing and filing the joint NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

B. Use of Information

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Use of Information - Compliance User: Broker-dealers - Keywords: - Consolidated Audit trail, - Commission, - NMS Plan, - -

The information contained in the NMS plan submitted to the Commission for its consideration will provide the Commission and the public with detailed information regarding how the consolidated audit trail will be created, implemented, and maintained in order for the Commission and the public to be able to carefully consider all aspects of the NMS plan. Further, the information contained in the NMS plan should facilitate an analysis of how well the NMS plan will allow regulators to effectively and efficiently carry out their responsibilities.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

C. Respondents

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Respondents - Compliance User: Broker-dealers - Keywords: - Securities association, - -

Rule 613 applies to the 16 national securities exchanges and to one national securities association (FINRA) currently registered with the Commission.906

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pubdate: July 18, 2012 effdate: October 01, 2012 -

D. Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan - Compliance User: Broker-dealers - Keywords: - Estimated Hours, - -
pubdate: July 18, 2012 effdate: October 01, 2012 -
1. Preliminary Burden Hour Estimates from Proposing Release
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Preliminary Burden Hour Estimates from Proposing Release - Compliance User: Broker-dealers - Keywords: - Estimated Hours, - -

In the Proposing Release, the Commission estimated that each SRO, on average, would spend approximately 840 hours of legal, compliance, information technology, and business operations time to prepare and file the NMS plan. All together the SROs would spend an estimated 12,600 hours.907 The Commission's 840 hour estimate included internal personnel time and external legal costs - 400 Attorney hours, 100 Compliance Manager hours, 220 Programmer Analyst hours, and 120 Business Analyst hours. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal time to develop and draft the NMS plan, at an average hourly rate of $400, for a total external cost of $20,000 per SRO.908 All together, the SROs would spend an estimated $300,000 in external costs.909

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In making these estimates, the Commission assumed that the burden hours necessary for preparing and filing the NMS plan pursuant to the proposed Rule would be comparable to the burden hours needed to create other existing NMS plans.910 The Commission's estimates included anticipated work hours for Programmer Analysts, Business Analysts, Attorneys and Compliance Managers. The Commission did not receive comments on any of these burden estimates.

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pubdate: July 18, 2012 effdate: October 01, 2012 -
2. Revised Burden Hour Estimates
- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Total Annual Reporting and Recordkeeping Burden for the Creation and Filing of the NMS Plan, Revised Burden Hour Estimates - Compliance User: Broker-dealers - Keywords: - Estimated Hours, - Revised Initial, - Filing NMS Plan, - Programmer Analyst, - Business Analyst, - Attorney, - Compliance Manager, - -

As noted above, the Commission based its original estimates of SRO burden hours to prepare and file the NMS plan on the burden hours spent for existing NMS plans. The Commission, however, has modified the proposed Rule in several significant ways that differentiate the burden hours to prepare the NMS plan from all other existing NMS plans. These modifications require the SROs to expand the NMS plan in the following four ways: (1) provide additional information and analysis to address the considerations that are set forth in Rule 613(a)(1);911 (2) include additional provisions that were not required by the proposed Rule relating to enforcement mechanisms,912 security and confidentiality,913 and the preparation of a document every two years that contains a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance;914 (3) address error rates;915 and (4) provide for the creation of an Advisory Committee.916

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a. Revised Initial Burden Hours Needed to Prepare and File the NMS Plan

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In light of these modifications to the proposed Rule, the Commission is increasing substantially its estimated burden hours needed for the development and filing of the NMS plan. The Commission also is adjusting its preliminary burden hour estimates for the preparation and filing of an NMS plan to reflect the registration of two additional SROs after it issued the preliminary estimates.917 The Commission now estimates that the aggregate one-time burden hour amount for preparing and filing an NMS plan would be approximately 2,760 burden hours with $20,000 in external costs per SRO,918 or approximately 46,920 burden hours and $340,000 in external costs in the aggregate,919 compared to an initial estimate of 840 burden hours per SRO with $20,000 in external costs, or approximately 12,600 burden hours in the aggregate and $300,000 in external costs, to prepare and file an NMS plan.920

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The Commission believes that these revised estimates, which include internal SRO personnel time and external legal costs, are appropriate based on the Commission's analysis, set forth below, of the impact of the modifications to the proposed Rule on each of the job categories underlying the estimates. The Commission believes that the modifications to the proposed Rule will require SRO Programmer Analysts, Business Analysts, Attorneys, and Compliance Managers to expend additional time to address the requirements of the Rule. As discussed in more detail below, the Commission anticipates that the SROs will spend additional time on many activities, including: (1) research; (2) discussions with members, committees and with industry associations; (3) vendor negotiations; (4) making decisions regarding the various options and increased flexibility provided by the adopted Rule;921 (5) reviewing alternative NMS plans; (6) choosing between alternative plans and negotiating to reach a consensus on a single NMS plan; (7) providing a detailed estimate of the costs associated with that NMS plan; and (8) drafting the NMS plan. The Commission also believes that these increased estimates are appropriate in light of the comments, including the comment that asserted that the Commission underestimated the time the SROs would spend on the business analyses to be performed in designing the NMS plan, based on the experience of broker-dealers, vendors and SROs when OATS was expanded to all NMS stocks.922 In response, as discussed in more detail below, the Commission is increasing its estimated Programmer Analyst, Business Analyst, Attorney and Compliance Manager hours.

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The Commission notes that these revised average hourly and cost estimates per SRO for creating and filing the NMS plan likely overestimated the costs for some of SROs and underestimated the costs for other SROs. The Commission also believes that certain SROs, particularly those SROs under the same holding company, may decide to collaborate and realize some cost savings on a per SRO basis. On balance, however, the Commission believes that, these revised hours and cost estimates are reasonable on average even if they may not be precise for any specific SRO.

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(i) Programmer Analyst

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The Commission is increasing its estimates for the hours a Programmer Analyst would likely spend with respect to the preparation and filing of the NMS plan from 220 hours, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Programmer Analyst would need to spend substantially more time to address the considerations included in the Rule and the "use cases." Specifically, the SROs will need to rely on Programmer Analysts to help address many of the considerations, as many of those are of a technical nature. For example, several of the considerations relate to the specific features and details of the NMS plan. Programmer Analysts likely will be consulted when the SROs are considering the specific features and details of the NMS plan. The Programmer Analysts likely will provide guidance and information regarding whether a particular feature or detail is technologically possible. The SROs also likely will consult Programmer Analysts when drafting the additional provisions required by the Rule. For example, in drafting the security and confidentiality provisions, Programmer Analysts, who may have knowledge about the information security practices and issues, may be consulted to provide input on a draft provisions in light of technologies with respect to security and confidentiality. Programmer Analysts also may be consulted with respect to addressing errors rates because such analysts may have a technical understanding of trading and reporting systems and be able to provide recommendations on how errors that are introduced can be addressed. In each of these instances, Programmer Analysts may be involved in the NMS plan research, any industry discussions, negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Programmer Analysts in the creation and filing of the NMS plan.

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(ii) Business Analyst

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The Commission is increasing its estimates for the hours a Business Analyst would likely spend with respect to the preparation and filing of an NMS plan from 360 hours per SRO, as originally estimated, to 880 hours per SRO. The Commission anticipates that a Business Analyst would spend substantially more time to address the considerations and the "use cases." Overall, the Commission anticipates that this amount of additional time will be comparable to the additional time that would likely be spent by Programmer Analysts for the same reasons because Business Analysts will likely be involved in many of the same tasks as Programmer Analysts, albeit with separate responsibilities. The SROs will need to rely on Business Analysts to help address many technical considerations that have relevance to the business and operations of SROs. The Commission also believes that the SROs will need to rely on Business Analysts to work with the Programmer Analysts and the Compliance Managers to analyze the business impact of particular features and details of the NMS plan. Because Rule 613 is less prescriptive than the proposed Rule, Business Analysts may have a larger role in helping to determine which option the NMS plan will propose. Business Analysts also will likely be involved in determining the cost estimates and in analyzing the NMS plan's impact on efficiency, competition, and capital formation. The SROs also likely will consult with Business Analysts when drafting the responses to the considerations and the "use cases," as well as the additional provisions required by the Rule. For example, the SROs likely will consult with Business Analysts on the feasibility, benefits, and costs of any technological upgrades that may be required in order to provide the allocation information described in Rule 613(a)(1)(vi). Further, in drafting the security and confidentiality provisions, Business Analysts may have knowledge about the costs and the business risks of certain security and confidentiality decisions. Business Analysts also may be consulted with respect to addressing error rates because any decisions made may impact business operations and the cost estimates. Further, Business Analysts may likely be consulted by Attorneys with respect to the performance assessment and improvement plan. In each of these instances, Business Analysts may be involved in the NMS plan research, any industry discussions (particularly with members and other SROs), negotiations with vendors and SROs, and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Business Analysts in the creation and filing of the NMS plan.

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(iii) Attorney

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The Commission is increasing its Attorney hour estimates from 400 hours to 700 hours per SRO. The Commission now anticipates that an Attorney would spend substantially more time than the Commission had previously estimated to draft the NMS plan. The NMS plan that Attorneys would draft must now include a discussion of the considerations and the additional provisions required by the Rule, and must reflect additional consultations with Programmer Analysts, Business Analysts and Compliance Managers. Further, the NMS plan drafted also would likely reflect additional consultation on the "use cases." The NMS plan proposal would also likely require Attorney work on the Advisory Committee requirement and on the NMS plan policies and procedures to be used by the plan processor923 to ensure the security and confidentiality and accuracy of the information submitted to the central repository.924 Attorney work would also be required on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. The Commission believes that an Attorney would also be involved in the NMS plan research, any industry discussions, negotiations with vendors, negotiations with SROs (in particular, to reach consensus on an NMS plan), and in developing cost estimates for the consolidated audit trail. Thus, for these reasons, the Commission believes it appropriate to increase its estimate of the number of hours expended by Attorneys in the creation and filing of the NMS plan.

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(iv) Compliance Manager

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The Commission is increasing its Compliance Manager hour estimates from 100 hours to 300 hours per SRO. The Commission now anticipates that a Compliance Manager would spend substantially more time than the Commission had previously estimated to draft the NMS plan. Compliance Managers likely will help shape provisions of the NMS plan that deal with monitoring member and SRO compliance with the NMS plan's requirements. Compliance Managers likely will also be involved in the Advisory Committee requirement. They likely will also work on NMS plan policies and procedures to be used by the plan processor to ensure the security and confidentiality and accuracy of the information submitted to the central repository, and to ensure that these policies and procedures are feasible for SRO compliance and for member compliance.925 They will likely also work on the mechanism to enforce compliance by plan sponsors with the NMS plan, as required by Rule 613(h)(3), including penalty provisions, if the plan sponsors deem appropriate. Further, Compliance Managers will also work on NMS plan provisions that address error rates and performance assessment and improvement. The Commission believes that Compliance Managers may also be involved in the NMS plan research and industry discussions (particularly with regard to SRO and member compliance issues). Thus, for these reasons, the Commission believes it is appropriate to increase its estimate of the number of hours expended by Compliance Managers in the creation and filing of the NMS plan.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

E Collection of Information is Mandatory

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Collection of Information is Mandatory - Compliance User: Broker-dealers - Keywords: - Collection, - -

The collection of information discussed above is a mandatory collection of information.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

F. Confidentiality

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Confidentiality - Compliance User: Broker-dealers - Keywords: - Policies, - Reporting, - Central Repository, - -

The Rule requires that the data to be recorded and reported to the central repository will only be available to the SROs and the Commission for the purpose of performing their respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations.926 Further, the NMS plan submitted to the Commission for its consideration pursuant to the adopted Rule is required to include policies and procedures to ensure the security and confidentiality of all information submitted to the central repository, and to ensure that all plan sponsors and their employees, as well as all employees of the central repository, use appropriate safeguards to ensure the confidentiality of such data and shall agree not to use such data for any purpose other than surveillance and regulatory purposes.927

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pubdate: July 18, 2012 effdate: October 01, 2012 -

G. Retention Period of Recordkeeping Requirements

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Paperwork Reduction Act, Retention Period of Recordkeeping Requirements - Compliance User: Broker-dealers - Keywords: - Rule 17a-1, - Retention, - -

The SROs are required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.928 Members are required to retain records and information in accordance with Rule 17a-4 under the Exchange Act.929

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pubdate: July 18, 2012 effdate: October 01, 2012 -

V. Regulatory Flexibility Act Certification

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Regulatory Flexibility Act Certification - Compliance User: Broker-dealers - Keywords: - Administrative Procedure Act, - RFA, - Rule 605(b), - FINRA, - NMS Plan, - -

The Regulatory Flexibility Act ("RFA")930 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative Procedure Act, as amended by RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on "small entities."931 Rule 605(b) of the RFA states that this requirement shall not apply to any proposed rule or proposed rule amendment, which if adopted, would not "have a significant economic impact on a substantial number of small entities."932

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In the Proposing Release, the Commission requested comment on whether proposed Rule 613 would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities.933 The Commission also requested that commenters provide empirical data to support the extent of such impact.934 The Commission received two comments on the general anticipated effect of the proposed Rule on small-broker dealers; FINRA and a small broker-dealer that solely handles orders manually requested that an exemption from the proposed Rule be adopted to accommodate the business model of small broker-dealers.935 In response to the commenters, the Commission amended the Rule as proposed to provide additional time for small broker-dealers to comply with the reporting requirements of Rule 613.936 The Commission notes that none of the comment letters received specifically responded to the Commission's initial regulatory flexibility analysis.

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As proposed and as adopted, Rule 613 requires the SROs to file an NMS plan to create, implement, and maintain the consolidated audit trail. In response to commenters and as discussed in this release, the Commission has modified the proposed Rule to provide the SROs with a range of options and greater flexibility for how they choose to meet the requirements of the Rule. As a result, the Commission will not know the specific requirements of the NMS plan until it is filed with the Commission, and cannot analyze how the NMS plan will impact small entities until then. At this time, there are no small entities "subject to the requirements" of Rule 613.937

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However, because Rule 613 requires that the national securities exchanges and national securities associations (i.e., FINRA) file an NMS plan with the Commission, for purposes of the RFA, the Commission is undertaking an analysis of how the NMS plan filing requirement will impact the exchanges and FINRA to ascertain whether the exchanges and FINRA are "small businesses." Paragraph (e) of Rule 0-10 provides that for the purposes of the RFA, an exchange is considered a "small business" if it has been exempted from the reporting requirements of Rule 601 of Regulation NMS,938 and is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0-10. Under this standard, none of the national securities exchanges subject to Rule 613 is a "small business" for purposes of the RFA. In addition, FINRA is not a small entity as defined in Rule 0-10.939 Therefore, the Commission believes that Rule 613, which requires that the SROs file an NMS plan with the Commission to create, implement, and maintain the consolidated audit trail, will not have a significant economic impact on a substantial number of small entities because this requirement will only apply to the existing national securities exchanges and national securities associations, which do not qualify as small entities pursuant to the RFA.

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For the foregoing reasons, the Commission hereby certifies that, pursuant to 5 U.S.C. 605(b), Rule 613 will not have a significant economic impact on a substantial number of small entities.

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pubdate: July 18, 2012 effdate: October 01, 2012 -

VI. Statutory Authority

- Topic: SEC Final Rule, Release No. 34-67457, Supplementary Information, Statutory Authority - Compliance User: Broker-dealers - Keywords: - 17 CFR Part 242, - § 242.613, - Data Recording, - Data Reporting, - CAT-Order, - -

Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), the Commission is adopting Rule 613 of Regulation NMS, as set forth below.

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Text of Rule

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List of Subjects in 17 CFR Part 242

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Brokers, Reporting and recordkeeping requirements, Securities.

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In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows.

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PART 242 — REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

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1. The authority citation for part 242 continues to read as follows:

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Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.

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2. Add § 242.613 to read as follows:

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§ 242.613 Consolidated Audit Trail.

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(a) Creation of a National Market System Plan Governing a Consolidated Audit Trail.

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(1) Each national securities exchange and national securities association shall jointly file on or before 270 days from the date of publication of the Adopting Release in the Federal Register a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository as required by this section. The national market system plan shall discuss the following considerations:

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(i) The method(s) by which data will be reported to the central repository including, but not limited to, the sources of such data and the manner in which the central repository will receive, extract, transform, load, and retain such data; and the basis for selecting such method(s);

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(ii) The time and method by which the data in the central repository will be made available to regulators, in accordance with paragraph (e)(1) of this section, to perform surveillance or analyses, or for other purposes as part of their regulatory and oversight responsibilities;

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(iii) The reliability and accuracy of the data reported to and maintained by the central repository throughout its lifecycle, including transmission and receipt from market participants; data extraction, transformation and loading at the central repository; data maintenance and management at the central repository; and data access by regulators;

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(iv) The security and confidentiality of the information reported to the central repository;

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(v) The flexibility and scalability of the systems used by the central repository to collect, consolidate and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost-effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments;

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(vi) The feasibility, benefits, and costs of broker-dealers reporting to the consolidated audit trail in a timely manner:

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(A) The identity of all market participants (including broker-dealers and customers) that are allocated NMS securities, directly or indirectly, in a primary market transaction;

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(B) The number of such securities each such market participant is allocated; and

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(C) The identity of the broker-dealer making each such allocation;

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(vii) The detailed estimated costs for creating, implementing, and maintaining the consolidated audit trail as contemplated by the national market system plan, which estimated costs should specify:

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(A) An estimate of the costs to the plan sponsors for establishing and maintaining the central repository;

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(B) An estimate of the costs to members of the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan;

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(C) An estimate of the costs to the plan sponsors, initially and on an ongoing basis, for reporting the data required by the national market system plan; and

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(D) How the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors;

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(viii) An analysis of the impact on competition, efficiency and capital formation of creating, implementing, and maintaining of the national market system plan;

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(ix) A plan to eliminate existing rules and systems (or components thereof) that will be rendered duplicative by the consolidated audit trail, including identification of such rules and systems (or components thereof); to the extent that any existing rules or systems related to monitoring quotes, orders, and executions provide information that is not rendered duplicative by the consolidated audit trail, an analysis of:

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(A) Whether the collection of such information remains appropriate;

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(B) If still appropriate, whether such information should continue to be separately collected or should instead be incorporated into the consolidated audit trail; and

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(C) If no longer appropriate, how the collection of such information could be efficiently terminated; the steps the plan sponsors propose to take to seek Commission approval for the elimination of such rules and systems (or components thereof); and a timetable for such elimination, including a description of how the plan sponsors propose to phase in the consolidated audit trail and phase out such existing rules and systems (or components thereof);

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(x) Objective milestones to assess progress toward the implementation of the national market system plan;

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(xi) The process by which the plan sponsors solicited views of their members and other appropriate parties regarding the creation, implementation, and maintenance of the consolidated audit trail, a summary of the views of such members and other parties, and how the plan sponsors took such views into account in preparing the national market system plan; and

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(xii) Any reasonable alternative approaches to creating, implementing, and maintaining a consolidated audit trail that the plan sponsors considered in developing the national market system plan including, but not limited to, a description of any such alternative approach; the relative advantages and disadvantages of each such alternative, including an assessment of the alternative's costs and benefits; and the basis upon which the plan sponsors selected the approach reflected in the national market system plan.

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(2) The national market system plan, or any amendment thereto, filed pursuant to this section shall comply with the requirements in § 242.608(a), if applicable, and be filed with the Commission pursuant to § 242.608.

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(3) The national market system plan submitted pursuant to this section shall require each national securities exchange and national securities association to:

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(i) Within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor;

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(ii) Within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with paragraph (d) of this section;

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(iii) Within one year after effectiveness of the national market system plan provide to the central repository the data specified in paragraph (c) of this section;

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(iv) Within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by paragraph (f) of this section;

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(v) Within two years after effectiveness of the national market system plan require members of each such exchange and association, except those members that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter, to provide to the central repository the data specified in paragraph (c) of this section; and

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(vi) Within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0-10(c) of this chapter to provide to the central repository the data specified in paragraph (c) of this section.

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(4) Each national securities exchange and national securities association shall be a sponsor of the national market system plan submitted pursuant to this section and approved by the Commission.

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(5) No national market system plan filed pursuant to this section, or any amendment thereto, shall become effective unless approved by the Commission or otherwise permitted in accordance with the procedures set forth in § 242.608. In determining whether to approve the national market system plan, or any amendment thereto, and whether the national market system plan or any amendment thereto is in the public interest under § 242.608(b)(2), the Commission shall consider the impact of the national market system plan or amendment, as applicable, on efficiency, competition, and capital formation.

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(b) Operation and Administration of the National Market System Plan.

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(1) The national market system plan submitted pursuant to this section shall include a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor.

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(2) The national market system plan submitted pursuant to this section shall include a provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan.

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(3) The national market system plan submitted pursuant to this section shall include a provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan.

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(4) The national market system plan submitted pursuant to this section shall include a provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan.

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(5) The national market system plan submitted pursuant to this section shall require the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed.

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(6) The national market system plan submitted pursuant to this section shall include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. Such document shall include, at a minimum:

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(i) An evaluation of the performance of the consolidated audit trail including, at a minimum, with respect to data accuracy (consistent with paragraph (e)(6) of this section), timeliness of reporting, comprehensiveness of data elements, efficiency of regulatory access, system speed, system downtime, system security (consistent with paragraph (e)(4) of this section), and other performance metrics to be determined by the Chief Compliance Officer, along with a description of such metrics;

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(ii) A detailed plan, based on such evaluation, for any potential improvements to the performance of the consolidated audit trail with respect to any of the following: improving data accuracy; shortening reporting timeframes; expanding data elements; adding granularity and details regarding the scope and nature of Customer-IDs; expanding the scope of the national market system plan to include new instruments and new types of trading and order activities; improving the efficiency of regulatory access; increasing system speed; reducing system downtime; and improving performance under other metrics to be determined by the Chief Compliance Officer;

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(iii) An estimate of the costs associated with any such potential improvements to the performance of the consolidated audit trail, including an assessment of the potential impact on competition, efficiency, and capital formation; and

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(iv) An estimated implementation timeline for any such potential improvements, if applicable.

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(7) The national market system plan submitted pursuant to this section shall include an Advisory Committee which shall function in accordance with the provisions set forth in this paragraph (b)(7). The purpose of the Advisory Committee shall be to advise the plan sponsors on the implementation, operation, and administration of the central repository.

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(i) The national market system plan submitted pursuant to this section shall set forth the term and composition of the Advisory Committee, which composition shall include representatives of the member firms of the plan sponsors.

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(ii) Members of the Advisory Committee shall have the right to attend any meetings of the plan sponsors, to receive information concerning the operation of the central repository, and to provide their views to the plan sponsors; provided, however, that the plan sponsors may meet without the Advisory Committee members in executive session if, by affirmative vote of a majority of the plan sponsors, the plan sponsors determine that such an executive session is required.

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(c) Data Recording and Reporting.

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(1) The national market system plan submitted pursuant to this section shall provide for an accurate, time-sequenced record of orders beginning with the receipt or origination of an order by a member of a national securities exchange or national securities association, and further documenting the life of the order through the process of routing, modification, cancellation, and execution (in whole or in part) of the order.

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(2) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to report to the central repository the information required by paragraph (c)(7) of this section in a uniform electronic format, or in a manner that would allow the central repository to convert the data to a uniform electronic format, for consolidation and storage.

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(3) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and member to record the information required by paragraphs (c)(7)(i) through (v) of this section contemporaneously with the reportable event. The national market system plan shall require that information recorded pursuant to paragraphs (c)(7)(i) through (v) of this section must be reported to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day such information has been recorded by the national securities exchange, national securities association, or member. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(4) The national market system plan submitted pursuant to this section shall require each member of a national securities exchange or national securities association to record and report to the central repository the information required by paragraphs (c)(7)(vi) through (viii) of this section by 8: 00 a.m. Eastern Time on the trading day following the day the member receives such information. The national market system plan may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties.

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(5) The national market system plan submitted pursuant to this section shall require each national securities exchange and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security registered or listed for trading on such exchange or admitted to unlisted trading privileges on such exchange.

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(6) The national market system plan submitted pursuant to this section shall require each national securities association and its members to record and report to the central repository the information required by paragraph (c)(7) of this section for each NMS security for which transaction reports are required to be submitted to the association.

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(7) The national market system plan submitted pursuant to this section shall require each national securities exchange, national securities association, and any member of such exchange or association to record and electronically report to the central repository details for each order and each reportable event, including, but not limited to, the following information:

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(i) For original receipt or origination of an order:

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(A) Customer-ID(s) for each customer;

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(B) The CAT-Order-ID;

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(C) The CAT-Reporter-ID of the broker-dealer receiving or originating the order;

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(D) Date of order receipt or origination;

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(E) Time of order receipt or origination (using time stamps pursuant to paragraph (d)(3) of this section); and

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(F) Material terms of the order.

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(ii) For the routing of an order, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is routed;

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(C) Time at which the order is routed (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order;

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(E) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association to which the order is being routed;

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(F) If routed internally at the broker-dealer, the identity and nature of the department or desk to which an order is routed; and

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(G) Material terms of the order.

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(iii) For the receipt of an order that has been routed, the following information:

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(A) The CAT-Order-ID;

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(B) Date on which the order is received;

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(C) Time at which the order is received (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) The CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving the order;

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(E) The CAT-Reporter-ID of the broker-dealer or national securities exchange routing the order; and

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(F) Material terms of the order.

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(iv) If the order is modified or cancelled, the following information:

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(A) The CAT-Order-ID;

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(B) Date the modification or cancellation is received or originated;

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(C) Time the modification or cancellation is received or originated (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Price and remaining size of the order, if modified;

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(E) Other changes in material terms of the order, if modified; and

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(F) The CAT-Reporter-ID of the broker-dealer or Customer-ID of the person giving the modification or cancellation instruction.

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(v) If the order is executed, in whole or part, the following information:

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(A) The CAT-Order-ID;

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(B) Date of execution;

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(C) Time of execution (using time stamps pursuant to paragraph (d)(3) of this section);

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(D) Execution capacity (principal, agency, riskless principal);

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(E) Execution price and size;

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(F) The CAT-Reporter-ID of the national securities exchange or broker-dealer executing the order; and

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(G) Whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information.

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(vi) If the order is executed, in whole or part, the following information:

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(A) The account number for any subaccounts to which the execution is allocated (in whole or part);

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(B) The CAT-Reporter-ID of the clearing broker or prime broker, if applicable; and

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(C) The CAT-Order-ID of any contra-side order(s).

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(vii) If the trade is cancelled, a cancelled trade indicator.

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(viii) For original receipt or origination of an order, the following information:

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(A) Information of sufficient detail to identify the customer; and

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(B) Customer account information.

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(8) All plan sponsors and their members shall use the same Customer-ID and CAT-Reporter-ID for each customer and broker-dealer.

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(d) Clock Synchronization and Time Stamps. The national market system plan submitted pursuant to this section shall require:

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(1) Each national securities exchange, national securities association, and member of such exchange or association to synchronize its business clocks that are used for the purposes of recording the date and time of any reportable event that must be reported pursuant to this section to the time maintained by the National Institute of Standards and Technology, consistent with industry standards;

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(2) Each national securities exchange and national securities association to evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards; and

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(3) Each national securities exchange, national securities association, and member of such exchange or association to utilize the time stamps required by paragraph (c)(7) of this section, with at minimum the granularity set forth in the national market system plan submitted pursuant to this section, which shall reflect current industry standards and be at least to the millisecond. To the extent that the relevant order handling and execution systems of any national securities exchange, national securities association, or member of such exchange or association utilize time stamps in increments finer than the minimum required by the national market system plan, the plan shall require such national securities exchange, national securities association, or member to utilize time stamps in such finer increments when providing data to the central repository, so that all reportable events reported to the central repository by any national securities exchange, national securities association, or member can be accurately sequenced. The national market system plan shall require the sponsors of the national market system plan to annually evaluate whether industry standards have evolved such that the required time stamp standard should be in finer increments.

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(e) Central Repository.

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(1) The national market system plan submitted pursuant to this section shall provide for the creation and maintenance of a central repository. Such central repository shall be responsible for the receipt, consolidation, and retention of all information reported pursuant to paragraph (c)(7) of this section. The central repository shall store and make available to regulators data in a uniform electronic format, and in a form in which all events pertaining to the same originating order are linked together in a manner that ensures timely and accurate retrieval of the information required by paragraph (c)(7) of this section for all reportable events for that order.

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(2) Each national securities exchange, national securities association, and the Commission shall have access to the central repository, including all systems operated by the central repository, and access to and use of the data reported to and consolidated by the central repository under paragraph (c) of this section, for the purpose of performing its respective regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations. The national market system plan submitted pursuant to this section shall provide that such access to and use of such data by each national securities exchange, national securities association, and the Commission for the purpose of performing its regulatory and oversight responsibilities pursuant to the federal securities laws, rules, and regulations shall not be limited.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring the creation and maintenance by the plan processor of a method of access to the consolidated data stored in the central repository that includes the ability to run searches and generate reports.

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(4) The national market system plan submitted pursuant to this section shall include policies and procedures, including standards, to be used by the plan processor to:

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(i) Ensure the security and confidentiality of all information reported to the central repository by requiring that:

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(A) All plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and agree not to use such data for any purpose other than surveillance and regulatory purposes, provided that nothing in this paragraph (A) shall be construed to prevent a plan sponsor from using the data that it reports to the central repository for regulatory, surveillance, commercial, or other purposes as otherwise permitted by applicable law, rule, or regulation;

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(B) Each plan sponsor adopt and enforce rules that:

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(1) Require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository; and

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(2) Permit only persons designated by plan sponsors to have access to the data in the central repository;

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(C) The plan processor:

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(1) Develop and maintain a comprehensive information security program for the central repository, with dedicated staff, that is subject to regular reviews by the Chief Compliance Officer;

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(2) Have a mechanism to confirm the identity of all persons permitted to access the data; and

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(3) Maintain a record of all instances where such persons access the data; and

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(D) The plan sponsors adopt penalties for non-compliance with any policies and procedures of the plan sponsors or central repository with respect to information security.

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(ii) Ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository pursuant to paragraph (c) of this section; and

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(iii) Ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository pursuant to paragraph (c) of this section.

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(5) The national market system plan submitted pursuant to this section shall address whether there will be an annual independent evaluation of the security of the central repository and:

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(i) If so, provide a description of the scope of such planned evaluation; and

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(ii) If not, provide a detailed explanation of the alternative measures for evaluating the security of the central repository that are planned instead.

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(6) The national market system plan submitted pursuant to this section shall:

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(i) Specify a maximum error rate to be tolerated by the central repository for any data reported pursuant to paragraphs (c)(3) and (c)(4) of this section; describe the basis for selecting such maximum error rate; explain how the plan sponsors will seek to reduce such maximum error rate over time; describe how the plan will seek to ensure compliance with such maximum error rate and, in the event of noncompliance, will promptly remedy the causes thereof;

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(ii) Require the central repository to measure the error rate each business day and promptly take appropriate remedial action, at a minimum, if the error rate exceeds the maximum error rate specified in the plan;

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(iii) Specify a process for identifying and correcting errors in the data reported to the central repository pursuant to paragraphs (c)(3) and (c)(4) of this section, including the process for notifying the national securities exchanges, national securities association, and members who reported erroneous data to the central repository of such errors, to help ensure that such errors are promptly corrected by the reporting entity, and for disciplining those who repeatedly report erroneous data; and

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(iv) Specify the time by which data that has been corrected will be made available to regulators.

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(7) The national market system plan submitted pursuant to this section shall require the central repository to collect and retain on a current and continuing basis and in a format compatible with the information consolidated and stored pursuant to paragraph (c)(7) of this section:

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(i) Information, including the size and quote condition, on the national best bid and national best offer for each NMS security;

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(ii) Transaction reports reported pursuant to an effective transaction reporting plan filed with the Commission pursuant to, and meeting the requirements of, § 242.601; and

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(iii) Last sale reports reported pursuant to the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, § 242.608.

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(8) The national market system plan submitted pursuant to this section shall require the central repository to retain the information collected pursuant to paragraphs (c)(7) and (e)(7) of this section in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years.

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(f) Surveillance. Every national securities exchange and national securities association subject to this section shall develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the consolidated audit trail.

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(g) Compliance by Members.

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(1) Each national securities exchange and national securities association shall file with the Commission pursuant to section 19(b)(2) of the Act> (15 U.S.C. 78s(b)(2)) and § 240.19b-4 of this chapter on or before 60 days from approval of the national market system plan a proposed rule change to require its members to comply with the requirements of this section and the national market system plan approved by the Commission.

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(2) Each member of a national securities exchange or national securities association shall comply with all the provisions of any approved national market system plan applicable to members.

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(3) The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to agree to enforce compliance by its members with the provisions of any approved plan.

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(4) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance with the requirements of any approved plan by the members of a national securities exchange or national securities association.

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(h) Compliance by National Securities Exchanges and National Securities Associations.

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(1) Each national securities exchange and national securities association shall comply with the provisions of the national market system plan approved by the Commission.

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(2) Any failure by a national securities exchange or national securities association to comply with the provisions of the national market system plan approved by the Commission shall be considered a violation of this section.

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(3) The national market system plan submitted pursuant to this section shall include a mechanism to ensure compliance by the sponsors of the plan with the requirements of any approved plan. Such enforcement mechanism may include penalties where appropriate.

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(i) Other Securities and Other Types of Transactions. The national market system plan submitted pursuant to this section shall include a provision requiring each national securities exchange and national securities association to jointly provide to the Commission within six months after effectiveness of the national market system plan a document outlining how such exchanges and associations could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

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(j) Definitions.

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(1) The term CAT-Order-ID shall mean a unique order identifier or series of unique order identifiers that allows the central repository to efficiently and accurately link all reportable events for an order, and all orders that result from the aggregation or disaggregation of such order.

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(2) The term CAT-Reporter-ID shall mean, with respect to each national securities exchange, national securities association, and member of a national securities exchange or national securities association, a code that uniquely and consistently identifies such person for purposes of providing data to the central repository.

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(3) The term customer shall mean:

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(i) The account holder(s) of the account at a registered broker-dealer originating the order; and

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(ii) Any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

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(4) The term customer account information shall include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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(5) The term Customer-ID shall mean, with respect to a customer, a code that uniquely and consistently identifies such customer for purposes of providing data to the central repository.

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(6) The term error rate shall mean the percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market.

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(7) The term material terms of the order shall include, but not be limited to, the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, short exempt; open/close indicator; time in force (if applicable); if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions.

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(8) The term order shall include:

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(i) Any order received by a member of a national securities exchange or national securities association from any person;

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(ii) Any order originated by a member of a national securities exchange or national securities association; or

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(iii) Any bid or offer.

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(9) The term reportable event shall include, but not be limited to, the original receipt or origination, modification, cancellation, routing, and execution (in whole or in part) of an order, and receipt of a routed order.

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By the Commission.

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Elizabeth M. Murphy

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Secretary

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Dated: July 18, 2012

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Exhibit A

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Key to Comment Letters Cited in Adopting Release Proposal to Implement Consolidated Audit Trail (File No. S7-11-10)

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1. Letter from Rep. Melissa L. Bean, U.S. Congress, to Mary Schapiro, Chairman, Commission, dated May 20, 2010 ("Bean Letter").

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2. Letter from Norris W. Beach to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Beach Letter").

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3. Letter from Steven Vannelli to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Vannelli Letter").

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4. Letter from Simhan Mandyam, Managing Partner, Triage Life Sciences LLC, to Elizabeth M. Murphy, Secretary, Commission, dated May 26, 2010 ("Triage Letter").

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5. Letter from Paul Drescher, Registered Principal, Foothill Securities, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated May 28, 2010 ("Foothill Letter").

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6. Letter from Chandler Green to Elizabeth M. Murphy, Secretary, Commission, dated June 1, 2010 ("Green Letter").

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7. Letter from Dan T. Nguyen, Wealth Management Company, to Elizabeth M. Murphy, Secretary, Commission, dated June 5, 2010 ("Wealth Management Letter").

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8. Letter from Nicos Anastaspoulos to Elizabeth M. Murphy, Secretary, Commission, dated June 6, 2010 ("Anastaspoulos Letter").

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9. Letter from Ning Wen, Sales Director, Know More Software, Inc., to Heather Seidel, Division of Trading and Markets, Assistant Director, Commission, dated June 9, 2010 ("Know More Letter").

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10. Letter from John McCrary to Elizabeth M. Murphy, Secretary, Commission, dated June 11, 2010 ("McCrary Letter").

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11. Letter from Howard Meyerson, General Counsel, and Vlad Khandros, Market Structure and Public Policy Analyst, Liquidnet, to Elizabeth M. Murphy, Secretary, Commission, dated July 19, 2010 ("Liquidnet Letter").

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12. Letters from Justin S. Magruder, President, Noetic Partners, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated July 22, 2010 and August 3, 2010 ("Noetic Partners Letter I" and "Noetic Partners Letter II).

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13. Letter from Martin Koopman, Director, Aditat, to Elizabeth M. Murphy, Secretary, Commission, dated July 28, 2010 ("Aditat Letter").

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14. Letter from Courtney Doyle McGuinn, FPL Operations Director, FIX Protocol Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("FIX Letter").

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15. Letter from Senator Edward E. Kaufman, U.S. Senate, to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kaufman Letter").

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16. Letter from Mahesh Kumaraguru to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Kumaraguru Letter").

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17. Letter from R. T. Leuchtkafer to Elizabeth M. Murphy, Secretary, Commission, dated August 5, 2010 ("Leuchtkafer Letter").

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18. Letter from Horst Simon, Associate Laboratory Director for Computing Sciences and Division Director, Computational Research Department, and David Leinweber, Director, LBNL Center for Innovative Financial Technology Computing Sciences, Lawrence Berkeley National Laboratory, to Elizabeth M. Murphy, Secretary, Commission, dated August 8, 2010 ("Berkeley Letter").

-

19. Letter from Peter A. Bloniarz, Dean, College of Computing & Information, University of Albany, George Berg, Associate Professor and Chair, Department of Computer Science, University of Albany, Sandor P. Schuman, Affiliated Faculty, Department of Informatics, University of Albany, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Albany Letter").

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20. Letter from Christopher Nagy, Managing Director Order Strategy, Co-Head Government Relations, and John Markle, Deputy General Counsel, Co-Head Government Relations, TD AMERITRADE, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Ameritrade Letter").

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21. Letter from James J. Angel, Associate Professor of Finance, Georgetown University, Commission, dated August 9, 2010 ("Angel Letter").

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22. Letter from Eric J. Swanson, Senior Vice President and General Counsel, BATS Exchange, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BATS Letter").

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23. Letter from Anthony D. McCormick, Chief Executive Officer, Boston Options Exchange Group, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("BOX Letter").

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24. Letter from Charlie J. Marchesani, President Broadridge Financial Solutions, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Broadridge Letter").

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25. Letter from Eric W. Hess, General Counsel, Direct Edge Holdings, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Direct Edge Letter").

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26. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA Letter").

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27. Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, and Janet McGinness Kissane, Senior Vice President and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FINRA/NYSE Euronext Letter").

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28. Letter from Ted Myerson, Chief Executive Officer, Doug Kittelsen, Chief Technology Officer, and M. Gary LaFever, General Counsel and Chief Corporate Development Officer, FTEN, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("FTEN Letter").

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29. Letter from Karrie McMillan, General Counsel, Investment Company Institute, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("ICI Letter").

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30. Letter from Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel, Managed Funds Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Managed Funds Association Letter").

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31. Letter from Dror Segal and Lou Pizzo, Mansfield Consulting, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Mansfield Letter").

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32. Letter from Andrew C. Small, General Counsel, Scottrade, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Scottrade Letter").

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33. Letter from Devin Wenig, Chief Executive Officer, Markets Division, Thomson Reuters, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Thomson Reuters Letter").

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34. Letter from Jon Feigelson, Senior Vice President, General Counsel and Head of Corporate Governance, TIAA-CREF Individual and Institutional Services, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("TIAA-CREF Letter").

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35. Letter from Ronald C. Long, Director, Regulatory Affairs, Wells Fargo Advisors, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 ("Wells Fargo Letter").

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36. Letter from John A. McCarthy, General Counsel, GETCO, to Elizabeth M. Murphy, Secretary, Commission, dated August 10, 2010 ("GETCO Letter").

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37. Letter from Michael Erlanger, Managing Principal, Marketcore, Inc., to Commission, dated August 10, 2010 ("Marketcore Letter").

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38. Letter from Edward J. Joyce, President and Chief Operating Officer, Chicago Board Options Exchange, Inc., to Commission, dated August 11, 2010 ("CBOE Letter").

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39. Letter from Leonard J. Amoruso, Senior Managing Director and General Counsel, Knight Capital Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated August 11, 2010 ("Knight Letter").

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40. Letter from Jose Manso, Executive Vice President, Sales and Marketing, Middle Office Solutions LLC, to Commission, dated August 11, 2010 ("Middle Office Letter").

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41. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("FIF Letter").

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42. Letter from John Harris, Chief Executive Officer, BondMart Technologies, Inc., to Commission, dated August 12, 2010 ("BondMart Letter").

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43. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, dated August 12, 2010 ("Nasdaq Letter I").

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44. Letter from Patrick J. Healy, Chief Executive Officer, Issuer Advisory Group LLC, to Elizabeth M. Murphy, Secretary, Commission, dated August 15, 2010 ("IAG Letter").

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45. Letter from James T. McHale, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Elizabeth M. Murphy, Secretary, Commission, dated August 17, 2010 ("SIFMA Letter").

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46. Letter from Mike Riley, Chief Executive Officer, Endace Technology Limited, to Elizabeth M. Murphy, Secretary, Commission, dated August 30, 2010 ("Endace Letter").

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47. Letter from Terry Keene, Chief Executive Officer, Integration Systems LLC, to Elizabeth M. Murphy, Secretary, Commission, dated November 12, 2010 ("iSys Letter").

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48. Letter from Bonnie K. Wachtel, Wachtel & Co., Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 24, 2010 ("Wachtel Letter").

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49. Letter from Richard A. Ross to Elizabeth M. Murphy, Secretary, Commission, dated December 6, 2010 ("Ross Letter").

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50. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to David Shillman, Associate Director, Division of Trading and Markets, Commission, dated January 12, 2011 ("SIFMA Drop Copy Letter").

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51. Letter from Daniel J. Connell, Chief Executive Officer, Correlix, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated February 4, 2011 ("Correlix Letter").

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52. Letter from Richard A. Ross, Founder, High Speed Analytics, to Elizabeth M. Murphy, Secretary, Commission, dated February 9, 2011 ("High Speed Letter").

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53. Letter from Michael Belanger, President, Jarg Corporation; Joseph Carrabis, Chief Regulatory Officer and Founder, NextStage Evolution; Wayne Ginion, Vice President, Enterprise Infrastructure Services; and David Morf, Partner, Senior Regional Economics Advisor, Founding Member, Center for Adaptive Solutions, to Elizabeth M. Murphy, Secretary, Commission, dated April 6, 2011 ("Belanger Letter") (note, this letter is an amended letter that replaces a letter submitted by the same parties on March 30, 2011).

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54. Letter from Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, to Robert Cook, Director, Division of Trading and Markets, and Carlo DiFlorio, Director, Office of Compliance Inspections and Examinations, Commission, dated April 6, 2011 ("FINRA Proposal Letter").

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55. Letter from Senator Charles E. Schumer, U.S. Senate, to Mary L. Schapiro, Chairman, Commission, dated May 9, 2011 ("Schumer Letter").

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56. Letter from Joan C. Conley, Senior Vice President and Corporate Secretary, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated November 18, 2011 ("Nasdaq Letter II").

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57. Letter from Geraldine M. Lettieri to Elizabeth M. Murphy, Secretary, Commission, dated November 29, 2011 ("Lettieri Letter").

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58. Letter from James T. McHale, Managing Director and Associated General Counsel, Securities Industry and Financial Markets Association, to Robert Cook, Director, Division of Trading and Markets, Commission, dated February 7, 2012 ("SIFMA February 2012 Letter").

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59. Letter from John M. Damgard, President, Futures Industry Association, to Elizabeth M. Murphy, Secretary, Commission, dated February 22, 2012 ("FIA Letter").

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60. Letter from Manisha Kimmel, Executive Director, Financial Information Forum, to Elizabeth M. Murphy, Secretary, Commission, dated March 2, 2012 ("FIF Letter II").

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61. Letter from Jennifer Setzenfand, Chairman, Security Traders Association, dated March 7, 2012 ("STA Letter").

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62. Letter from Dr. Gil Van Bokkelen, Chairman and Chief Executive Officer, Athersys, Inc., to Mary Schapiro, Chairman, Commission, dated March 14, 2012 ("Van Bokkelen Letter").

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-
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fn -

1 EBSs are trading records requested by the Commission and SROs from broker-dealers that are used in regulatory investigations to identify buyers and sellers of specific securities. See Securities Exchange Act Release No. 44494 (June 29, 2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (adopting Rule 17a-25). See also Securities Exchange Act Release Nos. 26235 (November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the Chicago Board Options Exchange's ("CBOE") rule for the electronic submission of transaction information); 26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the National Association of Securities Dealers' (n/k/a FINRA) rule for the electronic submission of transaction information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 1989) (approving the Philadelphia Stock Exchange's (n/k/a NASDAQ OMX PHLX LLC) ("Phlx") rule for the electronic submission of transaction information). To partially address some of the current limitations of the EBS system, and to provide the Commission, in the short term, with more detailed and timely trade information for large traders, the Commission recently adopted new Rule 13h-1 concerning large trader reporting. See Securities Exchange Act Release No. 61908 (July 27, 2011), 76 FR 46960 (August 3, 2011) ("Large Trader Release"). Rule 13h-1 requires "large traders" to identify themselves to the Commission and make certain disclosures to the Commission on Form 13H. As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See also Section II.A.3., infra. On April 20, 2012, the Commission, among other things, extended the time by which registered broker-dealers were required to comply with Rule 13h-1 to allow broker-dealers additional time to develop, test, and implement enhancements to their recordkeeping and reporting systems as required under Rule 13h-1. See Securities Exchange Act Release No. 66839, 77 FR 25007 (April 26, 2012) (Order Temporarily Exempting Broker-Dealers From the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 Under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions) ("Large Trader Extension").

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-
fn -

2 The Commission uses the National Securities Clearing Corporation's ("NSCC") equity cleared report for initial regulatory inquiries. This report is generated on a daily basis by the SROs and is provided to the NSCC in a database accessible by the Commission, and shows the number of trades and daily volume of all equity securities in which transactions took place, sorted by clearing member. The information provided is end-of-day data and is searchable by security name and CUSIP number.

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-
fn -

3 See Large Trader Extension, supra note 1.

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fn -

4 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) ("Proposing Release"). The comment file is on the Commission's website at: http://www.sec.gov/comments/s7-11-10/s71110.shtml.

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fn -

5 In this release, "consolidated audit trail" means both a system capable of capturing a complete record of all transactions relating to an order, from origination to execution or cancellation, and the complete record for an order generated by such a system, as the context may require.

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-
fn -

6 NMS plan is defined in Rule 600(b)(43) to mean "any joint self-regulatory organization plan in connection with: (i) [t]he planning, development, operation or regulation of a national market system (or a subsystem thereof) or one or more facilities thereof; or (ii) [t]he development and implementation of procedures and/or facilities designed to achieve compliance by self-regulatory organizations and their members with any section of [Regulation NMS] . . . ." 17 CFR 240.600(b)(43). Such NMS plan may be subject to modification prior to approval by the Commission pursuant to Rule 608 of Regulation NMS, as discussed in Section III.C.2.a.v., infra.

-
-
fn -

7 "NMS security" is defined in Rule 600(a)(46) of Regulation NMS to mean "any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options." 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) to mean "any NMS security other than an option." 17 CFR 242.600(a)(46). A listed option is defined in Rule 600(a)(35) of Regulation NMS to mean "any option traded on a registered national securities exchange or automated facility of a national securities association." 17 CFR 242.600(a)(35).

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fn -

8 See Exhibit A for a citation key to the comment letters received by the Commission on the proposed rule. The Commission also received four comment letters that do not address the substance of the consolidated audit trail proposal. See Ericson Letter; Kondracki Letter; Grady Letter; Deep Liquidity Letter.

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-
fn -

9 The Commission notes that, in some cases, commenters fell into more than one such category.

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-
fn -

10 See Vannelli Letter; Beach Letter; Foothill Letter; Green Letter; Wealth Management Letter; McCrary Letter; Anastasopoulos Letter; Triage Letter; FTEN Letter; Middle Office Letter; Correlix Letter; Lettieri Letter; Bean Letter.

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fn -

11 See ICI Letter; Thomson Reuters Letter; Scottrade Letter; Liquidnet Letter; FINRA/NYSE Euronext Letter; BOX Letter; Nasdaq Letter I; Nasdaq Letter II; TIAA-CREF Letter; GETCO Letter; BATS Letter; SIFMA Letter; SIFMA February 2012 Letter; CBOE Letter; Direct Edge Letter; Angel Letter; IAG Letter; Managed Funds Association Letter; Mansfield Letter; Marketcore Letter; Kumaraguru Letter; Ameritrade Letter; FINRA Letter; Wells Fargo Letter; Noetic Partners Letters; Knight Letter; FIF Letter; FIF Letter II; Albany Letter; Endace Letter; Ross Letter; FINRA Proposal Letter; Schumer Letter; FIA Letter; STA Letter; Van Bokkelen Letter.

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fn -

12 See Belanger Letters; SIFMA Drop Copy Letter; Wachtel Letter; High Speed Letter (recommending next steps in the development of the consolidated audit trail).

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-
fn -

13 See BondMart Letter; Leuchtkafter Letter.

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fn -

14 See Broadridge Letter; FIX Letter; Know More Letter; Aditat Letter; iSys Letter; Kaufman Letter; Berkeley Letter.

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15 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

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16 See Ameritrade Letter, p. 3; Kumaraguru Letter, p. 1; FINRA Proposal Letter, p. 6-8, 13 and Appendix A.; Angel Letter, p. 2-3; Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11-12, 14; SIFMA Drop Copy Letter, p. 2; Liquidnet Letter p. 6-7; FINRA Letter, p. 4, 7-9; CBOE Letter, p. 2; Knight Letter, p. 2; Scottrade Letter, p. 1; DirectEdge Letter, p. 3; FIF Letter, p. 2-3, 6-7; FIF Letter II, p. 2; BOX Letter, p. 2; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; Thomson Reuters Letter, p. 3; Endace Letter, p. 1-2; GETCO Letter, p. 4.

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17 See Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2, 4-5; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 3-4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; FINRA Proposal Letter, p. 2-3.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Correlix Letter, p. 2.; FTEN Letter, p. 13; SIFMA Letter, p.1-8, 15-16; FINRA/NYSE Euronext Letter, p 4, 7; FINRA Letter, p. 3, 10-13; Scottrade Letter, p. 1; ICI Letter, p. 4-6; GETCO Letter, p. 2; BATS Letter, p. 1-2; Direct Edge Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; SIFMA February 2012 Letter; FIA Letter, p. 1-2; Noetic Partners Letter II, p. 2; High Speed Letter, p. 1.

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18 See FINRA Proposal Letter; Angel Letter, p. 3; BOX Letter, p. 2; BATS Letter, p. 2; CBOE Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIF Letter, p. 1-3; FINRA Letter, p. 3, 6; FINRA/NYSE Euronext Letter, p. 8, 14; SIFMA Drop Copy Letter.

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19 As used herein, the term "order event data" is used to refer to the information reported pursuant to Rule 613(c)(3) and identified in Rule 613(c)(7)(i) through (v), generally including: (1) the Customer-ID(s) for each customer, including the person giving a modification or cancellation instruction; (2) the CAT-Order-ID; (3) the CAT-Reporter-ID of the broker-dealer, national securities exchange, or national securities association receiving, originating, routing, modifying, cancelling or executing an order, and to which an order is being routed; (4) the identity and nature of the department or desk to which an order is routed, if routed internally at the broker-dealer; (5) the date an order was received, originated, routed, modified, cancelled, or executed; (6) the time an order was received, originated, routed, modified, cancelled, or executed; (7) material terms of an order and any changes of such terms, if modified; (8) the price and remaining size of an order, if modified; (9) execution capacity (principal, agency, riskless principal); (10) execution price and size; and (11) whether the execution was reported pursuant to an effective transaction reporting plan or the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information ("OPRA"). See Section III.B.1.d., infra. Information reported pursuant to Rule 613(c)(4) and identified in Rule 613(c)(7)(vi) through (viii) is referred to as "supplemental data."

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20 See Rule 613(c)(3); Sections II.A., III.B.1.e., infra.

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21 See Rule 613(c)(2); Sections III.B.1.f., III.B.2., infra.

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22 See Rule 613(j)(1); Section III.B.1.d.iv., infra.

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23 See Rule 613(a)(3)(vi); Section III.B.1.c., infra.

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24 See Rule 613(a)(1)(xii); Section III.C.2.a., infra.

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25 See Rule 613(a)(1)(ix); Section III.C.2.a., infra.

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26 See Rule 613(a)(1)(xi).

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27 See Rule 613(b)(7). For a further discussion of the composition of the Advisory Committee, see Section III.B.3.b., infra.

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28 See Section III.B.2., infra.

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29 See Rule 613(e)(4).

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30 See Rule 613(e)(6); Section III.B.2., infra.

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31 See Section II.A., infra, for a discussion of the objectives of the consolidated audit trail.

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32 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail).

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33 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

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34 See Section III.C.2.b., infra.

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35 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597, n. 352.

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36 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

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37 See Rule 613(a)(1).

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38 See Rule 613(a)(5).

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39 The proposed Rule would have required SROs to submit such proposed rule changes on or before from 120 days from approval of the Rule. Because the adopted Rule permits the SROs up to 270 days from the date of publication of the Adopting Release in the Federal Register to submit NMS plans, the Commission believes that the more appropriate deadline for SROs to submit rule changes is 60 days from the date the Commission approves an NMS plan.

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40 Specifically, the adopted Rule provides SROs six months, instead of two months, after effectiveness of the NMS plan to submit this document to the Commission.

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41 See Proposing Release, supra note 4, at 32558-61.

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42 See FINRA/NYSE Euronext Letter, p. 1-3; Nasdaq Letter I, p. 1-5.

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43 See note 1, supra; Proposing Release, supra note 4, at 32557-58.

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44 See note 2, supra.

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45 The term "market reconstruction" is used to refer to the efforts by SRO and Commission staff to collect and process detailed trade and order data, often from multiple and varied data sources (e.g., market participants, trading venues, and other SROs) to recreate the sequence of events and market conditions that existed over a given period of time. A recent example of this occurred following the "Flash Crash" of May 6, 2010, with the market reconstruction analysis undertaken by Commission and the Commodity Futures Trading Commission ("CFTC") staff, which can be found in the "Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." See http://www.sec.gov/news/studies/2010/marketevents-report.pdf.

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46 The Commission recognizes that the accuracy of the data available may also be subject to occasional errors, including errors caused by rare and unexpected events.

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47 The effectiveness of such efforts with respect to cross-market activities within the Commission's jurisdiction depends on the qualities of data from multiple sources, such as separate SRO audit trails used for equities and equity options. See Section II.A.1.c., infra. This dependency also exists with respect to market activities that involve other products outside the Commission's jurisdiction, such as futures and certain swaps. See note 239, infra.

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48 17 CFR 240.17a-25. Rule 17a-25 codified the requirement that broker-dealers submit to the Commission, upon request, information on their customer and proprietary securities transactions in an electronic format. The rule requires submission of the same standard customer and proprietary transaction information that SROs request through the EBS system in connection with their market surveillance and enforcement inquiries.

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49 See Rule 17a-25; supra note 1, and accompanying text.

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50 See FIF Letter I, p. 3; SIFMA Letter, p. 18-19.

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51 As adopted, Rule 13h-1 requires certain broker-dealers to capture and report through EBS the time of execution for any trade involving a large trader and a Commission-issued large trader identifier that identifies the large trader. See Large Trader Release and Large Trader Extension, supra note 1.

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52 A 1990 Senate Report acknowledged the immense value of the EBS system, but noted that "it is designed for use in more narrowly focused enforcement investigations that generally relate to trading in individual securities. It is not designed for use for multiple inquiries that are essential for trading reconstruction purposes." See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.

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53 See, generally, Sections II.A.1. and II.A.2., infra.

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54 See note 2, supra, and accompanying text.

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55 The Commission also uses the Options Cleared Report, with data supplied by the Options Clearing Corporation ("OCC"), for analysis of trading in listed options. The OCC is an equity derivatives clearing organization that is registered as a clearing agency under Section 17A, 15 U.S.C. 78q-1, of the Exchange Act, and operates under the jurisdiction of both the Commission and the CFTC.

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56 A CUSIP number is a unique alphanumeric identifier assigned to a security and is used to facilitate the clearance and settlement of trades in the security.

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57 In 2007, NASD and the member-related functions of NYSE Regulation, Inc., the regulatory subsidiary of New York Stock Exchange LLC ("NYSE"), were consolidated. As part of this regulatory consolidation, the NASD changed its name to FINRA. See Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 42190 (August 1, 2007). FINRA and the National Futures Association ("NFA") are currently the only national securities associations registered with the Commission; however, the NFA has a limited purpose registration with the Commission under Section 15A(k) of the Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 2001).

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58 See In the Matter of National Association of Securities Dealers, Inc., Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions, Exchange Act Release No. 37538 (August 8, 1996), Administrative Proceeding File No. 3-9056 and Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and The Nasdaq Stock Market LLC ("Nasdaq"). See also Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules comprising OATS) ("OATS Approval Order").

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59 See Securities Exchange Act Release No. 47689 (April 17, 2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule change by NYSE relating to order tracking) ("OTS Approval Order").

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60 See In the Matter of Certain Activities of Options Exchanges, Administrative Proceeding File No. 3-10282, Securities Exchange Act Release No. 43268 (September 11, 2000) (Order Instituting Public Administrative Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions) ("Options Settlement Order"). See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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61 See Securities Exchange Act Release No. 63311 (November 12, 2010), 75 FR 70757 (November 18, 2010) (SR-FINRA-2010-044) (order approving proposed rule change by FINRA relating to the expansion of OATS to all NMS stocks).

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62 See Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011) (SR-NYSE-2011-49); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011) (SR-NYSEAmex-2011-74); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (SR-NYSEArca-2011-69).

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63 See FINRA Rule 7410(j) (defining "Order" for purposes of OATS, to mean "any oral, written, or electronic instruction to effect a transaction in an NMS stock or an OTC equity security that is received by a member from another person for handling or execution, or that is originated by a department of a member for execution by the same or another member, other than any such instruction to effect a proprietary transaction originated by a trading desk in the ordinary course of a member's market making activities." Additionally, Nasdaq, Nasdaq OMX BX, Inc. ("BX") and Phlx equities ("PSX") members that are registered as market makers in a certain security are similarly exempted from recording OATS audit trail data for the security in which they are registered to make a market. See Nasdaq and BX Rules 6951(i); PSX Rule 3401(i). The Commission notes that members of Nasdaq, BX and PSX, that are not also members of FINRA, are required by those exchanges to record the audit trail data required by OATS; however, they are only required to report that data through OATS upon request by their respective exchanges. See Nasdaq and BX Rules 6955(b); PSX Rule 3405(b). Additionally, as of October 17, 2011, members of NYSE and NYSE Amex, who are not also FINRA members, are required to record their trade and order activity. These non-FINRA members are not required to report this data through OATS unless requested. See NYSE and NYSE Amex Equities Rules 7450(b); see, e.g., Securities Exchange Act Release Nos. 65523 (October 7, 2011), 76 FR 64154 (October 17, 2011); 65524 (October 7, 2011), 76 FR 64151 (October 17, 2011); 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE and NYSE Amex Equities rules). Members of NYSE Arca, who are not also FINRA members, were required to record their trade and order activity as of March 31, 2012. See NYSE Arca Equities Rule 7450(b); see Securities Exchange Act Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011) (notice of immediate effective of proposed rule change to adopt the FINRA Rule 7400 series, the OATS rules, and making certain conforming changes to the NYSE Arca Equities rules). See also Securities Exchange Act 66094 (January 4, 2012), 77 FR 1545 (January 10, 2012) (notice of immediate effectiveness to extend the implementation date of the NYSE Arca Equities Rule 7400 Series, the OATS rules, for Equity Trading Permit Holders that are not FINRA members from January 31, 2012 to March 31, 2012).

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64 FINRA has represented to Commission staff that, as part of its own surveillance activities, FINRA acquires some of this order handling system data from non-FINRA members to supplement the data it receives from its members via OATS, but that matching data across the audit trails yields varying levels of success and accuracy due to the disparate methods used by the different order handling systems to collect and store data. FINRA represented that, during the period from November 28, 2011 to February 24, 2012, approximately 2% of reportable OATS data related to exchange orders could not be linked with matching exchange data. See Commission Staff Memorandum to File No. S7-11-10 regarding telephone conversations with FINRA, dated April 17, 2012 ("Commission Staff Memorandum"). Also, since this process only involves acquiring trade and order data from select sources, it still does not produce a complete record of all market activity. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of reportable OATS data related to exchange orders that could not be linked with matching exchange data remained at approximately 2%. Id.

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65 Common reasons given by FINRA for syntax rejections include: missing mandatory fields, invalid fields, and invalid field combinations (e.g., a Limit Price without a Time in Force Code). OATS will reject records as duplicates if more than one record is submitted with the same Order Receiving Firm Market Participant Identifier, Order Received Date, and Order Identifier or if more than one record contains all of the same information. http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/FAQ/P085542 (last viewed on May 23, 2012).

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66 See Commission Staff Memorandum, supra note 64. FINRA estimates that, from the period November 28, 2011 to February 24, 2012 approximately 0.10% of the intra-firm data reported daily by broker-dealers were rejected for errors. Id. The Commission notes that, when considering data covering a time period of approximately 26 months, the percentage of the intra-firm data reported daily by broker-dealers rejected for errors was more than double this amount. Id.

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67 See FINRA Letter, p. 11. FINRA represented to Commission staff that many of the validation errors result from problems encountered in translating order information from broker-dealer formats into OATS format. See Commission Staff Memorandum, supra note 64.

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68 Id.

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69 Id.

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70 FINRA estimates that during the period from November 28, 2011 to February 24, 2012 approximately 0.5% of each day's reportable events remained unmatched (i.e., multi-firm events, such as routes, that cannot be reconciled). See Commission Staff Memorandum, supra note 64. When considering data covering a time period of approximately 26 months, the percentage of each day's reportable events remaining unmatched was more than double this amount. Id.

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71 For example, FINRA has been given access to order audit trail information from certain SROs pursuant to Regulatory Services Agreements.

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72 ISG is an international group of exchanges, market centers, and regulators that perform market surveillance in their respective jurisdictions. The organization provides a forum for its members to share information and coordinate regulatory efforts to address potential intermarket manipulation and trading abuses.

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73 See Section II.A.2.b., infra.

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74 See FINRA/NYSE Euronext Letter, p. 3.

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75 Examples of schemes that typically rely on orders from accounts at multiple brokers include: (1) "network" insider trading schemes in which the participants cultivate multiple sources of non-public information and trade on the information they receive over an extended period of time and through accounts at a large number of broker-dealers; (2) wash trading; and (3) order layering. Unlike insider trading, for example, which is neither defined nor expressly prohibited in the Act, wash trading is specifically prohibited in the statute. The entering of matched orders for the purpose of creating the illusion of market activity or to artificially affect the price is one of the oldest and most difficult to detect manipulative practices. Technology that permits the routing of thousands of orders to different venues in micro seconds has made cross market surveillance for this activity extremely difficult. "Order layering" is similar to wash trading. In this practice, a market participant can enter numerous non-bona fide market moving orders, often in substantial size relative to a security's legitimate volume to create the false impression of buy or sell side pressure. When such orders induce others to execute against profitable limit orders, the market participants immediately cancel the pending orders that manipulated the price. As with wash sales, multiple traders can enter orders on different venues, impacting the NBBO and making the activity difficult to detect.

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76 For example, implementation of a consolidated audit trail also will help regulators monitor reliance on the use of the safe harbor provision for issuer repurchases in Rule 10b-18 under the Exchange Act. 17 CFR 240.10b-18. Rule 10b-18 under the Exchange Act provides issuers with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, when they repurchase their common stock in the market in accordance with the Rule's manner, timing, price, and volume conditions. The data required to be included in the consolidated audit trail will assist regulators in monitoring issuer repurchases that rely on Rule 10b-18's safe harbor protections to ensure that they comply with all required criteria.

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77 The Commission receives an average of over 200 market-related TCRs each month.

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78 See FINRA/NYSE Euronext Letter, p. 2.

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79 See Rule 613(f).

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80 See note 45, supra.

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81 See "Preliminary Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and the SEC to the Joint Advisory Commission Emerging Regulatory Issues." (May 18, 2010). See http://www.sec.gov/sec-cftc-prelimreport.pdf.

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82 For detailed discussions and chronologies of the investigation into the events of May 6, 2010, see SEC (http://www.sec.gov/spotlight/sec-cftcjointcommittee.shtml) and CFTC (http://www.cftc.gov/PressRoom/Events/AdvisoryCommitteeMeetings/index.htm) webcasts and minutes of public meetings held with the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on May 24, 2010, June 22, 2010, August 11, 2010, November 5, 2010, and February 18, 2011.

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83 See note 45, supra, at p. 11.

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84 Id.

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85 Id.

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86 Id. at p. 18, 80.

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87 See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) ("Concept Release on Equity Market Structure").

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88 See note 1, supra.

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89 See ICI Letter, p. 6-7; Liquidnet Letter, p. 4-5; SIFMA Letter, p. 18-19; CBOE Letter, p. 6 (questioning the need for a large trader reporting system if a consolidated audit trail is implemented).

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90 See FINRA/NYSE Euronext letter, p. 7.

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91 See SIFMA Letter, p. 18.

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92 See Liquidnet Letter, p. 5.

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93 Id.

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94 See Rule 613(j)(4).

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95 Though certain reporting requirements of Rule 13h-1 may eventually be unnecessary due to Rule 613, the Commission notes that Rule 13h-1 will be implemented much more expeditiously compared to the consolidated audit trail, and therefore will address the Commission's near-term need for access to more information about large traders and their activities.

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96 Section 3(a)(3)(A) of the Exchange Act defines the term "member" to mean: "(i) any natural person permitted to effect transactions on the floor of the exchange without the services of another person acting as broker; (ii) any registered broker or dealer with which such a natural person is associated; (iii) any registered broker or dealer permitted to designate as a representative such a natural person; and (iv) any other registered broker or dealer which agrees to be regulated by such exchange and with respect to which the exchange undertakes to enforce compliance with the provisions of the [Exchange Act], the rules and regulations thereunder, and its own rules." Section 3(a)(3)(A) further provides that, "[f]or purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 17(d), 19(d), 19(e), 19(g), 19(h), and 21 of [the Exchange Act], the term 'member' when used with respect to a national securities exchange also means, to the extent of the rules of the exchange specified by the Commission, any person required by the Commission to comply with such rules pursuant to Section 6(f) of this title." Finally, Section 3(a)(3)(B) provides that "[t]he term 'member' when used with respect to a registered securities association means any broker or dealer who agrees to be regulated by such association and with respect to whom the association undertakes to enforce compliance with the provisions of [the Exchange Act]." See 15 U.S.C. 78c(a)(3)(A) and 15 U.S.C. 78c(a)(3)(B).

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97 The proposed Rule would have explicitly required each national securities exchange and national securities association to be a sponsor of the NMS plan submitted pursuant to the Rule and approved by the Commission. See proposed Rule 613(a)(4). "Sponsor," when used with respect to an NMS plan, is defined in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory organization which is a signatory to such plan and has agreed to act in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).

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98 Proposed Rule 613(j)(1) would have defined the term "customer" to mean the beneficial owner(s) of the account originating the order and the person exercising investment discretion for the account originating the order, if different from the beneficial owner(s).

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99 The proposed Rule would have defined "material terms of the order" to include, but not be limited to: the NMS security symbol; security type; price (if applicable); size (displayed and non-displayed); side (buy/sell); order type; if a sell order, whether the order is long, short, or short exempt; if a short sale, the locate identifier, open/close indicator, time in force (if applicable), whether the order is solicited or unsolicited, and whether the account has a prior position in the security; if the order is for a listed option, option type (put/call), option symbol or root symbol, underlying symbol, strike price, expiration date, and open/close; and any special handling instructions. See proposed Rule 613(j)(3).

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100 "The OPRA Plan" is the Plan for Reporting of Consolidated Options Last Sale Reports and Quotation Information filed with the Commission pursuant to, and meeting the requirements of, Rule 608 of Regulation NMS. The OPRA Plan governs the dissemination of trade and quotation information for listed options. In this capacity, it provides real-time quotation and transaction information to market participants. See 17638 (March 18, 1981), 22 SEC Docket 484 (March 31, 1981) (order approving the OPRA Plan).

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101 The effective transaction reporting plans include the Consolidated Tape Association Plan ("CTA Plan") and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis ("UTP Plan").

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102 See Proposing Release, supra note 4, at 32586 and 32594.

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103 Id.

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104 For comments on general costs of the proposed Rule, see, e.g., Thomson Reuters Letter, p. 2; Liquidnet Letter, p. 1; CBOE Letter, p. 2; Nasdaq Letter I, p. 2; Angel Letter, p. 1-2; IAG Letter, p. 3.; Kaufman Letter, attachment p. 3; Wells Fargo Letter, p. 4; Noetic Partners Letter, p. 2; Leuchtkafer Letter, p. 1-5; Broadridge Letter, p. 3; SIFMA Letter, p. 1-2, FINRA Letter, p. 3; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8.

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105 See Section II.C., infra, for a discussion of specific concerns raised by commenters.

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106 See FINRA/NYSE Euronext Letter, p. 1. NYSE Euronext is the publicly traded parent of a number of subsidiaries, including three SROs, NYSE, NYSE Amex, and NYSE Arca.

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107 See Nasdaq Letter I, p. 2. The NASDAQ OMX Group, Inc. is the publicly traded parent of a number of subsidiaries, including three SROs, Nasdaq, Phlx, and BX.

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108 See Direct Edge Letter, p. 1. Direct Edge is the parent of two SROs, EDGA Exchange, Inc. and EDGX Exchange, Inc.

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109 See CBOE Letter, p. 2.

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110 See, e.g., Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; euchtkafer Letter; Broadridge Letter, p. 3; SIFMA Proposal Letter, p. 1; FINRA Proposal Letter, p. 3.; Liquidnet Letter, p. 3 & p. 5-6; Ameritrade Letter, p. 2-3

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111 Id.

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112 Id.

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113 See BATS Letter, p. 1.

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114 See Liquidnet Letter, p. 1.

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115 Id. at p. 1-2.

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116 See SIFMA Letter, p. 1-2.

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117 Id. at p. 2.

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118 See, e.g., FINRA/NYSE Euronext Letter, p. 7, FINRA Letter, p. 3, FINRA Proposal Letter, p. 1-16, FTEN Letter, p.1, 4-5, Correlix Letter, p. 2-3; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2; Angel Letter, p. 2; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1.

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119 See FIF Letter, p. 1.

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120 See Nasdaq Letter I, p. 2.

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121 See Thomson Reuters Letter, p. 2; Noetic Partners Letter, p. 2; FTEN Letter, p. 1; Ross Letter; Correlix Letter, p. 2.; FINRA Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p. 7-8; Aditat Letter, p. 2 (stating that FIX protocol is already used in the industry today, making it cheaper to create systems to handle consolidated audit trail data as the data already exists in a "suitable format").

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122 See FTEN Letter, p. 13; Thomson Reuters Letter, p. 2-3.

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123 See FTEN Letter, p. 1.

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124 Id. at p. 3.

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125 See Know More Software Letter, p. 1.

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126 See Belanger Letter, p. 4.

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127 See Leuchtkafer Letter, p. 4. See also IAG Letter, p. 3.

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128 See, e.g., SIFMA Letter, p. 2, 15-16; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; Angel Letter, p. 2; CBOE Letter, p. 2-6 (suggesting several ways that the costs of the proposal could be reduced, including: leveraging existing SRO experience with audit trail systems and imposing uniformity across markets in those systems; requiring the submission of audit trail information through a batch process after the close of the trading day; deleting the requirement that all market maker quotes be submitted to the proposed consolidated audit trail; making clear that broker-dealers have no obligation to report order information that has already been reported to an exchange; and revisiting the need for a large trader reporting system if that proposed rule is adopted.).

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129 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 1-2.

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130 See Section III.F.2., infra; see also, e.g., BATS Letter, p. 1-2; Broadridge Letter, p. 3; FIF Letter, p. 4-5; FINRA/NYSE Euronext Letter, p. 7; FINRA Letter, p. 3; ICI Letter, p. 4-5; Knight Letter, p. 2; Scottrade Letter, p. 1-2; SIFMA Letter, p. 3-6; SIFMA February 2012 Letter. Some commenters also questioned whether the costs to provide data on a real-time basis would outweigh the benefits. See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; ICI Letter, p. 4-6; GETCO Letter, p. 2; Direct Edge Letter, p. 3; Leuchtkafer Letter; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 2.

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131 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4; Knight Letter, p. 2. See also Broadridge Letter, p. 3; FIF Letter, p. 4; FIA Letter, p. 2.

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132 See SIFMA Letter, p. 4-6.

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133 Id. at p. 5.

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134 See SIFMA Letter, p. 3-4.

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135 See SIFMA Drop Copy Letter.

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136 Id.

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137 A "drop copy" is an electronic copy of a message automatically generated by the existing order management and execution systems used by broker-dealers and SROs.

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138 See SIFMA Drop Copy Letter.

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139 See GETCO Letter, p. 3-4.

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140 See Wells Fargo Letter, p. 3.

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141 See Correlix Letter, p. 2-3.

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142 Id.

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143 As discussed in Section II.C.4, infra, both SIFMA and FINRA submitted several comment letters with increasing levels of detail on the extent to which existing infrastructures could be used to achieve different forms of the various reporting requirements of the proposed Rule. In one of its later comment letters, FINRA submitted a detailed blueprint describing how it would build a consolidated audit trail that it believed would meet the primary objectives of the proposed Rule in a relatively short timeframe and with minimum costs to the industry. See FINRA Proposal Letter; SIFMA Letter, p. 16-18. See also BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 3.

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144 See, e.g., FINRA/NYSE Euronext Letter; FINRA Letter; Schumer Letter, p. 1.

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145 See Noetic Partners Letter II, p. 2; High Speed Letter, p. 1 (opining that estimated costs could be reduced if data were stored in an off-the-shelf cloud-based storage system or if a petabyte storage facility was built to store data and also estimating that "an integrated analysis system combining bespoke software for first-cut filtering of data from the repository, along with [commercial off-the-shelf software] for detailed analysis, could be developed for less than $10M"). See also Know More Software Letter, p. 1; Belanger Letter, p. 4; FTEN Letter, p. 1, 13.

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146 See Noetic Partners Letter II, p. 2.

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147 Id.

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148 See Section I., supra.

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149 See, generally, Section III., infra.

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150 See Section I., supra, for a summary of the changes to proposed Rule 613.

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151 See Rule 613(c)(3); Section I., supra; Section III.B.1.e., infra.

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152 See Rule 613(j)(1); Section I., supra; Section III.B.1.d.iv., infra.

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153 See Rule 613(a)(1)(i) through (xii); Section I., supra; Section III.C.2.a., infra.

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154 See FIF Letter II, p. 2-3; STA Letter, p. 2; Nasdaq Letter I, p. 6-7.

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155 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3.

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156 See FIF Letter II, p. 2; STA Letter, p. 1.

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157 See FIF Letter II, p. 1; STA Letter, p. 1-2.

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158 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5.

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159 See FIF Letter, p. 1.

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160 See FIF Letter II, p. 2.

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161 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3 (recommending the use of working groups comprising the Commission, FINRA, exchanges, broker-dealers, investors, vendors, and institutional asset managers to conduct business analysis and requisite discussions with the industry in planning a consolidated audit trail that meets the Commission's goals).

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162 Id. at p. 3.

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163 See Broadridge Letter, p. 2.

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164 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

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165 See FIF Letter II, p. 1-2; STA Letter, p. 2.

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166 See FIF Letter II, p. 2; STA Letter, p. 2-3; see also Nasdaq Letter I, p. 7 (arguing for "scheduling flexibility at the initial stage" of designing the consolidated audit trail).

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167 See proposed Rule 613(a)(1).

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168 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely applicable to the cost of the creating and filing the NMS plan required by Rule 613.

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169 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

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170 See Section III.C.2.a., infra.

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171 See Section III.C.2.b., infra.

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172 17 CFR 242.608.

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173 17 CFR 242.608(b)(2).

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174 See FINRA Proposal Letter.

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175 See FINRA Proposal Letter, p. 4, 6 (arguing against requiring the name and address of the beneficial owner of an account, as well as of the individual making the investment decision, and against requiring tax identification or social security numbers for individual investors).

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176 Id. at p. 7 and Appendix B.

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177 Id.

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178 Id. at p. 3-4 (noting that this information would be available for query by regulators within one hour of receipt, would include a unique order identifier and MPID, and would be added on T+1 to the "order lifecycle" using OATS and TRF data).

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179 Id. at p. 4.

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180 See Angel Letter, p. 3 (also noting, "While the OATS data are extremely useful for understanding market behavior and for searching for various violations, these data are not really needed for real time surveillance. Real time surveillance is generally focused on the question of whether or not some change needs to take place immediately . . . . The extensive OATS data regarding the handling of individual orders are more useful for economic analysis and enforcement activities and do not need to be reported in real time.")

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181 Id.

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182 See FINRA Proposal Letter; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; SIFMA Letter, p. 16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA Letter, p. 1-3.

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183 See FINRA/NYSE Euronext Letter, p. 7. See also FINRA Letter, p. 3 (stating that "the necessary components to an effective, comprehensive, and efficient consolidated audit trail are: (1) uniform data (both data content and data format); (2) reliable data; and (3) timely access to the data by SROs and the SEC. FINRA believes this can be achieved most effectively, efficiently, and expeditiously by expanding FINRA's existing OATS requirements to additional securities and non-FINRA member broker-dealers and by consolidating exchange data in a central repository to be used with OATS data").

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184 See BATS Letter, p. 2.

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185 See FINRA/NYSE Euronext Letter, p. 14; FINRA Letter.

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186 Id.

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187 See FINRA Letter, p. 6. Specifically, FINRA proposed enhancements to OATS and outlined a phased approach for implementation. It explained that, under its approach, implementation would begin with equity securities in the first two phases, followed by options in the third and fourth phases. FINRA further proposed that it could "establish an intraday abbreviated order submission capability based on SIFMA's drop-copy proposal." FINRA estimated the initial cost for the first two phases of the OATS enhancement would be between $100 to $125 million and the ongoing annual costs to be between $30 million and $40 million. While FINRA's proposal appears to include many of the elements required by Rule 613, the Commission notes that the proposal does not include a Customer-ID (which was similarly lacking in the SIFMA proposal), nor would all broker-dealers be required to report order information to the central repository (certain firms that route orders exclusively to another reporting firm that is solely responsible for further routing decisions would be exempt from reporting obligations; additionally, FINRA proposed retaining exemptive authority in certain limited situations to provide relief to small member firms that do not otherwise qualify for exclusion from the definition of an OATS Reporting Member). Further, FINRA's proposal would not collect customers' names, addresses and account numbers. See FINRA Proposal Letter, p. 10; 14-16; Appendix. The Commission believes a unique Customer-ID and customer account information are critical to the efficacy and usefulness of the consolidated audit trail, and therefore is requiring the NMS plan submitted for its consideration to include such information.

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188 Id. This commenter also noted that OATS compliance rates have improved to over 99% since the system was first implemented, and emphasized that creating a new system would result initially in low compliance rates until users became familiar with the system. Id. at p. 11; see also FINRA/NYSE Euronext Letter, p. 8.

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189 See FIF Letter, p. 6 (also providing thoughts on the functionalities of OATS that should be considered in creating the consolidated audit trail, such as OATS' ability to identify and reject duplicative reporting; to link reports between firms and Nasdaq exchanges without using a unique customer identifier; its possible flexibility in incorporating additional order types; its current incorporation of quote data; and its current identification of index arbitrage and program trading, and ability to possibly add a large trader identification field "to enhance analysis of high volume, algorithm trading").

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190 See BOX Letter, p. 2; CBOE Letter, p. 2.

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191 See BOX Letter, p. 2.

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192 See CBOE Letter, p. 2.

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193 See SIFMA Drop Copy Letter. The FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. These market participants share a vision of a common, global language for the automated trading of financial instruments. See http://fixprotocol.org/what-is-fix.shtml (last viewed on May 30, 2012).

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194 Id. at p. 1.

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195 Id. at p. 1-2.

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196 See Section II.A.1.c., supra.

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197 This Section III.A. discusses the use of a NMS plan to create, implement, and maintain a consolidated audit trail. Section III.C., infra, focuses on the process the SROs must follow when submitting the NMS plan to the Commission.

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198 17 CFR 242.608. See Rule 613(a)(2).

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199 See Proposing Release, supra note 4, at 32568.

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200 See Thomson Reuters Letter, p. 2; CBOE Letter, p. 7.

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201 See Thomson Reuters Letter, p. 2.

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202 See CBOE Letter, p. 7.

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203 See FINRA Letter, p. 15; Angel Letter, p. 3.

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204 See FINRA Letter, p. 15.

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205 See Angel Letter, p. 3.

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206 See Rule 613(a). The proposed Rule provided that the NMS plan must be filed with the Commission pursuant to Rule 608. Adopted Rule 613(a)(2) clarifies that the NMS plan must also satisfy the requirements set forth in Rule 608(a). See Rule 608(a) of Regulation NMS; 17 CFR 242.608(a).

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207 See Section III.C., infra.

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208 17 CFR 242.608. See Rule 613(a)(2).

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209 See Thomson Reuters Letter, p. 2.

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210 See Section I., supra; Sections III.B., III.C., infra.

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211 See Section III.B.1.d.i.(A)., infra.

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212 See FINRA Letter, p. 15.

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213 See CBOE Letter, p. 7.

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214 See Rule 613(a)(1)(xi).

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215 See Rule 613(b)(7)(i). Because members of the SROs will be required to report data pursuant to the NMS plan, the Rule provides that the plan must require that the Advisory Committee include representatives of the member firms of the SROs. However, the Commission believes that it is advisable for the SROs to consider including other interested parties such as SIPs, vendors, investors, and/or academics on the Advisory Committee. In addition, the Commission expects that the Advisory Committee would include the Commission's Chief Technology Officer as an observer. See Section III.B.3.b., infra.

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216 See Rule 613(b)(7).

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217 17 CFR 242.608(b)(1).

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218 See Angel Letter, p. 3.

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219 See Section II.A., supra. The Commission notes that, in the Proposing Release, it used the term "proprietary orders" to describe orders that were generated for the account of a broker-dealer. See Proposing Release, supra note 4, at 32570. To avoid confusion with the proposed "Volcker Rule," which proposes new regulations with respect to "proprietary" trading by commercial banks and their affiliates, the Commission is using the term "principal orders" in this Release to describe orders that were generated for the account of a broker-dealer. See Securities Exchange Act Release No. 65545 (October 12, 2011), 76 FR 68846 (November 7, 2011) (File No. S7-41-11).

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220 See Section I., supra.

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221 See proposed Rule 613(c)(5).

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222 The Commission notes that any expansion of the consolidated audit trail to cover non-NMS securities would be effectuated through notice and comment.

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223 See Liquidnet Letter, p. 2 (suggesting limiting the scope of the first phase of audit trail implementation to end-of-day-reporting to ensure that it can be completed in a timely and cost-effective manner; this commenter also recommended that the first phase apply the consolidated audit trail to all market participants, not just the SROs, as proposed). See also FIF Letter, p. 7 (suggesting that the consolidated audit trail cover just NMS stocks - then at a later date, all NMS securities, including options); FINRA Proposal Letter, p. 5 (suggesting several phases of expansion, beginning with NMS stocks and over-the-counter ("OTC") equity securities, and ultimately including standardized options, fixed income securities, conventional options, and security-based derivatives in the consolidated audit trail); SIFMA Letter, p. 16-17 (believing that OATS could form the basis for the consolidated audit trail, stating that OATS should be modified to include non-Nasdaq-listed securities, listed options, quotes, street side and exchange-to-exchange routing and market making and recommending phasing in NMS stocks first, then any additional data elements, then listed options and, finally, non-NMS securities); FIF Letter II, p. 2 (suggesting that the consolidated audit trail have "multi-instrument capabilities, most importantly options and futures but also fixed income and other instruments).

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224 See Broadridge Letter, p. 4.

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225 See Nasdaq Letter II, p. 3.

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226 See Liquidnet Letter, p. 2; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17; Marketcore Letter, p. 1.

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227 See Marketcore Letter, p. 1.

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228 See Ameritrade Letter, p. 3. See also Mansfield Letter, p. 1 (suggesting other data, including "metrics" and "market environmental information" to be included in the consolidated audit trail).

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229 See Direct Edge Letter, p. 4.

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230 See Proposing Release, supra note 4, at 32568-70; Rule 613(c)(5).

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231 See Rule 613(i). Specifically, Rule 613(i) now provides that the SROs provide a document outlining how such exchanges and associations "could" incorporate non-NMS securities into the consolidated audit trail, rather than how the exchanges and associations "would propose to" incorporate non-NMS securities; and that the exchanges and associations should provide details for each order and reportable event that "may" be required to be provided, and which market participants "may" be required to provide the data. As proposed, the comparable provision of Rule 613(i) required that the exchanges and associations should provide details for each order and reportable event that "would" be required to be provided, and which market participants "would" be required to provide the data.

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232 See Section III.B.3.b., infra.

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233 See Ameritrade Letter, p. 3; Liquidnet Letter, p. 2; Marketcore Letter, p. 1; FINRA Proposal Letter, p. 5; SIFMA Letter, p. 16-17.

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234 See Rule 613(a)(1)(vi). See also Section III.C.2.a.i., infra.

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235 See note 222, supra.

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236 See Rule 613(a)(3), which states that the NMS plan must require the plan sponsors: (i) within two months after effectiveness of the NMS plan to select a plan processor; (ii) within four months after effectiveness of the NMS plan to synchronize their business clocks and require the members of each such exchange and association to synchronize their business clocks; (iii) within one year after effectiveness of the NMS plan to provide to the central repository the data specified in Rule 613(c); (iv) within fourteen months after effectiveness of the NMS plan to implement a new or enhanced surveillance system(s) as required by Rule 613(f); (v) within two years after effectiveness of the NMS plan to require their members, except those members that qualify as small broker-dealers as defined in § 240.0–10(c), to provide to the central repository the data specified in Rule 613(c); and (vi) within three years after effectiveness of the NMS plan to require their members that qualify as small broker-dealers as defined in § 240.0–0(c) to provide to the central repository the data specified in Rule 613(c).

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237 See Section III.D., infra.

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238 The Commission also believes that limiting the application of the Rule initially to only NMS securities should help ensure that the implementation schedule prescribed by the Rule is achievable. See Section III.D., infra.

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239 See Section II.A.2, supra.

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240 See note 223, supra.

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241 The Commission notes that the financial markets have become increasingly interrelated, with transactions occurring in the futures markets affecting transactions in the securities markets. To the extent that instruments other than NMS securities (e.g., futures on a securities index or security-based swaps) can be substitutes for trading in NMS securities, or are otherwise linked to such trading (e.g., as part of a strategy that involves multiple products), having access to an audit trail that includes these instruments would improve regulators' ability to more quickly detect potentially manipulative or other illegal activity that could occur across markets. The Commission recognizes, however, that any such expansion to include products not under the Commission's jurisdiction, and thus not contemplated by this Rule, would need to be coordinated with the CFTC or other applicable regulatory authorities, and would likely require a separate rulemaking, which would include a consideration of the costs and benefits of such an expansion. In this regard, the Commission believes that it could be beneficial to discuss with the CFTC, at the appropriate time, the possibility of including within the consolidated audit trail data relating to futures or swap products regulated by the CFTC that are based on securities. The Commission is therefore directing the Commission staff to work with the SROs, the CFTC staff, and other regulators and market participants to determine how other asset classes, such as futures, might be added to the consolidated audit trail. The information from such an expanded consolidated audit trail could benefit both the CFTC and the Commission. An example of a non-NMS security is a security-based swap. The Commission notes that, separately, it has proposed rules requiring the reporting of security-based swap information to registered security-based swap data repositories ("SDR") or the Commission. See Securities Exchange Act Release No. 63446, File No. S7-34-10 (November 19, 2010), 75 FR 75208 (December 2, 2010) (proposing Regulation SBSR under the Exchange Act providing for the reporting of security-based swap information to registered security-based SDR or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information); see also Securities Exchange Act Release No. 63447, File No. S7-35-10 (November 19, 2010), 75 FR 77306 (December 10, 2010) (proposing rules governing the SDR registration process, duties, and core principles).

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242 See 17 CFR 242.100 et seq.; 17 CFR 240.10b-5. Rule 105 of Regulation M prohibits the short selling of equity securities that are the subject of a public offering for cash and the subsequent purchase of the offered securities from an underwriter or broker or dealer participating in the offering if the short sale was effected during a period that is the shorter of the following: (i) beginning five business days before the pricing of the offered securities and ending with such pricing; or (ii) beginning with the initial filing of such registration statement or notification on Form 1-A or Form 1-E and ending with the pricing. Thus, Rule 105 prohibits any person from selling short an equity security immediately prior to an offering and purchasing the security by participating in the offering. Rule 10b-5 provides that "[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) [t]o employ any device, scheme, or artifice to defraud, (b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

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243 See Direct Edge Letter, p. 4.

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244 See Rule 613(i).

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245 See Section III.B.3.b., infra.

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246 See note 2145, supra.

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247 See Proposing Release, supra note 4, at 32570; proposed Rule 613(j)(4).

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248 Id.

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249 See note 219, supra.

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250 See Proposing Release, supra note 4, at 32571.

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251 See FINRA Letter, p. 10; SIFMA Letter, p. 15; Liquidnet Letter, p. 3; FINRA Proposal Letter, p. 6.

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252 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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253 See SIFMA Letter, p. 13; CBOE Letter, p. 5.

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254 See CBOE Letter, p. 5. See also Options Settlement Order, supra, note 60. See, e.g., Securities Exchange Act Release No. 50996 (January 7, 2005), 70 FR 2436 (order approving proposed rule change by CBOE relating to Phase V of COATS).

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255 See Liquidnet Letter, p. 3.

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256 See Ameritrade Letter, p. 3.

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257 See SIFMA Letter, p. 15.

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258 See BOX Letter, p. 3.

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259 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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260 See Rule 613(j)(4).

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261 See, e.g., FINRA Rule 5320; NYSE Arca Equities Rule 6.16.

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262 See Section II.A., supra.

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263 See BOX Letter, p. 3.

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264 See SIFMA Letter, p. 15.

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265 See Rule 613(c)(7)(ii)(F). The Commission notes that the NMS plan submitted by the plan sponsors would need to provide appropriate detail as to how orders routed within a single broker-dealer would be reported. For example, the NMS plan would need to address the routing of an order received by a customer-facing sales desk within a broker-dealer to a separate trading or market-making desk within the same broker-dealer that actually determines how to execute the order.

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266 See Ameritrade Letter, p. 3.

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267 See CBOE Letter, p. 5; TIAA-CREF Letter, p. 2; Wachtel Letter, p. 1; SIFMA Letter p. 13; FINRA Proposal Letter, p. 5-6; GETCO Letter, p. 3-4; Nasdaq Letter II, p. 3.

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268 See TIAA-CREF letter, p. 2-3. Another commenter echoed this concern and recommended that the consolidated audit trail develop a means to avoid such duplicative reporting, explaining that this is a problem with the current OATS system. See Wells Fargo Letter, p. 2.

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269 See TIAA-CREF letter, p. 2.

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270 See FINRA Proposal Letter, p. 5-6.

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271 Id.

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272 See Wachtel Letter, p. 1. The Commission notes any exemptions granted by FINRA under FINRA Rule 7470 may not exceed a period of two years, unless extended. See FINRA Rule 7470. FINRA's authority to grant exemptions under FINRA Rule 7470 expires on July 10, 2015. See FINRA Rule 7470(c).

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273 See CBOE Letter, p. 5-6; SIFMA Letter, p. 13; GETCO Letter, p. 3-4.

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274 See CBOE Letter, p. 5-6 (stating its belief that "it would be redundant for both the market makers and the exchanges to all submit this information to the CAT. We recommend that the exchanges be permitted to submit information on market maker quotes to the CAT. Market makers who submit quotes to an exchange would have no obligation other than to correctly identify themselves to the exchange as the party submitting the quotation. The exchange could add the rest of the required information (participant identifier, unique order identifier, etc.) to the quote and transmit it to the CAT").

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275 See SIFMA Letter, p. 13.

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276 See GETCO Letter, p. 3-4. Another commenter proposed to develop a platform that would collect audit trail information from the SROs and other sources of information, and thus reduce the obligations on broker-dealers to report data. See Nasdaq Letter II, p. 3.

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277 See Rules 613(c)(5) through (7).

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278 The Commission notes that the Rule does not preclude the NMS plan from allowing broker-dealers to use a third party to report the data required to the central repository on their behalf. In particular, the Commission recognizes that introducing brokers may wish to contract with clearing broker-dealers for this purpose and that the SROs may need to amend their rules to address the allocation of responsibility between the parties. In such cases, the Commission expects that the clearing contract, as mandated by the SRO's rules, as amended, would address the allocation of responsibility for the reporting of required data.

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279 The Commission has adopted Rule 613(c)(5) and (6) using the terms "record" and "report" the required audit trail data, rather than "collect" and "provide" the required audit trail data, as proposed. See also Section III.B.1.e., infra.

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280 The Rule as adopted requires the NMS plan submitted to the Commission for its consideration to require broker-dealers and SROs to record and report to a central repository only the audit trail information for actions each took with respect to an order. For example, if a member receives an order from a customer, the member will be required to report its receipt of that order (with the required information) to the central repository. If the member then routes the order to an exchange for execution, the member will be required to report the routing of that order (with the required information) to the central repository. Likewise, the exchange receiving the routed order will be required to report the receipt of that order from the member (with the required information) to the central repository. If the exchange executes the order on its trading system, the exchange will be required to report that execution of the order (with the required information) to the central repository, but the member will not also be required to report the execution of the order. If the member executes the order in the OTC market, however, rather than routing the order to an exchange (or other market center) for execution, the member will be required to report the execution of the order (with the required information) to the central repository. In this regard, there is no duplicative reporting of audit trail information because each market participant is required to report only the audit trail data for the actions it has taken with respect to an order. The Commission notes that, for orders that are modified or cancelled, Rule 613(c)(7)(iv) would require the broker-dealer who received the modification from a customer, for example, to report the order modification to the central repository. Thus, if broker-dealer A received a modification to a customer's order from the customer, broker-dealer A would be required to report such modification to the central repository. If broker-dealer A had already routed the customer's order to another broker-dealer ("broker-dealer B"), the customer's modification would also need to be reported by broker-dealer A to broker-dealer B. The receipt of the customer's modification by broker-dealer B would also need to be reported to the central repository, pursuant to Rule 613(c)(7)(iv). The same reporting obligations would apply if the modification were originated by broker-dealer A.

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281 Such costs might include the costs to purchase or build new systems and/or costs to modify existing systems to record and report the required data. As discussed in Section I., supra, the NMS plan would include detailed information about costs for the public and the Commission to consider.

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282 See Section III.C.2.iii., infra.

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283 See Wachtel Letter, p. 1.

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284 See Section III.D., infra.

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285 If a clearing broker-dealer receives an order from a small broker-dealer during the period between the time the Rule is applicable to large broker-dealers and the time the Rule is applicable to small broker-dealers, the broker-dealer performing the clearing function for the small introducing broker will be subject to only the requirements of the Plan applicable directly to the clearing broker-dealer, while the small introducing broker will not be subject to the reporting requirements at that time.

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286 In particular, the Commission acknowledges that certain elements are not collected by existing audit trails and thus SROs and members would incur additional costs to record and report such information. The Commission also acknowledges that there might be additional costs with respect to assigning customer identifiers, the broker-dealer identifiers and the order identifiers because such assignments might, depending on the NMS plan, require coordination amongst various different entities and possibly further systems changes.

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287 See proposed Rules 613(c)(7)(i)(I), 613(c)(7)(ii)(G), 613(c)(7)(iii)(F) and 613(c)(7)(iv)(D).

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288 A broker or dealer currently must mark all sell orders of any equity security as long, short, or short exempt. See Rule 200(g)(1) under the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked short exempt only if the conditions of Rule 201(c) or (d) under the Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 200(g)(2) under the Exchange Act, 17 CFR 242.200(g)(2).

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289 See Kumaraguru Letter, p. 1.

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290 Id.

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291 See Ameritrade Letter, p. 3.

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292 Id.

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293 See FINRA Proposal Letter, Appendix A.

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294 See Section II.A.2., supra.

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295 See Kumaraguru Letter, p. 1.

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296 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C).(2)., infra (discussing the definition of "customer" as applied to investment advisers).

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297 See Section III.B.1.d.ii., infra, for a discussion of the proposed requirement to report the unique identifier of the registered representative receiving or originating an order.

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298 See Proposing Release, supra note 4, at 32575.

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299 See Angel Letter, p. 2-3.

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300 Order type information is important because it reflects the intention of the person originating an order with regard to how an order should be handled, and also provides information regarding the potential impact of orders on the market.

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301 See Proposing Release, supra note 4, at 32575.

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302 See proposed Rule 613(j)(3).

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303 See Angel Letter, p. 2-3.

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304 Id.

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305 See Managed Funds Association Letter, p. 2; SIFMA Letter, p. 11; SIFMA Drop Copy Letter, p. 2.

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306 See Managed Funds Association Letter, p. 25-7">

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307 See SIFMA Letter, p. 11. SIFMA subsequently submitted an alternative proposal that did not include a flag for algorithms, citing lack of clarity in the Commission's definition of algorithmic order, and stating that the FIX standard lacks existing fields to flag such orders. Id. at 2.

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308 See Angel Letter, p. 2-3.

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309 See Rule 613(j)(7).

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310 See Proposed Rule 613(c)(7)(i)(F).

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311 See SIFMA Letter, p. 12; Liquidnet Letter, p. 6; FINRA Letter, p. 4; FINRA Proposal Letter, p. 6.

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312 See FINRA Letter, p. 4 (explaining that "multiple firms can currently be represented by a single MPID that is used for market access arrangements and is assigned to another firm that has no direct relationship to the trading activity being reported under that MPID"). This commenter also supported the use of more specific "sub-identifiers" to allow regulators to distinguish between desks or trading units within a firm.

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313 Id. at p. 9. FINRA also requested that the Commission reconsider the need for reporting the identification of the beneficial owner, the identification of the person exercising investment discretion, and the unique identifier of the branch office and registered representative. For further discussion of this comment, see note 170 supra and accompanying text.

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314 See FINRA Proposal Letter, p. 6, 13. The CRD is the central licensing and registration system operated by FINRA which contains employment, qualification and disciplinary histories for securities industry professionals who do business with the public.

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315 See FINRA Proposal Letter, p. 6, 13.

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316 Id. at p. 6.

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317 See Angel Letter, p. 2.

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318 This standard is being developed by Technical Committee 68 (TC68) of ISO, in whose meetings a Commission staff representative participates. Its final publication is subject to the resolution of specific issues on implementation, operating procedures, and the need to coordinate with a global legal entity identifier initiative conducted by the global regulatory community, in which a Commission staff representative is also participating.

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319 One commenter requested the Commission consider how the Department of Treasury's newly-created Office of Financial Research ("OFR") would impact reporting requirements imposed by the consolidated audit trail. See SIFMA Letter, p. 22-23. The commenter noted that the collection powers granted to the OFR, as well as its authority to require standardized reporting of data, could affect how data is submitted to the consolidated audit trail. Id. at p. 22. The commenter suggested that any information that is provided to the consolidated audit trail should not be required to be provided to the OFR again or in a different format. Id. The Commission understands that the OFR has been participating in and encouraging efforts by interested parties to have a standard for assigning unique entity identifiers created by an internationally recognized standards body ("IRSB") and that the ISO has issued a draft ISO standard, ISO 17442, for the financial services industry that is proposed to provide a viable global solution for the accurate and unambiguous identification of legal entities engaged in financial transactions. See ISO Press Release "ISO Financial Services Standard Wins Industry Support Six Months Ahead of Publication," July 25, 2011. Because the ISO standard is still in draft form and issues of implementation, governance and operating procedures remain to be resolved, the Commission does not believe that it is appropriate for it to mandate the use of the ISO standard at this time. The Commission notes, however, that to the extent that unique entity identifiers become available from an IRSB, Rule 613 provides SROs with sufficient flexibility to submit, if they so chose, an NMS plan that makes use of those identifiers and requires all or some reporting parties to obtain such identifiers, assuming such identifiers otherwise meet the requirements of the Rule.

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320 See proposed Rule 613(c)(7)(iv)(E) (requiring the reporting of the identity of the person giving a modification or cancellation instruction for an order); adopted Rule 613(c)(7)(iv)(F) (requiring the CAT-Reporter-ID or Customer-ID of such person instead).

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321 See note 313, supra.

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322 See proposed Rule 613(c)(7)(i)(F).

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323 17 CFR 240.17a-3(a)(6)(i).

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324 17 CFR 240.17a-4(b)(1).

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325 See Rule 613(j)(3) for a definition of "customer."

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326 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(B).

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327 See CBOE Letter, p. 2; Managed Funds Association Letter, p. 2; FINRA Letter, p. 9; SIFMA Drop Copy Letter, p. 1; SIFMA Letter, p. 9.

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328 See CBOE Letter, p. 2.

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329 See Managed Funds Association Letter, p. 2.

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330 See FINRA Letter, p. 9.

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331 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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332 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4.

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333 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, 2.

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334 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 3; FIF Letter, p. 2.

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335 See SIFMA Drop Copy Letter, p. 1. See also SIFMA Letter, p. 9.

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336 Id.

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337 See SIFMA Letter p. 9, 10.

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338 See Liquidnet Letter, p. 4; SIFMA Letter, p. 10-11; Knight Letter, p. 2; Scottrade Letter, p. 1; Direct Edge Letter, p. 3; FINRA Proposal Letter, p. 4; SIFMA Letter, p. 11.

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339 See Proposing Release, supra note 4, at 32573; Liquidnet Letter, p. 4.

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340 See SIFMA Letter, p. 10.

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341 See Knight Letter, p. 2.

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342 See Scottrade Letter, p. 1. See also Knight Letter, p. 2; Direct Edge Letter, p. 4.

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343 See Direct Edge Letter, p. 3.

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344 See FINRA Proposal Letter, p. 4.

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345 See SIFMA Letter, p. 11.

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346 See Angel Letter, p. 2; FIF Letter, p. 2; BOX Letter, p 2.

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347 See Angel Letter, p. 2. This commenter stated that "[i]t would be relatively simple and cheap to add four fields to each trade report that would contain the account numbers of the buyer and seller and the Market Participant Identifier (MPID) for the original order entry firms."

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348 See FIF Letter, p. 2. This commenter recommended that the requirement for such unique customer identifiers be tabled until after regulators have experience using CAT without this identifier.

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349 See FIF Letter, p. 2.

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350 See BOX Letter, p. 2.

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351 See Section II.A.3., supra.

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352 See SIFMA Letter, p. 11; FINRA Proposal Letter, p. 6-7.

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353 See SIFMA Letter, p. 11.

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354 Id. See also FINRA Proposal Letter, Appendix B (setting forth a method for identifying large traders through the "registration of unique market participant identifiers rather than by requiring broker-dealers to provide the CAT processor with any large trader numbers assigned by the SEC in order reports, thereby minimizing the ability of market participants to reverse engineer a large trader's identity or trading strategy").

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355 See FINRA Proposal Letter, p. 6-7.

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356 See SIFMA Letter, p. 10; Wells Fargo Letter, p. 3; Ross Letter, p. 1; ICI Letter, p. 2; FIF Letter, p. 2.

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357 See SIFMA Letter, p. 10 (noting that "in recent years, increased concerns about identity theft and client confidentiality have led the securities industry to move away from using social security identification numbers or taxpayer identification numbers as a way to monitor clients and customers. The SEC has affirmed that it would guard access to customer social security and taxpayer identification numbers with even more safeguards than it does other information in the central repository of the consolidated audit trail. Although the SEC has a strong record of protecting investor privacy, the very presence of potentially billions of unique customer identifiers tied to personal information in a central repository would create a substantial risk of misuse and identity theft. The risk of unique customer identifiers being stolen or misused would be magnified in a real-time reporting system").

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358 See Wells Fargo Letter, p. 3. However, this commenter also noted that, "[w]hile the full panoply of privacy concerns that flow from having a unique order identifier being available to every participant in the order execution process may be difficult to assess, creating a system that has that unique identifier available for primarily the post trade review likely solves both the privacy and cost issues in a manner reasonable for both clients, market participants and regulators." Id.

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359 See Ross Letter, p. 1 (asking at what level of security to encrypt customer data, and for how long to encrypt it for, as well as how long the Commission would need to decrypt the customer's name – whether on a real time or overnight basis, and noting that data encryption is expensive and could enlarge message sizes.) See also ICI, p. 3 (suggesting that the Commission expressly state who would have access, when they could access it, and how they could use it; and also recommending requiring that all data sent to the central repository be encrypted and that certain fields be "masked" or that reporting of information in such fields be delayed until end-of-day to reduce concerns about leaked information being used for frontrunning).

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360 See FIF Letter, p. 2.

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361 Because existing SRO audit trails do not require customer information to be reported, regulators must request that information identifying the customer, often from a multitude of sources, which can result in significant delays in investigating market anomalies or violative trading. Additionally, indirect access to an exchange (such as "sponsored access" arrangements) also has made it more difficult to use the current EBS system and Rule 17a–25 to identify the originating customer because the broker-dealer through whom an order is sent to an exchange may not know or have direct access to information identifying the customer who originally submitted the order.

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362 See notes 331-334, supra, and accompanying text.

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363 See Angel Letter, p. 2.

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364 See SIFMA Letter, p. 9-11; FINRA Proposal Letter, p. 4 and 6.

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365 For purposes of the following discussion, the Commission will use the terms "unique customer identifier" and "Customer-ID" interchangeably.

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366 Under the Rule, each customer would be assigned a unique customer identifier, or Customer-ID. However, an order may have more than one Customer-ID if the account holder differs from the person from whom the broker-dealer is authorized to take trading instructions or if more than one person is an account holder for the account or is authorized to give trading instructions for the account.

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367 See Rule 613(a)(1)(xi).

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368 See SIFMA Letter, p. 11.

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369 See SIFMA Letter, p. 11.

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370 See Section III.B.1.e., infra.

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371 See FINRA Letter, p. 8-9.

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372 See ICI Letter, p. 2-4; SIFMA Letter, p. 10-11; Angel Letter, p. 2; Ross Letter, p. 1.

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373 See Section III.B.2.e., infra.

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374 See Ross Letter, p. 1.

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375 See Rule 613(a)(1)(iv).

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376 See also Section III.B.2.e., infra, for a discussion of the provisions in the NMS plan designed to protect the privacy and confidentiality of the consolidated audit trail data.

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377 See Rule 613(j)(4).

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378 See Rule 613(e)(2). See also Section III.B.2.d., infra.

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379 See FINRA Letter, p. 9.

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380 See SIFMA Letter, p. 11.

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381 Id.

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382 The Commission also notes that it retains the authority to request additional information from broker-dealers (and other market participants it regulates) where information about a customer of a broker-dealer beyond that required by Rule 613(j)(3) is needed to fulfill its mission.

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383 Rule 17a-3(a)(9), among other things, requires a broker-dealer to make and keep a record of the name and address of the "beneficial owner" of each cash or margin account with the broker-dealer. 17 CFR 240.17a-3(a)(9). Rule 613 is not intended to alter in any way the information that a broker-dealer is currently required to obtain under Rule 17a-3(a)(9).

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384 The Commission notes that, under Rule 613, both joint account holders would also receive their own unique customer identifier.

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385 See Rule 613(j)(3)(ii).

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386 For the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(i).

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387 Pursuant to the definition of "customer" under adopted Rule 613, the Rule would not capture owners of a fund because they are not the account holders at the broker-dealer.

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388 This is because, for the purpose of Rule 613(j)(3), natural persons who are employed by an entity that is an account holder, and who are authorized to trade for that account, are not considered different from the account holders, and are therefore not covered by Rule 613(j)(3)(ii). If an individual creates and operates two separate entities (as an employee of each such entity) that each maintain a trading account at one or more broker-dealers, the broker-dealers would be required to record and report the Customer-IDs of those entities, and not the customer ID of the individual trader.

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389 See Proposing Release, supra note 4, at 32576.

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390 See Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3; FIF Letter II, p. 2.

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391 See Liquidnet Letter, p. 6-7; SIFMA Letter, p. 12; FINRA Letter, p. 7; FIF Letter, p. 3.

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392 See FINRA Letter, p. 7-8. FINRA expressed concern that, if two child orders from the same parent order are sent to the same market center, regulators would need to look at time stamps and other attributes, such as share quantity and price, to attempt to create an accurate linkage for each individual child order. FINRA stated that this complexity could be avoided if members used a separate unique routed order identifier for each routed order. Id.

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393 See FINRA Proposal Letter, p. 7-8.

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394 See FIF Letter II, p. 2.

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395 See SIFMA Letter, p. 12. See also SIFMA Drop Copy Letter, p. 2 (suggesting a routed order identifier or a child order identifier which would be separate from the unique order identifier of the parent order, and would be reported to the consolidated audit trail separately on a non-real-time basis, as well as linkage information).

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396 See FIF Letter, p. 3 (recommending the linking of the order information in a fashion similar to OATS whereby the information would only be available to regulators).

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397 See SIFMA Letter, p. 12. In addition, another commenter suggested that order identifiers should be unique by broker and day, similar to the approach used by OATS. See Liquidnet Letter, p. 7.

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398 See Rule 613(c)(7)(i)(B); Rule 613(c)(7)(ii)(A); Rule 613(c)(7)(iii)(A); Rule 613(c)(7)(iv)(A); Rule 613(c)(7)(v)(A); Rule 613(c)(7)(vi)(C); and Rule 613(j)(1).

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399 See Rule 613(j)(1).

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400 See Section III.C.2.a., infra.

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401 See FIF Letter, p. 3; Liquidnet Letter, p. 7; SIFMA Letter, p. 12; SIFMA Drop Copy Letter, p. 12; FINRA Letter, p. 8.

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402 See Section II.A., supra.

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403 See Rule 613(j)(1). For example, one of the methods that the SROs could consider using to demonstrate the efficacy of their approach would be to engage appropriate third party experts to confirm that the system's proposed design and functionality would achieve its stated accuracy and reliability benchmarks.

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404 See Section III.C.2.a.i., infra; Rule 613(a)(1)(iii) and (iv).

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405 See Rule 613(e)(1).

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406 See FINRA Letter, p. 4-7.

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407 See SIFMA Letter, p. 12. See also FIF Letter, p. 3.

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408 See SIFMA Letter, p. 12.

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409 See proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), 613(c)(7)(v)(C).

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410 See Endace Letter, p. 1-2.

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411 See Endace Letter, p. 1. The Commission notes that this commenter also suggested that the same time increment be extended to market data feeds to help increase transparency and deter fraudulent activity; however, this comment is outside the scope of this Release.

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412 Id. at 2-3.

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413 See SIFMA Letter, p. 14.

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414 See FIF Letter, p. 6-7.

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415 Id. See Section III.B.1.d.v., infra, for further discussions of "time drift" and the issues raised by this commenter in that regard.

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416 See Proposed Rules 613(c)(7)(i)(H), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(B), and 613(c)(7)(v)(C).

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417 See Rules 613(c)(7)(i)(E), 613(c)(7)(ii)(C), 613(c)(7)(iii)(C), 613(c)(7)(iv)(C), and 613(c)(7)(v)(C).

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418 See, e.g., Securities Industry Automated Corporation's ("SIAC") Consolidated Quotation System ("CQS") Output Specifications Revision 40 (January 11, 2010); SIAC's Consolidated Tape Service ("CTS") Output Specifications Revision 55 (January 11, 2010); and Nasdaq's Unlisted Trading Privileges Plan Quotation Data Feed Interface Specifications Version 12.0a (November 9, 2009).

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419 See, e.g., http://batstrading.com/resources/features/bats_exchange_Latency.pdf (describing, among other things, the time it takes to accept, process, and acknowledge or fill a member order).

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420 See Endace Letter, p. 1.

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421 See FIF Letter, p. 7.

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422 See Section III.B.1.h., infra, for a discussion of clock synchronization.

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423 See FIF Letter, p. 6-7.

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424 Similarly, although reporting in increments finer than a millisecond would also enable the accurate time-sequencing of events originating from within a single system or systems operating off the same clock, the Commission recognizes that the effects of time drift across the clocks of different systems could limit the efficacy of time-sequencing sub-millisecond events across those systems.

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425 See FINRA's Order Audit Trail System, Frequently Asked Questions, http://www.finra.org/Industry/Compliance/MarketTransparency/OATS/NMS/P122893 (last visited on May 15, 2012).

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426 See Endace Letter, p. 1 (stating that "[t]oday Exchanges such as NYSE Euronext and BATS are claiming that they are executing orders in less than a millisecond (see Wall Street Journal on the January 6th 2010) and are displaying details of these trades in increments of milliseconds on their market data feeds. Clearly from an Exchange perspective the publishing of trade data at one millisecond increments is not just possible, its current practice. However, Endace believes that one millisecond increments is not good enough"); SIFMA Letter, p. 14 (acknowledging that, "[a]lthough firm systems tend to capture time stamps in milliseconds, reporting in milliseconds would require changes to internal systems given that existing audit trails such as OATS require reporting of time stamps accurate only to the second").

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427 See SIFMA Letter, p. 14.

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428 See Rule 613(a)(1)(xii).

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429 See Rule 613(a)(1)(vii).

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430 See Rule 608(b)(1) under Regulation NMS, 17 CFR 242.608(b)(1).

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431 See GETCO Letter, p. 4.

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432 Id.

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433 Id.

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434 OATS rules currently require the recording and reporting of orders routed internally. See FINRA Rule 7440(c).

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435 The Commission acknowledges that certain orders received by an exchange may be routed to another exchange; however, the routing of such an order to the other exchange is largely subject to the rules of the exchange and Rule 613 will capture such routing as a reportable event.

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436 In general, flash orders are communicated to certain market participants and either executed immediately or withdrawn immediately after communication. The Commission has proposed and sought comment on whether to amend Rule 602 of Regulation NMS under the Exchange Act to eliminate an exception for the use of flash orders by equity and options exchanges. See Securities Exchange Act Release Nos. 60684 (September 18, 2009), 74 FR 48632 (September 23, 2009); 62445 (July 2, 2010), 75 FR 39625 (July 9, 2010).

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437 See Section III.B.1.d.vi., supra, for a discussion of the modifications to Rule 613(c)(7)(ii) through (iii).

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438 The Commission notes that OATS rules also require both the FINRA reporting member routing an order and the FINRA reporting member receiving the order to record and report certain audit trail data. See FINRA Rule 7440(C). See also Rule 613(c)(7)(ii)(D) and Rule 613(c)(7)(iii)(D) through (E).

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439 See SIFMA Drop Copy Letter, p. 4.

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440 Id.

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441 See Liquidnet Letter, p. 7.

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442 See, e.g., FINRA Rule 7440(d); Nasdaq Rule 6950; NYSE Rule 132B.

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443 See SIFMA Drop Copy Letter, p. 4.

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444 See Section III.B.1.iii., supra.

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445 See Liquidnet Letter, p. 7.

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446 While the Commission is not requiring that execution data be linked with the public trade report using a common identifier, the Commission notes that the Rule does not prohibit the SROs from including a provision in the NMS plan for the establishment of a common identifier to link the audit trail execution reports for buy and sell orders to the public trade report.

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447 See Rule 613(j)(9) for a definition of "reportable event."

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448 See proposed Rule 613(c)(3).

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449 See Proposing Release, supra note 4, at 32572.

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450 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

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451 See Ameritrade Letter, p. 1.

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452 See Aditat Letter, p. 1-2. FIX Protocol is a series of messaging specifications for the electronic communication of trade-related messages. It has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. See What is FIX? available at http://fixprotocol.org/what-is-fix.shtml (last visited on May 7, 2011).

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453 See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter, p. 1-2.

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454 See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA Letter, p. 4-5; Knight Letter, p. 2. See also BATS Letter, p. 2; Broadridge Letter, p. 3; FIF Letter, p. 4; GETCO Letter, p. 3-4; CBOE Letter, p. 4; FIA Letter, p. 2. In particular, FIA noted its belief that "real-time reporting accounts for a significant portion of the considerable costs associated with the CAT." See FIA Letter, p. 2.

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fn -

455 See FINRA/NYSE Euronext Letter, p. 5; FINRA Letter, p. 13; SIFMA Letter, p. 5; CBOE Letter, p. 4 (stating that, "given the increased speed of order submission, quote changes, and order cancellation, modifications and executions, a real time submission requirement could strain the systems capacities and computer resources of SROs and many member firms").

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fn -

456 See FINRA Letter, p. 13. See also Berkeley Letter, p. 2 (noting the "peta-scale" problem of collecting audit trail data generally).

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-
fn -

457 See FINRA/NYSE Euronext Letter, p. 5-6; Knight Letter, p. 2-3; CBOE Letter, p. 4; Wells Fargo Letter, p. 3; FINRA Letter, p. 11-12; SIFMA Letter, p. 5; Direct Edge Letter, p. 3; FIA Letter, p. 2.

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fn -

458 See FINRA/NYSE Euronext Letter, p. 5-6 (noting that "drawing conclusions based solely on real time data increases the potential for inaccuracy because the data has not gone through the full range of validations . . . ."). See also Wells Fargo Letter, p. 3 ("[A]ccurate market information often does not happen in real time."); FINRA Letter, p. 11-12 (stating that current order-handling practices make "accurate real time order reporting problematic, and automated surveillance is only useful if the underlying data is accurate and complete . . . ."); SIFMA Letter, p. 5 ("There also would be data integrity costs in the form of less reliable data, or data that would have to be revised or resubmitted where it otherwise may not have been required if firms had a short window of time to more thoroughly 'scrub' or validate their submissions."); Direct Edge Letter, p. 3 ("Real-time data may be less reliable than information collected after the validations that come with settling a transaction.").

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fn -

459 See Knight Letter, p. 2-3. See also CBOE Letter, p. 4 ("[G]enerally our belief is that next day (T+1) data, which incorporates additional information such as cleared trade data, is a better report resource for generating surveillance and compliance reviews."); FINRA/NYSE Euronext Letter, p. 6 (stating that, "from a market surveillance standpoint, reliable and complete data received on a T+1 basis . . . is generally superior to unvalidated real-time data"); FIA Letter, p. 2 ("We believe the Commission's Proposal overvalues any potential benefits achieved by real-time reporting as compared to reporting on day after trade, or 'T+1,' basis.").

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-
fn -

460 See FINRA Letter, p. 11-12.

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-
fn -

461 Id. at p. 11.

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-
fn -

462 See Nasdaq Letter I, p. 9-10.

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fn -

463 See Nasdaq Letter II, p. 3.

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fn -

464 See ICI Letter, p. 5; Leuchtkafer Letter; GETCO Letter, p. 2; FIA Letter, p. 2; Scottrade Letter, p. 2; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3; CBOE Letter, p. 4; FINRA/NYSE Euronext Letter, p. 4, 6; FINRA Letter, p. 11; SIFMA Letter, p. 3, 7; SIFMA Drop Copy Letter, p. 1; FINRA Proposal Letter, p. 4, 10-11.

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fn -

465 See FINRA Letter, p. 11.

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fn -

466 See SIFMA February 2012 Letter, p. 1.

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fn -

467 See FINRA/NYSE Euronext Letter, p. 4; FINRA Letter, p. 11; FIA Letter, p. 2.

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fn -

468 See FINRA Proposal Letter, p. 4.

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fn -

469 See SIFMA Drop Copy Letter, p. 1-2. See also FINRA Proposal Letter, p. 10.

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fn -

470 See GETCO Letter, p. 2; BATS Letter, p. 2.

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fn -

471 See FIA Letter, p. 2.

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fn -

472 See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8; SIFMA February 2012 Letter, p. 1; CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3; FIA Letter, p. 2.

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473 See FINRA/NYSE Euronext Letter, p. 4. Similarly, FINRA believes "the SEC has significantly overvalued the regulatory benefits to be achieved . . . while underestimating some of the problems with relying on real-time data. This is true not only because certain information is difficult, if not impossible, to provide on a real-time basis, but also because real-time data is less reliable." See FINRA Letter, p. 10-11. See also SIFMA February 2012 Letter, p. 1 (stating, "[a]ny potential incremental benefit of receiving this information on a real-time basis is, in our view, substantially outweighed by the additional expense and implementation delays associated with building and maintaining a real-time system"); FIA Letter, p. 2 ("It is not apparent to us from the Proposal that the additional costs associated with a real-time audit trail, compared to a T+1 audit trail, would be offset by any incremental benefits to the Commission.").

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fn -

474 See CBOE Letter, p. 4.

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fn -

475 See SIFMA Letter, p. 3; see also SIFMA February 2012 Letter, p. 1 (questioning the regulatory need for real-time data versus data provided on an "end-of-day or 'T+1" basis); FIA Letter, p. 2.

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-
fn -

476 See Scottrade Letter, p. 2; ICI Letter, p. 5; BATS Letter, p. 2; Angel Letter, p. 3; Broadridge Letter, p. 3.

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-
fn -

477 See ICI Letter, p. 6.

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478 See SIFMA Drop Copy Letter, p. 1. The commenter stated that "implementation options and complexity are significantly different if the reporting regime is within'minutes' rather than 'seconds.' If real-time reporting is required in seconds, then significant re-engineering is required within broker-dealer order management systems and trading systems to support such a requirement (e.g., passing additional information between systems, performance tuning to compensate for additional processing of payload). Instead, if the definition of real-time allows for reporting within minutes (e.g., 10-15 minutes) of the events, it would be substantially less intrusive on order management systems and may allow for greater flexibility in designing reporting systems architecture and more standardized content for events such as order modifications, as described below. Also, as with prior implementations of new trade reporting regimes in the U.S. (e.g., ACT and TRACE), having more liberal reporting timeframes for an appropriate initial period (e.g., 12 months or more) to provide a sufficient period to optimize processes would be very helpful." This commenter also questioned "the need for real-time reporting of the entire set of data elements in the CAT proposal," and believed that "reporting on a T+1 (or in some cases later) basis should satisfy the SEC's stated regulatory objectives more efficiently." Id. See also Nasdaq Letter II, p. 3 (stating its proposed platform could support the provision of data in real time or within 10-15 minutes using drop copies).

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fn -

479 See GETCO Letter, p. 4. The commenter also believed this approach would lower the costs of the consolidated audit trail.

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fn -

480 See Bean Letter, p. 1.

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-
fn -

481 See BOX Letter, p. 2.

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-
fn -

482 Id. at p. 3.

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483 See Nasdaq Letter II, p. 2.

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484 See FINRA/NYSE Euronext Letter, p. 6. This commenter stated that "[a]n alternative to the all-encompassing real time order audit trail set forth in the Proposal would be to standardize and consolidate existing real time reporting systems (e.g., enhancing trade reporting and quotation systems with standardized and uniform identification for all broker-dealers) and enhance existing reporting requirements where the need is narrowly focused." See also FINRA Proposal Letter, p. 3-4, 10-11.

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fn -

485 See FIF Letter, p. 4; Ross Letter, p. 1.

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486 See FIF Letter, p. 4.

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fn -

487 See Ross Letter, p. 1.

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-
fn -

488 See Ameritrade Letter, p. 2.

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fn -

489 Id.

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fn -

490 Id.

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-
fn -

491 Id.

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-
fn -

492 Id.

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fn -

493 See Thomson Reuters Letter, p. 2.

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494 See Rule 613(c)(3). The Rule further provides that the NMS plan "may accommodate voluntary reporting prior to 8: 00 a.m. Eastern Time, but shall not impose an earlier reporting deadline on the reporting parties." Id.

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-
fn -

495 Id.

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-
fn -

496 See Scottrade Letter, p. 1-2; Angel Letter, p. 3; ICI Letter, p. 3-6; FINRA/NYSE Euronext Letter, p. 4, 6; GETCO Letter, p. 2; BATS Letter, p. 1-2; SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3; FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal Letter, p. 3; Nasdaq Letter II, p. 3-4; FIA Letter, p. 1-2.

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fn -

497 See Thomson Reuters Letter, p. 3; Aditat Letter, p. 2; FTEN Letter p. 3; Ameritrade Letter, p. 1 (stating that the scalability of its systems could support real-time reporting); Nasdaq Letter II, p. 3 (stating that a platform supported by FTEN and SMARTS technology would support the real-time provision of data).

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-
fn -

498 See SIFMA Drop Copy Letter.

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-
fn -

499 See Section II.A.1.c., supra.

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-
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500 See Rule 613(c)(3). The Commission notes that Rule 613, as proposed, was inconsistent in its use of the terms "provide" and "report." To eliminate this inconsistency, the Commission is replacing all uses of "provide" with "report," which the Commission believes more accurately describes the requirement the Commission is imposing on national securities exchanges, national securities associations, and members.

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fn -

501 See note 494, supra.

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fn -

502 See note 453, supra, and accompanying text.

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-
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503 The Commission notes that, consistent with adopting an incremental approach to the creation of a consolidated audit trail, even though it is not requiring audit-trail data to be reported in real time, it is adding various additional requirements, discussed in Section III.C.2.a., infra, to the Rule regarding the evolution of the consolidated audit trail, including the possibility for reduced reporting times in the future as technologies evolve.

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504 The current OATS technical specifications require OATS reporting by 8: 00 a.m. on the calendar day after the reportable event. The Commission notes that the FINRA rules for OATS reporting, however, require that data "shall be transmitted on the day such event occurred" – unless information required by FINRA Rule 7440(b), (c), or (d) (order receipt and origination; order transmittal; order modifications, cancellations, and executions) is unavailable – in such cases, OATS requires reporting on the day the information becomes available. See FINRA Rule 7450(b)(2). Because of the discrepancy between the technical specifications and the applicable FINRA rule, the Commission approved FINRA's proposed rule change to allow OATS reporting as late as 8: 00 a.m. the next day. See Securities Exchange Act Release No. 66021 (December 21, 2011), 76 FR 81551 (December 28, 2011).

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505 The Commission notes that the Rule, as adopted, provides that an NMS plan must require information to be reported by 8: 00 a.m. the following trading day, while OATS requires information to be reported by 8: 00 a.m. the following calendar day. Thus, the Rule as adopted provides for a longer reporting period than does OATS with respect to weekends and holidays.

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506 As noted in the Proposing Release, supra note 4, at 32592, broker-dealers that rely mostly on their own internal order routing and execution management systems would have needed to make changes to or replace those systems to collect and report the required order and reportable event information to the central repository to comply with the proposed Rule.

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507 See e.g., BATS Letter, p. 2; CBOE Letter, p. 2-3; Wells Fargo Letter, p. 2; Knight Letter, p. 3; High Speed, p. 1; FTEN Letter p. 1; Correlix Letter, p. 2; Thomson Reuters Letter, p. 2; FINRA Proposal Letter, p. 16; FINRA/NYSE Euronext Letter, p. 7.

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fn -

508 See Proposing Release, supra note 4, at 32572.

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-
fn -

509 See FTEN Letter, p. 3-4, 13-15; Thomson Reuters Letter, p. 2-3.

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510 Id.

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511 See FTEN Letter, p. 4, 12, 14. See also SIFMA Drop Copy Letter.

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fn -

512 See FIX Letter, p. 1; Aditat Letter, p. 2.

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513 Id.

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514 See Nasdaq Letter II, p. 3.

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fn -

515 See Rule 613(c)(2).

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-
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516 See FTEN Letter, p. 3-4, 13; Thomson Reuters Letter, p. 2-3. See also SIFMA Drop Copy Letter.

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517 The Commission believes that, if the NMS plan does not require data to be reported to the central repository in a uniform format, broker-dealers and SROs may not have to make substantial changes to their order management and execution systems to comply with Rule 613, and thus may face lower costs than if data were required to be reported in a uniform format because in that instance, broker-dealers may need to make substantial changes to their order management and execution systems to comply with Rule 613. The Commission acknowledges, however, that there would be costs to convert data to a "uniform electronic format for consolidation and storage." On balance, however, the Commission preliminarily believes that broker-dealers might benefit from economies of scale when normalizing data.

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518 See Rule 613(a)(1)(iii).

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-
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519 See Proposing Release, supra note 4, at 32578.

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520 See proposed Rule 613(c)(4), 613(c)(7)(vi) through (vii).

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521 See SIFMA Letter, p. 8; SIFMA Drop Copy Letter, p. 1.

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522 See Rule 613(c)(7)(viii).

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523 See Section III.B.1.g.i., supra.

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524 Rule 613(c)(4) now requires that "each member of a national securities exchange or national securities association" provide the information set forth in the Rule; as proposed, Rule 613(c)(4) required "each national securities exchange, national securities association, and member" to provide the information set forth in the Rule.

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525 The Commission has also amended Rule 613(c)(4), as proposed, to include the provision of information sufficient to identify the customer and customer account information. See Rule 613(c)(7)(viii); Section III.B.1.g.ii.(C)., supra.

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526 See proposed Rule 613(c)(4), 613(c)(7)(vi), 613(c)(7)(vii).

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527 See proposed Rules 613(c)(7)(vi)(D), 613(c)(7)(vi)(E), and 613(c)(7)(vi)(F).

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fn -

528 See Proposing Release, supra note 4, at 32573; proposed Rule 613(c)(7)(i)(A), (C).

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529 See Liquidnet Letter, p. 3; Direct Edge Letter, p. 4 (emphasizing that it would be more important for exchanges to obtain the identity of the brokers on both sides of an execution for cross-market surveillance purposes); SIFMA Letter, p. 6, 9; Ameritrade Letter, p. 3.

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-
fn -

530 See FIF Letter, p. 2-3.

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-
fn -

531 This commenter suggested an alternative if the Commission believed customer information was necessary, using both EBS and OATS: EBS could send the central repository customer account information (including account number), and OATS would add a field for the account number to link the OATS reports and customer information together. Id. at p. 2-3.

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-
fn -

532 See SIFMA Letter, p. 6, 9.

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fn -

533 See Ameritrade Letter, p. 2-3.

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fn -

534 Id.

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-
fn -

535 See Liquidnet Letter, p. 3.

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-
fn -

536 See Liquidnet Letter, p. 3, 5-6.

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537 See FIF Letter II, p. 2.

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-
fn -

538 See SIFMA Letter, p. 6; Liquidnet Letter, p. 3.

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-
fn -

539 See also Rule 613(j)(4) which defines "customer account information" to include, but not be limited to, account number, account type, customer type, date account opened, and large trader identifier (if applicable).

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fn -

540 Rule 613(j)(3), as adopted, defines the term "customer" to mean the account holder(s) of the account at a registered broker-dealer originating the order; and any person from whom the broker-dealer is authorized to accept trading instructions for such account, if different from the account holder(s).

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-
fn -

541 See Proposing Release, supra note 4, at 32573.

-
-
fn -

542 The Commission notes that, under the Rule, a broker-dealer must only report the account number for the account the customer used to submit an order, not the account numbers for all accounts of a customer.

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-
fn -

543 See Rule 613(c)(4).

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-
fn -

544 As adopted, Rule 613(c)(7)(viii) provides that, "[f]or original receipt or origination of an order, the following information: (A) Information of sufficient detail to identify the customer; and (B) Customer account information" be recorded and reported to the central repository.

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-
fn -

545 See Proposing Release, supra note 4, at 32578.

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-
fn -

546 See Section III.B.1.d.iii., supra.

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-
fn -

547 See FIF Letter, p. 3.

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-
fn -

548 See Section III.B.3.b., infra.

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fn -

549 See Ameritrade Letter, p. 2-3.

-
-
fn -

550 However, if any information previously reported by a broker-dealer to the central repository changes, the broker-dealer would need to report the updated information to the central repository by 8: 00 a.m. Eastern Time on the trading day following the day that the broker-dealer receives the updated information

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-
fn -

551 See Proposing Release, supra note 4, at 32566.

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-
fn -

552 See, e.g., Rules 17a-3, 17a-4, 17a-25 under the Exchange Act, 17 CFR 240.17a-3, 17a-4, 17a-25.

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-
fn -

553 See Liquidnet Letter, p. 3, 5-6.

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-
fn -

554 See Rule 613(j)(3); see also Section III.B.1.d.iii.(C)(2)., supra (discussing the definition of "customer" as applied to investment advisers).

-
-
fn -

555 See Proposing Release, supra note 4, at 32573.

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-
fn -

556 See SIFMA Letter, p. 21.

-
-
fn -

557 Id.

-
-
fn -

558 Id.

-
-
fn -

559 The Rule does, of course, require the NMS plan submitted to the Commission for its consideration to require the foreign broker-dealer to disclose information about itself to the U.S. broker-dealer, as such information would be expected to be part of the records of the U.S. broker-dealer holding a foreign broker-dealer account.

-
-
fn -

560 See proposed Rule 613(d)(1).

-
-
fn -

561 See proposed Rule 613(d)(2).

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-
fn -

562 See proposed Rule 613(a)(3)(ii).

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-
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563 See SIFMA Letter, p. 14; FIF Letter, p. 6-7; Broadridge Letter, p. 3; Endace Letter, p. 2.

-
-
fn -

564 See FIF Letter, p. 6.

-
-
fn -

565 See FIF Letter, p. 6-7 (stating that currently "time drift" is an issue, despite advancements in synchronization technology, with at least one exchange experiencing time drifts between one and three seconds, and the SIP having its own time drift).

-
-
fn -

566 See SIFMA Letter, p. 14.

-
-
fn -

567 See Broadridge Letter, p. 3.

-
-
fn -

568 See FIF Letter, p. 7.

-
-
fn -

569 See Endace Letter, p. 2.

-
-
fn -

570 See Liquidnet Letter, p. 8.

-
-
fn -

571 See OATS Reporting Technical Specifications (May 3, 2011), available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p123579.pdf (last accessed December 8, 2011). In addition, FINRA allows clock drift of an additional two seconds before re-synchronization is required.

-
-
fn -

572 See Endace Letter, p. 2.

-
-
fn -

573 See FIF Letter, p. 6-7.

-
-
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574 The Commission notes that one commenter suggested that the cost might be limited because GPS receivers could be used and installed for a few thousand dollars per installation. See Endace Letter, p. 2.

-
-
fn -

575 See Section III.B.1.d.v., supra (explaining the importance to enforcement cases of an accurately timed record of order events).

-
-
fn -

576 See proposed Rule 613(d)(2).

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-
fn -

577 See Rule 613(d)(2).

-
-
fn -

578 Rule 613(d)(2) provides that "[e]ach national securities exchange and national securities association [shall] evaluate annually the clock synchronization standard to determine whether it should be shortened, consistent with changes in industry standards . . . ."

-
-
fn -

579 See FIF Letter, p. 7.

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-
fn -

580 See proposed Rule 613(e)(1).

-
-
fn -

581 The term "facility" is defined in Section 3(a)(2) of the Exchange Act, with respect to an exchange, to include "its premises, tangible or intangible property whether on the premises or not, any right to use such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service." 15 U.S.C. 78c(a)(2).

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582 See proposed Rule 613(e)(2).

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-
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583 See proposed Rule 613(a)(4).

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-
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584 See proposed Rule 613(a)(3)(i).

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-
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585 See Ameritrade Letter, p. 4; High Speed Letter, p. 1; BATS Letter, p. 2.

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-
fn -

586 See Ameritrade Letter, p. 4.

-
-
fn -

587 See High Speed Letter, p. 1.

-
-
fn -

588 See BATS Letter, p. 2.

-
-
fn -

589 See FINRA Proposal Letter, p. 14-16.

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-
fn -

590 See High Speed Letter, p. 1.

-
-
fn -

591 See Ameritrade Letter, p. 4.

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-
fn -

592 See note 581, supra (describing the nature of a "facility").

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-
fn -

593 See Ameritrade Letter, p. 4.

-
-
fn -

594 See, e.g., 15 U.S.C. 78b; 15 U.S.C. 78f(b); 15 U.S.C. 78o-3(b); 15 U.S.C. 78s(h)(1).

-
-
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595 Section 19(b)(1) of the Exchange Act defines the term "proposed rule change" to mean "any proposed rule or rule change in, addition to, or deletion from the rules of [a] self-regulatory organization." Pursuant to Section 3(a)(27) and 3(a)(28) of the Exchange Act, the term "rules of a self-regulatory organization" means (1) the constitution, articles of incorporation, bylaws and rules, or instruments corresponding to the foregoing, of an SRO, and (2) such stated policies, practices and interpretations of an SRO (other than the Municipal Securities Rulemaking Board) as the Commission, by rule, may determine to be necessary or appropriate in the public interest or for the protection of investors to be deemed to be rules.

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-
fn -

596 See Ameritrade Letter, p. 4.

-
-
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597 See note 581, supra (describing the nature of a "facility").

-
-
fn -

598 15 U.S.C. 78s.

-
-
fn -

599 17 CFR 242.608(d)(1). If the Commission does not make a finding that the action or failure to act is consistent with the provisions of the NMS plan and was applied in a manner consistent with the Act, or if it finds that such action or failure to act imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, the Commission, by order, can set aside such action and/or require such action with respect to the matter reviewed as the Commission deems necessary or appropriate in the public interest, for the protection of investors, and the maintenance of fair and orderly markets, or to remove impediments to, and perfect the mechanisms of, the NMS plan. 17 CFR 242.608(d)(3).

-
-
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600 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any penalty provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any penalty provisions set out in the NMS plan approved by the Commission.

-
-
fn -

601 See Section III.B.2.b., infra; Rule 613(e)(1).

-
-
fn -

602 See Section III.B.2.e., infra; Rule 613(e)(4)(i).

-
-
fn -

603 See proposed Rule 613(e)(1).

-
-
fn -

604 See Sections III.B.1.d. and III.B.1.f., supra.

-
-
fn -

605 See Rule 613(c)(2); see Section III.B.1.f., supra.

-
-
fn -

606 See Proposing Release, supra note 4, at 32564. See also Section III.B.2.d., infra.

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-
fn -

607 See note 516, supra.

-
-
fn -

608 See Section III.B.1.d., supra.

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-
fn -

609 See proposed Rule 613(e)(5)(i).

-
-
fn -

610 The effective transaction reporting plans include the CTA Plan and the UTP Plan. See note 101, supra; proposed Rule 613(e)(5)(ii).

-
-
fn -

611 See proposed Rule 613(e)(5)(iii).

-
-
fn -

612 See Liquidnet Letter, p. 7. See also Section III.B.d.vii., supra.

-
-
fn -

613 See proposed Rule 613(e)(5)(i) through (iii).

-
-
fn -

614 See proposed Rule 613(e)(7)(i) through (iii).

-
-
fn -

615 See Liquidnet Letter, p. 7.

-
-
fn -

616 Quote condition is a field in the CQS feed that provides information on a quote, including whether such quote is an opening quote, closing quote, news pending, slow on ask side, slow on bid side, order imbalance or non-firm quote. See CQS Output Multicast Line Interface Specification, Version 48 (October 11, 2011), Appendix G.

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-
fn -

617 Manual quotes are not eligible for automatic execution and do not have trade through protection under Rule 611 of Regulation NMS. See 17 CFR 242.600(57) for a definition of a protected bid or protected offer.

-
-
fn -

618 17 CFR 242.611.

-
-
fn -

619 See proposed Rule 613(e)(6).

-
-
fn -

620 See Nasdaq Letter I, p. 10-11.

-
-
fn -

621 See Ross Letter, p. 1.

-
-
fn -

622 See proposed Rule 613(e)(6).

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-
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623 See Section III.C.2.a.i., infra.

-
-
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624 See Rule 613(a)(1)(ii).

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-
fn -

625 The Commission acknowledges there would be costs to the central repository for retaining data received or collected by the central repository pursuant to Rule 613. As discussed in Section I., supra, the NMS plan submitted to the Commission for its consideration will include a detailed analysis of the costs of the Rule for the Commission and the public to consider after the NMS plan has been submitted.

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-
fn -

626 See Proposing Release, supra note 4, at 32582.

-
-
fn -

627 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

-
-
fn -

628 See Nasdaq Letter I, p. 8.

-
-
fn -

629 See FIF letter, p. 4.

-
-
fn -

630 See Aditat Letter, p. 2.

-
-
fn -

631 See Commission Staff Memorandum, supra, note 64.

-
-
fn -

632 Id.

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-
fn -

633 Id.

-
-
fn -

634 See FINRA Letter, p. 11.

-
-
fn -

635 Id.

-
-
fn -

636 Id.

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-
fn -

637 Id.

-
-
fn -

638 Id.

-
-
fn -

639 Id. FINRA also noted, however, that "compliance rates for OATS steadily improved over time as members gained experience with the system. For example, when the OATS rules were first implemented, the match rate between executed orders and the related trade report submitted to an NASD transaction reporting system was only 76%. Currently, this match rate is consistently over 99%, which reflects the significant time and effort that has been expended by the industry to make their systems OATS compliant. FINRA believes that creation of a new system, rather than building off of an existing reporting infrastructure, will necessarily create a learning curve and lead to reduced compliance rates over the short-term." Id. The Commission acknowledges that there could be a learning curve for compliance with the NMS plan requirements for the reporting of data. The Commission, however, expects the NMS plan to minimize such reduced compliance rates to the extent reasonably practicable.

-
-
fn -

640 See Nasdaq Letter I, p. 13.

-
-
fn -

641 See Endace Letter, p. 2-3.

-
-
fn -

642 Id. at p. 3.

-
-
fn -

643 Rule 613(e)(4)(ii) provides that the NMS plan shall include policies and procedures, including standards, to ensure the timeliness, accuracy, integrity, and completeness of the data provided to the central repository.

-
-
fn -

644 See Section II.A., supra.

-
-
fn -

645 See Aditat Letter, p. 2; FIF Letter, p. 4; FINRA Letter, p. 11; Nasdaq Letter I, p. 8.

-
-
fn -

646 See Rule 613(e)(6)(i). The term "error rate" is defined in Rule 613(j)(6) to mean "[t]he percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order event that occurred in the market." The SROs should consider calculating an aggregate error rate as well as error rates for subcategories such as trade reporting and quote reporting.

-
-
fn -

647 See Rule 613(e)(6)(iii) through (iv).

-
-
fn -

648 See Rule 613(e)(6).

-
-
fn -

649 The Commission recognizes that in any complex system there is always a risk of occasional unexpected errors, or errors caused by rare and unexpected events. However, the Commission believes that, by tracking error rates on a daily basis, the SROs, and the Commission would be able to observe any repeated patterns or longer-term trends that suggest more systematic problems or concerns with data collection, reporting, or consolidation processes.

-
-
fn -

650 See Rule 613(e)(6)(iii) through (iv).

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-
fn -

651 See Commission Staff Memorandum, supra note 64.

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-
fn -

652 See Rule 613(a)(1)(ii).

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-
fn -

653 See proposed Rule 613(e)(2).

-
-
fn -

654 Id.

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-
fn -

655 See proposed Rule 613(e)(3).

-
-
fn -

656 See Liquidnet Letter, p. 8-9. See also SIFMA Letter, p. 19.

-
-
fn -

657 See Angel Letter, p. 3; Albany Letter, p.1-4; and TIAA-CREF Letter, p.4.

-
-
fn -

658 See Angel Letter, p. 3.

-
-
fn -

659 See Albany Letter, p. 1-3. This commenter acknowledged the privacy concerns involved in making the data available for academic research, but stated that researchers have faced similar challenges before and researchers are capable of developing a way to access and share information without the risk of divulging trading strategies or identities. The commenter also stated that data released after a delay would limit the data's usefulness.

-
-
fn -

660 See Van Bokkelen Letter, p. 1.

-
-
fn -

661 See Rule 613(e)(3). See also Rule 613(a)(1)(ii) (requiring the NMS plan to detail how readily the NMS plan will allow data in the central repository to be accessed by regulators, as well as the regulators' manner of access); see also Section III.C.2.a.i., infra.

-
-
fn -

662 See Sections III.C.2.a.i through ii., infra; Rule 613(a)(1)(ii) through (vii).

-
-
fn -

663 See proposed Rule 613(e)(4)(i). However, a plan sponsor also would be permitted to use the data it submits to the central repository for commercial or other purposes as otherwise permitted by applicable law, rule or regulation. Id.

-
-
fn -

664 See proposed Rule 613(h)(3), Rule 613(g)(4).

-
-
fn -

665 See Proposing Release, supra note 4, at 32582.

-
-
fn -

666 See Scottrade Letter, p. 2 (expressing concern that trading strategies and confidential customer information could be at risk from cyber-attacks or accidental data breaches); ICI Letter, p. 2-4; Ross Letter, p.; 1 Liquidnet Letter, p. 4. See also Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3.

-
-
fn -

667 See Ameritrade Letter, p. 3-4.

-
-
fn -

668 See Liquidnet Letter p. 4.

-
-
fn -

669 See Thomson Reuters Letter, p. 4.

-
-
fn -

670 See TIAA-CREF Letter, p. 4.

-
-
fn -

671 See ICI Letter, p. 2-4.

-
-
fn -

672 Id. at 3.

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-
fn -

673 Id.

-
-
fn -

674 See BATS Letter, p. 3.

-
-
fn -

675 See Managed Funds Association Letter, p. 2-3.

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-
fn -

676 Id.

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-
fn -

677 See Ross Letter, p. 1.

-
-
fn -

678 Id.

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-
fn -

679 5 U.S.C. 552.

-
-
fn -

680 See ICI Letter, p. 4.

-
-
fn -

681 For example, appropriate confidentiality protections will need to be programmed in any Commission systems that collect, store, or access data collected from the central repository. In addition, it may be appropriate to establish multiple access levels for Commission staff so that staff members are allowed only as much access as is reasonably necessary in connection with their duties.

-
-
fn -

682 See ICI Letter, p. 3

-
-
fn -

683 Rule 613(e)(4)(i)(B); see ICI Letter, p. 3 (recommending that "the confidential nature of the information supports limiting access to the CAT data to regulators and repository staff").

-
-
fn -

684 See Rule 613(e)(4)(i)(C). The Commission expects that the central repository's CCO would be responsible for determining the frequency of these regular reviews in the first instance, in accordance with industry standards for the review of information security, taking into account the sensitivity of the data stored in the central repository. See Rule 613(b)(5) for a description of the CCO.

-
-
fn -

685 See BATS Letter, p. 3. See also Managed Funds Association Letter, p. 2-3.

-
-
fn -

686 The Commission notes that, as part of its inspection and examination program, its staff has the authority to examine the application of any security and confidentiality provisions in the NMS plan to determine whether they have been applied fairly. In this manner, the Commission will be able to monitor how the plan sponsors have applied any such provisions set out in the NMS plan approved by the Commission, and whether their uses of the consolidated audit trail were consistent with the plan and the Exchange Act.

-
-
fn -

687 See Ross Letter, p. 1.

-
-
fn -

688 Specifically, adopted Rule 613(e)(4) requires the NMS plan to include policies and procedures, including standards, to be used by the plan processor to ensure the security and confidentiality of all information submitted to the central repository. In addition, one of the considerations the NMS plan must address is how the security and confidentiality of all information, including customer information, submitted to the central repository, will be ensured. See Rule 613(a)(1)(iv).

-
-
fn -

689 See ICI Letter, p. 4.

-
-
fn -

690 See Rule 613(e)(4)(i)(D).

-
-
fn -

691 See Liquidnet Letter, p. 4.

-
-
fn -

692 See Section III.C.2.a.i., infra.

-
-
fn -

693 See Rule 613(a)(1)(iv).

-
-
fn -

694 See proposed Rule 613(h)(1).

-
-
fn -

695 See proposed Rule 613(h)(2).

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-
fn -

696 See proposed Rule 613(h)(3).

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-
fn -

697 See Nasdaq Letter I, p. 13.

-
-
fn -

698 Id.

-
-
fn -

699 Id.

-
-
fn -

700 Id.

-
-
fn -

701 This technical modification simplifies the language of Rule 613(h)(1) and (2) from the proposal. Adopted Rule 613(h)(1) and (2) deletes the language "submitted pursuant to this section" and "of which it is a sponsor." Adopted Rule 613(h)(1) and (2), like the proposed Rule, requires each SRO to comply with the provisions of the NMS plan "approved by the Commission." Because each SRO will be a member of the NMS plan approved by the Commission, it is not necessary to include the phrases not adopted.

-
-
fn -

702 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

-
-
fn -

703 The Commission notes that any failure by a national securities exchange or national securities association to comply with the provisions of the NMS plan approved by the Commission will be considered a violation of Rule 613, and that the Commission could take appropriate steps to address such a violation, including imposing penalties as appropriate. See Rule 613(h)(2).

-
-
fn -

704 See Section III.B.2.a., supra.

-
-
fn -

705 See supra note 581 (describing the nature of a "facility").

-
-
fn -

706 15 U.S.C. 78q.

-
-
fn -

707 17 CFR 242.608(d)(1).

-
-
fn -

708 Id.

-
-
fn -

709 See Nasdaq Letter I, p. 13.

-
-
fn -

710 Any such provision would be subject to notice and comment pursuant to Rule 608 of Regulation NMS.

-
-
fn -

711 15 U.S.C. 78s(b)(2).

-
-
fn -

712 17 CFR 240.19b-4.

-
-
fn -

713 See proposed Rule 613(g)(1). This provision in the proposed Rule echoes the requirement contained in Rule 608 that "each self-regulatory organization also shall, absent reasonable justification or excuse, enforce compliance with any such plan by its members and persons associated with its members." 17 CFR 242.608(c).

-
-
fn -

714 See proposed Rule 613(g)(2).

-
-
fn -

715 See proposed Rule 613(g)(3).

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-
fn -

716 See proposed Rule 613(g)(4).

-
-
fn -

717 See Knight Letter, p. 3.

-
-
fn -

718 See Knight Letter, p. 3.

-
-
fn -

719 See Proposing Release, supra note 4, at 32585.

-
-
fn -

720 See Nasdaq Letter I, p. 3, 13; Direct Edge Letter, p. 5; FIF Letter, p. 1, 8; FINRA Letter, p. 15; SIFMA February 2012 Letter, p. 1.

-
-
fn -

721 See Nasdaq Letter I, p. 3, 13.

-
-
fn -

722 Id. at p. 3.

-
-
fn -

723 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

-
-
fn -

724 See FIF Letter, p. 8.

-
-
fn -

725 See Direct Edge Letter, p. 4-5.

-
-
fn -

726 Id. at p. 5.

-
-
fn -

727 Id.

-
-
fn -

728 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

729 Proposed Rule 613(b) required that the NMS plan include "a governance structure to ensure fair representation of the plan sponsors, and administration of the central repository, including the selection of the plan processor, . . . [a] provision addressing the requirements for the admission of new sponsors of the plan and the withdrawal of existing sponsors from the plan, . . . [a] provision addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan, . . . [a] provision addressing the manner in which the costs of operating the central repository will be allocated among the national securities exchanges and national securities associations that are sponsors of the plan, including a provision addressing the manner in which costs will be allocated to new sponsors to the plan. . . [and the] appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness in light of market and technological developments, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed."

-
-
fn -

730 See Rule 613(b)(6); Rule 613(b)(7).

-
-
fn -

731 See Rule 613(b)(5).

-
-
fn -

732 See Rule 613(b)(6). The written assessment could also further inform the extent to which it could be appropriate to share certain information collected by the consolidated audit trail with third parties. See Section III.B.2.d.

-
-
fn -

733 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

734 See Rule 613(b)(7)(i).

-
-
fn -

735 See Rule 613(b)(7)(ii).

-
-
fn -

736 See Rule 613(b)(7)(i).

-
-
fn -

737 See Rule 613(b)(7)(ii).

-
-
fn -

738 See Rule 613(a)(1)(xi); Section III.C.2.a.iii.c., infra, for a discussion of the tenth consideration.

-
-
fn -

739 See Nasdaq Letter I, p. 3, 13.

-
-
fn -

740 See, e.g., Options Order Protection and Locked/Crossed Market (Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009)) (including a unanimous voting requirement).

-
-
fn -

741 See FIF Letter, p. 1; Direct Edge Letter, p. 5.

-
-
fn -

742 As discussed and for the reasons set forth in Section I., supra, in light of the multi-step process for developing and approving an NMS plan that will govern the creation, implementation, and maintenance of a consolidated audit trail, the Commission is deferring a detailed analysis of costs and benefits of this requirement of the Rule until after the NMS plan has been submitted.

-
-
fn -

743 See proposed Rule 613(a)(3)(iv).

-
-
fn -

744 See Nasdaq Letter I, p. 10; Thomson Reuters Letter, p. 4.

-
-
fn -

745 See Thomson Reuters Letter, p. 4.

-
-
fn -

746 See FINRA/NYSE Euronext Letter, p. 3-4. See also Nasdaq Letter I, p. 8.

-
-
fn -

747 See IAG Letter, p. 2.

-
-
fn -

748 See BATS Letter, p. 2-3.

-
-
fn -

749 See Nasdaq Letter I, p. 10.

-
-
fn -

750 See iSys Letter, p. 2-3.

-
-
fn -

751 See Rule 613(f).

-
-
fn -

752 17 CFR 240.17d-2.

-
-
fn -

753 The Commission has examined the issue of a single market regulator in the past, specifically in the Intermarket Trading Concept Release (see Securities Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20, 2003)); however, a single regulator structure is not suggested by the adopted Rule.

-
-
fn -

754 These cost savings may accrue to any SRO that would no longer need to operate a retired system, as well as to any SRO members that would no longer be required to report to such systems.

-
-
fn -

755 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA Letter, p. 2; Direct Edge Letter, p. 2-3, 5. See also Section II.C.3.

-
-
fn -

756 See FIF Letter II, p. 2.

-
-
fn -

757 Id. at p. 3.

-
-
fn -

758 See Broadridge Letter, p. 2; FIF Letter, p. 8. See also Ross Letter, p. 1 (discussing examples of information security details to consider); Nasdaq Letter I, p. 6 (stating that the proposed Rule provided "incomplete technical information on which design and features make the most sense").

-
-
fn -

759 See FIF Letter II, p. 2-3; STA Letter, p. 2. See also Nasdaq Letter I, p. 6.

-
-
fn -

760 See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3. See also Nasdaq Letter I, p. 6.

-
-
fn -

761 See FIF Letter II, p. 2; STA Letter, p. 1.

-
-
fn -

762 See FIF Letter II, p. 1; STA Letter, p. 1-2.

-
-
fn -

763 See FIF Letter II, p. 2; STA Letter, p. 2.

-
-
fn -

764 See FIF Letter II, p. 1-2; STA Letter, p. 2.

-
-
fn -

765 See FIF Letter II, p. 2; STA Letter, p. 2-3.

-
-
fn -

766 See proposed Rule 613(a)(1).

-
-
fn -

767 See FIF Letter II, p. 3. The commenter also provided the cost to the industry for the expansion of OATS to all NMS stocks - $48 million. The Commission notes that this is the cost for the project as a whole, not solely for the planning phase, and therefore is not entirely attributable to the cost of the creation and filing of the NMS plan required by Rule 613.

-
-
fn -

768 The time remaining was spent on "testing and other activities." See FIF Letter II, p. 3.

-
-
fn -

769 See Nasdaq Letter I, p. 12; FIF Letter II, p. 2-3; STA Letter, p. 1-3; Direct Edge Letter, p. 2-3, 5.

-
-
fn -

770 See Section I., supra.

-
-
fn -

771 See, e.g., FINRA Letter, p. 14 (advocating that SROs build off existing audit trails to develop a consolidated audit trail) and Nasdaq Letter I, p. 11-12 (arguing against building off existing audit trail systems and supporting the development of new system to establish a consolidated audit trail). See also Section II.C.4., supra.

-
-
fn -

772 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

-
-
fn -

773 See Section III.B.2.c., supra.

-
-
fn -

774 The Commission notes that another related consideration that must be discussed by the NMS plan includes the alternative approaches to creating the consolidated audit trail that the plan sponsors considered. See Rule 613(a)(1)(xii).

-
-
fn -

775 See Section II.A., supra, for additional discussion of the timeliness of access to current audit trail data.

-
-
fn -

776 See Proposing Release, supra note 4, at 32564.

-
-
fn -

777 Id. at 32564-32565 and 32594. Differences in audit trail data requirements between markets can hinder the ability of regulators to piece together related illegal trading activity occurring across several markets.

-
-
fn -

778 Id. at 32594.

-
-
fn -

779 Id. at 32567.

-
-
fn -

780 "Transmission from the SRO or member to receipt by the central repository" refers to the process through which SROs and their members report data to the central repository.

-
-
fn -

781 "Data extraction, transformation and loading at the central repository" is the process during which the central repository accepts data reported by the SROs and their members, converts it into a uniform electronic format, if necessary, and receives it into the central repository's internal systems.

-
-
fn -

782 "Data maintenance and management at the central repository" refers to the process for storing data at the central repository, indexing the data for linkages, searches, and retrieval, dividing the data into logical partitions when necessary to optimize access and retrieval, and the creation and storage of data backups.

-
-
fn -

783 As noted in Section III.B.1.d.iv., supra, for example, regardless of whether the NMS plan elects to use a series of order identifiers or a unique order identifier, it will be very important to demonstrate how the approach selected in the NMS plan will ensure that information about all events pertaining to an order will be reliably and accurately linked together in a manner that allows regulators efficient access to complete order information.

-
-
fn -

784 See Proposing Release, supra note 4, at 32582, 32596.

-
-
fn -

785 In addition, proposed Rule 613(e)(4)(i) required plan sponsors, and employees of the plan sponsors and central repository to agree to use appropriate safeguards to ensure the confidentiality of such data, and not to use such data other than for surveillance and regulatory purposes.

-
-
fn -

786 See Scottrade Letter, p. 2; ICI Letter, p. 2-4; Liquidnet Letter, p. 4; Ameritrade Letter, p. 3; Thomson Reuters Letter, p. 4; BATS Letter, p. 3; Managed Funds Association Letter, p. 2-3; Ross Letter, p. 1. The Commission notes that it is adopting Rule 613(e)(4) with modifications – the Commission has added provisions to the Rule to help ensure the confidentiality of the data submitted to and retained by the central repository. See Section III.B.2.e., supra.

-
-
fn -

787 Rule 613(i) requires the NMS plan to include a provision requiring each SRO to jointly provide to the Commission a document outlining how the consolidated audit trail could be expanded to products other than NMS securities. See also Section III.B.1.a., supra. The consideration of flexibility and scalability of the systems requires the SROs to address whether the system proposed in the SRO's NMS plan submission can accommodate the expansion, while the document required by Rule 613(i) will discuss more broadly how the SROs could incorporate into the consolidated audit trail information with respect to equity securities that are not NMS securities, debt securities, primary market transactions in equity securities that are not NMS securities, and primary market transactions in debt securities, including details for each order and reportable event that may be required to be provided, which market participants may be required to provide the data, an implementation timeline, and a cost estimate.

-
-
fn -

788 See Concept Release on Equity Market Structure, supra note 87.

-
-
fn -

789 See Proposing Release, supra note 4, at 32568-32569.

-
-
fn -

790 Id. at 32569-70.

-
-
fn -

791 Id. at 32567.

-
-
fn -

792 See Proposing Release, supra note 4, at 32569 and 32610. The Commission noted in the Proposing Release that a "primary market transaction is any transaction other than a secondary market transaction and refers to any transaction where a person purchases securities in an offering." Proposing Release at n. 167.

-
-
fn -

793 See Section II.A. for a discussion of these four qualities.

-
-
fn -

794 See, e.g., Exchange Act Rules 17a-3 and 17a-4 (requiring broker-dealers to make and keep "records of purchases and sales of securities").

-
-
fn -

795 Regulation S-K requires registrants to provide information related to the number of offered securities that are underwritten by each syndicate member in an effort to describe the nature of the obligation of the syndicate members with respect to the offered securities. See 17 CFR 229.508(a). This information comprises investor-focused disclosures, rather than information that may be needed by regulators for investigative and other purposes, such as the information contemplated by Rule 613(a)(1)(vi).

-
-
fn -

796 For example, FINRA rules require the lead underwriters of an IPO to collect and provide issuers – but not the public, FINRA, or the Commission – with names of institutional investors who received allocations and aggregated information regarding the allocation to retail investors. See FINRA Rule 5131(d). The Depository Trust Company ("DTC") also collects information on some IPO allocations in its IPO Tracking System at the discretion of the lead underwriter. See 61 FR 25253 (May 20, 1996). However, as well as being discretionary and therefore only addressing a subset of primary market transactions, the IPO Tracking System only includes allocations to persons with DTC accounts, which generally excludes retail investors.

-
-
fn -

797 See, e.g., FINRA Rules 5130 and 5131. FINRA Rule 5130 imposes certain restrictions on primary market transactions. FINRA Rule 5131 prohibits certain allocation practices such as "spinning," which refers to an underwriter's allocation of IPO shares to directors or executives of investment banking clients in exchange for receipt of investment banking business. See Securities Exchange Act Release No. 64521 (May 18, 2011), 76 FR 29808 (May 23, 2011) (Order Approving SR-FINRA-2011-017). Certain "quid pro quo" practices are also addressed by FINRA Rule 5131.

-
-
fn -

798 Currently, SROs must request customer account information during examinations of broker-dealers to check for compliance with order marking rules.

-
-
fn -

799 This approach also may unduly burden the lead underwriter as the "gatekeeper" of such information and prevents the Commission and SROs from pursuing investigative techniques that may rely on reaching out to individual market participants for preliminary information without using the underwriter.

-
-
fn -

800 See note 242, supra.

-
-
fn -

801 See note 795, supra.

-
-
fn -

802 "Laddering" is a practice that generally refers to inducing investors to give orders to purchase shares in the aftermarket at particular prices in exchange for receiving IPO allocations. See NYSE/NASD IPO Advisory Committee report and Recommendations (May 2003), at 6, available at http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p010373.pdf.

-
-
fn -

803 See, e.g, FINRA Letter, p. 14; SIFMA Letter, p. 16-18.

-
-
fn -

804 The methodology in the Proposing Release assumed that the scope of the required systems changes would be comparable to those made in connection with Regulation NMS. See Proposing Release, supra note 4, at 32597 n. 352. See also Section I., supra.

-
-
fn -

805 These actions include the requirement that the SROs develop an NMS plan, utilizing their own resources and undertaking their own research that addresses the specific details, cost estimates, considerations, and other requirements of the Rule.

-
-
fn -

806 See Section I., supra.

-
-
fn -

807 See Rule 613(a)(1)(vii).

-
-
fn -

808 See Wells Fargo Letter, p. 4; SIFMA Letter, p. 22.

-
-
fn -

809 See Wells Fargo Letter, p. 4.

-
-
fn -

810 See Liquidnet Letter, p. 9.

-
-
fn -

811 See SIFMA Letter, p. 22.

-
-
fn -

812 See Nasdaq Letter I, p. 13-14; BOX Letter, p. 3; Liquidnet Letter, p. 9; Kaufman Letter, attachment p. 3.

-
-
fn -

813 See Nasdaq Letter I, p. 13-14.

-
-
fn -

814 See Kaufman Letter, attachment p. 3.

-
-
fn -

815 See Schumer Letter, p. 1.

-
-
fn -

816 Id. at p. 1-2.

-
-
fn -

817 Id. at p. 2.

-
-
fn -

818 See Section III.B.2., supra.

-
-
fn -

819 See Section III.B.1., supra.

-
-
fn -

820 See Section I., supra.

-
-
fn -

821 See 17 CFR 242.608(a)(4)(ii)(C).

-
-
fn -

822 See Rule 613(a)(1)(viii).

-
-
fn -

823 See Rule 613(a)(5).

-
-
fn -

824 See Section II.C.3., supra, for a summary of comments suggesting wider involvement in the development of the consolidated audit trail.

-
-
fn -

825 See FIF Letter II, p. 2; SIFMA February 2012 Letter, p. 1; STA Letter, p. 1-2.

-
-
fn -

826 See SIFMA February 2012 Letter, p. 1.

-
-
fn -

827 See Broadridge Letter, p. 2.

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fn -

828 See FIF Letter II, p. 2, STA Letter, p. 1-2.

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fn -

829 See Direct Edge Letter, p. 2.

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-
fn -

830 See Direct Edge Letter, p. 2.

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-
fn -

831 See Ameritrade Letter, p. 2.

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-
fn -

832 See IAG Letter, p. 3 (also recommending that the consolidated audit trail, in general, should involve a reduction in its size and scope, as well as a review of the capabilities of existing systems).

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fn -

833 See FIF Letter II, p. 1-3. See also STA Letter, p. 1-3 (recommending the same, but with the inclusion of the investor community and institutional asset managers).

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-
fn -

834 See also Rules 613(a)(1)(vii)(A) and (D), respectively requiring "[a]n estimate of the costs to the plan sponsors for establishing and maintaining the central repository" and an explanation of "[h]ow the plan sponsors propose to fund the creation, implementation, and maintenance of the consolidated audit trail, including the proposed allocation of such estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors."

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fn -

835 The Commission notes that any NMS plan submitted and any amendment to the plan would be subject to notice and public comment, during which members of the industry and other interested persons may provide comments on the NMS plan. 17 CFR 242.608(b)(1).

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-
fn -

836 See Rule 613(b)(7). See also Section III.B.3.b., supra.

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-
fn -

837 See Rule 613(a)(1)(xii).

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-
fn -

838 See Rule 613(a)(1)(ix).

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-
fn -

839 See Proposing Release, supra note 4, at 32595.

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-
fn -

840 See SIFMA Letter, p. 2.

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-
fn -

841 Id.

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-
fn -

842 See FINRA Letter, p. 2.

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-
fn -

843 Id. at p. 2-3.

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-
fn -

844 See FINRA/NYSE Euronext Letter, p. 4.

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-
fn -

845 See Liquidnet Letter, p. 1.

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-
fn -

846 See BATS Letter, p. 4. See also FIA Letter, p. 1; FIF Letter II, p. 2.

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-
fn -

847 See Nasdaq Letter I, p. 11. The Commission notes that this comment letter was submitted prior to the adoption of the Large Trader Reporting Rule. See note 1, supra, and accompanying text.

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-
fn -

848 To further facilitate this review, the Commission expects that the plan sponsors would keep minutes of their meetings to formulate the NMS plan, and that such minutes would be readily reviewable by the Commission.

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fn -

849 17 CFR 242.608(b)(2). To approve such a plan, the Commission must find that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.

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-
fn -

850 See Rules 613(a)(1)(v), (b)(6), (d)(2). See also Sections III.B. and III.C.2.a.i., supra (discussing the consideration of flexibility and scalability of the systems used by the central repository; the requirement that the NMS plan require the plan sponsors to provide a written assessment with an evaluation of, and a detailed plan to improve, the performance of the consolidated audit trail at least every two years; and the requirement to annually evaluate the clock synchronization and time stamp standards).

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851 17 CFR 242.608(a)(2). For example, if the requirements of the plan are not amended after the annual evaluation of the clock synchronization and time stamp standards to be consistent with changes in the industry standards, the Commission has the authority and means to propose an amendment to those requirements of the plan. The Commission can approve an amendment to an effective national market system plan that was initiated by the Commission, by rule. 17 CFR 242.608(b)(2).

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-
fn -

852 See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; Direct Edge Letter, p. 2-3, 5; Section III.C.1.a., supra.

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fn -

853 For purposes of these use-cases, an "off-line" analysis is defined to be any analysis performed by a regulator based on data that is extracted from the consolidated audit trail database, but that uses the regulator's own analytical tools, software, and hardware.

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-
fn -

854 Fixed search criteria are those that are based on specific pre-defined data elements that are stored in the consolidated audit trail database. In contrast, dynamic search criteria are those that are based on numerical levels, thresholds, or other combinations of mathematical formula or logic that would require some amount of additional calculations to be performed on, and derived from, pre-defined data elements already stored in the database to complete the search operation and return to the user the data that meets the requested criteria.

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-
fn -

855 See FIF Letter II, p. 2. See also STA Letter, p. 2 (stating "[t]he SEC should allow six months for the CAT selection process rather than the two months currently identified in the proposed release").

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-
fn -

856 See FIF Letter II, p. 3.

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-
fn -

857 See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p. 1-3.

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-
fn -

858 These additional provisions relate to: (1) the security and confidentiality of the central repository (see Rule 613(e)(4)(i)(A) through (D) and Section III.B.2.e., supra); (2) error rates (see Rule 613(e)(6) and Section III.B.2.c., supra); (3) an Advisory Committee (see Rule 613(b)(7) and Section III.B.3.b., supra); (4) a retrospective assessment of the performance of the consolidated audit trail, as well as a plan to improve its performance (see Rule 613(b)(6)(i) through (iv) and Section III.B.3.b., supra); and (5) potential penalties (see Rule 613(h)(3) and Section III.B.3.a.1., supra).

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-
fn -

859 See Sections III.C.2.a. and c., supra.

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-
fn -

860 See Section I., supra. See also Section III.D., infra, for a discussion of the timelines pertaining to the implementation of the consolidated audit trail.

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-
fn -

861 See Section I., supra. See also Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan, or amendment, as applicable, on efficiency, competition, and capital formation").

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-
fn -

862 See Section I., supra.

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-
fn -

863 44 U.S.C. 3501 et. seq.

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-
fn -

864 Commission staff estimated that each SRO would expend (400 Attorney hours x $305 per hour) + (100 Compliance Manager hours x $258 per hour) + (220 Programmer Analyst hours x $193 per hour) + (120 Business Analyst hours x $194 per hour) = $213,540 per SRO to prepare and file the NMS plan. Commission staff also estimated that each SRO would outsource, on average, 50 hours of legal work, at an average hourly rate of $400, for a total of $20,000 per SRO, for an aggregate one-time cost to prepare and file an NMS plan of $233,540 per SRO. See Proposing Release, supra note 4, at 32596. The $305 per hour figure for an Attorney; the $258 per hour figure for a Compliance Manager; the $193 per hour figure for a Programmer Analyst; and the $194 per hour figure for a Business Analysis (Intermediate) were from SIFMA's Management & Professional Earnings in the Securities Industry 2008, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

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865 Commission staff estimated that the SROs would incur an aggregate one-time cost of ($233,540 per SRO) x (15 SROs) = $3,518,100 to prepare and file an NMS plan.

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866 See Proposing Release, supra note 4, at note 299.

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-
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867 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

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-
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868 See Rule 613(h)(3); Section III.B.3.a.1., supra.

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-
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869 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

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-
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870 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

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-
fn -

871 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See also Rule 613(e)(6)(iii) through (iv).

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-
fn -

872 See Rule 613(b)(7).

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-
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873 Commission staff now estimates that each SRO would expend 700 Attorney hours, 300 Compliance Manager hours, 880 Programmer Analyst hours, and 880 Business Analyst hours.

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-
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874 The $378 per-hour figure for an Attorney; the $279 per hour figure for a Compliance Manager; the $196 per hour figure for a Programmer Analyst; and the $201 per hour figure for a Business Analyst (Intermediate) are from SIFMA's Management & Professional Earnings in the Securities Industry 2011, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

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-
fn -

875 Commission staff estimates that each SRO would incur an aggregate one-time cost of (700 Attorney hours x $378 per hour) + (300 Compliance Manager hours x $279 per hour) + (880 Programmer Analyst hours x $196 per hour) + (880 Business Analyst hours x $201 per hour) = $697,660 per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a one-time external cost of (50 legal hours x $400 per hour) = $20,000. As a result, the Commission staff estimates that the aggregate one-time cost to each SRO to prepare and file an NMS plan, including external costs, would be ($20,000 in external costs) + ($697,660 in aggregate internal costs) = $717,660 per SRO to prepare and file an NMS plan.

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-
fn -

876 Commission staff estimates that the SROs would incur an aggregate one-time cost of ($717,660 per SRO) x (17 SROs) = $12,200,200 to prepare and file an NMS plan.

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-
fn -

877 See Proposing Release, supra note 4, at 32596.

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-
fn -

878 See Section I., supra.

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-
fn -

879 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

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-
fn -

880 See proposed Rule 613(a)(3)(iii).

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-
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881 See proposed Rule 613(a)(3)(v).

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-
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882 See Nasdaq Letter I, p. 3.

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-
fn -

883 See Bean Letter, p. 1.

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-
fn -

884 See FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15; Scottrade Letter, p. 1; CBOE Letter, p. 7; FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Nasdaq Letter I, p. 6-7; Wells Fargo Letter, p. 2-3; Direct Edge Letter, p. 2-3.

-
-
fn -

885 See CBOE Letter, p. 6; Thomson Reuters Letter, p. 3; Liquidnet Letter, p. 2-3, 9; Ameritrade Letter, p. 3; Nasdaq Letter I, p. 7-9; Scottrade Letter, p. 1; SIFMA Letter, p. 13. See also FIF Letter, p. 8; FIF Letter II, p. 2-3; STA Letter, p. 2-3; Wells Fargo Letter, p. 2-3; FINRA/NYSE Euronext Letter, p. 8; FINRA Letter, p. 15.

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-
fn -

886 See Kaufman Letter, Attachment p. 1; Schumer Letter, p. 1.

-
-
fn -

887 See Schumer Letter, p. 1.

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-
fn -

888 See Nasdaq Letter I, p. 7.

-
-
fn -

889 See FINRA Proposal Letter, p. 5-6; and Wachtel Letter, p. 1.

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-
fn -

890 See Rule 613(g)(1).

-
-
fn -

891 The Commission notes that the SROs could begin drafting the document even before an NMS plan is approved by the Commission.

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-
fn -

892 See FINRA Proposal Letter, p. 5-6; Wachtel Letter, p. 1.

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-
fn -

893 See Section III.B.1.c., supra.

-
-
fn -

894 See Rule 613(a)(3)(vi); see also Rule 613(a)(3)(v).

-
-
fn -

895 17 CFR 240.0-10.

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896 17 CFR 240.0-10(c).

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-
fn -

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

-

897 Pursuant to Rules 613(a)(3)(i) through (vi), the NMS plan must require the SROs to meet the following implementation deadlines: (1) within two months after effectiveness of the national market system plan jointly (or under the governance structure described in the plan) select a person to be the plan processor; (2) within four months after effectiveness of the national market system plan synchronize their business clocks and require members of each such exchange and association to synchronize their business clocks in accordance with Rule 613(d); (3) within one year after effectiveness of the national market system plan provide to the central repository the data specified in Rule 613(c); (4) within fourteen months after effectiveness of the national market system plan implement a new or enhanced surveillance system(s) as required by Rule 613(f); (5) within two years after effectiveness of the NMS plan, require members of each such exchange and association (except those that qualify as small broker-dealers as defined in § 240.0-10(c)) to provide to the central repository the data specified in Rule 613(c); and (6) within three years after effectiveness of the national market system plan require members of each such exchange and association that qualify as small broker-dealers as defined in § 240.0–10(c) to provide to the central repository the data specified in Rule 613(c).

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-
fn -

898 See Section III.C.3., supra.

-
-
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899 See Rule 613(a)(5) (providing, in part, that the Commission "shall consider the impact of the national market system plan on efficiency, competition, and capital formation"). See also Section I., supra.

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-
fn -

900 See Rule 613(a)(1).

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-
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901 See Rule 613(c).

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902 See Rule 613(a)(1)(i) through (xii).

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-
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903 For example, the NMS plan must include provisions: (1) to ensure fair representation of the plan sponsors; (2) for administration of the central repository, including selection of the plan processor; (3) addressing the requirements for admission of new plan sponsors and withdrawal of existing plan sponsors; (4) addressing the percentage of votes required by the plan sponsors to effectuate amendments to the plan; (5) addressing the manner in which the costs of operating the central repository would be allocated among the SROs that are sponsors of the plan, including a provision addressing the manner in which costs would be allocated to new sponsors to the plan; (6) requiring the appointment of a Chief Compliance Officer to regularly review the operation of the central repository to assure its continued effectiveness, and make any appropriate recommendations for enhancements to the nature of the information collected and the manner in which it is processed; and (7) including an enforcement mechanism to ensure that each SRO and member is collecting and providing to the central repository the information required. See Rule 613(b), 613(g)(4), and 613(h)(3).

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-
fn -

904 For example, the NMS plan must include a provision requiring the creation and maintenance by the plan processor of a method of access to the data stored in the central repository, that includes the ability to run searches and generate reports. See Rule 613(e)(3). Additionally, the NMS plan is required to include policies and procedures, including standards, to be used by the plan processor to: (1) ensure the security and confidentiality of all information submitted to the central repository; (2) ensure the timeliness, accuracy, integrity and completeness of the data provided to the central repository; (and (3) ensure the accuracy of the consolidation by the plan processor of the data provided to the central repository. See Rule 613(e)(4). The NMS plan also must include a provision requiring the plan sponsors to provide to the Commission, at least every two years after effectiveness of the national market system plan, a written assessment of the operation of the consolidated audit trail. See Rule 613(b)(6). The NMS plan is also required to include an Advisory Committee to advise the plan sponsors on the implementation, operation and administration of the central repository. See Rule 613(b)(7). Further, the NMS plan must specify a maximum error rate to be tolerated by the central repository for the data it collects, and processes for identifying and correcting errors in the data, for notifying the entities responsible for the reporting of the erroneous data, and for disciplining those who repeatedly report erroneous data. See Rule 613(e)(6)(i) through(iv). The NMS plan must also specify as a time by which the corrected data will be available to regulators. See Rule 613(e)(6)(iv).

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-
fn -

905 The NMS plan must include: (1) a provision that makes each SRO that sponsors the plan responsible for enforcing compliance by its members with the provisions of the plan; and (2) mechanisms to ensure that plan sponsors and their members comply with the requirements of the plan. See Rules 613(g)(3), 613(g)(4), and 613(h)(3).

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-
fn -

906 At the time the Proposing Release was published, there were 14 national securities exchanges. On August 13, 2010, the Commission granted the application of BATS-Y Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 62719, 75 FR 51295 (August 19, 2010). Additionally, on April 27, 2012, the Commission granted the application of BOX Options Exchange for registration as a national securities exchange. See Securities Exchange Act Release No. 66871, 77 FR 26323 (May 3, 2012).

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-
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907 Commission staff estimated that each SRO would spend an aggregate one-time amount of (400 Attorney hours) + (100 Compliance Manager hours) + (220 Programmer Analyst hours) + (120 Business Analyst hours) x (15 SROs) = 12,600 burden hours to prepare and file the NMS plan.

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-
fn -

908 Based on industry sources, the Commission estimated that the hourly rate for outsourced legal services in the securities industry is $400 per hour.

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909 Commission staff estimated that the SROs would spend ($20,000 per SRO) x (15 SROs) = $300,000 in external costs to develop and draft the NMS plan.

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910 See Proposing Release, supra note 4, at 32596.

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-
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911 See Rule 613(a)(1)(i) through (xii); Section III.C.2.a., supra.

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-
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912 See Rule 613(h)(3); Section III.B.3.a.1., supra.

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913 See, e.g., Rule 613(e)(4)(i)(A) through (D). For example, Rule 613(e)(4)(i)(A) requires that the NMS plan require that all plan sponsors and their employees, as well as all employees of the central repository, agree to use appropriate safeguards to ensure the confidentiality of such data and not use such data for purposes other than surveillance or regulatory purposes. Additionally, Rule 613(e)(4)(i)(B) requires the NMS plan to require that each SRO adopt and enforce rules that: (1) require information barriers between regulatory staff and non-regulatory staff with regard to access and use of data in the central repository and (2) permit only persons designated by plan sponsors to have access to the data in the central repository. See Section III.B.2.e., supra.

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-
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914 See Rule 613(b)(6)(i) through (iv). See Section III.B.3.b., supra.

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915 See Rule 613(e)(6)(i) through (ii). See Section III.B.2.c., supra. See Rule 613(e)(6)(iii) through (iv).

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916 See Rule 613(b)(7).

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917 See note 906, supra.

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918 Commission staff estimates that each SRO would spend an aggregate one-time amount of (700 Attorney hours) + (300 Compliance Manager hours) + (880 Programmer Analyst hours) + (880 Business Analyst hours) = 2,760 burden hours per SRO to prepare and file an NMS plan. In addition, Commission staff estimates that each SRO would incur a onetime external cost of (50 legal hours x $400 per hour) = $20,000.

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919 Commission staff estimates that the SROs would incur an aggregate one-time amount of (2,760 burden hours per SRO) x (17 SROs) = 46,920 burden hours to prepare and file an NMS plan. Commission staff estimates that ($20,000 per SRO) x (17 SROs) = $340,000 in external costs to prepare and file the NMS plan.

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-
fn -

920 See Proposing Release, supra note 4, at 32596.

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921 See Section I., supra.

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922 See FIF Letter II, p. 2-3. See also STA Letter, p. 2-3.

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923 See Rule 613(e)(4). The Commission believes that an outline or overview description of the policies and procedures, including standards, to be used by the plan processor that would be implemented under the NMS plan submitted to the Commission for its consideration would be sufficient to satisfy the requirement of the Rule. The Commission believes it is important for the NMS plan to establish the fundamental framework of these policies and procedures, but recognizes the utility of allowing the plan sponsors flexibility to subsequently delineate them in greater detail with the ability to make modifications as needed. See Section III.B.2.e., supra.

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924 See Rule 613(e)(4)(i)(A) through (D).

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925 See Rule 613(e)(4)(i)(A) through (D).

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926 See Rule 613(e)(2).

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927 See proposed Rule 613(e)(4)(i).

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-
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928 17 CFR 240.17a-1.

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fn -

929 17 CFR 240.17a-4.

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fn -

930 5 U.S.C. 601 et seq.

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931 Although Section 601(6) of the RFA defines the term "small entity," the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term "small entity" for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).

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-
fn -

932 5 U.S.C. 605(b).

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933 See Proposing Release, supra note 4, at 32607.

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934 Id.

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-
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935 See FINRA Proposal Letter, p. 5-6 and Wachtel Letter, p. 1.

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936 See Rule 613(a)(3)(vi).

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-
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937 Section 604(a)(4) of the RFA.

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938 17 CFR 242.601.

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939 13 CFR 121.201.

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- \ No newline at end of file diff --git a/spider/files/data000031.html b/spider/files/data000031.html deleted file mode 100644 index d726778..0000000 --- a/spider/files/data000031.html +++ /dev/null @@ -1,313 +0,0 @@ - - jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: SEC Names Manisha Kimmel as Senior Policy Advisor to the Chairman on the Consolidated Audit Trail - source: SEC Press Release - source_type: Press Release - language: English -
pubdate: Jan. 29, 2019 effdate: N/A -

SEC Names Manisha Kimmel as Senior Policy Advisor to the Chairman on the Consolidated Audit Trail

- Topic: US SEC Press Release, Chairman on the Consolidated Audit Trail - Compliance User: eef72c84-6879-40fd-9f89-9961ff3af81a - Keywords: - Chairman, - -

FOR IMMEDIATE RELEASE

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2019-5

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Washington D.C., Jan. 29, 2019 — The Securities and Exchange Commission today announced that Manisha Kimmel will serve as Senior Policy Advisor for Regulatory Reporting to Chairman Jay Clayton. In this new role, Ms. Kimmel will coordinate the SEC’s oversight of the self-regulatory organizations’ (SROs) creation and implementation of the Consolidated Audit Trail (CAT). Ms. Kimmel will work closely with the Division of Trading and Markets and other divisions and offices on the CAT and other regulatory reporting matters.

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In the wake of the 2010 “Flash Crash,” the Commission adopted a rule that requires the national securities exchanges and FINRA (collectively, the SROs) to work together to develop and submit to the SEC a plan to create, implement and maintain a CAT. The CAT is designed to provide a single, comprehensive database that, when fully implemented, will allow regulators to more efficiently and accurately track trading in equities and options throughout the U.S. markets. The CAT is intended to, among other things, allow the Commission to better carry out its oversight responsibility by improving its ability to reconstruct trading activity following a market disruption or other event, which in turn would allow the Commission to more quickly understand the causes of such an event and respond appropriately.

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“Manisha knows the value of orderly, deep, and transparent markets to our investors and our country, and I am grateful that she has decided to take on this new, important role,” said Chairman Jay Clayton. “I am confident that her extensive experience and expertise in market data and regulatory reporting will further enhance the Commission’s ability to effectively oversee the SROs’ implementation of the CAT.”

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“I am honored to have been chosen by the Chairman to advise him on matters related to the SROs’ implementation of the CAT, and I look forward to working with the SEC’s talented staff on these important topics,” said Ms. Kimmel.

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Kimmel joins the SEC from Refinitiv, where she served as Head of Regulatory and Compliance, Wealth Management. In addition to her role at Refinitiv, Ms. Kimmel served on the Advisory Committee for CAT NMS LLC, a diverse group of industry experts that offers advice to SROs on technical specifications, reporting functionality, and other matters relating to the CAT. She has previously been a member of the SEC’s Equity Market Structure Advisory Committee (EMSAC). Prior to her time at Refinitiv, Ms. Kimmel served as Managing Director of the Financial Information Forum, where she worked with broker dealers, exchanges, and vendors on issues involving regulatory and market data technology issues. She has also held positions at Jordan & Jordan and Automatic Data Processing. Ms. Kimmel earned her B.S. in Economics from the Wharton School of Business at the University of Pennsylvania and her B.S. in Engineering from Penn’s School of Engineering and Applied Sciences.

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- \ No newline at end of file diff --git a/spider/files/data000032.html b/spider/files/data000032.html deleted file mode 100644 index 23b710e..0000000 --- a/spider/files/data000032.html +++ /dev/null @@ -1,490 +0,0 @@ - - jurisdiction: US - regulatory_authority: US/SEC - content_type: periodic - document_title: Selection of CAT NMS Plan Processor (SEC File Number 4-698) - document_type: Notices - source: US/SEC/Notices/Plan Processor Notice - source_type: Plan Processor Notice - language: English - citation: SEC File Number 4-698 -
pubdate: January 18, 2017 effdate: N/A -

Selection of CAT NMS Plan Processor (SEC File Number 4-698)

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail - Compliance User: Thesys Technologies, LLC - Keywords: - CAT NMS plan, - SRO, - Rule 608, - Securities Exchange Act, - -

January 18, 2017

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Secretary

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Brent J. Fields

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Securities and Exchange Commission

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100 F Street, NE

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Washington, DC 20549-1090

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Re: File Number 4-698

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Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail

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Dear Mr. Fields:

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The parties to the National Market System Plan Governing the Consolidated Audit Trail (the "CAT NMS Plan" or "Plan")- Bats BYX Exchange, Inc., Bats BZX Exchange, Inc., Bats EDGA Exchange, Inc., Bats EDGX Exchange, Inc., BOX Options Exchange LLC, C2 Options Exchange, Incorporated, Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, Inc., International Securities Exchange, LLC, Investors' Exchange LLC, ISE Gemini, LLC, ISE Mercury, LLC, Miami International Securities Exchange LLC, MIAX PEARL, LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (collectively, "Participants")- respectfully file with the Securities and Exchange Commission ("SEC" or "Commission") this statement in connection with the selection of a person to act as the Plan Processor for the CAT NMS Plan pursuant to Rule 608(a)(6) of Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act").1

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pubdate: January 18, 2017 effdate: N/A -

A. Identification of Person Selected as Plan Processor

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Identification of Person Selected as Plan Processor - Compliance User: Thesys Technologies, LLC - Keywords: - CAT NMS plan, - Selection Committe, - Thesys Technologies, LLC, - Plan Processor, - -

On, January 17, 2017, the Selection Committee of the CATNMS Plan selected Thesys Technologies, LLC ("Plan Processor") as the Plan Processor for the CAT NMS Plan pursuant to Article V of the CAT NMS Plan.

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pubdate: January 18, 2017 effdate: N/A -

B. Material Terms under which such Person is to Serve as Plan Processor

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Material Terms under which such Person is to Serve as Plan Processor - Compliance User: Thesys Technologies, LLC - Keywords: - CAT NMS Plan LLC, - Plan Processor Agreement, - CAT NMS plan, - -

The CAT NMS, LLC and the Plan Processor (the "Parties") are in the process of negotiating the terms of the agreement under which the Plan Processor will act as such with regard to the CAT NMS Plan ("Plan Processor Agreement"). Nevertheless, the Participants anticipate that Plan Processor Agreement will contain provisions that require the Plan Processor to: (1) serve as the Plan Processor to perform CAT-related functions and services required by SEC Rule 613 and the CAT NMS Plan (the "Services"); (2) develop and implement the CAT System in accordance with the development and implementation phases, milestones and timeline agreed upon by the Parties; (3) provide the Services in accordance with service level requirements to be agreed upon by the Parties; and (4) develop the CAT System in a manner consistent with the Plan Processor's response to the RFP. The Participants also anticipate that the Plan Processor Agreement will require the Services to be provided in manner that is consistent with and in accordance with the CAT NMS Plan and SEC rules and regulations. Furthermore, the Participants expect that the Plan Processor Agreement will include other provisions related to the Services, including: (1) pricing and fees; (2) term of the agreement; (3) limitations of liability; (4) indemnification; (5) insurance; (6) capitalization of the Plan Processor; and (7) intellectual property. Now that the Plan Processor has been selected, the CAT NMS, LLC and the Plan Processor will finalize their negotiations regarding the Plan Processor Agreement, which will define the terms under which the Plan Processor will act as the Plan Processor for the CAT. The Participants believe that finalizing negotiations with the Plan Processor and executing the Plan Processor Agreement are necessary conditions for the Plan Processor to serve in that role.

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pubdate: January 18, 2017 effdate: N/A -

C. Solicitation Efforts for Alternative Plan Processors

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Solicitation Efforts for Alternative Plan Processors - Compliance User: Thesys Technologies, LLC - Keywords: - Request for Proposal, - CAT NMS plan, - Development Advisory Group, - Bidders, - -

The Participants utilized a Request for Proposal ("RFP") to seek proposals to implement the main requirements to successfully build and operate the CAT.2 "This approach was designed to solicit imaginative and competitive proposals from the private sector as well as to provide an adequate amount of insight into the costs associated with creating, implementing and maintaining the CAT. To design the RFP process, the Participants consulted with their technology subject matter resources to determine the technical implications and requirements of the CAT and to develop the RFP."3 Based on these requirements, the Participants developed the Proposed RFP Concepts Documents, which identified the high level requirements for which potential Bidders would be expected to design a solution, ahead of publishing the full RFP.4 The Participants also sought the input ofthe Development Advisory Group ("DAG") regarding the RFP and, over time, continued to engage in meaningful dialogue with the DAG regarding the selection process and development ofthe CAT. The Participants then developed the RFP to solicit interest from potential plan processors. The RFP was published on February 26, 2013. In response to the RFP, the Participants received 31 intents to bid, and hosted a Bidders conference on March 8, 2013 to discuss the requirements and provide additional context to the industry and potential Bidders. Two additional conference calls to discuss additional questions on the RFP were held on April 25, 2013 and May 2, 2013. The Participants also established an e-mail box through which questions on the RFP were received. After this process, the Participants received ten competitive proposals on March 21, 2014 in response to the RFP. The Plan Processor was selected from among these Bidders.

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pubdate: January 18, 2017 effdate: N/A -

D. Alternative Plan Processors Considered

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Alternative Plan Processors Considered - Compliance User: Thesys Technologies, LLC - Keywords: - Bidders, - AxiomSL, - Cinnober, - EPAM, - FINRA, - First Derivatives, - IBM, - J. Streicher Analytics, - Sungard Data Systems, - TATA America International Corporation, - Thesys Technologies LLC, - Participants, - -

The Participants received responses to the RFP from the following ten Bidders:

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• AxiomSL and Computer Sciences Corporation (CSC) (with subcontractor MIAX)

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• Cinnober (with subcontractors Equinix, OneMarketData, and Fundamental Interactions)

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• EPAM (with subcontractor Broadridge Financial Solutions, Inc.)

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• FINRA (with subcontractor DTCC/Kingland)

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• First Derivatives (with subcontractors Kx Systems, Inc., Equinix and Steadfast)

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• IBM

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• J. Streicher Analytics on behalfofCATPRO Consortium: Hewlett Packard, Booz Allen and Buckley Sandler (with subcontractors CBX Technologies Inc., and Networth Services Inc.)

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• Sungard Data Systems (with subcontractor Google)

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• TATA America International Corporation (TAIC) (with subcontractors Promontory Financial Group and Tata Consultancy Services)

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• Thesys Technologies, LLC

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The Participants carefully reviewed and considered each of the ten proposals, including holding in-person meetings with each of the ten Bidders. Following this review, the Selection Committee voted to reduce the number of Bidders to six in accordance with the National Market System Plan Governing the Process of Selecting a Plan Processor and Developing a Plan for the Consolidated Audit Trail ("Selection Plan"). After additional reviews and discussions, the Selection Committee voted to reduce the number of Bidders to three pursuant to the Selection Plan. Finally, after further discussions with the Bidders, the Selection Committee reduced the number of Bidders to two, and then selected the Plan Processor, pursuant to the CAT NMS Plan.

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pubdate: January 18, 2017 effdate: N/A -

E. Reasons for Selection of the Plan Processor

- Topic: SEC, File Number 4-698, Selection of Plan Processor for the National Market System Plan Governing the Consolidated Audit Trail, Reasons for Selection of the Plan Processor - Compliance User: Thesys Technologies, LLC - Keywords: - Participants, - Plan Processor, - Reporting Requirements, - Sec Rule 613, - Thesys Technologies LLC, - -

In selecting the Plan Processor, the Selection Committee has been guided by the need to satisfy the requirements of Rule 613 and the CAT NMS Plan. In addition, the Selection Committee also has been guided by Guiding Principles that the Participants adopted for the CAT development process. The Participants developed the following Guiding Principles:

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• The CAT must meet the specific requirements of Rule 613 and achieve the primary goal of creating a single, comprehensive audit trail to enhance regulators' ability to surveil the U.S. markets in an effective and efficient way.

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• The reporting requirements and technology infrastructure developed must be adaptable to changing market structures and reflective of trading practices, as well as scalable to increasing market volumes.

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• The costs of developing, implementing, and operating the CAT should be minimized to the extent possible. To this end, existing reporting structures and technology interfaces will be utilized where practicable.

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• Industry input is a critical component in the creation of the CAT. The Participants will consider industry feedback before decisions are made with respect to reporting requirements and cost allocation models.

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With these requirements and principles as guides, each Participant serving on the Selection Committee voted on the Bidders in each round of voting based on its own view of how each Bid satisfied these various provisions. Accordingly, the Selection Committee has determined that Thesys Technologies, LLC was the most appropriate Bidder to become the Plan Processor.

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* * * * *

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Thank you for your attention to this matter. Please contact any of the undersigned if you have any questions or comments.

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Respectfully submitted,

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[Executed signature pages are located at the end of this submission.]

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cc: The Hon. Mary Jo White, Chair

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The Hon. Kara M. Stein, Commissioner

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The Hon. Michael S. Piwowar, Commissioner

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Ms. Heather Seidel, Acting Director, Division of Trading and Markets

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Mr. Gary L. Goldsholle, Deputy Director, Division of Trading and Markets

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Mr. David S. Shillman, Associate Director, Division of Trading and Markets

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Mr. David Hsu, Assistant Director, Division of Trading and Markets

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IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

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IN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as of the day and year first above written.

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P A R T I C I P A N T S:

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TN WITNESS WHEREOF, the Participants have executed this Limited Liability Company Agreement as ofthe day and year first above written.

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PARTICIPANTS:

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1 17 C.F.R. § 242.608(a)(6). Unless otherwise defined herein, capitalized terms are defined as set forth in the CAT NMS Plan.

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2 The RFP process is described in Appendix C of the CAT NMS Plan, as well as on the CAT NMS Plan website (www.catnmsplan.com).

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3 Appendix C, CAT NMS Plan.

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4 The RFP is set forth in Appendix A of the CAT NMS Plan. The RFP was published in full in the notice of the CAT NMS Plan. See Securities Exchange Act Rel. No. 77724 (Apr. 17, 2016), 81 Fed. Reg. 30614 (May 17, 2016).

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- \ No newline at end of file diff --git a/spider/files/data000033.html b/spider/files/data000033.html deleted file mode 100644 index 8c7810e..0000000 --- a/spider/files/data000033.html +++ /dev/null @@ -1,348 +0,0 @@ - - jurisdiction: United States - authority: United States District Court, District of Columbia - content_type: Case - document_title: U.S. v. PHILIP MORRIS USA, INC. - source: Case Law -
pubdate: 2004-07-21T00:00:00 effdate: 2004-07-21T00:00:00 -

U.S. v. PHILIP MORRIS USA, INC.

- Topic: Banking Financial Services Review, Record Retention, Litigation Holds - Compliance User: N/A - Keywords: - Preservation Order, - Hold Order, - Retention Period, - Effective Litigation Hold, - -

No. CIV.A.99-2496 GK.

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327 F.Supp.2d 21 (2004)

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UNITED STATES of America, Plaintiff, v. PHILIP MORRIS USA INC. f/k/a Philip Morris Inc., et al., Defendants.

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United States District Court, District of Columbia.

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July 21, 2004.

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Attorney(s) appearing for the Case

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Sharon Yvette Eubanks, Renee Brooker, Stephen Dudley Brody, U.S. Department of Justice, Washington, DC, for Plaintiff.

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Alfred McDonnell, Arnold & Porter, Denver, CO, Amy L. McGinnis, Amy Elizabeth Ralph, Anne McBride Walker, Duane J. Mauney, Floyd E. Boone, Jr., James Miller Rosenthal, Jeanna Maria Beck, Jonathan Louis Stern, Kendall Millard, Kevin M. Green, Leslie Wharton, Melissa L. Marglous, Michael R. Geske, Murray R. Garnick, Nick Malhotra, Peter Thomas Grossi, Jr., Ryan David Guilds, Sharma Jnatel Simmons, Sharon L. Taylor, Stacy J. Pollock, Susan Louise Lyndrup, Brian K. Esser, Arnold & Porter, Washington, DC, Anastasia G. Weis, Bradley E. Lerman, Dan K. Webb, Elizabeth D. Jensen, Jeffrey Wagner, Kevin J. Narko, Luke A. Palese, Ricardo E. Ugarte, Thomas J. Frederick, Winston & Strawn, Chicago, IL, Ashley Cummings, Hunton & Williams, Atlanta, GA, Ben M. Germana, Herbert M. Wachtell, Jeffrey M. Wintner, Steven M. Barna, Wachtell, Lipton, Rosen & Katz, C. Ian Anderson, Davis, Polk & Wardwell, New York, NY, Christopher J. Cullen, Jane E. Chang, Jay L. Levine, Matthew Campbell, Robert M. Rader, Thomas M. Stimson, Timothy M. Broas, Winston & Strawn LLP, Washington, DC, Cindy L. Gantnier, Erik D. Nadolink, Patricia M. Schwarzschild, Richard H. Burton, Cheryl Grissom Ragsdale, Christy L. Henderson, Michele B. Scarponi, Jason T. Jacoby, Hunton & Williams, Richmond, VA, Daniel C. Jordan, Hunton & Williams, McLean, VA, James Lewis Brochin, Theodore V. Wells, Jr., Paul, Weiss, Rifkind, Wharton &

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Garrison, New York, NY, Lauren J. Bernstein, Winston & Strawn, New York, NY, Seth Barrett Tillman, U.S. Courthouse, Chambers of Judge William J. Martini, Newark, NJ, Richard P. Cassetta, Thompson Coburn, LLP, St. Louis, MO, David B. Alden, Paul Crist, Randal S. Baringer, Robert C. Weber, Jones, Day, Reavis & Pogue, Cleveland, OH, Elizabeth P. Kessler, Ivan C. Smith, Scott C. Walker, Jones, Day, Reavis & Pogue, Columbus, OH, Geoffrey T. Wright, Jonathan Redgrave, Patrick L. Hubbard, Paul Sommer Ryerson, Peter John Biersteker, Robert Francis McDermott, Jr., Karen O'Brien Hourigan, Jones Day, Washington, DC, Harold K. Gordon, Jones, Day, Reavis & Pogue, New York, NY, John Buchanan Williams, William M. Bailey, Collier Shannon Scott, PLLC, Washington, DC, Lisa M. Sheppard, Womble, Carlyle, Sandridge & Rice, PLLC, Winston-Salem, NC, Nicholas N. Nierengarten, Gray, Plant, Mooty, Mooty & Bennett, PA, Minneapolis, MN, Dan H. Willoughby, Leign Ann Dowden, King & Spalding, Atlanta, GA, David M. Bernick, Douglas G. Smith, Michelle H. Browdy, Stephen R. Patton, Steven D. McCormick, Kirkland & Ellis, Chicago, IL, David Mendelson, Dawn D. Marchant, Karen McCartan DeSantis, Kenneth N. Bass, Kirkland & Ellis LLP, Washington, DC, Paul Lamont McDonald, Philadelphia, PA, Rebecca I. Ruby, Goodwin Procter, LLP, Washington, DC, William Charles Hendricks, III, King & Spalding, Washington, DC, Bruce D. Ryder, J. William Newbold, James M. Cox, Michael B. Minton, Richard Paul Cassetta, Thompson Coburn LLP, St. Louis, MO, Edward Craig Schmidt, Matthew David Schwartz, Thompson Coburn, LLP, Washington, DC, Paige Q. Szajnuk, Thomas A. Duncan, Shook, Hardy & Bacon, Kansas City, MO, Aaron H. Marks, Daniel R. Benson, Julie R. Fischer, Leonard A. Feiwus, Marc E. Kasowitz, Nancy E. Straub, Kasowitz, Benson, Torres Friedman, L.L.P., New York, NY, Fred W. Reinke, Clifford Chance US, LLP, Washington, DC, Melodie M. Mabanta, Robinson Woolson, P.A., Baltimore, MD, Demetra Frawley, Mary Elizabeth McGarry, Michael V. Corrigan, Simpson Thatcher & Barlett, New York, NY, Michael Asher Schlanger, Sonnenschein, Nath & Rosenthal, Washington, DC, Lawrence Saul Robbins, Roy T. Englert, Jr., Robbins, Russell, Englert, Orseck & Untereiner, Washington, DC, Bruce G. Sheffler, David L. Wallace, F. John Nyhan, Garyowen P. Morrisroe, Jessica L. Zellner, Timothy M. Hughes, Lawrence Edward Savell, Chadbourne & Parke LLP, New York, NY, William Salvatore D'Amico, Chadbourne & Parke, Washington, DC, Bruce G. Merritt, Judah Best, Kevin C. Lombardi, Steven Klugman, Debevoise & Plimpton, Washington, DC, David Runtz, Dennis H. Hranitzky, Joseph P. Moodhe, Steven S. Michaels, Debevoise & Plimpton LLP, New York, NY, Clausen Jr. Ely, James Alexander Goold, Joseph A. Kresse, Keith Allen Teel, Covington & Burling, Washington, DC, Guy Miller Struve, Davis Polk & Wardwell, New York, NY, for Defendants.

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David Charles Shonka, Federal Trade Commission, Washington, DC, Neil H. Koslowe, Shearman and Sterling LLP, Washington, DC, Alvin Bertram Dunn, Jack McKay, Shaw Pittman LLP, Washington, DC, for Movants.

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Steven D. Gordon, Holland & Knight, L.L.P., Kate Cumming Beardsley, Buc & Beardsley, Washington, DC, Stephen Printiss Murphy, Reed Smith, Washington, DC, Stephen Paul Mahinka, Morgan, Lewis & Bockius, L.L.P., Washington, DC, for Intervenors.

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Arnon D. Siegel, Robbins, Russell, Englert, Orseck & Untereiner, Washington, DC, for Defendants and Intervenors.

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MEMORANDUM OPINION

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KESSLER, District Judge.

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The United States has filed a Motion for Evidentiary and Monetary Sanctions Against Philip Morris USA ("Philip Morris") and Altria Group Due to Spoliation of Evidence ("Motion"). Upon consideration of the Motion, the Opposition, the Reply, and the entire record herein, the Court concludes that the Motion should be granted in part and denied in part.

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On October 19, 1999, this Court entered Order # 1, First Case Management Order for Initial Scheduling Conference, requiring preservation of "all documents and other records containing information which could be potentially relevant to the subject matter of this litigation." Order # 1, ¶ 7 at 4-5. Despite this Order, Defendants Philip Morris and Altria Group deleted electronic mail ("email") which was over sixty days old, on a monthly systemwide basis for a period of at least two years after October 19, 1999. In February, 2002, Defendants became aware that there was inadequate compliance with Order # 1, as well as its own internal document retention policies, and that some emails relevant to this lawsuit were, in all likelihood, lost or destroyed. It was not until June 19, 2002, four months after learning about this serious situation, that Philip Morris notified the Court and the Government. Moreover, despite learning of the problem in February 2002, Philip Morris continued its monthly deletions of email in February and March of 2002.

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[327 F.Supp.2d 24]

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The parties have set forth in great detail the facts pertaining to Philip Morris' policies for preservation of documents and emails. Such policies were created with and approved by its parent company, Altria Group. Despite the lengthy submissions and explanations, there is no question that a significant number of emails have been lost and that Philip Morris employees were not following the company's own internal procedures for document preservation. What is particularly troubling is that Phillip Morris specifically identified at least eleven employees who failed to follow the appropriate procedures, and that those eleven employees hold some of the highest, most responsible positions in the company. These individuals include officers and supervisors who worked on scientific, marketing, corporate, and public affairs issues that are of central relevance to this lawsuit. Specifically, they include, among others, the Director of Corporate Responsibility, the Senior Principal Scientist in Research Development and Engineering, and the Senior Vice President of Corporate Affairs. All but one of the eleven employees were noticed for deposition by the United States.

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The Government points out the following undisputed facts:

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Philip Morris deleted and irretrievably lost email of employees with responsibility for: (1) tracking cigarette brand demographics such as the age and race of smokers as well as where they lived and where they purchased their cigarettes; (2) the review of yearly marketing plans; (3) planning, creating, and executing Marlboro event programs, such as the Marlboro Bar Program, the Marlboro Party at the Ranch Program, and the Marlboro Racing School; and (4) conducting consumer research on individual smokers through means such as interviews and focus groups and using Philip Morris databases which track cigarette market share figures to support Philip Morris's marketing initiatives. Philip Morris deleted and irretrievably lost email from employees serving as: (1) the highest level person at Philip Morris who is responsible for marketing Marlboro; (2) the Senior Vice President for Marketing at Philip Morris; (3) a Senior Branch Manager for Marlboro at Philip Morris USA; and (4) the Director of Marketing and Sales Decision Support.

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... [T]he employees specifically identified by Philip Morris as those who failed to preserve relevant email include officers and supervisors with responsibility for corporate policy, Master Settlement Agreement compliance, media relations and public statements and positions on issues highly relevant to the United States' claims in this action, such as the health effects of exposure to cigarette smoke. Philip Morris deleted and irretrievably lost email of employees with responsibility for: (1) communicating Philip Morris's positions to the media on tobacco-related issues, including, for example, message points for use in response to likely media inquiries regarding a Philip Morris brochure for parents on youth smoking prevention and a message track for responding to the American Legacy Foundation's Truth advertising campaign; (2) all press releases that are issued by Philip Morris USA regarding Philip Morris's business policies and positions; and (3) advertising and communication of Philip Morris's positions on tobacco related issues, including the Master Settlement Agreement and environmental tobacco smoke. Philip Morris deleted and irretrievably lost email from employees serving as: (1) Director of Corporate Responsibility, Planning and Programs; (2) Senior Vice President of Corporate Affairs; and (3) Vice President of Communications and Public Affairs.

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The employees specifically identified by Philip Morris as those who failed to preserve relevant email also include officers and supervisors with responsibility for research on potentially less harmful cigarette products, as well as new cigarette product design and development.

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Motion at 45-47; see also, 19-21.

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In short, it is astounding that employees at the highest corporate level in Philip Morris, with significant responsibilities pertaining to issues in this lawsuit, failed to follow Order # 1, the document retention policies of their own employer, and, in particular, the "print and retain" policy which, if followed, would have ensured the preservation of those emails which have been irretrievably lost. Moreover, it must be noted that Philip Morris is a particularly sophisticated corporate litigant which has been involved in hundreds, and more likely thousands, of smoking-related lawsuits.

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The only issue is what remedy is appropriate. As a practical matter, as this Court noted at the January, 2003 status hearing, "you cannot recreate what has been destroyed." Transcript, January 17, 2003 Status Hearing, at 39. Because we do not know what has been destroyed, it is impossible to accurately assess what harm has been done to the Government and what prejudice it has suffered. See In re Prudential Insurance Co., 169 F.R.D. 598, 616 (D.N.J.1997).

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The Government requests four different forms of relief. First, it seeks an adverse inference that Philip Morris "has researched how to target its marketing at youth and actively marketed cigarettes to youth through advertising and marketing campaigns that are intended to entice young people to initiate and continue smoking, manipulated the nicotine content of its cigarettes in order to create and sustain smokers' addiction, and failed to market potentially less hazardous cigarettes after October 19, 1999." Memorandum in Support of United States' Motion, at 67.

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There is no doubt that the Court has the authority to impose such a sanction for a discovery violation as serious and as irremediable as Philip Morris' email destruction. Webb v. District of Columbia, 146 F.3d 964, 971 (D.C.Cir.1998); Shea v. Donohoe Construction Co., 795 F.2d 1071, 1074 (D.C.Cir.1986). However, the Court has concluded, in the exercise of its discretion and with knowledge of the breadth of issues involved in this lawsuit, that such a far-reaching sanction is simply inappropriate. In Bonds v. District of Columbia, 93 F.3d 801, 808 (D.C.Cir.1996), the Court of Appeals emphasized that "[t]he choice of sanctions should be guided by the `concept of proportionality' between offense and sanction." See Shea, 795 F.2d at 1077. The sanction sought by the United States fails to meet this test and simply casts too wide a net.

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Second, the Government requests that Philip Morris be precluded from calling Peter Lipowicz as a fact or expert witness at trial. That request is granted. Mr. Lipowicz, as well as any other individual who has failed to comply with Philip Morris' own internal document retention program, will be precluded from testifying in any capacity at trial.

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Third, the Government requests that Philip Morris and Altria Group be precluded from asserting compliance with the Master Settlement Agreement as a defense to the United States' claims. This remedy is unnecessary since the Court has already ruled in Order # 537 that the Master Settlement Agreement, in and of itself, cannot constitute a defense to the United States' claims.

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[327 F.Supp.2d 26]

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Fourth and finally, the Government requests that Philip Morris and Altria Group pay a monetary sanction of $2,995,000 to the Court Registry as punishment for their egregious violation of Order # 1. A monetary sanction is appropriate. It is particularly appropriate here because we have no way of knowing what, if any, value those destroyed emails had to Plaintiff's case; because of that absence of knowledge, it was impossible to fashion a proportional evidentiary sanction that would accurately target the discovery violation. Despite that, it is essential that such conduct be deterred, that the corporate and legal community understand that such conduct will not be tolerated, and that the amount of the monetary sanction fully reflect the reckless disregard and gross indifference displayed by Philip Morris and Altria Group toward their discovery and document preservation obligations. Consequently, Philip Morris and Altria Group will be jointly required to pay a monetary sanction of $2,750,000 into the Court Registry no later than September 1, 2004. 1 In addition, Phillip Morris and Altria Group will be required to reimburse the United States for the costs associated with a Fed.R.Civ.P. 30(b)(6) deposition on email destruction issues. Those costs are a minimal $5,027.48.

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ORDER # 600

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The United States has filed a Motion for Evidentiary and Monetary Sanctions Against Philip Morris USA ("Philip Morris") and Altria Group Due to Spoliation of Evidence. Upon consideration of the Motion, the Opposition, the Reply, and the entire record herein, the Court concludes that the Motion should be granted in part and denied in part.

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WHEREFORE, it is this 21st day of July, 2004,

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ORDERED that Philip Morris and Altria Group are precluded from calling as fact or expert witnesses at trial any individual who has failed to comply with Philip Morris' own internal document retention program, including Peter Lipowicz and the ten other individuals identified by Philip Morris; and it is further

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ORDERED that Philip Morris and Altria Group are jointly required to pay a monetary sanction of $2,750,000 into the Court Registry no later than September 1, 2004; and it is further

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ORDERED that Philip Morris and Altria Group shall reimburse the United States, no later than September 1, 2004, in the amount of $5,027.48.

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1. Philip Morris identified eleven corporate managers and/or officers who failed to comply with the "print and retain" policy. Each such individual is being sanctioned in the amount of $250,000.

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- \ No newline at end of file From cd28b973ac9c5585178d98d98e83b08509501155 Mon Sep 17 00:00:00 2001 From: Mike Kroutikov Date: Tue, 12 Mar 2019 12:18:21 -0400 Subject: [PATCH 2/2] moved data CSS under assets --- spider/{ => assets}/css/data.css | 0 spider/files/data000000.html | 2 +- spider/files/data000001.html | 2 +- spider/files/data000002.html | 2 +- spider/files/data000003.html | 2 +- spider/files/data000004.html | 2 +- spider/files/data000005.html | 2 +- spider/files/data000006.html | 2 +- spider/files/data000007.html | 2 +- spider/files/data000008.html | 2 +- spider/files/data000009.html | 2 +- spider/files/data000010.html | 2 +- spider/files/data000011.html | 2 +- spider/files/data000012.html | 2 +- spider/files/data000013.html | 2 +- spider/files/data000014.html | 2 +- spider/files/data000015.html | 2 +- spider/files/data000016.html | 2 +- spider/files/data000017.html | 2 +- spider/files/data000018.html | 2 +- spider/files/data000019.html | 2 +- spider/files/data000020.html | 2 +- spider/files/data000021.html | 2 +- spider/files/data000022.html | 2 +- 24 files changed, 23 insertions(+), 23 deletions(-) rename spider/{ => assets}/css/data.css (100%) diff --git a/spider/css/data.css b/spider/assets/css/data.css similarity index 100% rename from spider/css/data.css rename to spider/assets/css/data.css diff --git a/spider/files/data000000.html b/spider/files/data000000.html index 73a1634..0212984 100644 --- a/spider/files/data000000.html +++ b/spider/files/data000000.html @@ -1,4 +1,4 @@ - 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+ jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000005.html b/spider/files/data000005.html index 323966a..589ee05 100644 --- a/spider/files/data000005.html +++ b/spider/files/data000005.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000006.html b/spider/files/data000006.html index 9f89bf5..dfc5c5e 100644 --- a/spider/files/data000006.html +++ b/spider/files/data000006.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000007.html b/spider/files/data000007.html index 7d9be61..dcc5760 100644 --- a/spider/files/data000007.html +++ b/spider/files/data000007.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: compilation diff --git a/spider/files/data000008.html b/spider/files/data000008.html index 1f90ec1..d3ec188 100644 --- a/spider/files/data000008.html +++ b/spider/files/data000008.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000009.html b/spider/files/data000009.html index c73ced6..402195c 100644 --- a/spider/files/data000009.html +++ b/spider/files/data000009.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000010.html b/spider/files/data000010.html index cb96498..9ebc447 100644 --- a/spider/files/data000010.html +++ b/spider/files/data000010.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000011.html b/spider/files/data000011.html index 0bd210f..72988a1 100644 --- a/spider/files/data000011.html +++ b/spider/files/data000011.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000012.html b/spider/files/data000012.html index 0dbd52e..1884de3 100644 --- a/spider/files/data000012.html +++ b/spider/files/data000012.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000013.html b/spider/files/data000013.html index 20c7b6b..11c0517 100644 --- a/spider/files/data000013.html +++ b/spider/files/data000013.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000014.html b/spider/files/data000014.html index 40d7ee2..1354dd0 100644 --- a/spider/files/data000014.html +++ b/spider/files/data000014.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: compilation diff --git a/spider/files/data000015.html b/spider/files/data000015.html index 954d9bd..d4de288 100644 --- a/spider/files/data000015.html +++ b/spider/files/data000015.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: compilation diff --git a/spider/files/data000016.html b/spider/files/data000016.html index 67fb343..adf53d9 100644 --- a/spider/files/data000016.html +++ b/spider/files/data000016.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000017.html b/spider/files/data000017.html index 20d7e29..5679983 100644 --- a/spider/files/data000017.html +++ b/spider/files/data000017.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000018.html b/spider/files/data000018.html index f01600e..ca1db3e 100644 --- a/spider/files/data000018.html +++ b/spider/files/data000018.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000019.html b/spider/files/data000019.html index 7b26a33..7bf3cd3 100644 --- a/spider/files/data000019.html +++ b/spider/files/data000019.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000020.html b/spider/files/data000020.html index a0fa60a..3c92c6f 100644 --- a/spider/files/data000020.html +++ b/spider/files/data000020.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: Securities and Exchange Commission content_type: compilation diff --git a/spider/files/data000021.html b/spider/files/data000021.html index 36be3dc..bdfd8d5 100644 --- a/spider/files/data000021.html +++ b/spider/files/data000021.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic diff --git a/spider/files/data000022.html b/spider/files/data000022.html index ce5f1ac..da65ec1 100644 --- a/spider/files/data000022.html +++ b/spider/files/data000022.html @@ -1,4 +1,4 @@ - + jurisdiction: US regulatory_authority: US/SEC content_type: periodic